HQ 968007 - NAFTA; inventory management methods; fungible material; 19 CFR 181 App. Schedule X; and country of origin marking requirements - United States International Trade Commision Rulings

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HQ 968007

February 2, 2006

CLA-2: RR:CTF:TCM 968007 KSH

CATEGORY: MARKING

Mr. Paul Gentzke
ATEC Systems, Ltd.
650 S. North Lake Blvd.
Altamonte Springs, FL 32701

RE: NAFTA; inventory management methods; fungible material; 19 CFR 181 App. Schedule X; and country of origin marking requirements

Dear Mr. Gentzke:

This is in reply to your letter dated October 7, 2005, in which you requested a ruling regarding the classification under the Harmonized Tariff Schedule of the United States Annotated (HTSUSA), North American Free Trade Agreement (NAFTA) eligibility, country of origin and marking requirements for frozen hamburger patties imported from Mexico. Your request for marking, country of origin and NAFTA eligibility was forwarded to Customs and Border Protection (CBP) Headquarters for review by the Office of Regulations and Rulings.

FACTS:

The merchandise is comprised of processed boneless beef that is manufactured in Mexico from 80 percent frozen beef trimmings originating in the United States and / or Canada and 20 percent frozen beef trimmings from Australia. You state that the beef trimmings are commercially interchangeable and are identical in nature. During the manufacturing process in Mexico, the beef trimmings are ground and blended together in a vat and subsequently formed into beef patties. After processing, the beef patties will be frozen and packed in bulk cardboard containers weighing 30 and 38 pounds net weight.

ISSUE:

(1) Whether the origin of the fungible materials used to produce the frozen beef patties may be allocated on the basis of an inventory management method to determine whether the frozen beef patties will qualify for preferential tariff treatment under the NAFTA when imported into the United States.

(2) What are the country of origin marking requirements for the frozen beef patties?

LAW AND ANALYSIS:

General Note 12 of the HTSUSA incorporates Article 401, North American Free Trade Agreement (NAFTA), as implemented by section 207 of the North American Free Trade Agreement Implementation Act (Pub. L. 103-182, 107 Stat. 2057) (December 8, 1993) and the interim amendments to the CBP Regulations published as T.D. 94-4 (59 Fed. Reg. 109, January 3, 1994), into the HTSUSA. Note 12(b) provides in pertinent part:

For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as "goods originating in the territory of a NAFTA party" only if--

(i) they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or

(ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that--

(A) except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r),(s) and (t) of this note or the rules set forth therein, or,

(B) the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or

(iii) they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials.

To become an originating good, the non-originating materials which make up the good must satisfy the tariff shift rule applicable to the finished frozen hamburger patties which are classified under subheading 0202.30, HTSUS. The applicable General Note 12(t)/ Chapter 2 rule for this good provides as follows: “A change to headings 0201 through 0210 from any other chapter.”

Since the Australian-origin beef trimmings are classified in the same subheading (0202.30, HTSUS) as the finished good, the tariff shift rule for the good is not met.

General Note 12(g), HTSUS, provides as follows:

Fungible goods and materials. For purposes of determining whether a good is an originating good --

(i) where originating and non-originating fungible materials are used in the production of a good, the determination of whether the materials are originating need not be made through the identification of any specific fungible material, but may be determined on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury;

Section 7(16) and Schedule X of the Appendix to Part 181 of the CBP Regulations, Title 19 Code of Federal Regulations (19 CFR Part 181, Appendix) which implement Section 202(f) of the NAFTA Rules of Origin Regulations (ROR) provides in pertinent part as follows:
for purposes of determining whether a good is an originating good,

(a) where originating materials and non-originating materials that are fungible materials (i) are withdrawn from an inventory in one location and used in the production of the good the determination of whether the materials are originating materials may be made on the basis of any of the applicable inventory management methods set out in Schedule X;

Schedule X, Section 2, of the NAFTA states that the inventory management methods for determining whether fungible materials referred to in section 7(14)(b) of the Appendix are originating materials are as follows: (a) specific identification method; (b) FIFO method; (c) LIFO method; and (d) average method.

General Note 12(g) defines the term "fungible" to mean "that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties." See also 19 CFR Part 181, App. Part I, section 2(1).

In the instant case, both the beef trimmings from the U.S. and/or Canada and the beef trimmings which are imported into Mexico from Australia are fungible materials which can be used interchangeably for commercial purposes since they possess essentially identical properties. In accordance with General Note 12(g), HTSUSA, and section 202(f) of the NAFTA, because the beef trimmings are fungible materials which are mixed in inventory and are used in the production of a good, the determination of whether the materials are "originating" may be determined on the basis of one of the inventory management methods set out in 19 CFR Part 181, App. Schedule X.

Depending upon the particular inventory management method selected a proportion of the frozen beef patties would be deemed to have satisfied the applicable tariff shift requirement. Another proportion would be deemed not to have met the tariff shift requirement. Also, inasmuch as there is no de minimus allowed for the goods, this portion could not be treated as falling under the de minimus allowance with regard to the non-originating Australian beef trimmings.

The importer's records must be sufficient to allow for verification by CBP of the respective quantity of beef trimmings which are imported from Australia and the quantity of beef trimmings from the U.S. and/or Canada and received into its inventory, and any other information which the port director deems relevant in order to substantiate the importer's claim for tariff preference under the NAFTA (i.e., receipt, shipment and inventory records).

II. Country of Origin Marking Requirements

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co., 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940).

Part 134 of the CBP Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. The country of origin marking requirements for a "good of a NAFTA country" are also determined in accordance with Annex 311 of the NAFTA.

Section 134.1(b) of the CBP Regulations, defines "country of origin" as:
the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of this part; however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin.

Section 134.1(j) of the CBP Regulations, provides that the "NAFTA Marking Rules" are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) of the CBP Regulations, defines a "good of a NAFTA country" as an article for which the country of origin is Canada, Mexico or the United States as determined under the NAFTA Marking Rules. Section 134.45(a)(2) of the regulations, provides that "a good of a NAFTA country may be marked with the name of the country of origin in English, French, or Spanish."

Part 102 of the CBP Regulations, sets forth the "NAFTA Marking Rules" for purposes of determining whether a good is a good of a NAFTA country for marking purposes. Section 102.11 of the CBP Regulations, sets forth the required hierarchy for determining country of origin for marking purposes. Section 102.11(a) of the CBP Regulations states that "[t]he country of origin of a good is the country in which:

(1) The good is wholly obtained or produced;

(2) The good is produced exclusively from domestic materials; or

(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section 102.20 and satisfies any other applicable requirements of that section, and all other requirements of these rules are satisfied."

Pursuant to 19 CFR 102.11(a)(3), the country of origin of a good is the country in which each foreign material incorporated in that good undergoes an applicable change in tariff classification as set forth in 19 CFR 102.20, which sets forth the specific tariff classification changes and/or other operations, which are specifically required to occur in order for country of origin to be determined on the basis of operations performed on the foreign materials contained in a good. “Foreign Material" is defined in section 102.1(e) of the CBP Regulations as "a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced."

In the case before us, because the frozen beef patties are classified under subheading 0202.30, the change in tariff classification must be made in accordance with section 102.20(a), Section I: HTSUS 0201 through 0209, require "[a] change to heading 0201 through 0209 from any other chapter." The beef trimmings are classified under heading 0202, HTSUS, and the frozen beef patties are also classified in heading 0202, HTSUS. Accordingly, the foreign material incorporated in the frozen beef patties does not undergo the applicable tariff shift.

Since the country of origin cannot be determined by section 102.11(a) (incorporating section 102.20) of the CBP Regulations, the next step in the country of origin regulations hierarchy is section 102.11(b). Section 102.11(b) of the regulations states as follows:

Except for a good that is specifically described in the Harmonized System as a set, or is classified as a set pursuant to General Rule of Interpretation 3, where the country of origin cannot be determined under paragraph (a) of this section:

(1) The country of origin of the good is the country or countries of origin of the single material that imparts the essential character of the good, or

(2) If the material that imparts the essential character to the good is fungible, has been commingled, and direct physical identification of the origin of the commingled material is not practical, the country or countries of origin may be determined on the basis of an inventory management method provided under the appendix to part 181 of this chapter.

“Material" is defined in section 102.1(l) of the regulations as "a good that is incorporated into another good as a result of production with respect to that other good, and includes parts, ingredients, subassemblies, and components."

Section 102.1(b) defines the term "commingled" to mean physically combined or mixed. Section 102.1(f) defines the term "fungible goods or fungible material" to mean goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical.

Pursuant to section 102.18(b)(2):
for purposes of applying section 102.11, only domestic and foreign materials (including self-produced materials) that are classified in a tariff provision from which a change in tariff classification is not allowed in the rule for the good set out in section 102.20 shall be taken into consideration in determining the parts or materials that determine the essential character of the good.

Therefore, taking into consideration only those domestic and foreign materials that are classified in a tariff provision for which a change in tariff classification is not allowed in the rule for the good under section 102.20, the beef trimmings impart the essential character of the good. Accordingly, the country of origin of the frozen beef patties is the origin of all countries from which the beef trimmings originate. CBP does not object to including the U.S. However, the determination of whether it is acceptable to label a good as a product of the U.S. is within the jurisdiction of the Federal Trade Commission. Therefore, you should contact the FTC regarding the appropriateness of the use of this phrase. The FTC address is: Federal Trade Commission, Division of Enforcement, 6th and Pennsylvania Avenue, N.W., Washington, D.C. 20508.

In the alternative, you have stated that the beef trimmings are fungible goods which will be commingled in inventory and during the processing operations in Mexico. The Australian and U.S. and/or Canadian-origin beef trimmings will be identical in terms of the relevant commercial characteristics prior to the processing operations performed in Mexico. Consequently, where direct physical identification of the origin of the frozen beef patties is not practical, the outermost container may reflect the origin determined using one of the approved inventory methods set forth in Part 1, Schedule X of the Appendix to Part 181 of the CBP Regulations. Please note that where the inventory management method is used to reflect that portion that is originating under General Note 12, HTSUS, the NAFTA Preference Override set forth in 19 CFR 102.19 will be applicable to the subject merchandise inasmuch as an application of the NAFTA Marking Rules contained in 19 CFR 102.11 will not yield an origin determination of either Canada, Mexico or the United States. Specifically, the finished product is neither wholly obtained or produced in a single country as is required under section 102.11(a)(1) nor is the finished product produced exclusively from domestic materials as required under section 102.11(a)(2). Section 102.11(a)(3) also does not provide a country of origin determination because the frozen beef patties do not undergo an applicable tariff shift pursuant to 102.11(a)(3). However, 19 CFR 102.19(a) states:

Except in the case of goods covered by paragraph (b) of this section, if a good which is originating within the meaning of 181.1(q) of this chapter is not determined under 102.11(a) or (b) or 102.21 to be a good of a single NAFTA country, the country of origin of such good is the last NAFTA country in which that good underwent production other than minor processing, provided that a Certificate of Origin (see 181.11 of this chapter) has been completed and signed for the good.

Accordingly, provided the frozen beef patties are originating under General Note 12, HTSUS, as determined by an inventory management method of accounting and the requirements of section 102.19(a) are met, the country of origin of the subject merchandise is Mexico.

Please be advised that notwithstanding our determination regarding the country of origin and marking of the frozen beef patties, the imported merchandise must also comply with USDA food labeling regulations administered by the Animal and Plant Health Inspection Service (APHIS). For APHIS requirements, please consult your local USDA office or their website at http://www.aphis.usda.gov.

Those portions of the frozen beef patties that are not originating goods by application of an inventory management method should be marked to indicate their multiple countries of origin of the beef trimmings.

HOLDING:

Based on the foregoing analysis, determinations as to NAFTA preferential tariff treatment and country of origin marking may be made through an application of one of the inventory management methods of accounting set out in Schedule X of the NAFTA.

Where the frozen beef patties are not considered a NAFTA originating good, the country of origin of the frozen beef patties is the origin of all countries from which the beef trimmings originate. Pursuant to 19 CFR 102.19, where based on an inventory management method, the frozen beef patties are an originating good under General Note 12, HTSUS, the country of origin is Mexico.

A copy of this ruling should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy,
this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Gail A. Hamill, Chief
Tariff Classification and Marking Branch

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