Application for Further Review of Protest No. 2604-13-100011; Protest against denial of NAFTA preferential treatment

HQ H246422 February 23, 2016 OT:RR:CTF:VS H246422 GaK CATEGORY: Classification Port Director U.S. Customs and Border Protection 200 North Mariposa Road Nogales, AZ 85621 RE: Application for Further Review of Protest No. 2604-13-100011; Protest against denial of NAFTA preferential treatment Dear Port Director: This is in response to your correspondence, dated September 5, 2013, forwarding the Application for Further Review (“AFR”) of Protest No. 2604-13-100011, timely filed by counsel on July 19, 2013, on behalf of Jowett Garments Factory, Inc. (“Jowett”) and California Textiles S.A. de C.V. (“CalTxt”) (collectively “Protestant”). The AFR concerns the eligibility of certain wearing apparel imported from Mexico for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”). We also considered the supplemental presentation submitted during our meeting with Protestant and their counsel on October 27, 2015, and additional information submitted on December 14, 2015. We regret the delay in responding. FACTS: Jowett imported 92%/8% polyester/spandex men’s t-shirt styles 449786 and 449787, 100% polyester men’s t-shirts style 371642 and 84%/16% polyester/spandex men’s t-shirts style 456173 (“apparel”) from a related company, CalTxt in Mexico. The apparel was entered on May 18, 2012 under subheading 6109.90.10 of the Harmonized Tariff Schedule of the United States (“HTSUS”) and liquidated on April 19, 2013. On July 18, 2012, your port initiated a NAFTA verification on the apparel imported under four commercial invoices. The port issued a Request for Information (CF 28) to CalTxt, which requested the following documents: Certificates of Origin, detailed production timeline, contracts between raw materials suppliers and CalTxt, raw materials information, production records, post-production records, full explanation of inventory control method with the date of implementation, sub-contractor records, inspection certificates, accurate information on how CalTxt determines the value of the imported product, and evidence of payment from Jowett. Your port also initiated a NAFTA verification on Joy Textile S.A. de C.V. (“Joy”), a related party that produced the fabric used by CalTxt, on the same day. In response to the CF 28, Protestant submitted numerous documents in Chinese or Chinese and Spanish without English translations and a large percentage of documents did not have titles or headings. Protestant did not provide an explanation of the documents or a written explanation of its inventory control method. Several documents such as purchase orders (“PO”), commercial invoices and Certificates of Origin were not dated or dated several months outside of the verification period. For example, one of the Certificates of Origin completed by Jowett for the period January 1, 2012 to December 31, 2012 covers 100% polyester yarn produced by a yarn producer, and in the “PRODUCER” column it states “NO-1.” However, the same yarn producer’s affidavit of origin for 100% polyester yarn covers the period from January 2011 to August 2011. In addition, when the port requested a full explanation of the current inventory control method including the date of its implementation, Protestant simply stated that it uses “Specific Identification for inventory control and costing of the goods” and that it “purchases raw materials based on the actual fabric and trims to be used based on a specific garment style” or POs received from CalTxt’s customers. Protestant did not provide the date of implementation with regard to the inventory control method. The port also reviewed unidentified documents that appear to be bills of materials written mostly in Chinese, and the only discernible information was the fabric number and PO number. Protestant also submitted to the port a video of its production facility, warehouse storage areas, and images of a computer system. The port also examined in-bond transactions destined for exportation to Mexico, which revealed substantial amounts of Chinese origin yarns, U.S. origin yarns, Chinese origin fabrics, and U.S. cut garment components made from Chinese origin fabrics. On March 13, 2013, the port issued a Notice of Action Taken (CF 29) to Jowett and found that yarns, fabrics, and the finished garments are being commingled based on the existence of non-NAFTA materials being exported to Mexico and the lack of documentation to clearly substantiate that an adequate inventory control method existed. The port found that the video did not conclusively confirm the absence of commingling for the yarns and fabrics in question and did not demonstrate the adequate implementation of an inventory control method. Protestant filed an AFR, claiming that CBP’s negative determination of the NAFTA verification based on potential commingling was incorrect and without any factual support. Protestant also stated that the denial was not proper because the Notice of Action Taken (CF 29) was not sent to the exporter pursuant to 19 C.F.R. § 181.75 and was only sent to the importer. Protestant also stated that since its U.S. customers, such as Nike and Under Armour, required total control of its products, such controls existed. Protestant did not provide any documents from its U.S. customers to substantiate this claim. Protestant stressed that the negative NAFTA determination is inconsistent with previous NAFTA verifications of the same or substantially similar products and specific identification procedures in 2000, 2003, 2009, and 2010. In support of its AFR, Protestant refers to the video that allegedly demonstrates the specific identification procedures used at CalTxt’s factory. The video shows rolls of fabric which are stored after they arrive at the warehouse. The identification coding system located above the rolls have a location identifier and the fabric item number, without any reference to country of origin, manufacturer, PO, color, or any other identifying information. Protestant also provided a Notice of Action Taken (CF 29) issued to Joy to illustrate the claim that CBP did not review the submissions separately and emphasized that CBP used similar language in both CF 29s. Protestant submitted a letter from CalTxt’s accountant, who is also Joy’s accountant, dated July 16, 2013, which describes CalTxt’s inventory control method as “Direct/Specific Identification” that controls the origin status of their inventory. The accountant states that their audits show that inventory materials of NAFTA origin are maintained in different inventory locations that are separate from other fungible non-originating materials. The accountant further states that inventory materials are distinctly labeled as originating or non-originating. The letter does not state when the audit was conducted. In support of its NAFTA preference claim, Protestant submitted a narrative of CalTxt’s manufacturing process of a sample PO #4502474218 from Nike. The attached exhibits consist of the following: PO #4502474218 issued by Nike to Jowett, dated January 1, 2013, style #540572. Screenshot of an excel sheet containing PO information to create the work orders. Screenshot of a work order being created from the excel sheet, which contains the following information: PO number, style number (garment style and season), color and original goods at consolidator expressed in date form (“OGAC”). After the work orders are created, cut orders are created. Fabric purchase summary. Fabric PO #45M-22082, dated January 22, 2013. The fabric is to be shipped to CalTxt, and the customer is indicated as Jowett. The PO includes the number “MBTJ015-27USA,” which is similar to the fabric number used in CalTxt’s other documents. The fabric PO does not state which supplier the order was placed with. Protestant’s narrative stating that after the fabric is received from the supplier, the packing list is verified against the received materials’ fabric number, country of origin, color, weight, etc. The fabric is stated to be stored in the warehouse in assigned spaces and recorded in the storekeeper record. This is stated to be done to help locate the correct fabric for production to avoid any possibility of commingling. Production sheet dated February 6, 2013, that contains manufacturing information, fabrics, trims, accessories, cutting information, embellishment, sewing, package, label information, etc. specific to the garment style and related to one or more client POs if they are of the same style and color. The production sheet is in English and Chinese. The PO #4502474218 and style #540572 are included in the production sheet. Screenshot of a work order system selecting PO #4502474218 to create cut orders for production. Screenshot of creating embellishments (heat transfers, embroidery, screen print, etc.) associated with a cut order. The screenshot includes the style #540572. Protestant states that this will produce a bundle of tickets that will be used to track and pay production bonuses to employees. Copy of embellishment order tickets dated February 11, 2013 for PO #4502474218. The tickets include cut #32440.1, customer “Nike”, color, size, quantity, style #540572, location information, and other unidentified numbers. Screenshot of a system creating the sewing production order based on the quantities of the bundles. It states that the order is for Nike style #540572. Sewing production tickets that are linked to the work order, PO and style of the same customer. However, the sewing production ticket was illegible and CBP could not verify that they are connected to PO #4502474218. Screenshot of a system creating shipments and dividing garments into different cartons. The packing detail contains the information of the shipments from the packing area. Then the shipment is created, which contains the information necessary for Customs, such as truck number, weight, cartons, styles, colors, etc. The port attached to the protest, a list of inconsistencies and defects that led to the conclusion that the submitted documentation did not substantiate the preferential claim. In addition to the fact that the documents were not properly identified, the port noted that the area where the rolls of fabric are stored in CalTxt’s warehouse does not have any reference to country of origin, manufacturer, PO, color, or any other identifying element. One of the unidentified documents was later identified as a production sheet, and it references fabric #MBT-J015-3EF and PO #45D-18700. The same document indicates that the color of the fabric is black. However, in another unidentified document (that may be a list of orders or fabric inventory sheet), fabric #MBTJ0153EF is associated with the color “new green.” The port also notes that in the video, the fabric is grouped together in a bundle with fabric numbers and PO numbers, but it did not contain the country of origin information. The port also states that during its meeting with Protestant, Protestant explained that after receiving rolls of fabric at the warehouse prior to production, the rolls are extended, also known as “relaxing,” to allow for precise cutting of the fabric and to avoid shrinkage, which is done for a period of not more than 24 hours. The port points to an unidentified document dated February 17, 2012, later identified as a packing list in the video, which contains the PO #45D-18702, fabric #MBTJ015-3HF, roll #779 and #790, and a notation stating “2/29/12 Dispatch from warehouse to ‘relax’ the fabric.” The port points to another unidentified and undated document that appears to be a cutting order, which contains the same PO #45D-18702, fabric #MBTJ015-3HF, roll #790 and #779, and a big notation that reads “2/27.” Taking into account that relaxing the fabric can take up to 24 hours, the port notes that if “2/27” represents February 27, 2012, it is impossible for the fabric to have been dispatched from warehouse to relax on February 29, 2012. The port also points to an unidentified document in Chinese and notes that it is missing information present on similar documents used to show the cutting of other rolls of fabric. During the meeting on October 27, 2015, Protestant provided a written explanation of their inventory control method with clear, legible versions of the documents submitted with the protest. Protestant added that a materials requirement report is created after all work orders are processed, and Protestant issues POs for the required materials, mainly to Joy. When the fabrics are delivered and verified, a location number is assigned by rack and bin number, which is recorded in the Piece Good Inventory Record. Protestant states that the Piece Good Inventory is maintained using the specific identification method, which includes the style number, color, dye lot number, piece number, and fabric PO number. Protestant further states that Piece Good Inventory is used during production to ensure that the correct fabric is used for the specific POs, and assigned to a specific cut for a specific work order, which can have multiple cut orders assigned to it. Then all POs with the same style number are evaluated and the production manager decides what needs to be cut, based on the work orders. Production begins by assigning a 5-digit cut order number based on the style number. Additionally, a production card is generated for the particular cut with detailed specifications for the particular PO and style, such as dimensions and placement of the customers’ logo. After the cut number is assigned, fabric is released from the Piece Good Warehouse based on the order specifications and it is cross referenced with the production card to ensure that the correct fabric is used. This process ensures that fabric used for a specific cut order is tracked and can be traced back to the source of the fabric production. The fabric production process is discussed in our decision of H246655, dated November 25, 2015. The cut fabric then undergoes the embellishment process, where it is processed with a heat transfer and embroidery, depending on the style. Computer generated bar-code and order tickets are generated for the cut pieces pending embellishment, which ensures tracking of each process. After embellishment, the pieces are bundled by the PO number and sewing production tickets are generated. The sewing production tickets include the customer information, work order number, PO number, and style number. After sewing, all completed garments undergo inspection, and are packed into cartons based on the instructions on the production card. In the December 14, 2015 submission, Protestant explained that the unidentified document associated with the February 17, 2012 packing list referenced above, is a cutting worksheet. Protestant stated that the specific cutting worksheet that the port referred to is a voided cutting worksheet. The correct corresponding cutting worksheet for fabric #MBTJ015-3HF including a big notation that reads “2/29” which represents February 29, 2012, was submitted and we note it was included in the original submission to the port without a sufficient explanation. The corresponding packing lists were also submitted, which indicated that the fabric was dispatched from warehouse to be “relaxed” on February 24, 25, 27, 28, and 29, 2012. ISSUE: Whether the documentation, submitted by the protestant, supports the claim for preferential tariff treatment under the NAFTA for the imported wearing apparel. LAW AND ANALYSIS: The NAFTA is implemented in the HTSUS in General Note (“GN”) 12. However, at issue in this case is not the question of whether the imported apparel met the terms of GN 12 per se, but whether the information submitted substantiated the claim that the product met the terms of GN 12. To verify or substantiate the NAFTA claim, CBP has the right to seek further information by initiating a NAFTA verification pursuant to 19 C.F.R. § 181.72. As noted in the FACTS section above, Protestant initially submitted partially translated documents to demonstrate that its inventory control method is sufficient. While Protestant later submitted translations and provided a thorough narrative of their inventory control method, we note that it is incumbent on the importer to present documentation which CBP personnel will be able to analyze and consider. Such documentation must either be in English or, if in a foreign language, accompanied by an English translation. Anything else falls short of the importer's obligation to exercise reasonable care in providing information which is necessary to enable CBP to properly assess duties, collect accurate trade statistics and determine whether any other applicable legal requirements are met. See Headquarters Ruling Letter (“HQ”) H036556, dated February 12, 2009 and 19 U.S.C. § 1484. Furthermore, in TBT-12-003, dated March 22, 2012, “Supplemental Instructions for Document Review When Verifying Trade Preference Program Claims for Textiles and Wearing Apparel,” CBP stated that the trade is to exercise reasonable care in the preparation of trade preference claims and it is incumbent on the importer to supplement the documents with an explanation and showing of how the documents are connected to one another. CBP also stated that import specialists should seek clarification or additional information that could support the preferential claim. The port denied Protestant’s preferential claim because the submitted documentation was not properly labeled, in a language other than English without proper translation, and Protestant did not provide a written explanation of the inventory control method. While the port stated that they requested translations and clarifications on multiple occasions, Protestant stated that they did not receive requests for further explanation or clarification. While for the foregoing reasons the information submitted with the claim was not submitted in a manner to support the NAFTA preference claim, we note that there was a breakdown of communication between Protestant and the port which led to the negative determination of the NAFTA verification. During the October 27, 2015 meeting, Protestant sufficiently demonstrated that CalTxt’s main supplier, Joy, maintains acceptable inventory control method. We find that the explanation of CalTxt’s inventory control method coupled with the video establish that Protestant’s specific identification inventory control method is acceptable. The documentation and narrative show that the fabric is inventoried as soon as it is delivered to the factory and is tracked throughout the entire production process using work orders, cutting orders, production cards, sewing orders, and sewing production tickets. Each order is linked to the original purchase order and the documentation shows that the numbers are reflected in all of the documents maintained during production. The main reason that the port denied Protestant’s NAFTA preferential claim is that the documents were not properly identified, in a language other than English, and Protestant did not provide a written explanation of the inventory control method. Protestant explained that the documents were in Chinese because some of its employees are Chinese that do not speak English. One of the reasons the port had suspicions of commingling is that the video showed how the rolls of fabric are stored in the warehouse without any reference to country of origin, PO, color, or any other identifying elements. However, Protestant tracks each roll of fabric in its computer system, which contains all the pertinent information. The port also noted a discrepancy of colors for the same fabric item. One of the many documents submitted without a label is the production card, which references fabric #MBTJ015-3EF, the color black, and PO #45D-18700. In another unidentified document listing different fabric items being dyed into different colors, #MBTJ015-3EF is associated with the color “new green.” During the October 27, 2015 meeting, Protestant explained that fabric produced by Joy is dyed into different colors, which is why the same fabric item is associated with different colors in the second document. In addition, the port was concerned with the fact that the labels on the bundles of fabric did not have any country of origin information, even though Protestant stated in the video that each bundle of clothes is labeled with the purchase order number which is linked to country of origin, and other pertinent information on the computer system. The port was also concerned with the possible contradiction of the date on a cutting worksheet and the date the fabric was dispatched for “relaxing.” However, in its December 14, 2015 submission, Protestant explained that the cutting worksheet pointed out by the port was voided and it provided copies of valid cutting worksheets that correspond with the packing lists, which were previously submitted to the port, that show the fabrics were dispatched for relaxing several days before or on the day of cutting. Furthermore, one of the unidentified documents written in Chinese which the port described as missing information present on similar documents is a dyeing production control sheet used in Joy’s factory, which demonstrates that the documents were not presented in an orderly fashion and the port was not able to properly review the submission. Many other issues that arose in the document review by the port could have been avoided had the importer exercised greater care in the preparation and review of documents. Particularly in this case where several work orders and documents are used for different processes of production, a thorough written explanation of the inventory control method is necessary and could have saved the importer and the agency time and effort in reviewing the subject entry. A narrative to the port explaining the documents submitted in the numerical system would have been helpful. As this has now been explained to our satisfaction, we find the goods qualify for preferential NAFTA treatment. HOLDING: The protest is GRANTED. The documentation submitted to the port was not sufficient to support the claim for preferential tariff treatment under the NAFTA. However, Protestant has provided this office with sufficient explanation and translations to show that the goods are indeed eligible under the NAFTA. In accordance with Section IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of International Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division