Application for Further Review of Protest 0712-13-100024; General Note 12; NAFTA; Commingled Orange Juice; Fungibility; Inventory Management Method; De Minimis Rule; Marking of Containers

HQ H264513 July 9, 2015 RR:CTF:VS H264513 AJR CATEGORY: Classification Port Director U.S. Customs & Border Protection Port of Champlain 237 West Service Road Champlain, NY 12919 RE: Application for Further Review of Protest 0712-13-100024; General Note 12; NAFTA; Commingled Orange Juice; Fungibility; Inventory Management Method; De Minimis Rule; Marking of Containers Dear Port Director: This is in reference to the Application for Further Review of Protest 0712-13-100024, timely filed by counsel, on February 22, 2013, on behalf of their client, The Minute Maid Company Canada, Inc. (“TMMCCI”), contesting the denial of preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”) to frozen concentrated orange juice. FACTS: This case involves 16 entries of frozen concentrated orange juice (“FCOJ”) imported from Canada between April 1, 2011, and October 12, 2011. The FCOJ entries at issue concern three types of FCOJ: regular FCOJ, no-pulp FCOJ, and FCOJ with calcium. The regular FCOJ and the no-pulp FCOJ (collectively, the “Non-Fortified” FCOJ) were classified under subheading 2009.11.00, Harmonized Tariff Schedule of the United States (“HTSUS”). The FCOJ with calcium (the “Fortified” FCOJ) was classified under subheading 2106.90.48, HTSUS. We specifically address the entry dated March 28, 2011, which concerned all three types of FCOJ, but according to TMMCCI’s counsel, this represents all 16 entries including the type of inventory records kept by the companies at issue. TMMCCI produced the Non-Fortified and Fortified FCOJ in Canada by blending U.S.-origin concentrated orange juice for manufacture (“COJM”) with: orange essence and essential oils from the United States; water from Canada; a tetra-pack COJM blend from the United States, Brazil, and Canada; and product-specific ingredients (e.g. calcium) depending on the type of FCOJ. For instance, the Fortified FCOJ consisted of the following ingredients: Ingredients % in Fortified FCOJ Origin Classification COJM > 99% USA 2009.19 Orange Essence < 1% USA 3301.90 Orange Pulp < 1% USA 2008.30 Tri-Calcium Phosphate < 1% USA/Mexico 2835.26 Calcium Lactate < 1% Netherlands 2918.11 Mono Calcium Phosphate < 1% Mexico 2835.26 Essential Oils, Orange < 1% USA 3301.12 Tetra-pack (COJM Blend) < 1% USA/Brazil/Costa Rica 2009.12 The Non-Fortified FCOJ consisted of similar ingredient proportions, and with the added water from Canada, the final batches of each Non-Fortified and Fortified FCOJ totaled 1,800 liquid gallons. After production, the Non-Fortified and Fortified FCOJ were separately packed into 12 fluid-ounce cans and shipped to the United States. The 200 mL tetra-packs were produced in Texas by Coca-Cola Refreshments (“CCR”), a company related to TMMCCI, by blending 50 gallons of COJM produced from Florida oranges, 46 gallons of COJM produced from Brazilian oranges, 50 gallons of COJM produced from Costa Rican oranges, and 854 gallons of water, which brought the three COJM down to a single-strength orange juice. Accordingly, the Brazilian and Costa Rican oranges accounted for 9.6 percent of the total blend, which equates to 19.2 mL of non-U.S.-origin COJM in each 200 mL tetra-pack. When the tetra-packs were added to the FCOJ produced during the period in question, counsel states that it resulted in less than three ten-thousandths of a percent (0.000282 percent) of Brazilian and Costa Rican oranges in each batch of FCOJ,  and ensured a continuous uniform country of origin label despite the different orange crop sources. TMMCCI submitted Attachments 4 – 9, to show the tracing and linking of each ingredient used in a particular FCOJ batch. TMMCCI indicates that for each production run, it generated unique lot identifier numbers, process orders, and used average inventory methods, allowing it to account for the originating and non-originating materials, and thus claim that non-originating COJM accounted for only 0.000282 percent of the imported FCOJ. These attachments also provide an analysis of each of the COJM sources used in the tetra-packs, indicating their respective brix value, color, USDA Grade, and total score. Attachments 4 – 9 also included the following information: Attachment 4 – provides CCR’s inventory records, showing the production of a tetra-pack batch used in Non-Fortified FCOJ (Regular) produced by TMMCCI. The inventory records include a compilation of computer screen images displaying data processing records (“SAP records”) from CCR, which assign particular batch numbers for the Brazilian and Costa Rican orange orders, respectively. These batch numbers match the batch numbers on the packing list, invoice, bill of lading, and inspection records found in this attachment. The respective dates, quantities, and other reference numbers also align among these records; Attachment 5 – provides TMMCCI’s SAP records showing four purchase orders issued by TMMCCI to CCR for a product identified under a specific material number, and a material document list that identifies the material number noted in the four purchase orders as a particular tetra-pack batch, with a description stating, “BLEND US BR CR”; Attachment 6 – provides TMMCCI’s SAP records for the production of 12,000 cases of Non-Fortified FCOJ (Regular) at its facility in Canada as follows: Attachments 6-A and 6-B show the initial order for the 12,000 cases identified by a process order number and a batch number (collectively, “initial order”); TMMCCI states that to fill the initial order it issues more specific orders for each 1,800 gallon of FCOJ batch required to fill the initial order. To show this, TMMCCI provides Attachments 6-C through 6-F; Attachment 6-C shows 15 process order numbers and corresponding batch numbers (collectively, “specific order[s]”), ordering the production of FCOJ required to fill the initial order; Attachment 6-D shows the ingredients for one specific order, listing tetra-pack with the same material number identified in Attachment 5; Attachment 6-E shows the tetra-packs used from TMMCCI’s inventory for all 15 specific orders, listing the tetra-packs with the same material number identified in Attachment 5; Attachment 6-F associates the 15 specific orders with the initial order by matching the batch numbers from the specific orders with the process order number from the initial order; Attachments 6-G through 6-J show the complete bill of materials, packaging, delivery, and shipment documents, identified by the process order number and batch number from the initial order, and also a specific delivery number; Attachment 7 – provides TMMCCI’s SAP records for the production of 9,600 cases of Fortified FCOJ at its facility in Canada in the same manner as provided in Attachment 6; Attachment 8 – provides TMMCCI’s SAP records for the production of 6,400 cases of Non-Fortified FCOJ (Pulp-Free) at its facility in Canada in the same manner as provided in Attachment 6; and, Attachment 9 – provides TMMCCI’s SAP records for the delivery of the FCOJ produced in Attachments 6, 7, and 8, all identified under the same delivery number. On April 14, 2011, Customs and Border Protection (“CBP”) issued a Request for Information (CBP Form 28) to TMMCCI requesting a NAFTA Certificate of Origin for the FCOJ products at issue. On May 12, 2011, TMMCCI’s customs broker, Livingston Consulting (“Livingston”), filed a prior disclosure on behalf of TMMCCI, with an attached blanket NAFTA Certificate of Origin for 2011, dated December 29, 2012, identifying the three FCOJ products with their respective HTSUS numbers, TMMCCI as the producer, the country of origin as the United States, and with preference criterion B. The prior disclosure acknowledged that the COJM from the United States was shipped to Canada and mixed with small quantities of COJM from Brazil and Costa Rica, but that the three COJM were fungible because each was required to meet the exact quality specifications in order for TMMCCI to deliver a consistent product. The prior disclosure references TMMCCI’s use of an inventory management method, but not the specific method that was used. On August 12, 2011, Livingston supplemented the prior disclosure, indicating that “specific identification method […] is the most appropriate method under these facts since the predominant juice is physically segregated from the pre-mixed juices.” With respect to the tetra-packs, this response states “[t]his supply of pre-mixed orange juice is physically segregated from other supplies of juice that come from the predominant country [the United States].” On August 31, 2011, CBP requested more detailed inventory management system records from TMMCCI. On October 14, 2011, Livingston responded on behalf of TMMCCI, stating that the “United States juice and blend of United States/Brazilian/Costa Rican juices were kept segregated until the two were blended together pursuant to the processing protocol.” Attached to this response was TMMCCI’s COJM offloading process, which instructs TMMCCI employees to run received orange juice shipments through a lab for approval and then offload the juice into particular tanks designated according to its origin. Another attachment shows a tank for Costa Rican COJM with a label stating “[c]ontents to be segregated at all times from all other juices in facility.” On February 22, 2012, Livingston responded to another request for information, providing the same inventory management process previously described. However, on May 18, 2012, TMMCCI’s counsel made reference to both the specific identification method and the averaging method, while indicating the same inventory management process described by Livingston. TMMCCI’s counsel provided the same description and reference to both methods in the protest on February 20, 2013. Your office states that on February 28, 2012, TMMCCI’s counsel forwarded a certification from TMMCCI’s parent company, The Coca-Cola Company (“TCCC”), stating that on December 29, 2011, TCCC made a sourcing change, using only U.S.-origin oranges, due to an incident involving the possible use of the fungicide Carbendazim on Brazilian orange crops. TCCC’s ingredient specifications, dated August 25, 2010, indicate the COJM standards applied by the company, which include minimum and maximum brix levels of 63 and 67 degrees, a target brix level of 65 degrees, and a warning that any lot found to contain residues of agricultural chemicals (non-approved or exceeding tolerance standards) would be rejected. Your office states that TCCC reported this possible use to the Food and Drug Administration (“FDA”), but that TMMCCI’s response to a CBP Form 28, dated February 22, 2012, continued to claim that the oranges were from the United States, Brazil, and Costa Rica. On April 10, 2013, Livingston emailed your office stating that they could not recall with whom they talked to at the FDA, but that after the Carbendazim ban was removed, they were advised to have TMMCCI revert back to the old documentation format. On April 4, 2012, CBP issued a proposed Notice of Action (CBP Form 29), indicating that the FCOJ products did not qualify for preferential tariff treatment under the NAFTA because they did not qualify to be marked as goods of Canada, they did not satisfy the tariff shift rule in General Note 12, HTSUS, and they did not meet the criteria from the fungibility provisions. Your office states that, though USDA Grade-A designation was provided, there was insufficient evidence to consider the materials fungible because no contract, agreements, or terms of sale were provided to indicate that the Cotton Exchange Standards were met; and, the originally submitted non-originating FCOJ analysis scores did not meet the necessary threshold to be considered commercially interchangeable. Your office also states that the de minimis rule does not apply to these goods. On September 10, 2012, CBP issued another CBP Form 29, taking action to deny NAFTA preference for the entries at issue. A timely protest, dated February 20, 2013 was filed by TMMCCI, which included Attachments 3 – 9 and the following: Attachment 1 – CBP Form 29, dated April 4, 2012, and corresponding entry summary from April 8, 2011; Attachment 2 – Livingston’s response to CBP Form 28, dated February 22, 2012, with attached bills of materials for the three FCOJ products and the following NAFTA Certificates of Origin: A blanket NAFTA Certificate of Origin for 2011, dated February 15, 2012, identifying the three FCOJ products with their respective HTSUS numbers, TCCC as the exporter, the country of origin as the United States, and with preference criterion A; Two blanket NAFTA Certificates of Origin for 2011, both dated December 10, 2010, identifying Encompress, Tricalcium Phosphate, Tricalcium Phosphate FG, Regent 12XX FCC, Regent 12XZX FCC, Monocalcium Phosphate FCC, Ajax, V90, Triphosphate Dodecahydrate, and Trisodium Phosphate AH Tech; all classified under heading 2835, HTSUS; all with preference criterion B, except one with preference criterion C; the United States and Mexico as the countries of origin; and, Innophos Canada, Inc. as the exporter; A blanket NAFTA Certificate of Origin for 2011, dated May 16, 2011, identifying Essential Oils, Orange classified under 3301.12, HTSUS, with preference criterion B; the United States as the country of origin; and TCCC as the exporter; Attachments 10 – An analysis of U.S.-origin COJM, showing a total score of 93, a Brix value of 65.42, a Brix value to acid ratio of 18.48 to 1, a 36 for flavor, a 37 for color, and a 20 for defect; Attachment 11 – An analysis of Brazilian-origin COJM, showing a total score of 95, a Brix value of 66.24 degrees, a Brix value to acid ratio of 17.81 to 1, a 37 for flavor, a 38 for color, and a 20 for defect; and, Attachment 12 – An analysis of Costa Rican-origin COJM, showing a total score of 96, a Brix value of 66.6 degrees, a Brix value to acid ratio of 16.40 to 1, a 38 for flavor, a 37 for color, and a 20 for defect. As mentioned, the above facts pertain to the entry dated March 28, 2011, which concerned all three types of FCOJ. TMMCCI’s counsel states that the facts from this entry represent all 16 entries. However, counsel states “TMMCCI uses the same policies to purchase all of the orange juice concentrate, regardless of origin, that it uses to make the 200 milliliter seed-pack and the FCOJ. TMMCCI adds the 200 milliliter seed-pack to the FCOJ blend to maintain a single, accurate, country of origin label inventory that allows TMMCCI to quickly adjust its sourcing of orange juice concentrate from the U.S., Brazil, and Costa Rica in response to season or other changes in available supply from orange harvests.” Counsel also states that “the orange juice concentrate from the U.S., Brazil, and Costa Rica have identical physical properties and can be used interchangeably at various states of the blending process” and “the orange juice concentrate from the U.S., Brazil, and Costa Rica are all imported and used to produce one of two products, 200 milliliter seed-packs, or FCOJ, and the orange juice concentrates are used interchangeably for either of the above purposes.” ISSUES: I. Whether the de minimis rule is applicable to the FCOJ; II. Whether the originating and non-originating COJM may be considered “fungible” for purposes of using one of the inventory management methods set out in the Appendix to 19 CFR § 181 of the CBP Regulations; and, III. Whether the FCOJ is a good of a NAFTA country for both duty and country of origin marking purposes? LAW & ANALYSIS: Pursuant to General Note 12 (“GN 12”), HTSUS, for an article to be eligible for NAFTA preference, two criteria must be satisfied. The good must be “originating” under the terms of GN 12(b), and the good must qualify to be marked as a good of a NAFTA country under the NAFTA Marking Rules contained in Part 102 of the CBP Regulations. GN 12(b) provides, in part, as follows: [G]oods 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-- […] (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 material 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… GN 12(r)(iii), HTSUS, provides that for purposes of interpreting the rules of origin, a requirement of change in tariff shift applies only to non-originating materials. In this case, TMMCCI is protesting 16 entries, but we have only been provided with specific information pertaining to the entry dated March 28, 2011. With regard to the entry dated March 28, 2011, the imported Non-Fortified and Fortified FCOJ are produced using non-originating materials, which include the Brazilian and Costa Rican COJM in the tetra-packs, as well as product-specific ingredients, such as the calcium from the Netherlands added to the Fortified FCOJ. With regard to the other 15 entries, the imported FCOJ products appear to also use Brazilian and Costa Rican COJM in the same manner U.S. COJM was used in the entry dated March 28, 2011, to produce the FCOJ product, beyond its use in the tetra-pack; that is, the Brazilian and Costa Rican COJM in these other 15 entries comprise portions of the FCOJ that were only comprised by U.S. COJM in the entry dated March 28, 2011. The NAFTA tariff shift rules are provided for in GN 12(t), HTSUS. For the Non-Fortified FCOJ, which is correctly classified under 2009.11.00, HTSUS, the tariff shift rules provide: A change to subheadings 2009.11 through 2009.39 from any other chapter, except from heading 0805. For the Fortified FCOJ, which is correctly classified under 2106.90.48, HTSUS, the tariff shift rules provide: A change to tariff items 2106.90.48 or 2106.90.52 from any other chapter, except from headings 0805 or 2009, or tariff items 2202.90.30, 2202.90.35 or 2202.90.36. According to the bill of materials, each non-originating material undergoes the requisite tariff shift, except for the tetra-packs, which were classified under 2009.12, HTSUS, before they were used in the production of the FCOJ. Therefore, the imported FCOJ does not qualify for preferential tariff treatment under the NAFTA, unless another rule is applicable. De Minimis TMMCCI argues that the non-originating COJM amounts in the tetra-packs are de minimis and should not bar the imported FCOJ from NAFTA eligibility. GN 12(f)(i), provides that: Except as provided in subdivisions (f)(iii) through (vi), inclusive, a good shall be considered to be an originating good if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classification set out in subdivision (t) of this note is not more than 7 percent of the transaction value of the good, adjusted to a F.O.B. basis…. However, GN 12(f)(iii)(C), HTSUS, states that subdivision (f)(i) does not apply to, “a non-originating material provided for in […] subheadings 2009.11 through 2009.30, inclusive, that is used in the production of a good provided for in subheadings 2009.11 through 2009.30, inclusive, or tariff items 2106.90.48[….].” Additionally, GN 12(r)(v)(A), HTSUS, provides that the de minimis rule under GN 12(f), HTSUS, does not apply to, “certain non-originating materials used in the production of goods