CLA-02 RR:CR:SM 563190 DCC
Cindy R. Taber
Sandler, Travis & Rosenberg, P.A.
551 Fifth Avenue
New York, NY 10176
RE: NAFTA; inventory management methods; fungible material; 19 CFR 181 App. Schedule X
Dear Mr. Wallace:
This is in reply to your letter dated November 22, 2004, requesting an advance ruling on behalf of Main Knitting, Inc. of Montreal, Canada (“Main”), regarding the use of inventory management methods for claiming the North American Free Trade Agreement (“NAFTA”) preference.
FACTS:
According to your letter, Main manufactures men’s and women’s undergarments in Canada. These garments are made with yarn from the United States and India. The yarn from the United States is wholly produced in the United States, and the yarn from India is foreign yarn. Main knits the U.S. and Indian yarn into fabric at its manufacturing facilities in Canada. Main then cuts and sews this fabric into men’s and women’s underwear and undershirts. You state that after the U.S. and Indian yarn has been spun into fabric and dyed, there is no way to determine the origin of the imported yarn material. The yarns from the United States and India are classified under tariff headings 5205, 5206, and 5509, HTSUS. The finished garments are classified under tariff headings 6107 and 6109, HTSUS.
You seek a ruling to affirm the use of the averaging method as an inventory management method described in the NAFTA rules of origin (19 C.F.R. Part 181, App. 7(16)(a)). These regulations provide methods for the treatment of originating and non-originating materials which are fungible.
You state that Main would use the commingled yarns to produce finished apparel at its plant in Canada which would then be shipped to the United States. You state Main would like to use the averaging inventory management method to identify which yarns are originating materials for the purposes of determining NAFTA preference eligibility. Main proposes to track its yarn in inventory using the “average method” for either a one-month or three-month period. Under this method, the ratio between originating and non-originating materials during a given one-month or three-month period would be the same ratio used to determine the originating status of finished goods during the following one-month or three-month period.
ISSUE:
Whether inventory management methods are acceptable in the instant case for NAFTA preference purposes.
LAW AND ANALYSIS:
The NAFTA Rules of Origin Regulations (ROR) for purposes of determining NAFTA preference eligibility provides for the use of inventory management methods to distinguish originating and non-originating materials. Part 181 App. § 7(16)(a), Rules of Origin, provides that:
For purposes of determining whether a good is an originating good,
(a) where originating materials and non-originating materials that are fungible materials . . . are 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.
The various inventory management methods set out in Schedule X are set forth in 19 C.F.R. Part 181 App. Schedule X, § 2, which states:
The inventory management methods for determining whether fungible materials referred to in section 7(16)(a) of this appendix are originating materials are the following:
specific identification method;
FIFO method;
LIFO method; and
average method
The term “fungible goods” is defined by the NAFTA, as implemented in the Harmonized Tariff Schedule of the United States (“HTSUS”), General Note (“GN”) 12(g) (19 U.S.C. § 1202) as:
Fungible goods and materials. For purposes of determining whether a good is an originating good—
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; and
where originating and non-originating fungible goods are commingled and exported in the same form, the determination may be made on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury.
The term “fungible” means that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties.
Customs and Border Protection (“CBP”) has previously reviewed the use of an inventory management methods for originating and non-originating yarns used to produce drapery tassels. In Headquarters Ruling Letter 562255, CBP considered the use of a “First In First Out” (“FIFO”) accounting method for originating and non-originating yarns that were commingled and dyed in the United States before being sent to Mexico for processing. CBP determined that because the originating and non-originating yarns were used indiscriminately the yarns were fungible and the importer could therefore use a FIFO inventory management method.
Similarly, in the instant case, we find that for NAFTA preference purposes, once the non-originating yarn from India and the NAFTA originating yarn from the United States are commingled before they are knitted, the yarn is fungible material within the meaning of the provision in General Note (“GN”) 12(g)(ii). The fact that the yarn is commingled and used indiscriminately in the knitting process is dispositive that the yarn is interchangeable for commercial purposes and has essentially identical properties. Therefore, for determining whether the exported yarn is NAFTA originating or non-originating, an inventory management method may be used. Furthermore, we find that the proposed average method is acceptable under the NAFTA rules of origin (19 C.F.R. 181, App. Schedule X).
HOLDING:
Based on the information provided, the use of an inventory management method appears appropriate in this case for NAFTA preference eligibility. If you use the average method as proposed, the duration of its use would be from the time of choice until the end of your fiscal year.
A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division