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HQ 562344

September 9, 2002

MAR-05 RR:CR:SM 562344 NL


Port Director
U.S. Customs Service
198 West Service Road
Champlain, NY 12919

RE: Protest No. 0712-00-100166; NAFTA Eligibility; Inventory Management Methods; Average Method; Recordkeeping; De Minimis

Dear Port Director:

This is a decision on the above-referenced Protest and Application for Further Review filed by the importer, Brinks Canada, Ltd. on behalf of Johnson Matthey, Ltd (JML). JML is in the business, among other things, of refining precious metals. The instant Protest concerns all of JML’s importations from Canada of gold bars and grain in refined form during the months of November and December, 1999.


The bars and grain of refined gold that JML imported into the U.S. were produced in Canada using various kinds of materials, including gold ore, scrap and waste derived from production, and scrap and waste derived from collected used goods. A large proportion of the materials, received in unrefined form by JML, are mined, produced, derived or collected in the U.S. or Canada. It is not disputed that these materials are originating materials for the purposes of duty treatment under the North American Free Trade Agreement (NAFTA). A small proportion of the unrefined materials do not originate in a NAFTA country. Consequently, the finished refined gold bars and grain imported into the U.S. include some materials that are not originating for the purposes of the NAFTA.

Under a CF 434 dated November 11, 1999, JML claimed NAFTA eligibility for its 1999 shipments of refined gold. Although the company knew that the refined product contained non-originating materials, it calculated that the value of the non-originating materials used in the production of the gold was below the NAFTA seven percent de minimis threshold for non-originating materials. The company considered that this calculation was supported by its internal records showing the quantity and originating status of the materials received and other records.

Following a NAFTA verification visit on January 27, 2000 at JML’s Canadian premises, Customs on February 16, 2000 issued a CF 29 Notice of Action advising that NAFTA duty treatment for 1999 would be denied. The Notice of Action stated that the denial was based on two discrepancies: (1) None of the four NAFTA Inventory Management Methods prescribed in 19 CFR Part 181, Schedule X were in place to determine non-originating content; and (2) JML did not have CF 434 Certificates of Origin from all of its suppliers.

All the subject entries were liquidated on May 26, 2000. Brinks Canada Ltd. filed this protest on behalf of JML on August 23, 2000 and applied for Further Review. Accordingly, the Protest was timely filed. On February 5, 2002, the Protest, having been approved for Further Review, was referred to this office.


Did JML substantiate its claims of eligibility for NAFTA tariff treatment for refined gold imported in November and December of 1999?


It is acknowledged by JML that a portion of the unrefined materials (gold ore, slag, scrap, waste and materials derived from scrap or waste) did not qualify as NAFTA originating materials. JML obtained these from countries other than NAFTA parties for refining in Canada. Then these refined non-originating materials were combined with a substantial amount of identical materials that qualified as NAFTA originating to produce refined bars and grain.

The use by JML of non-originating materials precludes NAFTA eligibility for the refined gold under the criterion of goods wholly obtained or produced in the territory of a NAFTA country. See, General Note 12(b)(i), HTSUS, and Instructions for completion of CF 434. JML’s CF 434 Certificate of Origin claims eligibility for the goods under Criterion “B”. This is a representation that the refined gold was produced entirely in a NAFTA country and satisfies the applicable rule of origin. For the refined gold, classified in heading 71.08, HTSUS, the applicable rule of origin requires that non-originating materials undergo a change to that heading from any other chapter. See General Note 12(t)71.1, HTSUS. Although changes from gold ores classified in Chapter 26 would satisfy this rule, other non-originating materials used by JML, including gold in unrefined forms such as dore classified in heading 71.08 and scrap and waste of gold classified in heading 71.12 would not satisfy this rule. It would appear that two of the production steps undertaken by JML – collection and recovery of unrefined gold, or refining and production of gold bars and grain – do not result in the required change in tariff classification. That is, neither the recovery nor refining confers originating status on materials mined or collected or derived from production in non-NAFTA countries.

Accordingly, under the facts presented, a CF 434 claim of eligibility under Criterion “B” is only warranted if the amount of non-originating unrefined gold materials may be disregarded under NAFTA’s de minimis provisions.

JML’s use of the “Average Method” of Inventory Management for Fungible Materials

As provided in General Note 12(f), HTSUS, a good may be NAFTA originating if the amount of non-originating materials used in its production is de minimis. Specifically, “if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classificationis not more than 7 percent of the transaction value of the good[or] not more than 7 percent of the total cost of the good,” the good shall be considered originating. JML has advised that here transaction value is the basis of appraisement, and submits that the value of the non-originating materials used in the production of the refined gold was not more than 7 percent of the transaction value of the refined gold imported into the United States.

In this case it is a straightforward matter for the importer to establish the relative values of originating and non-originating materials because JML, after processing and refining the various input materials and prior to producing its finished bar and grain for importation to the U.S., conducts assays for each lot received, originating and non-originating. The assays measure the gold content. Weight determines the value of the gold in accordance with well-established market indices.

However, the nature of JML’s operations does not permit direct identification of originating and non-originating materials in a given bar of gold or lot of gold in grain. Approval by Customs of NAFTA eligibility for the refined gold therefore depends upon the importer’s appropriate attribution of originating status to originating and non-originating materials in inventory on an accounting basis. JML contests Customs’ finding that it has failed to determine the origin of its originating and non-originating fungible materials on the basis of NAFTA inventory management methods, and offers records as discussed below in support of its position.

Fungible materials are defined in General Note 12(g), HTSUS as materials that are “interchangeable for commercial purposes and have essentially identical properties.” Both JML and Customs appear to have treated the unrefined materials (gold ore, slag, scrap and waste, and materials derived from scrap and waste) from the various NAFTA and non-NAFTA source countries as fungible under this definition. This office confirms that the materials were appropriately considered fungible for the purposes of determining the NAFTA eligibility of the refined gold.

JML contends that its system of records reflects management of its inventory of originating and non-originating fungible materials that is compliant with NAFTA requirements. These records are said to track, using the “average method”, originating and non-originating fungible materials withdrawn from materials inventory. It submits that its inventory management records substantiate that the value of non-originating materials used in production of the refined gold during the relevant period was below the seven percent de minimis standard, and thus should be disregarded for purposes of NAFTA eligibility.

Section I, Part IV, Section 7(16)(a) of the Appendix to the NAFTA Rules of Origin Regulations (19 CFR Part 181 and App.) provides that:

For the purpose of determining whether a good is an originating good...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, at the choice of the producer of the good or the person from whom the producer acquired the materials, be made on the basis of any of the applicable inventory management methods set out in Schedule X....

The Protestant submits that its origin determinations were made using the “average method” set out in Schedule X of the NAFTA Rules of Origin Regulations. Under the “average method” the origin of fungible materials is determined on the basis of the ratio of non-originating to total materials in materials inventory calculated over the preceding one-month or three-month period. JML elected to utilize a three-month preceding period.

The documentation submitted substantiates that JML operated an “average method” inventory management system in accordance with the NAFTA Rules of Origin Regulations. This computerized system was based on the Refining Reports generated for each shipment of unrefined materials (ore, scrap, waste, etc.) received. The Refining Reports itemize the supplier, lot composition, lot description, date of receipt, date of refining, net weight, metal assay and further refining. These Refining Reports thus are the basis for aggregation of the country of origin, gold content by weight, and value of each lot received by JML for refining in Canada. Country of origin is tracked on the basis of the country that supplied the lot, and these records permit segregation of the NAFTA from the non-NAFTA source materials. Examples of Refining Reports have been provided by the Protestant as Exhibit B to its submission.

The calculation of the ratios begins with the Refining Report Summaries that aggregate the weight and value of NAFTA and non-NAFTA materials (Exhibit D); and the weight and value of the materials provided by non-NAFTA suppliers (Exhibit E). These aggregate reports indicate that during Calendar 1999, of a total of $1,079,940,809 in unrefined gold by value, $24,302.913 consisted of non-originating unrefined material.

The month-by-month ratios by value of non-originating to total materials appear in Exhibit F of JML’s Protest submission. This Exhibit provides the monthly ratios for JML’s April through March fiscal year. Under the Schedule X “average method”, the ratio for the three-months preceding the November and December 1999 entries under protest will be applied to the protested entries. The ratio for August, September and October 1999 will be the ratio applied to determine whether the non-originating materials used in production of the refined gold is not more than seven percent of the transaction value of the goods.

Exhibit F shows that during that three-month period JML received in materials inventory a total of $285,584,911 in gold, of which $14,979,169 was non-originating. The ratio of non-originating materials to all materials for this period thus may be calculated as 5.245. Applying this ratio to the entries under protest in the succeeding period, the value of non-originating materials used in production of the gold may be reflected as not more than seven percent of the transaction value of the gold – the de minimis allowance under U.S. Note 12(t), HTSUS. Thus, using the “average method” inventory management method of Schedule X, the non-originating materials used in production of the gold imports under protest may be disregarded for determining the NAFTA eligibility of the gold imported from Canada. Disregarding the non-originating fungible materials, the gold may be treated as NAFTA originating for tariff treatment and other purposes.

It is noted that in using the Schedule X “average method” JML sets the opening inventory at the beginning of each three-month period at zero. JML submits that this accounting treatment reflects its practice because the gold that JML receives is typically refined and shipped within twelve weeks. JML acknowledges that there might be slight discrepancies between this accounting treatment and its actual practice, but seeks endorsement of it on grounds of ease of administration. Upon consideration of these representations, this office finds that JML’s treatment of opening inventory at zero under the “average method” of Schedule X is reasonable and acceptable. This treatment is to be distinguished from the treatment addressed in HQ 227272 (May 1, 1997), where the importer provided no method for treating opening inventory under Schedule X, and thus was found not to have operated a Schedule X inventory management method for tracking originating and non-originating fungible goods.

Sufficiency of CF 434 Certificates of Origin

JML protests Customs’ finding that JML should have presented NAFTA Certificates of Origin from its suppliers. Upon review of the blanket CF 434 prepared by JML covering the protested entries, it is noted that this document lists JML as both the producer and exporter. As a producer executing a CF 434, JML acts upon its own responsibility. It is required to maintain and present upon request documentation to support the certificate. However, there is no requirement to obtain, maintain or submit CF 434’s from the suppliers of its materials. On this point the protest should be allowed.

This office has reviewed the blanket CF 434 submitted by JML on its own behalf as producer, exporter and importer of the subject merchandise. The CF 434 covers this merchandise and is otherwise in order.


This Protest should be ALLOWED.

The Protestant has demonstrated that its inventory management method was in conformity with the requirements of 19 CFR Part 181 App., Schedule X. Application of this inventory management method demonstrates that the
value of non-originating materials used in production of refined gold was de minimis for the purposes of NAFTA eligibility.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, this decision and the Customs Form 19 are to be mailed to the protestant no later than sixty 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 Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.


Myles B. Harmon
Acting Director

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