Eligibility of jewelry for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA); U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS; Subheading 9802.00.80; double substantial transformation; alloying; casting; setting

HQ 560331 December 2, 1997 CLA-2 RR:TC:SM 560331 MLR CATEGORY: Classification John S. Rode, Esq. Rode & Qualey 295 Madison Avenue New York, NY 10017 RE: Eligibility of jewelry for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA); U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS; Subheading 9802.00.80; double substantial transformation; alloying; casting; setting Dear Mr. Rode: This is in response to your letter of February 20, 1997, requesting a ruling on behalf of Progressive Entities Dominicana, S.A. ("Progressive"), regarding whether certain jewelry from the Dominican Republic is eligible for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA). A meeting was held at the Office of Regulations & Rulings on October 9, 1997, and additional information was submitted by letter dated October 27, 1997, wherein you requested a ruling regarding the applicability of duty-free treatment for the subject jewelry pursuant to Section 222 of the Customs Trade Act of 1990 (Public Law 101-382), which amended U.S. Note 2, Subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS), {hereinafter "Note 2(b)"}. FACTS: The articles at issue are finished jewelry pieces. In order to produce the jewelry in the Dominican Republic, it is stated that Progressive will either alloy gold in the Dominican Republic using metals which do not originate in a beneficiary country (BC) and then produce castings from such alloys of gold, or use raw castings which are products of the U.S. Whether the alloying and casting is performed in the Dominican Republic or the U.S., it is stated that the first step involves alloying gold bars with silver, copper, zinc, nickel, or brass to the desired specification. The molten alloy is then poured into a modeled mold to form a number of parts connected by one or more casting sprues. Each individual part is then removed from its sprues, usually by cutting. Next, the castings, either produced in the Dominican Republic or the U.S., undergo the following processes in the Dominican Republic. The individual parts removed from the sprues are mechanically tumbled with a mild abrasive to remove any mold residue and to preliminarily smooth and compress the casting's surfaces. At this stage, it is stated that the casting has a relatively rough surface, with protruding sprue fragments, casting "flash", pits, scratches, and parting lines. In order to remove casting sprues, mold lines, and other gross excrescences, grinding wheels are used to return the casting to the shape of the original wax model. Grinding is followed by successively finer abrasives, using rubber and emery wheels to eliminate scratches and minor dents or bulges. The casting is then shaped, often by bending or stretching to conform to the desired configuration and size. It is stated that particular effort is required to reshape those portions of the casting which are designed to mate with other castings, such as adjoining links in a bracelet or a necklace. The finishing is performed by hand using hand-held gravers, hand-directed and controlled motor-driven grinders with grinding, rubber, and emery wheels on flexible shafts, plus buffing and grinding machines. When the castings are in final form for assembly, they are pre-polished by hand, machine-washed, and then ultrasonically cleaned to remove residual abrasives and polishing compounds. The requisite number of component parts are then matched and assembled into bracelets, necklaces, earrings, etc. Depending on the design, the number of components will range between 5 and 40 and the assembly will involve rivets, wire, hammering, cutting, shaping, or soldering, or any combination of these to result in a permanent assembly. Additionally, it is stated that since the exact dimensions and configuration of any precious or semi-precious stones to be set is not known, the designs, wax models, and raw castings must all be prepared to accommodate a range of stones, and to that end sufficient excess metal will be incorporated so that the setter can shape, mold, cut and conform each individual stone mounting on the raw casting to receive the particular stones provided by a customer. In order to set a stone, it is stated that each piece is set in shellac for support. The stones and gem sites on the castings are measured, and each mounting site on the casting is then adjusted to receive a particular stone, cutting away portions of the prongs or beads to proper size, and using a motor with a flex shaft and drills to open a hole in the casting to accommodate the base of the stone. When prongs are employed in the mounting, the surfaces from which portions have been cut or ground are then reshaped and polished to finished tolerances. If a bezel or beads are used instead of prongs, appropriate techniques are used to form the bezel or raise and shape the beads to support and retain each stone in the mounting. Last, each piece is transferred to a polisher who "brushes" all of the surfaces using a variety of brushes of varying sizes driven by a horizontally mounted motorized tool and a mildly abrasive compound. Then, a lapper, using a vertically mounted driven abrasive disk and compound, laps all of the flat surfaces on the jewelry article to a smooth finish free of visible discontinuities. Each article is then washed and steamed to remove residual compound and alloy particles from the brushing and lapping operations. The final stage is done by a polisher, who employs power driven felt, muslin, and cotton wheels, and a polishing compound to make all surfaces of the piece perfectly smooth and flawless. The finished jewelry piece is then imported into the U.S. For purposes of this ruling request, you ask Customs to assume that the direct costs of processing operations performed by Progressive in the Dominican Republic equal or exceed the 35 percent value-content requirement. ISSUES: I.a. Whether articles of jewelry alloyed, cast, and finished in the Dominican Republic from imported metals and precious and semi-precious stones from a country other than a BC or the U.S. will be eligible for duty-free treatment under the CBERA. I.b. Whether articles of jewelry alloyed and cast in the U.S. will be eligible for duty-free treatment under the CBERA. II. Whether articles of jewelry finished in the Dominican Republic from U.S.-origin castings and precious and semi-precious stones will be eligible for duty-free treatment under Note 2(b). III. Whether articles of jewelry finished in the Dominican Republic from U.S.-origin castings and precious and semi-precious stones of U.S. or non-U.S. origin will be eligible for the partial duty exemption under subheading 9802.00.80, HTSUS. LAW AND ANALYSIS: I. CBERA Under the CBERA, eligible articles the growth, product, or manufacture of a designated BC, which are imported directly to the U.S. from a BC, qualify for duty-free treatment, provided the sum of (1) the cost or value of materials produced in a BC or two or more BCs, plus (2) the direct costs of processing operations performed in a BC or BCs is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S. 19 U.S.C. 2703(a)(1). In addition, the cost or value of materials produced in the U.S. may be applied toward the 35 percent value-content minimum in an amount not to exceed 15 percent of the imported article's appraised value. See 19 CFR 10.195(c). As stated in General Note 7(a), Harmonized Tariff Schedule of the United States (HTSUS), the Dominican Republic is a designated BC under the CBERA. To determine whether an article will be eligible to receive duty-free treatment under the CBERA, it must first be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "E". It is stated that gold jewelry of the types imported by Progressive is classifiable in Chapter 71, HTSUS, all tariff provisions of which are CBERA-eligible provisions. Therefore, the jewelry will receive duty-free treatment if it is considered to be a "product of" the Dominican Republic, the 35 percent value-content requirement is met, and it is "imported directly" into the U.S. from the Dominican Republic. Where an article is produced from materials that are imported into the BC, the article is considered "the growth, product or manufacture" of the BC only if the imported materials are substantially transformed there into a new and different article of commerce. See 19 CFR 10.195(a). Moreover, the cost or value of the U.S.- and foreign- origin materials to be imported into the Dominican Republic may be counted toward satisfying the 35 percent value-content requirement (over and above the 15 percent cap on U.S. materials) only if there is a finding that those materials were subjected to a "double substantial transformation" in the Dominican Republic. That is, the imported materials will be considered "materials produced" in the Dominican Republic only if they are substantially transformed in the Dominican Republic into a new and different intermediate article of commerce, which is then used in the Dominican Republic in the production of the final imported article, the finished jewelry. See 19 CFR 10.196(a). The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982). A. Castings produced in the Dominican Republic Under the first scenario, the alloying and casting is performed in the Dominican Republic. In Headquarter Ruling Letter (HRL) 555801 dated January 2, 1991, Customs held that casting non-beneficiary sourced precious metal alloys into the form of an article of jewelry, and setting foreign gem stones, resulted in a substantial transformation into a product of the Dominican Republic. Therefore, consistent with HRL 555801, we find that the jewelry in the instant case which is cast into various types of jewelry and then set with stones in the Dominican Republic will be considered "products of" the Dominican Republic. The next issue relates to whether the materials imported into the Dominican Republic are subjected to a double substantial transformation in the production of the jewelry so as to permit the cost or value of the imported materials to be counted toward the value-content requirement (over and above the 15 percent cap on U.S. materials). In HRL 555546 dated January 30, 1990, Customs held that 24 karat gold imported into Mexico and converted into 14 karat gold shot by an alloying process, and cast into jewelry items resulted in a double substantial transformation for purposes of the Generalized Systems of Preferences (GSP). Therefore, in this case we also find that the cost or value of the gold bars, silver, copper, zinc, nickel, or brass which are alloyed to the desired specification and subsequently cast into the jewelry pieces in the Dominican Republic may be included in the 35 percent calculation. However, as Customs determined in HRL 556457 dated March 5, 1992, the finished precious and semiprecious stones which are imported into the Dominican Republic and set into the castings are not subjected to a double substantial transformation. Therefore, the stones' cost or value may not be included in the 35 percent calculation. Accordingly, in the first scenario, the jewelry articles will be entitled to duty-free treatment under the CBERA, provided they are imported directly into the U.S., they are classifiable in a CBERA-eligible tariff provision and the 35 percent value-content requirement is satisfied at the time of entry. B. Castings produced in the United States The second scenario involves casting the jewelry in the U.S. and shipping the castings to the Dominican Republic, that is, where the sprues are removed from the tree, and the grinding and polishing operations are performed to make finished pieces of jewelry. It is alleged that the operations performed in the Dominican Republic are not simple combining operations as defined in 19 CFR 10.195(a)(2)(i), as on average, between 20 and 40 discrete components are assembled into finished jewelry pieces. It is, however, noted that some jewelry pieces are only assembled from as few as five component pieces. Once in the Dominican Republic, the rough surfaces are removed from the castings or fine details are added which cannot be produced during the casting process. Customs has held that cutting or bending materials into defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length or width which does not render the article suitable for a particular use, constitutes a substantial transformation. See HRL 055726 dated September 18, 1979 (a substantial transformation results from cutting, bending, and crimping wire into identifiable trigger pins for spring rings); HRL 071788 dated April 17, 1984 (forming 18 karat gold wire into circles, ovals, and other specially designed links for bracelets results in a substantial transformation); and HRL 556060 dated August 27, 1991 (gold and silver strip bent into a ring or bracelet shape and soldered into one piece, gold sheet cut to the desired size of a jewelry piece and soldering a bail onto the cut piece, or taking preformed ring blanks and cutting them in half and soldering a pin or a clip onto the cut ring blank to form an earring were considered substantial transformations). However, in HRL 556060 Customs also found that U.S.-origin jewelry blanks already possessing the essential character of rings or bracelets did not undergo a substantial transformation into products of a beneficiary country for purposes of the GSP by further engraving, decorative cutting, polishing and cleaning. See also HRL 731963 dated July 26, 1989 (hand-faceting jewelry using a diamond tipped high-speed rotating wheel to cut away small pieces of silver did not result in a substantial transformation); and HRL 071314 dated May 10, 1983 (polishing, assembly of labels and catches, and packaging do not substantially transform jewelry). In HRL 556457 dated March 5, 1992, Customs determined that base metal of U.S. origin, cast into ring forms in its condition as imported into Costa Rica, did not undergo a double substantial transformation when finished precious and semiprecious stones, imported into Costa Rica, were set into the castings. Therefore, the cost or value of the base metal used in the production of base metal jewelry could only be applied toward the 35 percent minimum in an amount not to exceed 15 percent of the jewelry's appraised value as the base metal casting was of U.S. origin. In HRL 555801 dated January 2, 1991, Customs considered foreign gem stones mounted onto U.S. origin castings in the Dominican Republic, which produced unfinished rings. The unfinished rings were returned to the U.S. for grinding, buffing and polishing operations. It was held that the rings would not be entitled to duty free treatment under the CBERA pursuant to 19 CFR 10.195(a)(2)(i)(B) which provides that no article or material shall be considered to have been grown, produced, or manufactured in a BC by virtue of having merely undergone simple combining or packaging operations, including the fitting together a small number of components by bolting, gluing, soldering, etc. Customs found that since only two components were fitted together, the mounting of a gem stone onto a ring casting was considered a simple combining operation and, therefore, the rings were not considered "products of" the Dominican Republic. See also HRL 554448 dated August 25, 1987 (setting artificial stones into jewelry was not considered a substantial transformation of the jewelry into a "product of" a BC). In HRL 558635 dated June 20, 1995, Customs considered imported gold tube made into hollow hoops used to make various items of jewelry, such as earrings, bracelets, chains, and bangles. In producing bracelets, the hoops were further processed by bending or winding to achieve oval shapes or smaller overall diameters. The shapes were also cut and soldered into links, buffed, cleaned, dried, and hand polished. A hoop was also made into a necklace by combining, by hand, different links with different overall diameters of tubing, soldering them together, buffing, cleaning, polishing, soldering a clasp, hand polishing, quality control inspection, and packaging. In producing earrings and other articles of jewelry, such as bangles, the hollow hoops were assembled without further change in shape or diameter with clasps, yokes, posts, jump rings, and other findings to produce the finished articles of jewelry. For purposes of the GSP, Customs found that the hollow hoops were a new and different article of commerce in comparison to imported gold tubes and were "products of" Bolivia. Furthermore, Customs found a second substantial transformation when hoops were further processed into bracelets or necklaces, as the operations involved bending or winding the tubing to achieve oval shapes or smaller diameters, cutting and soldering the resulting shapes into links, and combining the links by soldering and attachment of a clasp and the completed necklace or bracelet had an essential character different from the hoop from which it was derived. However, it was found that where an operation consisted merely of soldering the completed hoops together to form earrings, bangles or similarly produced articles of jewelry, and a clasp or other type closure was added, the essential character of the hoops was not changed and the hoops did not undergo a second substantial transformation when used to produce these items of jewelry. In HRL 560333 dated July 24, 1997, published in the "Customs Bulletin", Volume 31, No. 33, August 13, 1997, Customs revoked HRL 556892 dated December 23, 1992, and HRL 556624 dated July 31, 1992, which held that weaving gold links in a beneficiary developing country into chain substantially transformed the links into a new and different article for purposes of the GSP. In HRL 560333, Customs ruled that the simple assembly or weaving of gold links into chain, even when coupled with a soldering operation, does not effect a substantial transformation of the gold links, as supported by National Hand Tool v. United States, 16 CIT 308 (1992), aff'd, 989 F.2d 1201 (Fed. Cir. 1993). Accordingly, based upon the rulings above, it is our opinion that the U.S. origin castings imported into the Dominican Republic do not undergo a substantial transformation when they are made into finished jewelry pieces. It is clear that when ring forms are combined with stones, or earring forms are only combined with findings and other decorative operations occur, that there is no substantial transformation as the ring or earring forms already possess the essential character of the finished jewelry piece. Furthermore, while the rulings recognize that cutting sheet or bending wire is a substantial transformation, based upon the information presented in this case, the jewelry components are not created by cutting or bending but emerge ready for assembly from their cast molds in conjunction with refining operations. In regard to bracelets or necklaces which are assembled together from cast components, in HRL 560333 Customs stated that assembling gold links does not constitute a substantial transformation. Accordingly, while