Revocation of Internal Advice Decision, Headquarters Ruling Letter 562035, dated June 22, 2001; alloying; casting; double substantial transformation

H072082 May 5, 2010 VAL-2 OT:RR:CTF:VS H072082 CMR CATEGORY: Classification Port Director U.S. Customs and Border Protection 605 W. Fourth Avenue Anchorage, Alaska 99501 RE: Revocation of Internal Advice Decision, Headquarters Ruling Letter 562035, dated June 22, 2001; alloying; casting; double substantial transformation Dear Port Director: This ruling revokes our earlier decision in Headquarters Ruling Letter (HQ) 562035, dated June 22, 2001, issued in response to an internal advice request from your port regarding the eligibility of gold jewelry imported from Sri Lanka for duty-free treatment under the Generalized System of Preferences (GSP). We have reviewed our decision in HQ 562035 and found it to be in conflict with earlier and later decisions on substantially identical transactions. Pursuant to section 625(c)(1), Tariff Act of 1930 (19 U.S.C. § 1625(c)(1)), as amended by section 623 of Title VI, (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993), notice of the proposed revocation was published on March 31, 2010, in the Customs Bulletin, Vol. 44, No. 14. No comments were received. FACTS: The facts of the transaction at issue in HQ 562035 were set forth in the ruling as follows: Hansa Jewellery Ltd. purchases pure gold from a foreign country other than Sri Lanka. The company purchases alloying metals in Italy. In their production facilities in Sri Lanka, the pure gold is mixed with the appropriate percentages of alloying metals. This mixture is then melted to form an alloy. The alloy is then poured into flasks and cast into various styles, typically used to make rings and pendants. The castings are then set with diamonds and/or colored stones ("stones"). The gold castings, set with stones, are then polished. The country of origin of the diamonds and stones is not indicated. We will assume for the purposes of this ruling that the diamonds and stones are not of U.S. or Sri Lankan origin. In HQ 562035, it was held that the gold alloying materials and stones only underwent a single substantial transformation in Sri Lanka. ISSUE: Whether the imported gold jewelry is eligible for special tariff treatment under the GSP. LAW AND ANALYSIS: Congress originally enacted the GSP program to extend preferential tariff treatment to the exports of less-developed countries to encourage economic diversification and export development within the developing world. SDI Technologies Inc. v. United States, 977 F. Supp. 1235 (CIT 1997), quoting S. Rep. No. 93-1298, (1974). Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operations performed in the BDC, is equivalent to at least 35 % of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(a). General Note 3(c)(i), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A”, “A*,” or “A+”. Under General Note 4(a), HTSUS, Sri Lanka is designated as a beneficiary developing country for GSP purposes. It is assumed for the purposes of this ruling that the imported gold jewelry is classified in Chapter 71, HTSUS. At the time that HQ 562035 was issued, all the tariff provisions of Chapter 71 were GSP-eligible. Currently, gold jewelry classified in subheading 7113.19, HTSUS (which we believe to be the applicable tariff provision for classification of the merchandise described herein), and a product of Sri Lanka is eligible for preferential tariff treatment under the GSP provided the requirements of that program are met. The first issue involved in this case is whether the imported jewelry is a “product of” Sri Lanka. The “product of” requirement means that to receive duty-free treatment, an article either must be made entirely of materials originating in the BDC, or if made of materials imported into the BDC, those materials must be substantially transformed in the BDC into a new and different article of commerce. A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process.” Texas Instruments Inc. v. United States, 681 F.2d 778 (1982). 2 CBP considered a similar issue in Headquarters Ruling Letter ("HQ") 560331, dated December 2, 1997, involving imported jewelry from the Dominican Republic. CBP held that casting non-beneficiary precious metal alloys into jewelry and setting foreign gem stones resulted in a substantial transformation and therefore, the jewelry was considered a product of the Dominican Republic. In HQ 556457, dated March 5, 1992, CBP ruled that gold, silver and alloys of U.S. origin shipped to Costa Rica to be alloyed to create shot and then cast into jewelry and the setting of stones was considered a substantial transformation. Therefore, the finished pieces of jewelry were considered products of Costa Rica for the purposes of the CBERA. See also HQ 555801, dated January 2, 1991. In this case, the gold, the alloying materials and the stones are imported into Sri Lanka from a foreign country. The facts that you have provided are similar to the above cited rulings. Like HQ 560331 and HQ 556457, the casting and setting of stones that transform the metals and stones into jewelry are performed in the GSP beneficiary country. There is a change in name from gold, alloy materials and the stones into a finished ring or pendant. There is also a change in character; the gold is mixed with the other materials and therefore, the resulting material has different characteristics than pure gold or the alloy materials. Gold, alloying materials and stones have many potential uses while the finished jewelry has a single use. Therefore, we conclude that the gold, alloy materials and stones are substantially transformed into a finished piece of jewelry in Sri Lanka with a different name, character and use. Thus, there is a substantial transformation and the finished jewelry is a "product of" Sri Lanka for the purposes of the GSP. If an article consists of materials that are imported into a BDC, as in the instant case, the cost or value of these materials may be counted toward the 35% value- content requirement only if they undergo a double substantial transformation in the BDC. See 19 CFR 10.177(a)(2). Materials imported into the BDC must first be substantially transformed into a new and different article of commerce which becomes "material produced," and these materials produced in the BDC must then be substantially transformed into a new and different article of commerce (the final article). With regard to the gold and metal alloys, we must determine whether they undergo a double substantial transformation in Sri Lanka when they are used to make jewelry to determine whether their value may be counted toward the 35% requirement. The description of the processing of the gold and metal alloys set forth in the facts portion of this decision indicates that the gold and metal alloys are mixed and melted, and the molten mixture is poured into flasks and cast. In one scenario, in HQ 560331, dated December 2, 1997, the alloying and casting was done in the Dominican Republic. It was held that the cost or value of the gold bars, silver, copper zinc, nickel or brass which were alloyed to the desired specifications and subsequently cast into the jewelry pieces in the Dominican Republic could be included in the 35% value calculation. Similarly, in HQ H022844, dated June 3 20, 2008, which cited to HQ 560331, it was held that gold alloyed, poured into a mold and cast in Thailand, constituted a double substantial transformation. It was noted that in situations where all processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass through operation is greatly diminished. In this case, if the processing ceased after the gold and metal alloys were mixed and melted to form the alloy to be used in casting the jewelry, and the alloy was allowed to cool and harden, the alloy shot would clearly be an intermediate article of commerce. However, although the processing is not stopped before casting, it could be and following HQ H022844 and HQ 560331, we find that the gold and metal alloys in this case undergo a double substantial transformation and the value of the gold and metal alloys may be counted toward meeting the required 35% value content requirement of the GSP. With regard to the diamonds and/or colored stones which are set in the gold castings, setting the diamonds and/or colored stones into the castings is not considered a double substantial transformation. See HQ 556467, dated March 5, 1992 which held that finished precious and semiprecious stones set into castings are not subjected to a double substantial transformation. HOLDING: The jewelry produced as described herein is a product of Sri Lanka as the materials used to produce the jewelry, i.e., the gold, metal alloys, and diamonds and/or colored stones, are substantially transformed in Sri Lanka. Furthermore, the value of the gold and metal alloys may be counted toward meeting the required 35% value content requirement of the GSP as these materials undergo a double substantial transformation. The value of the diamonds and/or colored stones may not be counted toward meeting the required 35% value content of the GSP. HQ 562035, dated June 22, 2001, is hereby revoked. In accordance with 19 U.S.C. § 1625(c), this ruling will become effective 60 days after publication in the Customs Bulletin. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division 4