Revocation of Internal Advice Decision, Headquarters Ruling Letter 562526, dated November 15, 2002; alloying; casting; double substantial transformation

H072776 May 5, 2010 VAL-2 OT:RR:CTF:VS H072776 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 562526, dated November 15, 2002; alloying; casting; double substantial transformation Dear Port Director: This ruling revokes our earlier decision in Headquarters Ruling Letter (HQ) 562526, dated November 15, 2001, issued in response to an internal advice request from your port regarding the eligibility of silver jewelry imported from Thailand for duty- free treatment under the Generalized System of Preferences (GSP). We have reviewed our decision in HQ 562526 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 562526 were set forth in the ruling as follows: Toucan, Inc. (dba "Tomas Jewelry"), imports sterling silver jewelry from Thailand. The jewelry is made from pure silver and copper imported into Thailand from many foreign countries. In Thailand, the pure silver is mixed with the copper in a ratio of 92.5% silver to 7.5% copper, known as sterling silver. This mixture is then melted to form an alloy known as 925 silver. The alloy is then poured into molds and cast into various styles. The castings are created using the traditional "lost wax" technique. The design is either carved into hard wax using a stylus or an original piece of jewelry can be used in lieu of a wax model. A rubber mold is then made, and multiple patterns of the original design are produced by injecting wax into this mold. The wax images are then attached to a base, forming a tree-like shape, a process called sprueing. This wax "tree" is placed into a metal flask and is covered with investment, a substance that resembles plaster of Paris. When the investment sets or hardens, the flask is placed in a kiln set at 1,275 degrees Fahrenheit until the wax vaporizes, leaving a hollow impression in the plaster. The molten sterling silver is then poured into the hot flask under a vacuum-like pressure created in a centrifuge. After cooling slightly, the container is "quenched" in water, thus dissolving the plaster and leaving the metal "tree" intact. When it is completely cool, the cast tree is chemically cleaned. Each cast piece is then cut off the tree at the base, and lightly filed to smoothness. Oxidizing agents may also be applied, if desired, to enhance the detail of the piece. The castings are eventually buffed and polished, either before or after further manufacture, to remove any chemical residue left by processing and to remove any scratches. The castings are then assembled with either metal posts or wires (hooks) to make earrings. In addition to being used to make earrings, counsel for Tomas states that the castings are used in making anklets and bracelets, or as decoration on other items such as pillboxes, bookmarks, key rings, pocket pieces, cake pulls, wine glass identifiers, shoestring decorations and zipper pulls. However, we understand that this particular case only involves the production and importation of earrings. In HQ 562526, it was held that while the silver and gold made into earrings were a product of Thailand, the silver and gold did not undergo a double substantial transformation and could not be counted towards the 35% value added requirement. ISSUE: Whether the imported sterling silver earrings are 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 2 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, Thailand is designated as a beneficiary developing country for GSP purposes. It is assumed for the purposes of this ruling that the imported sterling silver jewelry is classified in Chapter 71, HTSUS. At the time that HQ 562526 was issued, all the tariff provisions of Chapter 71 were GSP-eligible. Currently, sterling silver jewelry classified in subheading 7113.11, HTSUS (which we believe to be the applicable tariff provision for classification of the merchandise described herein), and a product of Thailand 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” Thailand. 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). 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 silver and copper are imported into Thailand 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 that transforms the metals and stones into jewelry are performed in the GSP beneficiary country. There is a change in name from silver and copper into finished earrings. There is also a change in character; the silver is mixed with copper and therefore, the resulting material has different characteristics 3 than pure silver or copper. Silver and copper have many potential uses while the finished jewelry has a single use. The processing involved to manufacture the earrings from silver and copper is complex and intricate rather than of a minor nature. Therefore, based on the above, we conclude that the silver and copper are substantially transformed into finished earrings in Thailand with a different name, character and use. Thus, the finished jewelry is a "product of" Thailand 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 silver and copper, we must determine whether they undergo a double substantial transformation in Thailand 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 silver and copper set forth in the facts portion of this decision indicates that the silver and copper are mixed and melted, and the molten mixture is poured into molds 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 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 silver and copper 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 silver and copper in this case undergo a double substantial transformation and the value of the silver and copper may be counted toward meeting the required 35% value content requirement of the GSP. HOLDING: The earrings produced as described herein are a product of Thailand as the materials used to produce the jewelry, i.e., the silver and copper, are substantially 4 transformed in Thailand. Furthermore, the value of the silver and copper may be counted toward meeting the required 35% value content requirement of the GSP as these materials undergo a double substantial transformation. HQ 562526, dated November 15, 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 5