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HQ 555787


October 2, 1991

CLA-2 CO:R:C:S 555787 LS

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.50

Kenneth H. Keefe, Esq.
Sandler, Travis & Rosenberg, P.A.
The Waterford
5200 Blue Lagoon Drive
Miami, Florida 33126-2022

RE: Applicability of partial duty exemption under subheading 9802.00.50, HTSUS, to gold jewelry subjected to a diamond cutting operation by means of jeweler's handmotor. Reconsideration of 555640. Alteration.

Dear Mr. Keefe:

This is in response to your letter of November 14, 1990, on behalf of Auracast, Inc., requesting partial reconsideration of Headquarters Ruling Letter (HRL) 555640 dated August 13, 1990. That ruling held, in part, that certain gold jewelry subjected to a diamond cutting or faceting operation were commercially different articles when returned to the U.S. and, therefore, were ineligible for the partial duty exemption under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS). You request that we reconsider this portion of the ruling. Samples of "polished" and "diamond cut" ring jewelry were submitted for examination. Further information provided at a meeting at Customs Headquarters on May 13, 1991, and submitted by letter dated May 31, 1991, was also considered in this reconsideration.

FACTS:

In HRL 555640, we considered whether certain gold jewelry subjected to two alternative processes, i.e., polishing and diamond-cutting, to produce varied lustres were entitled to the partial duty exemption under subheading 9802.00.50, HTSUS. The facts of that ruling are incorporated herein by reference. The gold jewelry is manufactured in the U.S. in a condition known as "tumbled lustre," and put up for sale. Customers can purchase the tumbled jewelry as is, or order that same jewelry with one of the optional additional lustres, i.e., "wheel polished lustre" or "diamond cut lustre." These two lustres will be added to the jewelry in Mexico. We found that the polishing operation constitutes an alteration within the meaning of subheading 9802.00.50, HTSUS, whereas the diamond cutting operation exceeds an alteration. Accordingly, we denied the partial duty exemption for the gold jewelry subjected to the diamond cutting operation, and allowed the exemption for the jewelry subjected to the polishing operation. We supported this result by finding that the distinction between the diamond cut jewelry and the tumbled lustre jewelry is greater than that between the polished jewelry and the tumbled lustre jewelry because the diamond cut jewelry has a more dramatic change in lustre than the polished jewelry. We also found that the diamond cut imparts a new and different texture to the jewelry, which affects its character and quality by giving it a "diamond-like sparkle." Therefore, we concluded that the diamond cutting operation results in a commercially different article.

In your letter of November, 1990, you maintain that certain facts pertaining to the subject "diamond cutting" operation were not originally considered by us. You also assert that our ruling in HRL 555576 dated September 7, 1990, establishes dispositive authority for finding that subheading 9802.00.50, HTSUS, applies to operations which create a contrasting effect on the surface of gold jewelry.

Most of the additional facts you have presented in your submission of November 14, 1990, relate to the following comparisons between the polishing and diamond cutting operations: (1) the loss of gold effected by the polishing operation is approximately 50% greater than the loss resulting from the diamond cutting operation; (2) the cost of the polishing operation averages more than seven times the cost of the diamond cutting operation; (3) the time required for the polishing operation on each piece of jewelry is approximately eight times that required for the diamond cutting operation; (4) neither operation requires the skills of craftsmen or artists; instead, a similarly low level of human skill is required; (5) the cost of each operation represents a relatively minor percentage of the overall cost of the gold jewelry, e.g., each operation costs less than two percent of the total price to be charged for the polished karat gold ring and the diamond cut karat gold ring; (6) the price of the polished gold jewelry is generally the same as that of the diamond cut jewelry; (7) both operations are performed on finished articles, i.e., the tumbled lustre jewelry; (8) neither operation results in the gold jewelry being sold in a different commercial market than the tumbled lustre jewelry; however, both operations are intended to enhance the marketability of the jewelry to potential customers at the same commercial level in the same commercial market, i.e., to the same wholesalers who, in turn, market both products to the same retail customers, based on the particular tastes of those customers.

Following a meeting at Customs Headquarters, you submitted a letter dated May 31, 1991, containing the following supplemental information. You state that the hand-held diamond cutting tool, known as a jeweler's handmotor, which is used by Auracast, Inc. to perform the diamond cutting operation on the jewelry, is very similar in appearance and operation to the polishing machine used in the alternative polishing operation. Both machines are relatively simple to operate, not requiring a high degree of precision. You assert that the accent cuts or diamond cuts are so minor that a simple polishing operation could be employed to entirely remove the cuts created by the handmotor. You also contrast the diamond cutting operation at issue, which is performed by use of the jeweler's handmotor, with a more sophisticated artistic diamond cutting operation, which employs a computer controlled machine to create diamond cuts with a "sculptered" or "engraved" quality. In addition, in contrast to the information contained in your original submission, i.e., that the diamond cut jewelry is sold at a slightly lower unit price than the tumbled jewelry, you now maintain that the diamond cutting operation does not affect either the wholesale or retail price of the jewelry. In conclusion, you claim that the diamond cutting operation utilizing a "jeweler's handmotor" constitutes an alteration for purposes of subheading 9802.00.50, HTSUS, because it does not change the name, character, or use of the already finished jewelry product, i.e., the tumbled jewelry. Rather, you assert that this operation only slightly alters the appearance of the jewelry, and that this "alteration" is no more dramatic than the changes resulting from processes found to be alterations in Royal Bead Novelty Co. v. United States, 68 Cust. Ct. 154, C.D. 4353 (1972) and Amity Fabrics v. United States, 43 Cust. Ct. 64, C.D. 2104 (1959).

ISSUE:

Whether the "diamond cutting" operation performed on gold jewelry utilizing a "jeweler's handmotor" constitutes an alteration for purposes of subheading 9802.00.50, HTSUS.

LAW AND ANALYSIS:

Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the U.S. after having been exported to be advanced in value or improved in condition by means of repairs or alterations. However, entitlement to this tariff treatment is precluded where the exported articles are incomplete for their intended use prior to the foreign processing. Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Tariff treatment under this provision is also precluded where the foreign processing operation destroys the identity of the articles or creates new or commercially different articles. See Guardian Industries; A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956). Articles entitled to this duty exemption are dutiable only upon the cost or value of the foreign repairs or alterations when returned to the U.S., provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied.

In this reconsideration we will focus primarily on the second criteria mentioned above, i.e., whether the diamond cutting operation creates a new and different commercial article. As to the first criterion, it appears that the tumbled lustre jewelry, in its condition as exported, is considered a completed article in that it is complete for its intended use. In the original submission in HRL 555640, Auracast, Inc. stated that once the pieces of jewelry have completed the tumbling stage of the manufacturing process, they are finished articles of gold jewelry ready for marketing and sale to customers. The alternative lustres created by the polishing and diamond cutting operations are optional and are applied depending on the particular customer's orders. The polished and diamond-cut jewelry are sold to the same wholesalers as the tumbled jewelry. Thus, the diamond cutting operation is not a continuation of the manufacturing process, and the tumbled jewelry, as exported, is complete for its intended use.

Among the factors the courts have considered in determining whether a foreign processing operation creates a new or commercially different article are changes in the following: name, value, appearance, size and shape; subsequent handling and use; performance characteristics; and markets or classes of buyers. See Burstrom; Guardian Industries; Dolliff & Company, Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015 (1979). In HRL 555640, we distinguished the facts in Royal Bead Novelty Co. v. United States, 68 Cust. Ct. 154, C.D. 4353 (1972), by finding that the quality, texture, and character of the gold jewelry is changed as a result of the diamond cutting operation. Although we agree that the texture has been changed, we believe that this change and the imparting of an additional lustre or "diamond-like sparkle" do not, by themselves, lead to a conclusion that a commercially different product has been created. An important factor considered in Royal Bead, Dolliff, and other court decisions in determining whether a foreign processing operation exceeds an alteration is whether that operation results in changes in characteristics which alter the subsequent commercial use. This change in commercial use is usually ascertained by a change in the market and class of buyers. Although you state that both the polishing and diamond cutting operations are intended to enhance the marketability of the jewelry to potential customers, you emphasize the fact that both the polished and diamond cut jewelry will be sold at the same commercial level in the same commercial market as the tumbled lustre jewelry. We find this factor persuasive.

Since we maintain our opinion that the polishing operation performed in Mexico on the gold jewelry constitutes an alteration within the meaning of subheading 9802.00.50, HTSUS, we also find persuasive the additional evidence you have presented comparing the polishing and diamond cutting operations. Considering solely the appearance of the polished jewelry and diamond cut jewelry, we find that the main difference between the two articles is in the type and degree of lustre. As discussed previously, the polishing and diamond cutting operations impart different lustres to the jewelry, which are alternatives to the original tumbled lustre. We believe that what is described as a "more dramatic" lustre in HRL 555640, is not significant enough to support a conclusion that the polishing operation constitutes an alteration, whereas the diamond cutting operation exceeds an alteration. As to the other comparison factors stated in the facts above, they are either the same for both operations (e.g., level of skill, price, and commercial market), or greater for the polishing operation than the diamond cutting operation (e.g., time and cost figures). Another similar factor is that both operations use relatively unsophisticated machines which "accent" or highlight cast karat gold jewelry, rather than artistically working it. The overall similarities between the two operations appear to outweigh the differences. Whatever differences do exist support a conclusion that the diamond cutting operation should be treated the same as the polishing operation with respect to eligibility for the tariff treatment under subheading 9802.00.50, HTSUS.

In HRL 555640, we relied upon two prior rulings to support our finding that the diamond cutting operation exceeded an alteration. In one of those rulings, HRL 555105 dated October 31, 1988, we held that pewter figurines that undergo a diamond cutting operation which impacts on the metal and imparts new and different characteristics to the articles are deemed to have been "further processed" within the meaning of subheading 9802.00.60, HTSUS. Although both the diamond cutting operations in that case and the instant case impact on the metal and impart new and different characteristics to the metal, the fact that the operation in HRL 555105 was considered "further processing" for purposes of item 806.30 (the predecessor tariff provision to subheading 9802.00.60, HTSUS) is not necessarily controlling for purposes of determining whether the instant operation constitutes an alteration within the meaning of subheading 9802.00.50, HTSUS. Further, the pewter figurines in HRL 555105 were subjected to the diamond cutting operation in the U.S., after being "further processed" in Mexico, but while still in a semi-finished condition. In contrast, the tumbled lustre jewelry in the instant case is considered to be a finished article, ready for sale.

In HRL 555250 dated March 13, 1980, which was also relied upon in HRL 555640, we held that the combined processes of etching and special tempering glass mugs exceeded an alteration. The facts in HRL 555250 are distinguishable from those in the instant case because the foreign processing not only enhanced the appearance of the mugs, but also effected a fundamental change by increasing their durability. These new features were found to have a substantial commercial significance, thus resulting in a commercially different product.

HOLDING:

For the reasons set forth above, we modify HRL 555640, in part, with respect to its finding that the diamond cutting operation exceeds an alteration. We conclude that the instant diamond cutting operation, performed by means of a jeweler's handmotor, does constitute an alteration for purposes of subheading 9802.00.50, HTSUS. Therefore, the gold jewelry subjected to that operation is entitled to the partial duty exemption under that provision.

HRL 555640 is modified accordingly.

Sincerely,

John Durant, Director

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