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HQ 556559


April 24, 1992

CLA-2 CO:R:C:S 556559 WAW

CATEGORY: CLASSIFICATION

Robert P. Larson, Esq.
Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center
33 South Sixth Street
Minneapolis, MN 55402-3796

RE: Eligibility of gold rings from Costa Rica for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) and U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA

Dear Mr. Larson:

This is in reference to your letter dated March 5, 1992, on behalf of Jewelmont Corporation ("Jewelmont"), concerning the eligibility of gold rings from Costa Rica for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706) and U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States Annotated (HTSUSA) (hereinafter, "Note 2(b)").

FACTS:

Jewelmont is a manufacturer and wholesaler of gold jewelry. Jewelmont works in conjunction with a facility located in Costa Rica that currently processes unfinished gold rings into finished articles. The Costa Rica facility is named Jene S.A. (hereinafter "Jene"), and is solely-owned by the co-shareholder and CEO of Jewelmont. As a result of the close relationship between Jewelmont and Jene, the materials and components of the rings are sent to Jene at Jewelmont's cost. Once the rings are produced in Costa Rica, they are imported into the U.S. for wholesale distribution.

Currently, the gems which are shipped to Jene are originally purchased by Jewelmont from U.S. wholesalers. The wholesalers import the gems into the U.S. from either Israel or India. The gold alloy used by Jewelmont in the production of jewelry comes from a U.S. corporation. Jewelmont commences its operations by first designing the product on paper, designing models, constructing molds and casting unfinished gold rings in its Minneapolis, MN facility. The unfinished rings, in addition to the gems (if any) that will be assembled into the ring, are shipped to Jene for finishing operations. These operations include pre-polishing, stripping, bombing, buffing, tapping, and setting of gemstones. In addition, some pieces of jewelry undergo additional procedures such as head or plate attachments, laser finishing and rhodium treatment before they are shipped to the U.S.

Jewelmont intends to alloy gold bullion at its Costa Rica facility. This process consists of melting pure gold and adding other metals, such as silver and copper, to create a gold product which possesses different properties and values from the pure gold. Next, the alloyed gold will be cast into rings, and a gem stone will be mounted onto the ring casting. The importer maintains that alloying the gold in Costa Rica constitutes a single substantial transformation, and the subsequent casting of the rings constitutes the second substantial transformation for purposes of the CBERA. Therefore, the importer argues that under these circumstances, the full value of the gold (over and above the 15% cap on U.S. materials under 19 CFR 10.195(c)), should be counted toward the CBERA 35% value-content requirement.

You also state that in the course of Jewelmont's production of jewelry in Costa Rica, a few questions have arisen regarding the eligibility of gold rings for duty-free treatment under Note 2(b). Our responses to your questions are set forth below.

ISSUES:

(1) Whether the alloying of U.S.-origin gold and the subsequent casting of the gold into rings in Costa Rica result in a double substantial transformation of the materials, thereby enabling the cost or value of these materials to be counted toward the 35% value-content requirement for purposes of the CBERA.

(2) Whether gold scrap from Costa Rica is eligible for duty- free treatment under the HTSUS.

(3) Whether the gold rings from Costa Rica which consist of both U.S. and foreign materials are eligible for duty-free treatment under Note 2(b).

LAW AND ANALYSIS:

Question 1:

Under the CBERA, eligible articles the growth, product or manufacture of designated beneficiary countries (BC's) may receive duty-free treatment if such articles are imported directly to the U.S. from a BC, and if the sum of (1) the cost or value of the materials produced in a BC or BC's, plus (2) the direct cost of processing operations performed in a BC or BC's, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a). The cost or value of materials produced in the U.S. may be applied toward the 35% value-content minimum in an amount not to exceed 15% of the imported article's appraised value. See section 10.195(c), Customs Regulations (19 CFR 10.195(c)).

As stated in General Note 3(c)(v)(A), Harmonized Tariff Schedule of the United States (HTSUS), Costa Rica is a BC for CBERA purposes. In addition, gold jewelry is classified under one of the tariff provisions in Chapter 71 of the HTSUS, and all the jewelry in this chapter is eligible for duty-free treatment under the CBERA. Therefore, in this analysis, we are assuming that Jewelmont's rings will fall under a CBERA-eligible tariff provision. Accordingly, provided that the gold rings are considered "products of" Costa Rica and the 35% value-content minimum is met, the rings will be entitled to duty-free treatment under the CBERA.

Where an article is produced from materials imported into a BC from non-BC's, as in this case, the article is considered a "product of" the BC only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.195(a). In the present situation, the cost or value of the U.S. components to be imported into Costa Rica may be counted toward satisfying the 35% value-content requirement (over and above the 15% cap on U.S. materials) only if there is a finding that the components were subjected to a double substantial transformation in Costa Rica. See section 10.196(a), Customs Regulations (19 CFR 10.196(a)).

A substantial transformation occurs when 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, 681 F.2d 778 (1982).

You state that Jewelmont plans on shipping pure gold from the U.S. where it will be alloyed at its Costa Rica facility. The gold alloy will then be cast into rings, and gems will be mounted into the ring castings. The importer contends that the alloying of the gold and subsequent casting operations result in a double substantial transformation of the imported gold, thereby enabling the cost or value of the U.S.-origin gold (over and above the already included 15% U.S. value) to be included toward the CBERA 35% value-content requirement.

For the cost or value of the imported gold to be counted in the 35% value-content requirement, it must undergo a double substantial transformation. We have previously held that the alloying of imported gold in a BC and the subsequent casting of the alloy into jewelry are sufficient to constitute a double substantial transformation. See 555832 dated December 15, 1987 (converting pure gold into an alloy form and casting the alloyed metal into pieces of jewelry results in a double substantial transformation); HRL 555716 dated April 15, 1991 (pendants and jump rings which are made in the Bahamas from imported 24 karat gold bullion that is alloyed down to 14 karat gold and then handcrafted into their final design undergo a double substantial transformation); HRL 555337 dated March 8, 1990 (conversion of pure gold and alloy shot in Mexico into 14 karat gold shot produced an intermediate article of commerce, which itself is then substantially transformed by casting into rings).

Therefore, since the operations in the present case are closely analogous to those in the above-cited rulings, we are of the opinion that the alloying of pure gold in Costa Rica and the subsequent casting of the alloy into rings is sufficient to constitute a double substantial transformation for purposes of the CBERA. Accordingly, the full cost or value of the U.S.- origin gold may be counted toward the 35% value-content requirement for CBERA eligibility purposes.

Question #2:

You have asked us to determine whether gold scraps which result from finishing and polishing gold rings in Costa Rica, will be subject to duty upon entry into the U.S. We are assuming that the gold used to produce the rings will originate from the U.S. You maintain that the scraps or findings of gold alloy are eligible for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUS. In support of your position, you state that the gold scraps or findings remain whole ingredients that are a product of the U.S., and do not enter into the commerce of any other country.

We agree that the gold scraps or findings are eligible for duty-free treatment upon entry into the U.S. Gold scrap is classified under subheading 7112.10.00, HTSUS, which provides for "[w]aste and scrap of precious metal or of metal clad with precious metal: Of gold, including metal clad with gold but excluding sweepings containing other precious metals." All scrap which is classified under this provision is subject to a free rate of duty upon entry into the U.S., regardless of the country of origin. Therefore, in the instant case, pursuant to subheading 7112.10.00, HTSUS, the scrap gold from Costa Rica is eligible for duty-free treatment.

Question #3:

The third question you present is whether rings, which are processed and assembled in a BC from materials which are sent to the BC from the U.S., are eligible for duty-free treatment under U.S. Note 2(b) in cases where some of the materials originate from outside of the U.S. The importer argues that Note 2(b) should apply to jewelry that includes precious or semi-precious gems, even though such gems may not meet the "product of" requirement of section 10.12(e), Customs Regulations (19 CFR 10.12(e)). In the alternative, the importer claims that the gems which are entered into the U.S. duty-free from Israel and/or India and subsequently exported to Costa Rica for assembly into rings should be eligible for duty-free status upon re-entry into the U.S., because the duty-free status "runs" with the gems.

Note 2(b) provides, in pertinent part, as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum. . .) may be treated as a foreign article, or as subject to duty,

(i) the article is --

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(B) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation to the United States, enters the commerce of any foreign country other than a beneficiary country.

Although U.S. Note 2(b)(i)(A) and (B) are separated by the word "or", it is our opinion that Congress did not intend to preclude free treatment under this provision to an article which is created in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients.

To qualify for Note 2(b) duty-free treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients which are "products of" the U.S. A "product of" the U.S. is an article manufactured within the Customs territory of the U.S. and may consist wholly of U.S. components or materials, of U.S. and foreign components or materials, or wholly of foreign components or materials. An article which consists wholly or partially of foreign components or materials, may still become a "product of" the U.S. if the components or materials undergo a process of manufacture in the U.S. which results in a substantial transformation. See sections 10.12(e) and 10.14(b), Customs Regulations (19 CFR 10.12(e) and 10.14(b)). The test for determining whether a substantial transformation occurs 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. Texas Instruments, Inc. v. U.S., 69 CCPA 152, 681 F.2d 778, 782 (1982).

Based on the information provided, it is our understanding that the gems are simply imported into the U.S. from either Israel or India and subsequently exported to Costa Rica for assembly into finished rings. The gems are imported into the U.S. in finished condition and do not undergo any process of manufacture in the U.S. which results in a substantial transformation. Thus, we believe that the gems do not constitute "products of" the U.S. for purposes of Note 2(b). Accordingly, the rings which consist of U.S. and foreign materials are not eligible for duty-free treatment under this provision.

HOLDING:

The processes of alloying U.S.-origin gold and casting the alloyed gold into rings in Costa Rica is sufficient to constitute a double substantial transformation for purposes of the CBERA. Accordingly, the full cost or value of the U.S.-origin gold imported into Costa Rica may be counted in calculating the 35% value-content requirement for CBERA eligibility purposes.

Gold scrap is classified under subheading 7112.10.00, HTSUS, which provides for "[w]aste and scrap of precious metal or of metal clad with precious metal: Of gold, including metal clad with gold but excluding sweepings containing other precious metals." Articles classified under this provision are eligible for duty-free treatment upon entry into the U.S.

The gems imported into the U.S. do not undergo a substantial transformation into "products of" the U.S., and therefore, the rings made in Costa Rica from U.S. and foreign materials are not eligible for duty-free treatment under Note 2(b).

Sincerely,

John Durant, Director

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