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HQ 560333

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July 24,
1997
MAR-05 RR:TC:SM 560333 BLS

CATEGORY:

Area Director
JFK Airport
Jamaica, New York 11430

RE: Eligibility of certain gold jewelry for duty-free treatment under U.S.-Israel FTA;
I/A 4/97; substantial transformation; revocation of HRLs 556892 and 556624

Dear Sir:

This is in reference to your memorandum dated January 31, 1997, forwarding an internal advice request on behalf of Coloseum Industries Ltd. and Adipaz Ltd. ("Adipaz"), in connection with a claim for duty-free entry of certain jewelry under the United States-Israel Free Trade Area Implementation Act of 1985 ("U.S.-Israel FTA") (General Note 8, Harmonized Tariff Schedule of the United States (HTSUS)).

FACTS:

The subject jewelry consists of small link gold chains which undergo processing in Israel and in Zimbabwe. The operations performed are as follows:

Operations in Israel

1. Fine gold bullion is imported into Israel.

2. The bullion is squeezed into one long flat piece of gold.

3. The gold is then shredded into small pieces to fit into the crucible (for melting).

4. The gold is weighed and, together with different alloys, is prepared for melting.

5. The gold and alloys are melted into ingots, which become karat gold.

6. The ingots are rolled in a big rolling mill.

7. Intermediate annealing is done in a controlled-atmosphere furnace.

8. Continuous rolling and annealing (to soften the gold) intermittently are done until a wire with a square cross section of 1.2 mm results.

9. Drawing dyes are inserted on the wire (purpose is to size the wire eventually to the correct gauge).

10. The wire is drawn to the required diameter through dyes (stones).

11. The spool of wire rod is degreased and dried.

12. The gold wire rod is squeezed in a large squeezing machine to create a round wire of gold.

13. The wire is annealed.

14. The gold is squeezed to the final gauge in a small squeezing machine.

15. Further annealing is carried out.

16. Aluminum wire is drawn to the required core diameter.

17. The strip of gold and the aluminum core are inserted into a drawing dye and winding spindle with a spindle winding machine. (This places the aluminum core into the gold.)

18. The resulting spiral is sawed with circular saws into separate links.

19. The separate links are fit between flat cylinders to flatten the links into the final shape.

20. The links are sifted from sawdust remains.

21. The links are shipped to Zimbabwe.

Operations in Zimbabwe

22. The individual links are connected together by hand (assembled) and soldered.

Operations Upon Return to Israel

23. The assembled links are returned to Israel in lengths of 33 cm.

24. The 33 cm lengths are further assembled in Israel by adding ten more links and connecting them together to form continuous lengths.

25. These continuous lengths are cut to the required lengths for either neck chains (minimum 45 cm) or bracelets (approximately 22 cm).

26. The ends are cleaned from the cuttings.

27. End links, quality tag and lock are added.

28. The ends are soldered.

29. The chemical department then cleans the chain by: - Sulfuric acid wash - water rinse- Booming (to strip an outside layer of gold off the chain) - Rinsing-Neutralization of the acids-Polishing in a vibrating tumbler - Rinsing-Drying.

30. The jewelry then goes to Quality Control.

31. The jewelry is exported.

ISSUE:

1) Whether the gold chains are considered to be a "product of" Israel upon importation into the U.S., for purposes of determining whether the jewelry is eligible for duty-free treatment under the U.S.-Israel FTA.

2) Whether the gold chains are considered to be "imported directly" into the U.S. from Israel.

LAW AND ANALYSIS:

Under the U.S.-Israel FTA, eligible articles which are the growth, product, or manufacture of Israel and are imported directly to the U.S. from Israel qualify for duty-free treatment or a duty preference, provided the sum of 1) the cost or value of materials produced in Israel, plus 2) the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the article at the time it is entered. See General Note 8, Harmonized Tariff Schedule of the United States (HTSUS).

Adipaz contends that the processing in Zimbabwe during which the gold links are assembled (or woven) into chain does not result in a substantial transformation of the Israel-origin gold links. In the alternative, Adipaz argues that upon return to Israel from Zimbabwe, the product is again substantially transformed. Accordingly, Adipaz argues that upon importation into the U.S., the gold jewelry is a "product of" Israel.

"Product Of"

The substantial transformation criteria is used to determine whether an article is a "product of" Israel for purposes of the U.S.-Israel FTA. See U.S.-Israel FTA, Annex 3, paragraph 4. A substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process." See Texas Instruments, Inc. v. United States v. United States, 69 CCPA 152, 681 F.2d 778 (1982). See also U.S.-Israel FTA, Annex 3.

In Headquarters Ruling Letter (HRL) 556892 (December 23, 1992), we addressed the question of whether certain rope-chain jewelry was eligible under the Generalized System of Preferences (GSP) where gold links produced in a GSP country (Thailand) was sent to a non-GSP countries for weaving operations. The woven chains were then returned to Thailand where they were soldered, cut into lengths, clasps attached to make bracelets and/or necklaces, and cleaned and polished. Alternatively, the chains were combined into one continuous length and cleaned. In that case, we stated that weaving links into chain forms the fundamental and essential character of the finished article (bracelet and/or necklace) and dedicates its use as jewelry. Therefore, we found that the weaving operation in the non-GSP countries substantially transformed the links into a new and different product of" the country where that process occurred. Accordingly, we held in that case that the imported
jewelry was not a "product of" Thailand and thus was ineligible for duty-free treatment under the GSP. In (HRL) 556624 (July 31, 1992), we addressed a request involving identical operations as in HRL 556892, except that the processing in the non-GSP country also included soldering the links together after the weaving operation.

We have reconsidered our position in HRL's 556624 and 556892, and are of the opinion that the simple assembly or weaving of gold links into chain [even when coupled with soldering] does not effect a substantial transformation of the gold links.
In National Hand Tool v. United States, 16 CIT 308, 312 (1992), aff'd, 989 F.2d 1201 (Fed. Cir. 1993), a country of origin marking case, certain hand tool components used to make flex sockets, speeder handles, and flex handles, were imported from Taiwan. The imported components were either cold-formed or hot-forged into their final shape before importation, with the exception of the speeder handle bars, which were reshaped by a power press after importation. In the U.S., the components were subject to heat treatment, which increased the strength of the components, sand-blasting (a cleaning process), and electroplating (enabling the components to resist rust and corrosion). After these processes were complete, the components were assembled into the final products, which were used to loosen and tighten nuts and bolts.

The Court of International Trade decided the issue of substantial transformation based on three criteria, i.e., name, character, and use. Applying these rules, the court found that the name of the components did not change after the post-importation processing, and that the character of the articles similarly remained substantially unchanged after the heat treatment, electroplating and assembly, as this process did not change the form of the components as imported. The court further pointed out that the use of the articles was predetermined at the time of importation, i.e., each component was intended to be incorporated into a particular finished mechanic's hand tool. Based on this test, the court concluded that the processing in the U.S. did not effect a substantial transformation of the foreign hand tool components.

In HRL 559406 (April 25, 1996), Israeli-origin gold jewelry components of various shapes (diamond cut, squares, rectangles etc.) were exported to Thailand where they were assembled into finished gold jewelry. Citing National Hand Tool, we found in that case that the character and use of the finished jewelry was
predetermined by the form of the exported components. Noting that the jewelry components' character and shape did not change as a result of the assembly and finishing operations performed in Thailand, we found that the processing in that country did not substantially transform the jewelry components into new and different articles, but rather constituted a continuation of the production process leading to their completion as items of gold jewelry. Accordingly, we held that the articles of gold jewelry were considered to be a "product of" Israel for purposes of determining their eligibility for duty-free treatment under the U.S.-Israel FTA.

Consistent with the foregoing, we find in the instant case that the mere assembly and soldering of the Israeli-origin gold links in Zimbabwe to form a chain does not result in a substantial transformation in Zimbabwe. A new and different article having a new name, character or use, has not been created. The assembly operations in Zimbabwe do not alter the fundamental character or specific design of the gold links, nor do they affect the uses to which the links may be put. Both before and after the weaving operation, the links are clearly recognizable as jewelry components and dedicated to be finished into specific types of jewelry, in this case, necklaces or bracelets. The assembly of the links represents a continuation of the production process leading to their completion as finished gold jewelry. (See Uniroyal Inc., v. United States, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983), where the court held that the assembly of the formed uppers to the soles to form a finished moccasin did not result in a substantial transformation of the formed uppers because the uppers formed the "very essence" of the shoes.) Accordingly, the finished gold jewelry will be considered a "product of' Israel for purposes of the U.S.-Israel FTA.

Imported Directly

Annex 3, paragraph 8, of the U.S.-Israel FTA defines the words "imported directly," as follows:

(a) Direct shipment from Israel to the U.S. without passing through the territory of any intermediate country;

(b) If shipment is through the territory of an intermediate country, the articles in the shipment do not enter into the commerce of any intermediate country while en route to the U.S., and the invoices, bills of lading, and other shipping documents, show the United States as the final destination;

(c) If shipment is through an intermediate country and the invoices and other documentation do not show the U.S. as the final destination, then the articles in the shipment, upon arrival in the U.S., are imported directly only if they:

(i) remain under control of the customs authority in an intermediate country;

(ii) do not enter into the commerce of an intermediate country except for the purpose of a sale other than at retail, provided that the articles are imported as a result of the original commercial transaction between the importer and the producer or the latter's sales agent;

(iii) have not been subjected to operations other than loading and unloading, and other activities necessary to preserve the article in good condition.

The definition of "imported directly" under the U.S.-Israel FTA is very similar to that under the GSP. See section 10.175, Customs Regulations (19 CFR 10.175).
We have held for purposes of the GSP that merchandise is deemed to have entered the commerce of an intermediate country if manipulated (other than loading or unloading), offered for sale (whether or not a sale actually takes place), or subjected to a title change in the country. See HRL 071575, dated November 20, 1984.

In the instant case, the gold links will be sent to Zimbabwe from Israel for assembly. It is apparent that these operations constitute a manipulation of the merchandise, and accordingly, the merchandise is deemed to have entered the commerce of Zimbabwe. Therefore, the merchandise will be considered to be "imported directly" from Israel only if, upon its return from Zimbabwe, it re-enters the commerce of, and then is directly shipped from, Israel to the U.S.

According to the submission, upon return to Israel, the chains will be subject to further assembly by the addition of ten more links. It will then be cut to length, and will become finished items of jewelry with the addition of end links, locks, and quality tags. The jewelry will then be cleaned and sent to quality control, before exportation to the U.S.

Under these facts, we find that there will be a manipulation of the merchandise in Israel, and thus the gold jewelry is considered to enter the commerce of Israel prior to direct exportation to the U.S. Accordingly, based upon this information, the gold jewelry will be considered to be "imported directly" from Israel into the U.S.

HOLDING:

1) Israeli-origin gold links exported to Zimbabwe for assembly into gold chain, even when coupled with a soldering operation, do not undergo a substantial transformation as a result of the operations in Zimbabwe. Therefore, for purposes of the U.S.-Israel FTA, the gold chain will be considered a "product of" Israel upon importation into the U.S.

2) The gold chain will enter the commerce of Israel upon return from Zimbabwe. Therefore, the gold jewelry will be considered to be "imported directly" from Israel upon entry into the U.S.

Accordingly, the imported articles will qualify for duty-free treatment under the U.S.-Israel FTA, provided the sum of (a) the cost or value of the materials produced in Israel, plus (b) the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the merchandise at the time of entry. Whether the 35 percent value-content requirement will be met must await actual entry of the merchandise. HRL 556892 and HRL 556624 are hereby revoked as a result of the position in this ruling regarding the substantial transformation of gold links.

Sincerely,

John
Durant, Director
Tariff

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