HQ 562526 - Eligibility of sterling silver jewelry for duty-free treatment under the GSP; double substantial transformation; castings - United States International Trade Commision Rulings

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HQ 562526

November 15,2002

CLA-2 RR:CR:SM 562526 KSG

CATEGORY: CLASSIFICATION

Port Director
U.S. Customs Service
605 W. Fourth Avenue
Anchorage, Alaska 99501

RE: Eligibility of sterling silver jewelry for duty-free treatment under the GSP; double substantial transformation; castings

Dear Director:

This is in response to your request for internal advice of August 20, 2002, (initiated by counsel for Toucan, Inc. by letter of February 13, 2002) concerning the eligibility of silver jewelry imported from Thailand for duty- free treatment under the Generalized System of Preferences (“GSP”).

FACTS:

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.

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 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 percent 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+”. It is assumed for the purposes of this ruling that the imported silver jewelry is classified in Chapter 71, HTSUS. All the tariff provisions of Chapter 71 are GSP-eligible. Under General Note 4(a), HTSUS, Thailand is designated as a beneficiary developing country for GSP purposes.

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).

In regard to the "product of" requirement, Customs considered a similar issue to that involved here in Headquarters Ruling Letter ("HRL") 560331, dated December 2, 1997, involving imported jewelry from the Dominican Republic. The stones were from a foreign country other than a BC. In one scenario, the alloying and casting was done in the Dominican Republic. Customs 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 HRL 556457, dated March 5, 1992, Customs 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 HRL 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 HRL 560331 and HRL 556457, the casting that transform the metals 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 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 a finished piece of jewelry in Thailand with a different name, character and use. Thus, the finished jewelry is a "product of" Thailand for the purposes of the GSP. To be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy the 35% value-content requirement. 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). This intermediate product must be a distinct article of commerce. An article of commerce is commercially recognizable as an article which is readily susceptible of trade and one that persons might well wish to buy and acquire for their own purposes of consumption or production. See Azteca Mill Co. v. U.S., 703 F. Supp. 949 (CIT 1988), and F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United States, 996 F.2d 1203 (Fed. Cir. 1993).

Therefore, the second issue in this case is whether the silver and copper undergo a double substantial transformation in Thailand when they are used to make jewelry and therefore, their value may be counted toward the 35 percent requirement. Counsel for Tomas contends that production of the silver castings from the imprinted silver and copper results in the first substantial transformation and that processing the castings into finished earrings constitutes a second substantial transformation.

In HRL 555337, dated March 8, 1990, Customs concluded that "the conversion of the pure gold and alloy shot in Mexico into 14-karat gold shot produces an intermediate article of commerce, which itself is then substantially transformed by casting into rings." In HRL 555546, dated January 30, 1990, Customs stated that 24-karat gold made into 14-karat gold shot by an alloying process and cast into jewelry items underwent a double substantial transformation for purposes of the GSP statute. However, a contrary result was reached in a recent similar case (HRL 562035, dated June 22, 2001) involving pure gold and alloying metals that were imported into a GSP BDC where they were mixed together and melted to form an alloy that was then cast into rings and pendants. Customs stated that, unlike HRL's 555337 and 555546, there was no conversion of the gold and alloying material into shot- -an article previously held to be an intermediate article of commerce. Rather, the creation of the molten alloy and the subsequent casting of the alloy into specific jewelry articles was determined to represent a continuous production sequence which did not result in an identifiable, separate article of commerce. Customs held that only one substantial transformation resulted from the above processing.

In this case, based on the facts presented, we find that there is essentially one continuous process that transforms the silver and copper into finished jewelry pieces. As discussed above, the processing in Thailand would constitute a single substantial transformation of the silver and copper. The processing necessary to convert the purported intermediate article of commerce (the casting) into a finished earring merely involves adding an ear post or hook to the casting. This is a very simple assembly process which, in our opinion, does not result in a new and different article. Accordingly, neither the silver nor the copper undergo a double substantial transformation in Thailand and therefore, neither the cost of the silver nor the copper may be counted toward the 35 percent value content requirement under the GSP.

HOLDING:

Based on the information provided, the silver and copper undergo a single substantial transformation in Thailand and therefore, the earrings would be considered a product of Thailand for the purposes of GSP. Neither the silver nor the copper undergo a double substantial transformation in this case and therefore, neither one of the materials may be counted toward the 35 percent value content requirement under the GSP. This decision should be mailed by your office to the internal advice requester no late than sixty (60) days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other means of public distribution.

Sincerely,

Myles B. Harmon
Acting Director
Commercial Rulings Division

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