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HQ 562671




April 15, 2003

CLA-2 RR:CR:SM 562671 ALH

CATEGORY: CLASSIFICATION

Mr. Robert B. Silverman
Mr. T. James Min, III
Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP 245 Park Avenue - 33rd Floor
New York, New York 10167-3397

RE: Eligibility of gold jewelry imported from Croatia for duty-free treatment under the GSP

Dear Mr. Silverman and Mr. Min:

This is in reference to your letter dated February 12, 2003, requesting a ruling on a prospective transaction concerning gold jewelry, which is processed in Italy and Croatia. Specifically, you ask whether the jewelry will be eligible for duty-free treatment under the Generalized System of Preferences ("GSP").

FACTS:

Your client, Creazioni Alangold s.p.a. ("Creazioni"), plans to manufacture gold jewelry (bracelets and necklaces) in Croatia for shipment to the United States. Bars or scraps of 14 karat gold will be acquired from a country that is not a designated beneficiary country under the GSP. The gold bars or scraps will be shipped to Croatia, melted down and drawn out into 6mm wire. The 6mm gold wire will be drawn out to 1mm or less wire sticks. The gold wire sticks will be inserted into a machine that converts the wire sticks into unclosed chain links of 50 meters to 100 meters in length. The dimensions of the links are specifically designed for bracelets or necklaces. The unclosed chain links will then be shipped to Italy where they will be closed, flattened, polished, and cut to shorter lengths. Clasps will be added to complete the necklaces and bracelets. Then, the articles will be returned to Croatia where they will be cleaned, polished, packaged, and then shipped directly to the United States.

ISSUE:

Whether the gold bracelets and necklaces produced in Croatia as described above qualify for GSP preferential tariff treatment. LAW AND ANALYSIS:

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 United States 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 United States. See 19 U.S.C. 2463(b)(1). The Customs implementing regulations are found at 19 CFR 10.171 et seq.

Under General Note 4, Harmonized Tariff Schedule of the United States ("HTSUS"), Croatia is a designated BDC for purposes of the GSP. In your submission, you state that the gold necklaces to be imported are classifiable under subheading 7113.19.29, HTSUS, which provides for "Articles of jewelry and parts thereof, of precious metal or of metal clad with precious metal...Of precious metal whether or not plated or clad with precious metal...Other, Necklaces and neck chains, of gold...Other" and the gold bracelets are classifiable in subheading 7113.19.50, HTSUS, which provides for "Articles of jewelry and parts thereof, of precious metal or of metal clad with precious metal...Of precious metal whether or not plated or clad with precious metal...Other...Other." Articles from Croatia classified under these provisions are eligible for GSP treatment.

Where an article is produced from materials imported into the BDC, as in this case, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.177(a)(2). The cost or value of materials, which are imported into the BDC, may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. See Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). In the present case, the non-Croatian components must be substantially transformed into an intermediate article of commerce, which is then used in Croatia in the production of the imported article, the gold jewelry.

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character, or use different from that possessed by the article prior to the processing. See Texas Instruments v. United States, 69 CCPA 152, 156, 681 F.2d 778,782 (1982). In order to achieve a "double substantial transformation", the materials imported into the BDC must be substantially transformed into a new and different intermediate article of commerce, which is substantially transformed a second time into the final article. The intermediate article itself must "...be an article of commerce, which must be readily susceptible of trade, and be an item that persons might well wish to buy or acquire for their own purposes of consumption or production." See Torrington Co. V. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985).

Previous rulings provide guidance in making a determination as to whether a substantial transformation has occurred in the present case. In Headquarters Ruling Letter (HRL) 071788 dated April 17, 1984, Customs ruled that 18 karat gold wire produced from 24 karat fine gold bars was a substantially transformed constituent material of gold chains or bracelets for GSP purposes. In that case, the gold bars were imported into the BDC, and melted down and mixed with necessary alloys to reduce the gold's purity. The resulting 18 karat gold was then rolled into wires of different gauge and size, which were shaped into round circles and ovals, soldered together, and stamped into a flat link figure-eight or similar shape. Clasps were then attached to form chains or bracelets, which were cleaned, polished and buffed, and exported directly to the United States. The 18 karat gold wire was determined to be an intermediate article of commerce; therefore, it was determined that its cost or value may be included as part of the GSP 35 percent requirement of the subsequently produced chains and bracelets.

Similarly, in HRL 555210 dated April 26, 1989, imported 24 karat fine gold was converted in a BDC country into gold wire, which was then combined to create gold chain necklaces. Customs held that the conversion of the 24 karat fine gold in the BDC country into 14 karat gold wire produced an intermediate article of commerce, which itself was ultimately substantially transformed when made into the 14 karat gold necklaces. Again, it was determined that its cost or value may be included as part of the GSP 35 percent requirement of the subsequently produced necklaces.

The facts in the present case are nearly identical to those in HRL 071788 and HRL 555210. In your letter, you state that imported 14 karat gold bars or scraps are converted in Croatia, a BDC country, into wire sticks. Based on prior rulings, the wire sticks are considered to be substantially transformed into an intermediate article of commerce. The wire sticks are inserted into a machine that forms the wire sticks into unclosed chain links in continuous lengths of 50 to 100 meters. Customs finds that the continuous lengths of unclosed chain links are new and different articles of commerce from the wire sticks, which are new and different articles of commerce from the gold bars or scraps. Accordingly, we find that the unclosed chain links are considered "products of" Croatia. As a result of processing in the BDC, the imported gold bar or scraps undergo a double substantial transformation in the BDC and therefore their cost or value may be included in the 35 percent value-content computation.

The next issue is whether the operations performed in Italy result in a substantial transformation of the continuous lengths of unclosed chain links into a new and different article of commerce. In HRL 556892 dated December 23, 1992, gold chains made up of woven links were imported into a BDC country in order to make bracelets and necklaces. In the BDC, the links underwent processing which included soldering, cutting to lengths, attaching clasps, cleaning, and polishing. Customs held that the processes performed in the BDC to the woven gold chain did not substantially transform it into a "product of" the BDC and therefore, the merchandise was not eligible for duty-free treatment under the GSP. Similarly, in HRL 556624 dated July 31, 1992, Customs held that soldering clasps to gold chains constituted a simple combining operation for which GSP treatment was not allowed. In HRL 557100 dated April 30, 1993, Customs held that cutting to length, soldering end tips, attaching locks or clasps and brushing and cleaning of gold chains did not result in a substantial transformation.

The operations performed in Italy include closing the links, flattening and polishing, cutting to length, and attaching clasps. It is Customs opinion that the essence of the chain has not been substantially changed as a result of the operations performed in Italy. Consistent with previous rulings, the chains are dedicated for use as, and have the essential character of, jewelry such as bracelets and necklaces prior to their exportation from Croatia to Italy. The operations performed in Italy constitute finishing operations and therefore do not result in a substantial transformation into a new and different article of commerce. Based on the operations performed in Italy, the jewelry is not substantially transformed into a "product of" Italy.

In your letter, you ask for a confirmation on your client's compliance with the "imported directly" requirement. The term "imported directly" from a BDC, for GSP purposes, is defined in section 10.175, Customs Regulations (19 CFR 10.175). Articles which are shipped directly from a BDC to the United States without passing through the territory of any other country will clearly be "imported directly" to the United States from the BDC. See section 10.175(a), Customs Regulations (19 CFR 10.175(a)).

The issue in the present case is whether the operations in Italy disqualify the articles from being "imported directly" from Croatia. Customs has previously held that where a product of a BDC is shipped to another country before coming to the United States, and the merchandise enters the commerce of the other country (beyond that permitted by 19 CFR 10.175), the merchandise will satisfy the "imported directly" requirement only if it returns to the BDC and re-enters the commerce of that country before coming to the United States. See HRL 555398 dated December 12, 1989, HRL 555598 dated May 18, 1990 (reconsidering and affirming HRL 555398), and HRL 557077 dated July 21, 1993. Articles are deemed to have entered the commerce of a country for purposes of the GSP if manipulated (other than loading and 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 present case, the merchandise is initially processed into chain links in Croatia. The chain links are then sent to Italy where they undergo finishing operations, causing the chain links to enter the commerce of Italy. Subsequently, the finished merchandise is returned to Croatia where cleaning, polishing, and packaging operations are performed. As a result of these operations, the merchandise is manipulated for GSP purposes and therefore enters the commerce of Croatia. Pursuant to 19 CFR 10.175(a), the merchandise meets the "imported directly" requirement upon direct shipment to the United States after final processing in Croatia.

HOLDING:

Based on the information submitted, we find that in Croatia the 14 karat gold bars or scraps undergo a substantial transformation into intermediate articles of commerce, wire sticks. The wire sticks are further transformed into chain links. Therefore, the cost or value of the wire sticks may be included in calculating the 35 percent value-content requirement under the GSP. The "imported directly" requirements is satisfied when the product, upon return to Croatia from Italy, enters the commerce of Croatia as a result of processing, such as cleaning, polishing, and packaging.

A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

Myles B. Harmon
Director

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