HQ 562635 - Request for internal advice regarding eligbility of gold jewelry for preferential tariff treatment under the Generalized System of Preferences (GSP) - United States International Trade Commision Rulings

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HQ 562635

May 8, 2003

CLA-02 RR:CR:SM 562635 KKV

CATEGORY: CLASSIFICATION

Area Port Director of Customs
605 West Fourth Street
Room 203
Anchorage, AK 99501

RE: Request for internal advice regarding eligbility of gold jewelry for preferential tariff treatment under the Generalized System of Preferences (GSP)

Dear Sir or Madam:

This is in response to your request for internal advice dated July 25, 2002 (received by our office via facsimile dated January 21, 2003), which seeks guidance regarding the eligibility of certain items of jewelry for preferential tariff treatment under the Generalized System of Preferences (GSP). No samples were submitted for our examination.

FACTS:

We are informed that 24-karat gold bar is imported into Thailand, where it is melted and poured into a container of water, which re-shapes the 24-karat gold into shot, grain or pellets. Subsequently, the 24-karat shot is melted together with other metal shot alloys. The molten alloy mixture is cast into pieces of jewelry, which are then trimmed, cleaned, polished and, in some instances, set with stones.

You inquire whether the value of the 24-karat gold bar may be included in the 35% value-content requirement in meeting the criteria for eligibility for preferential treatment under the GSP.

ISSUE:

Whether articles of jewelry manufactured in the manner described above will be eligible for preferential tariff treatment pursuant to the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product or manufacture of a 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 of value of material produced in the BDC, plus (2) the direct costs of the processing operations in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry into the United States.

General Note 3(a)(iii), Harmonized Tariff Schedule of the United States (HTSUS), states that special rates of duty under one or more of the special tariff treatment programs (including the GSP) apply to those products which are classified under a provision for which a special rate is indicated in the “Special” subcolumn and for which all of the legal requirements for such program(s) have been met. For an article to be eligible to receive dutyfree treatment under the GSP, it must be imported from a designated BDC and classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "A" or "A*." As provided in General Note 4(a), HTSUS, Thailand is a designated BDC. The tariff classification of the items of jewelry has not been provided; for purposes of this request for internal advice, we assume that they are classifiable in a provision which has been designated as eligible for duty-free treatment under GSP.

Articles provided for in a designated provision are eligible for duty-free treatment under the GSP provided that they are a “product of” a BDC and meet the value-content requirement and are “imported directly” into the U.S. Inasmuch as your inquiry focuses solely on the value-content requirement, we will dispense with discussion of the remaining two requirements.

In addition to the "imported directly" and "product of" requirements, to be eligible for dutyfree treatment under the GSP statute, merchandise must satisfy a 35% valuecontent requirement. If an article consists of materials which are imported into a BDC, as in the instant case, the cost or value of these materials may be counted toward the 35% valuecontent requirement only if they undergo a double substantial transformation in the BDC.

Customs application of the double substantial transformation requirement in the context of the GSP received judicial approval in The Torrington Company v. United States, 8 CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (Fed. Cir. 1985). The Court of International Trade, after affirming Customs application of the double substantial transformation concept, said:

Regulations promulgated by Customs define the term "materials produced" to include materials from third countries that are substantially transformed in the BDC into a new and different article of commerce. 19 CFR 10.177(a)(2). It is not enough to transform substantially the nonBDC constituent materials into the final article, as the material utilized to produce the final article would remain a nonBDC material. There must first be a substantial transformation of the nonBDC material 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 the new and different article of commerce. It is noted that 19 CFR 10.177(a) distinguishes between "merchandise produced in the BDC" and the cost or value of the "materials produced in the BDC" which demonstrates the contemplation of a dual substantial transformation requirement.

Id. at 1086.

Thus, in the case before us, in order to achieve a "double substantial transformation," the 24-karat gold bar imported into Thailand must be substantially transformed into a new or different intermediate article of commerce, which is then used in Thailand in the production of the final imported article – gold jewelry. 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 and acquire for their own purposes of consumption or production." Torrington, supra, at 1570.

You bring to our attention several Customs rulings which discuss the substantial transformation of gold bar in connection with the making of jewelry. In Headquarters Ruling Letter (HRL) 560331, dated December 2, 1997, Customs concluded that a substantial transformation occurred when pure gold bar was melted together with other metals, yielding an alloy grain of 14-karat gold. Customs determined that a second substantial transformation occurred when the 14-karat gold grain was re-melted and cast into jewelry, and held that because a double substantial transformation of foreign materials had occured, the value of the gold bar could be used in meeting the 35% value-content requirement. Likewise, in HRL 555337, dated March 8, 1990, Customs determined that “the conversion of pure gold and alloy shot in Mexico into 14-karat gold shot produces an intermediate article of commerce” for purposes of GSP eligibility.

However, in HRL 562035, dated June 22, 2001, Customs held that pure gold and alloy metals melted and mixed at the time of casting into articles of jewelry did not yield the requisite double substantial transformation for inclusion in the 35% value-content calculation for GSP eligibility. In reaching this determination, Customs found that “there is no conversion of the metals and alloying materials into shot, an article that was held to be and intermediate article of commerce.”

In the case before us, unlike the facts at issue in 562035, supra, pure gold bar is not melted and mixed with alloy metals at the time of casting, but is processed to form gold shot or casting grain. However, unlike HRL 560331 and 555337, supra, the casting grain created is not an alloyed mixture composed of 18 karat or 14 karat gold, but remains pure gold. Thus, the question at issue is whether the processing of 24 karat gold bar to 24 karat gold shot is sufficient to effect a substantial transformation.

The well-established test for determining whether a substantial transformation has occurred is derived from language enunciated by the court in Anheuser-Busch Association v. United States, 207 U.S. 556, 562 (1908), which defined the term "manufacture" as follows:

Manufacture implies a change, but every change is not manufacture and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary, as set forth and illustrated in Hartranft v. Wiegmann, 121 U.S. 609. There must be transformation; a new and different article must emerge, having a distinctive name, character or use.

Simply stated, 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) cited with approval in Torrington Co. v. United States, 764 F.2d 1463, 1568 (1985).

In this case, we are of the opinion that the foreign 24 karat gold bar is not substantially transformed when made into 24-karat gold shot. Although the processing results in a change in the name of the article to “gold shot” or “casting grain” the courts have held that although a name change may support a finding of substantial transformation, this fact is not necessarily determinative. Superior Wire, a Division of Superior Products Company v. United States, 669 F. Supp. 472 (CIT 1987), aff'd, 867 F.2d 1409 (Fed.Cir. 1989). Moreover, it has been stated that "a change in the name of the product is the weakest evidence of a substantial transformation." National Juice Products Ass'n v. United States, 628 F. Supp. 978 (CIT 1986).

Although the gold may undergo a name change, the 24-karat gold “bar” does not undergo a change in character as a result of processing into 24-karat gold shot. While the 24-karat gold shot is different in appearance from the 24-karat gold bar, the chemical composition of both articles is exactly the same. The gold has not been changed in any manner except in size. Nor has the gold undergone a change in use as a result of processing. While the 24-karat gold may be more portable or more conveniently measured in shot form, the unalloyed 24 karat pure gold shot nevertheless has the same range of potential uses as pure gold bar.

Therefore, based upon the facts presented, the 24-karat gold does not undergo a double substantial transformation when processed into jewelry in Thailand, and the value of the foreign gold may not be counted towards the 35 percent value content requirement.

HOLDING:

Twenty-four karat gold bar is not substantially transformed into a new and different article when processed into 24-karat gold shot. Accordingly, articles of jewelry manufactured in the manner described above will not be eligible for preferential tariff treatment under GSP.

Sincerely,

Myles B. Harmon

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