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HQ W562035





June 22, 2001

CLA-2 RR:CR:SM 562035 KSG

CATEGORY: CLASSIFICATION

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

RE: Eligibility of gold jewelry for duty-free treatment under the GSP; double substantial transformation; stones

Dear Director:

This is in response to your request for internal advice of February 1, 2001, concerning the eligibility of gold jewelry imported from Sri Lanka for duty- free treatment under the Generalized System of Preferences (“GSP”).

FACTS:

Hansa Jewellery Ltd. purchases pure gold from a foreign country other than Sri Lanka. The company purchases alloying metals in Italy. In their production facilities in Sri Lanka, the pure gold is mixed with the appropriate percentages of alloying metals. This mixture is then melted to form an alloy. The alloy is then poured into flasks and cast into various styles, typically used to make rings and pendants. The castings are then set with diamonds and/or colored stones ("stones"). The gold castings, set with stones, are then polished. The country of origin of the diamonds and stones is not indicated. We will assume for the purposes of this ruling that the diamonds and stones are not of U.S. or Sri Lankan origin.

ISSUE:

Whether the imported gold jewelry is 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Congress originally enacted the GSP program to extend preferential tariff treatment to the exports of less-developed countries to encourage economic diversification and export development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 gold jewelry is classified in Chapter 71, HTSUS. All the tariff provisions of Chapter 71 are GSP-eligible. Under General Note 4(a), HTSUS, Sri Lanka 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” Sri Lanka. 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).

Customs considered a similar issue 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 gold, the alloying materials and the stones are imported into Sri Lanka 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 and setting of stones that transform the metals and stones into jewelry are performed in the GSP beneficiary country. There is a change in name from gold, alloy materials and the stones into a finished ring or pendant. There is also a change in character; the gold is mixed with the other materials and therefore, the resulting material has different characteristics than pure gold or the alloy materials. Gold, alloying materials and stones have many potential uses while the finished jewelry has a single use. Therefore, we conclude that the gold, alloy materials and stones are substantially transformed into a finished piece of jewelry in Sri Lanka with a different name, character and use. Thus, there is a substantial transformation and the finished jewelry is a "product of" Sri Lanka 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 issue is whether the gold, the alloying materials from Italy and the finished stones undergo a double substantial transformation in Sri Lanka when they are used to make jewelry and therefore, may be counted toward the 35 percent requirement.

In HRL 560331, Customs considered the issue of whether the materials imported into the Dominican Republic were subjected to a double substantial transformation so that their value could be included in the 35% value-content requirement. Customs held that the gold bars, silver, copper, zinc, nickel, or brass, which were alloyed to the desired specification from shot and cast into jewelry pieces were subjected to a double substantial transformation, but that the finished stones which were set into the castings in the Dominican Republic were not subjected to a double 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. See also HRL 556457, dated March 5, 1992, which held that finished precious and semiprecious stones set into castings are not subjected to a double substantial transformation.

In this case, based on the facts presented, there is no conversion of the metals and alloying materials into shot, an article that was held to be an intermediate article of commerce. See HRL 555337 and HRL 555546. Further, there is no other article created that would be considered an intermediate article of commerce. Based on the facts presented, there is one continuous process involved that transforms the gold, the alloying materials and the stones into finished jewelry pieces. As discussed above, this processing in Sri Lanka would constitute a single substantial transformation for the gold, alloying materials and stones. Setting the stones into the castings is not considered a double substantial transformation. See HRL 556457. Accordingly, none of the materials of the finished jewelry undergo a double substantial transformation in Sri Lanka and therefore, none of the materials could be counted toward the 35 percent value content requirement under the GSP.

HOLDING:

Based on the information provided, the gold, alloying materials and stones undergo a single substantial transformation in Sri Lanka and therefore, would be considered a product of Sri Lanka for the purposes of
the GSP. None of the materials of the finished jewelry undergo a double substantial transformation in this case and therefore, none of the materials may be counted toward the 35 percent value content requirement under the GSP.

Sincerely,

John Durant
Director
Commercial Rulings Division

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