CLA-2 CO:R:C:V 555716 SER
Mr. David McPhail
Adanac Investment Co. Ltd.
P.O. Box F647
Freeport, Bahamas
RE: CBI eligibility of gold necklaces from the Bahamas; 071788,
555210; Azteca Milling v. United States.
Dear Mr. McPhail:
This is in reference to your letter of July 17, 1990,
concerning the eligibility for duty-free treatment of jewelry
under the Caribbean Basin Initiative (CBI) (19 U.S.C. 2701-
2706). We regret the delay in responding.
FACTS:
The jewelry at issue consists of two different types of gold
necklaces-- one with a "star fish" pendant and one with a "sand
dollar" pendant. The manufacture of both of these articles is
very similar, with only some differences arising in the cost
calculations.
The necklaces are made from two gold bracelets that are
imported from Italy into the Bahamas, where they are joined
together to form a chain of necklace length. The gold starfish
and gold sand dollar pendants are attached to the necklaces by
means of 14 karat gold jump rings. A blue topaz is set in the
center of each of the star fish pendants. The sand dollar
pendants are set with 15 small diamonds and one blue topaz. The
diamonds and the topaz gemstones are stated to be of non-U.S. and
non-Bahamian origin.
The pendants and the jump rings are made in the Bahamas from
imported 24 karat gold bullion that Adanac alloys down to 14
karat gold. The pendants and the jump rings are then
handcrafted in the Bahamas into their final design from the 14
karat gold. The gemstones and diamonds are then set into the
pendants before the final article is formed.
The cost analysis provided in your submission states that
the total Bahamian product and labor costs for the starfish
necklaces is 62.2% of the appraised value, and the Bahamian costs
for the sand dollar pendants is 51.4% of their appraised value,
though no breakdown of this information was provided.
-2-
ISSUE:
Is the jewelry at issue entitled to duty-free treatment
under the CBI?
LAW AND ANALYSIS:
Under the CBI, eligible articles the growth, product or
manufacture of designated beneficiary countries (BC's), may enter
the U.S. free of duty if such articles are imported directly to
the U.S. from the BC, and if the sum of (1) the cost or value of
the materials produced in a BC or BC's, plus (2) the direct cost
of processing operations performed in a BC or BC's, is not less
than 35% of the appraised value of the article at the time it is
entered into the U.S. See 19 U.S.C. 2703(a). The cost or value
of materials produced in the U.S. may be applied toward the 35%
value-content minimum in an amount not to exceed 15% of the
imported article's appraised value. See section 10.195(c),
Customs Regulations (19 CFR 10.195(c)).
As stated in General Note 3(c)(v)(A) of the Harmonized
Tariff Schedule of the United States Annotated (HTSUSA), the
Bahamas is a BC for CBI purposes. In addition, the jewelry is
classified under the provision for other necklaces and neck
chains, of gold: other, in subheading 7113.19.2900, HTSUSA, which
is a CBI eligible provision.
Under 19 CFR 10.195, an eligible article may receive duty-
free treatment if it is either wholly the growth, product, or
manufacture of a beneficiary country or a new or different
article of commerce which has been grown, produced, or
manufactured in the BC. Accordingly, the materials imported into
the Bahamas and used in the production of the final article must
be substantially transformed into a new and different article of
commerce, a "product of" the BC.
The test for determining whether a substantial
transformation occurs is whether an article emerges from a
process with a new name, character, or use different from that
possessed by the article prior to processing. Texas Instruments,
Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782
(1982).
If an article is comprised of materials that are imported
into the BC, the cost or value of those materials may be included
in calculating the 35% value-content requirement only if they
undergo a "double substantial transformation" in the BC. See
section 10.196(a), Customs Regulations (19 CFR 10.196(a)).
Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988),
aff'd 890 F.2d 1150 (Fed. Cir. 1989).
-3-
The jump rings and pendants clearly emerge as new and
different articles of commerce in comparison to the gold bullion
from which they were made. Since the pendants and jump rings
comprise the major portion and value of the jewelry, and 19 CFR
10.195(a)(2)(i)(D), allows combining of materials where one
material is fabricated in the BC, the pendants and jump rings
would be considered a "product of" the Bahamas. If the direct
costs of processing represent at least 35% of the appraised
value, the jewelry would be entitled to duty-free treatment if
they are imported directly to the U.S.
You state that the Bahamian portion of the costs includes:
the labor costs to alloy the gold bullion to 14 karat gold, the
labor costs to manufacture the pendants, the labor costs to set
the gemstones, and the labor costs to transform the Italian
chains to necklaces. All other costs described, as long as they
are "direct costs of processing" as discussed in 19 CFR 10.197,
may be used in the calculation of the 35% value-content
requirement.
For the cost or value of the imported gold bullion to be
counted in the 35% value-content requirement it must undergo a
double substantial transformation. Customs has previously ruled
on whether the manufacture of jewelry from 24 karat gold
constitutes the requisite substantial transformations. In
Headquarters Ruling Letters (HRLs) 071788 dated April 17, 1984
and 555210 dated April 26, 1989, we held that 24 karat gold bars
which were imported into the BDC, and melted down and mixed with
the necessary alloys to form an 18 karat gold composition and
then rolled into wires, constituted as an intermediate
substantially transformed article. The completion of the
articles into jewelry then constituted the second substantial
transformation.
Although you have not supplied a detailed description of
the processes involved in producing these articles, previous
experience leads us to believe that the alloyed 14 karat gold is
a substantially transformed intermediate article for both the
pendants and the jump rings. In addition, a second substantial
transformation occurs when the gold is handcrafted into the
pendants' completed design form-- either the starfish or the sand
dollar, and when the jump rings are handcrafted in the Bahamas.
The pendants and jump rings clearly have a new name, character
and use from the 14 karat gold alloy from which they are made.
-4-
HOLDING:
The pendants and jump rings undergo a substantial
transformation into new and different articles of commerce.
Therefore, they are a "product of" the Bahamas, and entitled to
duty-free treatment if the direct costs of processing in the
Bahamas are at least 35% of the appraised value of the article at
the time of importation into the U.S.
The gold bullion imported into the Bahamas undergoes a
double substantial transformation and, therefore, is a
substantially transformed constituent material which can be used
in the calculation of the 35% value-content requirements.
Accordingly, if the sum of the cost or value of the gold bullion
plus those direct costs of processing which meet the requirements
of 19 CFR 10.197 equal or exceed 35% of the appraised value of
the jewelry at the time of entry into the U.S., they will qualify
for duty-free treatment under the CBI.
Sincerely,
John Durant, Director
Commercial Rulings Division
cc: Ass't Area Dir., NIS
NY 854802