CLA-2 CO:R:C:S 556559 WAW
Robert P. Larson, Esq.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
3400 City Center
33 South Sixth Street
Minneapolis, MN 55402-3796
RE: Eligibility of gold rings from Costa Rica for duty-free
treatment under the Caribbean Basin Economic Recovery Act
(CBERA) and U.S. Note 2(b), subchapter II, Chapter 98,
HTSUSA
Dear Mr. Larson:
This is in reference to your letter dated March 5, 1992, on
behalf of Jewelmont Corporation ("Jewelmont"), concerning the
eligibility of gold rings from Costa Rica for duty-free treatment
under the Caribbean Basin Economic Recovery Act (CBERA) (19
U.S.C. 2701-2706) and U.S. Note 2(b), subchapter II, Chapter 98,
Harmonized Tariff Schedule of the United States Annotated
(HTSUSA) (hereinafter, "Note 2(b)").
FACTS:
Jewelmont is a manufacturer and wholesaler of gold jewelry.
Jewelmont works in conjunction with a facility located in Costa
Rica that currently processes unfinished gold rings into finished
articles. The Costa Rica facility is named Jene S.A.
(hereinafter "Jene"), and is solely-owned by the co-shareholder
and CEO of Jewelmont. As a result of the close relationship
between Jewelmont and Jene, the materials and components of the
rings are sent to Jene at Jewelmont's cost. Once the rings are
produced in Costa Rica, they are imported into the U.S. for
wholesale distribution.
Currently, the gems which are shipped to Jene are originally
purchased by Jewelmont from U.S. wholesalers. The wholesalers
import the gems into the U.S. from either Israel or India. The
gold alloy used by Jewelmont in the production of jewelry comes
from a U.S. corporation. Jewelmont commences its operations by
first designing the product on paper, designing models,
constructing molds and casting unfinished gold rings in its
Minneapolis, MN facility. The unfinished rings, in addition to
the gems (if any) that will be assembled into the ring, are
shipped to Jene for finishing operations. These operations
include pre-polishing, stripping, bombing, buffing, tapping, and
setting of gemstones. In addition, some pieces of jewelry
undergo additional procedures such as head or plate attachments,
laser finishing and rhodium treatment before they are shipped to
the U.S.
Jewelmont intends to alloy gold bullion at its Costa Rica
facility. This process consists of melting pure gold and adding
other metals, such as silver and copper, to create a gold
product which possesses different properties and values from the
pure gold. Next, the alloyed gold will be cast into rings, and a
gem stone will be mounted onto the ring casting. The importer
maintains that alloying the gold in Costa Rica constitutes a
single substantial transformation, and the subsequent casting of
the rings constitutes the second substantial transformation for
purposes of the CBERA. Therefore, the importer argues that
under these circumstances, the full value of the gold (over and
above the 15% cap on U.S. materials under 19 CFR 10.195(c)),
should be counted toward the CBERA 35% value-content requirement.
You also state that in the course of Jewelmont's production
of jewelry in Costa Rica, a few questions have arisen regarding
the eligibility of gold rings for duty-free treatment under Note
2(b). Our responses to your questions are set forth below.
ISSUES:
(1) Whether the alloying of U.S.-origin gold and the
subsequent casting of the gold into rings in Costa Rica result in
a double substantial transformation of the materials, thereby
enabling the cost or value of these materials to be counted
toward the 35% value-content requirement for purposes of the
CBERA.
(2) Whether gold scrap from Costa Rica is eligible for duty-
free treatment under the HTSUS.
(3) Whether the gold rings from Costa Rica which consist of
both U.S. and foreign materials are eligible for duty-free
treatment under Note 2(b).
LAW AND ANALYSIS:
Question 1:
Under the CBERA, eligible articles the growth, product or
manufacture of designated beneficiary countries (BC's) may
receive duty-free treatment if such articles are imported
directly to the U.S. from a 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), Harmonized Tariff
Schedule of the United States (HTSUS), Costa Rica is a BC for
CBERA purposes. In addition, gold jewelry is classified under
one of the tariff provisions in Chapter 71 of the HTSUS, and all
the jewelry in this chapter is eligible for duty-free treatment
under the CBERA. Therefore, in this analysis, we are assuming
that Jewelmont's rings will fall under a CBERA-eligible tariff
provision. Accordingly, provided that the gold rings are
considered "products of" Costa Rica and the 35% value-content
minimum is met, the rings will be entitled to duty-free
treatment under the CBERA.
Where an article is produced from materials imported into a
BC from non-BC's, as in this case, the article is considered a
"product of" the BC only if those materials are substantially
transformed into a new and different article of commerce. See 19
CFR 10.195(a). In the present situation, the cost or value of
the U.S. components to be imported into Costa Rica may be counted
toward satisfying the 35% value-content requirement (over and
above the 15% cap on U.S. materials) only if there is a finding
that the components were subjected to a double substantial
transformation in Costa Rica. See section 10.196(a), Customs
Regulations (19 CFR 10.196(a)).
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).
You state that Jewelmont plans on shipping pure gold from
the U.S. where it will be alloyed at its Costa Rica facility.
The gold alloy will then be cast into rings, and gems will be
mounted into the ring castings. The importer contends that the
alloying of the gold and subsequent casting operations result in
a double substantial transformation of the imported gold, thereby
enabling the cost or value of the U.S.-origin gold (over and
above the already included 15% U.S. value) to be included toward
the CBERA 35% value-content requirement.
For the cost or value of the imported gold to be counted in
the 35% value-content requirement, it must undergo a double
substantial transformation. We have previously held that the
alloying of imported gold in a BC and the subsequent casting of
the alloy into jewelry are sufficient to constitute a double
substantial transformation. See 555832 dated December 15, 1987
(converting pure gold into an alloy form and casting the alloyed
metal into pieces of jewelry results in a double substantial
transformation); HRL 555716 dated April 15, 1991 (pendants and
jump rings which are made in the Bahamas from imported 24 karat
gold bullion that is alloyed down to 14 karat gold and then
handcrafted into their final design undergo a double substantial
transformation); HRL 555337 dated March 8, 1990 (conversion of
pure gold and alloy shot in Mexico into 14 karat gold shot
produced an intermediate article of commerce, which itself is
then substantially transformed by casting into rings).
Therefore, since the operations in the present case are
closely analogous to those in the above-cited rulings, we are of
the opinion that the alloying of pure gold in Costa Rica and the
subsequent casting of the alloy into rings is sufficient to
constitute a double substantial transformation for purposes of
the CBERA. Accordingly, the full cost or value of the U.S.-
origin gold may be counted toward the 35% value-content
requirement for CBERA eligibility purposes.
Question #2:
You have asked us to determine whether gold scraps which
result from finishing and polishing gold rings in Costa Rica,
will be subject to duty upon entry into the U.S. We are assuming
that the gold used to produce the rings will originate from the
U.S. You maintain that the scraps or findings of gold alloy are
eligible for duty-free treatment under U.S. Note 2(b), subchapter
II, Chapter 98, HTSUS. In support of your position, you state
that the gold scraps or findings remain whole ingredients that
are a product of the U.S., and do not enter into the commerce of
any other country.
We agree that the gold scraps or findings are eligible for
duty-free treatment upon entry into the U.S. Gold scrap is
classified under subheading 7112.10.00, HTSUS, which provides for
"[w]aste and scrap of precious metal or of metal clad with
precious metal: Of gold, including metal clad with gold but
excluding sweepings containing other precious metals." All scrap
which is classified under this provision is subject to a free
rate of duty upon entry into the U.S., regardless of the country
of origin. Therefore, in the instant case, pursuant to
subheading 7112.10.00, HTSUS, the scrap gold from Costa Rica is
eligible for duty-free treatment.
Question #3:
The third question you present is whether rings, which are
processed and assembled in a BC from materials which are sent to
the BC from the U.S., are eligible for duty-free treatment under
U.S. Note 2(b) in cases where some of the materials originate
from outside of the U.S. The importer argues that Note 2(b)
should apply to jewelry that includes precious or semi-precious
gems, even though such gems may not meet the "product of"
requirement of section 10.12(e), Customs Regulations (19 CFR
10.12(e)). In the alternative, the importer claims that the gems
which are entered into the U.S. duty-free from Israel and/or
India and subsequently exported to Costa Rica for assembly into
rings should be eligible for duty-free status upon re-entry into
the U.S., because the duty-free status "runs" with the gems.
Note 2(b) provides, in pertinent part, as follows:
(b) No article (except a textile article, apparel article,
or petroleum, or any product derived from petroleum. . .)
may be treated as a foreign article, or as subject to duty,
if --
(i) the article is --
(A) assembled or processed in whole of fabricated
components that are a product of the United
States, or
(B) processed in whole of ingredients (other than
water) that are a product of the United States, in
a beneficiary country; and
(ii) neither the fabricated components, materials or
ingredients, after exportation from the United
States, nor the article itself, before importation
to the United States, enters the commerce of any
foreign country other than a beneficiary country.
Although U.S. Note 2(b)(i)(A) and (B) are separated by the
word "or", it is our opinion that Congress did not intend to
preclude free treatment under this provision to an article which
is created in a BC both by assembling and processing U.S.
fabricated components and by processing U.S. ingredients.
To qualify for Note 2(b) duty-free treatment, an eligible
article must be assembled or processed in a BC entirely of
components or ingredients which are "products of" the U.S. A
"product of" the U.S. is an article manufactured within the
Customs territory of the U.S. and may consist wholly of U.S.
components or materials, of U.S. and foreign components or
materials, or wholly of foreign components or materials. An
article which consists wholly or partially of foreign components
or materials, may still become a "product of" the U.S. if the
components or materials undergo a process of manufacture in the
U.S. which results in a substantial transformation. See sections
10.12(e) and 10.14(b), Customs Regulations (19 CFR 10.12(e) and
10.14(b)). 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. U.S., 69 CCPA 152, 681 F.2d 778, 782 (1982).
Based on the information provided, it is our understanding
that the gems are simply imported into the U.S. from either
Israel or India and subsequently exported to Costa Rica for
assembly into finished rings. The gems are imported into the
U.S. in finished condition and do not undergo any process of
manufacture in the U.S. which results in a substantial
transformation. Thus, we believe that the gems do not
constitute "products of" the U.S. for purposes of Note 2(b).
Accordingly, the rings which consist of U.S. and foreign
materials are not eligible for duty-free treatment under this
provision.
HOLDING:
The processes of alloying U.S.-origin gold and casting the
alloyed gold into rings in Costa Rica is sufficient to constitute
a double substantial transformation for purposes of the CBERA.
Accordingly, the full cost or value of the U.S.-origin gold
imported into Costa Rica may be counted in calculating the 35%
value-content requirement for CBERA eligibility purposes.
Gold scrap is classified under subheading 7112.10.00, HTSUS,
which provides for "[w]aste and scrap of precious metal or of
metal clad with precious metal: Of gold, including metal clad
with gold but excluding sweepings containing other precious
metals." Articles classified under this provision are eligible
for duty-free treatment upon entry into the U.S.
The gems imported into the U.S. do not undergo a substantial
transformation into "products of" the U.S., and therefore, the
rings made in Costa Rica from U.S. and foreign materials are not
eligible for duty-free treatment under Note 2(b).
Sincerely,
John Durant, Director
Commercial Rulings Division