HQ 560333
July 24,1997
MAR-05 RR:TC:SM 560333 BLS
Area Director
JFK Airport
Jamaica, New York 11430
RE: Eligibility of certain gold jewelry for duty-free treatment
under U.S.-Israel FTA;
I/A 4/97; substantial transformation; revocation of HRLs
556892 and 556624
Dear Sir:
This is in reference to your memorandum dated January 31,
1997, forwarding an internal advice request on behalf of Coloseum
Industries Ltd. and Adipaz Ltd. ("Adipaz"), in connection with a
claim for duty-free entry of certain jewelry under the United
States-Israel Free Trade Area Implementation Act of 1985 ("U.S.-Israel FTA") (General Note 8, Harmonized Tariff Schedule of the
United States (HTSUS)).
FACTS:
The subject jewelry consists of small link gold chains which
undergo processing in Israel and in Zimbabwe. The operations
performed are as follows:
Operations in Israel
1. Fine gold bullion is imported into Israel.
2. The bullion is squeezed into one long flat piece of gold.
3. The gold is then shredded into small pieces to fit into
the crucible (for melting).
4. The gold is weighed and, together with different alloys,
is prepared for melting.
5. The gold and alloys are melted into ingots, which become
karat gold.
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6. The ingots are rolled in a big rolling mill.
7. Intermediate annealing is done in a controlled-atmosphere
furnace.
8. Continuous rolling and annealing (to soften the gold)
intermittently are done until a wire with a square
cross section of 1.2 mm results.
9. Drawing dyes are inserted on the wire (purpose is to size
the wire eventually to the correct gauge).
10. The wire is drawn to the required diameter through dyes
(stones).
11. The spool of wire rod is degreased and dried.
12. The gold wire rod is squeezed in a large squeezing machine
to create a round wire of gold.
13. The wire is annealed.
14. The gold is squeezed to the final gauge in a small
squeezing machine.
15. Further annealing is carried out.
16. Aluminum wire is drawn to the required core diameter.
17. The strip of gold and the aluminum core are inserted into a
drawing dye and
winding spindle with a spindle winding machine. (This
places the aluminum core into the gold.)
18. The resulting spiral is sawed with circular saws into
separate links.
19. The separate links are fit between flat cylinders to
flatten the links into the final shape.
20. The links are sifted from sawdust remains.
21. The links are shipped to Zimbabwe.
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Operations in Zimbabwe
22. The individual links are connected together by hand
(assembled) and soldered.
Operations Upon Return to Israel
23. The assembled links are returned to Israel in lengths of
33 cm.
24. The 33 cm lengths are further assembled in Israel by
adding ten more links and connecting them
together to form continuous lengths.
25. These continuous lengths are cut to the required lengths
for either neck chains (minimum 45 cm) or bracelets
(approximately 22 cm).
26. The ends are cleaned from the cuttings.
27. End links, quality tag and lock are added.
28. The ends are soldered.
29. The chemical department then cleans the chain by: -
Sulfuric acid wash - water rinse- Booming
(to strip an outside layer of gold off the chain) -
Rinsing-Neutralization of the acids-Polishing in a
vibrating tumbler - Rinsing-Drying.
30. The jewelry then goes to Quality Control.
31. The jewelry is exported.
ISSUE:
1) Whether the gold chains are considered to be a "product
of" Israel upon importation into the U.S., for purposes of
determining whether the jewelry is eligible for duty-free
treatment under the U.S.-Israel FTA.
2) Whether the gold chains are considered to be "imported
directly" into the U.S. from Israel.
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LAW AND ANALYSIS:
Under the U.S.-Israel FTA, eligible articles which are the
growth, product, or manufacture of Israel and are imported
directly to the U.S. from Israel qualify for
duty-free treatment or a duty preference, provided the sum of 1)
the cost or value of
materials produced in Israel, plus 2) the direct costs of
processing operations performed in Israel is not less than 35
percent of the appraised value of the article at the time it is
entered. See General Note 8, Harmonized Tariff Schedule of the
United States (HTSUS).
Adipaz contends that the processing in Zimbabwe during which
the gold links are assembled (or woven) into chain does not
result in a substantial transformation of the Israel-origin gold
links. In the alternative, Adipaz argues that upon return to
Israel from Zimbabwe, the product is again substantially
transformed. Accordingly, Adipaz argues that upon importation
into the U.S., the gold jewelry is a "product of" Israel.
"Product Of"
The substantial transformation criteria is used to determine
whether an article is a "product of" Israel for purposes of the
U.S.-Israel FTA. See U.S.-Israel FTA, Annex 3, paragraph 4. A
substantial transformation occurs "when an article emerges from a
manufacturing process with a new name, character, or use which
differs from that of the original material subjected to the
process." See Texas Instruments, Inc. v. United States v. United
States, 69 CCPA 152, 681 F.2d 778 (1982). See also U.S.-Israel
FTA, Annex 3.
In Headquarters Ruling Letter (HRL) 556892 (December 23,
1992), we addressed the question of whether certain rope-chain
jewelry was eligible under the Generalized System of Preferences
(GSP) where gold links produced in a GSP country (Thailand) was
sent to a non-GSP countries for weaving operations. The woven
chains were then returned to Thailand where they were soldered,
cut into lengths, clasps attached to make bracelets and/or
necklaces, and cleaned and polished. Alternatively, the chains
were combined into one continuous length and cleaned. In that
case, we stated that weaving links into chain forms the
fundamental and essential character of the finished article
(bracelet and/or necklace) and dedicates its use as jewelry.
Therefore, we found that the weaving operation in the non-GSP
countries substantially transformed the links into a new and
different product of" the country where that process occurred.
Accordingly, we held in that case that the imported
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jewelry was not a "product of" Thailand and thus was ineligible
for duty-free treatment under the GSP. In (HRL) 556624 (July 31,
1992), we addressed a request involving identical operations as
in HRL 556892, except that the processing in the non-GSP country
also included soldering the links together after the weaving
operation.
We have reconsidered our position in HRL's 556624 and
556892, and are of the opinion that the simple assembly or
weaving of gold links into chain [even when coupled with
soldering] does not effect a substantial transformation of the
gold links.
In National Hand Tool v. United States, 16 CIT 308, 312
(1992), aff'd, 989 F.2d 1201 (Fed. Cir. 1993), a country of
origin marking case, certain hand tool components used to make
flex sockets, speeder handles, and flex handles, were imported
from Taiwan. The imported components were either cold-formed or
hot-forged into their final shape before importation, with the
exception of the speeder handle bars, which were reshaped by a
power press after importation. In the U.S., the components were
subject to heat treatment, which increased the strength of the
components, sand-blasting (a cleaning process), and
electroplating (enabling the components to resist rust and
corrosion). After these processes were complete, the components
were assembled into the final products, which were used to loosen
and tighten nuts and bolts.
The Court of International Trade decided the issue of
substantial transformation based on three criteria, i.e., name,
character, and use. Applying these rules, the court found that
the name of the components did not change after the
post-importation processing, and that the character of the
articles similarly remained substantially unchanged after the
heat treatment, electroplating and assembly, as this process did
not change the form of the components as imported. The court
further pointed out that the use of the articles was
predetermined at the time of importation, i.e., each component
was intended to be incorporated into a particular finished
mechanic's hand tool. Based on this test, the court concluded
that the processing in the U.S. did not effect a substantial
transformation of the foreign hand tool components.
In HRL 559406 (April 25, 1996), Israeli-origin gold jewelry
components of various shapes (diamond cut, squares, rectangles
etc.) were exported to Thailand where they were assembled into
finished gold jewelry. Citing National Hand Tool, we found in
that case that the character and use of the finished jewelry was
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predetermined by the form of the exported components. Noting
that the jewelry components' character and shape did not change
as a result of the assembly and finishing operations performed in
Thailand, we found that the processing in that country did not
substantially transform the jewelry components into new and
different articles, but rather constituted a continuation of the
production process leading to their completion as items of gold
jewelry. Accordingly, we held that the articles of gold jewelry
were considered to be a "product of" Israel for purposes of
determining their eligibility for duty-free treatment under the
U.S.-Israel FTA.
Consistent with the foregoing, we find in the instant case
that the mere assembly and soldering of the Israeli-origin gold
links in Zimbabwe to form a chain does not result in a
substantial transformation in Zimbabwe. A new and different
article having a new name, character or use, has not been
created. The assembly operations in Zimbabwe do not alter the
fundamental character or specific design of the gold links, nor
do they affect the uses to which the links may be put. Both
before and after the weaving operation, the links are clearly
recognizable as jewelry components and dedicated to be finished
into specific types of jewelry, in this case, necklaces or
bracelets. The assembly of the links represents a continuation
of the production process leading to their completion as finished
gold jewelry. (See Uniroyal Inc., v. United States, 542 F. Supp.
1026 (1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983), where the
court held that the assembly of the formed uppers to the soles to
form a finished moccasin did not result in a substantial
transformation of the formed uppers because the uppers formed the
"very essence" of the shoes.) Accordingly, the finished gold
jewelry will be considered a "product of' Israel for purposes of
the U.S.-Israel FTA.
Imported Directly
Annex 3, paragraph 8, of the U.S.-Israel FTA defines the
words "imported directly," as follows:
(a) Direct shipment from Israel to the U.S. without passing
through the territory of any intermediate country;
(b) If shipment is through the territory of an intermediate
country, the articles in the shipment do not enter into the
commerce of any intermediate country while en route to the U.S.,
and the invoices, bills of lading, and other shipping documents,
show the United States as the final destination;
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(c) If shipment is through an intermediate country and the
invoices and other documentation do not show the U.S. as the
final destination, then the articles in the
shipment, upon arrival in the U.S., are imported directly only if
they:
(i) remain under control of the customs authority in an
intermediate country;
(ii) do not enter into the commerce of an intermediate
country except for the purpose of a sale other than at retail,
provided that the articles are imported as a result of the
original commercial transaction between the importer and the
producer or the latter's sales agent;
(iii) have not been subjected to operations other than
loading and unloading, and other activities necessary to preserve
the article in good condition.
The definition of "imported directly" under the U.S.-Israel
FTA is very similar to that under the GSP. See section 10.175,
Customs Regulations (19 CFR 10.175).
We have held for purposes of the GSP that merchandise is deemed
to have entered the commerce of an intermediate country if
manipulated (other than loading or 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 instant case, the gold links will be sent to Zimbabwe
from Israel for assembly. It is apparent that these operations
constitute a manipulation of the merchandise, and accordingly,
the merchandise is deemed to have entered the commerce of
Zimbabwe. Therefore, the merchandise will be considered to be
"imported directly" from Israel only if, upon its return from
Zimbabwe, it re-enters the commerce of, and then is directly
shipped from, Israel to the U.S.
According to the submission, upon return to Israel, the
chains will be subject to further assembly by the addition of ten
more links. It will then be cut to length, and will become
finished items of jewelry with the addition of end links, locks,
and quality tags. The jewelry will then be cleaned and sent to
quality control, before exportation to the U.S.
Under these facts, we find that there will be a
manipulation of the merchandise in Israel, and thus the gold
jewelry is considered to enter the commerce of Israel prior to
direct exportation to the U.S. Accordingly, based upon this
information, the gold jewelry will be considered to be "imported
directly" from Israel into the U.S.
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HOLDING:
1) Israeli-origin gold links exported to Zimbabwe for
assembly into gold chain, even when coupled with a soldering
operation, do not undergo a substantial transformation as a
result of the operations in Zimbabwe. Therefore, for purposes of
the U.S.-Israel FTA, the gold chain will be considered a "product
of" Israel upon importation into the U.S.
2) The gold chain will enter the commerce of Israel upon
return from Zimbabwe. Therefore, the gold jewelry will be
considered to be "imported directly" from Israel upon entry into
the U.S.
Accordingly, the imported articles will qualify for
duty-free treatment under the U.S.-Israel FTA, provided the sum
of (a) the cost or value of the materials produced in Israel,
plus (b) the direct costs of processing operations performed in
Israel is not less than 35 percent of the appraised value of the
merchandise at the time of entry. Whether the 35 percent
value-content requirement will be met must await actual entry of
the merchandise. HRL 556892 and HRL 556624 are hereby revoked as
a result of the position in this ruling regarding the substantial
transformation of gold links.
Sincerely,
John
Durant, Director
Tariff
Classification Appeals Division