VAL-2 OT:RR:CTF:VS H033857 CMR
U.S. Customs and Border Protection
Port of Los Angeles International Airport
11099 South La Cienega Boulevard Los Angeles, CA 90045
RE: Application for further review and Protest 2720-08-100341; GSP eligibility of
certain necklaces from India
Dear Port Director:
This determination is in response to the application for further review and protest filed against your decision to liquidate an entry of pendants with chains without benefit of preferential tariff treatment under the Generalized System of Preferences (GSP). The protest was timely filed by Stein Shostak Shostak Pollack & O’Hara, on behalf of their client, Bridal Line, Inc. Justification for the application for further review was provided and was properly approved by the port.
FACTS:
The merchandise at issue in this protest is necklaces consisting of gold pendants on chains. The invoice in the file describes the merchandise in the entry more generally as “10KT & 14KT Gold Jewellery Studded with Diamonds.” The entry includes other articles of jewelry, i.e., rings, earrings, bracelets, and pendants, but only the necklaces are at issue herein. There is no dispute that the necklaces are classifiable in subheading 7113.19.2900 of the Harmonized Tariff Schedule of the United States (HTSUS) which provides for: “Articles of jewelry and parts thereof, of precious metal or of metal clad with precious metal: Of precious metal whether or not plated or clad with precious metal: Of other precious metal, whether or not plated or clad with precious metal: Other: Necklaces and neck chains, of gold: Other.” Subheading 7113.19.2900, HTSUS, is a provision of the tariff for which preferential tariff treatment under the GSP is available provided the requirements of the GSP are met. The protestant asserts that the merchandise at issue qualifies under the GSP.
The pendants are made in India. However, the chains are produced outside of India and imported to be joined with the pendants to form the necklaces. The pendants are produced by first purchasing the raw materials, i.e., gold, diamonds and gemstones. The origin of these materials is not known by the protestant, but the protestant’s supplier has indicated that the gold may have come from various countries, including the United States, and that the rough diamonds probably originated in South Africa or Russia. Documentation received in a supplemental submission from counsel includes invoices for metal alloys from a U.S. company and invoices from Indian gem companies indicating that the companies sold cut and polished gems to the protestant’s supplier. A statement from one of the Indian gem companies indicates they obtained rough diamonds from Antwerp, Belgium and cut and polished the diamonds in India. Statements from two other Indian gem suppliers do not indicate the origin of the rough diamonds, only that they are bought in India. However, the suppliers indicate that the rough diamonds are cut and polished in India. In addition, to invoices and submitted statements, the file contains photographs of the gem suppliers’ offices and workers performing various stages of the gem processing.
With regard to the gold and alloys, the information in the file indicates that the gold is obtained in bar form and melted and blended with various alloys which appear to be in powder or granular form. The resulting gold product is cast by pouring the molten gold into the mold or flask for the jewelry piece. After cooling down, the usable pieces are sent for further processing, including mechanical finishing of the surface of the pieces and cleaning of the pieces. Those pieces into which stones are to be set are sent to the setting department for that process.
After the pendants are finished, they are joined with imported chains to form necklaces. Invoices in the file indicate that the imported chains are purchased from a U.S. company related to the protestant.
ISSUE:
Do the gold necklaces at issue, consisting of Indian-produced pendants and foreign neck chains, qualify for preferential tariff treatment under the GSP?
LAW AND ANALYSIS:
Title V of the Trade Act of 1974, as amended (19 U.S.C. §§ 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles imported directly from beneficiary developing countries (“BDCs”). Articles produced in a BDC may qualify for duty-free treatment under the GSP if the goods are imported directly into the customs territory of the United States from the BDC and the sum of the cost or value of materials produced in the BDC, or any two or more countries that are members of the same association of countries and are treated as one country under 19 U.S.C. § 2467(2), plus the direct costs of the processing operations performed in the BDC or member countries, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. § 2463(a)(2) and (3), and the implementing Bureau of Customs and Border Protection (“CBP”) Regulations at 19 CFR § 10.171-178.
India has been designated as a BDC for purposes of the GSP and may be afforded preferential treatment under the 2007 Harmonized Tariff Schedule of the United States (“HTSUS”) which is the relevant HTSUS at the time of the entry. See General Note 4(a), HTSUS (2007). General Note 4(c), HTSUS (2007), provides in pertinent part as follows:
Articles provided for in a provision for which a rate of duty of “Free” appears in the “Special” subcolumn followed by the symbols “A” or “A*” in parentheses are those designated by the President to be eligible articles for purposes of the GSP pursuant to section 503 of the Trade Act of 1974.
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. . . No article or material of a beneficiary developing country shall be eligible for such treatment by virtue of having merely undergone simple combining or packing operations, or mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the article.
See also, 19 CFR 10.176(a).
Subheading 7113.19.2900, HTSUS (2007), the provision in which the pendant necklaces are classified, has the “Free” rate of duty in the “Special” subcolumn followed by the symbol “A”, among other symbols. Therefore, to be eligible for GSP treatment, the pendant necklaces must be a product of India, imported directly to the United States, and meet the 35 percent value-added requirement set forth in General Note 4(c), HTSUS. See also 19 U.S.C. § 2463(a)(2).
As the pendant necklaces are not wholly the growth, product or manufacture of India, we must determine if the production or manufacture which occurs in India creates a new or different article of commerce, i.e., whether the production which occurs in India constitutes a substantial transformation of the materials and components of the necklaces. 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. Texas Instruments Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).
It is not disputed that the pendants are the result of the substantial transformation of the various materials from which they are made – the gold, alloy, diamonds and gemstones. See Headquarters Ruling Letter (HQ) 556457, dated March 5, 1992, regarding the tariff treatment of jewelry set with stones in Costa Rica wherein CBP determined that the jewelry cast into various types of jewelry and then set with stones which were cut and polished in Costa Rica would be considered “products of” Costa Rica. CBP determined that the processes performed in Costa Rica on the imported "rough" diamonds, i.e., the cutting and faceting of the stones into finished gems and setting the gems into jewelry pieces cast in Costa Rica, constituted a double substantial transformation and the cost or value of the intermediate articles of commerce (the cut and faceted diamonds) could be included in the 35% calculation for purposes of meeting the value-added requirement under the Caribbean Basin Economic Recovery Act. See also, HQ 555801, dated January 2, 1991 (casting precious metal alloys into a ring and then mounting the ring a gem stone results in a substantial transformation).
However, the Indian-produced pendant is joined with the foreign neck chain to form a necklace. Your position is that the joining of the foreign neck chain with the pendant to form a pendant necklace is a simple combining operation which does not substantially transform the neck chain. You note that the neck chain is classifiable as a necklace of subheading 7113.19.2900, HTSUS, when imported into India, and remains classifiable in that subheading after being combined with the Indian-produced pendant. Counsel for the importer argues that combining the pendant with the chain is a substantial transformation of the two components creating a new and different article of commerce. With regard to the chain, counsel argues that it is a “neck chain” that becomes a necklace when combined with the pendant in India. Counsel cites to the Court of International Trade’s decision in Uniden America Corp. and Uniden Financial v. United States, 24 C.I.T. 1191 (2000), for support that the combination of the chain with the pendant qualifies as a “product of” India eligible for GSP, as the chain does not need to undergo a double substantial transformation. In addition, while 19 CFR § 10.176(a)(2)(i) provides examples of simple combining or packaging operations and examples of mere dilution, i.e., examples of operations that will not cause an article to be considered grown, produced, or manufactured in a beneficiary country, counsel argues that the port’s denial of GSP is contrary to 19 CFR § 10.176(a)(2)(ii)(D) which provides, in relevant part:
(2) Combining, packaging, and diluting operations. No article which has undergone only a simple combining or packaging operation or a mere dilution in a beneficiary developing country within the meaning of paragraph (a)(1) of this section will be entitled to duty-free treatment even though the processing operation causes the article to meet the value requirement set forth in that paragraph. For purposes of this section:
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(ii) Simple combining or packaging operations and mere dilution will not
be taken to include processes such as the following:
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(D) A simple combining or packaging operation or mere dilution coupled with any other type of processing such as testing or fabrication (for example, a simple assembly of a small number of components, one of which was fabricated in the beneficiary developing country where the assembly took place) . . . .
However, the port correctly points out that § 10.176(a)(2)(iii) acts to limit the effect of § 10.176(a)(2)(ii) by providing the following:
The fact that an article has undergone more than a simple combining or packaging operation or mere dilution is not necessarily dispositive of the question of whether that processing constitutes a substantial transformation for purposes of determining the country of origin of the article.
The pendant necklaces at issue would appear to fall within the language of
§ 10.176(a)(2)(ii)(D) so that the combining of a neck chain with a pendant produced in India would not be considered a simple combining or packaging operation. However,
§ 10.176(a)(2)(iii) serves as a reminder that we must still determine whether the processing in India, i.e., the production of the pendants and the subsequent combining of the pendants with the neck chains, results in a substantial transformation causing the pendant necklaces to be “products of” India.
Protestant’s counsel relies upon HQ 555716, dated April 15, 1991, which determined the eligibility of certain jewelry, i.e., gold necklaces with pendants, for preferential tariff treatment under the Caribbean Basin Initiative. The ruling held the jewelry to be “products of” the Bahamas as the pendants and jump rings were substantially transformed there.
When considering whether the pendant necklace is a “product of” India, we must consider all of the processing which occurs in India. We agree that the neck chain at the time it is imported into India is a necklace, albeit a simple one. However, it is also a component in the production of the finished good, the pendant necklace. Additionally, in this specific case, we consider the nature of the neck chain to which the pendant is added. In our view, this is not the type of chain generally sold separately as a necklace in its own right. It is, as used here, a chain to which something must be added to give it substance and commercial appeal. While it is a necessary component in the formation of the pendant necklace, it is secondary to the pendant which comprises the greater value of and imparts the essential character to the good. When considering all of the processing which occurs in India and viewing the neck chain as a component of the finished good, which alone is not of the type generally sold to the consumer at retail, we believe that the finished pendant necklace is a “product of” India as the various components are substantially transformed in India into the commercial product, i.e., the pendant necklace, which is imported for sale into the United States. We agree with counsel that the provision of 19 CFR § 10.176(a)(2)(ii)(D) is applicable in this case. See HQ 556902, dated February 3, 1993 wherein, citing 19 CFR 10.195(a)(2)(ii)(D) which contains identical language to 10.176(a)(2)(ii)(D), CBP determined that operations of assembling the cap and platform to form a razor cartridge and assembling the handle to the cartridge to form the completed razor constituted a substantial transformation and not merely a simple combining or packaging operation as the cartridge components and razor handle were made in Mexico from imported plastic pellets. See also HQ 556646, dated August 6, 1992, regarding the production of certain eyeglasses and which also cited to 10.195(a)(2)(ii)(D) in determining the goods were eligible for GSP treatment.
Finally, as to counsel’s argument that the court’s decision in Uniden supports his argument that the pendant necklace is an eligible product for GSP, counsel referenced the case to counter any argument that the neck chain needed to undergo a double substantial transformation in India. No one is making that argument and therefore, we will not address this case.
There is no dispute regarding the “imported directly” requirement of GSP and thus, we are left with determining whether the merchandise has met the 35 percent value-added requirement, i.e., whether the sum of the cost or value of materials produced in India, plus the direct costs of the processing operations performed in India, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States.
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).
With regard to the gold and metal alloys, we must determine whether they undergo a double substantial transformation in India when they are used to make the pendants to determine whether their value may be counted toward the 35 percent requirement. The description of the processing of the gold bars and alloy provided in the record and set forth in the facts portion of this decision indicates that the gold and metal alloys are blended and melted and the molten mixture is poured into molds. This is similar to the process described in HQ H022844, dated June 20, 2008, which cited to HQ 560331, dated December 2, 1997, for holding that the gold and alloy so processed underwent a double substantial transformation. Following HQ H022844 and HQ 560331, the value of the gold and metal alloys may be counted toward meeting the required 35 percent value content requirement of the GSP.
With regard to the diamonds and other gem stones which are set in some, not all, of the pendants at issue, the record contains documentation to support the assertion that these materials do undergo a double substantial transformation in India. In HQ 556467, CBP held that imported rough diamonds which were cut and faceted into finished gems and then set into jewelry pieces underwent a double substantial transformation in the country in which the processes occurred. Here the rough gems were imported into India and cut and polished into gem stones ready for placement into jewelry pieces. Therefore, the value of the diamonds and gems processed in India may be counted toward meeting the required 35 percent value content requirement of the GSP.
HOLDING:
The protest is allowed, provided that the port is satisfied that the 35 percent value added requirement for the GSP has been met, which from the record appears to be satisfied. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division