March 5, 1992
CLA-2 CO:R:C:S 556457 CW
Mr. Michael Stern Secretary, CMS Products, Inc. 133 West 21st Street New York, New York 10011
RE: Tariff treatment applicable to jewelry set with stones in Costa Rica; CBERA; casting; polishing; substantial transformation; product of; HRLs 555546, 555801 and 731963
Dear Mr. Stern:
This is in response to your letters dated December 12, and 21, 1991, requesting a ruling on the tariff status of certain jewelry to be cast and set with stones in Costa Rica and imported into the U.S. Additional information was provided by telephone to a member of my staff by Mr. Jonathan Seidel of CMS Products, Inc.
According to your submissions, the products that are being produced in Costa Rica are gold, silver and base metal jewelry. Fine pure gold and silver as well as alloys, all of U.S. origin, are shipped to Costa Rica where they are manufactured into various types of castings. The processing of the gold involves melting down the fine gold and alloying it to create 10, 14 and 18 karat shot, which is then melted and poured into a mold to create the castings. The fine silver is also melted and alloyed to create sterling silver shot which is then cast into various types of jewelry. The base metal jewelry is cast in a one-step process from non-ferrous metals -- copper, zinc and tin -- presumably of U.S. origin. The castings are then polished before any of a variety of stones are set into the jewelry pieces. You state that the stones, which are almost exclusively of foreign origin, are usually imported into the U.S. and then later shipped to Costa Rica for assembly with the castings. However, polished or rough stones may be shipped directly to Costa Rica from their source, in which case the rough stones will be cut and polished prior to the setting stage.
After the stones are set into the castings, the castings undergo a final polish. The finished jewelry is then imported into the U.S.
You ask whether those stones, such as diamonds, which arrive in the U.S. duty-free, would again receive duty-free treatment when they are shipped to Costa Rica, assembled with castings, and returned to the U.S. as part of finished pieces of jewelry. Secondly, you ask whether stones which were previously imported and duty paid would incur further duty when shipped to Costa Rica and returned to the U.S. as part of finished pieces of jewelry. Lastly, you ask whether finished jewelry from Costa Rica would receive duty-free treatment if the stones set in the castings were previously shipped directly to Costa Rica from their source in rough form and cut and polished in Costa Rica. ISSUE:
Whether gold, silver, and base metal jewelry cast and set with stones in Costa Rica are entitled to duty-free treatment when imported into the U.S.
LAW AND ANALYSIS:
All articles imported into the U.S. are subject to duty unless specifically exempted therefrom under the Harmonized Tariff Schedule of the United States (HTSUS). In addition, in the absence of a specific provision to the contrary, the tariff status of an article is not affected by the fact that it was previously imported into the U.S., whether or not duty was paid upon the previous importation. See U.S. Note 2, Chapter 98, HTSUS. To determine the duty applicable to an imported article, it must be properly classified in a HTSUS tariff provision. Without samples or a detailed description of the jewelry to be imported, we are unable to make a definitive classification at this time. However, based on the limited information provided, it appears that the jewelry set with stones would be classified in subheading 7116.20.10, HTSUS, which provides for articles of precious or semiprecious stones (natural, synthetic or reconstructed): articles of jewelry. Articles classified in this provision are subject to a duty rate of 6.5% ad valorem.
However, eligible articles imported into the U.S. from designated beneficiary countries (BCs) may be exempt from duty under the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). Costa Rica is a designated BC under this program. Under the CBERA, eligible articles the growth, product or manufacture of designated BCs 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 the BC, plus 2) the direct cost of processing operations
performed in the BC, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See, section 10.195(a), Customs Regulations (19 CFR 10.195(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)).
Jewelry classifiable in subheading 7116.20.10, HTSUS, is eligible for CBERA treatment. Therefore, we will assume for purposes of this ruling that the jewelry under consideration here is CBERA eligible.
Where an article is produced from materials imported into the BC, as in this case, the article is considered to be a "product of" the BC for purposes of the CBERA only if those materials are substantially transformed into a new or different article of commerce. Moreover, the cost or value of the U.S.- and foreign- origin materials 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 those materials were subjected to a double substantial transformation in Costa Rica. See, section 10.196(a), Customs Regulations (19 CFR 10.196(a)). That is, the cost or value of the materials imported into Costa Rica and used to produce the jewelry may be included in the 35% computation only if they are first substantially transformed into a new and different intermediate article of commerce, which is itself substantially transformed during the production of the final article -- the finished jewelry.
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).
The first issue to be addressed concerns whether the jewelry is considered to be a "product of" Costa Rica for CBERA purposes. In Headquarters Ruling Letter (HRL) 555801 dated January 2, 1991, we held that casting precious metal alloys into a ring and then mounting the ring with a gem stone in the Dominican Republic results in a substantial transformation of the components into a "product of" that country for CBERA purposes. Therefore, the jewelry in the instant case which is cast into various types of jewelry and then set with stones in Costa Rica would be considered "products of" Costa Rica.
The next issue relates to whether the materials imported into Costa Rica are subjected to a double substantial transformation in the production of the jewelry so as to permit the cost or value of the imported materials to be counted toward the value-content requirement (over and above the 15% cap on U.S.
materials). In HRL 555546 dated January 30, 1990, we held that 24 karat gold imported into Mexico and converted into 14 karat gold shot by an alloying process, and cast into jewelry items results in a double substantial transformation for purposes of the Generalized Systems of Preferences (GSP). See, also, HRLs 554823 dated December 15, 1987, and 555337 dated March 8, 1990. Thus, the cost or value of the fine gold and the alloys of U.S.
origin which are cast into the 10, 14 and 18 karat gold jewelry in Costa Rica may be included in the 35% calculation. Similarly, the cost or value of the fine silver and the alloys of U.S.
origin which are converted into sterling silver and then cast into jewelry in Costa Rica may also be included in the 35% calculation. However, with respect to the base metal jewelry, as the base metal of U.S. origin is cast into jewelry in its condition as imported into Costa Rica, no double substantial transformation results. Therefore, the cost or value of the base metal used in the production of base metal jewelry may be applied toward the 35% minimum in an amount not to exceed 15% of the jewelry's appraised value.
The finished precious and semiprecious stones which are imported into Costa Rica and merely set into castings clearly are not subjected to a double substantial transformation. Thus, the stones'cost or value may not be included in the 35% calculation.
However, with respect to the "rough" stones which are imported into Costa Rica, and cut and polished (faceted) prior to the setting operation, it is our opinion that such operations, if performed on "rough" diamonds, result in a substantial transformation. Although limited information was provided concerning these operations, we understand that the cutting of a gem quality diamond by cleaving or sawing to subdivide and shape the stone and/or eliminate flaws, and putting 52 facets on each diamond, are exacting processes which require considerable skill and attention to detail. These operations, which we understand remove approximately 50% or more of the weight of the "rough" stones, result in more than a mere cosmetic change in the stone's appearance; they significantly alter the shape and appearance of the diamond, enhance its value, and transform an article with numerous potential uses (e.g., cutting tools, thread grinders, rock drills, wire drawing dies) to one dedicated to a single use as a gem. In T.D. 44370(11) dated November 17, 1930, Customs held that the country of origin of diamonds which are mined in South Africa and cut and finished in Holland is Holland for marking purposes.
Therefore, as the processes performed in Costa Rica on the imported "rough" diamonds -- cutting and faceting the stones into finished gems and setting the gems into jewelry pieces cast in Costa Rica -- constitute a double substantial transformation, the cost or value of the intermediate articles of commerce (the cut and faceted diamonds) may be included in the 35% calculation. Before a determination can be made on whether the cutting and polishing of stones, other than diamonds, constitutes a substantial transformation, more detailed information is required concerning the types of stones and their potential uses, the processing steps involved, and the value added and changes effected by the processing. Without information relating to the direct costs of processing to be incurred in Costa Rica, the material costs and the estimated appraised value of the jewelry when imported into the U.S., we are unable to determine whether the 35% requirement will be satisfied. We have enclosed for your information a copy of the Customs Regulations relating to the CBERA (19 CFR 10.191- 10.198).
Based on the information provided, the production of gold, silver and base metal jewelry in Costa Rica by casting and setting stones into the castings substantially transforms the materials into "products of" Costa Rica for purposes of the CBERA. The casting of the gold and silver jewelry results in a double substantial transformation of the fine gold and silver and the alloys imported into Costa Rica, thereby permitting the cost or value of these materials to be included in the CBERA 35% value-content calculation. In addition, "rough" diamonds imported into Costa Rica and cut, polished and set into jewelry items cast in that country are subjected to a double substantial transformation, thereby permitting the cost or value of the cut and polished diamonds to be counted toward the 35% requirement. However, the cost or value of finished stones imported into Costa Rica and merely set into castings may not be included in the value-content calculation. Finally, the cost or value of U.S.- origin base metals imported into Costa Rica and cast into base metal jewelry may be counted toward the 35% requirement only up to the 15% cap for U.S. materials.
Accordingly, the jewelry items will be entitled to duty- free treatment under the CBERA, provided they are imported directly into the U.S. and the 35% value-content requirement is satisfied.
John Durant, Director Commercial Rulings Division