HQ 555716

April 15, 1991

CLA-2 CO:R:C:V 555716 SER

CATEGORY: Classification

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.

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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