HQ 560333

July 24,1997

MAR-05 RR:TC:SM 560333 BLS

CATEGORY:

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