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HQ 555716

April 15, 1991

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


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.


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.


Is the jewelry at issue entitled to duty-free treatment under the CBI?


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).

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.


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.


John Durant, Director
Commercial Rulings Division

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