CLA-2 CO:R:C:S 555787 LS
Kenneth H. Keefe, Esq.
Sandler, Travis & Rosenberg, P.A.
The Waterford
5200 Blue Lagoon Drive
Miami, Florida 33126-2022
RE: Applicability of partial duty exemption under subheading
9802.00.50, HTSUS, to gold jewelry subjected to a diamond
cutting operation by means of jeweler's handmotor.
Reconsideration of 555640. Alteration.
Dear Mr. Keefe:
This is in response to your letter of November 14, 1990, on
behalf of Auracast, Inc., requesting partial reconsideration of
Headquarters Ruling Letter (HRL) 555640 dated August 13, 1990.
That ruling held, in part, that certain gold jewelry subjected
to a diamond cutting or faceting operation were commercially
different articles when returned to the U.S. and, therefore,
were ineligible for the partial duty exemption under subheading
9802.00.50, Harmonized Tariff Schedule of the United States
(HTSUS). You request that we reconsider this portion of the
ruling. Samples of "polished" and "diamond cut" ring jewelry
were submitted for examination. Further information provided at
a meeting at Customs Headquarters on May 13, 1991, and submitted
by letter dated May 31, 1991, was also considered in this
reconsideration.
FACTS:
In HRL 555640, we considered whether certain gold jewelry
subjected to two alternative processes, i.e., polishing and
diamond-cutting, to produce varied lustres were entitled to the
partial duty exemption under subheading 9802.00.50, HTSUS. The
facts of that ruling are incorporated herein by reference. The
gold jewelry is manufactured in the U.S. in a condition known as
"tumbled lustre," and put up for sale. Customers can purchase
the tumbled jewelry as is, or order that same jewelry with one of
the optional additional lustres, i.e., "wheel polished lustre"
or "diamond cut lustre." These two lustres will be added to the
jewelry in Mexico. We found that the polishing operation
constitutes an alteration within the meaning of subheading
9802.00.50, HTSUS, whereas the diamond cutting operation exceeds
an alteration. Accordingly, we denied the partial duty exemption
for the gold jewelry subjected to the diamond cutting operation,
and allowed the exemption for the jewelry subjected to the
polishing operation. We supported this result by finding that
the distinction between the diamond cut jewelry and the tumbled
lustre jewelry is greater than that between the polished jewelry
and the tumbled lustre jewelry because the diamond cut jewelry
has a more dramatic change in lustre than the polished jewelry.
We also found that the diamond cut imparts a new and different
texture to the jewelry, which affects its character and quality
by giving it a "diamond-like sparkle." Therefore, we concluded
that the diamond cutting operation results in a commercially
different article.
In your letter of November, 1990, you maintain that certain
facts pertaining to the subject "diamond cutting" operation were
not originally considered by us. You also assert that our ruling
in HRL 555576 dated September 7, 1990, establishes dispositive
authority for finding that subheading 9802.00.50, HTSUS, applies
to operations which create a contrasting effect on the surface of
gold jewelry.
Most of the additional facts you have presented in your
submission of November 14, 1990, relate to the following
comparisons between the polishing and diamond cutting operations:
(1) the loss of gold effected by the polishing operation is
approximately 50% greater than the loss resulting from the
diamond cutting operation; (2) the cost of the polishing
operation averages more than seven times the cost of the diamond
cutting operation; (3) the time required for the polishing
operation on each piece of jewelry is approximately eight times
that required for the diamond cutting operation; (4) neither
operation requires the skills of craftsmen or artists; instead, a
similarly low level of human skill is required; (5) the cost of
each operation represents a relatively minor percentage of the
overall cost of the gold jewelry, e.g., each operation costs less
than two percent of the total price to be charged for the
polished karat gold ring and the diamond cut karat gold ring; (6)
the price of the polished gold jewelry is generally the same as
that of the diamond cut jewelry; (7) both operations are
performed on finished articles, i.e., the tumbled lustre jewelry;
(8) neither operation results in the gold jewelry being sold in a
different commercial market than the tumbled lustre jewelry;
however, both operations are intended to enhance the
marketability of the jewelry to potential customers at the same
commercial level in the same commercial market, i.e., to the same
wholesalers who, in turn, market both products to the same retail
customers, based on the particular tastes of those customers.
Following a meeting at Customs Headquarters, you submitted a
letter dated May 31, 1991, containing the following supplemental
information. You state that the hand-held diamond cutting tool,
known as a jeweler's handmotor, which is used by Auracast, Inc.
to perform the diamond cutting operation on the jewelry, is very
similar in appearance and operation to the polishing machine used
in the alternative polishing operation. Both machines are
relatively simple to operate, not requiring a high degree of
precision. You assert that the accent cuts or diamond cuts are
so minor that a simple polishing operation could be employed to
entirely remove the cuts created by the handmotor. You also
contrast the diamond cutting operation at issue, which is
performed by use of the jeweler's handmotor, with a more
sophisticated artistic diamond cutting operation, which employs a
computer controlled machine to create diamond cuts with a
"sculptered" or "engraved" quality. In addition, in contrast to
the information contained in your original submission, i.e., that
the diamond cut jewelry is sold at a slightly lower unit price
than the tumbled jewelry, you now maintain that the diamond
cutting operation does not affect either the wholesale or retail
price of the jewelry. In conclusion, you claim that the diamond
cutting operation utilizing a "jeweler's handmotor" constitutes
an alteration for purposes of subheading 9802.00.50, HTSUS,
because it does not change the name, character, or use of the
already finished jewelry product, i.e., the tumbled jewelry.
Rather, you assert that this operation only slightly alters the
appearance of the jewelry, and that this "alteration" is no more
dramatic than the changes resulting from processes found to be
alterations in Royal Bead Novelty Co. v. United States, 68 Cust.
Ct. 154, C.D. 4353 (1972) and Amity Fabrics v. United States, 43
Cust. Ct. 64, C.D. 2104 (1959).
ISSUE:
Whether the "diamond cutting" operation performed on gold
jewelry utilizing a "jeweler's handmotor" constitutes an
alteration for purposes of subheading 9802.00.50, HTSUS.
LAW AND ANALYSIS:
Subheading 9802.00.50, HTSUS, provides a partial duty
exemption for articles returned to the U.S. after having been
exported to be advanced in value or improved in condition by
means of repairs or alterations. However, entitlement to this
tariff treatment is precluded where the exported articles are
incomplete for their intended use prior to the foreign
processing. Guardian Industries Corp. v. United States, 3 CIT 9
(1982). Tariff treatment under this provision is also precluded
where the foreign processing operation destroys the identity of
the articles or creates new or commercially different articles.
See Guardian Industries; A.F. Burstrom v. United States, 44 CCPA
27, C.A.D. 631 (1956). Articles entitled to this duty exemption
are dutiable only upon the cost or value of the foreign repairs
or alterations when returned to the U.S., provided the
documentary requirements of section 10.8, Customs Regulations
(19 CFR 10.8), are satisfied.
In this reconsideration we will focus primarily on the
second criteria mentioned above, i.e., whether the diamond
cutting operation creates a new and different commercial article.
As to the first criterion, it appears that the tumbled lustre
jewelry, in its condition as exported, is considered a completed
article in that it is complete for its intended use. In the
original submission in HRL 555640, Auracast, Inc. stated that
once the pieces of jewelry have completed the tumbling stage of
the manufacturing process, they are finished articles of gold
jewelry ready for marketing and sale to customers. The
alternative lustres created by the polishing and diamond cutting
operations are optional and are applied depending on the
particular customer's orders. The polished and diamond-cut
jewelry are sold to the same wholesalers as the tumbled jewelry.
Thus, the diamond cutting operation is not a continuation of the
manufacturing process, and the tumbled jewelry, as exported, is
complete for its intended use.
Among the factors the courts have considered in determining
whether a foreign processing operation creates a new or
commercially different article are changes in the following:
name, value, appearance, size and shape; subsequent handling and
use; performance characteristics; and markets or classes of
buyers. See Burstrom; Guardian Industries; Dolliff & Company,
Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp.
618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015 (1979).
In HRL 555640, we distinguished the facts in Royal Bead Novelty
Co. v. United States, 68 Cust. Ct. 154, C.D. 4353 (1972), by
finding that the quality, texture, and character of the gold
jewelry is changed as a result of the diamond cutting operation.
Although we agree that the texture has been changed, we believe
that this change and the imparting of an additional lustre or
"diamond-like sparkle" do not, by themselves, lead to a
conclusion that a commercially different product has been
created. An important factor considered in Royal Bead, Dolliff,
and other court decisions in determining whether a foreign
processing operation exceeds an alteration is whether that
operation results in changes in characteristics which alter the
subsequent commercial use. This change in commercial use is
usually ascertained by a change in the market and class of
buyers. Although you state that both the polishing and diamond
cutting operations are intended to enhance the marketability of
the jewelry to potential customers, you emphasize the fact that
both the polished and diamond cut jewelry will be sold at the
same commercial level in the same commercial market as the
tumbled lustre jewelry. We find this factor persuasive.
Since we maintain our opinion that the polishing operation
performed in Mexico on the gold jewelry constitutes an alteration
within the meaning of subheading 9802.00.50, HTSUS, we also find
persuasive the additional evidence you have presented comparing
the polishing and diamond cutting operations. Considering solely
the appearance of the polished jewelry and diamond cut jewelry,
we find that the main difference between the two articles is in
the type and degree of lustre. As discussed previously, the
polishing and diamond cutting operations impart different lustres
to the jewelry, which are alternatives to the original tumbled
lustre. We believe that what is described as a "more dramatic"
lustre in HRL 555640, is not significant enough to support a
conclusion that the polishing operation constitutes an
alteration, whereas the diamond cutting operation exceeds an
alteration. As to the other comparison factors stated in the
facts above, they are either the same for both operations (e.g.,
level of skill, price, and commercial market), or greater for the
polishing operation than the diamond cutting operation (e.g.,
time and cost figures). Another similar factor is that both
operations use relatively unsophisticated machines which "accent"
or highlight cast karat gold jewelry, rather than artistically
working it. The overall similarities between the two operations
appear to outweigh the differences. Whatever differences do
exist support a conclusion that the diamond cutting operation
should be treated the same as the polishing operation with
respect to eligibility for the tariff treatment under subheading
9802.00.50, HTSUS.
In HRL 555640, we relied upon two prior rulings to support
our finding that the diamond cutting operation exceeded an
alteration. In one of those rulings, HRL 555105 dated October
31, 1988, we held that pewter figurines that undergo a diamond
cutting operation which impacts on the metal and imparts new and
different characteristics to the articles are deemed to have been
"further processed" within the meaning of subheading 9802.00.60,
HTSUS. Although both the diamond cutting operations in that case
and the instant case impact on the metal and impart new and
different characteristics to the metal, the fact that the
operation in HRL 555105 was considered "further processing" for
purposes of item 806.30 (the predecessor tariff provision to
subheading 9802.00.60, HTSUS) is not necessarily controlling for
purposes of determining whether the instant operation constitutes
an alteration within the meaning of subheading 9802.00.50, HTSUS.
Further, the pewter figurines in HRL 555105 were subjected to
the diamond cutting operation in the U.S., after being "further
processed" in Mexico, but while still in a semi-finished
condition. In contrast, the tumbled lustre jewelry in the
instant case is considered to be a finished article, ready for
sale.
In HRL 555250 dated March 13, 1980, which was also relied
upon in HRL 555640, we held that the combined processes of
etching and special tempering glass mugs exceeded an alteration.
The facts in HRL 555250 are distinguishable from those in the
instant case because the foreign processing not only enhanced the
appearance of the mugs, but also effected a fundamental change by
increasing their durability. These new features were found to
have a substantial commercial significance, thus resulting in a
commercially different product.
HOLDING:
For the reasons set forth above, we modify HRL 555640, in
part, with respect to its finding that the diamond cutting
operation exceeds an alteration. We conclude that the instant
diamond cutting operation, performed by means of a jeweler's
handmotor, does constitute an alteration for purposes of
subheading 9802.00.50, HTSUS. Therefore, the gold jewelry
subjected to that operation is entitled to the partial duty
exemption under that provision.
HRL 555640 is modified accordingly.
Sincerely,
John Durant, Director
Commercial Rulings Division