Artifacts are different from the other items in the game because they work around the crafting system. If you try to combine shards with artifacts in the crafting window, nothing will happen because they are scripted and run on a different system. To upgrade an artifact, place it on the ground, and use the skill provided to you by a shard (make certain that you are using a shard of the right level, or the combination will not work.) When you begin casting the spell granted by the shard, a targeting circle will appear around your character. Make sure that the artifact is inside of this circle and click-confirm to cast the skill. A cool animation will play and when the dust clears you will have a shiny new upgraded artifact!