OT:RR:CTF:VS H305372 CMR
Center Director
Consumer Products and Mass Merchandising
Center of Excellence and Expertise
U.S. Customs & Border Protection
157 Tradeport Drive, Suite B
Atlanta, GA 30354
RE: Application for Further Review and Protest No. 2095-18-102743; Valuation of watch components
Dear Center Director:
This is in response to the Application for Further Review (AFR) and Protest No. 2095-18-102743 filed on behalf of U Save On Time, by its counsel, against the decision of the Consumer Products and Mass Merchandising Center of Excellence and Expertise (CEE) to rate advance imported watches by reapportioning the declared value among the watch components comprising each watch. While the Automated Commercial Environment system (ACE) indicates that 40 entries are at issue, we note that the protestant lists 41 entries. The protest was timely filed within 180 days of the liquidation dates. The AFR was properly approved as the protestant relies upon 19 CFR § 174.24(a) and cites to Headquarters Ruling Letter (HQ) H259490, dated April 4, 2017 in the argument for their position.
FACTS:
The merchandise in the entries at issue in this protest consist of various styles and models of Rolex wrist watches. The merchandise was entered under subheadings 9101.21, Harmonized Tariff Schedule of the United States (HTSUS) and 9102.21, HTSUS. These subheadings provide for “Wrist watches, pocket watches and other watches, including stop watches, with case of precious metal or of metal clad with precious metal: Other wrist watches, whether or not incorporating a stop watch facility: With automatic winding”, and “Wrist watches, pocket watches and other watches, including stop watches, other than those of heading 9101: Other wrist watches, whether or not incorporating a stop watch facility: With automatic winding”, respectively. Watches classifiable in these subheadings are assessed duty based upon the constructive segregation of their components with duty assessed upon the individual components of the watches and not upon the entered watches themselves.
As duty is assessed on the individual components, and not the watches, the declared value of the watches was allocated among the components, i.e., the movements, the cases, and the straps, upon which duty is assessed. We were informed by counsel that the watches are of “gold or stainless steel” and have Swiss movements. In addition, counsel stated that all of the subject watches include more than 17 jewels in the movement. The company apportions the component valuation as 85 percent on the movement, 10 percent on the case, and 5 percent on the bracelet. In addition, counsel stated that “[v]irtually all imported watches would have metal bracelets, not rubber or leather straps.”
A review of the entries by Customs and Border Protection (CBP) personnel revealed that in all entries, the protestant used the same watch component percentage value allocations regardless of the type, value, or classification of the entered watches. CBP personnel believe that the watch component value apportionments are inconsistent with component value apportionments of other merchandise of the same class or kind and classified in the same or similar provisions. CBP Form 29s for proposed action were sent and CBP received no reply. The entries were rate advanced. The protestant paid the billed additional duties and filed this protest.
This office requested additional information regarding the specific watches at issue in this protest. Other than being told that the merchandise consists of authentic Rolex watches, and being provided with a list of the most common models imported by the protestant, this office was unable to obtain any additional information regarding the transactions which resulted in the importation of the subject watches. For instance, the protestant was unable to inform this office which specific models were in the entries at issue and whether the watches were new, used, refurbished or shopworn.
Counsel submits that the protestant’s component value allocations should be accepted by CBP because the protestant used the same methodology as allowed by CBP in Headquarters Ruling Letter (HQ) H259490, dated April 4, 2017, wherein the importer deducted the costs of the watch case, strap or band, and battery to determine the value of the watch movement. Counsel submits that the protestant “has implemented a procedure whereby it verifies the value of similar components available in the market.” As an example of the protestant’s methodology, counsel refers to the availability of watch batteries on the open market and their “costs are readily obtainable through the internet.” In addition, counsel stated: “Petitioner has verified the available sourcing costs of identical leather, rubber, textile and metal bands and straps through countless suppliers and years of experience in the trade.” Further, as in HQ H259490, the protestant “sums up the values of the case, strap/band/bracelet and battery, and deducts it from the transaction value of the complete watch to determine the statistical reporting value attributable to the movement subheading.” According to counsel, “[t]his methodology allows for the full declaration of unknown intangible costs of the finished watch including marketing, advertising, warehousing, transportation, design, intellectual property, development, testing, etc. [.]”
ISSUE:
Whether the CEE improperly rejected the importer’s allocation of the values of their imported watches to the watches’ components.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions. 19 U.S.C. § 1401a(b)(1). The duty assessed upon imported merchandise is most often, though not always, based upon a percentage of the appraised value of the merchandise, i.e., an ad valorem duty.
Watches are classified in Chapter 91, HTSUS. The Additional U.S. Notes to Chapter 91 inform us as to the elements of a watch. Specifically, Additional U.S. Note 1 provides:
For the purposes of this chapter:
The term "watches" embraces timepieces (including timepieces having special features, such as chronographs, calendar watches and watches designed for use in skin diving) of a kind for wearing or carrying on the person whether or not the movement contained therein conforms to the definition of "watch movements" in note 3, above. Timepieces incorporating a stand, however simple, are not classifiable as watches.
We note that this is essentially the same definition of “watches” provided in the prior Tariff Schedules of the United States, with minor differences. Additional U.S. Note 2 provides:
Watch straps, watch bands and watch bracelets entered with wrist watches and of a kind normally sold therewith, whether or not attached, are classified with the watch in heading 9101 or 9102. Otherwise, watch straps, watch bands and watch bracelets shall be classified in heading 9113.
A careful reading of these notes reveals that a watch containing a movement, for tariff purposes, consists of the movement and case. The watch strap, band or bracelet is not considered part of the watch. See also, The Harmonized Commodity and Coding System Explanatory Notes, Chapter 91, General Notes, which state, in relevant part:
A clock or watch is composed of two main parts: the movement and the container for the movement (case, cabinet, etc.).
Further, the Explanatory Notes (EN), state with regard to heading 9102, that:
Wrist-straps presented with their watches (whether or not attached) are classified in this heading
This is in keeping with the historical treatment of watches for customs purposes. Under the prior tariff schedule, i.e., the Tariff Schedules of the United States (TSUS), the movement and case were classifiable as a watch in item 715.05, TSUS, whereas the straps, bands, or bracelets of watches were classified based upon the materials from which they were made. See Headnote 2(a), Subpart E, Part 2, Schedule 7, Tariff Schedules of the United States (1987) (TSUS).
In this case, all of the watches at issue have more than 17 jewels in the movement. We were informed that some were classified in subheading 9101.21, HTSUS, and some were classified in subheading 9102.21. For those watches classified in subheading 9101.21, HTSUS, the subheading provides for, among other things, wrist watches with a case of precious metal or of metal clad with precious metal, whether or not incorporating a stop watch facility, that have automatic winding and over 17 jewels in the movement. The tariff schedule provides that the watch straps, bands or bracelets of such watches are separately classified and dutiable, whether or not attached to such watches at the time of entry, within subheading 9101.21.10, HTSUS, or subheading 9101.21.30, HTSUS, depending upon the material from which the straps, bands or bracelets are made. Based upon the information provided regarding the watches at issue, subheading 9101.21.30, HTSUS, was applicable as, per counsel, virtually all of the watches had metal bracelets. The watch to which such bands, straps or bracelets are attached is classifiable in subheading 9101.21.50, HTSUS. Thus, the structure of the tariff schedule has separated the classification and duty assessment of the watches (subheading 9101.21.50, HTSUS) from their watch bands, straps, or bracelets (subheading 9101.21.30, HTSUS).
As to those subject watches classified in subheading 9102.21, HTSUS, one applicable provision within the subheading, subheading 9102.21.70, HTSUS, provides for, among other things, wrist watches, other than those of heading 9101, with automatic winding, and having over 17 jewels in the movement, with strap, band or bracelet of base metal, whether or not gold- or silver-plated. The normal trade relations duty rate set forth in the General Column 1 for those watches that entered in 2017 was $1.53 each + 4.2% on the case + 9.8% on the strap, band or bracelet.
Wrist watches imported into the United States, are not assessed duty against the appraised value of the watch and strap, band or bracelet as a whole. Duty is assessed against the allocation of that appraised value to the components of the watch as duty is assessed against the components, and not the watch. This is evident from the structure of the tariff schedule provisions and the expression of the duty assessment in the column 1, general rate (or normal trade relations) of duty, and the column 2 rate of duty, as can be seen from the provisions of subheading 9101.21, HTSUS, referenced above. Further, Statistical Note 1, Chapter 91 of the HTSUS, provides additional information with regard to the duty rate set forth for subheading 9102.21.70, HTSUS, and states, in relevant part, as follows:
The calculation of duties on various watches, clocks, watch movements and clock movements requires that these articles be constructively separated into their component parts and each component separately valued. The individual components shall be separately reported under the statistical suffixes show (sic) below. In each instance the sum of the values of the individual components shall be equal to the total value of the article. . . .
At paragraph (c) of Statistical Note 1, the note directs that for subheading 9101.21.50, HTSUS, among others, the movement and case are separately identified at the statistical level based upon the statistical suffixes (which are added to the eight digit subheading 9101.21.50) 10 and 20, respectively.
The duty assessment against the components of the watch, and not the watch itself, is also in keeping with the historical treatment of watches and their straps, bands, or bracelets for customs purposes. See United States v. Continental Lemania, Inc., 21 CCPA 192 (1933), wherein the court stated:
In a long line of decisions, among them United States v. European Watch Co., 11 Cust. Ct. App. 363, T.D. 59160, it is definitely settled that watch movements and watchcases had by judicial determination, as well as by departmental direction, attained a settled definite status as separate entities for tariff purposes prior to the act of 1913. [citations omitted].
See also, Dale Products Corp., et. al. v. United States, 31 Cust. Ct. 170, C.D. 1565, discussing the classification of watch bands.
In this protest, the protestant objects to the CEE’s rejection of the protestant’s allocation of the entered watches’ values to the components of the watches. Counsel for the protestant cites HQ H259490 and asserts that the protestant uses the same methodology accepted by CBP in that ruling. However, the matter here is distinguishable from that in HQ H259490. In the cited ruling, the importer, Timeworks, engaged in the importation of watches under two different types of transactions. One type of transaction involved the importer engaging manufacturers to produce watches for it. As Timeworks engaged the manufacturers directly, it was able to obtain invoices showing the actual costs of the watch components assessed duty under the watch provisions set forth in Chapter 91. The other type of transaction involved Timeworks importing, for the most part, “shop-worn” luxury watches. Timeworks developed a spreadsheet, based upon its experience and familiarity with the direct manufacturing costs of similar items, upon which to base values for watch components. In HQ H259490, CBP stated that “based on the fact that Timeworks has access to cost information for the components made for its own Swiss origin house brand watches that are very comparable to the components of the luxury shop-worn Swiss origin watches that it is importing, CBP believes that Timeworks is in a unique position to furnish an accurate valuation for the four watch components that Statistical Note 1 of Chapter 91 of the HTSUS requires to be reported.” Further, CBP was satisfied that the watch components for Timeworks in-house brand watches were basically comparable to the components used in the other brands of Swiss watches it was importing.
Thus, while Timeworks was able to present evidence to CBP to support its methodology of allocating value to the watch components, including actual documentation from its contract manufacturers regarding the cost to produce components, this case stands in stark contrast. Although in HQ H259490, CBP accepted Timeworks contention that the majority of the value contained in a brand name of a watch can be generally attributed to the movement as accurate, it did not address whether all intellectual property value should be attributed to the movement; an argument posited in this protest.
In the protest at issue, it is submitted that the protestant “has implemented a procedure whereby it verifies the value of similar components available in the market.” CBP is asked to accept the protestant’s valuation of the watch components based upon the cost to purchase such components in the market, as found on the internet, for instance. As to the sourcing costs of identical leather, rubber, textile and metal bands and straps, CBP is asked to accept the protestant’s values because it has verified the costs “through countless suppliers and years of experience in the trade.” Yet, nothing more was submitted to support these assertions. CBP received no documentation, such as invoices or affidavits attesting to the values of similar or identical watch components. Furthermore, protestant’s counsel asserted that “used, shop-worn, damaged, prior season, repaired, close-outs, liquidation sales, marketing expenditures, transportation costs, warehousing, packaging, warranties, intellectual property and countless other metrics will alter the component value percentages in a given transaction.” Yet, although CBP asked, we were never informed whether the imported watches in the entries at issue were new, used, refurbished or shopworn; only that they were all authentic Rolex watches. The CEE questioned the protestant’s value allocation to the watch components because the protestant used the same watch component value apportionments, regardless of the type and classification of the watches, for all of the watches in the entries at issue.
In the protestant’s allocation of value to the components, it is argued that all of the intellectual property value should be allocated to the movement, as the strap, band, bracelet, or battery are typically in the public domain. In this case, while CBP was not informed as to whether the watches at issue are new, used, refurbished or shop-worn, we were told that they are Rolex watches. A search of the United States Patent and Trademark website reveals that patents are assigned to Rolex for components of watch straps and watch bracelets, and for watch cases, in addition to patents which are attributable to watch movements. Thus, in this case, it is clearly erroneous to allocate all of the intellectual property value of the watches to the movement components. Further, the labor for encasing the movement into the watch case should not be wholly attributed to the movement. See S.H. Pomerance Co., 21 Cust. Ct. 334 (1948) wherein the court upheld the decision of the appraiser in including part of the “casing-up expenses,” that is, “the time and labor expended on the watchcases and watch movements . . . in combining them to form watches, . . .” in the value of the cases, as well as the value of the movements. Based upon this decision, it is improper to allocate all labor expenses related to the assembly of watches to the movement alone.
Further support for the CEE’s rejection of the protestant’s use of uniform value percentage allocations to all of the imported watches, regardless of the type, i.e., model or style, and value, may be found on the Rolex watch website, www.Rolex.com. Using the “configurator” to configure a watch, one can see where the same style watch’s value can vary based on differences in the case or the band, strap or bracelet. In some instances, the value difference is significant. Therefore, a uniform percentage value allocation to all of the Rolex watches in the entries at issue would seem impossible. Certainly, the protestant has not submitted any evidence to support the value allocations.
As it is apparent that the protestant’s allocation of value to the components of the imported watches is obviously flawed and incorrect, it was appropriate for the CEE to reject it. Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding….
19 U.S.C. § 1500(a).
In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:
Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculation. . . . Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.
In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.
Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67.
Section 152.107 of the CBP regulations (19 CFR § 152.107) provides: (a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used. (b) Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used.
* * *
Although there is no dispute as to the total appraised values of the watches at issue, the correct allocation of those values to the watch components, which are the imported merchandise being assessed duty, falls within the general appraisement authority set forth in 19 U.S.C. § 1500. It is our understanding that the CEE utilized a fallback method to reallocate the watch values to the watch components, based upon the experience of CBP personnel and information regarding similar merchandise which the CEE had obtained through previous importations. The use of such information to base the CEE’s reallocation of the watches’ values to the watch components for the purpose of duty assessment falls under 19 U.S.C. § 1401a(f) and the provisions of 19 CFR § 152.107(b) with regard to identical and similar merchandise and flexibility as to the time of exportation.
Based upon our review, we agree with the CEE that the protestant’s value allocation cannot be correct for all of the watches. As the protestant has failed to support its method of allocation of the watches’ values to the watch components, the protest should be denied.
HOLDING:
The protest should be denied. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision.
Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the
Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Craig T. Clark, Director
Commercial and Trade Facilitation Division