OT:RR: H259490 RSD
Port Director
Attn: Branch Chief, Trade Operations Branch B
U.S. Customs and Border Protection
John F. Kennedy International Airport
Bldg
Jamaica, NY 11430
RE: Request for Internal Advice Concerning the Valuation of Luxury Watches and Watch Components; Statistical Note 1, Chapter 91, H TSUS
Dear Port Director:
This is in response to your memorandum, dated October 15, 2014, requesting internal advice concerning the valuation of watches and watch components for watches imported by Timeworks International, Inc. (Timeworks). On February 17, 2017, a meeting was held at the Office of Trade, Regulations and Rulings, with Timeworks' employees and their counsel to discuss the company's method for appraising watches and the watch components. Counsel made a subsequent submission, dated February 15, 2017.
FACTS:
Timeworks is an importer of watches. It is engaged in two different kinds of watch importing businesses. The first type of watch importing business involves Timeworks' own in-house branded watches. These watches are exclusively manufactured for Timeworks by overseas watch manufacturing companies. The watch manufacturing business comprises the design and the production of timepieces made in China, Hong Kong, and Switzerland, which are sold worldwide under several different house brands. The prices of these manufactured time pieces typically range from about $5.00 to $500. When these timepieces are imported into the United States, their costs are apportioned based on the specific value of the four individual components of the watches (the movements, cases, straps/bands, and the batteries) in accordance with the requirements of Chapter 91 of the Harmonized Tariff Schedule of the United States (HTSUS) and reported to Customs Border Protection (CBP). The values of the components are determined from the invoices provided by the contractor that manufactures the watches for Timeworks. Since Timeworks directly contracts with the manufacturer who produces these timepieces, the company can obtain the invoices showing the actual cost of each of the four watch components that are involved in making the watch.
The other type of watch importing business that Timeworks is engaged in is the importing of luxury watches into the United States from foreign suppliers. These luxury watches are primarily Swiss-origin brands. Typically, though not exclusively, Timeworks imports what they refer to as "shop-worn" luxury timepieces. These items are mostly purchased from watch and jewelry stores, boutiques, distributors and country agents. While shop-worn watches are unworn, they still may not be in what Timeworks calls a "factory-fresh" condition having been handled by, at the very least, sales associates who place such items daily into their showcases. Because of the handling of these watches, they may be slightly scratched and have other cosmetic defects, but they are generally in perfect working condition. Timeworks employs agents in Switzerland who aggregate the purchased watches, inform Timeworks of the specific model numbers, and the condition of each item to be imported, prior to the importation into the United States. After the watches are imported, Timeworks employs a staff of trained watchmakers who restore the shop-worn watches to their factory-fresh condition. The watches are then sold to consumers through various means, including through websites such as "Amazon.com." However, the manufacturers of these watches usually do not provide any cost breakdowns for the components of these finished timepieces.
Timeworks alleges that because it is involved in the production of its own Swiss origin timepieces, it can obtain the actual costs for comparable watch components. It further claims that if Timeworks wants to make a watch case with a particular metal composition, thickness, mass, complexity, and finish, comparable to any Swiss manufacturer, it will have direct access to an accurate quotation to produce such an item. From its intimate knowledge of the watch industry, which it has gained from being in the watch business for more than 15 years and its familiarity of the direct manufacturing costs of similar items, Timeworks has been able to formulate a spreadsheet that provides specific valuation ranges for most Swiss manufacturers broken down into levels of luxury hierarchy for a variety of different watch brands.
Values are further segmented based on the complexity of the components with more complex sophisticated components embodying a greater cost. Costs are assigned for cases and bracelets/straps with cost designations for simple, standard, and complex examples. Each brand is further segmented into classes, ranging from factory fresh condition, to differing levels of surface imperfections, and finally, including heavily soiled items.
Timeworks has prepared a spreadsheet listing by individual piece the precise cost allocation of the case, bracelet/strap, and battery (if it is a quartz movement watch). It is explained that batteries are purchased directly from a company called Renata, the largest Swiss watch battery supplier in the United States, and Timeworks is cognizant of distribution pricing for these batteries, which averages 50 cents each (however, typically the actual cost of a battery is about 30 cents). Timeworks claims that it assigns a value for the case and the bracelet/strap that is typically higher than the price it could actually purchase the same manufactured component from its supplier. Timeworks does this because the duties are higher on the case and on the bracelet/strap, and it is willing to be cautious to avoid being accused of under-valuation even if it results in paying higher duties.
Timeworks knows how much it pays for a finished watch it has purchased and it has an actual invoice from the watch seller to verify this amount. In order to determine the value of a watch movement, it then subtracts the values it has ascertained for the watch case, the watch strap/bracelet, and the battery (if the watch has a quartz movement) from the amount it paid for the finished watch. Timeworks claims that while the case may be scratched, the band can be cracked or marked and the battery partially used up, the watch movement will almost always be in a pristine condition because it is cased up and protected. Under this approach, Timeworks alleges that it knows with a fair degree of certainty the cost of all other components, and, thus, it can accurately assign the remaining value of the watch to the watch movement. Further, it maintains that the movement is the most difficult component to value because it is usually unique to a particular manufacturer and its finishing processes. The movement is also usually the most valuable component of the Swiss-made luxury watch brand. According to Timeworks, many luxury watch brands manufacture their own movements in-house, and it is an extremely time-consuming and personnel-intensive task to produce and assemble a watch movement. Furthermore, the trademark of the brand is typically affixed to both the watch movement and to the watch dial (which is considered a part of the movement under Chapter 91 of the HTSUS). This further increases the value of the movement, making the movement valuation more difficult to determine.
CBP conducted an audit of Timeworks operations. The audit findings revealed that Timeworks apportioned 69 to 98 percent of the total watch value to the movement component, which carries a specific rate of duty based on the quantity. Under this approach the value of the remaining components, the case, the band, and/or battery, which are subject to ad valorem rates of duty, are reduced. During the audit period, from January 1, 2012 to June 30, 2013, Timeworks imported 83.74 percent of their total entered value from one exporter Mazal Inc., located in Lugano, Switzerland.
The commercial invoices provided in the entry documentation from Mazal Inc. do not reflect a per piece value breakout for the individual watches nor do they reflect a value allocation for the watch components. The invoices state a quantity and a total value for that quantity of merchandise. In addition to the invoice, Timeworks provides an addendum that it prepared which indicates a component value breakdown for each of the watches contained in the shipment.
The auditors determined that the value declared on the watch components imported by Timeworks was not supported by the commercial documentation from the manufacturers/suppliers for 22 out of 25 sample entry lines. The 22 sample entry lines represented merchandise from one exporter named Mazal, Inc. However, payment for imported merchandise was made on commercial invoices from suppliers other than Mazal, Inc. Three of the 25 samples were from exporters other than Mazal, Inc. and reflected the manufacturer's breakdown of the watch components on the commercial invoices. The auditors also explained that the Timeworks sheets did not consider the added-value of the name brand (i.e. stamped, etched, or embossed) on the watch components. Our decision follows.
ISSUE:
Whether the method used by Timeworks to appraise imported Swiss origin shopworn watches and their components is acceptable and complies with the requirements of Statistical Note 1, Chapter 91 of the HTSUS.
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 (19 U.S.C. S 1401a). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. S 1401 a(b)(l). The term "price actually paid or payable" means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C §
1401)(A).
In order for transaction value to be used as a method of appraisement, there must be a bona fide sale between the buyer and the seller. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal
Circuit found that the term "sold" for purposes of 19 U.S.C. 1401a(b)(1) means a
"transfer of title from one party to another for consideration" (citing JL. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). No single factor is decisive in determining whether a bona fide sale has occurred. See Headquarters Ruling Letter (I-IQ) 548239, dated June 5, 2003. CBP will consider whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise and whether consideration has passed.
Beyond the general prerequisites of 19 U.S.C. § 1401a, in appraising watches and timepieces, the H TSUS also requires that certain additional information regarding watch component valuation must be declared to CBP. The HTSUS makes specific reference to the calculation of duties on watches. Statistical Note 1, Chapter 91 of the HTSUS states as follows.
The calculation of duties of 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 below. In each instance the sum of the values of the individual components shall be equal to the total value of the article. In those instances where components of an article are to be separately reported under the following reporting scheme, the entry should include all the individually named components even if not included in the shipment.
In other words, under Statistical Note 1 to Chapter 91 of the HTSUS, the value of a watch must be reported to CBP by specifying the value of four individual components. The four components are: 1) the movement; 2) the case; 3) strap, band, or bracelet; and, 4) the battery. The value of the watch must equal the total value of the four individual components. Each of these components is subject to a different duty rate under the HTSUS
In this instance, Timeworks is able to present an invoice that shows the price that it has actually paid to a watch seller or supplier for an entire shop-worn watch. Although these are not considered used watches, they are referred to as shop-worn watches, analogous to floor models, having been handled by watch dealers, boutiques, or jewelry stores. Since the shop-worn watches have minor imperfections, Timeworks is able to buy these watches at a discounted price. While Timeworks obtains and presents the actual invoices from the seller for these shop-worn watches to CBP, they usually cannot obtain any specific documents from the seller or the manufacturer regarding the value of the four watch components that Statistical Note 1 to Chapter 91 of the H TSUS requires to be reported to CBP.
As discussed above, because the information concerning the actual costs of the four watch components is not available to Timeworks, it has had to devise a particular method based on its knowledge of the watch industry to report the values of the four components. This method is based on the cost information that Timeworks obtains when it directly contracts with manufacturers to produce its own in-house branded watches. It claims that it can obtain the actual costs for comparable watch components to the components found in the shop-worn watches that it imports. As discussed in the FACTS portion of this decision, the costs of the watch components are set forth on a spreadsheet that Timeworks has developed. On the spreadsheet, the values of the components are segmented based on the complexity of the component. Costs are assigned for cases and bracelets/straps with cost designations for simple, standard and complex examples. Each brand is further segmented into classes, such as factory fresh, surface imperfections, and heavily soiled. Since Timeworks knows how much it pays for the finished watch, it can determine the value of a watch movement by subtracting the values for the case, the strap/bracelet, and the battery (if it has a quartz movement) from the amount it paid for the entire finished watch.
Because many watch manufacturers do not provide a cost breakdown of the watch components for the products they make, if they are not related to the manufacturer, many watch importers may have a difficult time obtaining accurate information regarding the valuation of the four watch components that Statistical Note 1, Chapter 91 of the HTSUS requires to be reported to CBP.
However, after reviewing the situation involved in this case, 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 be reported. CBP recognizes that from its expertise and knowledge of the watch industry, Timeworks has the ability to accurately report the cost of the cases, straps/bands and batteries for the other brands of Swiss origin watches that it is importing. Furthermore, CBP is satisfied that the watch components that Timeworks has manufactured in Switzerland for its own in-house brands are basically comparable to the components used in the other brands of Swiss origin watches that it is importing. It is also acknowledged that other watch importers may not be able to apply a similar method of valuing the watch components, unless they are also engaged in the watch manufacturing business, because they will not have access to the cost information for comparable components of the watches they are importing
To support its valuation, Timeworks is further able to provide actual documentation from the contract manufacturers it uses, regarding the cost to produce comparable components for the other watches they are importing. CBP is also aware that in most circumstances, Timeworks contention that the majority of the value contained in the brand name of a watch can be generally attributed to the watch movement is accurate. Consequently, CBP also finds that Timeworks' line of reasoning that after the value of the three other components are subtracted from the value of the finished watch, the remaining value of the completed watch must be attributable to the watch movement, which remains the most important component of the Swiss origin watch, is supportable. The contention that the movement is the most important component of a watch is consistent with CBP's position that the origin of a watch is determined by where the watch movement is made. See HQ 560471, dated January 5, 1997.
Timeworks has also confirmed to CBP that its valuation methodology calculating the value of the various watch components will be consistently applied for all the watch models that it imports unless circumstances change. In addition, the component value information will be put onto a spreadsheet that, together with accompanying supporting documentation, will be available for review by the import specialists and the auditors who handle the Timeworks' importations upon request.
Therefore, CBP finds that the method Timeworks has proposed to value the watch components is reasonable and acceptable and meets the requirements of Statistical Note I , Chapter 91 of the HTSUS for valuing the four watch components that are to be reported to CBP at the time of entry.
HOLDING:
Based on the information provided, the method proposed by Timeworks to appraise the imported shop-worn watches and the four watch components complies with the requirements of Statistical Note 1, Chapter 91 of the H TSUS and is acceptable.
You are to mail this decision to the Internal Advice requester no later than 60 days from the date of the decision. At that time, the Office of Trade, Regulations and Rulings, will make the decision available to CBP personnel and the public on the CBP website located at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Yuliya A. Gulis, Acting Chief
Valuation and Special Programs Branch