OT:RR:CTF:VS H306338 CMR
Shara L. Aranoff, Esq.
William R. Isasi, Esq. Covington & Burling LLP
One CityCenter
850 Tenth Street, NW
Washington, DC 20001-4956
RE: Modification of Headquarters Ruling Letter (HQ) H304105; Country of origin of imported watches; Section 301 Trade Remedies
Dear Ms. Aranoff and Mr. Isasi:
This is in response to your submission, dated October 28, 2019, submitted on behalf of the American Watch Association (“AWA”) and certain of its member companies, including Casio, Citizen, Fossil, Movado, Seiko and Selco, requesting U.S. Customs and Border Protection (CBP) reconsider and revoke Headquarters Ruling Letter (HQ) H304105, dated June 25, 2019, issued to Seiko Watch of America, LLC, one of your member companies, regarding the country of origin to declare in Block 10 of the CBP Entry Summary Form (CBP 7501) or its electronic equivalent in ACE, and for purposes of the constructively segregated components as required in Block 27 for certain imported watches, and whether Section 301 duties apply. In reaching our decision to modify HQ H304105, set forth below, CBP has taken into consideration the additional arguments submitted in your supplemental submission, dated June 17, 2020.
Pursuant to section 625(c)(1), Tariff Act of 1930 (19 U.S.C. 1625(c)(1)), as amended by section 623 of Title VI, a notice proposing to modify HQ H304105 was published on March 31, 2021, in Volume 55, Number 12 of the Customs Bulletin. Two comments were received in response to the proposed action, but only one commenter specifically addressed the modification of HQ H304105. Those comments are addressed in this decision.
FACTS:
Seiko is a wholly owned U.S. subsidiary of Grand Seiko Corporation of America which is, in turn, a wholly owned subsidiary of Seiko Watch Corporation, headquartered in Tokyo, Japan. Seiko distributes watches and related products in the United States. The chart below sets forth the four scenarios that you presented.
Movement
Production
Case
Production
Band
Production
Battery
Production
Assembly of entirety to wearable watch
1
Japan
China
China
Japan
Japan
2
Japan
China
China
Japan
China
3
Japan
China
China
Japan
Thailand
4
Malaysia
China
China
China
In the fourth scenario, the watch movement was mechanical and, therefore, the watch did not contain a battery.
The complete wristwatches are classified in headings 9101 or 9102 of the Harmonized Tariff Schedule of the United States (HTSUS), specifically, subheadings 9101.11.40, 9101.11.80, 9101.19.40, 9101.19.80, 9102.11.10, 9102.11.25, 9102.11.30,
9102.11.45, 9102.11.50, 9102.11.65, 9102.11.70, 9102.11.95, 9102.19.20, 9102.19.40, 9102.19.60 and 9102.19.80, which are listed in Statistical Note 1(a), Chapter 91, and subheadings 9101.21.80, 9101.29.10, 9101.29.20, 9101.29.30, 9101.29.40, 9101.29.50, 9102.21.10, 9102.21.25, 9102.21.30, 9102.21.50, 9102.21.70, 9102.21.90, 9102.29.10, 9102.29.15, 9102.29.20, 9102.29.25, 9102.29.30, 9102.29.35, 9102.29.40, 9102.29.45, 9102.29.50, 9102.29.55 and 9102.29.60, which are listed in Statistical Note 1(d), Chapter 91.
On June 25, 2019, CBP issued HQ H304105 and determined that the country of origin of the watches was Japan in scenarios 1, 2, and 3, based upon the country of origin of the watch movement, and Malaysia in scenario 4, again based upon the country of origin of the watch movement. However, with regard to the components of the watches, i.e., and for purposes of constructive segregation, HQ H304105 explained that the movement’s origin and where the entire watch was assembled with its components was relevant. Therefore, in scenario 1, CBP held that because the movement was made in Japan and the assembly of all of the components to form the watch occurred in Japan, the country of origin of all of the components would be Japan. However, in scenario 2, because the assembly of all of the components to form the watch occurred in China (not the country of origin of the movement which was Japan), the assembly of the components did not substantially transform the case or band and their origin remained China. Similarly, in scenario 3, as the assembly of the components to form the watch occurred in Thailand (a country other than the country where the movement was made which was Japan), the assembly of the components did not substantially transform the case or band and their origin remained China. Finally, in scenario 4, again, as the assembly of the components in China to form the watch did not occur in the same country as the origin of the movement which was Malaysia, the case and band retained their origin of China.
Based upon the analysis in HQ H304105, CBP held that although the origin of the watches in scenarios 1, 2, and 3 was Japan, and the origin of the watch in scenario 4 was Malaysia; the watch cases and watch bands in scenarios 2, 3, and 4 did not undergo substantial transformations and retained their original origin which was China. In calculating the duties owed on these constructively segregated components of the subject watches, the Section 301 duties were found to apply as these components remained products of China.
You seek reconsideration and revocation of HQ H304105 because you believe it incorrectly held that the watch cases and watch bands in scenarios 2, 3, and 4 were products of China subject to the Section 301 duties. You submit that CBP (and its predecessor the U.S. Customs Service) has, for decades, continuously and consistently found a watch to be a single article with a single country of origin which is determined by the country of assembly of the watch movement. You assert that HQ H304105 effectively modified or revoked Customs’ treatment of watches without complying with the notice and comment procedures of 19 U.S.C, § 1625 and 19 C.F.R. § 177.12(c)(2). You request that CBP find that the watches at issue are products of Japan or Malaysia for country of origin purposes, and likewise, are products of Japan or Malaysia for purposes of duty assessment. As such, they should not be subject to Section 301 duties.
Further, you submit that CBP should immediately revoke HQ H304105 because the Automated Commercial Environment (ACE) does not permit importers to enter their
imports in accordance with the ruling’s holding. You assert that the inability to comply with the ruling in ACE demonstrates the need for CBP to reconsider and revoke the ruling.
You commented on the proposed modification of HQ H304105 raising concerns that CBP’s determination regarding watches and watch bands entered with them is inconsistent with Section 301 and the United States Trade Representative’s instructions to CBP. You also submit that CBP’s determination is inconsistent with its treatment of similar products. You cite to Headquarters Ruling Letter (HQ) H302801, dated October 3, 2019, which dealt with the country of origin of a Fitbit, and New York Ruling Letter (NY) N305154, dated July 31, 2019, which dealt with the country of origin of a Roomba robotic vacuum cleaner and its accessories.
ISSUE:
What is the country of origin for the watches made with components from Japan, China, and Malaysia for purposes of application of the Section 301 measures in the four scenarios described above?
LAW AND ANALYSIS:
For watches listed in Statistical Notes 1(a) and 1(d), Chapter 91, HTSUS, duty is assessed based upon the value of the constructively segregated components of the watch, i.e., the separately valued movement, watch case, and watch band, bracelet or strap. In addition, the battery is separately assessed pursuant to Statistical Note 1(a). The values of these components must equal the declared value of the watch. See Statistical Note 1, Chapter 91, HTSUS. The rate set forth in the tariff specifies a set amount per movement, an ad valorem rate for the case and band, strap, or bracelet, and a different ad valorem rate for the battery.
To understand the tariff treatment of watches for classification and origin purposes, an understanding of the history of watches under the various tariff schedules of the United States is essential. A review of the previous tariff schedules and various court decisions reveal that watches have received substantially similar treatment under the tariff schedules for more than 80 years. As stated in a report prepared by the United States International Trade Commission in the early 1980s, when the Tariff Schedules of the United States (TSUS) were in effect, the tariff structure for watches and parts of watches dates from 1930. Under the TSUS, “the duty on a watch classified under item 715.05 [was] composed of separate duties assessed on the case, the movement, and the bracelet (if any).” This is the case in the specific subheadings at issue here, i.e., the various subheadings of headings 9101 and 9102, HTSUS, identified above, with the addition of duties assessed on the battery, if applicable. Duty rates are established by Congress, and Congress did not change the manner in which duty is assessed for imported watches. Duty is not assessed against the watch, but based upon the value of the separately identified components of the watch. As the structure of the tariff with regard to the assessment of duty for watches has changed little over the years since 1930, reference to court cases involving watches under previous tariff schedules is not misplaced.
First, it is vital that all parties understand the definition of a watch for tariff purposes. Additional U.S. Note 1(a), Chapter 91, HTSUS, states:
For 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 the definition of watches in Chapter 91, HTSUS, is substantially similar to the definition of watches in Headnote 2(a), Subpart E, Schedule 7, TSUS, which provided:
[T]he terms “watches” embraces timepieces (including timepieces having special features, such as chronographs, calendar watches, stopwatches, and watches designed for use in skin diving) suitable for wearing or carrying on or about the person, whether or not the movement therein is within the definition of "watch movements" in headnote 2(b), below.
Item 715.05, TSUS, was a new provision for “watches.” The previous tariff act had no provision for watches, but provided “for them by separate classification provision for their movements and for their cases.” See Tariff Classification Study, Explanatory and Background Materials, Schedule 7, United States Tariff Commission (November 15, 1960), at 166. See Mitsui & Co., v. United States, 70 Cust. Ct. 53 (February 7, 1973), at 61, wherein the court noted that:
. . . prior to [the] TSUS, watches had not been provided for eo nomine under the Tariff Acts of 1897 down through 1930. See Concord Watch Co., Inc. v. United States, 41 CCPA 13, C.A.D. 523 (1953). Therefore, watch movements and watch cases were held to be dutiable as separate entities. Accordingly, if a complete watch, or a clock incorporating a complete watch movement, were imported, the case was held to be separately dutiable from the movement; and the movement, complete with dial and hands, was assessed as a watch movement. United States v. Continental Lemania, Inc., 21 CCPA 192, T.D. 46726 (1933); United States v. John Wanamaker, Philadelphia, Inc., 20 CCPA 367, T.D. 46132 (1933); United States v. European Watch & Clock Co., 11 Ct. Cust. Appls. 363, T.D. 39160 (1922); United States v. Strasburger & Co., 9 Ct. Cust. Appls. 138, T.D. 37982 (1919); Racine et al. v. United States, 99 F. 557 (S.D. N.Y. 1899), aff'd, 107 F. 111 (2d Cir. 1901).
See also, United States v, Continental Lemania, Inc., 21 CCPA 192, 199 (October 12, 1933), in which the court stated:
In a long line of decisions, among them United States v. European Watch Co., 11 Ct. Cust. 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. See Racine v. United States, 107 F. 111; Chicago Watchman's Clockworks v. United States, 4 Ct. Cust. App. 105, T.D. 33376; United States v. Strasburger & Co., 9 Ct. Cust. App. 138, T.D. 37982. If this was true then, it is certainly true under the act of 1922.
Although the TSUS provided for watches at item 715.05, the recognition of the cases and movements as separate articles for tariff purposes was evident in the expression of the duty assessment for the provision, i.e., the rate of duty was the rate applicable to the case plus the rate applicable to the movement, as if they had been imported separately. This treatment of cases and movements continues today in the HTSUS as the method of duty assessment is based upon the segregated components of the watch.
Additional U.S. Note 2, Chapter 91, HTSUS, 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.
Further, Additional U.S. Note 3, Chapter 91, HTSUS, provides:
Batteries entered with battery powered watches or clocks, or with the complete, assembled movements thereof, and intended for use therewith, are classifiable under the provision for the watch, clock or movement. Similarly, batteries entered with a complete watch or clock movement, unassembled or partly assembled (movement set) or with an incomplete watch or clock movement, assembled, and intended for use therewith, are classifiable under the provision for such movement. Batteries are otherwise classifiable in heading 8506 or 8507, whether or not suitable for use with watches or clocks.
We note that Additional U.S. Note 2 addresses the classification of watch straps, watch band and watch bracelets with “the watch” and does not reference them as parts of watches. The same is true of Additional U.S. Note 3 with regard to batteries entered with watches. The note addresses the classification of the item, but does not infer that the item is to be considered a part of a watch.
Based upon the Additional U.S. Notes to Chapter 91, the implementation of item 715.05, TSUS, as evident in the TSUS and discussed in the Tariff Classification Study, the method of duty assessment based upon the constructive segregation of the components of the watches at issue, and the historical treatment of watches under the various tariff schedules and reflected in court decisions, CBP believes that for tariff purposes a watch consists of the movement and the case which are separate articles for purposes of tariff assessment. A watch, under the tariff, does not by definition include a band, strap, or bracelet. See United States v. European Watch & Clock Co., 11 Ct. Cust. 363 (April 26, 1922) wherein the court rejected the Government’s argument that watch cases and wristlets should be regarded as entireties and classified as jewelry. The court considered the classification of wristwatches and found that the watch cases and watch movements were classifiable within paragraph 161 of under the Tariff Act of 1913 which provided for, in relevant part, “[w]atch movements, whether imported in cases or not, watchcases and parts of watches[.]” The court noted with approval the decision of the Board of United States General Appraisers that the wristlets or bracelets were a necessary and useful attachment to the watches. We note that neither the Board nor the court viewed the wristlets or bracelets to be classifiable in paragraph 161 as “parts of watches.”
As is evident, determining the classification of a good is a separate exercise from its origin determination. CBP’s long-standing position has been that the origin of a watch (excluding the strap, band or bracelet) is the country of assembly of the watch movement. Although the addition of the hands, dial, case or watchband may add definition to the timepiece, it does not substantially change the character or use of the watch movement, which is the essence of the watch. See HQ 735197, dated January 4, 1994.
In HQ 560471, dated January 5, 1997, CBP held that the assembly in the U.S. Virgin Islands of a watch strap band or bracelet of non-U.S. Virgin Island origin to a watch made in the U.S. Virgin Islands resulted in a substantial transformation of the watch strap or bracelet in the U.S. Virgin Islands. However, in HQ 560471 CBP noted that, as a separate component, the watch band did not serve the function for which it was intended, but when assembled with the watch, the two components operate as a wristwatch. If this assembly takes place in the country in which the watch was produced, the production of the finished wristwatch cannot be stated to have resulted from a “simple assembly.” See, e.g., 19 CFR §10.195(a)(2). Therefore, HQ 560471 modified HQ 733533 and HQ 734565 and held that, when attached in a country to a watch produced in that country, watch straps lose their identity and become an integral part of the finished watch. Therefore, CBP held that the watch bands assembled with their watches did not have to be marked, as they were considered to be a product of the U.S. Virgin Islands, a U.S. insular possession. See also HQ 563287, dated August 23, 2005.
The holding in HQ 560471 applies in the situation (Scenario 1) where the Chinese watch band is assembled with the Japanese movement, Chinese case and Japanese battery in Japan. However, the holding in HQ 560471 does not apply in the situation where the Japanese or Malaysian watch movements are combined with the Chinese watch bands in China or Thailand. As noted in HQ 560471, the rulings were only modified therein to the extent that CBP stated or held that, based on the applicable facts, the watch straps assembled with their watches in the country in which the watches were produced must be marked with their own origin, if different from the country of origin of the watch. Based on the facts of some of the rulings mentioned in HQ 560471, it was not always clear where the final assembly of the watch took place.
Therefore, based upon the facts presented, we make the following determinations.
The watch movements, manufactured in Japan or Malaysia, are not substantially transformed in China or Thailand. The country of origin of the watch movements for marking purposes is Japan or Malaysia, as appropriate.
Concerning the bands, it is CBP’s position that a watch strap must be separately marked with its country of origin when that country of origin is different from the country of origin of the watch. CBP has reasoned that the watch strap maintains its separate identity from the watch as the attachment of the watch strap to the watch does not effect a substantial transformation of the watch strap. See, for example, HQ 560471, dated January 5, 1997 and HQ 968218, dated July 10, 2006 (where it was noted that where the strap would be assembled in a country other than the Philippines, where the movement was made, the strap would be separately marked with its own origin). Therefore, the country of origin of the bands for marking purposes is China, except in scenario 1, as discussed above.
As noted above, CBP has been consistent in ruling that the country of origin of an imported watch for marking purposes, 19 U.S.C. 1304, (excluding the strap, band or bracelet) is the country of assembly of the movement. In HQ H243796, CBP stated that a watch with one country of origin for the movement, another for the case, and another for the battery, was considered, for purposes of 19 U.S.C. 1304, to be a product of the country in which the movement was produced. Therefore, in accordance with HQ H243796, we find that the H304105 was incorrect and that the watch cases should be considered a product of Japan or Malaysia, where the movement was made.
Statistical Note 1 to Chapter 91, HTSUS, provides in pertinent part that ‘[t]he calculation of duties on various watches, clocks, watch movements and clock movements requires that these articles be constructively segregated into their component parts and each component separately valued.”
As the watches are products of Japan or Malaysia, the segregated components of the watch, i.e., the movement, case and battery, are assessed duty based upon the origin of the watch. However, as the bands of the watches are not substantially transformed when joined to the Japanese or Malaysia watches in China or Thailand, the bands remain products of China.
You have raised concerns that this decision is inconsistent with Section 301 and the United States Trade Representative’s (USTR’s) instructions to CBP. We disagree. Section 301, which is implemented in 19 U.S.C. § 2411, refers to USTR’s authority to impose duties or other import restrictions on the goods of a foreign country. See 19 U.S.C. § 2411(c)(1)(B). In the relevant Federal Register Notice announcing its actions under Section 301, 84 Fed. Reg. 43304, dated August 20, 2019, the USTR referenced “products of China” and provided for new headings created in Chapter 99 of the HTSUS to implement the actions. You specifically reference the language of the Annexes which specifies that the new headings apply to “all products of China that are classified in the following 8-digit subheadings.” Based on this language, you take issue with CBP’s determination that Section 301 duties apply to Chinese bands attached to watches found to be other than of Chinese origin.
You seek to imply that the language of headings 9101 and 9102, HTSUS, somehow limits CBP’s application of Section 301 duties to Chinese bands, straps or bracelets entered with wrist watches. However, this interpretation is flawed. The USTR did not list products by name for application of Section 301 duties, but rather listed subheadings in which products are classified. As noted above, based upon Additional U.S. Note 2, Chapter 91, HTSUS, Chinese bands, straps or 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. As products of China, classified in a designated 8-digit subheading, the bands, straps or bracelets are subject to Section 301 duties.
You also submit that CBP’s determination is inconsistent with its treatment of similar products. You cite to Headquarters Ruling Letter (HQ) H302801, dated October 3, 2019, which dealt with the country of origin of a Fitbit, and New York Ruling Letter (NY) N305154, dated July 31, 2019, which dealt with the country of origin of a Roomba robotic vacuum cleaner and its accessories. We disagree.
HQ H302801 addressed the country of origin of two Fitbit devices which are quite different from a watch. A watch is a time-piece, and while some watches may have added features, the primary feature of a watch is to tell the wearer the time. The Fitbit devices at issue in HQ H302801 were wirelessly-communicative, wearable electronic smart devices. The devices consisted of a Bluetooth radio transceiver; central processing unit (“CPU”); printed circuit board; memory; and certain task-specific integrated circuits; a touchscreen display; vibration motor; rechargeable lithium ion battery; plastic/aluminum housing; a wristband; an accelerometer and certain task-specific integrated circuits.
You submit that “the Fitbit ruling holds that assembly of a band and other parts with the [printed circuit board assembly (PCBA)] (the equivalent of a watch movement for a smartwatch) substantially transforms those parts into a new and different product and changes their country of origin to the country of origin of the PCBA.” You believe this ruling supports your argument that the attachment of a watch band to a watch should be a substantial transformation.
Fitbit “smart” devices are quite different from watches and are classified in a different heading, that is, heading 8517, which provides for “Telephone sets, including telephones for cellular networks or for other wireless networks; other apparatus for the transmission or reception of voice, images or other data, including apparatus for communication in a wired or wireless network (such as a local or wide area network), other than transmission or reception apparatus of heading 8443, 8525, 8527 or 8528; parts thereof.” As such, one cannot equate an origin determination for a Fitbit device to an origin determination for a watch with a band as these are completely different products with completely different tariff classifications and tariff histories.
As for NY N305154, dated July 31, 2019, the decision in that ruling was based on the classification of the Roomba with its accessories as a General Rule of Interpretation (GRI) 3 set. It is not applicable to the current situation because a band, strap or bracelet classified with a watch with which it is entered, attached or unattached, is classified based upon GRI 1 and the application of the legal notes of Chapter 91. NY N305154 is simply not relevant to the matter at issue.
Finally, we note that you state in your submission that you do “not agree that the constructive separation of component value required by Statistical Note 1 to Chapter 91 of the HTSUS provides a legal basis for treating a watch and its band as distinct articles of commerce for purposes of assessing either ordinary or Section 301 duties because the statistical annotations to the HTSUS have no legal status. While we reference provisions of Statistical Note 1, it is not the basis for our decision. The provisions of Statistical Note 1 serve to explain the application of the duty rate expressed at the legal eight-digit level for articles classified in headings 9101 and 9102, among other headings of Chapter 91. The duty rates imposed at the legal level are written to impose duty on the constructive separation of the components of the articles classified within the headings. This is the legal basis, along with the Additional U.S. Notes, for our decision.
Please note that the subject watches must also satisfy the special marking requirement of Additional U.S. Note 4, Chapter 91, HTSUS, which in part, requires the movement and case to be marked with the name of the country of manufacture. In this situation, the country of manufacture of the movement would be Japan, and the country of manufacture of the cases, for purposes of the special marking requirements would be China.
HOLDING:
HQ H304105 is modified in accordance with the analysis above. The country of origin of the watches is the country of assembly of the watch movements. Thus, for scenarios 1 through 3, the country of origin of the watches is Japan. For scenario 4, the country of origin is Malaysia.
However, with regard to the country of origin of the dutiable components of the imported watches, in Scenario 1, since all of components of the watches are of Japanese origin, the Section 301 duties for Chinese origin products would not be applicable. In Scenarios 2, 3, and 4, the country of origin of the watch components (the movement, case, and battery) is the country of assembly of the watch movement; the watch bands are not substantially transformed, and their country of origin is China. As these watch bands will be products of China, in calculating the duties that will be imposed on the watches, the proposed Section 301 measures would apply to these items in Scenarios 2, 3, and 4.
HQ H304105, dated June 25, 2019, is MODIFIED. In accordance with 19 U.S.C. 1625(c), this ruling will become effective 60 days after its publication in the Customs Bulletin.
Sincerely,
Craig T. Clark, Director
Commercial and Trade Facilitation Division