Protest and Application for Further Review of 2704-20-108728; Valuation of Imported Watch Components; Statistical Note 1, Chapter 91, HTSUS

H326890 August 22, 2025 OT:RR:CTF:VS H326890 AMW CATEGORY: Valuation Director Consumer Products and Mass Merchandising CEE U.S. Customs and Border Protection 1500 Centre Pkwy Atlanta, GA 30344 C/O Paul Sumbi, Assistant Center Director RE: Protest and Application for Further Review of 2704-20-108728; Valuation of Imported Watch Components; Statistical Note 1, Chapter 91, HTSUS Dear Director: This is in response to the Application for Further Review (“AFR”) of Protest No. 2704- 20-108728, dated January 10, 2020, filed against U.S. Custom and Border Protection’s (“CBP’s”) decision to liquidate the subject imported wrist watches based on a revised apportionment of the value of the underlying components. The Protestant, [ ] (“[ ]” or the “Protestant”), seeks reliquidation at the component valuation declared at entry. FACTS: This protest relates to 13 entries of wrist watches imported by [ ] during the year 2018. [ ] purchased the subject watches from its [ ] parent company, [ ] (“[ ]” or the “Parent”). The Parent produces all movements for its watches in-house in Japan, either directly or via its wholly owned subsidiaries. The movements are subsequently assembled with cases, bands, and batteries at facilities located in the People’s Republic of China and Thailand. After assembly, the watches are shipped to the United States via Hong Kong. The Protestant imports watches under both the [ ] and [ ] brands. The present AFR only relates to the [ ] brand watches; the Protestant has filed a separate protest and AFR regarding CBP’s reallocation of value regarding the imported [ ] watches. [ ] declared the valuation of the subject watches to be the transaction value between the Protestant and Parent. In addition, Statistical Note 1, Chapter 91 of the Harmonized Tariff Schedule of the United States (“HTSUS”) requires that the valuation of watches be reported by specifying the valuation of four individual components, which shall comprise the total valuation of the watch: (1) the movement; (2) the case; (3) the strap, band, or bracelet; and (4) the battery (collectively, the “components” or “breakouts”). Each of these components is subject to a separate duty rate, with the movement typically being assigned the lowest duty, a flat duty rate as opposed to an ad valorem amount. For the subject entries, the Protestant apportioned the component valuation based on two separate formulas. For watches with a two-tone case and a metal band, the apportionment was as follows: 70% for the movement, 15% for the case, and 15% for the band. For all other watches, the Protestant’s apportionment was as follows: 75% for the movement, 15% for the case, and 10% for the band. In each instance, the Protestant deducted 40 cents from the battery to account for the battery’s valuation. The Protestant claims that the component allocations were based on “established practice, using ratios published in the Los Angeles/Long Beach Customs Pipeline, issued to the trade community and that such practice could not be altered without formal notice and comment procedures….” In a subsequent follow-up submission, the Protestant clarified that, “[a]lthough historical documents are not available, the formulas used to determine the component allocations for [ ] watches were based on relevant specific factors and considerations recognizing” the nature and complexity of the watches’ solar power system. The Protestant argues that ongoing research and development costs as well as the distinctive nature of its brand are also important factors. In 2017 and 2018, CBP’s Trade Regulatory Audit (“TRA”) audited the Protestant’s entries for the period of 2013-2017. In so doing, TRA determined that the Protestant “did not provide cost production records or any other supporting documentation to reasonably support their apportionment of the value of the watch components….” Instead, TRA found that the valuation attributed to the movement for similar, “compliant companies” averaged approximately 33% for the scope period of 2013 to 2017, which represented a significant departure from the 70%-75% reported by the Protestant. CBP then reliquidated the subject 2018 entries in accordance with TRA’s findings. In reapportioning the valuation of the imported watch components, TRA utilized Reapportionment Percentages Constructed from Arithmetic Means of Stratified Entry Parameters (“RPCARSEP”). RPCARSEP is maintained by the Consumer Products and Mass Merchandising CEE (the “CEE”) and is used to assess the valuation for imported watch components when complete information is otherwise unavailable. In relevant part, RPCARSEP consists of hundreds of thousands of lines of entry data for watches imported by “compliant” importers (i.e., those importers that have demonstrated reasonable apportionment and value compliance). These data points may then be used to calculate the average valuation proportion for each component of a watch based on the following parameters: price range, year of import, country of origin, and classification. The CEE has also clarified that revised percentages are only calculated for watches for which there exist direct or reasonably comparable products represented in the underlying dataset (i.e., within the same price range, year of import, country of origin, and classification). If no direct or reasonably adjusted comparison can be made from the data available, then the reported valuation will remain unchanged and the CEE may further evaluate the apportionment. 2 The Protestant challenges CBP’s assessment on several bases, which can be divided into two categories: (1) that its initial means of valuing the watch components was a reasonable method of appraisal previously accepted by CBP; and (2) that CBP erred in using RPCARSEP to reapportion the value of the imported watch components. First, the Protestant claims that its use of the two formulas above represents a “practice” accepted by CBP since at least the 1980s and that any change should be enacted via the statutory notice and comment procedures promulgated at 19 U.S.C. § 1625. Furthermore, the Protestant asserts, that the above formulas more accurately represent the apportionment of the subject components. In support of this position, the Protestant has provided analytical data that is based on supplier component invoices for a select sample of “high-volume” cases and attachments. Furthermore, the Protestant asserts, the valuation of the subject movements is similar to that obtained by subtracting the component value for the case and strap/band from the total transaction value of a watch. In doing so, the entirety of the watch’s value attributable to overhead, profit, and intellectual property would be included in the valuation of the movement. The Protestant asserts that its proposed valuation apportionment is in line with CBP Headquarters Ruling Letter (“HQ”) H259490, dated April 4, 2017. In that matter, CBP permitted the importer of certain “shop-worn” watches to deduct the costs of the watch case, strap or band, and battery from the overall value of the watch to determine the value of the watch movement. Furthermore, the Protestant explains that 90% of its watch models contain movements that rely on a proprietary [“ ”] technology, which functions by use of a rechargeable lithium battery system powered by solar and other ambient light. This system, the Protestant argues, is “fundamental to understanding the basis” for its allocation formulas, asserting that the company has both significant historic and ongoing research and development costs and that much of the brand’s distinctiveness and value relates to the [ ] technology. Second, the Protestant asserts that there is no legal basis for CBP to use RPCARSEP to appraise the subject merchandise. In relevant part, the Protestant argues that it is difficult to ascertain the basis upon which the RPCARSEP calculations were made because the agency has failed to provide sufficient information regarding the exact basis of appraisement, the nature and description of the surrogate transactions and products, and how the information was gathered to ensure appropriate comparisons. The Protestant also argues that RPCARSEP cannot adequately compare the valuation apportionment used for its watches to other importers because the technology used in developing and manufacturing its subject movements is distinct from other watch brands. ISSUES: 1. Whether the Protestant correctly apportioned the valuation of the watch components in compliance with Statistical Note 1, Chapter 91, of the HTSUS? 2. Whether CBP’s use of the RPCRSEP to reallocate the component valuation complied with Statistical Note 1, Chapter 91, HTSUS? 3 LAW AND ANALYSIS: As an initial matter, we note that the protest was timely filed on January 1, 2020, within 180 days of liquidation of the entry on September 13, 2019, under the statutory provisions for protests. See 19 U.S.C. §1514(c)(3). Merchandise imported into the United States is appraised for customs purposes 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 primary 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 amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). As provided in 19 U.S.C. §1401a(b)(4): (A) 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. Section 152.103(a)(1), CBP Regulations (19 CFR §152.103(a)(1)) provides, in pertinent part, as follows: In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)). In the present matter, as noted above, the Protestant utilized the transaction value in reporting the total value of each imported watch. The Protestant asserts that the transaction value is based on an arm’s-length negotiation between the Protestant and its parent, [ ], in accordance with an advance pricing agreement. This office has not reviewed the pricing agreement, but notes that the overall valuation of the imported watches was not challenged in TRA’s audit nor was the overall transaction value changed when CBP liquidated the subject entries. As such, our analysis focuses solely on the apportionment of the component value of the watches as outlined in Statistical Note 1, Chapter 91, HTSUS. 4 Beyond the general requirements of 19 U.S.C. § 1401a, in appraising watches and timepieces, the HTSUS also requires that certain additional information regarding watch component valuation be declared to CBP. Watches are classified in Chapter 91, HTSUS. The Additional U.S. Notes to Chapter 91 inform us as to the elements of a watch, providing: For the purposes of this chapter: (a) The term “watches” embraces timepieces . . . 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. 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, 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. Wrist watches imported into the United States, are not assessed duty on the appraised value of the watch and strap, band or bracelet as a whole. Duty is instead assessed on the allocation of the appraised value of watch components, as duty is assessed against the components, and not the watch. In relevant part, Statistical Note 1, Chapter 91 of the HTSUS, provides additional information regarding the duty rate set forth for the subject watches 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. . . . In other words, Statistical Note 1 to Chapter 91 of the HTSUS provides that the value of a watch must be reported to CBP by specifying the value of four individual components (also referred to herein as the “statistical breakouts”). The four statistical breakouts are: (1) the movement; (2) the case; (3) the strap, band, or bracelet; and (4) the battery. The total value of the watch must equal the value of the individual breakouts. See also, See United States v. Continental Lemania, Inc., 21 CCPA 192 (1933) (“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.”) 5 1. Whether the Protestant’s Valuation Formulas Complied with Statistical Note 1, Chapter 91, HTSUS As outlined in the FACTS above, the Protestant utilized two formulas to apportion the component valuation of the imported watches, which resulted in either 70% or 75% of the transaction value being attributed to the movement. In its protest, the Protestant argues that the valuation formulas were approved by CBP and accepted by the agency since at least 1987. In so doing, the Protestant argues that CBP has followed a “practice” regarding the Protestant’s apportionment methodology that cannot be altered without a formal notice and comment process outlined in 19 U.S.C. § 1625. First, the Protestant asserts that the apportionment percentages were agreed to between it and CBP during a series of communications occurring in 1987. The Protestant provides two documents it purports to represent communication in response “to a request by CBP to provide component cost breakdowns for its watches.” However, the documents do not show any communication with CBP and do not reference any such request. Instead, the documents depict communication between “[ ]” and [ ] and are addressed to “Export/Import Manager” with a copy to the Protestant. These documents contain no indication they are addressed to, or intended for, CBP. In addition, the communication dated March 31, 1987, contains the following instructions for the recipient to include a statement that “US $ .040 per piece of battery cost is included in the movement cost.” In addition to incorrectly attributing the cost of the battery to the movement, this phrasing indicates the documents were directed towards an internal actor responsible for arranging shipping, rather than CBP. Next, the Protestant argues that the subject component apportionment is in line with “CBP’s 1987 directions concerning the allocation of values of watch components [which] constitute ‘rulings,’ since they are pronouncements by CBP officials regarding a particular issue.” In support, the Protestant provides a “Public Bulletin” issued by the Port of Los Angeles on February 19, 1987. This document provides several possible component allocations for “watches made or assembled in Hong Kong.” Even if this document were to represent a binding ruling, it would not apply to the subject entries. Although the subject watches were shipped through Hong Kong, they were not manufactured or assembled there. The Protestant concedes that the watches contain Japanese-origin movements (which typically impart the country of origin of a watch) and were assembled in either Thailand or China. Moreover, the Protestant provides two additional communications involving a single CBP Import Specialist for the proposition that CBP accepted the Protestant’s valuation apportionment. This includes a 2008 communication in which, the Protestant claims, the Import Specialist “advised that CBP was looking into the allocation of value to watch components in respect of many watch importers and sought information on how [ ] allocated costs.” We note, however, that the Protestant did not provide an email from the Import Specialist, but rather an out-of-context reply from an employee of the Protestant noting that its “movement allocation range [sic] from 70-75% of cost.” Nevertheless, the Protestant has not provided any related 6 communication in which CBP acknowledges and approves of this methodology. In addition, the Protestant provides a 2011 email exchange between the same Import Specialist and the Protestant in which the specialist asks whether the Protestant had included a watch’s mechanical display in the valuation of that watch, and noting that the Protestant would be potentially overpaying duties if it had not done so. This exchange contains no reference to the Protestant’s method of apportionment, but rather references the undisputed position that the component value of a watch’s mechanical display is attributable to the value of the movement. As such, these communications do not provide evidence of agency practice regarding the Protestant’s method of apportioning component value. Furthermore, even if this had been the case, such communications would not constitute a binding CBP ruling in accordance with 19 CFR § 177. In addition to its argument that CBP had “accepted” its valuation of the subject watches, the Protestant asserts that the apportionment formulas u