CLA-2 CO:R:CV:V 544105 EK

District Director of Customs
Chicago, Illinois

RE: Decision on Application for Further Review of Protest No. 3901-7-000064

Dear Sir:

This protest was filed against your decision in the liquidation of Entry No. 534044 dated October 24, 1986. The protesting party is disputing the inclusion of a royalty payment in the transaction value of imported merchandise pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)).


The merchandise in question was properly appraised pursuant to transaction value, section 402(b) of the TAA. The importer purchases from the foreign seller color chips used in ink formulation in the production of dry erase markers. In addition to the price paid by the importer, the foreign seller also furnished the importer with the ink formulation for processing the chips.

The agreement was in effect for a three-year period from October, 1982, through September, 1985. The amount of the payment was based upon net sales of all dry erase markers sold by the importer annually. The royalty was paid on the basis of the sale of the fully manufactured product, dry erase markers. These dry erase markers contain the ink produced by the importer from the color chips and technology supplied by the seller. The importer states that the royalty became due to the seller even when the color chips used to produce the black ink were not provided by the seller but rather, were supplied to the importer from another company.

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Whether the royalty payments made by the importer are to be included in the transaction value of the imported merchandise.


Transaction value is the preferred method of appraisement and is defined in section 402(b) of the TAA as:

. . . the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts equal to . . . any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States . . .

An addition will be made for a royalty fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the "price actually paid or payable" for the imported merchandise, and that it was not a condition of the sale of the imported merchandise.

In this case, it appears as if the payment of the royalty is not a condition of the sale. The royalty is paid for technology and assistance in connection with the manufacture and use of inks. The royalty payment is based upon net sales subsequent to importation and becomes due even though the markers are produced without any color chip supplied by the seller. The fees which are paid by the importer are separate from the right to import the color chip.


In view of the foregoing, it is our conclusion that the royalty payments are not to be added to the "price actually paid or payable" to arrive at a proper transaction value.

Accordingly, you should grant the protest. A copy of this decision should be attached to Form 19, Notice of Action, to be sent to the protestant.


John Durant
Acting Director, Commercial
Rulings Division