CLA-2 CO:R:C:V 544129 EK
District Director of Customs
RE: Decision on Application for Further Review of
Protest No. 3901-7-000473
This protest was filed against your decision in the
liquidation of Entry No. 64092 dated January 9, 1987, made by
(company name) (hereinafter referred to as importer). The
importer is disputing the inclusion of a royalty payment in the
transaction value of the 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 importer is a manufacturer of pharmaceutical products
in the United States. The royalty payments at issue in this case
are made to (company name) (hereinafter referred to as licensor).
The seller in the transaction is a Swedish corporation. The
licensor and seller are related within the meaning of section
402(g) of the TAA. The agreement provides for the importer to
pay a royalty to the licensor for the use and sale of a drug. The
amount owed to the licensor is reduced by payments made to an
unrelated company in the United States (also unrelated to the
seller) who was originally involved in the early development of
the product. These payments, when made, reduce the amount owed
to the licensor.
The license agreement provides for an exclusive right and
license to use and sell the license products within the United
States. The amount of the royalty is 5% of the importer's net
sales. The royalty is payable as long as the patent rights
continue. The licensor further agrees to undertake litigation,
at its expense, to stop others from infringing on the rights
conveyed by the agreement.
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The importer further acquired the right to manufacture the
drug in the United States if the manufacturer could not fulfill
the requirements in the supply agreement. This, however, does
not relieve the obligation to pay the royalty for sale and use to
the licensor. The importer may also use the drug for its own
purposes, i.e., give away samples without paying a royalty.
The agreement further provides for the importer to use
know-how possessed by the licensor. It covers know-now in
existence at the time of the contract as well as future know-how.
The purpose of this is to keep the importer connected with
developments and test results in alternative dosage forms of the
Whether the royalty payments made by the importer to the
licensor are to be included in the transaction value of the
LAW AND ANALYSIS:
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 for a royalty fee paid by the buyer will be
made to the "price actually paid or payable," unless the buyer
establishes that such payment is distinct from the price for the
imported merchandise, and that it is not a condition of the sale
of the imported merchandise.
In this case, is appears as if the royalties at issue are
not a condition of the sale of the imported merchandise. The
payment owed is paid for rights which are separate and apart from
the right of ownership on payment of the purchase price. The
royalty payments are triggered upon the resale of the product
rather than the importation of the product.
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In a similar situation, Headquarters ruled that royalty
payment by the importer to the licensor for the use, sale, and
manufacture of the product in the United States was not part of
the transaction value of the imported merchandise. In that case,
the payment was not a condition of the sale nor was it tied to
the importation of the product. See, Headquarters Ruling No.
544061 dated May 27, 1988.
In view of the foregoing, it is our conclusion that the
payments made by the importer pursuant to the royalty agreement
at issue are not part of the transaction value of the imported
merchandise within the meaning of section 402(b)(1)(D) of the
TAA. Please grant the protest and attach a copy of this decision
to the Form 19, Notice of Action, to be sent to the protestant.
John Durant, Director,
Commercial Rulings Division