VAL CO:R:C:V 544351 VLB

J.A. Burkham
Customs Administrator
The Proctor & Gamble Company
2 Proctor & Gamble Plaza
Cincinnati, Ohio 45202-3314

RE: Ruling Request Concerning Dutiability of License Payments Relating to Imported Toothbrushes

Dear Ms. Burkham:

This is in response to your letter dated June 1, 1989, requesting a prospective ruling on the dutiability of payments made by Proctor and Gamble (hereinafter referred to as the "importer") to Coronet Werke Heinrich Schlerf GmbH (hereinafter referred to as the "manufacturer"). We regret the delay in responding.


You state that the importer will be importing toothbrushes supplied by the manufacturer, a German corporation. The importer and the manufacturer have entered into an agreement entitled "Patent and Knowhow License" (hereinafter referred to as the "Agreement"). Under Article 2 of the Agreement, the manufacturer grants the importer "the worldwide right and license to make, have made, use and sell License Products [all types of brushes used for cleaning the oral cavity] in any Licensed Country or Licensed Countries under Licensed Coronet Patents and Licensed Coronet Knowhow."

The license is exclusive in the field of brushes used for cleaning the oral cavity with respect to specified patents and improvements and is non-exclusive with respect to other specified patents and improvements.

Under Article 3 of the Agreement the importer is required to pay the manufacturer a developmental fee in specified installments. The developmental fees are to cover the manufacturer's out-of-pocket development costs, including machine development and the preparation of sample licensed products. You indicate that three payments have been made. You further state that you believe that the developmental fees are dutiable - 2 -

payments and that these payments have been declared on an entry covering test samples. The future payments will also be declared.

Article 4 of the Agreement provides that the importer will pay a minimum annual royalty of DM 750,000 for five consecutive years commencing April 15, 1990. The royalty "will be calculated as a percentage of Net Sales based on the aggregate volume of all licensed countries using [a specified formula]. . ." "Net Sales" is defined as "the amount invoiced by [the importer] . . . to wholesalers or final users of the licensed product. . ." You state that a payment of DM 500,000 has been paid and shall be creditable toward any royalties becoming due after April 15, 1990, at a rate of DM 100,000 per year. See, Article 8, p.8 of the Agreement.

Article 5 of the Agreement establishes that the importer is required to pay a "running royalty" that runs concurrently with the importer's obligation to pay the minimum royalty. The running royalty is calculated in the same manner as the minimum royalty.

The royalties are payable quarterly within two months of the end of the quarter.


Whether the license fees and the prepayment to the manufacturer are dutiable under transaction value.


Transaction value, the preferred method of appraisement is defined in section 402(b), Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA), as the "price actually paid or payable for the merchandise when sold for exportation to the United States".

In addition, section 402(b)(1)(D) of the TAA provides for an addition to the price actually paid or payable for:

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. . . - 3 -

For purposes of this rulings, we are assuming that transaction value is the proper method of appraisement. You contend that the Agreement at issue provides for the use, sale and manufacture of toothbrushes, not as a condition of sale for the export to the U.S. You state that the importer is liable for the same royalty for the term of the Agreement regardless of whether brushes are imported or manufactured in the U.S.

You cite Headquarters Ruling Letter (HRL) 542844, dated June 17, 1982, in which Customs held that the importer's payments to the seller for the exclusive right to manufacture and distribute the seller's products in North America were not included in the transaction value of merchandise. The basis of the ruling was that the royalty fees were not a condition of sale of the imported merchandise. This was due to the fact that the importer would have been able to purchase the merchandise from the manufacturer regardless of whether the royalty fee was paid. In addition, the royalty agreement in HRL 542844 specifically excluded the value of the imported merchandise from the royalty computation formula. Rather, the payments were computed on a basis of the volume of business conducted in the U.S. The result was that the royalty fees were not so inextricably intertwined with the imported merchandise as to be considered part of the purchase price of the merchandise.

In the present case, neither the running royalty nor the minimum royalty payments are a condition of sale of the imported merchandise for export to the U.S. The royalties must be paid regardless of whether merchandise is imported into the U.S. In fact, a payment has already been made, but no merchandise has been imported.

Finally, the development fee payments are part of the price actually paid or payable for the imported samples as well as subsequent imported merchandise. Thus, these payments will be included in the transaction value of the merchandise. - 4 -


The royalty payments are not a condition of sale for the imported merchandise. Therefore, the payments are not included in the dutiable value of the merchandise. The development fee payments, on the other hand, are part of the price actually paid or payable for the imported merchandise. Thus, those payments must be included in the dutiable value of the merchandise.


John Durant, Director
Commercial Rulings Division