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.
FACTS:
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.
ISSUE:
Whether the license fees and the prepayment to the
manufacturer are dutiable under transaction value.
LAW AND ANALYSIS:
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 -
HOLDING:
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.
Sincerely,
John Durant, Director
Commercial Rulings Division