VAL CO:R:C:V 545388 LR

Area Director of Customs
J.F.K. Area
Jamaica, N.Y. 11430

RE: Application for Further Review of Protest 1001-92-106852; formula; royalties; retroactive reduction in royalties

Dear Sir:

The above-referenced protest and application for further review was filed by counsel on behalf of CIBA-GEIGY Corporation (protestant) against your decision to appraise the imported product at the invoice price. On September 20, 1994, we met with counsel to discuss the issue presented. We regret the delay in responding.

FACTS:

The imported merchandise is Habitrol, a Transdermal Nicotine Patch ("the product"). Protestant purchased the subject merchandise from its related company, CIBA-GEIGY, Limited ("Limited"). The product is manufactured in Germany by an unrelated third party ("manufacturer"). The methodology for setting prices is based on a contract between protestant and Limited entitled "Supply Agreement", dated January 1, 1985, a copy of which was submitted. Under Paragraph 3(b) of the Supply Agreement, the price equals the sum of certain costs incurred by Limited plus "an amount sufficient to reimburse Limited for any royalties paid to a third party in respect of the manufacture or sale of the product." The manufacturer owns a patent for the product. Pursuant to an agreement dated December 31, 1988, between Limited and the manufacturer ("Basic Royalty Agreement"), Limited is to pay patent royalties to the manufacturer which is a fixed percentage of the selling price in the United States. (Paragraph 8). A copy of an English translation of the Basic Agreement was submitted.

The manufacturer and Limited entered into a supplementary agreement (Amendment to Basic Agreement) dated August 26, 1992. An English translation was submitted. The introduction states that "in this Supplementary Agreement Limited and (name of manufacturer) intend to settle their differences of opinion, with particular reference to the interpretation of item 9.2 of the Basic Agreement in respect of certain patent rights of third parties." Under paragraph 1, the amount of the royalty is reduced to a lower percentage in specified circumstances. (Although the protest indicates that this rate change occurred in August 1991, the submitted documents indicate that it occurred in August 1992). Paragraph 2 states that reduced rates are applicable for "the following accounting period from 1.1.92."

Since royalty payments is one element of the Limited's price to protestant, counsel indicates that this reduction also reduced the price protestant paid to Limited for the imported product.

The merchandise in question was entered in March - May, 1992, several months before the date of the Amendment to Basic Agreement reducing the royalty rate. Therefore, the entered values and invoice price of the subject entries do not reflect a reduction in the royalty rate. The merchandise was appraised under transaction value based on the invoice price. Counsel contends that transaction value should be based on the post- importation price reduction. Its theory is that the price between protestant and Limited was based on a formula, an element of which was royalties Limited paid to third parties. Therefore, it argues that section 402(b)(4)(B), Trade Agreements Act of 1979 (precluding consideration of post-importation price decreases in ascertaining transaction value) is inapplicable because the price adjustments were derived from a formula which was in effect prior to importation. Alternatively, it is argued that the change in price was not a post-importation price reduction since the change was legally effective January 1, 1992.

ISSUE:

Whether transaction value should take into account the post- importation price reduction.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised 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 preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus five enumerated additions. There is no dispute that transaction value is applicable.

Section 402(b)(4) of the TAA provides in relevant part:

(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 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. 19 U.S.C. 1401a(b)(4).

Section 402(b)(4)(B) of the TAA provides that any rebate of, or other decrease in, the price actually paid or payable made or otherwise effected between the buyer and seller after the date of importation of the merchandise will be disregarded in determining transaction value. See also 19 CFR 152.103(a)(4). However, we have ruled that if the decrease in price is pursuant to a formula which was in existence prior to the date of exportation, such decrease will not be disregarded. See Headquarters Ruling Letter ("HRL") 544944, May 26, 1992.

In this regard, section 152.103(a)(1), Customs Regulations (19 CFR 152.103(a)(1)) provides that 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.

In HRL 544346, September 11, 1990, we emphasized that a formula in a contract can be acceptable under transaction value if it is a formula that is based on a future event over which neither the seller nor the buyer has any control. It must be an objective standard over which neither the buyer nor the seller has control, such as the price in effect on the date of export in the London Commodity Market, the example of an acceptable means of a formula used to determine the price actually paid or payable for the imported cited in 19 CFR 152.103(a)(1).

In the instant case, the Supply Agreement specifies that the price for the product will be the sum of certain specified costs incurred by Limited plus "an amount sufficient to reimburse Limited for any royalties paid to a third party in respect of the manufacture or sale of the product." Counsel indicates that this price calculation is a formula and that according to such formula, the price was to include the royalty paid to the manufacturer. Since the formula was in existence prior to the date of exportation, counsel argues that transaction value should include the reduction in price made pursuant to such formula. Counsel also indicates that the relevant element of the formula, i.e., the royalty paid to the manufacturer, is not within the "control" of either Limited or protestant.

Although the Supply Agreement specifies the method that will be used to determine the price for the product and arguably could be viewed as a formula for such, it is not a formula upon which transaction value can be based. This is because contrary to counsel's assertion, the amount of the royalty paid to the manufacturer is within the control of one of the parties, namely, Limited. The amount of such royalty first determined in the Basic Agreement between Limited and the manufacturer was subsequently reduced. Although counsel states that the manufacturer agreed to reduce its royalty on such sales to a lower percentage, in fact, the reduction was the result of an agreement between the manufacturer and Limited. Since Limited was a party to both the Basic Agreement and the Amendment to Basic Agreement, it cannot be said that the amount of such royalty was beyond Limited's control. While this element of the formula was not entirely within the control of Limited, it played a role in determining the amount of the royalty. Accordingly, we find that this element in the formula was not based on a future event over which neither the seller nor the buyer has any control and that it cannot be the basis for transaction value. Based on this conclusion, we do not address whether the other elements of the formula were beyond the control of the parties.

Protestant argues that even if we conclude that the prices at issue were not derived from a formula, section 402(b)(4)(B) of the TAA would not come into play. Under this provision any rebate of, or other decrease, in the price that is "made or otherwise effected...after the date of importation...shall be disregarded..." It argues that since the reduction in the royalty rate and the price change for the imported product was in effect on January 1, 1992, so too was the price change for the imported product. According to protestant, the fact that the change was not fully implemented until later did not alter the legal obligation to make the change on January 1, 1992. As such, it contends that this was not a post-importation price reduction, but rather, a belated implementation of a change legally effective January 1, 1992.

We disagree. At the time of importation, the price actually paid or payable for the imported product included an amount equal to Limited's royalty payment to the manufacturer (the original fixed percentage of net sales). These prices were in effect when the merchandise was sold for exportation. It wasn't until August 1992, after the subject importations, the amount of the royalty was decreased. Clearly, this was a decrease in the price that is "made or otherwise effected...after the date of importation..." and should be disregarded. The fact that such reduction was to apply retroactively to January 1, 1992, is not relevant.

HOLDING:

Pursuant to section 402(b)(4)(B) of the TAA, the decrease in price attributable to the lower royalty payment to the manufacturer shall be disregarded in determining the transaction value of the imported goods. Therefore, you are directed to deny the protest in full. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division