RR:IT:VA 546033 EK
Port Director
New York - JFK Area
RE: Internal Advice No. 25/95; Dutiability of Royalty Payments;
Related Parties;
Dutiability of Proceeds
Dear Sir:
This is in response to your memorandum of June 2, 1995,
regarding Internal Advice No. 25/95. The importer, through
counsel, has requested internal advice with respect to payments
made by the importer to its related party in Italy. We have
granted confidential treatment for the name of the importer and
names of all other parties implicated in the ruling request. We
regret the delay in responding.
FACTS:
The importer, ********************., (hereinafter referred
to as importer), is a wholly-owned subsidiary of
************************************************************
(hereinafter referred to as Company A). Company A is a wholly-owned subsidiary of ****************************** (hereinafter
referred to as licensor). The licensor also owns
************************************** (hereinafter referred to
as seller), which sells and supplies jewelry and silver to the
importer. Company A owns *****************************
(hereinafter referred to as seller), which also sells jewelry and
watches to the importer. The importer is related to both of the
sellers and to the licensor within the meaning of section 402(g)
of the Tariff Act of 1930, as amended by the Trade Agreements Act
of 1979 (TAA; 19 U.S.C. 1401a(g)).
Counsel states that the importer has previously submitted
information and documentary evidence which establishes that the
prices paid by the importer are "acceptable" within the meaning
of section 402(b) of the TAA. We are assuming, for purposes of
this internal advice request, that transaction value is in fact
applicable in
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appraising the imported merchandise, and that the relationship
between the parties does not influence the price actually paid or
payable.
Pursuant to an agreement dated April 30, 1988, the importer
pays the licensor a license fee for the use of a trademark and
trade name on the products that it sells in the United States.
The licensor grants the importer the right to use the tradename
and trademark in the operation of its New York store and the
right to sell products in the store. Therefore, two separate
licenses are granted to the importer. One is for the importer to
use the trade name in its operation of the retail store, and the
other authorizes the importer to sell in the store jewelry,
silverware, watches and other products purchased by the importer
from the sellers of the products.
In exchange for these rights granted to the importer, the
importer is required to pay the licensor a license fee equal to a
percentage of its net sales, less any discounts, allowances and
sales tax. In an addendum letter to the license agreement dated
October 17, 1990, the payments are not due with respect to any
sale of products to a company in which the licensor owns,
directly or indirectly, or to an independent franchise retailer
of the products in question.
ISSUE:
Whether the payments made by the importer to the related
party licensor are an addition to the price actually paid or
payable as either a royalty or as a proceed of a subsequent
resale.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into
the U.S. is transaction value 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). Section 402(b)(1) of the TAA
provides, in pertinent part, that the transaction value of
imported merchandise is the "price actually paid or payable for
the merchandise when sold for exportation to the United States",
plus enumerated statutory additions, including any royalty or
license fee related to the imported merchandise that the buyer is
required to pay as a condition of the sale for export to the
United States, section 402(b)(1)(D). In addition, the "proceeds
of any subsequent resale, disposal, or use of the imported
merchandise that accrue, directly or indirectly, to the seller"
must be added to the price actually paid or payable (section
402(b)(1)(E)).
For purposes of this internal advice, we are assuming that
the payment of the license at issue is distinct from the price
actually paid or payable for the imported merchandise.
Therefore, this ruling addresses the issue of whether the
payments are
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included in transaction value from the perspective of whether
they constitute additions to the price actually paid or payable.
Pursuant to section 402(b)(1)(D) of the TAA, an addition to
the price actually paid or payable is made for any royalty or
license fee which is "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." The
Statement of Administrative Action, H.R. Doc No. 153, 96 Cong.,
St. 1st Sess., reprinted in, Department of the Treasury, Customs
Valuation under the Trade Agreements Act of 1979 (October 1981),
at 48-49, which forms part of the legislative history of the TAA,
provides for the following:
Additions for royalties and license fees will be limited to
those that the buyer is required to pay, directly or
indirectly, as a condition of sale of the imported
merchandise for exportation to the United States. In this
regard, royalties and license fees for patents covering
processes to manufacture the imported merchandise will
generally be dutiable, whereas royalties and license fees
paid to third parties for use, in the United States of
copyrights and trademarks related to the imported
merchandise, will generally be considered as selling
expenses of the buyer and therefore will not be dutiable.
However, the dutiable status of royalties and license fees
paid by the buyer must be determined on a case-by-case basis
and will ultimately depend on: (1) whether the buyer was
required to pay them as a condition of sale of the imported
merchandise for exportation to the United States; and (ii)
to whom and under what circumstances they were paid. For
example, if the buyer pays a third party for the right to
use, in the United States, a trademark or copyright relating
to the imported merchandise, and such payment was not a
condition of sale of the merchandise for exportation to the
United States, such payment will not be added to the price
actually paid or payable. However, if such payment was made
by the buyer as a condition of sale of the merchandise for
exportation to the United States, an addition will be made.
As a further example, an addition will be made for any
royalty or license 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 was not a condition of sale of the imported
merchandise to the United States.
In a general notice on the dutiability of royalty payments,
i.e., Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. &
Dec., February 10, 1993, Customs determined that three factors
are relevant in determining whether a royalty is dutiable.
These factors are: (1) whether the imported merchandise is
manufactured under patent; (2) whether the royalty is involved
in the production or sale of the imported merchandise, and; (3)
whether the importer can buy the product without paying the
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fee. Affirmative responses to factors one and two and a negative
response to factor three indicates that the payments are a
condition of sale and, therefore, dutiable as
royalty payments. In order to determine whether the payment of
the royalty is a condition of sale, it is necessary to apply the
three-question analysis set forth in the notice.
Based upon the information submitted, the first question is
answered in the negative, i.e., the merchandise is not
manufactured under patent.
Regarding question No. 2, we disagree with the importer that
the royalty is not involved with the production or sale of the
imported merchandise. The license agreement is replete with
requirements regarding the sale of the imported merchandise. In
the agreement between the importer and licensor, page 2 states:
"WHEREAS, [LICENSOR] is the owner of the trademark and tradename
[-----]' and is engaged, together with its affiliate companies,
in the business of designing, manufacturing and/or selling
jewelry, goldsmith's wares, silverware, watchmakings, antiques,
gifts and other precious objects using the name and trademark [-----]'. In addition, page 3 states: "WHEREAS, [LICENSOR] and
its affiliate companies are engaged in the sale of their products
in stores operated by them or by third parties on the basis of
agreements having as object the use of the name [-----]' as
tradesign and the sale of [LICENSOR]' products". On page 4 of
the agreement, paragraph 1(b) provides for the suppliers of the
merchandise and further states that "[LICENSOR] reserves the
right to designate other Suppliers or withdraw any of them
previously designated from time to time." The agreement between
the importer and licensor further requires that the importer
purchases a minimum amount of products (See, paragraph 5.2, pg.
7). In addition, paragraph 5.3 on page 8 of the agreement states
that "[o]rders shall be placed in Rome in accordance with a
purchase schedule prepared by [LICENSOR] and shall be subject to
acceptance and the availability of Products. Order confirmations
shall indicate delivery dates and prices and accepted orders
shall be filled directly by the Supplier indicated on the order
confirmation." Paragraphs 6.1 and 6.2, respectively, provide:
"All orders shall be subject to [LICENSOR'S] standard terms and
conditions of sale", and "Delivery of the Products and the
transfer of title and of the risk related thereto shall be at the
moment when the Products are delivered by the Supplier to the
carrier or shipping agent designated by [IMPORTER]. Expenses for
transport, insurance and customs duties payable on the Products
shall be borne by [IMPORTER]."
The answer to question No. 2 is clearly yes. With regard to
question 3, i.e., whether the importer could buy the product
without paying the license fee, it is our conclusion that the fee
is in fact a condition of sale of the imported merchandise.
Since the licensor has such control over the sale of the imported
product to the importer, it is our conclusion that the licensor
would not allow the product to be sold by its
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wholly-owned suppliers if the importer was not paying the license
fee. The payment of the license fee and the sale and importation
of the imported merchandise are tied together and are not
exclusive of one another. The license fee is a condition of
sale, and the license fee paid to the licensor must be added to
the price actually paid or payable in determining transaction
value.
We do not need to address the issue of whether the license
payments should be added to the price actually paid or payable
pursuant to section 402(b)(1)(E) of the TAA, as proceeds of a
subsequent resale. They are clearly added to the price actually
paid or payable pursuant to section 402(b)(1)(D) as license fees
related to the imported merchandise that the buyer is required to
pay as a condition of the sale of the merchandise.
HOLDING:
The license fees paid by the importer to the related party
licensor are to be added to the price actually paid or payable
for the imported merchandise when sold for exportation to the
United States by the related party suppliers.
Sincerely,
Acting Director,
International Trade Compliance
Division