RR:IT:VA 546038 KCC
Port Director
U.S. Customs Service, JFK Airport
Building #77, Room 228
Jamaica, New York 11430
RE: IA 13/95; transaction value; price actually paid or payable;
402(b)(1), (b)(1)(D); HRL 545663; Generra Sportswear Co.;
Chrysler Corporation; royalties; General Notice, Dutiability
of Royalty Payments; sufficient information; HRL 545504
Dear Port Director:
This is in regard to your memorandum of March 6, 1995, under
cover of which you forwarded a request for internal advice (IA
13/95), dated February 2, 1995, submitted by Ross and Hardies on
behalf of CIBA-GEIGY Corporation ("the Company"), concerning
whether certain payments constitute non-dutiable charges under
402 of the Tariff Act of 1930, as amended ("TAA"; 19 U.S.C.
1401a). The "Basic Agreement", the "Supply Agreement" and its
three modifications, and the Guiliani Agreement, as described
below, were submitted with the internal advice request. We
regret the delay in responding.
FACTS:
The Company entered into a "Basic Agreement" with Gipharmex
S.p.A. ("Gipharmex") dated June 12, 1986. Under the Basic
Agreement, the Company acquired know-how, U.S. trademark and
patent rights for the "Agreement Product", which is defined as "a
pharmaceutical preparation in oral dosage which contains as its
active ingredient ursodeoxycholic acid...." The Basic Agreement
defines know-how as all technology, formulae, technical/clinical
data and any such data or information possessed or controlled by
Gipharmex relating to (or useful in connection with) the
Agreement Product..., as well as any improvements or modification
to the know-how developed or obtained by or for Gipharmex,
including, but not limited to, such data or information which
would enable the Company to manufacture the Agreement Product.
The Company was obligated to obtain the approval of the U.S. Food
and Drug Administration ("FDA") to market the product in the U.S.
Article 4.1 of the Basic Agreement sets forth the Company's
payment to Gipharmex.
Once FDA approval was obtained, the Company was required to
pay Gipharmex an additional sum in four installments over a 42
month period (Article 4). Furthermore, Article 5 requires that
the Company pay a royalty to Gipharmex based on a percentage of
the net sales of the "Royalty Bearing Product," which is defined
as "a pharmaceutical preparation in oral dosage form which
contains ursodeoxycholic acid as an active ingredient." The
royalty payments do not accrue until the Royalty Bearing Product
is sold. Under Article 6.1, the royalty payments are made semi-annually and due within 60 days after the end of each calendar
half year. Additionally, Article 4.4 of the Basic Agreement
provides that all payments made under Article 4 are fully
creditable against royalties to be paid under Article 5. As of
February 1995, Counsel for the Company states that the Company
had not been required to make any royalty payments under Article
5.
Also on June 12, 1986, the Company and Gipharmex entered
into a "Supply Agreement" which provides that during a specified
time period the Company must purchase all of its U.S.
requirements for the "Agreement Product" from Gipharmex. The
"Agreement Product (also referred to as the Royalty Bearing
Product)" is defined as "a pharmaceutical preparation in oral
dosage form which contains as its active ingredient
ursodeoxycholic acid...." The definitions of Agreement Product
in both the Basic and Supply Agreements are the same. For its
part, Gipharmex agrees to sell the Agreement Product only to the
Company. Presently, the Supply Agreement fixes the price of the
imported merchandise and requires, in addition to annual
forecasts, quarterly purchase orders. Payment for the Agreement
Product is to be made within 60 days of the of receipt of the
merchandise or of the applicable invoice. The Supply Agreement
permits price increases in the event costs increase and permits
the Company to seek alternative sources of supply only if
Gipharmex fails to deliver the Agreement Product as required by
the Supply Agreement. There are three modifications to the
Supply Agreement dated May 25, 1988, April 16, 1991, and July 31,
1993.
On December 23, 1989 Gipharmex was incorporated into
Guiliani S.p.A. ("Guiliani"). Thereafter, on May 23, 1990, the
Company entered into an Agreement with Guiliani ("Guiliani
Agreement") in which Guiliani assumed all the rights and
obligations of Gipharmex with regards to the Basic Agreement
dated June 12, 1986, the Supply Agreement dated June 12, 1986,
and a Labelling Exemption Agreement dated September 21, 1989.
The Guiliani Agreement states that all reference to Gipharmex in
the referenced agreements will be replaced by Guiliani and that
all other terms and conditions of the agreements remain in full
force an effect.
The Agreement Product/Royalty Bearing Product at issue is
"Actigall", in tablet form, which is the trade name for a
medicament containing the active ingredient, ursodiol
(ursodeoxycholic acid), a drug used to dissolve gallstones. The
product imported by the Company is also Actigall. It is your
opinion that the circumstances at issue are analogous to those
found in Headquarters Ruling Letter (HRL) 544436 dated February
4, 1991 (commonly known as the "Hasbro" ruling; C.S.D. 91-6, 25
Cust. Bull. 270) and General Notice on the Dutiability of
"Royalty" Payments, 27 Cust. Bull. 12 (1993) (commonly referred
to as the "Hasbro II" decision). You state that the initial
payments made pursuant to Article 4 of the Basic Agreement are
dutiable as royalties because the Company must pay them as a
condition of sale of the imported product. Additionally, you
contend that the Article 4 payments can also be construed as
proceeds of sale because as the Royalty Bearing Products are
sold, the royalty payments due under Article 5 are credited to
the Company based on the initial payment made under Article 4.
Accordingly, the amounts paid under Article 4 of the Basic
Agreement constitute royalties and/or proceeds of sale as defined
by 402(b)(1)(D) and (E) of the TAA, and are additions to the
price paid or payable.
ISSUES:
1. Whether the initial payments and continuing royalties
(hereinafter referred to as "royalty payments") made or to
be made by the Company to Guiliani under the Basic Agreement
are part of the price actually paid or payable for the
imported merchandise.
2. Whether the royalties payments made by the Company to
Guiliani under the Basic Agreement are included in the
transaction value of the imported merchandise as either
royalties under 402(b)(1)(D) of the TAA or proceeds of a
subsequent resale under 402(b)(1)(E) of the TAA.
3. Whether there is sufficient information to determine the
amount of the royalties.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into
the U.S. is transaction value pursuant to 402(b) of the TAA,
codified at 19 U.S.C. 1401a. 402(b)(1) of the TAA provides, in
pertinent part, that 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. Sections 402(b)(1)(D) and (E) of the TAA provide for
additions to the price actually paid or payable for:
(D) 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; and
(E) the proceeds of any subsequent resale, disposal or
use of the imported merchandise that accrue,
directly or indirectly, to the seller.
1. Price Actually Paid or Payable
The "price actually paid or payable" is defined in
402(b)(4)(A) of the TAA as the "total payment (whether direct or
indirect, and exclusive of any costs, charges, or expenses
incurred for transportation, insurance, and related services
incident to the international shipment of the merchandise...)
made, or to be made for the imported merchandise by the buyer to,
or for the benefit of, the seller." For purposes of this
decision, we have assumed that transaction value is the
appropriate method of appraisement.
There is a rebuttable presumption that all payments made by
a buyer to a seller, or party related to a seller, are part of
the price actually paid or payable. See, HRL 545663 dated July
14, 1995. This position is based on the meaning of the term
"price actually paid or payable" as addressed in Generra
Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990).
In Generra, the court considered whether quota charges paid to
the seller on behalf of the buyer were part of the price actually
paid or payable for the imported goods. In reversing the
decision of the lower court, the appellate court held that the
term "total payment" is all-inclusive and that "as long as the
quota payment was made to the seller in exchange for merchandise
sold for export to the United States, the payment properly may be
included in transaction value, even if the payment represents
something other than the per se value of the goods." The court
also explained that it did not intend that Customs engage in
extensive fact-finding to determine whether separate charges, all
resulting in payments to the seller in connection with the
purchase of imported merchandise, were for the merchandise or
something else.
Additionally, we note that in Chrysler Corporation v. United
States, CIT Slip Op. 93-186 (September 22, 1993), the Court of
International Trade applied the Generra standard and determined
that although tooling expenses incurred for the production of the
merchandise were part of the price actually paid or payable for
the imported merchandise, certain shortfall and special
application fees which the buyer paid to the seller were not a
component of the price actually paid or payable. With regard to
the latter fees, the court found that the evidence established
that the fees were independent and unrelated costs assessed
because the buyer failed to purchase other products from the
seller and not a component of the price of the imported engines.
Therefore, this presumption may be rebutted by evidence which
clearly establishes that the payments, like those in Chrysler,
are completely unrelated to the imported merchandise.
Since the royalty payments in question are made to the
seller, Guiliani, there is a rebuttable presumption that the
payments are part of the price actually paid or payable for the
imported merchandise. Counsel maintains that these payments are
not part of the price actually paid or payable because they are
made irrespective of the imported product. Reference is made to
the fact that the royalty payments were made by the Company to
gain U.S. trademark rights, patent rights, and know-how, i.e.,
all the information necessary to gain FDA approval and
manufacturing capabilities. We conclude that the payments are
closely related to the imported merchandise. We base this
conclusion in part on the fact that on the same day the Company
signed the Basic Agreement to acquire the manufacturing
capabilities, it also signed the Supply Agreement which obligated
the Company to purchase all of its requirements for the Agreement
Product from Guiliani. Thus, the Basic Agreement and the Supply
Agreement are intrinsically intertwined such that the Company
paid for the capabilities to manufacture the product and at the
same time that it forfeited that right by entering into the
Supply Agreement. As further evidence of the Basic and Supply
Agreements nexus, we refer to the May 23, 1990 Agreement between
the Company and Guiliani in which Guiliani assumed all the rights
and obligations of Gipharmex. The Guiliani Agreement modifies
both the Basic and Supply Agreement between the Company and
Gipharmex. Additionally, the Agreement Product/Royalty Bearing
Product in the Basic Agreement and the Agreement Product in the
Supply Agreement are by definition the same product, a
pharmaceutical preparation in oral dosage which contains as its
active ingredient ursodeoxycholic acid. It is our understanding
that the imported Agreement Product is manufactured using the
know-how referred to in the Basic Agreement for which the
royalties are paid. (Under the Basic Agreement, know-how includes
all technology, formulae, trade secrets, etc. possessed by
Gipharmex relating to the Agreement Product, which in this case,
is the imported product). In addition, the royalty payments made
for the know-how and U.S. trademark and patent rights, necessary
for the Company to get FDA approval for the product, enabled the
Company to import the product pursuant to the Supply Agreement.
Therefore, we conclude that these payments are directly related
to the imported product and are part of the total payment made or
to be made by the buyer to the seller for the importation of the
Agreement Product/Royalty Bearing Product.
2. Royalty
Although Customs believes that the royalty payments
constitute part of the price actually paid or payable, such
payments could otherwise be considered dutiable as statutory
additions to the price actually paid or payable.
With regard to royalties, the Statement of Administrative
Action ("SAA"), adopted by Congress with the passage of the TAA,
provides that:
[a]dditions for royalties and license fees will be
limited to those 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. 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 case-by-case basis and will
ultimately depend on: (i) 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.
Statement of Administrative Action, H.R. Doc. No. 153, Pt II,
96th Cong., 1st Sess. (1979), reprinted in Department of the
Treasury, Customs Valuation under the Trade Agreements Act of
1979 (October 1981), at 48-49.
In General Notice, Dutiability of Royalty Payments, 27 Cust.
Bull. 12 (1993), Customs articulated three factors, based on
prior court decisions, for determining whether a royalty was
dutiable. These factors were whether: 1) the imported
merchandise was manufactured under patent; 2) the royalty was
involved in the production or sale of the imported merchandise
and; 3) the importer could buy the product without paying the
fee. Affirmative responses to factors one and two and a negative
response to factor three would indicate that the payments were a
condition of sale and, therefore, dutiable as royalty payments.
In this case, first, it is not disputed that the imported
merchandise is manufactured under patent, insofar as the Basic
Agreement included the right for the Company to acquire the U.S.
patent rights for the imported merchandise.
Second, we find that the royalty payments are involved in
both the production and sale for exportation of the imported
product. The Basic Agreement grants the Company the exclusive
right to market and manufacture and sell the royalty product in
the U.S. Pursuant to the Supply Agreement, the Company must
purchase all of its U.S. supply needs for the product from
Guiliani, regardless of the fact that the Company has purchased
the know-how to manufacture the product from Guiliani. As
indicated above, it is our understanding that the imported
product, whether manufactured by the Company or Guiliani, is
manufactured using the know-how referred to in the Basic
Agreement for which royalties are paid. In essence, the
royalties relate to the know-how involved in the patented process
to manufacture the imported Agreement Product. As such, the
royalty, which is paid upon the sale of the imported product is
involved in its production of the imported product.
Additionally, as discussed above, the payment of the royalties is
inextricably intertwined with the sale of the imported product.
Thus, we find that the royalty payments pertain to the sale for
exportation of the imported product.
With regards to the third question, i.e., could the importer
buy the product without paying the fee, Customs acknowledged that
the answer goes to the heart of whether a payment is considered
to be a condition of sale. It is our opinion that the Company
could not buy the product without paying the royalties. The fact
that the Company obligated itself to purchase all of its
requirements for the licensed product from the licensor,
Guiliani, at the same time it agreed to pay royalties to the
licensor, is strong evidence that the Company could not buy the
imported product without also agreeing to pay the royalties.
Only under the very limited circumstance that Guiliani can not
fulfill the Company's needs, may the Company manufacture or
produce the product elsewhere. Royalty payments are due on each
item that is purchased, imported and sold. Thus, the answer to
question three is that the importer could not purchase the
imported product without paying the fees.
Based on the above considerations, we find that the royalty
payments are also considered royalties pursuant to 402(b)(1)(D)
of the TAA. The payments are related to the imported merchandise
which the buyer is required to pay as a condition of sale. As we
have determined that the subject royalty payments are part of the
price actually paid or payable of the imported merchandise or
are, alternatively, added to the price actually paid or payable
as royalties pursuant to 402(b)(1)(D) of the TAA, it is
unnecessary for purposes of this decision to consider whether the
royalty payments may be added to the price actually paid or
payable as proceeds of a subsequent resale pursuant to
402(b)(1)(E) of the TAA.
3. Sufficient Information
The next issue to be addressed is whether there is
sufficient information to determine the amount of the royalties.
This issue arises because the continuing royalties are not due
until the Actigall tablets are sold in the U.S.
402(b) of the TAA provides that the price actually paid or
payable for imported merchandise shall be increased by the
amounts attributable to the enumerated items only to the extent
that such amount is based on sufficient information. If
sufficient information is not available, for any reason,...the
transaction value of the imported merchandise concerned shall be
treated, for purposes of this section, as one that cannot be
determined. The term "sufficient information" is defined as
"information that establishes the accuracy of such amount,
difference, or adjustment."
In Headquarters Ruling Letter (HRL) 545504 dated May 4,
1995, involving proceeds under 402(b)(1)(E), counsel argued that
there was a lack of sufficient information to establish
transaction value because the proceeds cannot be quantified in a
reasonable period of time. In that case, the buyer was required
to account for sales on a quarterly basis, with an accounting and
payment due 30 days after the end of the quarter. Customs
rejected counsel's argument noting the following:
The TAA is designed to accommodate situations in which a
purchase price is established, but not paid, at the time
merchandise is imported into the United States. For
purposes of the transaction value provision, a bona fide
sale may be found to exist even though actual payment has
not been made for goods at the time of importation, provided
that the purchase agreement includes fixed terms which make
the purchase price either determined or determinable at that
time.
Two situations in which a buyer and a seller have
potentially agreed to a price without full payment being
made prior to or at the time of importation involve
royalties and proceeds of subsequent resale, disposal or use
of the imported merchandise. In both of these instances,
Customs must determine whether payments - which inure to the
benefit of a foreign seller after importation has occurred -- should be added to the "price actually paid of payable"
for purposes of calculating the duty owed. Such amounts
should be added provided there is sufficient information
upon which to determine the amounts therefor.
...we do not find that such a payment arrangement indicates,
prima facie, that the proceeds cannot be quantified in a
reasonable period of time and, hence, that there is a lack
of sufficient information. It is our position that the term
"subsequent resale," by its very nature, implies that
proceeds may not be paid, or even quantifiable, for some
time after importation of the merchandise. Furthermore, we
do not believe the payment structure agreed to by the
parties is uncommon in such transaction. To hold otherwise
could render transaction value unacceptable in numerous
cases in which proceeds subsequently accrue to the seller.
Cf. HRL 542701, TAA No. 47, issued April 28, 1982, and HRL
542746, issued March 30, 1982.
In this case, even though the amount of the royalty addition
is not known at the time of importation, we believe that there is
sufficient information to determine the amount of the addition.
The Basic Agreement clearly specifies how the royalties are to be
calculated. As such, there is information that establishes the
accuracy of such amount. As long as the Company continues to
import the licensed product, additions should be made for the
royalties paid by the Company to Guiliani.
HOLDING:
The royalty payments made under the Basic Agreement from the
Company to Guiliani are dutiable as part of the price actually
paid or payable for the imported merchandise. Alternatively,
they are dutiable as royalties under 402(b)(1)(D) of the TAA.
This decision should be mailed by your office to the
internal advice requester no later than 60 days from the date of
this letter. On that date 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,
Acting Director
International Trade Compliance
Division