RR:IT:VA 548560 RFC
Mr. Todd Owen
Area Port Director
ATTN: Ralph Riemer, FNIS
Port of New Orleans
U.S. Bureau of Customs and Border Protection
423 Canal Street, Suite 245
New Orleans, LA 70130
RE: Royalty Payments; License Agreement; Related Parties
Dear Mr. Owen:
This letter is in reference to a June 9, 2004, letter, submitted by Mr. John B. Pellegrini on behalf of Syngenta Crop Protection, Inc. to U.S. Customs and Border Protection (CBP) requesting an advance ruling on whether certain payments are dutiable. Specifically, the request concerns whether certain payments made by Syngenta Crop Protection, Inc. to a related company, Syngenta Investment Corporation, are dutiable.
As indicate above, the request was originally sent to this office as a ruling on a prospective transaction. As the issue in the request arose out of a pre-assessment survey, it should have been sent to this office through the port as a request for internal advice. See 19 CFR §177.11. Indeed, a request arising out of the same pre-assessment survey was sent to this office through your port as a request for internal advice. See HQ 548306 (July 9, 2003). Accordingly, the instant request will also be treated as a request for internal advice.
In addition to the importer’s June 9, 2004, request and submission, a telephone conference was conducted between the importer’s representatives and this office on September 2, 2004.
FACTS:
The facts as presented are as follows: As indicated above, Syngenta Crop Protection, Inc. makes certain royalty payments to a related company, Syngenta Investment Corporation. The payments are made to Syngenta Investment Corporation by Syngenta Crop Protection, Inc. pursuant to a license agreement between the two companies. As indicated in the license agreement, Syngenta Investment Corporation owns the intellectual property rights upon which the royalty payments are made. The imported merchandise in connection with which the royalty payments are made is sold to Syngenta Crop Protection, Inc. by Syngenta Crop Protection AG pursuant to a supply agreement between these two parties. Syngenta Crop Protection AG is related to both Syngenta Crop Protection, Inc. and Syngenta Investment Corporation.
The imported merchandise includes crop protection and professional products and agro-chemical or other products, including compounds, compositions and formulations thereof, and raw materials, intermediates and components for the manufacture or formulation thereof.
The importer contends that there are three types or categories of merchandise that incorporate or use the intellectual property covered by the license agreement and for which royalty payments are made by Syngenta Crop Protection, Inc. to Syngenta Investment Corporation: (1) merchandise that is manufactured entirely in the United States with no foreign ingredients; (2) licensed merchandise that is imported by Syngenta Crop Protection, Inc. and purchased from Syngenta Crop Protection AG that is fully formulated and sold in the United States by Syngenta Crop Protection, Inc. in its condition as imported; and (3) merchandise that is formulated in the United States with an imported licensed active ingredient (that is imported by Syngenta Crop Protection, Inc. and purchased from Syngenta Crop Protection AG), and later sold in the United States by Syngenta Crop Protection, Inc. This ruling will only address the latter two categories of merchandise or products as the first category of merchandise or products involves no imported merchandise. It is these latter two categories of products that are the products covered by the license agreement between Syngenta Crop Protection, Inc. and Syngenta Investment Corporation. Therefore, they are the “licensed products” that are the subject of this ruling request.
As indicate above, the above-mentioned three entities (i.e., Syngenta Crop Protection, Inc., Syngenta Investment Corporation, and Syngenta Crop Protection AG) are related to each other. In subsequent communications with this office, the importer indicates that all three entities are under common control. The importer further indicates that the ultimate parent of all the entities is Syngenta AG (Switzerland). Syngenta AG owns Syngenta Participations AG (Switzerland). Syngenta Participations AG owns Syngenta Corp. (Delaware). Syngenta Crop owns Syngenta Investment Corporation (Delaware). It also owns Syngenta Seeds, Inc. (Delaware) which is the parent of Syngenta Crop Protection, Inc. In all cases, the parent owns 100 percent of the subsidiary.
In its submission, there is a list of licensed products upon which Syngenta Crop Protection, Inc. pays royalties to Syngenta Investment Corporation under their license agreement. Of the many products listed, only one appears to have been purchase from an “unaffiliated third party.”
The request describes the merchandise and license agreement as follows:
The following is the history behind the ownership of intellectual property rights by [Syngenta Investment Corporation (“SIC”)].
[Syngenta Crop Protection, Inc. (the “Company”)] is a successor to the crop protection business of Ciba-Geigy Corporation (“Ciba US”). Prior to 1997, there was a research and development cost sharing arrangement between Ciba US and Ciba-Geigy Ltd. in Switzerland (“Ciba Ltd.”). By virtue of this agreement, Ciba US owned all of the United States intellectual property derived from the cost sharing arrangement.
Effective with the Sandoz-Ciba merger forming Novartis on January 1, 1997, Novartis Crop Protection, Inc. (“NCP”) was created as a new company. Most assets and liabilities associated with the crop protection business were transferred to NCP. The United States intellectual property rights relating to crop protection products were transferred to Novartis Finance Corporation (“NFC”).
SIC and the Company were created in 2000 in connection with the spin-off of NCP by Novartis. The United States intellectual property rights held by NFC were contributed to SIC.
The merchandise that is the subject to the SIC license is generally those crop protection products developed prior to 1997 by Ciba US and Ciba Ltd. The merchandise imported by the Company is in various stages of production. Some of the merchandise is sold in its condition as imported. Other merchandise is further processed by the Company prior to sale. In all cases, the royalty is paid on the basis of the quantity of merchandise sold in the United States, not the quantity of merchandise purchased or the quantity of merchandise imported. The majority of the merchandise subject to the royalty is manufactured entirely in the United States or formulated in this country with an imported active ingredient.
Some of the imported merchandise is the subject of a patent, other is not. Although most of the imported merchandise is purchased from related sellers, some merchandise is purchased from third parties. Finally, some of the merchandise whose sale creates a royalty obligation to SIC is purchased from sources in the United States.
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The license agreement between SIC and the Company covers research and development rights, registrations, rights in data, patents, patent applications, and trademarks that are used in connection with products manufactured, distributed or otherwise sold by the Company. A copy of the agreement is attached as Exhibit B. The Company is authorized to use this intellectual property in the United States. The agreement calls for a royalty based on net sales, plus 50 percent of gross license fees, when the Company exercises its rights involving research and development, registrations, rights in data, and/or patents. When the Company uses a licensed trademark, the royalty is also based on net sales but is at a lower rate and includes 50 percent of fees earned from sublicensing the trademarks. If the Company uses a trademark in addition to exercising rights involving research and development and/or patents, the royalty is capped at the rate applicable to the exercise of the propriety rights.
The same royalty is paid on all products whether imported in a fully-formulated condition, formulated in this country with an imported active agreement (sic), or produced entirely in the United States with no imported content.
There is a supply agreement between the Company and Syngenta Crop Protection AG (“AG”), an affiliate of the Company. A copy of the agreement is attached as Exhibit C. This agreement acknowledges that all United States propriety rights, patent rights, trademarks, etc. are owned by the buyer or a subsidiary of the buyer. There is no mention of the license agreement. The license agreement does not refer to the supply agreement and there is no requirement in the license agreement that the products, or their ingredients, be purchased from a particular source.
The license agreement between Syngenta Investment Corporation (licensor) and Syngenta Crop Protection, Inc. (licensee) is dated January 1, 2002. It contains, in part, the following provisions:
Whereas, Licensor owns certain patents, trademarks, know-how and other intellectual property rights relating to crop protection and professional products;
Whereas, Licensee desires to license for use within the United States, its territories and possessions (the “Territory”) certain of Licensor’s presently owned or hereafter acquired intellectual property rights relating to research, development, manufacture and sale of crop protection and professional products, as hereinafter identified; and
Whereas, Licensor desires to license such intellectual property rights to Licensee for appropriate authorized use in accordance with the further terms of this Agreement.
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License of Proprietary Rights
Licensor hereby grants to Licensee during the term of this Agreement a royalty-bearing exclusive license to use any and all of the Proprietary Rights within the Territory, including the right to make, have made, import, export, use, offer to sell and sell any Products using or incorporating the Proprietary Rights within the Territory.
License of Proprietary Information
Licensor hereby grants to Licensee during the term of this Agreement a royalty-bearing exclusive license to use any and all of the Proprietary Information within the Territory, including the right to make, have made, import, export, use, offer to sell and sell any Products using or incorporating the Proprietary information within the Territory.
License of Trademarks
Trademark License
Licensor hereby grants to Licensee during the term of this Agreement a royalty-bearing exclusive license to use the Trademarks in connection with the advertising, promotion, sale and marketing of any of the Products sold and distributed by Licensee in the normal course of business within the Territory.
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6. ROYALTIES
(a) Royalty Rate
In consideration of the license granted under Sections 2, 3, and 4 of this Agreement, Licensee shall pay to Licensor a royalty equal to 5% of its Net Sales plus 50% of the gross license fees or royalties received as the result of sublicenses of any of the Proprietary Rights or Proprietary Information granted pursuant to Section 5 of this Agreement; provided, however, that the royalty rate for Developments (as defined in Section 7(a) below) shall be 4% of applicable Net Sales rather than 5%.
In consideration of the licenses granted under Section 4 of this Agreement, Licensee shall pay to Licensor a royalty equal to 2% of its Net Sales plus 50% of the gross license gees (sic) or royalties received as the result of the sublicense of any of the Trademarks. Where there is any overlap between the royalties payable under the license grant under Sections 2 or 3 and Section 4, the higher rate royalty will govern, and the lower rate royalty will not be payable.
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7. DEVELOPMENT OF FURTHER TECHNOLOGY
Ownership
(1) Because of the exclusive and valuable ownership by Licensor of the Proprietary Rights, Proprietary Information and Trademarks, Licensor shall possess all right, title and interest in and to any intellectual property of a nature derivative of or a continuation of the Proprietary Rights, Proprietary Information or Trademarks, developed, invented or produced by Licensee through its practice, use and utilization, whether in research and development or otherwise, of the Proprietary Rights, Proprietary Information or Trademarks….
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8. Protection of Trademarks, Proprietary Rights and Proprietary Information
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(B) Ownership of Intellectual Property
Licensee agrees that nothing herein shall give Licensee any legal or equitable right, title or interest in the Proprietary Information, Proprietary Rights or Trademarks other than as provided herein; that the Proprietary Information, Proprietary Rights and the Trademarks are the sole property of Licensor; and that any and all use by Licensee of the Trademarks shall inure to the benefit of Licensor….
The supply agreement submitted with the request is dated January 1, 1997. With respect to the parties to the agreement, it states in the request that the “agreement is between the Company [(Syngenta Crop Protection, Inc.)] and Syngenta Crop Protection AG.” In a footnote, with respect to this same agreement, it states that “[t]he parties to the agreement are Novartis Corp Protection AG and Novartis Produkte AG and Novartis Crop Protection, Inc. Syngenta AG and the Company are the same legal entities, albeit after name changes.” The supply agreement contains, in part, the following provisions:
Whereas, Basel [(Syngenta Crop Protection AG)] and Delaware [(Syngenta Crop Protection, Inc.)] are each engaged in the manufacture and sale of certain agro-chemicals and other products which are, in the main, the results of the respective and joint research efforts of the parties hereto and their predecessors; and
Whereas, the propriety rights, including patent rights, trademarks, etc. with respect to such products within the United States are owned by or licensed to Delaware or its subsidiaries.
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1. Definitions
The terms defined in its Section 1 shall for all purposes of this Agreement have the meanings in this Section 1 specified.
(a) The term “Agreement Products” means agro-chemical or other products, including compounds, compositions and formulations thereof, and raw materials, intermediates and components for the manufacture or formulation thereof which shall be supplied by Basel to Delaware and which shall have been (a) discovered under the Cost Sharing Research Agreement dated as of January 1, 1997 between Delaware and Basel or the predecessor agreement thereto, namely, the Research Agreement dated as of January 1, 1993 between Ciba-Geigy Limited and Ciba-Geigy Corporation, or (b) marked by Delaware prior to January 1. 1997.
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3. Determination of Prices
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(e) Unless it is otherwise impractical or precluded from doing so by reason of an agreement with a third party, all royalty payments due to third parties on account of the Agreements Products shall be paid by Buyer directly to such third party.
In addition to the above-mentioned license agreement and supply agreement, a sample purchase order (involving Syngenta, S.A. and Syngenta Crop Protection, Inc.) and a sample invoice (involving Syngenta, S.A. and Syngenta Crop Protection, Inc.) were submitted with the request.
ISSUES:
Whether the payments are part of the price actually paid or payable for the imported merchandise.
Whether the payments under consideration constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D).
Whether the payments under consideration constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(E).
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. §1401a. Section 402(b)(l) 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 amounts for the enumerated statutory additions. In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.
All three parties involved in the instant case are related. When parties are related, section 402(b)(2)(B) of the TAA (19 U.S.C. § 1401a(b)(2)(B)) provides that transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the buyer and seller did not influence the price actually paid or payable, or if the transaction value of the imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States or the deductive or computed value for identical or similar merchandise. Moreover, apart from the fact that the parties are related, we do not have enough information in the file to determine otherwise whether transaction value is the proper basis of appraisement. Therefore, this ruling does not address whether transaction value is the proper basis of appraisement in the instant case; for purposes of this ruling, we have assumed that transaction value is the proper basis of appraisement.
The term “price actually paid or payable” is defined as:
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, insurance, 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)(A).
The enumerated statutory additions include the following items:
(1) 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 amounts equal to--
(A) the packing costs incurred by the buyer with respect to
the imported merchandise;
(B) any selling commission incurred by the buyer with respect
to the imported merchandise;
(C) the value, apportioned as appropriate, of any assist;
(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.
19 U.S.C. § 1401a(b)(1).
The CBP regulations address additions to the price actually paid or payable:
(b) Additions to price actually paid or payable. (1) 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 amounts equal to:
(i) The packing costs incurred by the buyer with respect to
the imported merchandise;
(ii) Any selling commission incurred by the buyer with respect
to the imported merchandise;
(iii) The value, apportioned as appropriate, of any assist;
(iv) 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
(v) The proceeds of any subsequent resale, disposal, or use of
the imported merchandise that accrue, directly or
indirectly, to the seller.
19 CFR § 152.103(b)(1).
PRICE ACTUALLY PAID OR PAYABLE
With respect to the price actually paid or payable, the Statement of Administrative Action to the Trade Agreements Act of 1979, provides, in pertinent part, that:
The price actually paid or payable shall be considered without regard to its method of derivation. It may be the result of discounts or increases, or may be arrived at through some formula, or may be the result of negotiations. The word “payable” refers to a situation in which the price has been agreed, but actual payment has not been made at the time of importation.
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The price actually paid or payable is the total payment (exclusive of international freight, insurance, and other C.I.F. charges) made or to be made by the buyer to or for the benefit of the seller for the imported merchandise. (Statute) The payment may be made by way of letters of credit or negotiable instruments and may be made directly or indirectly….
Statement of Administrative Action, Trade Agreements Act of 1979, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 46-47.
As indicated above, the “price actually paid or payable” is the total payment, whether direct or indirect made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. See 19 U.S.C. § 1401a(b)(4)(A) and 19 CFR § 152.102(f). When a buyer makes payments to a party that is related to the seller of the imported merchandise, there is a rebuttable presumption that the payments are a part of the price actually paid or payable. See HQ 547148 (September 12, 2002). The presumption can be rebutted by evidence that clearly establishes that the payments are completely unrelated to the imported merchandise. Id. In view of the fact that the seller is related to the licensor, we find that this same principle applies in the instant case. Thus, the payments under consideration are part of the price actually paid or payable. This includes (1) the payments paid on licensed merchandise sold in the United States in its condition as imported and (2) the payments paid on products formulated in the United States with a licensed imported active ingredient. Furthermore, we find that in the instant case the importer/buyer has not presented evidence that clearly establishes that the payments are completely unrelated to the imported merchandise.
ROYALTIES
With respect to the dutiability of royalty payments, the Statement of Administrative Action to the Trade Agreements Act of 1979, provides, in pertinent part, that:
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 off 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: (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. 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 sale of the 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 the 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 the sale of the imported merchandise for exportation to the United States.
Statement of Administrative Action, Trade Agreements Act of 1979, Id. at 48-49.
In light of the above, 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 constitutes an addition to the price actually paid or payable. Moreover, any royalty paid by a buyer to a seller will be included in transaction value unless the buyer can establish that the payment is distinct from the price actually paid or payable and not a condition of the sale for exportation to the United States.
In a general notice published in the Customs Bulletin, the CBP has articulated three factors or questions that are relevant in determining whether royalty payments are related to the imported merchandise under consideration and are a condition of sale such that they are dutiable:
Was the imported merchandise manufactured under patent?
Was the royalty involved in the production or sale of the imported merchandise?
Could the importer buy the product without paying the fee?
The general notice indicates that affirmative answers or responses to the first and second questions, and a negative response to the third, point towards dutiability. The answer to question 3 goes to the heart of whether a payment is considered to be a condition of sale. See General Notice, “Dutiability of Royalty Payments,” Vol. 27, No. 6, Cust. B. & Dec. at 1, (February 10, 1993).
When analyzing the factors identified in the above-noted general notice, the CBP has taken into account certain considerations, which flow from the language set forth in the Statement of Administrative Action. These include, but are not limited to, the following:
(i) the type of intellectual property rights at issue (e.g., patents covering processes to manufacture the imported merchandise generally will be dutiable);
(ii) to whom the royalty was paid (e.g., payments to the seller or a party related to the seller are more likely to be dutiable than are payments to an unrelated third party);
(iii) whether the purchase of the imported merchandise and the payment of the royalties are inextricably intertwined (e.g., provisions in the same agreement for the purchase of the imported merchandise and the payment of the royalties; license agreements which refer to or provide for the sale of the imported merchandise, or require the buyer’s purchase of the merchandise from the seller/licensor; termination of either the purchase or license agreement upon termination of the other, or termination of the purchase agreement due to the failure to pay the royalties); and
(iv) payment of the royalties on each and every importation.
See, e.g., HQ 547148 (September 12, 2002).
In order to obtain a ruling with respect to the dutiability of royalty or license fees, copies of any royalty agreements relating to the payment of the royalty or license fees in question and any purchase or supply agreements relating to the sale of the imported merchandise for exportation to the United States must be submitted to the CBP with the request. If there are no such written agreements, this must be indicated in the ruling request. See General Notice, “Notice to Require Submission of Royalty and Purchase/Supply Agreements in Ruling Request Regarding Dutiability of Royalty or License Fees,” Vol. 29, No. 36, Cust. B. & Dec. at 10 (September 6, 1995). See also 19 CFR § 177.2(b). In the instant case, as discussed above, a license agreement and supply agreement were submitted with the request, together with a sample purchase order and invoice.
In the instant case, based on the information provided, the responses to each of the three above-listed questions are as follows:
Imported merchandise manufactured under patent?
With respect to the first question, some of the imported merchandise is manufactured under patent (i.e., under patents owned by Syngenta Investment Corporation that are licensed to Syngenta Crop Protection, Inc.). As indicated in the Statement of Administrative Action, “royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable.” As indicated above, under the terms of the above-mentioned license agreement, the licensor grants to the licensor with respect to patents and other propriety rights covered by the agreement “the right to make, have made, import, use, offer to sell and sell any Products using or incorporating the Proprietary Rights within the Territory.” Clearly, the licensee is exercising its “right to make or have made” the imported merchandise pursuant to or under the patents covered by the agreement. See HQ 548489 (August 4, 2004).
In the submission, the importer cites HQ 542818 (May 27, 1982) for the proposition that “royalty payments made to patent holder in the United States [are] not dutiable.” This 1982 ruling involved royalty payments made to a U.S. patent holder, who was an unrelated third party, and not to the seller of the merchandise. Moreover, the licensor, seller and importer were all unrelated to each other. This ruling, in relying on an even earlier ruling (HQ 542152 of December 4, 1980), held that the payments were not “a condition of the sale of the imported merchandise for exportation to the United States but rather (for the most part) for the right to obtain and use the U.S. patent, and for other related rights. To this extent, such royalty payments are not dutiable.” This ruling does not deal with the specific issue of whether the merchandise was manufactured under patent (as articulated in the above-mentioned general notice concerning the dutiability of royalty payments, See General Notice, “Dutiability of Royalty Payments,” at 9, supra). Moreover, the facts in the instant case are distinguishable from those in HQ 542818 insofar as the parties are all related in the instant case. Thus, this ruling cannot serve as a precedent for finding that the imported merchandise is not manufactured under patent in the instant case.
Royalty involved in the production or sale of the imported merchandise?
The second question expands on the analysis of the first question. With respect to this second question, in the instant case the agreements under consideration are ones between parties that are all related to each other that, on the one hand, grant the buyer the right to use specific intellectual property (as set forth in the license agreement) and, on the other hand, contract for the purchase of merchandise containing or using that exact same intellectual property (as set forth in the supply agreement). In fact, as indicated in the above-cited provisions, the license agreement recognizes that the licensee is obtaining the pertinent intellectual property rights for use in connection with the manufacture or sale of merchandise using that exact same intellectual property (see paragraphs 2, 3 and 4 of the license agreement); and the supply agreement recognizes that the merchandise that is being sold to the importer/licensee uses intellectual property licensed by the importer/licensee (see beginning or preamble of the supply agreement) and that royalties will be paid with respect to the rights to that intellectual property in connection with the sale of the imported merchandise for exportation to the United States (see paragraph 3(e) of the supply agreement). Consequently, the agreements, royalties and imported merchandise are interrelated as the parties are all related to each other. Additionally, as discussed above, the payments must be made each time the merchandise is imported and resold. For all intents and purposes, the royalties are required to be paid to a party related to the seller (and also related to the buyer/importer) on the licensed products purchased by the buyer/importer from the seller pursuant to the license agreement and the supply agreement. Moreover, there is clearly a relationship that exists between or among the parties with respect to the merchandise, as recognized in the preamble and definition section of the supply agreement cited above:
Whereas, Basel [(Syngenta Crop Protection AG)] and Delaware [(Syngenta Crop Protection, Inc.)] are each engaged in the manufacture and sale of certain agro-chemicals and other products which are, in the main, the results of the respective and joint research efforts of the parties hereto and their predecessors. (Emphasis added.)
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The term “Agreement Products” means agro-chemical or other products, including compounds, compositions and formulations thereof, and raw materials, intermediates and components for the manufacture or formulation thereof which shall be supplied by Basel to Delaware and which shall have been (a) discovered under the Cost Sharing Research Agreement dated as of January 1, 1997 between Delaware and Basel or the predecessor agreement thereto, namely, the Research Agreement dated as of January 1, 1993 between Ciba-Geigy Limited and Ciba-Geigy Corporation, or (b) marked by Delaware prior to January 1. 1997. (Emphasis added.)
In view of the circumstances discussed above, there is a link between the production and sale of the imported licensed merchandise and the payment of the royalty by the buyer (i.e., the same products that are being imported and sold by related parties are the licensed products). Thus, the royalty is involved in the production and sale of the imported merchandise for exportation to the United States, as concerns merchandise using the propriety information and the propriety rights (as they are necessary to produce the imported merchandise and include the patent rights) and merchandise bearing the licensed trademarks. See HQ 545035 (August 23, 1995) and HQ 545361 (July 20, 1995).
With respect to this second question, the importer argues that because the supply agreement does not mention the royalty payments, the sample seller’s invoice does not mention the royalty obligation, the license agreement does not mention the supply agreement and visa versa, and the purchase orders do not mention the royalty, the answer to second question is no. In light of the above analysis and conclusions, we believe that the importer’s arguments and conclusions with respect to the second question are without merit, and further believe they do not result in a negative response to the second question.
Could the importer buy the product without paying the fee?
The answer to question three goes to the heart of whether a payment is considered to be a condition of sale. See General Notice, “Dutiability of Royalty Payments,” at 11, supra. In the instant case, the royalty payments are not optional by the terms of the license agreement; they must be paid to the licensor each time the imported licensed merchandise is purchased and resold by Syngenta Crop Protection, Inc. (The fact that the royalty is due upon the resale of the product is not relevant to determining if the royalty is dutiable. See General Notice, “Dutiability of Royalty Payments,” at 10-11, supra). Even though the agreement does not require the goods to be purchased from the licensor’s related party, as a practical matter, this is what is being done. Additionally, as the parties are all related to each other, there is clearly a link between the payment of the royalties and the purchase of the merchandise imported by the buyer (Syngenta Crop Protection, Inc.). Therefore, the response to the third question is no—the importer could not purchase the merchandise without paying the fee.
Under 19 U.S.C. § 1401a(b)(1)(D), royalty payments are an addition to the price actually paid or payable if the buyer is required to pay them, directly or indirectly, as a condition of sale. See also 19 CFR § 152.103(b)(1)(vi). The CBP has held that when a royalty is paid by a licensee/buyer to a licensor who is related to the seller of the imported merchandise, the royalty payment is included in the transaction value if the buyer is required to pay them, directly or indirectly, as a condition of sale. See HQ 545361 (July 20, 1995). In the instant case, the royalty payments are paid indirectly as a condition of the sale of the imported licensed merchandise for exportation to the United States. Therefore, the royalty payments must be included in the transaction value.
In light of the above, the royalty fees or payments under consideration constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D). This includes (1) the royalties paid on licensed merchandise sold in the United States in its condition as imported and (2) the royalties paid on products formulated in the United States with a licensed imported active ingredient.
With respect the products formulated in the United States with a licensed imported active ingredient, the importer contends that the royalties paid in connection with this merchandise are not dutiable. It cites several CBP rulings and contends that they provide support for the proposition that the royalties paid to the Syngenta Investment Corporation on the sale in the United States of these products containing an imported licensed active ingredient are not dutiable. As indicated above, we disagree and have found that those royalties are dutiable. Moreover, in the instant case, the active ingredients themselves are licensed products that are covered by and referenced in schedule A to the agreement (on which royalties are paid). The license agreement requires that royalties be paid to the licensor when products sold by the licensee use or incorporate the intellectual property covered by the agreement (see paragraphs 1, 2, 3, 4 and 6 of the license agreement). This includes products that contain or use the licensed active ingredients.
The CBP has considered royalties paid on imported merchandise similar in nature to that in the instant case and found that the royalties were dutiable. In HQ 545710 (October 30, 1998), a buyer imported a patented pharmaceutical compound that was used as the active ingredient in a finished pharmaceutical product. By the terms of a license agreement, the buyer was granted from the patent holder of the products the right to make, have made, use and sell the finished pharmaceutical product from the patented pharmaceutical compound. As consideration for these rights, the buyer agree to pay the patent holder a royalty based on a specified percentage of the net sales of the licensed finished pharmaceutical product sold by the buyer or its sub-licensee or subsidiaries. Undertaking the same analysis as that described above for the merchandise in the instant case (See General Notice, “Dutiability of Royalty Payments,” supra), the royalties considered in HQ 545710 were found to relate to the imported pharmaceutical patented compound, and it was held that the buyer was required to pay them as a condition of the sale for exportation to the United States of the imported patented pharmaceutical compound. Consequently, the royalties were found to be additions to the price actually paid or payable as royalties under 19 U.S.C. § 1401a(b)(1)(D). As with the royalties in HQ 545710, the royalties paid in connection with the imported licensed active ingredient that is further formulated in the instant case in the United States also constitute additions to the price actually paid or payable as royalties under 19 U.S.C. § 1401a(b)(1)(D). See also HQ 544991 (September 13, 1995) and HQ 547148 (September 12, 2002).
In its submission, the importer makes reference to certain facts in support of its contention that the royalties are not dutiable because (1) they are distinct from the price actually paid or payable for the imported merchandise and (2) they are not a condition of the sale of the imported merchandise for exportation to the United States. They include the following. First, the importer makes reference in its submission to the fact that the royalty is paid on the basis of the quantity of merchandise sold in the United States rather than on the quantity of the merchandise purchased or the quantity of merchandise imported. This fact is not relevant to whether the royalty payments are dutiable. As discussed above, the CBP has previously held that the method of calculating the royalty (e.g., on the resale price of the goods) is not relevant to determining the dutiability of the royalty payment. See General Notice, “Dutiability of Royalty Payments,” at 10-11, supra.
Second, the importer makes reference in its submission to the fact that the royalty is also paid on products manufactured in the United States. This fact is not relevant as to whether the royalty payments are dutiable. The CBP has previously held that the fact that royalties are paid both on domestically produced good and imported goods does not lessen the fact that the payment of the royalties is closely related to the sale of the imported products. See, e.g., HQ 548055 (March 14, 2004) and HQ 548489 (August 4, 2004).
Third, the importer makes reference to the fact in its submission that no mention is made in the supply agreement or sample seller’s invoice of the royalty payments. Merely because the payments are not explicitly mentioned in the supply agreement or the sample seller’s invoice does not establish that the payments are distinct from the price actually paid or payable and are not a condition of sale. As discussed in detail above (with respect to the second question to the general notice on the dutiability of royalty payments), the agreements, royalties and imported licensed merchandise are interrelated as the parties are all related to each other; and the payments must be made each time the licensed merchandise is imported and resold by Syngenta Crop Protection, Inc. For all intents and purposes, the royalties are required to be paid to a party related to the seller (and also related to the buyer/importer) on the licensed products purchased by the buyer/importer from the seller pursuant to the license agreement and the supply agreement. Thus, there is clearly a link between the payment of the royalties and the purchase of the licensed merchandise imported by the buyer (i.e., the same products that are being imported and sold by related parties are the licensed products).
Despite the importer’s contentions to the contrary, the royalty fees or payments under consideration have been shown above to constitute additions to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D).
PROCEEDS
As indicated above, under 19 U.S.C. § 1401a(b)(1)(E), the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller will be an addition to the price paid or payable. The CBP has held in previous rulings that if the seller of imported merchandise is related to a licensor, payments made to the licensor in connection with the sale of the imported merchandise constitute proceeds of a subsequent resale, disposal or use within the meaning of 19 U.S.C. § 1401a(b)(1)(E), unless the buyer/importer can establish that no portion of the proceeds accrued directly or indirectly to the seller. See, e.g., HQ 545361 (July 20, 1995). In the instant case, the seller and licensor are related, and the buyer/importer has not established that none of the proceeds accrue directly or indirectly to the seller. Therefore, the proceeds are an addition to the price paid or payable under 19 U.S.C. § 1401a(b)(1)(E). See also 19 CFR § 152.103(b)(1)(v). This includes (1) the proceeds relating to the licensed merchandise sold in the United States in its condition as imported and (2) the proceeds relating to the products formulated in the United States with a licensed imported active ingredient.
In light of the above, the above-mentioned payments or proceeds are (1) part of the price actually paid or payable; (2) constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D); and (3) constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(E). This includes (1) the payments or proceeds paid on licensed merchandise sold in the United States in its condition as imported and (2) the payments or proceeds paid on products formulated in the United States with a licensed imported active ingredient.
HOLDING:
The above-mentioned payments or proceeds are (1) part of the price actually paid or payable; (2) constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D); and (3) constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(E). This includes (1) the payments or proceeds paid on licensed merchandise sold in the United States in its condition as imported and (2) the payments or proceeds paid on products formulated in the United States with a licensed imported active ingredient.
This internal advice should be mailed by your office to the requester no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP’s web site, and by means of the Freedom of Information Act as well as by other means of public distribution.
Sincerely,
Virginia Brown, Chief
Value Branch