VAL RR:IT:VA 545951 CRS
Patrick D. Gill, Esq.
Rode & Qualey
295 Madison Avenue
New York, NY 10017
RE: Royalties; Generra; Chrysler; price actually paid or payable;
value of the imported merchandise not included in the calculation of
the royalty payment
Dear Mr. Gill:
This is in reply to your letter, dated March 31, 1995, on
behalf of your client, [************ Inc.] (the "buyer"), concerning
the dutiability of certain royalty payments made to a related party.
This matter was also discussed with members of my staff at a meeting
on November 2, 1995. Pursuant to your request for confidentiality,
the names of your client and its related party will be deleted from
any published versions of this ruling. We regret the delay in
responding.
FACTS:
The buyer is a subsidiary of [***********] (the "licensor"),
from which it purchases and imports materials, components and
assemblies for use in the manufacture, in the United States, of
certain finished products, including motors, starters, inverters,
circuit breakers and converters. The imported components are
combined with domestic merchandise and other foreign merchandise to
produce the finished products. The imported merchandise is not
manufactured under patent.
In connection with these importations, the buyer and licensor
have concluded a "Basic Agreement on Manufacturing Assistance" (the
"basic agreement"), dated November 4, 1991. In addition to the
basic agreement, there are various individual agreements which are
referenced in and related to the basic agreement. The individual
agreements concern the products manufactured under license by the
buyer in the United States.
Section 2 of the basic agreement grants the buyer a non-exclusive right to manufacture, use and sell "contract products" in
the "contract territory." The "contract products" are the finished
products which are manufactured by the buyer in the United States
and which are the subject of the individual agreements. The
"contract territory" is the United States, its territories and
possessions and the Commonwealth of Puerto Rico.
Pursuant to section 3 of the basic agreement, the licensor will
provide the buyer with information necessary for the manufacture of
the contract products. The term "information" as used in the basic
agreement refers to "documents, data and other know-how" which the
licensor owns or to which it is otherwise entitled. Furthermore,
under section 4, the licensor supplies personnel to advise and
assist the buyer in the manufacture of the contract products.
Under section 6 of the basic agreement, the licensor, or other
subsidiaries of the licensor, will supply the buyer with "materials,
components, assemblies, etc." which the buyer requires for the
manufacture of the contract products. Alternatively, the licensor
will indicate sources of supply for items that are not manufactured
by the licensor or sellers related to the licensor. Payment terms
and other particulars in respect of the imported merchandise
purchased by the buyer from the licensor are set forth in a standard
agreement between the buyer and the licensor.
In consideration of the rights granted by the licensor, section
10 of the basic agreement provides that the buyer will pay the
licensor a royalty on the net sales of contract products sold by the
buyer. The percentage royalty due on each contract product is
specified in the relevant individual agreement. As used in the
basic agreement, the term "net sales" means the sum of all amounts
invoiced by the buyer to its customers for contract products
manufactured pursuant to the individual agreements less: (1) the
value of all items supplied by the licensor or other sellers related
to the licensor; and (2) amounts for insurance, freight, and taxes
on the contract products, to the extent these amounts are separately
invoiced. Thus, the value of the imported materials, components and
assemblies is not included in the calculation of the royalty
payments.
ISSUE:
The issue presented is whether the royalty payments made by the
buyer to the licensee are included in the transaction value of the
imported merchandise.
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
primary basis of appraisement is transaction value, defined as the
"price actually paid or payable for the merchandise when sold for
exportation to the United States," plus certain enumerated additions
thereto, including: any royalty or license fee related to the
imported merchandise 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; and 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)(D)-(E). Such additions will be made only if amounts in respect of
royalties, proceeds, etc. are not otherwise included in the price
actually paid or payable.
However, as you know, transaction value is an acceptable basis
of appraisement only if, inter alia, the buyer and seller are not
related, or if related, the relationship did not influence the price
actually paid or payable, or the transaction value of the
merchandise closely approximates certain "test values," e.g., the
deductive or computed value of identical or similar merchandise
determined pursuant to actual appraisements of imported merchandise.
19 U.S.C. 1401a(b)(2)(B). In the instant case, the buyer and the
licensor/seller are related but no information has been presented as
to whether the relationship influences the price actually paid or
payable; consequently, we are unable to determine whether
transaction value is an appropriate basis of appraisement.
Nevertheless, assuming that transaction value is the appropriate
basis of appraisement, the following constitutes our position in
regard to the dutiability of the royalty payments at issue.
In regard to the dutiability of royalties, the Statement of
Administrative Action (SAA), which forms part of the legislative
history of the TAA, provides in pertinent part:
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.... 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....
[A]n 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, 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
48-49.
As the language of the SAA makes clear, 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.
The term "price actually paid or payable" is defined as "the total
payment (whether direct or indirect...) made, or to be made, by the
buyer to, of for the benefit of, the seller." 19 U.S.C.
1401a(b)(4)(A). Thus the first inquiry is whether the payments at
issue are part of the price actually paid or payable for the
imported merchandise.
Based on Generra Sportswear Co. v. United States, 905 F.2d 377
(Fed. Cir. 1990), Customs presumes that all payments made by the
buyer to the seller are part of the price actually paid or payable
for imported merchandise. In Generra, the Court of Appeals 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
stated:
Congress did not intend for the Customs Service to 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, are
for the merchandise or for something else. As we said in
Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed.
Cir.1990), the "straightforward approach [of section
1401a(b)] is no doubt intended to enhance the efficiency
of Customs' appraisal procedure; it would be frustrated
were we to parse the statutory language in the manner, and
require Customs to engage in the formidable fact-finding
task, envisioned by [appellant].
Generra, 905 F.2d at 380 (brackets in original).
The presumption that all payments made by the buyer to the
seller are part of the price actually paid or payable may be
rebutted, however. In Chrysler Corporation v. United States, 17 CIT
1049 (1993), the Court of International Trade applied the standard
in Generra and determined that certain shortfall and Special
Application fees which the buyer paid to the seller were not a
component of the price actually paid or payable for the imported
merchandise. The court found that the evidence established that
these 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. Accordingly, the
royalty payments at issue will not be considered part of the price
actually paid or payable if the evidence clearly establishes that,
like those in Chrysler, they are totally unrelated to the imported
merchandise. The burden of establishing that the payments are
totally unrelated to the imported merchandise rests with the
importer. Generra, 905 F.2d at 380.
Based on the information submitted, we find that the royalty
payments at issue are not an element of the price actually paid or
payable. Pursuant to the basic and individual agreements, the
rights for which the royalties are paid relate solely to the
manufacture and sale in the U.S. of finished products made in part
from the imported merchandise. Moreover, the value of the imported
merchandise is not included in calculating the amount of the royalty
payments at issue. See, e.g., Headquarters Ruling Letter (HRL)
546478 dated February 11, 1998; But see, e.g., HRL 545194 dated
September 13, 1995 (license fees held to be part of the price
actually paid or payable where payments were made to the sellers or
parties related to the sellers, the sellers' invoices specifically
indicated that the importer was to pay the fees, and the only
agreements provided merely indicated that the fees were to be paid
to one of the sellers).
Despite having concluded that the payments at issue are not
part of the price actually paid or payable, it still remains to be
determined whether they should be added to the price actually paid
or payable under the provision for royalties or proceeds. After
reviewing the legislative history of the TAA, Customs has identified
three questions that are relevant in determining whether royalty
payments are dutiable under section 402(b)(1)(D) of the TAA.
General Notice, "Dutiability of Royalty Payments," 27:6 Cust. B. &
Dec 1 (February 10, 1993) (the "General Notice"). The questions
are: (1) was the imported merchandise manufactured under patent?
(2) was the royalty involved in the production or sale of the
imported merchandise? and (3) could the importer buy the product
without paying the fee? Id. at 9-11. Negative responses to the
first and second questions, and an affirmative response to the
third, suggest non-dutiability. The notice states that royalties
may be dutiable either as part of the price actually paid or
payable, or as additions thereto under section 402(b)(1)(D)-(E) of
the TAA. Id. at 11. For purposes of this ruling we have assumed
that the royalty payments at issue are distinct from the price
actually paid or payable for the imported merchandise. In view of
this, this ruling only addresses whether the payments made by the
buyer are dutiable under section 402(b)(1)(D)-(E) of the TAA.
In analyzing these factors, Customs in most recent rulings has
taken into account certain considerations which flow from the
language set forth in the SAA. These include, but are not limited
to:
(i) the type of intellectual property rights at issue
(e.g., patents covering processes to manufacture the
imported merchandise will generally 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 HRL 546478, dated February 11, 1998; see also, HRL 546433 dated
January 9, 1998, and HRL 544991 dated September 13, 1995 (and cases
cited therein).
In regard to the payments at issue, both the first and second
questions posed by the General Notice elicit negative responses.
Based on the information presented, the imported merchandise is not
manufactured under patent. As to the second question, based on our
review of the information submitted there is no linkage between the
sale for exportation of the imported merchandise and the payment of
the royalties by the buyer, notwithstanding the fact that the
payments are made to the licensor/seller. In the first instance, as
set forth in the agreements, the royalty is paid for the right to
manufacture, use and sell the contract products in the U.S. That
right is separate from the purchase price of the imported
merchandise.
Moreover, section 10 of the basic agreement excludes the value
of the imported merchandise from the royalty calculation. In
particular, section 10.2 of the basic agreement provides:
The term "net sales" as used in this Basic Agreement means
the sum of all amounts invoiced to customers for Contract
Products manufactured pursuant to the respective
Individual Agreements less:
- the value of supplies from the respective [*******]
group [(**************)], being the responsible
partner for the respective Contract Products, as
contained in such Contract Products....
The fact that the value of the imported merchandise is excluded from
the royalty calculation also establishes that the royalty is not
related to the sale for exportation to the U.S. of the imported
merchandise. HRL 546478 at 9. See also HRL 542900, dated December
9, 1982 (TAA No. 56) (royalty payment not dutiable where the amount
of the payment was based solely on the value-added in the United
States, the value of the imported components having been
specifically excluded from the computation of the royalty amount).
Accordingly, we find that the royalty payments at issue are not
involved in the production or sale of the imported merchandise.
The third question posed by the General Notice, i.e., whether
the importer could buy the merchandise without paying the fee, is
central to the question of whether a royalty payment is a condition
of sale. Payments that must be made for each imported item are a
condition of sale. However, the method of calculating the royalty,
e.g., on the resale price of the goods, is not relevant to
determining the dutiability of a royalty payment. 27:6 Cust. B. &
Dec 12. In HRL 544991, for example, royalty payments were paid in
consideration of licensed technology and technical assistance
provided by the seller/licensor to the importer/buyer. An agreement
between the licensor/seller and the importer/buyer effectively
linked the payment of the royalties to the purchase of the imported
parts by providing that the licensor/seller would supply the
licensee/buyer with parts in accordance with such terms and
conditions as were separately agreed. Consequently, it was
determined that the importer could not buy the imported merchandise
without paying the fee and that the royalties were a condition of
sale.
In the instant case, section 6 of the basic agreement suggests
a link between the royalties and the imported merchandise. In
particular, section 6 of the basic agreement provides:
[*********] is prepared under reasonable terms and
conditions and within the given possibilities to supply
or have supplied by Subsidiaries materials, components,
assemblies, etc., manufactured by [********] or by
Subsidiaries and which LICENSEE requires of the
manufacture of Contract Products, or to indicate to
LICENSEE sources of supply for items not manufactured by
it or by Subsidiaries.
In this respect, the language of section 6 essentially mirrors that
contained in the royalty agreement at issue in e.g., HRL 544991.
Moreover, the royalty is paid by the buyer to the licensor, the
seller of the imported merchandise. As noted above, the TAA states
that an addition to the price actually paid or payable will be made
for any royalty paid by the buyer to the seller, unless the buyer
can establish that the payment is distinct from the price actually
paid or payable and was not a condition of the sale of the imported
merchandise for exportation to the U.S.
However, in HRL 546433 the pertinent agreements were replete
with requirements relating to the purchase of the imported
merchandise; in HRL 544991, the purchase contracts and the royalty
agreements were inextricably intertwined such that the purchase of
the imported merchandise was closely tied to the payment of the
royalties. In contrast with HRL 546433 and HRL 544991, in section
six of the basic agreement there is only a brief reference to the
purchase of merchandise. Furthermore, the standard agreement
governing transactions between the buyer and the licensor/seller in
the instant case does not link the payment of the royalties to the
purchase of the materials, components and assemblies imported by the
buyer. Thus, unless there are other agreements between the buyer
and licensor which link the payment of the royalties to the purchase
of the imported goods, we find that the payment of the royalties is
not a condition of the sale for exportation to the U.S. of the
imported merchandise.
As noted previously, royalty payments may also be dutiable
under section 402(b)(1)(E) of the TAA which provides that the
proceeds of any subsequent resale, disposal or use of the imported
merchandise that accrue, directly or indirectly, to the seller, are
to be added to the price actually paid or payable. However, Customs
has held that payments based on the resale of a finished product
made in part from the imported merchandise are not dutiable as
proceeds under section 402(b)(1)(E). E.g., HRL 544656 dated June
19, 1991, HRL 545770 dated June 21, 1995. The royalty payments at
issue are not based on the sale of the imported merchandise.
Instead, the payments are based on the sale of "contract products",
finished products which may or may not contain the imported
merchandise. Accordingly, the payments at issue are not dutiable
under the proceeds provision.
Assuming that transaction value is the appropriate basis of
appraisement, it is our position that the royalty payments at issue
should not be included in transaction value as additions to the
price actually paid or payable under sections 402(b)(1)(D)-(E) of
the TAA.
HOLDING:
In conformity with the foregoing, if transaction value is
determined to be the appropriate basis of appraisement, royalties
paid in respect of the contract products covered by Individual
Agreements A1, A2, A3, A4, E1 and E2, are not part of the price
actually paid or payable for the imported merchandise, nor do they
constitute additions thereto under section 402(b)(1)(D)-(E) of the
TAA.
Sincerely,
Acting Director
International Trade Compliance Division