OT:RR:CTF:VS H089759 YAG
Port Director
U.S. Customs and Border Protection
Port of Los Angeles/Long Beach Seaport
301 E. Ocean Blvd.
Suite 1400
Long Beach, CA 90802
Re: Request for Internal Advice; Dutiability of Royalty Payments; Software
Dear Port Director:
This is in response to your memorandum, dated December 16, 2009, forwarding the internal advice request, submitted by the law firm of Fitch, King, LLC, on behalf of their client, [xxx], the Importer/Buyer, concerning the dutiability of royalty fees paid to the unrelated third party licensors. The royalty fees are paid on certain merchandise, to parties unrelated to the manufacturers, importer, or licensees, for the use of the software in the United States upon the resale of the imported merchandise in the United States.
The Importer has asked that certain information submitted in connection with this internal advice be treated as confidential. Inasmuch as the Importer’s request conforms to the requirements of 19 CFR §177.2(b)(7), the Importer’s request for confidentiality is approved. The information contained within brackets and all attachments to the internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
[xxx], the Importer/Buyer (hereinafter the “Importer”), purchases two (2) [xxx] in-dash GPS Navigation System Models from the [xxx], the seller (hereinafter the “Seller”): (1) the [xxx] (hereinafter the “Z model”); and (2) the [xxx] (hereinafter the “X model”). The Z model is manufactured in country A [xxx] by [xxx], and the X model is manufactured in country B [xxx] by [xxx]. The manufacturers are related to the Seller, and the Importer. The terms of sale of both models is FOB Country A [xxx] and Country B [xxx], respectively. These products are free of duty, and subject only to the Harbor Maintenance and the Merchandise Processing fees. After entry and release, the Importer stores the merchandise at designated warehouses until it has a purchase order from a U.S. customer. The Importer maintains significant inventories of these units and ships them upon sale either to retailers or distributors. Royalty fees are recognized on these articles and included in their valuation on the importer’s books, only at this point of sale after the importation.
The Importer states that in the course of manufacture, the following software is loaded on the GPS Navigation Systems: (1) digital map data; (2) navigation applications; and, (3) voice command/recognition. This software is installed only after the manufacture of the hardware. The navigation applications for the Z model are developed in-house by the Seller and are provided to the manufacturer by the Seller. According to the Importer, the cost of the software for the Z model is included in the price from the Seller to the Importer. With respect to the Z model, the Seller also has a License Agreement, dated [xxx] (effective in [xxx] with [xxx] (hereinafter “Map Company”) to provide digital map data and a License Agreement, [xxx] with [xxx] (hereinafter “Sound Company”) to provide the voice command/recognition software.
The navigation applications for the X model are provided to the manufacturer under the License Agreement (unsigned and undated copy provided) between the Seller and [xxx], (hereinafter European Company), located in [xxx]. The digital map data software and voice command/recognition software for the X model are also provided under the License Agreements with the Map Company and the Sound Company respectively. Neither the European Company, Map Company, nor the Sound
Company (licensors) are related to the manufacturers, Seller, or Importer. All of the license agreements were presented by the Importer for our review and consideration. All of the license agreements specify that the payments of license fees are payable by the Seller’s subsidiaries located in various regions/countries for the license granted to such subsidiaries to distribute the products in such regions/countries. Therefore, even though the agreements are between the Seller and various licensors, the Importer is responsible directly for the license fees.
The Importer claims that these agreements do not cover processes to manufacture the imported articles, but the software to operate them only in North America. Your office believes that the royalty payments represent an indirect condition of sale for the GPS Navigation Systems to be exported to the United States and should be included in the price paid or payable for these goods. In support of this assertion, your office states that no evidence is provided that the exporter has ever manufactured or sold GPS Navigation Systems without the software subject to the license included, and that these systems are designed, manufactured, and sold to be functional only with the use of the software involved.
The undated License Agreement between the Seller and the European Company with respect to the X GPS model concerning navigation software provides for the license fee, consisting of (1) software license fee and (2) database license fee. According to paragraph 32 of the License Agreement, the software license fee is a per-copy running royalty for software bundled and distributed with the licensee products, at the rate of $[xxx] per copy. The database license fee is a per-copy running royalty for the database bundled and distributed with the licensed products and the rate depends on the country or region. However, the Seller has a separate license agreement for the database, and license fees under that agreement are paid directly to the Map Company, a third party licensor. The software license fees are paid on the net sales of the bundled products to which the licensed product is bundled. Licensed product is defined as software, database, compilation, customization, and license, supplied by the European Company to bundle with licensee product. Bundled products are defined as any licensed products bundled with all or parts of the licensee products. The License Agreement gives the Seller the right to use the licensed product on a non-exclusive basis as part of the entire range of bundled products manufactured or distributed by the Seller. Nevertheless, paragraph 9 of the License Agreement specifies that nothing in the License Agreement will prevent the Seller to adopt or use any software or database provided by third parties for the licensed products. The license granted under the License Agreement is also non-transferable and limited and conditioned on the provisions of the License Agreement. Under the License Agreement, the Seller and its subsidiaries have a license to (a) upload and/or install the licensed products on suitable storage media to be solely bundled with the licensed products; (b) market, sale, or distribute sub-licenses to end-users for the use of the licensed products as part of the bundled products; (c) make changes (by itself or its authorized parties) on the operational flow, menu/guidance text of the software to improve its usability or make it suitable to market demands (concerning changes on the software made by the Seller, the European Company agrees to support such changed software to refine, if possible, the performance and the usability of the licensed product); (d) use the licensed products for the purpose of advertising and demonstrating the bundled products to potential distribution channels and/or end users; and (e) supply OEMS or end users with appropriate documentation and support.
With respect to both GPS models, the Seller’s License Agreement with the Map Company concerning digital map data, grants the Seller a non-exclusive, non-transferable, world wide license to (i) use each licensed product for the limited purpose of development by licensee of the product; (ii) to reproduce the product; and, (iii) to distribute the product to end users on tangible or intangible media either directly or indirectly through its affiliates, resellers and/or OEM. Paragraph 9 of the Seller’s License Agreement with the Map Company states that the Map Company agrees that the Licensee’s affiliates who sold the navigation product in which the product is implemented will pay the licensing fees herein to the Map Company instead of the Licensee. The license fee is a per unit fee for each DVD or set of DVDs or hard disk of the in-car navigation aftermarket product in which the product is implemented for North America sold by the affiliates. Additionally, pursuant to paragraph 9.1 of the License Agreement, the licensee shall make payment of all royalties and/or license fees due the Map Company on or before the expiration of sixty (60) days of the date on the invoice received from the Map Company. Licensee is prohibited from withholding or delaying payment to the Map Company pending receipt of payment from an end user.
The undated and unsigned Software License and Integration Services Agreement between the Seller and the Sound Company grants to the Seller and its affiliates a non-exclusive, non-transferable license, under the Sound Company’s intellectual property rights, including issued patent(s), to (1) reproduce, use, and embed or incorporate all or any portion of the license intellectual property and software in object code form only, solely in VBT-enabled Seller’s products; (2) promote, offer to sell, sell, export and import all or any portion of the licensed intellectual property and software solely as part of or for use with VBT-enabled Seller’s products; (3) reproduce, use, and embed, or incorporate all or any portion of the TTS software under the Sound Company sublicensing rights granted by ASR/TTS software provider, in object code form only, into Seller’s products; and, (4) promote, offer to sell, sell, export and import any or all portion of the TTS software as part of or for use with the Seller’s products under the the Sound Company’s sublicensing rights granted by ASR/TTS software provider. Under Paragraph 5.3 of the Agreement, the Seller or its affiliates are obligated to pay the Sound Company a per unit royalty fees for each VBT-enabled Seller product unit distributed by, through or under the Seller.
According to the counsel for the Importer, the Sound and Map Companies have recently been granted patents on some of the software, subject to the license fees at issue. Additionally, there are also U.S. copyrights covering some of the Map, Sound and European Companies’ software. However, none of the license agreements reference the sales transactions, or tie liability to pay license fees to manufacture, sale for exportation to the United States, or importation of the product.
Finally, there are no sales/supply agreements, purchase agreements, purchase orders or any other written contracts between the Seller, and the Importer. Pursuant to the counsel for the Importer, transactions for sales of the GPS Navigation systems are based on oral agreements. ISSUE:
Whether the royalty fees 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) or (E).
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”), codified at 19 U.S.C. §1401a. The preferred basis of appraisement under the TAA is transaction value, defined in section 1401a(b)(1), as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for enumerated statutory additions to the extent not otherwise included in the price actually paid or payable.
As both the Statement of the Administrative Action to the TAA (“SAA”), H.R. Doc. No. 153, 96 Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981) and the General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993), make clear, royalty payments are dutiable as part of the price actually paid or payable, or as an addition thereto. The TAA defines the term “price actually paid or payable” as meaning “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.” 19 U.S.C. §1401a(b)(4)(A). Citing to Generra Sportswear Company v. United States, 905 F.2d 377, 380 (Ct. Int’l Trade 1990), this office held that all payments made by the buyer to the seller are part of the price actually paid or payable. In Generra, the court determined that so long as a payment is made “to the seller in exchange for merchandise sold for export to the United States,” it is included in the price actually paid or payable. However, the payment will be excluded if the importer demonstrates that the payment was completely unrelated to the imported merchandise. See Chrysler Corporation v. United States, 17 CIT 1049 (September 22, 1993).
In the particular circumstances of this case, the information submitted establishes that the license fees are not made for the imported GPS Navigation System models, but rather relate to the installation by the Seller, of customer-specific software. Additionally, the license agreements between the Seller and the unrelated third party licensors, (the European, Map, and Sound Companies), specify that the payments of license fees are payable by the Seller’s subsidiaries located in various regions/countries for the license granted to such subsidiaries to distribute the products in such regions/countries. Thus, even though the agreements are between the Seller and various licensors, the Importer is responsible directly for the license fees. Therefore, the royalty and license fees in this case are not part of the price actually paid or payable for the imported merchandise because these payments are not made to, or for the benefit of, the seller and the Importer established that the payments are independent and unrelated to the imported merchandise.
The next question is whether the royalty payments are dutiable as an addition to the price actually paid or payable. The addition includes “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 “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). For purposes of this ruling, we assume that transaction value is the proper method of appraisement for the imported merchandise.
With respect to the dutiability of royalty payments and license fees, the Statement of Administrative Action to the TAA 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 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 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 imported
merchandise, and such payment was not a condition of the 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, H.R. Doc. No. 153, 96 Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 48-49.
In the General Notice, Dutiability of Royalty Payments, CBP articulated three factors or questions that assist in determining whether the royalty payments in question are related to the imported merchandise and are a condition of sale such that they are dutiable. As set forth in the 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?
3. 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.
When analyzing the factors identified in the above-cited general notice, CBP has taken into account certain considerations, which flow from the language set forth in the SAA. 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., Headquarters Ruling Letter (“HRL”) 547148, dated September 12, 2002.
In the instant case, as discussed above, the Importer submitted three license agreements for our review and consideration. However, the Importer also advised us that there are no sales/supply agreements, purchase agreements, purchase orders or any other written contracts between the Seller and the Importer. Pursuant to counsel for the Importer, transactions for sales of the GPS Navigation systems are based on oral agreements.
Therefore, based on the information provided, the responses to each of the three above-listed questions are as follows:
1. Was the imported merchandise manufactured under patent?
The SAA provides that royalties paid for patents covering processes to manufacture the imported merchandise will generally be dutiable, and royalty fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise will not be dutiable. Statement of Administrative Action, H.R. Doc. No. 153, reprinted in Customs Valuation under the Trade Agreements Act of 1979 (1981), supra, at 48. In this case, the Importer, Sound Company, and Map Company have recently been granted patents on some of the software, subject to the royalty fees at issue. Additionally, there are also U.S. copyrights covering some of the Map, European, and Sound Companies’ software. However, none of the patents cover the processes used in manufacture of the imported merchandise. Instead, the patents cover the navigation applications, map data, and voice software. The actual manufacturing process for the imported merchandise, the Z model, does not involve any patents, other than the patents, held by the Seller. However, the cost of the software for the Z model is already included in the price from the Seller to the Importer.
Additionally, the Importer does not make any royalty payments to the suppliers of the GPS devices (imported merchandise). The payments are made to unrelated third-party licensors for the software to be incorporated into the GPS devices (imported merchandise). Therefore, the license fees are also paid to unrelated third parties for the use of the copyrights. Accordingly, based upon the information submitted, the answer to the first question is “no.”
2. Was the royalty involved in the production or sale of the imported merchandise?
The second question expands the analysis of the first question. See General Notice, “Dutiability of Royalty Payments,” supra, at 10. The Importer is paying a license fee to unrelated third parties in connection with the use of software to operate the imported GPS devices exclusively in North America. License fees are not paid to the seller of the imported merchandise (GPS devices) or to a party related to the seller. There is nothing in the license agreements that obligates or requires the Importer to purchase merchandise from a particular manufacturer or seller.
Further, there is no evidence that the licensed fee is linked to individual sales agreements or purchase orders. See HRL W563382, dated May 25, 2006 (we held that the royalty payments were not involved in the production or sale of the imported merchandise, because Kmart/Licensee was paying the royalty to an unrelated third party and there was nothing in the agreement or the record to show Kmart’s obligation to purchase merchandise from particular manufacturers or sellers).
The various license agreements grant the Importer a non-exclusive, non-transferable right to use, market, and reproduce the software, installed into the hardware prior to importation. The license fees are paid on a per unit basis, as is the case with the Sound Company and the digital map data software, or on the net sales of the bundled products, as is the case with the navigation software. Therefore, neither manufacture nor the importation of the merchandise triggers the obligation to pay the royalty fee. Additionally, the relevant license agreements permit the Importer to adopt or use any software or database provided by third parties. Thus, considering the license agreements, we find there is no connection between the license fees paid by the Importer for the navigation, map, and voice recognition software. The licensee fees in question are clearly not paid upon each and every importation. In fact, the license fees are not related to the manufacture of the GPS devices at all. It appears that the license fees paid by the Importer for the right to use the software do not relate to the importation of GPS devices. In other words, the license agreements do not establish a nexus between the license fees and the production/manufacture of the GPS devices.
The license agreement is a contract between the licensor and the licensee – not between the licensee and the seller – that sets forth the rights and obligations governing the licensee’s use of the licensor’s intellectual property. The royalty is the fee that the licensee pays for these rights. In this case, the royalty is paid to the third party, unrelated to the seller for rights arising under a separate contractual arrangement, and there is no indication that it is tied in any manner to the sale for exportation or to the production of the imported merchandise.
3. Could the importer buy the product without paying the fee?
The answer to this third question goes to the heart of whether a payment is considered a condition of sale. See General Notice, “Dutiability of Royalty Payments,” supra, at 11. Royalty payments and license fees are a condition of sale when they are paid on each and every importation and are inextricably intertwined with the imported merchandise. If the payments are optional and not inextricably intertwined with the imported merchandise, or are paid solely for the exclusive right to manufacture and sell in a designated area, they do not constitute additions to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(D). See HRL 546675, dated June 23, 1999.
Hence, we must analyze whether the royalty payments are actually a condition of sale of the merchandise for exportation to the United States. Your office believes that these royalty payments are an indirect condition of sale for the GPS Navigation Systems to be exported to the United States. Your office states that no evidence is provided that these GPS devices were ever manufactured or sold without the software included in the final product. In other words, these systems are designed, manufactured, and sold to be functional only with the use of the software involved. We disagree.
Pursuant to the terms of the License Agreements between the Seller and the European, Map, and Sound Companies, the Importer is not required to purchase the software only from these companies. In fact, the Importer purchased and used computer programs from another European [xxx] corporation, and map data from a U.S. company in the past. Thus, the manufacture and sale of the GPS platforms is not related to the royalty payments made by the Importer to the third party unrelated licensors. It is the sale in the United States that triggers the obligation to pay the license fees. Even though paragraph 9.1 of the Map Company License Agreement prohibits the licensee from withholding or delaying payment, pending the receipt of payment from an end user, it is clear from the license agreements that the royalty payments are due upon the sale of the imported merchandise in the United States, and if the imported goods are never sold in the United States, the license fees are never paid, thus, making the payments of license fees optional. Further, license fees are paid for the use of software exclusively in North America.
Additionally, in this case, no portion of the fee is paid to the seller of the GPS devices or to a related party; there are no supply/manufacturing agreements or purchase contracts between the buyer and the seller, which link the royalty payments with the manufacture or purchase of the GPS devices; the license fees are not made upon each and every importation, but paid on the per unit basis of the merchandise being sold in the United States and since the software does not relate to the
manufacturing of GPS devices, the Importer could manufacture and purchase the GPS devices without paying the license fee. Therefore, the license fees or payments made by the Importer pursuant to the above-referenced license agreements are not related to the manufacture, importation, or sale of the imported GPS devices, and are not a condition of sale of the imported merchandise for export to the United States and do not constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. §1401a(b)(1)(D).
Finally, 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. Under this section, the “seller” of the merchandise is the Importer’s supplier. The license fees are paid by the Importer to the unrelated third party licensors. Since the licensors are also unrelated to the Importer’s manufacturers, the license fees do not constitute “proceeds to the seller” since these payments in no way accrue to the benefit of the Importer’s suppliers or manufacturers. Accordingly, the royalty payments are not dutiable as proceeds and are not an addition to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(E).
HOLDING:
Based upon the information provided, we find that the licensee fees paid by the Importer, [xxx], to the third-party unrelated Licensors pursuant to the above-referenced License Agreements are not a condition of sale of the imported merchandise for export to the United States and do not constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. §1401a(b)(1)(D)-(E).
Please mail this decision to the internal advice applicant no later than sixty (60) days from the date of this letter. Sixty days from the date of this letter, the Office of International Trade: Regulations and Rulings will take steps to make the public version of this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch