OT:RR:CTF:VS H239671 YAG
Mr. [***]
RE: Dutiability of license fees; license key; software programming
Dear Mr. [***]:
This is in response to your letter, dated March 11, 2013, on behalf of your client, [***] (“Company A”), requesting a ruling with respect to the dutiability of certain fees paid for a license key to the manufacturer of the imported software alterable machines.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as your request conforms to the requirements of 19 CFR §177.2(b)(7), your request for confidentiality is approved. The information concerning the names of the parties, the type of product, covered by the request, the sourcing and pricing of the imported products, the way in which the additional software alters the previously imported machine, and all attachments to your submission, if any, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
Company A is a U.S. company that proposes to purchase software alterable machines manufactured in either [***] or [***] by Manufacturer and resell those machines to the end-use customers in the United States. Company A and Manufacturer are related parties within the meaning of 19 U.S.C. §1401a(g). Company A will purchase the software alterable machines at an agreed upon FOB price. Title will pass to Company A, and Company A will assume risk of loss from the time of shipment of the imported merchandise until the time of resale to an unrelated customer. The FOB price of the software alterable machine will correspond to the price currently charged for a conventional machine with the capabilities that have been programmed into the software alterable machine at the time it is sold for exportation to the United States.
As imported into the United States, the software alterable machines will be fully functional. The software alterable machines consist of both hardware components and software components (or firmware that controls all the functions of the software alterable machines). However, the firmware on these machines can be reprogrammed so as to either expand or limit the capabilities of the machines. This reprogramming requires a license key from the Manufacturer and the download of a new program. Therefore, after the sale for export to the United States of the software alterable machines, Company A may purchase a license key from Manufacturer and download the software necessary to expand the capabilities of the imported machines, from the Manufacturer’s website. At the time of download, Company A will be invoiced by Manufacturer for the cost of the software embodying the intellectual property. Additionally, if Company A’s customer requires an upgrade in its software, Company A may download a license key, and if the software is downloaded, Company A may receive a post-importation rebate from Manufacturer to account for a difference between the price of the firmware installed on the machine that was originally purchased and the new firmware.
ISSUES:
Whether the fee for a license key, made by Company A to the manufacturer of the imported software alterable machines, is part of the price actually paid or payable for the imported merchandise;
Whether the license fee should be included in the transaction value of the imported merchandise as either royalties under section 402(b)(1)(D) or proceeds of subsequent resale under section 402(b)(1)(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”) and codified at 19 U.S.C. §1401a. The preferred method of appraisement under the TAA 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, 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 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) and (E). These additions apply only if they are not already included in the price actually paid or payable.
Moreover, in order for imported merchandise to be appraised under the transaction value method, there must be a bona fide sale between a buyer and seller, and the sale must be a sale for exportation to the United States. Also, pursuant to 19 U.S.C. §1401a(b)(2)(A)(iv), transaction value is acceptable only where the buyer and seller are not related, or where related, the relationship does not influence the price actually paid or payable.
In the instant case, Company A, the buyer, is related to the seller, Manufacturer. No information regarding the acceptability of the transaction value has been submitted. Thus, for purposes of this ruling, we assume that transaction value is the appropriate method of appraisement, and the applicable requirements with respect to the bona fide sale and sale for export between the related parties are satisfied. However, no ruling is being issued in regard to these issues.
Finally, 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 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 Requests Regarding Dutiability of Royalty or License Fees,” Vol. 29, No. 36, Cust. B. & Dec. at 10, dated September 6, 1995. See also 19 CFR §177.2(b).
In this case, you state that actual software license fees charged and rebates received will be the subject of negotiations between Company A and Manufacturer. Therefore, even though you did not specifically indicate that there are no license or purchase agreements, based on your statement, we assume that these agreements do not yet exist. Therefore, this ruling is issued pursuant to the facts referenced in your submission.
Price Actually Paid or Payable
The first issue is whether the royalty payments are included in the price actually paid or payable for the imported goods. The “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any charges, costs, 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).
It is CBP’s position that payments made by the buyer to a party related to the seller are indirect payments made to, or for the benefit of, the seller. All such payments are included in transaction value unless it is established that they were made in exchange for something other than the imported goods. See Generra Sportswear Company v. United States, 905 F.2d 377(CAFC 1990), and Chrysler Corporation v. United States, 17 CIT 1049 (CIT 1993).
In this case, the fees for a license key and a program as well as the rebates that could be received by Company A from Manufacturer for reprogramming of machines after the importation, are not part of the price actually paid or payable. The software alterable machines are fully functional when sold for export to the United States, and Company A has no obligation to purchase the license key or a program in order to import the machines. The license fee is not paid for the imported merchandise, but is a post-importation payment made for additional software. In other words, this fee is paid for the license key and the instructions that are being downloaded from the Manufacturer’s website upon completion of the sale of additional software from Manufacturer to Company A.
Additions to Value as Either Royalties Under Section 402(b)(1)(D) or Proceeds of Subsequent Resale Under Section 402(b)(1)(E).
A royalty payment may be added to the price actually paid or payable as either a royalty payment, pursuant to 19 U.S.C. §1401a(b)(1)(D), or as a proceed of a subsequent resale, disposal, or use of the imported merchandise, pursuant to 19 U.S.C. §1401a(b)(1)(E), if it is not included in the price actually paid or payable. Under 19 U.S.C. §1401a(b)(1)(D), an addition to the price actually paid or payable is made for 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.”
After reviewing the language of the statute along with the legislative history and prior case law, CBP looks to the following three questions as relevant in determining whether the requirements of 19 U.S.C. § 1401a(b)(1)(D) are met:
Was the imported merchandise manufactured under patent?
Was the royalty involved in the production or sale of the imported
merchandise? and,
Could the importer buy the product without paying the fee?
Affirmative answers to questions one and two and a negative answer to question three suggest that the payments are dutiable; negative answers to questions one and two and an affirmative answer to question three suggest that the payments are non-dutiable. Question three goes to the heart of whether the payment is considered to be a condition of sale. See General Notice entitled “Dutiability of “Royalty” Payments,” published in the Customs Bulletin and Decisions on February 10, 1993 (the “General Notice”; also sometimes referred to as “Hasbro II”) (stating these questions in discussing previously-issued HRL 544436, dated February 4, 1991).
In HRL W563562, dated November 20, 2008, CBP ruled that payments made for a royalty for specialized software sold to the customer after the importation of machine tools were not an addition to the price paid or payable of the imported machine tools. This case deals with a similar situation.
In this case, based on the information provided, we conclude that the answer to the first question is no. The license fee is paid by Company A for the license key has nothing to do with patents used to manufacture the imported software alterable machines. Furthermore, the response to the second questions is also no. Since the license fee is paid for the license key and additional software used to reprogram already imported machines at Company A’s discretion, it is not involved in the production of the imported merchandise. Similarly, the license fee is not involved in the sale of the software alterable machines to the United States. The license key is an optional component, and Company A has no obligation to purchase this license key upon the importation of the machines into the United States. Manufacturer bills Company A separately from the price of the imported machines, and the sale for export is long completed before there is any subsequent decision to purchase the license key.
The answer to the 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).
In this case, Company A can always purchase the software alterable machines without paying the fees for a license key; therefore, these fees are not paid as a condition of sale for the imported goods. The purchase of the imported machines is not inextricably intertwined to the payment of license fees. Rather, the payment of license fees relates to the installation of additional software, not the sale of the imported software alterable machines.
As the license fees are not dutiable as royalties under 19 U.S.C. §1401a(b)(1)(D), it is necessary to determine if the payments are dutiable as proceeds pursuant to 19 U.S.C. §1401a(b)(1)(E). 19 U.S.C. §1401a(b)(1)(E) 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.
With regard to proceeds, the Statement of Administrative Action (“SAA”) provides that:
Additions for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.
Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 49 (1981).
CBP has ruled that in order for proceeds of a subsequent resale to be dutiable under this section, they must pertain to the resale of the imported merchandise, and they must accrue directly or indirectly to the benefit of the seller. See HRL 545035, dated August 23, 1995.
In this case, the license fees are paid to the manufacturer/seller. Nevertheless, these fees are tied to the sale of the license key in the United States and are derived from a separate transaction and not from any subsequent resale, disposal or use of the imported merchandise. Accordingly, the payments by Company A to Manufacturer do not pertain to the imported goods at issue. Therefore, we find that the license fees in question are not dutiable as proceeds pursuant to 19 U.S.C. §1401a(b)(1)(E).
HOLDING:
Based upon the information provided, we find that the license fees that Company A may pay Manufacturer for a license key and download are not dutiable as part of the price actually paid or payable, nor are they additions to value as royalties, pursuant to 19 U.S.C §1401a(b)(1)(D), or proceeds, pursuant to 19 U.S.C. §1401a(b)(1)(E).
Please note that 19 CFR §177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch