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HQ 545951





February 12, 1998

VAL RR:IT:VA 545951 CRS

CATEGORY: VALUATION

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 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:
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 [*******] 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

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