HQ 546626 - Royalty Payments; §402(b)(1)(D); General Notice, Dutiability of Royalty Payments; Price Actually Paid or Payable; Generra - United States International Trade Commision Rulings

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HQ 546626

November 9, 2001

RR:IT:VA 546626 EK

CATEGORY: VALUATION

RE: Royalty Payments; §402(b)(1)(D); General Notice, Dutiability of Royalty Payments; Price Actually Paid or Payable; Generra

Dear Ms. [ ]:

This is in regard to your ruling request dated January 15, 1997, regarding royalty payments made by [ ] (hereinafter referred to as buyer/licensee) to [ ] (hereinafter referred to as seller/licensor). In a letter dated November 25, 1997, this office granted your request for confidentiality. We regret the delay in responding.

FACTS:

The buyer/licensee purchases and imports from the seller/licensor, aqueous processible flexographic printing plates (hereinafter referred to as plates), and all the associated equipment, processing methods and materials needed to manufacture the plates, including polymer, an essential ingredient in producing the plates. The plates are described as containing the following: a support, a photopolymer layer, and a coversheet. The plate is processed in water or in a solvent that contains primarily water. The buyer/licensee has entered into a License and Supply Agreement with seller/licensor, a [ ] company located in [ ]. The purpose of the agreement is to provide the buyer/licensee with the exclusive worldwide rights outside of [ ], and sole rights within [ ], to seller/licensor’s proprietary information related to the manufacture of these plates and associated equipment, materials and processing methods. The supply agreement pertains to the seller/licensor’s
patented plates and polymers. The buyer/licensee expects to manufacture, market and sell these plates which will be made by the buyer/licensee in the U.S. using the seller/licensor’s technology and the imported polymer purchased from the seller/licensee. In exchange for the exclusive worldwide license grant and sole license grant within [ ], the buyer/licensee has agreed to pay seller/licensor a fixed up-front sum. You indicate that the up-front set sum payment is for exclusive rights world-wide to access seller/licensee’s technology and polymer in order to manufacture and sell the patented plates. The amount must be paid whether or not buyer/licensee purchases plates or polymer from seller/licensor. This payment relates to the use of the proprietary information that includes the patent applications pertaining to the manufacture of the plates. The license permits buyer/licensee to import, make, have made, use, offer to sell and sell the plates, and to import, make, have made, and use photosensitive compositions and any proprietary component of the plates or polymer. The Agreement grants a more limited license in [ ]. Within [ ], the buyer/licensee is licensed to import, but not to make, or have made, polymer.

In addition to the up-front sum, the buyer/licensee is obligated to pay the seller/licensee an ongoing (---)% based royalty that is based upon the net selling price of the plates manufactured and sold by buyer/licensee under this license. No royalty is due on the plates that the buyer/licensee buys directly from the seller/licensee and either uses or sells. The royalty payments apply only to plates that are manufactured by buyer/licensee using seller/licensor’s technology and polymer purchased by buyer/licensee from seller/licensor. The buyer/licensor is purchasing the polymer from seller/licensor to add to various components to make the plates that will be sold worldwide.

Pursuant to the supply agreement, seller/licensor agrees to sell the plates and/or polymer exclusively to buyer/licensee. If buyer/licensee does not pay the up-front set sum royalty, it may still purchase the plates or polymer, but does not then have the right to exclude others from the manufacture of the plates.

For purposes of this ruling request, we are assuming that the parties are not related within the meaning of secton 402(g) of the TAA.

ISSUE:

Whether the payments made pursuant to the Agreement from buyer/licensee to seller/licensor are included in the transaction value of the imported merchandise as part of the price actually paid or payable or as an addition pursuant to §402(b)(1)(D) of the TAA to the price actually paid or payable.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to §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)(1) 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 certain enumerated statutory additions.

One of the statutory additions is for royalty fees. Section 402(b)(1)(D) of the TAA provides for additions to the price actually paid or payable 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.

With respect to royalties, the Statement of Administrative Action (SAA), adopted by Congress with the passage of the TAA, provides that:

[a]dditions 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 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 export to the United States. 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 48-49 (1981).

In a General Notice, Dutiability of Royalty Payments, Vol. 27, No. 12, Cust. B. & Dec. at 1 (February 10, 1993), Customs articulated three factors, based on prior court decisions, for determining whether a royalty is dutiable. These factors are: (1) the imported merchandise was manufactured under patent; (2) the royalty was involved in the production or sale of the imported merchandise and; (3) the importer could buy the product without paying the fee. Affirmative responses to factors one and two and a negative response to factor three would indicate that the payments are related to the imported merchandise and a condition of sale and, therefore, dutiable as royalty payments. The General Notice includes a review of HRL 544436 (C.S.D. 91-6) dated February 4, 1991, commonly known as the “Hasbro ruling.” This analysis set forth in the General Notice is applicable to entries of imported merchandise on or after May 11, 1993.

Although the SAA provides that determinations about the addition of royalty payments to the price actually paid or payable are to be made case-by-case, it is more likely that the royalty will be included in the transaction value when the payment is made directly to the seller. Under these circumstances, payment of the royalty is more likely to be a condition of the sale for exportation of the imported product than when the royalty is paid to an unrelated third party. See, HRL 545361 dated July 20, 1995, which held that trademark royalties are included in transaction value when paid to the seller/licensor but not when paid to a third party unrelated to the seller. In this case, the party to whom the royalties are paid is both the seller and the licensor.

Up-Front Sum

There are two payments that are at issue in this case. The first payment, the initial up-front sum paid directly to the seller, is for proprietary rights, which include patent rights and technology rights associated with the imported products. This payment is in consideration for the license to import and use the proprietary products and closely relates to the purchase and the importation of the products. The payment is made to the seller/licensor of the merchandise, by the buyer, and pursuant to the terms of the agreement, the payment relates to both the importation and the use of the products.

With regard to the “price actually paid or payable”, there is a rebuttable presumption that all payments made by a buyer to a seller, or a party related to a seller, are part of the price actually paid or payable. This position is based on the meaning of the term “price actually paid or payable” as addressed in Generra Sportswear Co. v. U.S., 8 CAFC 132, 905 F.2d 377 (1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term “total payment” is all-inclusive and that “as along as the quota payment was made to the seller in exchange for merchandise sold for export to the U.S., 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 explained that it did not intent that Customs 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, were for the merchandise or something else.

Additionally, we note that in Chrysler Corporation v. U.S., 17 CIT 1049 (1993), the Court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and the fees were not a component of the price of the imported engines. Therefore, the presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise.

The up-front sum is paid directly to the seller, and is for proprietary rights which include patent rights and technology rights associated with the imported products. This payment is in consideration for the license to import and use the proprietary products and closely relates to the purchase and the importation of the products. Based upon the fact that the payment is made to the seller/licensor of the merchandise, by the buyer, and pursuant to the terms of the agreement, the payment relates to both the importation and the use of the products, then it appears as if the payment is for the imported merchandise, and part of the price actually paid or payable.

The payment is related to the imported merchandise, both regarding the purchase and the subsequent importation of the products. The presumption that the payment is part of the price actually paid or payable has not been rebutted.

The initial up-front sum is part of the price actually paid or payable for the imported merchandise. Therefore, it is not necessary to analyze this payment pursuant to section 402(b) (1)(d) of the TAA regarding the addition to the price actually paid or payable of a royalty payment.

Ongoing percentage based-royalties

Regarding the ongoing percentage-based royalty payments, these payments are paid in consideration for licensed technology provided by the seller/licensor to the buyer/licensee. The buyer/licensee is using the seller’s technology and patent rights to produce the plates in the United States, and the royalty payments are paid based upon sales of the plates in the United States. The imported plates that already incorporate the imported polymer do not trigger the royalty payment. These plates are excluded from the payment of a royalty, thereby indicating that the royalty payments relate solely to the manufacturing process in the United States, rather than the imported merchandise. The agreement further provides that if the licensed technology or know-how generally becomes known within the flexographic printing plate field (without fault on the part of the buyer/licensee), then the buyer/licensee’s duty to continue paying the royalty shall cease.

You indicate that in fact the royalty payment is not a condition of sale of the plates or the polymer. Even though the agreement provides for an exclusive supply arrangement, it also provides that this arrangement applies only as long as the plates and polymer meet specifications that are mutually agreed upon. Included in this is that the price for the polymer and/or plates is reasonable enough to allow the buyer/licensee to market profitably. In addition, the seller/licensor agrees that it must satisfy the buyer/licensee’s worldwide supply requirements. There is nothing in the supply agreement between the parties that makes the continuing royalty payment a condition of the purchase of the plates or polymers.

In the agreement, the seller/licensor agrees to sell the plates and/or polymer exclusively to the buyer/licensee. However, if the buyer/licensee does not pay the continuing royalty payment, it may still purchase the plates or polymer, but not with the right to exclude others from the manufacture of the plates.

The facts presented in this case are similar to other rulings addressed by this office. In HRL’s 545114 dated 9/30/93, 544645 dated 6/19/91, and 545770 dated 6/21/95, we concluded that the payments in question were not dutiable. These cases involved the payment of royalty fees to a foreign supplier in exchange for the rights to use technical information and know-how in the
manufacture of a finished product incorporating the imported product. Customs found these fees were not dutiable based in part by the fact that the royalty was for technical information and know how related to using the imported products in the process of manufacturing the royalty product in the United States. Thus, Customs concluded that the royalties did not relate to the imported merchandise. Similarly, in HRL 545307 dated 2/3/95, the imported merchandise was a chemical product used in the manufacture of a finished pharmaceutical preparation. In the U.S., the chemical was combined with other materials to produce the finished products. The importer paid the seller/licensor a royalty based on a percentage of sales of the finished product. In this case, Customs found that the royalties paid to the seller were not a condition of the sale for exportation, and the fees were not added to the price actually paid or payable.

As in these cases, it is our conclusion, that the continuing percentage-based royalty payments are not a condition of the sale for exportation to the United States of the imported products. These payments pertain to technology and patents involved in the manufacture of the plates in the United States, rather than the importation of the polymer. These royalty payments should not be added to the price actually paid or payable pursuant to section 402(b)(1)(d) of the TAA.

HOLDING:

Based upon the information provided, the initial up-front sum is included in the appraised value as part of the “price actually paid or payable” for the imported merchandise. The ongoing percentage based royalty payments are not additions to the price actually paid or payable pursuant to section 402(b)(1)(d) of the TAA, in the determination of transaction value, and therefore, are not included in the appraised value.

Sincerely,

Virginia L. Brown

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