HQ 547968 - Request for Internal Advice; Price Actually Paid or Payable; Royalty Payments; Proceeds of a Subsequent Resale - United States International Trade Commision Rulings

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HQ 547968

May 7, 2002

RR:IT:VA 547968 DCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
Boston, MA 02222

RE: Request for Internal Advice; Price Actually Paid or Payable; Royalty Payments; Proceeds of a Subsequent Resale

Dear Port Director:

This is in response to your memorandum, dated May 7, 2001, requesting internal advice regarding the dutiability of certain license fees. This request originates from a prior disclosure filed by Counsel on behalf of [ ], or the “Importer,” located in [ ]. In addition to your memorandum, we received and considered three submissions from Counsel, dated March 5, 2001, July 4, 2001, and February 14, 2002, in support of the Importer’s claim. On February 5, 2002, we met with Counsel regarding the Importer’s claim.

Documents containing business proprietary information furnished in connection with the request for internal advice cannot be returned but will be accorded confidential treatment pursuant to 19 C.F.R. § 177.2(b)(7). Such information is designated by brackets.

FACTS:

The Importer is the wholly-owned subsidiary of [ ], or the “Licensor,” located in [ ]. The Importer is the U.S. distributor of [ ], or the merchandise, which the Importer purchases from its sister subsidiary [ ], or the “Seller,” also located in [ ].

In a letter to your office dated March 5, 2001, the Importer states that the Licensor owns the U.S.-registered trademark that is used for marketing the subject merchandise. On January 9, 1996, the Importer and Licensor executed a Trademark License Agreement. Ten months later, in November 1996, the Importer and Licensor signed an amended Trademark License Agreement. The original and amended Trademark License Agreements (collectively, the “Agreements”) are almost identical.

Counsel also provided the license agreement between the Licensor and the Seller, dated January 3, 2000. According to this agreement, the Licensor grants the Seller the exclusive right to use the trademark to manufacture the merchandise in [ ].

Counsel also provided the following documents: a letter from a consulting firm that determined the fair market value of the license was between two percent and five percent of net sales; purchase orders from the Importer; invoices from the Seller; audited financial statements and balance sheets for the Importer and Licensor; and records of payment from the Importer to the Licensor.

The Agreements grant the Importer the exclusive right to use the trademark to market products in the United States. According to the original Agreement, the Importer agreed to pay the Licensor a license fee of two percent of net U.S. sales in a single lump sum payment for the first year of the agreement at the end of 1995.

The original Agreement between the Licensor and the Importer grants the Importer an exclusive right to use the trademark to market the Licensor’s products in the United States. In November 1996, the Importer and Licensor increased the license fee to five percent of net U.S. sales paid on a quarterly basis. Counsel for the Importer explained that the licensing fee was increased after the parties agreed that a five percent license fee more accurately reflected the value of the trademark.

The Importer claims that no part of the royalties paid to the Licensor accrued to the benefit of the Seller. According to Counsel, the license income received by the Licensor formed part of the dividend issued annually to the shareholders of the Licensor. As such, Counsel claims the fees should not be included in the calculation of transaction value

It is your position, by contrast, that the license fees paid by the Importer to the Licensor are part of the price actually paid or payable. You state that the Importer has failed to rebut the presumption that royalties paid to a party related to the Seller are part of the total payment for the merchandise.

ISSUE:

Whether the license payments made by the Importer to the related party Licensor should be included in the transaction value of the merchandise.

LAW AND ANALYSIS:

Section 402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable, or the transaction value of the imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States or the deductive or computed value for identical or similar merchandise. Although we understand the parties are related, we have no information regarding the acceptability of the related party pricing. We therefore assume for purposes of this ruling that transaction value is the proper basis of appraisement.

Price Actually Paid or Payable

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 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) provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable,” plus enumerated statutory additions. The TAA further defines the term “price actually paid or payable” as the
total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise . . .) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.

Guidance on dutiable treatment of payments to the seller is provided by two cases decided by the Court of International Trade. In the first case, Generra Sportswear Company v. United States, 905 F.2d 377, 380 (Ct. Int’l Trade 1990), the CIT held 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. The Court further explained that it is irrelevant whether the payment represents something other than the per se value of the goods. “The focus of transaction value is the actual transaction between the buyer and seller.” Id.

Based on the Generra decision, Customs presumes that any payment made, directly or indirectly, by a buyer to a seller, is part of the price actually paid or payable for the imported merchandise. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), however, the Court of International Trade held that that presumption may be overcome if the payments are completely unrelated to the imported merchandise. In Chrysler, the court found that a penalty fee the importer was required to pay for failure to purchase the contracted quantity of goods was not part of the price paid to acquire the delivered goods. Consequently, in order to overcome the Generra presumption, an importer must demonstrate that payments at issue are unrelated to the imported merchandise.

Counsel argues that the license fees paid by the Importer to the Licensor are neither part of, nor an addition to, the price actually paid or payable. Counsel cites HRL 546478, dated February 11, 1998, in which Customs determined that sublicensing fees paid to a related party licensor who was not the seller were not part of the price actually paid or payable. Counsel also argues that the license payments to the Licensor do not accrue, either directly or indirectly, to the benefit of the seller. According to Counsel, the license fees paid by the Importer to the Licensor are separate and distinct from any payments made to the Seller.

Counsel explains that for the subject merchandise, two license fees are paid to the Licensor pursuant to two license agreements: one by the Seller and a second by the Importer. According to the Seller/Licensor license agreement, the Licensor grants the Seller the right to use the trademark to manufacture the subject merchandise. The Importer/Licensor license agreement, by contrast, relates to marketing the merchandise in the United States. Moreover, Counsel notes that the amount of the Seller/Licensor license agreement is included in the Importer’s declared value of the merchandise.

In HRL 546478, we determined that because the license fee payments at issue related only to the distribution and sale of the merchandise in the United States and because the value of the goods was not considered in determining the amount of the royalties, the license fees did not relate to the sale of the imported merchandise. Consequently, in order to determine the dutiability of the payments at issue we analyze the relationship between the license fees and the merchandise. If we find no connection between the payments and the merchandise, we will consider the two unrelated and not part of the transaction value of the merchandise.

According to the Agreements, the Licensor grants the Importer the right to use the trademark to market the merchandise in the United States. Significantly, pursuant to the license agreement between the Licensor and the Seller, the Seller pays the Licensor for the exclusive right to use the trademark to manufacture the merchandise. Moreover, according to Counsel, the manufacturing royalties paid by the Seller to the Licensor are included in the price paid by the Importer to the Seller. The amount of the manufacturing license fee paid by the Seller to the Licensor, therefore, is incorporated into the Importer’s declared value for the merchandise.

Finally, we note that Counsel presented audited financial statements, balance sheets, statement of income and retained earnings, and a breakdown of license fee income from the Licensor’s subsidiaries. In addition, Counsel represents that all license income received by the Licensor accrues to the benefit of the Licensor’s shareholders as part of the Licensor’s annual dividend payments. Based on this information, we determine that the Importer’s license fee payments were paid directly to the Licensor and did not accrue to the benefit of the Seller. Because we find the payments at issue in this case were made to the Licensor and do not accrue to the benefit of the Seller, the license payments are not part of the price actually paid or payable.

Royalties and License Fees

Under the valuation statute, certain payments may be added to the price actually paid or payable to determine the transaction value of a good. These statutory additions include the value of any royalty or license fee related to the imported merchandise that the buyer is required to pay as a condition of the sale for export to the United States pursuant to § 402(b)(1)(D), and the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue to the seller under § 402(b)(1)(E).

Under section 402(b)(1)(D) of the TAA, an addition to the price actually paid or payable is to be 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.” The Statement of Administrative Action (“SAA”), which forms part of the legislative history of the TAA, describes the circumstances under which license payments to third parties will be added to the price actually paid or payable. The SAA states:

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 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 for 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 TAA, at 48-49 (1981).

Counsel in the present case claims that because the amount of the payment is calculated only after the merchandise is sold in the United States—the license payments are based on net sales—the licensing fees cannot be a condition of the sale of merchandise to the Importer. Counsel also notes that there is no reference to the license fees in the Importer’s purchase order, nor any mention of sales between the Seller and Importer in the Agreements.

Although the fact that the payments are made to a party related to the Seller suggests that the royalties are tied to the purchase of the merchandise, this fact alone does not prove that the payments were a condition of sale. In the Agreements at issue, there is no reference to, and no requirement that the Importer purchase merchandise from, the Seller. In addition, there is no reference to the license fees in the Importer’s purchase orders. These documents indicate that the license fee is not a condition of the sale for exportation of the imported merchandise. The licensed rights for which the license fees were paid relate solely to the distribution and sale of the merchandise in the United States—not the sale for exportation. We therefore determine that the license fees paid by the Importer to the Licensor are not sufficiently related to the manufacture or sale of merchandise to be added to the price actually paid or payable under 19 U.S.C. 1401a(b)(1)(D).

HOLDING:

Based on the information provided, we determine that the subject license fee are not part of price actually paid or payable under 1401a(b)(4)(A). Furthermore, we find the subject license fees paid pursuant to the Agreements by the Importer to the Licensor are not royalties under section 1401a(b)(1)(D) and therefore not part of the transaction value of the merchandise. You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. Sincerely,

Virginia L. Brown
Chief, Value Branch

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