HQ 0544420 - Application for Further Review of Protest No. XXXXX Regarding a License Fee as a Dutiable Addition to the Price Actually Paid or Payable - United States International Trade Commision Rulings

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HQ 544420

July 8, 1991

VAL CO:R:C:V 544420 ML

CATEGORY: VALUATION

District Director
Pembina, North Dakota 58271

RE: Application for Further Review of Protest No. XXXXX Regarding a License Fee as a Dutiable Addition to the Price Actually Paid or Payable

Dear Sir:

This protest was filed against your appraisement decision in the liquidation of various entries made by Itex Corporation, the importer of Ferroscope instruments and the holder of exclusive licensing rights regarding technology associated with ferroscope instruments. The merchandise was manufactured in Canada by Cyberscope Industries. The merchandise was appraised pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)).

FACTS:

Itex Corporation, (hereinafter referred to as the "importer"), paid a license fee in 1988 of $XXX,000 (cdn) to obtain the exclusive right to use "technology" and "licensed products" developed by Cyberscope Industries, Inc., (hereinafter referred to as the "manufacturer"). The "technology" is a unique inspection method for detecting flaws in steel tubing. Clause 2.01 of the agreement, dated March 21, 1988, grants to the importer, among other things, an exclusive right and license:

"(a) to enjoy, commercialize, exploit, practice and to otherwise utilize any portion of the Technology and to use, distribute, lease, rent, enjoy, commercialize and exploit the Licensed Products only in the Territory;

(b) to utilize, commercialize, exploit and enjoy the Tradename solely and exclusively and only upon and in connection with the use, lease, rent, enjoyment, advertising, marketing, exploitation and distribution of the Licensed Products in the Territory; and

(c) to make, manufacture, produce, maintain, calibrate, service, repair, rebuild, redesign, reproduce and otherwise deal with the Licensed Products using the Technology subject to the terms and conditions herein contained."

This license fee calls for $XXX,000 (cdn) to be paid yearly, for 5 years for a total of $XXX,000 (cdn). The importer also agreed to purchase the "equipment" that utilized that "technology", in clause 9.02. The same contract states that the importer shall purchase from the manufacturer " a minimum of fifty (50) Instruments between the day of March 21, 1988 and the 20th day of March, 1993." No similar commercial equipment is manufactured in the United States. The first shipment of "equipment" was covered by this contract, which as stated, includes the license fee which is paid by the importer to the manufacturer.

The contract also states in clause 8.01, that in the event of any non-payment by the importer of any material amounts due under the Agreement or in the case of the importer not purchasing the equipment required to be purchased under the Agreement, the manufacturer may terminate the Agreement and the license.

ISSUE:

Whether a license fee paid by the importer to the manufacturer for the use of technology necessary to operate the imported equipment is a dutiable addition to the "price actually paid or payable" for the imported merchandise.

LAW AND ANALYSIS:

The primary basis of appraisement is transaction value. Transaction value is defined as the "price actually paid or payable" for imported merchandise when sold for exportation to the United States, plus certain enumerated additions. This is more specifically defined in section 402(b)(4)(A) of the TAA as the following:

The term "price actually paid or payable" means the total payment ... made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

The relevant portion of the TAA is section 402(b)(1)(D) which provides for the inclusion in transaction value of:

... 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), specifically approved by Congress, provides additional information pertaining to royalties. It states 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 sale of the imported merchandise for exportation to the United States (Statute). In this regard, royalties and license fees for patent 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 copyright and trademarks related to the imported merchandise, will generally be considered as selling expenses of the buyer and therefore would 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 that 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, as 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 exportation to the United States. (emphasis added)

In Internal Advice No. 42/83, Headquarters Ruling Letter (HRL) 543070, dated August 19, 1983, Customs responded to a question regarding the dutiability of a license fee made for technology known as the "Hoboken Process". The fee was paid by the importer to the seller, who then paid the fee to the licensor. The fee was part of the contract. The contract also covered the prices for the equipment as well as the process. In HRL 543070, we stated that if the royalty or license fee relates to the imported merchandise and the buyer is required to pay the royalty or license fee as a condition of the sale of the imported merchandise for exportation to the United States, then such a fee will be added to the price actually paid or payable for the merchandise when sold for exportation to the United States, unless otherwise contained in such a price. Customs held that the license fee for the "Hoboken Process" was related to the imported merchandise and the buyer was required to pay the fee as a condition of sale of the imported merchandise for exportation to the United States.

In support of your belief that the license fee is paid as a condition of the sale of the imported merchandise, and consequently, a dutiable addition to the "price actually paid or payable", you point to Clause 3 of the contract between the importer and the manufacturer. The relevant portion of that clause relates to the payment schedule of the $XXX,000. The amount of $XXX,000 was to be paid upon the execution of the contract, with the other $XXX,000 to be paid upon the delivery of the instruments. The timing of these payments lends support to your position that the payment for the license and the sale of the instruments are connected. Clause 9.02 also ties the purchase of equipment to the purchase of licensed technology. The termination clause, clause 8.01, allowing the manufacturer to cease deliveries of the contracted for merchandise in the event of the importer's inability to complete payment for the license, clearly establishes that the fee paid by the importer to the seller was paid "as a condition of the sale of the imported merchandise." The license fee was for the technology and the licensed products which are part of the imported merchandise. The license fee was related to the imported merchandise and the buyer was required to pay the fee as a condition of sale of the imported merchandise for exportation to the United States.

For the reasons stated above, we are of the opinion that this case is different from the circumstances described in HRL 543529, dated October 7, 1985, HRL 543062, dated November 8, 1983, HRL 544047, dated March 8, 1988, and HRL 542844, dated June 17, 1982 as cited in this Application for Further Review. The payment owed was paid for rights which are not separate and apart from the right of ownership on payment of the purchase price. As such, it should be an addition to the "price actually paid or payable."

HOLDING:

The License Fee was paid by the licensee for the territorial exclusivity to manufacture, use and sell in the licensed territory, as a condition of the ownership or importation of the merchandise. The buyer was required to pay the fee as a condition of sale of the imported merchandise for exportation to the United States. Therefore, these payments made from the importer to the manufacturer are part of the transaction value of the imported merchandise.

You are directed to deny this protest. A copy of this decision should be attached to Form 19, notice of action, to be sent to the protestant.

Sincerely,

John Durant, Director
Commercial Rulings Division

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