HQ 0544611 - Application for Further Review of Protest No. XXXX; Dutiability of Royalty Payment - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1993 HQ Rulings > HQ 0453024 - HQ 0544680 > HQ 0544611

HQ 544611

July 29, 1991

VAL CO:R:C:V 544611 ML

CATEGORY: VALUATION

District Director
Savannah, Ga 31401

RE: Application for Further Review of Protest No. XXXX; Dutiability of Royalty Payment

Dear Sir:

This protest was filed against your appraisement decision in the liquidation of an entry made August 9, 1989, by High Voltage Breakers, Inc., (hereinafter referred to as the "importer"). The importer is disputing the inclusion of a royalty payment in the transaction value of the imported merchandise 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:

The importer, in a letter dated July 2, 1990, stated that it was a joint venture company formed by Hitachi, Ltd., (hereinafter referred to as the "seller"), a Japanese company, and General Electric Company, a United States company. The importer produces circuit breakers in the United States. To produce or repair circuit breakers the importer purchases parts from various companies, and some of the parts used to produce circuit breakers were the parts imported from Hitachi by the importer. The imported merchandise covered by this protest consists of parts, such as the interrupter, operating mechanism, interpole links, closing spring, and dashpot. Circuit breakers were produced using technology from the seller. The technology was also used in servicing and maintaining the circuit breakers.

The parties to the joint venture agreement entered into a Patent License and Technical Assistance Agreement, hereinafter referred to as the "agreement"), dated March 14, 1977. Article V of the agreement stated that in consideration of licenses granted, and technical information and assistance, the importer agreed to pay the seller; (1) a service charge of X percent of the net selling price of "products" sold by the importer until such service charges totalled $XX million, and (2) X percent of the net selling price of such products subsequently sold by the importer. The agreement defined "net selling price" as the importer's gross invoice price to the end-user of the "products" packed for shipment, with deductions for items specified, to the extent to which they were included in the gross invoice price.

Subsequent to the March 14, 1977 agreement, the parties agreed to change the percentage of the royalty rate expand the meaning of "products", and eliminate the ceiling price on service charges.

The "technical information" consisted of material lists, test data, engineering and performance specifications, engineering instructions, and training in the United States The "technical assistance" provided by the seller to the importer consisted of engineering support and instructions regarding production of the circuit breakers in the United States.

In Article IV of the agreement, the seller granted to the importer a non-exclusive license to make and have made Products, and to make and have made for the importer's own use and to use Machines and Processes, under all Patents of the United States owned or controlled by the seller during the life of the joint venture agreement.

The importer paid a royalty or license fee of X percent of the resale price of the circuit breaker made by the importer or X percent of the replacement part sold by the importer.

ISSUE:

Whether the royalty payment made by the importer to the seller for technical assistance was a dutiable addition to the "price actually paid or payable".

LAW AND ANALYSIS:

Transaction value, the method of appraisement used for the imported merchandise, is defined in section 402(b) of the TAA as the "price actually paid or payable for imported merchandise when sold for exportation to the United States" plus certain enumerated additions. The "price actually paid or payable" is more specifically defined in section 402(b)(4) of the TAA as the "total payment...made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."

One of the statutory additions to the "price actually paid or payable" is section 402(b)(1)(D) of the TAA 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 importer contends that the royalty payment is not dutiable under section 402(b)(1)(D) of the TAA since the payment is made for rights that are separate and apart from the right of ownership. Thus, the importer concludes that the royalty payment is not dutiable because the payment was not a condition of sale of the imported merchandise. The importer cites Headquarters Ruling Letters (HRL's), 543773, dated August 28, 1986, 544105, dated March 25, 1988, 544129, dated August 31, 1988 (C.S.D. 88- 35), and 542881, dated November 23, 1982.

In each of those rulings, Customs concluded that the royalty payments were based upon net sales, were not a condition of the sale of the imported merchandise and were not connected to the ownership or importation of the merchandise.

In the instant case, the X percent royalty paid by the importer to the seller was triggered by technical assistance furnished by the seller after the importation of the merchandise and in most instances, in connection with the further processing of these parts into completed circuit breakers. We find that the royalty payment for technical assistance by the importer to the principal was not dutiable. Additionally, the payment was not connected to the right of ownership, rather it was paid for technical assistance with regard to the finished product in the United States.

The entry at issue was made in 1989, predating HRL 544436, dated February 4, 1991, which was published in C.S.D. 91-6, dated May 1, 1991. Therefore, there can be no retroactive application of HRL 544436 to the entry in question. Insofar as the application of HRL 544436 to post February 4, 1991, entries is concerned, your attention is directed to Headquarters' solicitation of comments and ruling requests set forth in the June 19, 1991 Customs Bulletin. This comment period has been extended to September 3, 1991.

HOLDING:

In view of the foregoing, it is our conclusion that the royalty payment made by the importer to the seller pursuant to a patent license and technical assistance agreement was not a dutiable addition to the "price actually paid or payable" for the imported merchandise.

Accordingly, you are directed to grant protest no. XXXX. A copy of this decision should be attached to Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling