HQ 0545150 - AFR Protest No. 3401-92-100040; royalty payments; machine amortization charges; beverage wraps; 19 U.S.C. 1401a(b)(1)(D) - 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 > 1994 HQ Rulings > HQ 0544662 - HQ 0545490 > HQ 0545150

HQ 545150

February 24, 1994

VAL CO:R:C:V 545150 CRS

CATEGORY: VALUATION

District Director
U.S. Customs Service
P.O. Box 610
Pembina, ND 58271

RE: AFR Protest No. 3401-92-100040; royalty payments; machine amortization charges; beverage wraps; 19 U.S.C. 1401a(b)(1)(D)

Dear Sir:

This is in response to an application for further review of Protest No. 3401-92-100040, filed September 24, 1992, by Norman G. Jensen, Inc., on behalf of protestant Somerville Packaging, of Winnipeg, Manitoba. The protest concerns thirty-one entries of imported beverage wrap material filed between October 1991 and May 1992.

FACTS:

Protestant manufactures wrapping material used in packaging mineral water and other bottled beverages. The imported wrapping material is sold to bottling companies in the United States which apply the wrap to groups of bottles by means of a patented process that encloses the bottles in a finished beverage container.

The instant protest concerns a "machine amortization charge" of $***** that is reflected on the invoices of the imported wrapping material. You maintain this charge is a royalty related to the imported wrapping material which the buyer is required to pay as a condition of sale of the packaging material. In your view the amortization charge should be, and indeed was, included in the appraised value of the thirty-one protested entries of imported beverage wraps.

The buyers of the imported wrap use this material in the U.S. to package beverage bottles for sale to their customers. Certain specialized machinery (the "equipment") is used to combine the imported merchandise, i.e., the wrapping material, with beverages such as bottled mineral water. The equipment is used only to package products for protestant's customers, and is not used to make the wrap itself. In its letters of March 12, 1992, and September 18, 1992, protestant notes that the equipment used in the wrapping process (Jak-et-Pak 150 machines, and in some cases, a Dacam diverger) was manufactured in the U.S. This equipment is owned by the protestant but is leased to and located on the premises of the bottlers. A copy of protestant's standard lease agreement (the "equipment lease") is attached to the file.

Protestant purchased the equipment from an unrelated third party, Federal Paper Board Company, Inc., in 1981. A copy of the contract is attached to the file. Under the terms of the contract, protestant agreed to pay Federal Paper Board two percent of the net selling price (the "royalty") of Jak-et-Pak blanks (wrapping material) used with the Jak-et-Pak equipment. Federal Paper Board subsequently sold its contract rights to Riverwood International. Accordingly, this royalty is now payable to Riverwood and, according to the protestant, is included in the price of the imported wrapping material.

In contrast, protestant maintains that the machine amortization charge reflected on the invoices submitted with the imported merchandise represents a payment for the leased equipment and is separate from the royalty charges assessed on the sale of the imported merchandise, i.e., the wrapping material. In this respect protestant contends the amortization charge is simply a method of financing the lease. While the lease calls for an annual payment of $****** over a three year period, this payment is amortized through a charge of $***** per thousand cartons wrapped. Nevertheless, pursuant to article 8 of the lease agreement should protestant's customers, i.e., the lessees, find another source of beverage wrap material the lease provides that the amortization charges would cease since, in this event, no wraps would be sold. However, customers would still be obligated to make their payments under the equipment lease. In such an event, protestant would issue a separate invoice for amounts due under the lease.

ISSUE:

The issue presented is whether the instant machine amortization charge is included in the appraised 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 preferred method of appraisement under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States." 19 U.S.C. 1401a(b)(1).

Under transaction value there are five enumerated additions to the price actually paid or payable, including the amount 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 sale of the imported merchandise for exportation to the United States." 19 U.S.C. 1401a(b)(1)(D). You state that the machine amortization charge is a royalty payment related to the imported merchandise which the buyer is required to pay as a condition of sale of the imported merchandise and that this amount should therefore be added to the price actually paid or payable for the imported wrapping material.

Royalty payments are added to the price actually paid or payable for imported merchandise only to the extent that such amounts are not otherwise included in the price. 19 U.S.C. 1401a(b)(1). In this instance there is indeed a royalty payable by the buyer and due on the sale of packaging material. Protestant acknowledges these royalty payments but notes that they are included in the price of the imported wrapping material; consequently, there is no addition to be made to the price actually paid or payable. These payments have already been included in the price actually paid or payable for the imported beverage wraps.

However, there remains the question of the "royalty" payments due under the equipment lease. Protestant has presented evidence in the form of a representative equipment lease that the machine amortization charge at issue is not a royalty payment related to imported merchandise. The terms of the lease indicate that this instrument pertains to equipment manufactured and located in the United States, rather than to the imported wrapping material. Article 2 of the lease provides for a fixed annual lease payment which is to be financed through a per carton amortization charge, viz., the machine amortization charge that is the subject of the instant protest. Accordingly, the charge is not related to the imported merchandise, and should not be added to the price actually paid or payable for the imported merchandise.

In addition, just as the amounts due under the equipment lease are not an addition to the price actually paid or payable, neither are they part of the price actually paid or payable for the imported beverage wraps. The term "price actually paid or payable" is defined as "the total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer, to or for the benefit of, the seller." 19 U.S.C. 1401a(b)(4)(A). The machine amortization charge at issue was not made for the imported merchandise but rather for equipment rental under the lease agreement. Furthermore, the payments are not "to or for the benefit of the seller," i.e., the protestant, but are owed to the company holding the rights to the Jak-et-Pak machines. While the payments are made through the protestant, the fact nevertheless remains that the lease is separate from the imported merchandise.

HOLDING:

The machine amortization charge is not part of transaction value of the imported beverage wraps and therefore should not be added to the price actually paid or payable.

You are instructed to grant the protest in full. A copy of this decision should be attached to the Form 19 Notice of Action. In accordance with section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and the public via the Diskette Subscription Service, Lexis, the Freedom of Information Act and other public access channels.

Sincerely,

Previous Ruling Next Ruling