HQ 545486 - Dutiability of royalty payments for use of trademark - United States International Trade Commision Rulings

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HQ 545486

July 14, 1995

VAL R:C:V 545486 LPF

CATEGORY: VALUATION

John B. Pellegrini, Esq.
Ross & Hardies
Park Avenue Tower
65 East 55th Street
New York, NY 10022-3219

RE: Dutiability of royalty payments for use of trademark

Dear Mr. Pellegrini:

This is in response to your letters of November 23, 1993 and June 21, 1995, submitted on behalf of [ ] (Importer), requesting a ruling concerning the dutiability of royalty payments made for trademark rights. A meeting was held on June 15, 1995 concerning the matter. We have excised, in the public version of this decision, the information as requested in your January 10, 1995 submission.

FACTS:

The Importer, a manufacturer, importer, distributor and retailer of apparel, owns in the U.S., and in other countries, a particular trademark. However, you explained the right to a similar the trademark in additional countries is owned by the [ ] (Licensor), an entity which you advise is unrelated to the importer. You also state that the manufacturers of the apparel, to which the trademark may be affixed, are unrelated to either the Licensor or the Importer.

In your most recent submission you explain that an agreement between the Importer and Licensor permits the Importer to affix its trademark in those territories where the Licensor owns the right to a similar trademark. However, you explain that the marks, although similar, are not identical. The Importer may purchase merchandise manufactured in countries where the Licensor owns the similar trademark, and the Importer may affix its trademark to the merchandise in those countries, under license granted by the Licensor. Pursuant to the agreements between the Importer and Licensor, the former pays the latter a royalty calculated as a percentage of the sale value of the apparel if the Importer's trademark is affixed in a country where the trademark license applies. The agreements also provide for a minimum amount of royalty payments.

Although the agreements refer to this payment as a royalty, you question whether the payments correctly are characterized as royalties. In particular, you explain that the Importer and Licensor have agreed that they will not sell products bearing their individual marks in territories where the other's mark has historical precedence. The agreement therefore allows the Importer to affix its mark in the Licensor's territory without interference from the Licensor. The payment, you advise, is not made in return for the right to use the Licensor's intellectual property, but rather is made in consideration for the Licensor's forbearance from taking any action which could prevent the Importer from affixing its mark in territories in which the Licensor has registered its mark.

You explain that if the Importer purchases the merchandise without affixing the trademark or purchases it within its territory, no royalty is paid. The seller of the merchandise receives the same price in either case. Sellers cannot require that the royalty be paid and, in contrast to the licensor, have no property rights concerning the trademark. Because the obligation to pay the royalty attaches only to the sales value of garments when the trademark is used, or affixed, in countries within the Licensor's territory, you advise that the identical merchandise could be purchased in such countries and the trademark affixed after importation, without paying the royalty.

Furthermore, you explain that the Importer owns all rights to the trademark in the U.S. The Importer need not pay the royalty to import or sell merchandise bearing the trademark if affixed in the U.S. You state that even if the trademark was affixed within the Licensor's territory, the Licensor could not prohibit the importation, to the U.S., of merchandise bearing the trademark. In support of your position, you explain that in situations when the "Importer" buys the merchandise from an unrelated importer, that is, the "Importer" does not serve as importer of record, then the unrelated importer does not pay, nor has the obligation to pay, the royalty. On the other hand, when the Importer does serve as importer of record, the choice of production still rests with the foreign manufacturer/seller and a royalty need only be paid on the merchandise bearing the trademark similar to the Licensor and affixed in the Licensor's territory, although exactly the same merchandise may have been manufactured and imported but with a different trademark or without one at all. Accordingly, even if found to fit the definition of a royalty or license fee, you believe the payment is not a condition of a sale for exportation to the U.S. and that the royalties are payments for a right entirely separate from the purchase or manufacture of the imported merchandise.

ISSUE:

Whether the royalties at issue, paid by the Importer to the unrelated Licensor for the right to sell merchandise which bears a trademark affixed in the Licensor's territory, are included within the transaction value of the imported merchandise as royalties or proceeds of subsequent sale.

LAW AND ANALYSIS:

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) 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 enumerated statutory additions, including 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 U.S. (section 402(b)(1)(D)) and the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue to the seller (section 402(b)(1)(E)).

You question whether the payments at issue are not accurately described as royalties. However, even if this were the case, it has not been shown that the payments at issue do not fit the definition of license fees, also included as a statutory addition pursuant to section 402(b)(1)(D). Consequently, it remains necessary in this case to consider whether the payments at issue constitute dutiable royalties or license fees.

With regard to royalties, the Statement of Administrative Action (SAA), adopted by Congress with the passage of the TAA, explains 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. [R]oyalties 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." 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 the General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993), Customs articulated three factors, based on prior court decisions, for determining whether a royalty was dutiable. These factors were whether: 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 were a condition of sale and, therefore, dutiable as royalty payments.

First, the imported merchandise is not manufactured under patent or trademark. The imported apparel is produced by foreign manufacturers independently from, and without regard to, the trademark. Furthermore, the royalty is not involved in the production or sale of the imported merchandise, but instead serves as consideration paid to the Licensor, a party unrelated to the seller, for the right to sell merchandise which bears the Importer's trademark affixed in the Licensor's territory as well as for the Licensor's forbearance from taking preventative action. Finally, it is our position that the importer can buy the imported merchandise without paying the fee. The fee is payable only on merchandise sold which bears the trademark when affixed within the Licensor's territory. We note that if the Importer sells the merchandise in the U.S. without affixing the trademark, or bearing the trademark affixed in the U.S. or elsewhere within its territory, no royalty is paid. In addition, in some cases an unrelated importer, as opposed to the "Importer," who does not pay, nor has the obligation to pay, the royalty, may serve as the importer of record.

Accordingly, the royalty payments at issue are not a condition of sale of the imported merchandise and, therefore, do not constitute an addition to the price actually paid or payable for the imported merchandise pursuant to section 402(b)(1)(D). Nevertheless, the payments still may be added to the price actually paid or payable as proceeds pursuant to section 402(b)(1)(E). General Notice, supra, at 6-7.

With regard to proceeds, the SAA provides that:

[a]dditions for the value of any part of the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.

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 49 (1981).

Based on the facts presented, we do not find that the proceeds of any subsequent resale, disposal, or use of the merchandise accrues directly or indirectly to the seller. Accordingly, in this instance, the royalty payments do not constitute proceeds pursuant to section 402(b)(1(E).

HOLDING:

Based on the facts submitted, the payments made to the Licensor do not constitute royalties or proceeds to be included within the transaction value of the imported merchandise.

Sincerely,

John Durant, Director
Commercial Rulings Division

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