HQ 546513 - Price Actually Paid or Payable; Indirect payments; Royalties; HRL 545194. - United States International Trade Commision Rulings

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HQ 546513

February 11, 1998

VAL RR:IT:VA 546513 LR

CATEGORY: VALUATION

Michael S. O'Rourke, Esq.
Rode & Qualey
295 Madison Avenue
New York, N.Y. 10017

RE: Price Actually Paid or Payable; Indirect payments; Royalties; HRL 545194.

Dear Mr. O'Rourke:

This is in response to your letter dated September 24, 1996, submitted on behalf of Sidney Rich Associates (SRA), Inc. requesting a ruling regarding the dutiability of certain license fees paid by the importer/buyers relating to certain trademarks on imported footwear. The dutiability of these fees was the subject of Headquarters Ruling Letter (HRL) 545194, September 13, 1995. Although Customs determined that such fees were dutiable, you have proposed certain procedural changes which you believe change the outcome. You filed three additional submissions dated April 18, July 25 and August 27, 1997, which contained six sets of transaction documents, three license agreements and a Trust Agreement. This ruling is based on the transaction documents along with the additional facts presented.

FACTS:

HRL 545194

In HRL 545194, Customs determined that certain fees paid by the importer/buyers to Pagoda Trade Company (Pagoda) or KidNATION Inc., denominated collectively in the ruling as the "Licensee" were dutiable. The decision notes that the so-called license fees paid by the importer are not paid to the Licensor, but are paid either to SRA or to the Licensee, each of whom is a party related to the sellers of the imported merchandise". The decision states that "notwithstanding the fact that the payments in question are referred to by the parties as license fees', we conclude that they are actually part of the total payment for the imported merchandise. These fees to a party related to the seller constitute indirect payments to the seller and part of the total payment made by the buyer to or for the benefit of the seller." The decision states further that "[h]aving concluded that the license fees at issue are part of the price actually paid or payable for the imported merchandise, we do not address whether they could alternatively be considered royalties or proceeds under TAA 402(b)(1)(D) and (E).

In order to address the above findings, you have proposed a different arrangement. whereby the importer/buyers would pay the fees in question to a Trustee (First National Bank of Chicago) instead of to SRA or the Licensee. The Trustee in turn would pay the Licensors the requisite license fees. You argue that under the terms of the Trust Agreement, and legal principles relating to Trusts, the Trustee is not related to the seller. Therefore, you believe that the impediment that existed previously for finding the payments to be dutiable has been removed.

Transaction Documents

You have provided six sets of transaction documents relating to previous import transactions. You indicate that these documents represent six of the largest purchasers of footwear on a first cost basis who utilize the services of SRA (including xxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx). (These purchasers are the importers and will be referred to collectively as the "importer/buyers"). In each case, the seller is xxxxxx xxxxxxxxxxxxx xxxxxxx and SRA is the buying agent. Each set consists of the importer/buyer's purchase order, the seller's invoice, SRA's buying commission invoice and the Licensee's license fee invoice (in each case, KidNATION is the Licensee). Under your proposal, the transaction documents will essentially be the same. The only difference will be regarding the issuance and payment of the license fees.

As reflected in these documents, the importer/buyer issues its own purchase order to the seller. The purchase order sets forth all the information necessary for ordering footwear, including a unit price per pair. The seller's invoice refers to the buyer's purchase order number. The buyer pays the seller the invoiced unit price for the imported merchandise directly by wire transfer or letter of credit. The price paid by the importer/buyer to the seller does not include a charge for license fees or buying commissions. Except with regard to xxxxxxxxxx transactions, the seller's commercial invoice includes the following section entitled "Information related to transaction":

A buying agent commission is payable to Sidney Rich Assoc Inc. By (buyer) and is not included in the value indicated on this commercial invoice
A License fee will be paid to a third party company in the U.S.A.
This is a non-related transaction.
No assists were provided.
Sellers code: xxxxxxxxxxxx

You indicate that this information appears on the seller's invoice for the purpose of alerting the importer/buyer or his broker to make appropriate statements at the time the entry is made. You state that if the importer/buyer instructs otherwise, the seller does not make such statements. In this regard, you point to the xxxxxxxx documents which make no reference to the payments of commissions or license fees. You also state that the seller will immediately cease including such statements on all future invoices if we determine that the removal of this information would more accurately reflect the nature of the license fee payment. Some of the submitted purchase orders also make reference to the fact that commissions and license fees will be paid. You advise that there are no written contracts pertaining to the sale of the imported merchandise between the importer/buyers and the seller and no license agreements between the importer/buyers and the Licensee or the Licensors.

In addition to the seller's commercial invoice, the importer/buyer receives a separate commission invoice from SRA and the importer/buyer directly pays SRA its commission. Under your proposal, the importer/buyers will also receive a license fee invoice from the Data Facilitator (see below) on behalf of the Trust. The importer/buyers (referred to in the Trust Agreement as the License Fees Obligors) will pay the license fee into the Trust who in turn will pay the Licensors. (As reflected in the submitted documents, previously, the Licensee issued the license fee invoice to the importer/buyer and the importer/buyer paid the Licensee directly).

You have submitted three license agreements between various Licensors and the Licensee, KidNATION, the terms of which are described below. Each agreement provides for the payment of license fees relating to licensed trademarks or other graphic representations on certain footwear. Although these fees will actually be paid by the importer/buyers, you indicate that there is no written agreements regarding the payment of such fees between the importer/buyers and Licensee or the Licensor.

Relationship of the Parties

The Licensee, KidNATION, the seller and SRA are related parties. Each is a subsidiary of the Brown Group International, Inc. The importer/buyers are not related to the Licensee, the Licensors or the sellers. The Licensors are not related to any of the other parties. The status of the Trustee will be addressed below.

The Trust Agreement

In order to facilitate the payment of license fees from the importer/buyers to the Licensors, a trust was established by an Agreement entitled "Footwear Trademarks License Fees Trust" dated September 4, 1996 (Trust Agreement) . The parties to the Trust Agreement are The First National Bank of Chicago (Trustee); Clayton License, Inc., KidNATION, Inc. and Pagoda Trading Company, Inc. Under the terms of the Trust Agreement, KidNATION and Clayton are referred to as the Trademark Licensees and Pagoda, the Data Facilitator. The Trademark Licensees grant the Trustee all the property described (the Trust Estate): all monies paid into the Trust by License Fees Obligors (importer/buyers), Trademark Licensees and any and all other parties. Section 2.02 of the Trust Agreement provides that the Data Facilitator shall send invoices to the License Fees Obligors (i.e., importer/buyers) requiring that they pay all license fees when due into the Trust Account, and the Data Facilitator shall account for and keep all necessary and desirable records in respect of the same. This section further provides that the Data Facilitator shall be entitled to receive fees for the performance of its duties. Section 1.01 of the Trust Agreement provides that the Trustee shall pay from the Trust Account all Trust Monies due and owing to the License Fees Beneficiaries (i.e., Licensors).

You indicate that in all instances the license fee invoice is issued well after the seller's commercial invoice. (39-68 days afterwards on the sample documents). You indicate that depending on when the goods are shipped and the end of a particular quarter for which KidNATION has to remit license fee payments to various Licensors, there may be instances where the license fee invoice is not paid before KidNATION's obligation to pay the Licensor arises. You also indicate that if a U.S. customer goes into bankruptcy it does not in any way affect KidNATION's obligation to remit license fee payments.

License Agreements

Copies of three license agreements were submitted which you indicate are typical license agreements. Although there are three different Licensors, in each case, KidNATION is the Licensee. The agreements are similar in most respects. In each case, the Licensor grants the Licensor a license to use certain licensed property (i.e., certain footwear containing trademarks or other graphic representations) in connection with the manufacture, sale and distribution of the licensed property through the specified territory and/or distribution channels. In each case, the Licensee must obtain the Licensor's advance approval to use third party manufacturers and the Licensee must provide the Licensor with an agreement signed by it and the manufacturer agreeing to the terms of the license agreement. Each license agreement contains various provisions whereby the Licensor will exercise control over the manufacture and sale of the licensed products. In addition to approving the manufacturer, the Licensor also has the right to visit the manufacturer, obtain pre-production samples of the licensed products, review prototypes, designs, etc. In one agreement, the Licensor specifies that the Licensee will only sell to certain types of buyers. Another agreement provides certain conditions regarding the price at which the Licensee shall sell the licensed product. Finally, each agreement provides for the payment of continuing royalties based on a specified percentage of the invoice price (less certain deductions) from the Licensee to its customers (i.e., the importer/buyers). Each agreement also has a provision for minimum guaranteed royalties; and two agreements provide for the payment of advance royalties.

Counsel claims that under its proposed arrangement, the fees paid by the importer/buyers to the Trust are not dutiable as part of the price actually paid or payable because they are being paid to a party who is not related to the seller. In addition, counsel claims that the fees are not dutiable as an additional to the price actually paid or payable as royalties because they are not related to the imported merchandise and are not a condition of the sale of the imported footwear.

The scope of this ruling is limited to the transactions covered by the submitted documents, but including the proposed method of payment of the royalties, i.e., through the Trust..

ISSUES:

Whether payments made by the importer/buyers to unrelated Licensors through the Trust are an addition to the price actually paid or payable as a royalty or license fee.

Whether payments made by the importer/buyers to unrelated Licensors through the Trust are part of the price actually paid or payable of the imported footwear.

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 basis 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," plus certain enumerated additions.

Are the fees dutiable as royalties under section 402(b)(1)(D)?

One of the additions to the price actually paid or payable is 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 sale of the imported merchandise for exportation to the United States" Section 402(b)(1)(D) TAA; 19 U.S.C. ? 1401a(b)(1)(D).. An addition is to be made only to the extent these amounts are not included in the price actually paid or payable. For purposes of this discussion we will assume that the fees in question are not included in the price actually paid or payable.

The Statement of Administrative Action (SAA), H.R. Doc. No. 153, 96 Cong., St. 1st Sess., reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49, which forms part of the legislative history of the TAA, addresses the dutiability of license fees. 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 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 a case-by-case basis and will ultimately depend on: (1) 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. 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, and 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 the 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 for the United States.

Although the SAA provides that determinations about the dutiability of royalty payments are to be made case-by-case, it is more likely that the royalty will be dutiable when the licensor and seller are one and the same and the royalty is paid directly to the seller. Under these circumstances, payment of the royalty is more likely to be a condition of the sale for exportation of the imported merchandise than when the royalty is paid to an unrelated third party. See HRL 545361, July 20, 1995 (trademark royalties dutiable when paid to the seller/licensor but not when paid to a third party unrelated to the seller). However, the fact that the payments are made to an unrelated third is not determinative. As indicated above, the SAA provides that if the payment was made by the buyer as a condition of the sale of the merchandise for exportation to the United States, an addition will be made.

In determining whether royalties or license fees are dutiable under section 402(b)(1)(D), Customs considers the following three questions: 1) was the imported merchandise manufactured under patent; 2) was the royalty involved in the production or sale of the imported merchandise; and 3) could the importer buy the product without paying the fee. An affirmative answer to question 1 and 2 and a negative answer to question 3 points to dutiability. Question 3 goes to the heart of whether the payment is considered to be a condition of sale. See General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) ("Hasbro II ruling").

In this case, there is no indication that the licensed footwear was manufactured under patent and we presume the answer to question one is no. However, for the reasons discussed below, we conclude that the royalty is involved in the production or sale of the imported merchandise and that the importer could not buy the products without paying the fees. Both of these conclusions are consistent with a finding that the fees are dutiable.

In the Hasbro II ruling, Customs determined that the royalty, paid to the seller, was involved in the sale of imported merchandise because the individual sales agreements and purchase contracts were subject to the terms of the royalty agreement. In HRL 544991, September 13, 1995, we held that a royalty was involved in the sale of the imported merchandise payment of the royalty was closely tied to the purchase of the imported product. For example, in that case, the terms and conditions related to the purchase of the imported products were set forth in the license agreements. See also HRL 545380, March 30, 1995 (royalty related to the production or sale of the imported merchandise where under the terms of the licensing agreement, importer was required to purchase components from the seller). Some other factors which Customs has considered in answering questions two and three are whether the purchase of products and the payment of royalties is inextricably intertwined and whether royalties are optional or whether they are paid on each and every importation. See HRL's 544991, 545380; 545361; and Hasbro II, supra.

In this case, payment of the license fees is inextricably intertwined with the sale for exportation of the imported footwear. First, we note that the imported footwear is the licensed product and the license fees are paid so that these products may be manufactured, distributed for sale and sold to the importer/buyer. In exchange for this right, the license fees must be paid to the Licensors. Each of the License Agreements contains provisions regarding the manufacture and sale of the licensed products. (See note 5). In other words, the royalties are related to the production and sale of the imported licensed products. Second, it is the sale for exportation between the seller and the importer/buyers which triggers the obligation to pay the license fees. In fact, the amount of the fees is determined based on the price paid by the importer/buyers. Finally, the License Agreements link the payment of license fees with the manufacture and sale of the licensed products. In addition to granting the Licensee the right to use the licensed products in connection with the manufacture, distribution for sale and sale of the licensed products in the specified territory, the Licensors exercise strict control over the manufacture and sale of the licensed product.

For example, the License Agreements provide that the Licensee must obtain prior approval from the Licensor to use third party manufacturers and that the Licensee must sign an approval of manufacturer's agreement whereby the manufacturer agrees, inter alia, to accept all relevant provisions of the License Agreements. The Licensor has the right to approve the licensed products, including the initial concepts, design documents, prototypes and manufacturing samples prior to manufacturing. Without such agreements, along with the Licensors' approval of the manufacturers, the imported products could not be sold. Finally, one of the License Agreements provides that the Licensee shall not sell any licensed products at a price ten percent or more below the price generally charged the trade by the Licensee for licensed products except under the conditions specified.

In addition, the payment of the requisite license fees by the importer/buyers is not optional. Although there is no written contract between the importer/buyers and the seller or the Licensee regarding the payment of the license fees owed by the Licensee, we conclude that it is an implied obligation. You indicate that the importer/buyers are informed orally of the requisite license fees prior to purchase and that after purchase, they will receive a license fee invoice from the Data Facilitator for these amounts to be paid to the Trustee. The Trustee in turn will pay these fees to the Licensors. The fees to be paid by the importer/buyers are the fees specified in the License Agreements. And, as noted above, the amount of the continuing royalties is based on a specified percentage of the invoiced price (less certain deductions) to the importer/buyers. Thus, on each and every sale of imported product between the seller and the importer/buyers, the seller's related party is obligated to pay a license fee to the Licensors, and such amount is actually paid by the importer/buyers to the Licensors through the Trust. The Data Facilitator will bill the importer/buyer the requisite amount. Payment of the license fees is not contingent upon anything other than the sale of the imported product from the seller to the importer/buyers. Whether the importer/buyer's obligation to pay the license fees arises from the language on the seller's invoice or from an oral agreement between the parties is immaterial. Clearly, it is understood that the importer/buyers are to pay the requisite license fees specified in the License Agreements and that such payments are not optional.

Based on the above considerations, we conclude that the payment of royalties is closely tied to the production and sale for exportation to the United States of the imported products and that the answer to question two is yes.

Finally, we conclude that the payment of the license fees is a condition of the sale for exportation to the United States. Under the terms of the License Agreements, the license and the requisite license fees enable the licensed products to be manufactured and sold to the importer/buyers. Whether or not the seller's invoices reference the royalty payment, we conclude that the Licensee's related party would not sell the licensed products to the importer/buyers unless there was an agreement (written or oral) by the importer/buyers to pay the requisite license fees. The issuance of license fee invoices for the amounts specified in the License Agreements supports this conclusion. The fact that the invoice for the license fee may be issued and payment made after importation is immaterial. It is not the timing of payment that is important, but the fact that the agreement to pay the requisite license fees is a prerequisite to the manufacture and sale of the licensed products to the importer/buyers. The importer/buyers are notified by the seller of the requisite license fees they must pay prior to purchase. Even though there is no written agreement license agreement which obligates the importer/buyers to pay the Licensors a royalty, we conclude that the payment of royalties by the importer/buyers is in fact a condition of the sale for exportation.

Based on the above considerations, we find that the license fees covered by the License agreements are related to the imported merchandise and must be paid by the importer/buyers as a condition of the sale of the imported merchandise for exportation to the United States. Therefore, we find that they are a proper addition to the price actually paid or payable of the imported merchandise under section 402(b)(1)(D) of the TAA.

Are the license fees part of the price actually paid or payable?

In HRL 545194, we ruled that the fees in question which were paid to the Licensee, a party related to the seller, were part of the price actually paid or payable. In concluding that such payments related to the imported merchandise, the decision notes that the sellers' invoices refer to the fact that license fees were to be paid by the importer and that the fees paid by the importer are based on the importer's purchase price for the imported merchandise. The question to be addressed here is whether a different result is warranted if the importer/buyers pay the fees in question to the Trustee instead of the Licensee. Counsel argues it is, based on its contention that the importer/buyers and the Trustee cannot be considered related parties. As such, counsel argues that the fees are being paid to unrelated third parties and must be considered to be non-dutiable.

We disagree with counsel's conclusion that under its proposal the fees in question cannot be considered to be part of the price actually paid or payable. We conclude that the fees can alternatively be considered to be part of the price actually paid or payable whether or not the Trustee and the seller are considered related parties under the TAA.

The 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. Title II of the SAA, provides that one example of an indirect payment to a seller would be "the settlement by the buyer, whether in whole or in part, of a debt owed by the seller. In HRL 542984, April 8, 1993, Customs ruled that payment for product liability insurance made by the buyer to a third party insurer were part of the price actually paid or payable for the imported merchandise as indirect payments, where a condition of the sale required the seller to obtain suitable insurance and bear the cost thereof. In HRL 544764, January 6, 1994, Customs stated that where the payments are for the settlement of a debt of a party related to the seller, such payments are also part of the price actually paid or payable for the imported merchandise. In that case, the payments by the buyer were to an unrelated third party supplier for an expense incurred by the assembler, a party related to the seller.

As discussed above, in this case, payment of the license fees is a condition of the sale between the importer/buyers and the seller. Under the terms of the License Agreements, the Licensee is obligated to pay the license fees upon sale of the licensed products to the importer/buyers. There is an implied obligation that the importer/buyers will pay the fees covered by the license agreements. The fees to be paid by the importer/buyers through the Trust to the Licensors have the effect of settling a debt owed by the Licensee, a party related to the seller. Since the Licensee and the seller are related parties, the payments to the Trust are for the settlement of a debt owed by a party related to the seller and considered an indirect payment to the seller.

HOLDING:

In conformity with the foregoing, the licensee fees paid by the importer/buyers are included in the transaction value of the imported merchandise either as an addition to the price actually paid or payable under section 402(b)(1)(D) of the TAA or as an indirect payment and part of the price actually paid or payable.

Sincerely,

Acting Director
International Trade Compliance Division

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