HQ 546565 - Application for Further Review of Protest 0401-96-100228; payments for use of label and assignment of rights to garments; royalty; ?402(b)(1(D); SAA; General Notice, Dutiability of Royalty Payments; Label Release and Assignment Agreement; HRL 544950 - United States International Trade Commision Rulings

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HQ 546565

September 11, 1997

RR:IT:VA 546565 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
10 Causeway Street
Boston, Massachusetts 02222-1059

RE: Application for Further Review of Protest 0401-96-100228; payments for use of label and assignment of rights to garments; royalty; ?402(b)(1(D); SAA; General Notice, Dutiability of Royalty Payments; Label Release and Assignment Agreement; HRL 544950

Dear Port Director:

This is in regard to the Application for Further Review of Protest 0401-96-100228 dated May 10, 1996, filed by Tamara Import concerning whether certain payments constitute non-dutiable charges under ?402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. ?1401; TAA). We regret the delay in responding.

FACTS:

Truly Yours, Inc. ("Truly Yours") ordered Ladies Acrylic Knitted Cardigans with its licensed trademark label "Fashion Exchange" from Seheng Knitting Ltd., Part. ("Seheng") with the intent of importing the merchandise into the United States. The Seheng invoice, #SK 20/95 dated June 14, 1995, is to Truly Yours with the terms of sale listed as "FOB Bangkok." The Thailand Textile Visa and Certificate of Origin also list Truly Yours as the importer/consignee. The shipping company's bill of lading shows that the garments were exported on June 21, 1995, and that Truly Yours was the consignee. Due to Truly Yours' financial difficulty, the garments were imported into the United States on July 8, 1995, into General Order warehouse pursuant to Part 127, Customs Regulations (19 CFR Part 127). Thereafter, on August 3, 1995, the imported garments were entered into the United States by Tamara Import using the Seheng invoice #SK 20/95.

A Label Release and Assignment Agreement ("Agreement") was executed on June 15, 1995, between Truly Yours and Colberts, Inc. ("Colberts"). In ?2 of the Agreement, Truly Yours "...sells, assigns, conveys, transfers, sets over and delivers...." to Colberts its right, title and interest in the garments at issue. Additionally, Truly Yours grants Colberts "...the non-transferrable right, license and privilege to use the Mark [Fashion Exchange] in connection with the Merchandise [garments at issue] only." ?3 of the Agreement. In consideration for Truly Yours performance of its obligations, Colberts agreed to pay $15,000.00 to Truly Yours in three installments ("Agreement payments"). ?1 of the Agreement. Tamara Import is the importing division of Colberts.

You liquidated the entry at the Seheng invoice price plus an addition of $15,000.00 for the Agreement payments from Tamara Import/Colberts to Truly Yours. You state that Tamara Import/Colberts had to make the Agreement payments in addition to the invoice price prior to taking ownership of the imported garments. Tamara Import/Colberts claims that the Agreement payments for use of the label in the U.S. is an expense of the buyer and, therefore, is not dutiable. Additionally, the Agreement payments should not be added to the price actually paid or payable for the imported garments as a royalty because it was not a condition of sale prior to exportation of the garments to the United States.

ISSUE:

Whether the Agreement payments made by Tamara Import/Colberts to Truly Yours are included in the transaction value of the imported garments under ?402(b)(1)(D) of the TAA.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to ?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. ?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. In this case, the sale for exportation occured between Seheng and Tamara Import/Colberts. Although Truly Yours was the original purchaser of the merchandise, it executed the Agreement that transfered the merchandise to Colberts on June 15, 1995. The Agreement was excuted before the merchandise was exported to the U.S. on June 21, 1995.

?402(b)(1) of the TAA provides for additions to the price actually paid or payable for:

(D) 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; and

For purposes of this decision, we assume that the Agreement payments are not part of the price actually paid or payable for the imported merchandise because they are not part of the total payment, directly or indirectly, made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller. See, ?402(b)(4)(A) of the TAA. Based on the facts submitted, the Agreement payments will be made to Truly Yours, who is a third party, unrelated to the seller, i.e., Seheng, and are distinct from the price actually paid or payable. It does not appear that Truly Yours is acting as a seller in this situation. As set forth in the Agreement, Truly Yours has assigned all of its rights and obligation in the garments at issue to Tamara Import/Colberts. Thus, the issue to be resolved is whether the Agreement payments are part of transaction value from the perspective of whether they constitute additions to the price actually paid or payable.

With regard to royalties, the Statement of Administrative Action (SAA), adopted by Congress with the passage of the TAA, provides 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. 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 case-by-case basis and will ultimately depend on: (i) 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.

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. 12, 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 related to the imported merchandise and a condition of sale and, therefore, dutiable as royalty payments.

The first question is whether the imported merchandise is manufactured under patent. It is unlikely that the imported garments are manufactured under patent. Regardless, the Agreement involves the assignment of title, rights and obligation to merchandise and the right to use a trademark label, both of which have nothing to do with any patents which might be associated with the manufacture of the garments. Thus, the imported garments are produced by a foreign manufacturer independently from, and without regard to, the Agreement.

The second question is whether the payments are involved in the production or sale of the imported merchandise. Under the terms of the Agreement, the Agreement payments are paid to Truly Yours in consideration for giving up its title or rights in the garments and for the right to use garments bearing the Fashion Exchange trademark label. Thus, the Agreement payments are not paid for rights associated with the manufacture or production of the imported garments.

However, the Agreement payments are involved in the sale for exportation to the United States of the imported garments. In Headquarters Ruling Letter (HRL) 544950 dated May 28, 1992, which involved imported machines, equipment, tools and molds, we held that a license fee related to the importation and ownership of the imported merchandise and was a condition of sale of the merchandise for exportation to the U.S. In that case, the license agreement specifically provided that the machines, equipment, tools, and molds are provided as "part of the aforesaid License Fee," and title to the merchandise did not pass to the importer until the total license fee was paid. In HRL 544950, the importer did not provide any evidence that the merchandise could have been purchased without payment of the license fee.

Similarly, an examination of the Agreement between Truly Yours and Tamara Import/Colberts reveals that the Agreement payments are involved in the sale of the imported garments. The Agreement links the Agreement payments to the assignment of the imported garments to Tamara Import/Colberts. Under ?2 and ?3 of the Agreement, Truly Yours "...sells, assigns, conveys, transfers, sets over and delivers...." the right, title and interest in the garments at issue to Tamara Import/Colberts. In addition, Truly Yours grants "...the non-transferrable right, license and privilege to use the Mark [Fashion Exchange] in connection with the Merchandise [garments at issue] only" to Tamara Import/Colberts. As stated in ?1 of the Agreement, Tamara Import/Colberts agreed to pay $15,000.00 to Truly Yours in three installments for the performance of Truly Yours obligations under the Agreement. Part of Truly Yours obligations is to sell, assign, convey, transfer, set over and deliver its rights, title and interest in the garments at issue. The transfer of title or rights in the garments took place on June 15, 1997, six (6) days before the garments were exported to the United States. Similar to HRL 544950, Tamara Import/Colberts was obligated to make the Agreements payments in order to obtain rights to and enter the trademark label garments into the United States. Additionally, as in HRL 544950, the protestant has not provided any evidence that it could have acquired and entered the garments into the United States without paying the Agreement payment. Based on the facts submitted, the Agreement payments are involved in the sale for exportation to the United States of the trademark label garments.

The third question posed by the notice is whether the importer could buy the imported merchandise without paying the Agreement payments, i.e., whether the payments are a condition of sale. As pointed out in the General Notice, supra, the answer to this question goes to the heart of whether a payment is considered to be a condition of sale. While royalties paid to third parties for the use, in the United States, of trademarks related to the imported merchandise are generally not dutiable, the SAA provides that such payments will nevertheless be treated as dutiable if they represent a condition of the sale for exportation. Payments that must be made for each imported item are a condition of sale. In a pre-TAA case, BBR Prestressed Tanks, Inc., Frank P. Dow Co., Inc., of L.A. v. United States, 60 Cust. Ct. 885, R.D. 11536 (1968), aff'd, 64 Cust. Ct. 787, A.R.D. 265 (1970), the buyer of imported merchandise was required to pay a lump-sum royalty in addition to the price. The court held that such a mandatory payment was dutiable, based primarily on the fact that the payment went to the seller. Under the TAA, such payments may be dutiable as royalties, as part of the price actually paid or payable, or as proceeds. Royalty payments are also a condition of sale when they are paid on each and every importation and are inextricably intertwined with the imported merchandise.

As stated previously, the Agreement payments are not optional. They must be paid to Truly Yours for Tamara Import/Colberts to acquire the rights to and enter the trademark label garments into the United States. Although the Agreement payments are not paid to the seller, Seheng, they are linked to the purchase of the trademark label garments, e.g., a requirement by Truly Yours that Tamara Import/Colberts pay the money to acquire the title and rights to the garments and for use of the trademark label. It is our position that Tamara Import/Colberts could not acquire and enter the trademark label garments without paying the Agreement payments. Accordingly, the Agreement payments at issue are a condition of sale of the imported merchandise and, therefore, do constitute an addition to the price actually paid or payable for the imported garments pursuant

HOLDING:

Based on the facts submitted, the Agreement payments made to Truly Yours constitute dutiable royalties pursuant to transaction value of the imported garments.

The protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, this decision, together with the Customs Form 19, should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing 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, Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade Compliance

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