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HQ 546915





July 6, 1998

RR:IT:VA 546915 DEC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
423 Canal Street
New Orleans, Louisiana 70130
Attention: Protest Office, Room 200

RE: Application for Further Review of Protest 2002-97-101105; licensing fees; royalties; proceeds; Hasbro II; HRL 544982; HRL 544656 (C.S.D. 92-12); HRL 544129; HRL 542844; HRL 544061; HRL 544129

Dear Port Director:

This is in regard to the Application for Further Review of Protest (AFR) 2002-97-101105 which was received by your office on June 4, 1997, and forwarded to the Office of Regulations and Rulings for our review under a cover letter dated November 4, 1997. The AFR was filed by Rode & Qualey on behalf of the importer, Sumitomo Electric Wiring Systems and concerns the dutiability of certain payments made pursuant to a "Technical Assistance Agreement" under ?402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. ?1401a).

FACTS:

Sumitomo Electric Wiring Systems, Incorporated (SEWS) imported certain manufacturing equipment from a related company, Sumitomo Electric Industries, Limited (SEI) for use in the manufacture of cable reel assemblies in the U.S. The entry for the merchandise was filed on April 9, 1993. In response to requests for information, Customs was provided with a "Technical Assistance Agreement" between SEWS and SEI. Pursuant to Article IV, paragraph 4-2 of the Agreement, SEWS agreed to pay SEI a license fee equal to 3% of net sales of the cable reel assemblies in exchange for the license and technical assistance to be provided by SEI. Customs extended the liquidation of the subject entry three times and as the entry approached its deemed liquidation date, Customs issued a value advance on February 22, 1997, which resulted in an increase in duties of $26,746.29.

ISSUE:

Whether the licensing fee paid by the importer to the seller based on sales of Contract Products manufactured using the imported machinery should be added to the price actually paid or payable and if so, for how long.

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 (TAA) of 1979, codified at 19 U.S.C. 1401a. Section 402(b)(1) of the Trade Agreements Act 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 licensing fee related to the imported merchandise that the buyer is required to pay as a condition of the sale for export to the United States (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)). For purposes of this ruling we assume that transaction value is acceptable. However, the issue to be resolved is whether the licensing fee is part of transaction value from the perspective of whether it constitutes an addition to the price actually paid or payable.

With regard to license fees, the Statement of Administrative Action (SAA), adopted by Congress with the passage of the Trade Agreements Act, 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.

SAA, 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).

Under section 402(b)(1)(D), Trade Agreements Act, an addition is made for any royalty or licensing 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." Thus, in order to be dutiable under this provision, the licensing fee must be related to the imported merchandise and the payment of such licensing fee must be a condition of the sale of the imported merchandise.

In analyzing whether royalty payments are dutiable under section 402(b)(1)(D), Customs follows the approach set forth in the General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) (Hasbro II). In that notice, among other things, Customs determined that the method of calculating the royalty, e.g. on the resale price of the goods, is not relevant to determining the dutiability of the royalty payment. The effective date of Hasbro II is May 10, 1993.

However, prior to the issuance of Hasbro II, one of the major factors for determining whether a royalty was dutiable was whether the royalty payments were calculated on the basis of sales that occurred subsequent to the importation of merchandise. If so, the royalty payment was not considered to be dutiable under section 402(b)(1)(D). In the instant case, the entry covered by the protest was filed on April 9, 1993, prior to the effective date of Hasbro II. Therefore, the method of calculating the royalty is relevant. The royalties are based on the resale price in the U.S. Based on pre-Hasbro II rulings, we find that the royalties are not dutiable under section 402(b)(1)(D). See Headquarters Ruling Letter (HRL) 542844, dated June 17, 1982; HRL 544061, dated May 27, 1988; HRL 544129, dated August 31, 1988. In addition, prior to Hasbro II, Customs' position was that a royalty payment that was deemed to be nondutiable under section 402(b)(1)(D) of the Trade Agreements Act could not be dutiable as a proceed of a subsequent resale under section 402(b)(1)(E) of the Trade Agreements Act. Thus, royalties paid for the merchandise imported prior to May 10, 1993, which are non-dutiable under section 402(b)(1)( D) were also found to be non-dutiable under section 402(b)(1)(E) of the Trade Agreements Act, the proceeds of subsequent resale provision. See HRL 544982, dated August 23, 1995, and HRL 544656, dated June 19, 1991 (Customs Service Decision (C.S.D. 92-12)).

Since the merchandise at issue in this protest was entered on April 9, 1993, before the effective date of the Hasbro II ruling, and since the royalty payments are not dutiable under section 402(b)(1)(D) of the Trade Agreements Act, the royalty payments are also not dutiable under section 402(b)(1)(E) of the Trade Agreements Act as proceeds.

Counsel contends that the entry subject to this AFR was deemed liquidated by operation of law at the entered values because Customs impermissibly extended liquidation of this entry. We will not address this issue since we believe it is moot in light of the fact that we have found the royalty payments non-dutiable.

HOLDING:

The licensing fee paid by the importer to the seller should not be added to the price actually paid or payable for the imported machinery either as royalties under section 402(b)(1)(D) or as proceeds of a subsequent use under section 402(b)(1)(E).

The protest should be GRANTED. 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

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