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HQ 545526

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November 30, 1995

RR:IT:VA 545526 er
CATEGORY: VALUATION

RE: Request for a Ruling Regarding the Dutiability of Certain Royalty Payments.

Dear [ ]:

This is in response to your letters dated January 5 and 20, 1994 and June 22, 1994, in which you resubmit a ruling request regarding the dutiability of certain royalty payments made by [the importer] to a related company, [X}. We regret the delay in responding.

FACTS:

[X] is a domestic company which has the right to sublicense certain Licensed Rights it has been granted by [Y], the foreign owner/licensor of [ ] patents, trademarks and technology. By agreement dated January 1, 1985, [X] granted [the importer], a company located in the United States, the sublicense to use the Licensed Rights. The agreement defines "Licensed Rights" as "[a]ll Licensed Patents, Licensed Trademarks and Licensed Technologies."

In addition to manufacturing [the] Products in the United States, [the importer] imports [the] Products, namely [], which it purchases from [ ] licensed foreign affiliates. [The importer] only purchases [the] products from the [ ] licensed foreign affiliates and not from the sublicensor, [X], or the licensor, [Y]. A copy of the subject licensing agreement between [X] and [the importer] was submitted with this ruling request.

[The importer] is sublicensed to "use the Licensed Rights ... for the purpose of manufacturing, selling and using [ ] Products in the Territory [United States and Puerto Rico]". (Article 2) In consideration for these rights [the importer] agrees to pay [X] a yearly fee equal to five percent (5%) of [the importer's] annual net sales of [ ]Products. (Article 8).

   In response to a request for additional information, [the importer] informed Customs that in actual practice various changes have been made in the manner in which the royalties are calculated. Namely, the fee is calculated every month based on sales for that month. This is an actual rather than an estimated amount and is verbally reported to [X]. [X] books the amount as a receivable while [the importer] books it as a payable. This royalty is paid for products manufactured by [the importer] in the U.S. and for products purchased by [the importer] from the related foreign affiliates which are imported and resold in the U.S.

In response to a request for additional information, [the importer] responded that all of the foreign [ ] affiliates from whom [the importer] makes purchases are licensees and that all purchases of [the Products] from these affiliates are governed pursuant to Article 8 of the licensing agreement between [the importer] and [X]. The agreement specifically states that "for that portion of [ ] Products purchased from [the importer] from another Licensee of [the] Products and resold within or outside the Territory, 'Annual Net Sales' shall also include that portion but shall be calculated on the value added by [the importer]." The "value added" by [the importer] is [the importer's] markup on the product. Monthly statements show the breakdown between domestic and imported sales and the corresponding royalty fees.

Thus, with regard to [products] purchased from the foreign affiliates and imported into the U.S., [the importer] pays royalties based on the markup of the [products], i.e., the difference between what [the importer] paid for the products and the price at which the [products] are resold in the U.S. For example, if [the importer] purchases and imports [products] for $100 and sells them in the U.S. for $110, a royalty of $.50 is due based on the $10 markup ($10 x 5%).

The results of a Customs audit of [the importer] were submitted to us in a report dated [ ]. Based on the audit report it appears that the [ ]foreign affiliates/sellers are related to the parties in the licensing agreements within the meaning of 19 U.S.C. 1401a(g)(A),(C), (F) or (G). Additionally, the review performed in the audit of the transfer prices used by [the importer] to declare imported merchandise to Customs led Customs to conclude that transaction value is the proper basis of appraisement for [the importer's] imported merchandise.

ISSUE:

Whether the payments made by [the importer] to [X] are part of the transaction value of the imported merchandise.

LAW AND ANALYSIS:

Transaction value, the preferred method of appraisement, is defined in section 402(b)(1) of the Trade and Tariff Agreements Act of 1930, as amended (TAA; 19 U.S.C. 1401a(b)(1)) as the "price actually paid or payable for the merchandise", plus five enumerated statutory additions. The term "price actually paid or payable" is defined in section 402(b)(4)(A) as:

...the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

Two court cases address the meaning of "total payment". In Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), the issue before the court was whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. The court found that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also stated:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir. 1990), the "straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs' appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Id. at 380.

In Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int'l Trade September 22, 1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines.

Based on Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise.

In HRL 545194, dated September 13, 1995, Customs determined that certain license fees paid by the importer to parties related to the sellers of the merchandise were part of the total payment for the imported merchandise. The parties to whom the payments were made were licensees. Citing to an earlier decision, HRL 545663 dated July 14, 1995, for the proposition that the Generra standard applies regardless whether payments are made directly to the seller or to a party related to the seller, Customs went on to explain that:

This position is consistent with the definition of the "price actually paid or payable" as the total payment made directly or indirectly by the buyer to, or for the benefit of, the seller. In our opinion, payments to a party related to the seller represent indirect payments made to, or, at the very least for the benefit of, the seller. We note that the same rebuttable presumption discussed above, that is that such payments are part of the price actually paid or payable, would equally apply in such instances. For these reasons, numerous Customs decisions have recognized that payments made from the buyer to a party other than the seller, particularly to a party related to the seller, also may be included as part of the price actually paid or payable. See HRLs 542169 (TAA No.6), dated September 18, 1980; 542150 (TAA No. 14), dated January 6, 1981; 544388, dated July 13, 1990; 544221, dated June 3, 1991; 544684, dated July 31, 1992; 557331, dated September 9, 1993; 544971, dated October 20, 1993; 544972, dated October 20, 1993; 544764, dated January 6, 1994; 545490, dated August 31, 1994; and 544694, dated February 14, 1995.

In HRL 545194 Customs next directed attention to HRLs 545071, dated June 28, 1995, 545321, dated June 30, 1995 and 545418, dated June 30, 1995, where Customs also determined that certain payments were part of the total payment. In those rulings the importer purchased merchandise from a related seller and reimbursed a parent company related to both the importer and the seller for license fees which the parent company paid to a licensor. Likewise in HRL 544978, dated April 27, 1995 Customs ruled that a payment related to the imported merchandise made by the importer to a related seller, although called a royalty, was part of the price actually paid or payable for the imported merchandise. And in HRL 545380, dated March 30, 1995, Customs found that a license fee paid by an importer to its related seller was part of the "total payment for the imported merchandise" within the meaning of section 402(b)(4)(A) of the TAA.

In the instant case, the royalties paid by the importer, [ ], are paid to the sublicensor, [X], who is related to the foreign affiliate/sellers of the imported merchandise. The sublicensing agreement between [the importer] and [X] specifically addresses payments to [X] for merchandise purchased from the foreign licensed affiliate/sellers. Per Article 8, "for that portion of the [ ] Products purchased by [the importer] from another Licensee of [the] Products and resold" [the importer] shall pay [X] a fee equal to five percent (5%) of its annual net sales, calculated on the markup added by [the importer]. Additionally, [the importer] freely admits that all purchases of [the products] from the foreign affiliates are governed pursuant to Article 8 of the licensing agreement between [the importer] and [X]. Under the circumstances we find that the royalties paid to [X] represent part of the total payment made to or for the benefit of the foreign affiliate/sellers. Thus, the royalty payments associated with the purchase of this imported merchandise are part of the "total payment" for the imported merchandise. Monthly statements show the breakdown between domestic and imported sales and the corresponding royalty fees, thus the royalty payments made in connection with the purchase of the imported merchandise are clearly ascertainable.

Having concluded that the royalties at issue are part of the price actually paid or payable for the imported merchandise, we will not address whether they could alternatively be considered royalties or proceeds under sections 402(b)(1)(D) and (E).

HOLDING:

The royalties paid by [the importer] to [X] in connection with merchandise purchased by [the importer] from related foreign licensed affiliates and imported into the U.S. are included in the transaction value of the imported merchandise as part of the price actually paid or payable.

Sincerely,

Acting Director
International Trade

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