HQ 545895 - Royalty payments; additions to the price actually paid or payable. - United States International Trade Commision Rulings

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HQ 545895

June 9, 1995

VAL R:C:V 545895 EK

CATEGORY: VALUATION

Saul L. Sherman, Esq.
750 Third Avenue
New York, New York 10017

RE: Royalty payments; additions to the price actually paid or payable.

Dear Mr. Sherman:

This is in response to your letter of January 29, 1995, on behalf of your client, (hereinafter referred to as importer), in which you requested a ruling on the valuation of certain ceramic tile imported into the United States. Pursuant to your request, the identity of the parties will not be disclosed and the proprietary information submitted with the request will be treated as confidential. The royalty agreement enclosed with your letter will be retained in our files.

FACTS:

In 1994, the importer entered into a ATrademark License Agreement@ with a licensor which authorizes the importer to use its trademarks and to redesign certain of its patterns for use on the importer=s tiles. The licensor markets a line of home furnishings, including fabrics and wallpapers. The importer markets a line of ceramic tiles used in bathrooms and elsewhere in the home. The importer proposes to design and market a line of tiles that will complement and coordinate with the licensor=s home furnishings. The license agreement gives the importer exclusive rights to market in the United States and Canada, under licensor=s trademarks, tiles bearing the designs to be developed by the importer from the licensor=s fabric and wallpaper designs. The designs used in the tiles are developed by the importer=s domestic-based staff of designers and must be approved by the licensor.

You state that the importer purchases tiles from a Spanish manufacturer of tiles. Counsel has submitted a copy of a purchase Blanket Purchase Order. The purchase order makes no reference to the royalties to be paid by the importer. In fact, according to counsel, the terms are the same as apply when the importer places its usual orders with the seller for tiles based on designs developed entirely by the importer. The licensed trademarks are not on the tiles as imported into the United States.

In consideration of the license granted to the importer, the importer pays the licensor a royalty equal to a specific percentage of net sales or a minimum royalty figure as set forth in their agreement, whichever is higher. The royalty is determined and paid in each contract year quarter.

The importer, the manufacturer of the tiles, and the licensor are not related parties within the meaning of section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(g); TAA).

ISSUE:

Whether the payments made by the importer to the licensor should be added to the price actually paid or payable as a dutiable royalty pursuant to section 402(d) of the TAA.

LAW AND ANALYSIS:

Transaction value is defined in section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979, as the Aprice actually paid or payable for the merchandise when sold for exportation to the United States@, plus certain enumerated 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 United States. For purposes of this ruling request, we assume that transaction value is in fact applicable in appraising the ceramic tiles.

According to the notice on the dutiability of royalty payments published in the Customs Bulletin on February 10, 1993, several questions must be answered in order to determine whether a royalty payment is related to the imported merchandise and therefore, required as a condition of sale. As set forth in the notice, the questions are; (1) is the imported merchandise manufactured under patent? (2) is the royalty involved in the production or sale of the imported merchandise? and, (3) could the importer buy the product without paying the fee? Negative responses to the first and section questions, and an affirmative response to the third, suggest that a royalty payment is not dutiable under section 402(b)(1)(D) of the TAA.

Based upon the information submitted, the imported merchandise is not manufactured under patent. The royalty paid by the buyer is not involved in the production or sale of the imported merchandise. With respect to the third question, the buyer can purchase the ceramic tiles without paying the royalty fee. The importer has an independent relationship with the seller of the ceramic tiles. The royalty payments are made to a third party and are triggered by U.S. sales of the imported merchandise rather than by the sale of the imported merchandise for exportation to the United States. The payments by the importer are not considered a condition of sale. The manufacturer of the tiles does not impose any royalty payment on the importer as a condition of the sale for exportation to the importer. As indicated above, the purchase order makes no reference to the royalties to be paid by the importer, and the importer purchases the tiles on the same terms that apply when the manufacturer produces tiles designed entirely by the importer=s staff of designers. Therefore, the royalty payments are not added to the price actually paid or payable in determining transaction value. Section 402(b)(1)(E) of the TAA provides that the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller are dutiable as part of the price actually paid or payable. Here, the payments at issue are not going to the seller of the imported merchandise. Therefore, they are not dutiable pursuant to section 402(b)(1)(E).

In addition, the design work sent to the manufacturer of the tiles is not an assist. As indicated in section 402(h)(1)(A)(iv), an assist is defined as design work that is undertaken elsewhere than in the United States. Here, the design work is undertaken by the importer=s U.S. design staff.

HOLDING:

In accordance with the foregoing, the royalty payments at issue do not constitute an addition to the price actually paid or payable pursuant to section 402(b)(1)(D) nor section 402(b)(1)(E) of the TAA. In addition, the design work is not considered to be an assist.

Sincerely,

John Durant, Director

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