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HQ 547662





September 28, 2002

RR:IT:VA 547662 MMC

CATEGORY: VALUATION

Area Director of Customs
United States Customs Service
1210 Corbin Street
Elizabeth, NJ 07201
Attention: Michael Opper

RE: Request for Internal Advice; Related Parties; License fees;

This is in response to a request for internal advice from counsel, dated May 3, 1999, to review the dutiable status of certain payments made by his client, XXX, Inc (the importer/buyer) and 3 subsidiaries XXX, MMM, RRR. The payments are made pursuant to 25 different agreements characterized by counsel as license, trademark, patent, technical assistance compensation, management services, and marketing agreements. According to counsel, the importer or one of the importer's subsidiaries pays the fees upon the sale in the United States of cosmetic, hair care and similar products. These products are either made from raw materials imported by the importer that are subjected to further manufacturing, processing and/or repackaging in the U.S. or goods imported in finished form.

The request for review notes that the importer filed an August 28, 1996 prior disclosure with the port of New York/Newark Area. The alleged prior disclosure concerns the dutiability of the above-described payments. It is based on the premise that pursuant to Customs February 10, 1993 issuance of a General Notice entitled Dutiability of Royalty Payments and the analysis contained therein, some of the submitted agreements may be determined to be dutiable. Counsel states that the prior disclosure is for entries made beginning ninety days after the February 10, 1993 date of publication, in essence the effective date of the application of the legal analysis stated in the General Notice. Additionally, counsel requested that Customs withhold liquidation of entries filed by the importer that were pending or filed on and after the date of prior disclosure. It is our understanding that to date no determination has been reached regarding the prior disclosure.

In the event that you determined any of the payments to be dutiable, counsel pursuant to 19 CFR §177.11 requested that you seek internal advice with respect to the
dutiable status of the payments. You concluded that all of the payments were dutiable and as such counsel now seeks internal advice.

In accordance with section 177.2(b)(7), Customs Regulations (19 CFR 177.2(b)(7)), counsel requested confidentiality. Pursuant to counsel’s request, we will excise the bracketed confidential information from any version of this decision made public. We regret the delay in responding.

FACTS:

According to counsel, the importer is one of a group of "affiliated" international companies that manufacture and market distinctive cosmetic, beauty and fragrance products throughout the world. The merchandise at issue includes salon and consumer hair care and color products, skin care products, make-up, fragrances and active cosmetics that are either imported into (finished goods) or manufactured in the United States by the importer. In the instance where the goods are manufactured in the United States, the importer is importing raw materials to be incorporated into the products. The merchandise is purchased from one of five identified companies: CCA, LUK, LPB, PCI and C. The foregoing companies are hereinafter collectively referred to as the "sellers."

The sellers purchase the merchandise in their own name from various factories and sell it to the importer or one of the importer's subsidiaries. The sellers are all subsidiaries of LSA a French Company. In a June 20, 1994 letter counsel asserts that the importer is not related to the sellers and in addition to purchasing from the sellers, the importer also purchases directly from LSA itself. However on September 22, 1994, the importer became a wholly owned subsidiary of LSA. As such, from September 22, 1994 to present the importer/buyer and its 3 subsidiaries are related to all of the sellers because LSA, which owns the importer/buyer also owns the sellers.

Counsel asserts that, prior to September 22, 1994, LSA and its subsidiaries were not related to the importer because, according to Counsel, together LSA and its subsidiaries only owned 3.72858% of the importer. Counsel describes the pre-September 22, 1994 corporate structure as follows:

TABLE DELETED

The companies that receive payment pursuant to the submitted agreements are LSA, LPB, PGLSA, PC, BSAM, C-HRI, PCI, P, PP and RL.

The relationships between the buyer, seller and 3rd parties involved in these agreements can be categorized as follows. In instances where the importer is the buyer, three of the licensors LSA, LPB and PCI are both the related seller and licensor. In another nine instances where the importer is the buyer, the importer, seller and licensors are all subsidiaries of LSA. Therefore, the questioned payments are made by the importer/buyer to a 3rd party who is related to both the seller and the buyer. In four instances, either the importer/buyer or the seller are subsidiaries of the related 3rd party receiving the questioned payment. In two instances, the importer/buyer makes payments to 3rd parties who are not related to the buyer or seller. In four instances, two different subsidiaries of the importer import goods on their own from related sellers and make the questioned payments to the seller's parent company.

Finally there are two agreements between the importer and LSA and one between a division of the importer and LSA that counsel characterizes as compensation, management services and marketing agreements respectively. Concerning the "compensation agreement" the importer paid LSA, its parent company, for use of certain rights (patents, technical assistance including formulas) concerning the manufacture, distribution, marketing and sale of fragrance, cosmetic and related products under the LR and PP trademarks and the GV trademarks. These rights could be owned by LSA or any one of its subsidiaries. The importer also had a "management services agreement" with LSA until 1996. It was replaced by an "advisory services agreement" with a U.S. subsidiary of LSA. This new agreement was for services that include development of marketing plans, advertising and promotional programs, development of investments among product lines including launch and development of new lines, development of budgets, insurance, agreements and relationships with third parties and affiliates including trademark, patent and know-how licenses and acquisition and divestiture of assets and business. Finally, one of the importer's divisions pays a fee to LSA for marketing development services and to support the expansion of a brand.

In the May 3, 1999 request for internal advice counsel asserts that none of the payments are dutiable either as royalty payments or as proceeds of a subsequent resale, disposal or use. Counsel asserts that the various agreements fall into 3 general classes; trademark, technical assistance and patents and that the importer/ buyer/licensee makes the payments to related licensors.

In support of his position that all of the payments are not dutiable counsel supplied copious amounts of documentation. Those documents include 11 separate attachments to the May 3, 1999 request for internal advice which detail the communications between counsel and the FNIS and NIS, 8 rulings cited by counsel and all of the agreements in two separate binders. In the first binder counsel also included:
a spreadsheet listing each agreement, the term period thereof, the licensors, the license fee rates, and the licensees,
a listing of the various agreements with each licensor, the date of the original agreement, and the dates of any amendments,
a listing of the various licensors, "related foreign sellers", and "related foreign manufacturers,"
an explanatory letter concerning the legal status of certain licensors, and
an explanation of the terms used throughout the narratives included in each agreement.

We note that on August 8, 1995 Customs issued a General Notice entitled, Notice to Require Submission of Royalty and Purchase/Supply Agreements in Ruling Request Regarding Dutiability of Royalty or License Fees. The notice announces that in order to obtain a ruling regarding the dutiability of royalty or license fees, any royalty agreement[s] relating to the payment of the royalty or license fees in question and any purchase/supply agreement[s] relating to the sale of the imported merchandise must be furnished. If there are no such written agreements the ruling request should so indicate. No sales agreements between any of the buyers and sellers for the imported goods were provided and counsel has not indicated whether or not they exist.

ISSUE:

Whether, pursuant to 19 U.S.C.§1401a(g) the importer and sellers were related based on the pre-September 24,1994 corporate structure?

Whether the payments paid by the importer or its subsidiaries to various 3rd parties are dutiable?

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with §402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary basis of appraisement 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 thereto, including: 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; and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. §402(b)(1)(D)- (E) of the TAA. Such additions will be made only if amounts in respect of royalties, proceeds, etc. are not otherwise included in the price actually paid or payable.

However, as you know, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values," e.g., the deductive or computed value of identical or similar merchandise determined pursuant to actual appraisements of imported merchandise. §402(b)(2)(B) of the TAA. In the instant case, in almost every instance the buyer/licensee and the licensor/seller are related but no information has been presented as to whether the relationship influences the price actually paid or payable. Consequently, we are unable to determine whether transaction value is an appropriate basis of appraisement. Nevertheless, assuming that transaction value is the appropriate basis of appraisement, the following constitutes our position in regard to the dutiablity of the payments at issue.

Related Parties (Pre-September 24, 1994 Agreement)

Section 402(g)(1) of the TAA defines related parties as follows:

(g)(1) For purposes of this section, the persons specified in any of the following subparagraphs shall be treated as persons who are related:

XXX

Any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization and such organization.

Two or more persons directly or indirectly controlling, controlled by, or under common control with, any person. [emphasis added]

From the facts presented, under the pre-September 24, 1994 arrangement, the importer was indirectly under common control with LSA. LSA's parent company owned 51% of LSA. In turn, the parent company was owned by two separate companies owning 51% and owning 49%. These two companies then each owned approximately 20% and 70% respectively of the importer. As such, LSA and the importer were both indirectly controlled by the two separate companies. Therefore, we find that the importer and the sellers are related.

Payments Between Related Parties

Transaction value is the preferred method of appraisement and is defined in §402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain additions specified in §402(b)(1)(A) through (E). The term "price actually paid or payable" is defined in TAA §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 have addressed the meaning of this term. In Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir.1990) [hereinafter Generra], 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. In reversing the decision of the lower court, the appeals court held 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) [hereinafter Chrysler], 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 the fees were 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 that clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise.

Questioned payments are made to the seller or a 3rd party related to the seller

In instances where the payment for the fees are paid to the seller or to a 3rd party related to the seller, based on the evidence presented the payments are part of the total payment and therefore are dutiable. The following is a chart that outlines the payments that fit this description.

Questioned Payments are Made by the Importer to the Related Seller or a 3rd Party Related to the Seller & Buyer Buyer/
Lessee
Agreement
Seller
Party receiving paymt
(3rd party)
Notes importer
Trdmk
CCA, LUK
LSA
The buyer & Seller are subsidiaries of the 3rd party importer
Tech Assist
CCA, LUK
LSA
The buyer & Seller are subsidiaries of the 3rd party importer
Patent
CCA, LUK
LSA
The buyer & Seller are subsidiaries of the 3rd party
importer
Trdmk
LPB
LPB
The questioned payment is made to the related seller importer
Tech Assist
LPB
LPB
The questioned payment is made to the related seller importer
Trdmk
PCI
PGLSA
The buyer, seller & 3rd party are all subsidiaries of LSA importer
Tech Assist
PCI
PGLSA
The buyer, seller & 3rd party are all subsidiaries of LSA importer
Trdmk
PCI
PC
The buyer, seller & 3rd party are all subsidiaries of LSA importer
Tech Assist
PCI
PC
The buyer, seller & 3rd party are all subsidiaries of LSA importer
Trdmk
IJP
Subsidiaries of LSA
Sales ended in 1993. importer
Tech Assits
IJP
Subsidiaries of LSA
Sales ended in 1993.
importer

License Agrmt

Unidentified subsidiaries of LSA in France

BSAM

The buyer, seller & 3rd party are all subsidiaries of LSA importer
License Agrmt (old)
PCI
C-HRI
The buyer, seller & 3rd party are all subsidiaries of LSA importer
License Agrmt (new)
PCI
PCI
The questioned payment is made to the related seller importer
License Inc.
PCI
P
The buyer, seller & 3rd party are all subsidiaries of LSA importer
"White" Product Tech Agrmt
CX
LSA
The buyer &seller are subsidiaries of LSA

Questioned Payments are Made by a Subsidiary of the Importer to a 3rd Party Related to the Seller RRR
Tech Agrmt (old)
CCA
LSA
The seller and the 3rd party are related
RRR
Tech Agrmt (new)
CCA
LSA
The seller and the 3rd party are related
RRR
Export Agrmnt
CCA
LSA
The seller and the 3rd party are related
MMM
Tech Assist
CX
LSA
The seller and the 3rd party are related

Other Agreements importer
Compensation Agrmnt
Sellers are subsidiaries of LSA
LSA
The seller(s) and the 3rd party are related importer
Mgmnt Services Agrmnt
Sellers are subsidiaries of LSA
LSA
The seller(s) and the 3rd parties are related importer
Advisory agrmnt
Sellers are subsidiaries of LSA
U.S. subsidiary of LSA
The seller(s) and the 3rd parties are related Division of Importer
Marketing Services agreement
Sellers are subsidiaries of LSA
LSA
The seller(s) and the 3rd parties are related

Counsel has not provided the information necessary to conclude as the court did in Chrysler that that the payments were independent and unrelated costs not associated with the goods as imported. Counsel provided the different agreements characterized as license, trademark, or technical assistance agreements and a short narrative in front of each which gave a cursory indication of what goods were imported and may be impacted by each agreement. However this by itself is insufficient information to rebut the Generra presumption. Until or unless counsel can provide evidence that proves that the payments were independent and unrelated costs not associated with the goods as imported, and that the payments should not be part of the price actually paid or payable, Customs presumes that the payments were made to the seller or the seller's related 3rd party in exchange for merchandise sold for export to the United States.

Evidence that may support a Chrysler claim or a claim that the payments are not royalty or proceed additions would include, but is not limited to, a clear and unequivocal explanation of what the goods are that are being imported. Also the sales agreements between the buyer and seller for all of the imported merchandise so that they may be analyzed with reference to the submitted agreements. Other needed information may include invoices for the imported goods.

Payments made to Unrelated 3rd Parties

In instances where the payment are to a 3rd party not related to the seller, based on the evidence presented the payments cannot be considered part of the price actually paid or payable. However the payments may be dutiable as additions to the price actually paid or payable. The following is a chart that outlines the payments that fit this description.

Questioned Payments Are Made To Unrelated 3rd Parties Buyer
Agreement
Seller
3rd Party
Notes importer
Trdmk
PCI
PP
importer
U.S. Design & Consltg Agrmt
CPR
RL

With regard to the dutiablity of royalties, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:

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 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.... 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: (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.... [A]n 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 to the United States.

Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49.

Despite having concluded that the payments at issue are not part of the price actually paid or payable, it still remains to be determined whether they should be added to the price actually paid or payable under the provisions for royalties and/or proceeds. After reviewing the legislative history of the TAA, Customs has identified three questions that are relevant in determining whether royalty payments are dutiable under §402(b)(1)(D) of the TAA. General Notice, "Dutiablity of Royalty Payments," 27:6 Cust. B. & Dec 1 (February 10, 1993) (the "General Notice"). The questions are: (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? Id. at 9-11. Negative responses to the first and second questions and an affirmative response to the third, suggest non-dutiablity. The notice states that royalties may be dutiable either as part of the price actually paid or payable, or as additions thereto under §402(b)(1)(D)-(E) of the TAA. Id. at 11.

In analyzing these factors, Customs in most recent rulings has taken into account certain considerations which flow from the language set forth in the SAA. These include, but are not limited to:

(i) the type of intellectual property rights at issue (e.g., patents covering processes to manufacture the imported merchandise will generally be dutiable);

(ii) to whom the royalty was paid (e.g., payments to the seller or a party related to the seller are more likely to be dutiable than are payments to an unrelated third party);

(iii) whether the purchase of the imported merchandise and the payment of the royalties are inextricably intertwined (e.g., provisions in the same agreement for the purchase of the imported merchandise and the payment of the royalties; license agreements which refer to or provide for the sale of the imported merchandise, or require the buyer’s purchase of the merchandise from the seller/licensor; termination of either the purchase or license agreement upon termination of the other, or termination of the purchase agreement due to the failure to pay the royalties); and

(iv) payment of the royalties on each and every importation.

See, HRL 546478, dated February 11, 1998; see also, HRL 546433 dated January 9, 1998, and HRL 544991 dated September 13, 1995 (and cases cited therein).

In regard to the payments at issue, it is unclear what the answer is to the first question posed by the General Notice. Based on the information available, there is no evidence available to indicate whether the imported merchandise is manufactured under patent.

As to the second question, based on the information submitted it is not possible to determine whether there is linkage between the sale for exportation of the imported merchandise and the payment of the fees by the buyer because no sales agreement was provided. Without the sales agreement(s) and invoices for the imported goods we cannot determine if there is linkage between the supply of the imported merchandise and the payment of fees based on net sales.

The third question posed by the General Notice, i.e., whether the importer could buy the merchandise without paying the fee, is central to the question of whether a payment is a condition of sale. Payments that must be made for each imported item are a condition of sale. However, the method of calculating the royalty, e.g., on the resale price of the goods, is not relevant to determining the dutiablity of a royalty payment. 27:6 Cust. B. & Dec 12. In HRL 544991, for example, royalty payments were paid in consideration of licensed technology and technical assistance provided by the seller/licensor to the importer/buyer. An agreement between the licensor/seller and the importer/buyer effectively linked the payment of the royalties to the purchase of the imported parts by providing that the licensor/seller would supply the licensee/buyer with parts in accordance with such terms and conditions as were separately agreed. Consequently, it was determined that the importer could not buy the imported merchandise without paying the fee and that the royalties were a condition of sale.

In the instant case, based on the evidence presented we cannot determine whether there is a linkage of the payment of the royalties to the purchase of the imported goods by the buyer. Thus, unless and until the importer can indicate the goods being imported, provide a sales agreement and invoices and any other necessary evidence, we will presume that the payment of the royalties is a condition of the sale for exportation to the U.S. of the imported merchandise. Thus, the royalty payments are added to the price actually paid or payable in determining the transaction value of the imported merchandise.

Proceeds of any subsequent resale, disposal or use

As noted previously, royalty payments may also be dutiable under §402(b)(1)(E) of the TAA, which provides that the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller, are to be added to the price actually paid or payable. However, Customs has held that payments based on the resale of a finished product made in part from the imported merchandise are not dutiable as proceeds under §402(b)(1)(E). E.g., HRL 544656 dated June 19, 1991, HRL 545770 dated June 21, 1995.

Based on the evidence presented, it is not possible to determine whether the payments at issue are based on the sale of the imported merchandise. Many of the payments appear to based on the sale of "licensed products" (finished products) which may or may not contain the imported merchandise or may be the imported merchandise itself. Accordingly, until or unless the importer can explain which products are imported and whether or in what instances they are the same products subject to the submitted agreements we will presume that the payments at issue are dutiable under the proceeds provision.

Assuming that transaction value is the appropriate basis of appraisement, based on the evidence submitted, all of the payments at issue should be included in transaction value as either part of the price actually paid or payable or as additions to the price actually paid or payable under §402(b)(1)(D) or (E) of the TAA. However, if the importer provides additional evidence, including, sales agreements, relevant contracts or supply agreements, invoices between the buyer or seller, and information on whether the imported merchandise is manufactured pursuant to a patent becomes available, the analysis presented in this decision may be inapplicable. For the entries that are liquidated subject to this internal advice, the importer may submit the additional information pursuant to the protest procedures provided by law and regulation.

HOLDING:

Assuming that transaction value is the appropriate basis of appraisement, based on the evidence submitted, all of the payments at issue should be included in transaction value as either part of the price actually paid or payable or as additions to the price actually paid or payable under §402(b)(1)(D) or (E) of the TAA. However, if the importer provides additional evidence, including, sales agreements, relevant contracts or supply agreements, invoices between the buyer or seller, and information on whether the imported merchandise is manufactured pursuant to a patent becomes available, the analysis presented in this decision may be inapplicable. For the entries that are liquidated subject to this internal advice, the importer may submit the additional information pursuant to the protest procedures provided by law and regulation.

This decision should be mailed by your office to the party requesting internal advice no later than sixty days from the date of this letter. On that date the Office of Regulations & 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,

Virginia L. Brown

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