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HQ 547761

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March 14, 2002

RR:IT:VA 547761 EK

CATEGORY: VALUATION

Mr. Mark Sandstrom
Thompson, Hine & Flory, LLP
1920 N Street, N.W.
Washington, D.C. 20036-1601

RE: Dutiability of Royalty Payments

Dear Mr. Sandstrom:

This is in response to your letter of July 5, 2000, regarding the dutiability of royalty payments made by [ ], (hereinafter referred to as licensee and /or licensee/buyer), to [ ] (hereinafter referred to as licensor and/or licensor/seller). Licensee/buyer is a wholly owned subsidiary of licensor/seller; therefore, the parties are related within the meaning of section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA). We regret the delay in responding.

In response to your request for confidentiality, we are granting confidential treatment to the identity of the parties, as well as numerical sales amounts relating to purchases between the parties. If this office receives a Freedom of Information Act request for your submission (including the agreements between the parties), Treasury Department Regulation 31 CFR1.6 regarding the disclosure of business information provides that the submitter of business information will be advised of receipt of a request for such information whenever the business submitter has in good faith designated the information as commercially or financially sensitive information. We accept your request, as a good faith request. Accordingly, you will be notified if a disclosure request is received. We have excised in the public version of this decision, the bracketed confidential information.

At this point, merchandise has been, and is currently being imported by licensee/buyer pursuant to the agreements at issue. Our policy is not to issue rulings when there are current transactions. However, due to the age of this request, we are issuing a ruling which will apply only to future importations. Previously, the merchandise was entered through the port of Columbus, Ohio. Currently, the merchandise is entered through the port of Chicago.

In addition, this ruling does not address any issues regarding the acceptability of the transfer price between the related parties. For purposes of this ruling request, we assume that transaction value is acceptable as a means of appraisement.

FACTS:

Licensee/buyer is in the business of manufacturing, assembling, and selling automobile parts. More specifically, you state that licensee/buyer manufactures front and back subframe assemblies (finished product) that are later attached to the chassis of new automobiles that are manufactured in the United States. In the process of manufacturing the finished product, licensee/buyer imports some parts from licensor/seller, its related party parent company located in [ ]. In addition, licensee/buyer imports parts from related and unrelated entities in [ ]. You state that most of the value of the finished product is attributable to the value of steel that is imported from [ ] from unrelated suppliers.

In April, 1997, licensee/buyer and licensor/seller entered into two separate agreements. The Supply Agreement grants licensee/buyer a discretionary right to purchase parts, products and manufacturing facilities on an as needed basis from licensor/seller. You have submitted a copy of the Supply Agreement. The Supply Agreement is indefinite, allowing for termination upon timely notice by either party. In addition, licensee/buyer also entered into a Technical Assistance Agreement with licensor/seller in order to assist licensee/buyer in manufacturing and selling the finished product. The Technical Assistance Agreement is limited in duration to a three-year term with an automatic renewal on a yearly basis. You have submitted a copy of this agreement as well.

Pursuant to Article 13 of the Technical Service Agreement, licensee/buyer must pay licensor/seller a royalty in return for “licence, know-how technical assistance, basic support and product design and development.” The agreement grants licensee/buyer a license to produce the finished product. The imported parts are assembled into a finished product and the royalties are paid for marketing and technical assistance in manufacturing the finished product. The royalty is calculated based upon a percentage of the sales revenue that is generated from sales of the finished product.

You state that licensee/buyer has full discretion to purchase the component parts from any vendor, and that licensee/buyer is not required to purchase any particular part from licensor/seller. You indicate that over time, the discretion granted to licensee/buyer to purchase from other vendors has been exercised in favor of other suppliers.

ISSUE:

Whether the payments made pursuant to the Technical Assistance Agreement from the buyer/licensee to the seller/licensor are included in the transaction value of the imported merchandise as part of the price actually paid or payable, or whether the payments should be added to the price actually paid or payable as royalties or proceeds pursuant to sections §402(b)(1)(D) or (E), respectively.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to §402(b) of the TAA. Section 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 certain enumerated statutory additions.

With regard to whether the payments are part of the “price actually paid or payable”, there is a rebuttable presumption that all payments made by a buyer to a seller, or a party related to a seller, are part of the price actually paid or payable. This position is based on the meaning of the term “price actually paid or payable” as addressed in Generra Sportswear Co. v. U.S., 8 CAFC 132, 905 F.2d 377 (1990). In Generra, the court considered 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 appellate court held that the term “total payment” is all-inclusive and that “as along as the quota payment was made to the seller in exchange for merchandise sold for export to the U.S., 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 explained that it did not intent that Customs 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, were for the merchandise or something else.

Additionally, we note that in Chrysler Corporation v. U.S., 17 CIT 1049 (1993), the Court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the 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. Therefore, the presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise.

One of the statutory additions to the price actually paid or payable is for royalty and license fees. Section 402(b)(1)(D) of the TAA provides for additions to the price actually paid or payable for:

. . . 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.

With respect 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 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. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the imported merchandise, and such payment was not a condition of the sale of the merchandise for exportation to the United States, such payment will not be added to the price actually paid or payable. However, if such payment was made by the buyer as a condition of sale of the merchandise for exportation to the United States, an addition will be made. As a further example, an 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 export to the United States. 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 a 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 is dutiable. These factors are: (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 are related to the imported merchandise and a condition of sale and, therefore, dutiable as royalty payments. The General Notice includes a review of HRL 544436 (C.S.D. 91-6) dated February 4, 1991, commonly known as the “Hasbro ruling.” This analysis set forth in the General Notice is applicable to entries of imported merchandise on or after May 11, 1993.

Although the SAA provides that determinations about the addition of royalty payments to the price actually paid or payable are to be made case-by-case, it is more likely that the royalty will be included in the transaction value when the payment is made directly to the seller. Under these circumstances, payment of the royalty is more likely to be a condition of the sale for exportation of the imported product than when the royalty is paid to an unrelated third party. See, HRL 545361 dated July 20, 1995, which held that trademark royalties are included in transaction value when paid to the seller/licensor but not when paid to a third party unrelated to the seller. In this case, the party to whom the royalties are paid is both the seller and the licensor.

Another enumerated addition to the price actually paid or payable is found in section 402(b)(1)(E) of the TAA, i.e., “proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly to the seller”. The SAA provides that:

[a]dditions for the value of any part of the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.

Customs has ruled in numerous cases that royalties will not be found to be dutiable as proceeds when paid on merchandise comprised of imported and domestic components. For instance, in C.S.D. 92-12, 26 Cust. Bull. 424 (1992), HQ 544656 dated June 19, 1991, because Customs found a substantial portion of the payments were based on components that were not imported, the payments were not dutiable as proceeds. In HQ 545419 dated November 30, 1995, the imported merchandise was used to manufacture a finished product, and the royalty payments at issue were based upon the net sales price of the final finished product. Since the payments were based partially on the imported merchandise and partially on other factors, Customs determined that the payments should not be added to the price actually paid or payable pursuant to section 402(b)(1)(E) of the TAA.

Payments Dutiable as Part of the Price Actually Paid or Payable

As indicated above, there is a presumption that all payments made by a buyer to a seller, or a party related to the seller, are part of the price actually paid or payable. However, this presumption may be rebutted by demonstrating that the payments are not related to the imported merchandise.

In this case, it does not appear as if the payments pursuant to the Technical Assistance Agreement relate to the imported merchandise. The payments are for the right to manufacture, sell and install and operate manufacturing facilities. In addition, the payments are for the right to exploit the seller’s customer base in the United States. The payments are made based upon a percentage of the sales of the finished product rather than a resale of the imported parts.

Further, the agreement to purchase the imported merchandise exists independently of the agreement regarding technical assistance, upon which the license fees are based. You stated in your submission that in fiscal year 1998/99, the licensee/buyer purchased less than [ ]% of its raw materials and parts from licensor/seller. The following year, this percentage decreased to less than [ ]%.

Therefore, we agree with you that the payments pursuant to the Technical Assistance Agreement are not related to the imported merchandise, and that the payments are not part of the price actually paid or payable in the determination of transaction value. Addition to Price Actually Paid or Payable as Royalties, Section 402(b)(1)(D)

In answering the questions enumerated previously regarding the dutiability of the license fee, the answer to the first question, i.e., is the merchandise manufactured under patent, the answer is no.

Regarding the second question, was the royalty involved in the production or sale of the imported merchandise, we agree with your conclusion that the license payment is not involved with the production or sale of the imported merchandise. The license fee at issue in this case is related to license rights, technical assistance, basic support and product design and development of the finished product, not the imported merchandise. The license fees are paid in exchange for marketing and technical assistance in the manufacture and sale of the finished product.

The answer to the third question, whether the importer could purchase the imported merchandise without paying the fee, relates to whether the payment of the license fee is a condition of the sale for exportation of the imported merchandise. It is our conclusion that the payment of the license fee is not a condition of sale. The Technical Assistance Agreement allows licensee/buyer to purchase the merchandise from third parties. Licensee/buyer has, in fact, purchased the vast majority of its supply requirements from third parties.

The facts presented in this case are similar to other rulings addressed by this office. In HRL’s 545114 dated 9/30/93,and 545770 dated 6/21/95, we concluded that the payments in question were not dutiable. These cases involved the payment of royalty fees to a foreign supplier in exchange for the rights to use technical information and know-how in the manufacture of a finished product incorporating the imported product. Customs found these fees were not dutiable based in part by the fact that the royalty was for technical information and know how related to using the imported products in the process of manufacturing the royalty product in the United States. Thus, Customs concluded that the royalties did not relate to the imported merchandise.

Specifically, in HRL 545307 dated 2/3/95, the imported merchandise was a chemical product used in the manufacture of a finished pharmaceutical preparation. In the U.S., the chemical was combined with other materials to produce the finished products. The importer paid the seller/licensor a royalty based on a percentage of sales of the finished product. In that case, Customs found that the royalties paid to the seller were not a condition of the sale for exportation, and the fees were not added to the price actually paid or payable. As in these cases, it is our conclusion, that the license fee is not a condition of the sale for exportation to the United States of the imported merchandise. These payments pertain to the technical assistance and know-how that clearly relate to the finished product, not the imported product. The purchase of the products and the payment of the license fees are not related to one another, and the payment of the license fees does not exist as a condition of sale of the imported merchandise. These license fees should not be added to the price actually paid or payable pursuant to section 402(b)(1)(d) of the TAA in determining transaction value.

Addition to Price Actually Paid or Payable as Proceeds, Section 402(b)(1)(E)

The payments at issue do not constitute “proceeds” of a subsequent resale which must be added to the price actually paid or payable. As in HQ 545419, supra, where the payments were based partially on the imported merchandise and partially on other facts and in HQ 544742 dated June 6, 1995, where substantial processing and manufacturing occurred with the use of the imported products, which led to the creation of new, distinct products on which the royalty payments were based, the payments here are similar. The license fee at issue in this case does not relate to the resale, disposal or use of the imported merchandise. The payment of the license fee and are based on other factors are not dutiable under section 402(b)(1)(E) of the TAA.

HOLDING:

Based upon the information provided, the license fees paid to the licensor/seller are not part of the price actually paid or payable, nor are the fees additions to the price actually paid or payable, as either royalties or proceeds pursuant to sections 402(b)(1)(D) of (E) of the TAA, respectively.

Sincerely,

Virginia L. Brown

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