HQ 548291 - Dutiability of payments identified as Royalties; Related Parties - United States International Trade Commision Rulings

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HQ 548291

May 28, 2003

RR:IT:VA 548291 MMC

CATEGORY: VALUATION

Mr. Allan Winsor
Newtons4th Ltd., Engineering Innovation
Ratcliffe House
30 Routhley Rd
Mountsorrel
Loughborough
LE12 7JU
ENGLAND

RE: Dutiability of payments identified as Royalties; Related Parties

Dear Mr. Winsor:

This is in response to your March 3, 2003 letter requesting a prospective binding ruling concerning the dutiability of certain payments you characterize as "royalty" payments. You have attached a copy of a document entitled "Memorandum of Intent" to your letter for our review.

FACTS:

Newtons4th Ltd., (N4UK) manufactures electronic test equipment in the United Kingdom (UK). In the proposed transaction N4UK plans to create a U.S. subsidiary identified as Newtons4th Inc. (N4US). The purpose of N4US would be to provide better service to N4UK's U.S. customers and explore the possibility of manufacturing all, or part of N4UK's current product range in the U.S. According to the March 3, 2003 letter, N4US would pay what is characterized as a "royalty" to N4UK " for every unit sold to fund ongoing product development".

Further, you state that there is no formal trading agreement between N4UK and N4US because "both companies are controlled by the same individuals." Additionally, as noted above, the letter contains an attachment identified as a "Memorandum of Intent." The "Memorandum of Intent" was drafted to document the proposed arrangement and identify the terms and conditions of the proposed transaction.

The Memorandum of Intent is not dated or signed. It states that it concerns the "trading relationship between Newtons4th Ltd. [N4UK] and Newtons4th Inc.[N4US]." According to the "General Arrangement" section of the memorandum, N4US imports products or components from N4UK and prepares these products for sale in the U.S. N4US then pays N4UK the "normal commercial manufacturing cost for the imported material and also pays a voluntary royalty to N4UK for the use of copyright[ed] materials." According to the "Details" section the price paid by N4US to N4UK shall be "at least the normal commercial cost of manufacturing the products or components (i.e. cost plus profit)." N4US may procure other parts locally or may import from other companies. N4UK retains ownership of the intellectual property rights to the products. N4US shall pay a:
voluntary unspecified monthly royalty to N4UK for use of copyright[ed] materials. The royalty payment will reflect the trading conditions in N4US and will not be related to the number of products or components bought from N4UK. If N4US invests locally in advertising or further development work then the royalty will be reduced or may not be paid at all; if costs at N4UK can be kept low the royalty payment may exceed the value of the products imported.

The value of the royalty to be paid to N4UK is set by N4US.

ISSUE:

Is the related party price acceptable for purposes of transaction value? If the related party price is acceptable for purposes of transaction value should certain costs characterized as "royalty" payments made between the buyer and seller be included in the transaction value?

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section 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. Section 402(b)(1)(D) of the TAA. Such additions will be made only if amounts for the royalties, proceeds, etc. are not otherwise included in the price actually paid or payable.

However, imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this instance the buyer and seller, i.e., N4US and N4UK are related pursuant to section 402(g)(1)(G) of the TAA in that they are two wholly-owned subsidiaries of the same parent. 19 U.S.C. 1401a(g)(1)(G).

Section 402(b)(2)(B) of the TAA sets forth two tests under which a transaction value between related parties will be deemed acceptable. The two tests are examination of the circumstances of sale and "test values." Customs examines the circumstances of sale to determine whether the relationship between the parties influenced the price actually paid or payable. Customs will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price was not influenced by the relationship. 19 C.F.R. 152.103(l)(1)(i)-(ii). In addition, Customs will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the buyer's overall profit realized over a representative period of time. 19 C.F.R. 152.103(l)(iii). Customs has held that determinations as to whether the price actually paid or payable was influenced by the relationship between buyer and seller should be made on a case-by-case basis.

The Memorandum of Intent provides information regarding the manner in which the buyer and seller will organize their commercial relations and the way in which the price in question will be derived. As previously stated, the Memorandum of Intent contains the statement that the price N4US pays is the normal commercial manufacturing cost for the material. However, the "Details" section of the memorandum indicates that the price paid by N4US to N4UK shall be "at least the normal commercial cost of manufacturing the products or components (i.e. cost plus profit)." Further N4US will pay a "voluntary unspecified monthly royalty to N4UK for use of copyright[ed] materials." Finally, the memorandum indicates that the value of the "royalty payment" to be paid to N4UK is set by N4US the buyer/licensee in the transaction.

These facts do not allow us to conclude that the relationship will not affect the price. Because the facts presented indicate that the price is influenced by the relationship, transaction value is not an acceptable method of appraisement. As such you will have to proceed sequentially through the subsequent provisions of §402 of the TAA for an alternative method of appraisement. See, 402(a)(1) of the TAA. The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise ( 402(c) of the TAA); deductive value ( 402(d) of the TAA); computed value ( 402(e) of the TAA); and the "fallback" method ( 402(f)).

Nevertheless, assuming that the structure of the transactions could be changed to allow for transaction value, the following constitutes our position concerning the dutiability of the payments characterized as "royalty payments". As the language of the SAA makes clear, 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. The term "price actually paid or payable" is defined as, "the total payment (whether direct or indirect. . .) made, or to be made, by the buyer to, of for the benefit of, the seller." Section 402(b)(4)(A) of the TAA. Thus, the first inquiry is whether the payments at issue are part of the price actually paid or payable for the imported merchandise.

Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990) [Generra], Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Court of Appeals 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].

Generra, 905 F.2d at 380 (brackets in original).

However, the presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993) [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 not a component of the price of the imported engines.

Accordingly, the payments made by N4US will not be considered part of the price actually paid or payable for the parts and components bought from N4UK if the evidence clearly establishes that, like those in Chrysler, they are totally unrelated to the imported merchandise. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer, Generra, 905 F.2d at 380.

The information submitted does not substantiate that the payments are totally unrelated to the imported merchandise. There is no contract between the parties to examine nor is there a royalty agreement in sufficient detail explaining the scope and purpose of the "royalty payments," and the Memorandum of Intent does not explain the scope and purpose of the "royalty payments." As such the "royalty" payment between the buyer and seller remains a part of the price actually paid or payable.

HOLDING:

Because the facts as presented indicate that the price is influenced by the relationship, transaction value is not an acceptable method of appraisement. As such it will be necessary to proceed sequentially through the subsequent provisions of 402 of the TAA for an alternative method of appraisement.

If the structure of the transactions could be changed to allow for the use of transaction value, the submitted evidence indicates that the payments characterized as "royalty payments" are part of the total payment of the goods and therefore should be included in the transaction value of the merchandise.

Sincerely,

Virginia L. Brown

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