HQ 544381
November 25,1991
VAL CO:R:C:V 544381 DPS
Area Director
Western Great Lakes Area
Minneapolis, Minnesota 55401
RE: I.A. Request 34/89; payments for tooling to produce
prototypes, research and development; license fees,
royalties and technical aid; assists; apportionment of
assists; indirect payments
Dear Sir:
This is in response to your memorandum (App-7-
10:GL:AAD:CO:I JB) dated June 16, 1989, and a memorandum from
NIS Division, Branch 1 (CLA-2-85:S:N1:101-118) dated August
7, 1989, requesting internal advice on transactions involving
Lake Center Industries (LCI), and the dutiability of certain
payments and fees in connection with the importation of
prototype switches imported from England during the years
1984 through 1987. LCI, formerly represented by the law firm
of Katten Muchin & Zavis, which initiated this internal
advice request through the port of Minneapolis, Minnesota,
now represents itself through its in-house counsel.
FACTS:
LCI manufactures and sells certain automobile switchgear
in the United States. In connection with its manufacture of
the switchgear, LCI imports prototype switches from Lucas
Industries ("Lucas") in England. The switchgear are imported
through the ports of Detroit and Minneapolis. In addition to
the invoiced amounts that LCI pays Lucas for the prototypes,
during the years 1984 through 1987, LCI also made payments to
Lucas for tooling, research and development ("R&D") and
testing.
LCI asserts that while the tooling, R&D, testing
equipment and testing it pays for appears to be includable in
transaction value, the dutiable portion of those expenditures
is minimal. In its submission, LCI characterizes these
payments as assists and contends that the payments should be
allocated over the products benefited by them in accordance
with section 152.103(e) Customs Regulations (19 C.F.R.
152.103(e)), in a manner consistent with generally accepted
accounting principles. Minneapolis Customs and the National
Import Specialist agree that the payments for tooling, R&D
and testing do not fall within the statutory definition of
assists. They believe that the payments are indirect
payments which are part of the price actually paid or payable
for the imported merchandise, which in this case are the
prototypes.
In addition to payments for tooling, R&D, and testing,
LCI pays Lucas a technical aid fee and part of royalty
income. Pursuant to the license agreement between Lucas
Industries and LCI, Lucas granted LCI the exclusive right to
make, use and sell in the United States certain switchgear.
Under the agreement, Lucas undertook to (1) allow LCI
representatives to visit Lucas' facility in England and
arrange for their instruction in Lucas' methods and
techniques, (2) supply LCI with the technical information
necessary to enable LCI to manufacture and sell the devices,
(3) communicate to, and allow LCI to use, any improvements,
(4) seek to obtain patents or registered designs in the
United States for any improvements and (5) offer to sell
devices or their components to LCI. In addition, Lucas and
LCI agreed to share, in equal parts, certain costs associated
with each individual device manufactured under the license
agreement. These costs are:
(1) the cost of production and sample tooling
performed in the United States by LCI,
less reimbursement of these costs to LCI
by the ultimate U.S. purchaser;
(2) the cost of sampling and sales promotion
conducted by LCI;
(3) the cost of liaison visits of LCI personnel to
Lucas' facilities;
(4) the cost of LCI's custom-designed plant and
equipment;
(5) the cost of liaison visits of Lucas personnel
to LCI's facilities; and
(6) the cost of prototypes, samples, testing and
development incurred by Lucas, less amounts
received by Lucas from the ultimate U.S.
purchaser.
When manufacturing of a particular device in commercial
quantities begins, the above costs are totalled and divided.
If one party has incurred more than fifty percent of the
costs, half of the excess amount becomes a debt of the other
party. When Lucas incurs more than fifty percent of these
costs, LCI pays Lucas what it characterizes as a license fee
in the amount of fifty percent of the excess costs.
Counsel states that the technical aid fee is a one-time
payment, representing in the words of the agreement, "the
value of the right to use the Patents, Designs, Copyright and
know-how supplied by Lucas in respect of all current and
future Licensed Devices." The technical aid fee is paid in
increments and is limited, in any one year, to the lower of
(a) twenty percent of a total specified amount (b) ten
percent of the gross Royalty Income or (c) one and one-half
percent of the sales revenue from the licensed devices.
Both the license fee and the technical aid fee are paid by
LCI out of its fifty percent share of royalty income.
Royalty income is the sales revenue from the devices, less
LCI's manufacturing costs, selling and administrative
expenses, warranty costs and interest expense.
LCI contends that none of the payments provided for in
LCI's license agreement are royalties and license fees of the
type contemplated by section 402(b)(1) of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979
(19 U.S.C. 1401a(b); TAA) because LCI is not required to pay
them as a condition of the sale for exportation of the
importred merchandise.
ISSUES:
(1) Whether the payments made by the importer of
prototypes for tooling, R&D and testing, are considered to be
assists or part of the price actually paid or payable for the
imported merchandise; and whether such payments can be
allocated over the number of devices that can be demonstrated
to benefit from the expenditures, which include the imported
prototype samples and all subsequent devices based on the
prototypes that have been, and will be produced by LCI in the
United States.
(2) Whether the subject license fees, technical aid and
royalty payments are dutiable as statutory additions to
transaction value pursuant to 402(b)(1)(D).
LAW & ANALYSIS:
For the purpose of this response, we assume that
transaction value is the proper basis of appraisement.
Transaction value, the preferred method of appraisement is
defined in section 402(b)(1) of the TAA as the "price
actually paid or payable for the merchandise" plus five
enumerated statutory additions. As stated in 402(b)(4)(A):
The term "price actually paid or payable" means 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.
The five enumerated statutory additions to transaction value
set forth in 402(b)(1) of the TAA are as follows:
(A) the packing costs incurred by the
buyer with respect to the imported
merchandise;
(B) any selling commission incurred by the
buyer with respect to the imported
merchandise;
(C) the value, apportioned as appropriate, of
any assist;
(D) 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; and
(E) the proceeds of any subsequent resale,
disposal or use of the imported merchandise
that accrue, directly or indirectly, to the
seller.
Tooling, R&D and Testing
With regard to the first issue involving LCI's payments
for tooling, R&D and testing, the importer asserts that such
payments constitute assists, and should be apportioned over
the anticipated production both abroad and in the U.S. Your
office takes the position that such payments are not assists,
but rather indirect payments for the imported merchandise.
We agree. The term "assist" is defined in section
402(h)(1)(A) of the TAA as follows:
any of the following if supplied directly or
indirectly, and free of charge or at reduced cost,
by the buyer of imported merchandise for use in
connection with the production or the sale for
export to the United States of the merchandise:
(i) Materials, components, parts, and similar
items incorporated in the imported
merchandise.
(ii) Tools, dies, molds, and similar items
used in the production of the imported
merchandise.
(iii) Merchandise consumed in the production
of the imported merchandise.
(iv) Engineering, development, artwork, design
work, and plans and sketches that are
undertaken elsewhere than in the United States
and are necessary for the production of the
imported merchandise.
It has been Customs position that a payment of money
from the buyer to the foreign manufacturer does not
constitute an assist within the meaning of 402(h)(1)(A).
In Headquarters Ruling Letter (HRL) 543376, dated November
13, 1984, Customs held that a payment by an importer to a
foreign manufacturer for the design and development of a
prototype industrial robot was not an assist, but rather was
dutiable as part of the price actually paid or payable to the
seller as a direct payment for the prototype. See also HRL
543983, dated December 2, 1987.
With regard to testing costs, Customs has held that
testing costs are not assists, but are dutiable as part of
the price actually paid or payable when paid by the buyer to
the seller of the imported merchandise (See HRL 542187, dated
November 7, 1980 (TAA No.11), and HRL 543645, dated February
17, 1987). With regard to payments for tooling, Customs has
held that payments made by the buyer to the seller to produce
or buy such items as tools and molds (which, if provided by
the buyer, would constitute assists) necessary to produce the
subject merchandise, constitute part of the price actually
paid or payable for the imported merchandise. (See HRL
542812, dated July 19, 1982, and HRL 543983, dated December
2, 1987).
Here, the imported prototypes that are developed, tested
and sold by Lucas to LCI are a necessary step in the
subsequent manufacture of switchgear in the United States.
Accordingly, we find that the payments for tooling, R&D and
testing are part of the price actually paid or payable for
the imported prototypes. We note that the Customs
Regulations do not provide guidelines specifically for the
apportionment of direct payments, as they do for assists.
Consequently, under the circumstances no authority exists to
apportion these expenditures over the anticipated number of
units produced, as LCI's former counsel has requested.
Furthermore, even if apportionment was proper under the
circumstances, which it is clearly not, such apportionment
pursuant to 152.103(e) of the Customs Regulations could only
be applied to those units produced abroad and imported into
the U.S., not to units manufactured in the U.S.
License Fees, Royalties and Technical Aid Fees
Based on the information provided in the I.A. request,
the license fees, royalties and technical aid fees described
by LCI relate to LCI's purchase from Lucas of the right to
use, make and sell certain switchgear in the U.S.
Consistent with their agreement, LCI acquires the designs,
patents, copyrights and know-how utilized by Lucas in
developing the prototypes, for production of switchgear in
the United States by LCI. LCI has indicated that payments
made pursuant to the license agreement are not related to the
imported merchandise. LCI is not required to pay royalty and
license fees as a condition of the sale for exportation of
the merchandise. Rather, these payments are related to LCI's
domestic production of switchgear. The technical aid
payment, stated to be a one-time payment, likewise covers
U.S. production units, and is not related to the sale of
imported merchandise.
Consistent with the language set forth in 402(b)(1)(D)
of the TAA, Customs held in HRL 543773, dated August 28,
1986, that where the royalty payment is not related to the
imported merchandise, is not paid as a condition of the sale
of the imported merchandise, is not connected to the
ownership or importation of the merchandise, but rather, the
payment is for the use of the trademarks and techniques with
regard to the product, the royalty is not added to the price
actually paid or payable. Likewise, in HRL 543617, dated
June 8, 1987, the licensing fee in question did not relate to
the imported merchandise. The rights granted to the importer
related to the distribution and servicing of the affected
merchandise as well as the worldwide use of the
manufacturer's technical data and trademarks. Customs held
that the fee was not dutiable as part of the transaction
value of the imported merchandise.
Here, the license fees, technical aid fees and royalties
are not required to be paid as a condition of the sale of the
imported merchandise (the prototypes) for exportation to the
U.S. Based on the information provided, these various fees
paid pursuant to the Licensing Agreement between LCI and
Lucas, pertain directly to the U.S. production of switchgear
that utilizes the technology, methodology, and equipment
developed by Lucas and incorporated in the imported
prototypes. As long as these payments are separate from the
importer's payments for tooling, R&D and testing discussed
above, they are not to be added to the price actually paid or
payable for the imported merchandise.
HOLDING:
The payments made by LCI to Lucas for tooling, R&D and
testing are part of the price actually paid or payable for
the imported merchandise, which are prototype samples. The
additional payments which are characterized as license fees,
technical aid fees and royalties, paid by LCI to Lucas, are
not required to be paid as a condition of the sale of the
merchandise to the U.S. These payments are related to units
produced in the U.S. Accordingly, they are not dutiable
under 402(b)(1)(D) of the TAA.
Sincerely,
John Durant, Director
Commercial Rulings Division