VAL CO:R:C:V 544459 VLB
District Director of Customs
Patrick V. McNamara Building
477 Michigan Avenue 48266
RE: Royalty Payments Made by [“A”] to [“B”]
Dear Sir:
This is in response to your memorandum (APP-6-08-CO:CT AR Royalty/TXTFRISC) dated February 13, 1990, concerning the dutiability of royalty payments made by “A” to”B”.
FACTS:
You have provided several documents that were executed between “A”, “B” and xxxxxxxxxxxxxxx. ("X"). According to a “A” memorandum from xxxxxxxxxxx to xxxxxxxxxxxxxx, dated February 6, 1984, “X” is a Korean company that is 50% owned by “A”.
The documents reveal that in 1984, “B” agreed to provide technical information and assistance to “X” to produce a new front-wheel drive motor vehicle, the xxxxxxx Car, for sale to “A” for the U.S. market. “B” also agreed to provide technical information and assistance for a new vehicle for sale in Korea, called the xxxxxx Car. (See, "Manufacturing Technical Information & Assistance Agreement between “B” and “X”", dated May 17, 1984 and "Product Technical Information & Assistance Agreement between “B” and “X”", dated May 17, 1984.) Pursuant to a "Supply Agreement", dated February 26, 1985, between “X”, “A”, “B” and xxxxxx Corporation ("xxxxxx") (p. 19), “X” agreed to sell the xxxx cars to “A” on an "F.A.S. vessel, quay port of export, Republic of Korea" basis.
Finally, pursuant to a "Technical Documentation & License Agreement between “B” and “A” ("the License Agreement"), dated August 13, 1985, “B” agreed to "furnish “X” and “A” with technical documentation and assistance on the xxxxxx Cars and on parts thereof". (See Article 2.2) The technical assistance was
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to be provided from August 13, 1985 to December 31, 1991. In addition, “B” granted “A” a nonexclusive license, including the right to license its Subsidiaries, to use and have used the technical documentation furnished under Article 2 to make, have made, use, and sell xxxxxx Cars and Parts (License Agreement, Article 3)."
Article 4.1 of the License Agreement, provides as follows:
As payment for “B”'s providing technical documentation and assistance to A under Article 2 and the license under Article 3, A shall pay a royalty to “B” of xxx deutsche marks and Fifty pfennig (DM xxx) for each xxxxxx Car made by or for “A” by others than “B” during the Royalty Period, provided, however, that the royalty shall be reduced by xxx deutsche marks (DM xx) for those cars which utilize transaxles purchased from “B” or “A” or their Subsidiaries and by xx deutsche marks (DM xx) for those cars which utilize engines purchased from “B”. The aforesaid reductions to be cumulative provided, further, that such royalties shall no longer be payable after “A” and its Subsidiaries shall have paid royalties on the first Three Hundred Seventy-Five Thousand (375,000) of said Cars less such reductions. With respect to cars made for “A” by “X”, royalties shall only be payable on xxxxxx Cars. “A” shall further pay “B” a royalty during the Royalty Period of xxx deutsche marks (DM xx) and of xx deutsche marks (DM xx), respectively, for each manual transaxle and engine made by or for “A” by other than “B” for sale by “A” for other than after sales service use on xxxxxx Cars.
The parties amended the license agreement on October 21, 1987. The amendment raised “A”'s payment to by x deutsche marks for each xxxxxxx Car purchased from [“X”] with a xxx transaxle for a five year royalty period commencing with the date of the first installation. In addition, the number of cars for which a royalty payment was to be made was raised to 600,000. You have requested a ruling on the dutiability of the payments made by “A” to “B” under the terms of the License Agreement.
ISSUE:
Whether “A”'s payments to “B” for providing technical documentation and assistance, as well as granting “A” a nonexclusive license to use and have used the technical documentation to make, have made, use, and sell the xxx cars and parts are includable in the transaction value of the imported merchandise.
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LAW AND ANALYSIS:
As you know, the preferred method of appraisement is transaction value, which is defined in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus enumerated statutory additions. The "price actually paid or payable" is defined in section 402(b)(4) of the TAA as the "total payment . . . made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."
One of the statutory additions to the "price actually paid or payable" is "the value, apportioned as appropriate, of any assist (section 402(b)(1)(C) of the TAA)." The term "assist" is defined in section 402(h) 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:
. . .(iv) Engineering, development, art work, design work, plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
In this case, under article 2.2 of the License Agreement, “B” agreed to furnish technical documentation and assistance for the xxxx cars and parts to “X” and “A”. Pursuant to Article 3 of the Agreement “B” granted “A” the nonexclusive right to use and have used the technical documentation furnished under Article 2. The payment for this technical information was made through a royalty that was due on each xxxx car that was produced by “X”. As previously mentioned, the xxxx car was produced for the U.S. market.
This situation is similar to the circumstances in HRL 542152 (TAA #13), dated December 4, 1980. In the second transaction addressed in TAA #13, the importer gave a cash advance to a Canadian company to develop a drawing and a crude working model for a product. The design drawing and the model were then supplied free of charge to the importer's Hong Kong subsidiary for use in fabricating the imported merchandise. The Canadian company obtained a Canadian patent for the invention and the importer agreed to pay the Canadian company royalty payments for the design after the advanced funds had been depleted.
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Customs held that the design work and the fabrication of the model were undertaken outside of the U.S. Therefore, the items were considered to be assists that were provided to the seller. In addition, Customs held that the value of the assists, based on the cost of acquisition, included not only the cash advance amount, but also, included the royalty payments.
Similarly, in this case, “A” is contracting with “B” to design and develop the xxxx automobiles. The design and development is then being provided to “X” free of charge. Thus, “A” is indirectly providing an assist under 402(h)(1)(A)(iv) to “X”.
As a result, a value must be established for the assist. Normally, as in TAA #13, if a buyer purchases an assist, the value of the assist is the buyer's cost of acquisition. In this case, “A” was required to pay a royalty to acquire the design and development for the xxxx cars. Thus, the royalty payments would be the value of the assist that “A” indirectly provided to “X”.
Please note that for purposes of this ruling we have assumed that transaction value is the proper basis of appraisement. However, it appears that “A” and “X” are related parties under section 402(g) of the TAA. Therefore, the transfer price between “X” and “A” is acceptable for transaction value purposes if it meets one of the tests set out in section 402(b)(2)(B). We do not have enough information in the file to determine whether one of the tests has been met.
HOLDING:
The payments made by “A” to “B” for technical documentation and assistance on the xxxx cars are includable in the transaction value of the imported xxxx cars. The technical documentation and assistance is an assist under section 402(h)(1)(A)(iv) that “A” provided to “X” free of charge. “A”'s cost to acquire the assist is the sum of the royalty payments to “B”.
Sincerely,
John Durant,
Director,
Commercial Rulings Division