VAL R:C:V 545071 IOR
David O. Elliott, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, NY 10016
RE: Royalty payments; transaction value
Dear Mr. Elliott:
This is in response to your letter of August 12, 1992 (hereinafter referred to as the "request"). On behalf of your client, xxxxxxxxxxxxxxx xxxxxxxx xxxxxxxxx xxx. xxxxxxxxxxxxx xxxxxxxx (hereinafter referred to as the "importer"), a United States corporation, you request a prospective ruling on whether a royalty paid to third parties is dutiable. We are in receipt of your supplemental submission dated May 11, 1994. This response follows a meeting between you and members of my staff in the Value Branch. We regret the delay in responding.
FACTS:
The importer imports television chassis from its subsidiary, xxxxxxx xxxxxxxxxx, S.A. DE C.V. (hereinafter referred to as "TMX"), a Mexican corporation, and from xxxxxxx xxxxxxxxx xxx LTD. (hereinafter referred to as "TSP"), a Singapore corporation, through the port of Nashville, Tennessee. The imported chassis are then assembled by the importer in Lebanon, Tennessee with other components to create completed television sets, which are marketed and sold primarily in the United States or Canada.
xxxxxxx xxxxxxxxxxx (hereinafter referred to as "TC"), a Japanese corporation, has indirect ownership of the importer. TSP is a wholly owned subsidiary of TC. TC has entered into two separate but similar agreements, one with the Carver Corporation (hereinafter referred to as "Carver"), a U.S. corporation, effective June, 1988, and the other with Telesonics Systems (hereinafter referred to as "Telesonics"), a U.S. limited partnership, effective December, 1987. Neither Carver nor Telesonics are related to TC or its affiliates. The agreements provide TC and its affiliates with the right to use certain patented technology owned by Carver and Telesonics in the manufacture of television chassis. The Carver patents cover a sound processing system and the Telesonics patents cover a transmission system. These systems are incorporated into the television chassis that are imported from TMX and TSP (hereinafter collectively referred to as the "seller").
With respect to each agreement, the licensed product is essentially a television, containing the patented system which is the subject of the license agreement. Each of the agreements requires that TC or an affiliate of TC pay a royalty based on the number of units sold, leased or otherwise placed into use. The agreement with Telesonics provides that TC is acting through and on behalf of its affiliates, and provides that TC and its affiliates are singularly and jointly referred to as a "licensee." The Telesonics agreement provides that "Grantee agrees to pay, or cause an Affiliate to pay, Telesonics a continuing royalty...." The agreement with Carver is only entered into by TC and makes no reference to the affiliates.
TC pays the royalties owed to Carver and Telesonics respectively, and then TC periodically charges the importer for its portion of the royalty payment. You take the position that the royalty payments made by the importer to TC are not part of the price actually paid or payable for the imported merchandise, and are not dutiable royalties or proceeds. You request a ruling as to the dutiability of the royalty payments. Alternatively, you request a ruling as to the dutiability of the royalty payments if the agreements described above were modified to permit direct payment to the licensors by the importer. This alternative arrangement would not apply to the licenses at issue because as of July, 1993 the importer no longer uses the Carver technology and the Telesonics patent expired in September, 1994.
ISSUE:
Whether the royalty payments paid by the importer to TC, which are for royalty payments made by TC to Carver and Telesonics, are included in the transaction value of the imported merchandise.
LAW AND ANALYSIS:
Transaction value is the preferred method of appraisement and is defined in §402(b) 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." In addition, §402(b)(1)(D) and (E) of the TAA provides for additions to the price actually paid or payable for:
(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;
(E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.
We are assuming for purposes of this ruling that transaction value is the proper method of appraisement for the imported merchandise, although we note that the importer and the seller are related parties under §402(g) of the TAA. We do not have enough information to determine whether the transfer price between the related importer and seller is acceptable. In order for the transfer price to be acceptable it must meet one of the tests set forth in TAA §402(b)(2)(B).
In reviewing the evidence submitted in connection with the subject ruling request, we have concluded that the concerned payments are clearly part of transaction value.
In this regard, we note that the importer is reimbursing TC, the parent of the seller, for certain funds it has paid the licensor. Based on the language of the agreements, the importer has no choice but to pay this amount. Consequently, in our opinion, a strong case can be made that such indirect payment is part of the total payment made by the buyer to or for the benefit of the seller.
In any event even if not viewed as part of the price actually paid or payable, the payments would still be a dutiable addition to the price actually paid or payable for the reasons described as follows.
In prior rulings, with respect to §402(b)(1)(D), in order to make the determination of whether the license fee payment is "related to the imported merchandise" and is paid "as a condition of the sale of the imported merchandise," Customs has looked to whether the fees are connected to the importation or ownership of the imported merchandise. See C.S.D. 92-12, HRL 544656 dated June 19, 1991, and 543773 dated August 28, 1986. The Statement of Administrative Action (SAA), specifically adopted by Congress when the TAA passed, contains an explanation of §402(b)(1)(D). In the SAA, Congress explained 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." See Customs Blue Book, 10/81, at p.48.
A General Notice on the dutiability of "royalty" payments published by Customs in the February 10, 1993 Customs Bulletin adopts an analysis using a historical approach that incorporates the SAA, legislative history and case law under the prior statute. U.S. Customs Service General Notice, Cus. Bull., February 10, 1993, 1. The analysis identifies three questions, the responses to which help determine whether a royalty payment is related to the imported merchandise and is a condition of sale:
1) Was the imported merchandise manufactured under patent?
2) Was the royalty involved in the production or sale of the imported merchandise?
3) Could the importer buy the product without paying the fee?
Cus. Bull., February 10, 1993, at 9-11. Negative responses to the first and second questions, and an affirmative response to the third, point toward non-dutiability.
Issues similar to those at hand were raised in Headquarters Ruling Letter ("HRL") 544166 dated July 18, 1988. Although that decision involved royalties paid to or for the benefit of TC, because it appears that the underlying facts were somewhat different and because it was issued prior to the General Notice on royalties which sets forth the analysis to be employed in determining the dutiability of royalties, it is not dispositive of the issues raised herein.
In this case, according to the request, the imported merchandise contains the sound processing and transmission systems which are covered by patents. Therefore the first question is answered in the affirmative. With respect to the second question, the royalty payments from the importer to TC, which are for payments to Carver and Telesonics, are involved in the production of the imported merchandise. The license agreements provide TC and its affiliates with the right to use the patents in the manufacture of television chassis. As indicated above, the Carver sound processing system and the Telesonics transmission system are incorporated into the imported merchandise. Therefore, without the license agreements the imported merchandise could not have been produced by TC's related manufacturing entities. Since the imported chassis contain the patented systems for which the royalty is paid, we find the royalty is involved in the production or sale of the imported merchandise, the television chassis. Therefore, this second question is also answered in the affirmative.
The General Notice states that the "answer to question three goes to the heart of whether a payment is considered to be a condition of sale." The analysis in the General Notice looks to whether the royalty or license fee is optional, or whether a payment must be made for each item of imported merchandise. In this case, although the royalty payments are not made until the sale or use of the licensed product, into which the imported merchandise has been incorporated, the royalty payment is not optional and is required to be paid by the importer to TC for the royalty paid by TC to Carver and Telesonics. Without the license agreement the sellers would not have had the right to manufacture the merchandise and without such right, the merchandise could not have been manufactured, purchased and imported. The importer could not buy the product without paying the fee. Therefore, this question is answered in the negative.
Based on this analysis, we find that the royalty payments are related to the imported merchandise and are a condition of sale of the imported merchandise for purposes of §402(b)(1)(D), and are to be added to the price actually paid or payable and included in the transaction value of the imported merchandise as a "royalty." We believe that the analysis would be the same even if the buyer would pay the royalties directly to the licensor.
As we have determined that the subject royalty payments are to be added to the price actually paid or payable under TAA §402(b)(1)(D) for the imported merchandise, it is not necessary to consider whether alternatively they may be dutiable under TAA §402(b)(1)(E) as "proceeds."
HOLDING:
The payments made by the importer are included in the transaction value of the imported merchandise under §402(b) of the TAA.
Sincerely,
John Durant, Director
Commercial Rulings Division