VAL CO:R:C:V 545380 RSD
District Director of Customs
555 Battery Street
San Francisco, California 94111
RE: Internal Advice 55/93; regarding license fee payments made by a U.S. manufacturer and seller of main frame computer systems to a related company in Japan for technology connected to imported components used in manufacturing the computers; price actually paid or payable; royalties
Dear Sir:
This is in response to your memorandum dated July 1, 1993, forwarding a request for internal advice from the corporate counsel for Fujitsu America, Inc., concerning whether license fee payments made by Amdahl Corporation, to Fujitsu Limited in Japan are dutiable. The file also contains a memorandum from the National Import Specialist on this matter dated July 13, 1993, and a copy of a licensing agreement between Amdahl and Fujitsu Limited for SIMTEC Technology used in the manufacture of mainframe computer systems. We regret the delay in responding to your request.
FACTS:
There are three parties involved in the relevant transactions, Fujitsu America Inc. ("FAI), Fujitsu Limited ("FJ"), and Amdahl Corporation ("AC"). FAI, a California Corporation based in San Jose, California imports certain computer components from FJ, a Japanese manufacturer of computers. AC is the U.S. customer of FAI. FJ, FAI, and AC are "related parties" within the meaning of that term under the value statute (19 U.S.C. 1401a(g)). FAI is a wholly-owned subsidiary of FJ. FJ also own a percentage of AC's equity. This case occurs in the context of an audit conducted by the Office Regulatory Audit of FAI, and it concerns issues that arose in the course of that audit regarding license fee payments from AC to FJ.
The imported merchandise in question consists of components for a mainframe computer
system, the "5995M". The 5995M is the successor model to older computer systems, M780 and 5990. FJ manufactures components for the 5995M, which are imported by FAI and purchased by AC. AC uses the imported components to manufacture the 5995M computer systems. The importations of these components occurred during 1992 and the first half of 1993.
The issue raised in this internal advice request concerns the dutiability of license fee payments from AC to FJ made pursuant to a June 7, 1991, licensing agreement. According to the licensing agreement, FJ has developed proprietary technical information and know-how relating to the development of the 5995M, known as SIMTEC Technology. According to the agreement, SIMTEC Technology means proprietary technical information and know-how developed mainly by FJ for use in Central Processing Unit (CPU), Memory Control Unit (MCU), and a component identified by the initials CHP of the 5995M and consists of:
. design technology of using custom semiconductor devices (Devices),
. packaging technology to incorporate devices into multiplay glass ceramic and to connect such multi-layer glass ceramics,
. cooling technology of cooling module device mounted on multi-layer glass ceramic including piping parts,
. technical information and know-how including assembly process flow, manufacturing data interface, and external specification of assembly and test equipment.
FJ provides AC SIMTEC technology by furnishing : (1) circuit manual, (2) packaging manual, (3) external specification, technical information and know-how related to eight SIMTEC components and subassemblies and three non-SIMTEC components and units described in paragraphs 2.1 and 2.2 of the SIMTEC License Agreement, and (4) technical information and know-how related to assemble and test MLG and motherboard assembly referred to below. The SIMTEC components are
. Custom Semiconductor Device which is packaged in Single Micro Package (SMP)
. Multi-layer Glass Ceramic (MLG) Board
. Interposer and components for attachment of device of MLG
. Conductive Cooling Module (CCM)
. Mother Board for MLG
. ZIF Connector which connects MLG and MLG mother board
. cable and I/O Connector which connects to MLG
. piping parts which connect CCM's etc. in the frame (not including the system dependent parts)
The license agreement provides that AC must pay a licensing fee to FJ as payment for the acquisition of the SIMTEC technology. The agreement further declares that the total amount of the license fee is XXXXXXXX "by way of an adjustment to the AC's cost of 5995M." (See section 4 of the Licensing Agreement). The agreement provides that $XXXXXX of the license fee is to be paid by the AC's U.S. operations in Sunnyvale, California. The remainder of the $XXXXXXX license fee is to be paid by AC's Irish affiliate for manufacturing conducted in Ireland. Under the terms of the agreement, after a 5995M system is shipped to an external Customer, AC shall pay FJ the sum of $XXXXXXX until the total license fee paid to FJ reaches XXXXXXXX. At issue in this case is the $XXXX paid by AC in Sunnyvale to FJ. The remainder of the $ XXXXXX does not relate to the imported components, but to components used in manufacturing done in Ireland.
In the license agreement each party grants to the other party a world-wide, non-exclusive and non-transferable license to make, have made, use, lease, sell and otherwise dispose of any product, including devices and components used for SIMTEC Technology, under all patents covering SIMTEC Technology. FJ also grants to AC a world-wide non-exclusive non-transferable license with the right to grant sublicenses to utilize for development of AC product, including but not limited to 5995M, the technical information and know-how of SIMTEC technology.
There is also a purchase commitment provision in the license agreement in which AC agrees to purchase from FJ and FJ agrees to sell to AC subassemblies, semiconductor devices, and components at quality levels, delivery schedules for 50% or more of AC's total requirements for assembly of SIMTEC subsystems for 5995M, and 100% of AC's total requirements for custom semiconductor device, glass ceramic board, conductive cooling module at prices that are mutually agreed upon. (See Section 5 of the Licensing Agreement). According to counsel for FAI, the components of the 5995M systems involved are subassemblies, semiconductor devices and components including a custom semiconductor device, glass ceramic board, and conductive cooling device. Counsel further indicates that imports of such components have been made at San Francisco.
We have been informed by an official from the Office of Regulatory Audit that there is no separate purchase agreement for the imported merchandise. A letter to your office from FAI indicates that in accordance with the license agreement, AC made a series of license fee payments
to FJ, in the period from April 1992 through June 1993, which totaled XXXXXXXXX. These payments were paid quarterly based on the number of finished manufactured goods that AC delivered in the U.S.
Counsel contends that the license fee payments are not dutiable as part of the price actually paid or payable because they are not for the imported merchandise and they are not made by the buyer, which it claims is FAI, and not AC. Counsel further maintains that they are not dutiable as royalties because they do not relate to the imported merchandise and they are not required to be paid by the buyer directly or indirectly and they are not a condition of sale of the imported merchandise.
In HRL 544793, dated February 16, 1995, involving FJ, FAI, and AC, Customs addressed an issue pertaining to the valuation of certain imported computer products. The products at issue were computer subassemblies (5890 series); communication control processors (system 4725) and Magnetic storage units (Models 6380 and 6380E) and storage control units (Model 6880-G2). In that case, there were a series of complex purchase agreements as well as other written contracts between the parties, such as a fundamental agreement and an administrative agreement. We concluded in HRL 544793, that the purchase agreements were valid sales contracts which set forth the legal obligations of FJ and AC with respect to the covered products; that of a buyer and a seller. We further found that the evidence, including the purchase agreement between AC and FJ, the Fundamental agreement between FJ and FAI, and the conduct of the parties, demonstrated that there was a sale for exportation for transaction value purposes between FJ and AC, and that FAI acted as FJ's selling agent. Therefore, the amount retained by FAI from the invoiced price to AC were considered dutiable selling commissions. The ruling covered products imported by FAI for distribution to AC and which were covered by the purchase agreements discussed in the ruling. The imported products involved in this case, the components for 5995M, were not covered by the separate purchase agreements mentioned in HRL 544793. Therefore, the findings of HRL 544793 regarding the issue of whether there is a sale for exportation between FJ and AC are not specifically applicable to this case.
ISSUES:
Whether the license fee payments for the SIMTEC Technology made by AC to
FJ are part of the price actually paid or payable for the imported merchandise?
Whether the license fee payments for the SIMTEC Technology are an addition to the price actually paid or payable for imported merchandise as a royalty under section 402(b)(1)(D)?
LAW AND ANALYSIS:
As you know 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. ยง 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United
States," plus certain enumerated additions. The term "price actually paid or payable" is defined in the section 402(b)(4)(A) of the TAA as the "total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller."
For purposes of this ruling, we will assume that transaction value is the proper basis of appraisement. Although we recognize that the parties are related within the meaning of section 402(g)(1), this issue has not been raised in the internal advice request and we will not address it in this ruling.
In its request for internal advice, FAI argues that the license fee payments should not be considered part of the price actually payable to the seller because 1) the payments are not for the imported merchandise, 2) AC may purchase the imported merchandise from FAI without accruing the license fee, and 3) they are not made by the buyer. It is claimed that FAI, not AC is the buyer of the imported merchandise.
Although as explained above, the findings in HRL 544793 regarding the sale issue do not
specifically apply to this case, the June 7, 1991 license agreement between FJ and AC implies that the sale likewise is between FJ and AC. Specifically, Section 5 of the licensing agreement provides that with respect to the imported components for the system 5995M, AC agrees to purchase from FJ and FJ agrees to sell to AC; subassemblies, semiconductor devices, and components at quality levels, delivery schedules for quantities of 50% or more of AC's total requirements for assembly of SIMTEC subsystems for 5995M, and 100% of AC's total requirements for custom semiconductor device, glass ceramic board, conductive cooling module at a price that are mutually agreed upon. (emphasis added) Based on this language it appears that AC purchases the imported components from FJ. Accordingly, for purposes of this ruling we will assume that there is a sale between FJ and AC for the computer components involved in the 5995M and that the license fee payments from AC to FJ were made from the buyer to the seller. However, even if there was no sale between AC and FJ, payments by an ultimate purchaser in the United States to an overseas seller on behalf of the buyer are considered indirect payments and are part of price actually paid or payable under section 402(b)(4)(A) of the TAA. See HRL 544694, dated February 14, 1995 and HRL 543967, dated December 17, 1987.
Consequently, the question that must be decided in determining if the license fee payments are part of the price actually paid or payable, is whether those payments were part of the "total payment for the imported merchandise" within the meaning of section 402(b)(4)(A) of the TAA. Two court cases have addressed the meaning of this term. In Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), the issue before the court was 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 appeals court 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].
Id. At 380.
In Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int'l Trade September 22, 1993), 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.
Based on Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are totally unrelated to the imported merchandise.
In this case, the evidence does not clearly establish that the license fees are totally unrelated to the imported merchandise. To the contrary, the language in the license agreement indicates that the fees are closely related to the imported merchandise. The agreement provides that the license fees are for the SIMTEC Technology and technical know-how used in the production of the 5995M computer system. The preamble of the agreement explains that FJ has developed proprietary technical information and know-how relating to semiconductor packaging technology, cooling technology and components therefor for the development of the M1800 and also for 5995M. (emphasis added). The next paragraph declares that AC intends to utilize and FJ intends to provide AC with FJ's proprietary technical information and know-how and components therefor for the development of 5995M. (emphasis added) Section 2.1 of the agreement further indicates that FJ shall provide SIMTEC Technology which includes external specifications and the technical information and know-how related to components which are listed in the section.
The language in these sections of the agreement indicates that FJ will supply and AC will obtain both SIMTEC technology and the components related to that technology. The apparent reason for these clauses in the agreement is that the technology and the components are closely linked together. SIMTEC Technology was developed in conjunction with the referenced imported components and they are clearly designed to be used together. Because the SIMTEC
Technology and the imported components referenced in the agreement are so closely intertwined, we believe that it is impossible to separate payment for the imported components from the payments for the technology and know-how which is necessary to properly use them.
Moreover, the section of the license agreement regarding payment states that as a consideration of the license grant of SIMTEC Technology AC shall pay to FJ the license fee up to fifteen million U.S. dollar by way of an adjustment to AC's cost of 5995M. (Emphasis added). This language indicates that it is understood the license fee is considered a part of the payment that AC will make to FJ for the 5995M computer products purchased from FJ.
We also disagree with counsel's contention that AC may purchase the imported merchandise without accruing the license fee. As indicated above, the license agreement includes a purchase commitment, in which AC agrees to purchase from FJ and FJ agrees to sell to AC subassemblies, semiconductor devices and components. In other words, in the licensing agreement, AC agreed to buy both the SIMTEC technology and the referenced imported computer components related to the technology from FJ. The license fee was specifically included as part of the purchase price of the imported components. The fact that AC was not obligated to pay FJ the license fees until AC sells the 5995 M is not dispositive of whether such payment was a condition of sale of the imported merchandise. While there is no requirement under Gennera that the payment to the seller must be a condition of sale in order for it to be part of the price actually paid or payable, it appears that in this case payment of the license fees was indeed such a condition.
Based on the above considerations, we conclude the license fees at issue are part of the price actually or payable for the imported merchandise. Since we have concluded that this payment is part of the price actually paid or payable, it is not necessary to address the second issue presented.
HOLDING:
The license fee payments for the SIMTEC Technology and know-how that AC made to FJ are dutiable as part of transaction value as part of the price actually paid or payable for the imported merchandise. The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels 60 days from the date of this decision.
Sincerely,
John Durant, Director
Commercial Rulings Division