VAL CO:R:C:V 545388 LR
Area Director of Customs
J.F.K. Area
Jamaica, N.Y. 11430
RE: Application for Further Review of Protest 1001-92-106852;
formula; royalties; retroactive reduction in royalties
Dear Sir:
The above-referenced protest and application for further
review was filed by counsel on behalf of CIBA-GEIGY Corporation
(protestant) against your decision to appraise the imported
product at the invoice price. On September 20, 1994, we met with
counsel to discuss the issue presented. We regret the delay in
responding.
FACTS:
The imported merchandise is Habitrol, a Transdermal Nicotine
Patch ("the product"). Protestant purchased the subject
merchandise from its related company, CIBA-GEIGY, Limited
("Limited"). The product is manufactured in Germany by an
unrelated third party ("manufacturer"). The methodology for
setting prices is based on a contract between protestant and
Limited entitled "Supply Agreement", dated January 1, 1985, a
copy of which was submitted. Under Paragraph 3(b) of the Supply
Agreement, the price equals the sum of certain costs incurred by
Limited plus "an amount sufficient to reimburse Limited for any
royalties paid to a third party in respect of the manufacture or
sale of the product." The manufacturer owns a patent for the
product. Pursuant to an agreement dated December 31, 1988,
between Limited and the manufacturer ("Basic Royalty Agreement"),
Limited is to pay patent royalties to the manufacturer which is a
fixed percentage of the selling price in the United States.
(Paragraph 8). A copy of an English translation of the Basic
Agreement was submitted.
The manufacturer and Limited entered into a supplementary
agreement (Amendment to Basic Agreement) dated August 26, 1992.
An English translation was submitted. The introduction states
that "in this Supplementary Agreement Limited and (name of
manufacturer) intend to settle their differences of opinion, with
particular reference to the interpretation of item 9.2 of the
Basic Agreement in respect of certain patent rights of third
parties." Under paragraph 1, the amount of the royalty is
reduced to a lower percentage in specified circumstances.
(Although the protest indicates that this rate change occurred in
August 1991, the submitted documents indicate that it occurred in
August 1992). Paragraph 2 states that reduced rates are
applicable for "the following accounting period from 1.1.92."
Since royalty payments is one element of the Limited's price
to protestant, counsel indicates that this reduction also reduced
the price protestant paid to Limited for the imported product.
The merchandise in question was entered in March - May,
1992, several months before the date of the Amendment to Basic
Agreement reducing the royalty rate. Therefore, the entered
values and invoice price of the subject entries do not reflect a
reduction in the royalty rate. The merchandise was appraised
under transaction value based on the invoice price. Counsel
contends that transaction value should be based on the post-
importation price reduction. Its theory is that the price
between protestant and Limited was based on a formula, an element
of which was royalties Limited paid to third parties. Therefore,
it argues that section 402(b)(4)(B), Trade Agreements Act of 1979
(precluding consideration of post-importation price decreases in
ascertaining transaction value) is inapplicable because the price
adjustments were derived from a formula which was in effect prior
to importation. Alternatively, it is argued that the change in
price was not a post-importation price reduction since the change
was legally effective January 1, 1992.
ISSUE:
Whether transaction value should take into account the post-
importation price reduction.
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
preferred method of appraisement under the TAA is transaction
value, defined as "the price actually paid or payable for the
merchandise when sold for exportation to the United States," plus
five enumerated additions. There is no dispute that transaction
value is applicable.
Section 402(b)(4) of the TAA provides in relevant part:
(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
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. 19 U.S.C. 1401a(b)(4).
Section 402(b)(4)(B) of the TAA provides that any rebate of,
or other decrease in, the price actually paid or payable made or
otherwise effected between the buyer and seller after the date of
importation of the merchandise will be disregarded in determining
transaction value. See also 19 CFR 152.103(a)(4). However, we
have ruled that if the decrease in price is pursuant to a formula
which was in existence prior to the date of exportation, such
decrease will not be disregarded. See Headquarters Ruling Letter
("HRL") 544944, May 26, 1992.
In this regard, section 152.103(a)(1), Customs Regulations
(19 CFR 152.103(a)(1)) provides that in determining transaction
value, the price actually paid or payable will be considered
without regard to its method of derivation. It may be the result
of discounts, increases, or negotiations, or may be arrived at by
the application of a formula, such as the price in effect on the
date of export in the London Commodity Market.
In HRL 544346, September 11, 1990, we emphasized that a
formula in a contract can be acceptable under transaction value
if it is a formula that is based on a future event over which
neither the seller nor the buyer has any control. It must be an
objective standard over which neither the buyer nor the seller
has control, such as the price in effect on the date of export in
the London Commodity Market, the example of an acceptable means
of a formula used to determine the price actually paid or payable
for the imported cited in 19 CFR 152.103(a)(1).
In the instant case, the Supply Agreement specifies that the
price for the product will be the sum of certain specified costs
incurred by Limited plus "an amount sufficient to reimburse
Limited for any royalties paid to a third party in respect of the
manufacture or sale of the product." Counsel indicates that this
price calculation is a formula and that according to such
formula, the price was to include the royalty paid to the
manufacturer. Since the formula was in existence prior to the
date of exportation, counsel argues that transaction value should
include the reduction in price made pursuant to such formula.
Counsel also indicates that the relevant element of the formula,
i.e., the royalty paid to the manufacturer, is not within the
"control" of either Limited or protestant.
Although the Supply Agreement specifies the method that will
be used to determine the price for the product and arguably could
be viewed as a formula for such, it is not a formula upon which
transaction value can be based. This is because contrary to
counsel's assertion, the amount of the royalty paid to the
manufacturer is within the control of one of the parties, namely,
Limited. The amount of such royalty first determined in the
Basic Agreement between Limited and the manufacturer was
subsequently reduced. Although counsel states that the
manufacturer agreed to reduce its royalty on such sales to a
lower percentage, in fact, the reduction was the result of an
agreement between the manufacturer and Limited. Since Limited
was a party to both the Basic Agreement and the Amendment to
Basic Agreement, it cannot be said that the amount of such
royalty was beyond Limited's control. While this element of the
formula was not entirely within the control of Limited, it played
a role in determining the amount of the royalty. Accordingly, we
find that this element in the formula was not based on a future
event over which neither the seller nor the buyer has any control
and that it cannot be the basis for transaction value. Based on
this conclusion, we do not address whether the other elements of
the formula were beyond the control of the parties.
Protestant argues that even if we conclude that the prices
at issue were not derived from a formula, section 402(b)(4)(B) of
the TAA would not come into play. Under this provision any
rebate of, or other decrease, in the price that is "made or
otherwise effected...after the date of importation...shall be
disregarded..." It argues that since the reduction in the
royalty rate and the price change for the imported product was in
effect on January 1, 1992, so too was the price change for the
imported product. According to protestant, the fact that the
change was not fully implemented until later did not alter the
legal obligation to make the change on January 1, 1992. As such,
it contends that this was not a post-importation price reduction,
but rather, a belated implementation of a change legally
effective January 1, 1992.
We disagree. At the time of importation, the price actually
paid or payable for the imported product included an amount equal
to Limited's royalty payment to the manufacturer (the original
fixed percentage of net sales). These prices were in effect when
the merchandise was sold for exportation. It wasn't until August
1992, after the subject importations, the amount of the royalty
was decreased. Clearly, this was a decrease in the price that is
"made or otherwise effected...after the date of importation..."
and should be disregarded. The fact that such reduction was to
apply retroactively to January 1, 1992, is not relevant.
HOLDING:
Pursuant to section 402(b)(4)(B) of the TAA, the decrease in
price attributable to the lower royalty payment to the
manufacturer shall be disregarded in determining the transaction
value of the imported goods. Therefore, you are directed to deny
the protest in full.
Sixty days from the date of the decision the Office of
Regulations and Rulings will take steps to make the 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.
Sincerely,
John Durant, Director
Commercial Rulings Division