VAL R:C:V 545612 LPF
Kathleen M. Murphy, Esq.
Katten Muchin & Zavis
525 West Monroe St. - Suite 1600
Chicago, IL 60661-3693
RE: Sale for exportation; Dutiability of royalty payments for use of trademark; HRLs 545271, 544923
Dear Ms. Murphy:
This is in response to your letters of March 31, 1994 and
November 14, 1994, submitted on behalf of Sears, Roebuck and Co.
(Sears) in which you request a ruling concerning the valuation of
luggage. We have granted your request for confidential treatment
of the information indicated in the November 14 submission. We
regret the delay in replying.
FACTS:
Sears obtains a portion of the luggage, which it imports and
sells through its retail stores, from York Luggage Company (York)
of Lambertville, NJ, a company which you advise is unrelated to
Sears within the meaning of section 402(g) of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979 (TAA),
codified at 19 U.S.C. 1401a. You explain that Sears provides
York with price, quantity, production standards, and other
specifications or requirements so that York can identify
appropriate manufacturers to supply such merchandise. Once Sears
and York reach an agreement regarding the price and features of
the product, they enter into a purchase contract. The price paid
by Sears includes a mark-up over the price paid by York to the
unrelated, independent manufacturers in China, Thailand and
Taiwan. You included with your submission a sample contract as
well as invoices from York to Sears and the factory to York.
Pursuant to the purchase contracts between Sears and York,
the luggage is shipped from the independent factories to Sears in
the U.S. At the time of production, you advise that the
merchandise is designated for shipment to Sears and may not be
sold to other York customers in the U.S. or elsewhere. The
purchase contracts provide that "two samples of each size and
color, properly labeled and packaged must be submitted . . . for
approval prior to production." When shipped from the factory,
each piece of luggage has a Sears stock number and a Sears bar-coded string tag. In addition, a Jordache hang tag is
permanently attached to the luggage before shipment. Finally,
you state that the luggage and packaging contains all marking
necessary for importation into the U.S. market. For these
reasons, it is your position that the merchandise is clearly
destined for export to the U.S. at the time of sale from the
independent factories to York and that these sales constitute
independent, arm's length transactions. Accordingly, you submit
that Customs must value the imported luggage at the price paid by
York to the foreign manufacturers.
The luggage at issue also bears either a "Sears" or
"Jordache" label. York is an authorized licensee of the Jordache
trademark in the U.S. Sears understands that York pays a royalty
to Jordache for the use of the trademark on luggage it sells to
its U.S. customers, including Sears. The royalty paid by York is
equal to seven percent of the price it charges Sears for the
luggage. Sears is not a licensee of the trademark used on the
merchandise. Accordingly, you explain that Sears is a purchaser
of merchandise for which York is authorized to use the Jordache
trademark, rather than a licensee of any trademark rights.
For luggage sold under the Sears label, York does not pay a
royalty. Thus, the price charged by York for such merchandise
simply is the factory price with a mark-up. The price charged by
York for merchandise sold under the Jordache label includes the
same mark-up. However, in order to maintain its margin on sales
of Jordache-labeled luggage, York adjusts its sales price to
Sears to cover the seven percent royalty payment. Consequently,
the royalty payment becomes part of the total price charged by
York for the merchandise. Under this pricing arrangement, York
applies the same mark-up over factory price to all of the luggage
it sells to Sears, regardless of whether it bears the Sears or
Jordache label. However, the price of luggage sold under the
Jordache label includes an additional 7% to cover the royalty
paid by York. It is your position that the payments made by York
to Jordache do not constitute dutiable royalties.
ISSUE:
Whether transaction value, as established by the sale
between the foreign manufacturers and York is the appropriate
basis for valuation and whether the royalties at issue constitute
dutiable royalties to be included within the transaction value.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into
the United States is transaction value pursuant to section 402(b)
of the Tariff Act of 1930, as amended by the Trade Agreements Act
of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of
the TAA provides, in pertinent part, that the transaction value
of imported merchandise is the "price actually paid or payable
for the merchandise when sold for exportation to the United
States" plus enumerated statutory additions, including any
royalty or license fee related to the imported merchandise that
the buyer is required to pay as a condition of the sale for
export to the U.S. (section 402(b)(1)(D)) and the proceeds of any
subsequent resale, disposal or use of the imported merchandise
that accrue to the seller (section 402(b)(1)(E)).
The "price actually paid or payable" is defined in section
402(b)(4)(A) of the TAA as 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...)
made, or to be made, for the imported merchandise by the buyer
to, or for the benefit of, the seller."
Sale for Exportation
Customs recognizes the term "sale," as articulated in the
case of J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d
1400, 1406 (1974), to be defined as: the transfer of property
from one party to another for consideration. In determining
whether a bona fide sale has taken place between a potential
buyer and seller of imported merchandise, no single factor is
determinative. Rather, the relationship is to be ascertained by
an overall view of the entire situation, with the result in each
case governed by the facts and circumstances of the case itself.
Dorf International, Inc. v. United States, 61 Cust. Ct. 604,
A.R.D. 245 (1968).
However, several factors may indicate whether a bona fide
sale exists between a potential buyer and seller. In determining
whether property or ownership has been transferred, Customs
considers whether the potential buyer has assumed the risk of
loss and acquired title to the imported merchandise. In
addition, Customs may examine whether the potential buyer paid
for the goods, and whether, in general, the roles of the parties
and circumstances of the transaction indicate that the parties
are functioning as buyer and seller.
In determining whether the relationship of the parties to
the transaction in question is that of a buyer-seller, where the
parties maintain an independence in their dealings, as opposed to
that of a principal-agent, where the former controls the actions
of the latter, some of the relevant considerations are whether
the potential buyer:
a. provided (or could provide) instructions to the seller;
b. was free to sell the items at any price he or she desired;
c. selected (or could select) his or her own customers
without consulting the seller; and
d. could order the imported merchandise and have it delivered for his or her own inventory.
In reviewing the documents presented to us, we note that, in
our opinion, they do not clearly establish that a bona fide sale
exists between the foreign manufacturer and York. Pursuant to 19
U.S.C. 1484(a)(1), the importer of record shall, using reasonable
care, make and complete entry by filing with Customs, among other
things, the declared value of the merchandise. Accordingly, if
the importer of record is able to establish by adequate evidence
that a bona fide sale has occurred, the decisions reached in
Nissho Iwai American Corp. v. United States, 786 F. Supp. 1002
(CIT 1992) rev'd 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport
International, Ltd., v. United States, Slip. Op. 93-5 (Ct. Int'l
Trade, decided January 12, 1993) are relevant. In particular,
these decisions may be relevant in determining whether a sale was
clearly destined for export to the U.S. or whether transaction
value is appropriately based on a manufacturer's price, rather
than a middleman's price. For purposes of this case, we have
assumed that the importer of record is able to establish that
such a bona fide sale between the manufacturer and York has
occurred.
In Nissho Iwai and Synergy, the U.S. Court of Appeals for
the Federal Circuit and the Court of International Trade,
respectively, addressed the proper dutiable value of merchandise
imported pursuant to a three-tiered distribution arrangement
involving a foreign manufacturer, a middleman, and a U.S.
purchaser. In both cases the middleman was the importer of
record. Both courts held that the manufacturer's price, rather
than the middleman's price, was valid as long as the transaction
between the manufacturer and the middleman fell within the
statutory provision for valuation. The courts explained that in
order for a transaction to be viable under the valuation statute,
it must be a sale negotiated at "arm's length" free from any
nonmarket influences and involving goods "clearly destined for
export to the United States."
In regard to this particular matter, you have advised that
the middleman, York, and the foreign manufacturers are not
related and that the sales from the foreign manufacturers to York
constitute independent, arm's length transactions. Moreover, you
have presented evidence demonstrating that the merchandise is
destined for the U.S. The submitted purchase contracts between
the importer, Sears, and the middleman indicate that the luggage
is designed and manufactured according to the importer's
specifications. These contracts also state that pre-production
samples, apparently from the manufacturers, are to be provided to
the importer.
Furthermore, the luggage, when shipped from the factory has
a Sears stock number and bar-coded string tag. The luggage and
packaging also contains all the requisite marking for importation
into the U.S. Finally, you have submitted copies of invoices
between a foreign manufacturer and York and between Sears and
York indicating that the luggage will be shipped directly from
the manufacturers to Sears. Based on the evidence presented and
the assumption that there is a bona fide sale between the
manufacturer and York, the sale between the middleman and the
foreign manufacturer is an arm's length sale, and the merchandise
is "sold for exportation to the U.S." within the meaning of
section 402(b)(1). This position is in accord with Headquarters
Ruling Letter (HRL) 545271, issued March 4, 1994.
Dutiability of Royalties
Based on the information provided, since the royalties are
not part of the price actually paid or payable for the
merchandise by York, we must consider whether these amounts
constitute royalties or proceeds to be added to the price. In
this regard, the Statement of Administrative Action (SAA),
adopted by Congress with the passage of the TAA, explains 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. [R]oyalties and license fees
paid to third parties for use, in the United States, of
copyrights and trademarks related to the imported merchandise,
will generally be considered as selling expenses of the buyer and
therefore will not be dutiable." Statement of Administrative
Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979),
reprinted in Department of the Treasury, Customs Valuation under
the Trade Agreements Act of 1979 at 48-49 (1981).
In the General Notice, Dutiability of Royalty Payments, Vol.
27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993), Customs
articulated three factors, based on prior court decisions, for
determining whether a royalty was dutiable. These factors were
whether: 1) the imported merchandise was manufactured under
patent; 2) the royalty was involved in the production or sale of
the imported merchandise and; 3) the importer could buy the
product without paying the fee. Affirmative responses to factors
one and two and a negative response to factor three would
indicate that the payments were a condition of sale and,
therefore, dutiable as royalty payments.
First, the luggage is not manufactured under patent or
trademark. The luggage is produced by the foreign manufacturers
independently from, and without regard to, the Jordache
trademark. Furthermore, the royalty is not involved in the
production or sale of the imported merchandise. The royalty, in
this case, is paid for the right to use the Jordache trademark in
the U.S. The payments to Jordache, an unrelated third party
licensor, are separate and apart from the payments made to the
foreign manufacturers. Finally, it is apparent that the luggage
can be bought without paying the fee. In fact, a portion of the
luggage is Sears labeled, as opposed to Jordache labeled. We
understand that no documents or agreements between the parties
require the royalties to be paid to Jordache if the luggage is
bought without the Jordache trademark. Accordingly, the royalty
payments at issue are not a condition of sale of the imported
merchandise and, therefore, do not constitute an addition to the
price actually paid or payable for the imported merchandise
pursuant to section 402(b)(1)(D). We assume nothing within the
license agreement is contrary to this finding. In any event, we
agree that HRL 544923, issued February 22, 1994, is instructive
in this regard.
We note that the payments do not constitute proceeds
pursuant to section 402(b)(1)(E) since they do not accrue
directly or indirectly to the seller as a result of subsequent
resale, disposal or use of the merchandise. See Statement of
Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st
Sess. (1979), reprinted in Department of the Treasury, Customs
Valuation under the Trade Agreements Act of 1979 at 49 (1981).
The above royalty/proceeds analysis is not applicable in the
event the importer is unable to establish that there is a bona
fide sale between the foreign manufacturer and York, and it is
determined that transaction value is based on the price Sears
pays for the imported luggage.
HOLDING:
Based on the facts submitted and the assumptions as stated,
the transaction value of the imported merchandise appropriately
is based on the price paid by the middleman, York, to the foreign
manufacturers. In such case, the additional payments made to
Jordache do not constitute dutiable royalties to be included
within the transaction value of the imported merchandise.
Sincerely,
John Durant, Director
Commercial Rulings Division