VAL R:C:V 545770 LPF
District Director
U.S. Customs Service
1 E. Bay Street - Room 104
Savannah, GA 31401
RE: Internal Advice concerning dutiability of royalty payments for technical assistance and
marketing and designing information for electrical machinery; C.S.D. 92-12; Generra Sportswear
Dear Sir:
This is in response to your memorandum dated September 2, 1994 forwarding a request
for internal advice, submitted by counsel on behalf of Yokogawa Corporation of America,
concerning the dutiability of royalty payments for technical transfer and assistance as well as for
marketing and designing information for electrical machinery. We regret the delay in responding.
FACTS:
Four agreements, or programs, between Yokogawa Corporation of America (YCA) and
its Japanese parent, Yokogawa Electric Corporation (YJ), concern the payment of royalties from
the former to the latter. In general, YCA manufactures, in the U.S., finished, or end, products
described in the following licensing agreements. The "end products" are primarily manufactured
from the imported parts and components at issue. Although purchase agreements concerning the
imported merchandise were not submitted for our review, for purposes of this decision we assume
that nothing in those agreements is contrary to the information provided by counsel and, hence, to
the findings made herein.
Agreements I, II, & III
In the April 1, 1992 "Technical Assistance Agreement on Stylist Meters and Power
Transducers" (Agreement I), YJ granted YCA the right to manufacture and sell certain models of
stylist meters and power transducers. Additionally, in the April 23, 1992 "Technical Assistance
Agreement on Portable Leak Detectors" (Agreement II), YJ granted YCA the right to
manufacture and sell a specific model of a portable leak detector. Finally, in the March 26, 1984
"Technical Assistance Agreement" (Agreement III), YJ granted YCA a license to make, use, and
sell various models of switchboard instruments, panel meters, digital panel instruments, elapsed
time meters, snapper hook-on instruments, and leak detectors.
In all the Agreements, YJ agreed to provide technical and marketing information and
assistance concerning the design, manufacture, sale, service, and, in some cases, assembly of the
various end products described in these licensing agreements. (1) YCA agreed to pay YJ a fee,
designated as a royalty, on either the gross sales amount (Agreements I and III) or on the net
sales price (Agreement II) of the end products as consideration for the technical transfer and
assistance and, in Agreement II, for world wide sales rights. For a time, the provisions of
Agreement III equally applied to products which were finished at the time of importation and did
not undergo any further processing. (2) Additionally, in Agreements I and II, YJ agreed to supply
YCA with parts, semi-finished products, test equipment, tools and any other equipment required
for the manufacture of the products on separately and mutually agreed terms and conditions.
Although YCA has manufactured, in the U.S., the models, or end products, primarily from
the imported parts and components, it is our understanding that a substantial portion of the parts
and components utilized are domestic. (3) Nothing in the Agreements obligates YCA to purchase
the parts and components from YJ. Moreover, except as noted above, YCA did not make
payments on the same imported parts and components when resold in the U.S. without any
further manufacturing.
Agreement IV
No written agreement covers the fee YCA paid to YJ following resale of certain imported
"elements" resold to Amprobe, a U.S. based hand held instruments manufacturer (Agreement IV).
The Amprobe fee is the subject of an oral agreement, partially reflected in portions of intra-company memoranda between YJ and YCA, mostly in September 1992.
The Amprobe fee relates to elements manufactured by Suzhou Yokogawa Corp. (SYC), a
Chinese manufacturer, who is a subsidiary of YJ. The elements were sold by SYC to YCA who
resells them to Amprobe, an unrelated U.S. manufacturer of meters. For the first and second
50,000 elements sold during the fiscal year to Amprobe, YCA agreed to pay YJ a fixed amount
per element. These payments per element represent reimbursement for engineering drawings and
services as well as for tools and dies, all of which were provided by YJ to SYC. Since October
1992, YCA has imported
the elements, resold them to Amprobe, and paid the fixed fees per element.
ENDNOTES
1. In Agreement III, YJ also agreed to assist in the design and manufacturing of the products by
sending engineers to YCA and giving YCA access to YJ's factories and employees.
2. Specifically, YJ granted YCA the rights to sell the finished imports and provided technical and
marketing information concerning those products. In return, YCA agreed to pay a royalty fee on
the resale price of the imported products. By agreement, such royalty payments terminated as of
March 31, 1992.
3. In Agreement III, it is evident that a portion of the parts and components were imported from
a source other than YJ.
ISSUE:
Whether the royalties or fees at issue, paid by the buyer, YCA, to the seller, YJ, are
included within the transaction value of the imported merchandise as part of the price actually
paid or payable or either as royalties or proceeds of subsequent resale.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the U.S. 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)). Although the buyer and seller of the
merchandise at issue are related parties pursuant to section 402(g), for purposes of this decision
we have assumed that transaction value is the appropriate method of appraisement.
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." 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.
Agreements I, II, & III
Based on the information provided concerning Agreements I, II, and III, it appears that
the royalty payments are not part of the price actually paid or payable for the merchandise since,
for the most part, they do not relate to the manufacture and sale of the imported products.
Therefore, we must consider whether the payments constitute royalties or proceeds to be added
to the price. First, the imported parts and components are not manufactured under patent.
Furthermore, the royalty is not involved in the production or sale of the imported
merchandise. The royalty, in this case, relates to the manufacture and sale of the finished, end
products produced in the U.S., as opposed to the manufacture and sale of the imported parts and
components. We also note that in Agreement II, the royalty is calculated based on a "net sales
price" excluding the cost of the imported parts and components.
Finally, it is our position that the importer can buy the imported parts and components
without paying the fee. The fee is payable only on the sales of the end products. In particular,
with the exception of a portion of the imported merchandise subject to Agreement III, discussed
below, we note that YCA does not make payments on the same imported parts and components
when they are resold in the U.S. without any further manufacturing. In addition, nothing in the
Agreements obligates YCA to purchase the parts and components from YJ.
With regard to the portion of Agreement III which applied to the products which are
finished at the time of importation, however, we make the following findings. First, counsel
advises that it is probable that some of the products were manufactured by YJ under various
patents. Second, because it is our understanding that the technical assistance provided by YJ
relates to the design and manufacture of the finished imported products, the royalty apparently is
involved in the production or sale of the imported merchandise. It has not been shown that YCA
agreed to pay YJ a royalty for anything other than YJ's technical assistance in manufacturing the
finished imported products, as opposed to end products produced in the U.S. (as was the case in
the other arrangements). Further, we cannot make a meaningful distinction between the amount
of the royalty paid for the technical, as opposed to marketing, assistance, the latter which may not
relate to the actual production or sale of the imported merchandise. Third, contrary to counsel's
position, we find it likely that YCA could not buy the product without paying the fee. In our
opinion, the fact that the royalty pertains to the "design and manufacture" of the imported
products, indicates that YCA could not buy the merchandise without paying the fee.
Accordingly, with regard to the portion of Agreement III which applied to the finished
product imports, the payments are dutiable as royalties to be added to the price actually paid or
payable. However, in all the other situations addressed above, 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). Nevertheless, we must consider whether the payments still may be added to the
price actually paid or payable as proceeds pursuant to section 402(b)(1)(E). General Notice,
supra, at 6-7.
With regard to proceeds, the SAA provides that:
[a]dditions for the value of any part of the proceeds of
any subsequent resale, disposal or use of the imported merchandise that accrues
directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported
merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.
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).
In C.S.D. 92-12, 26 Cust. Bull. 424 (1992), Headquarters Ruling Letter (HRL) 544656,
issued June 19, 1991, royalties were paid on the invoice sales price of machines made from both
imported and domestic components. In that decision, Customs determined, with regard to the
issue of proceeds, that the payments were not based on the resale of the imported product, but,
instead, were based on the resale of a finished product that included U.S. components. Because
Customs found that a substantial portion of the payments were based on components that were
not imported, the payments were not dutiable as proceeds.
Similarly, in Agreements I, II, and III the fees are paid on the sales price of the final
products made from both imported (in some cases other than from YJ) and domestic components.
Because the payments are not based on the resale of the imported products and it is our
understanding that a substantial portion of the payments are based on domestic components
incorporated into the end product, the fees are not dutiable as proceeds.
However, with regard to the portion of Agreement III which applied to the finished
importations, we find that if not dutiable as royalties, the payments would be dutiable as proceeds.
Particularly, the payments accrue directly to the seller, YJ, and directly relate to the imported
merchandise, which, we reiterate, does not undergo any further processing prior to its resale.
Agreement IV
The fees paid in Agreement IV represent payments actually made for the production of the
imported merchandise, that is "elements" used in the production of meters, as opposed to the
production of the end products, that is the meters themselves. Specifically, the fixed fees are paid
from YCA to YJ, following the resale to Amprobe, as reimbursement for the costs incurred by YJ
in providing the engineering services, tools, and dies to its subsidiary SYC who sells the elements
to YCA.
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 the value,
apportioned as appropriate, of any assist (section 402(b)(1)(C)). Furthermore, section
402(h)(1)(A) of the TAA provides, in pertinent part, that:
The term 'assist' means 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: . . .
(ii) Tools, dies, molds, and similar items used in the production of the
imported merchandise . . .
(iv) Engineering, development, artwork, design work,
and plans and sketches that are undertaken elsewhere
than in the United States and are necessary for the
production of the imported merchandise.
The facts in this case indicate that YCA, a buyer of the imported merchandise, reimburses
YJ for the engineering, drawings, tools, and dies it provides for use in connection with the
production of the elements. We note that these services and items fit the definitions referred to
above. Insofar as the services and items at issue are provided at a reduced cost, they constitute
assists to be added to the price actually paid or payable for the merchandise.
On the contrary, if the services and items are not provided at a reduced cost and, hence,
are not assists, it is necessary to consider whether the payments are dutiable as part of the price
actually paid or payable for the imported merchandise. 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." We note, in particular,
that section 402(b)(1) provides, in pertinent part, that the price actually paid or payable for
imported merchandise is increased by amounts for the enumerated statutory additions insofar as
they are not otherwise included within the price actually paid or payable.
Two recent court cases have addressed the meaning of the term "price actually paid or
payable." In Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990), the
court considered 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 appellate 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 explained that it
did not intend that Customs 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, were for the merchandise or something else.
In Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int'l Trade, decided
September 22, 1993), the Court of International Trade applied the Generra standard and
determined that although tooling expenses incurred for the production of the merchandise were
part of the price actually paid or payable for the imported merchandise, certain shortfall and
special application fees which the buyer paid to the seller were not a component of the price
actually paid or payable. With regard to the latter fees, the court found that the evidence
established that the 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.
Accordingly, it is our position based on Generra, that 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 completely unrelated to the imported
merchandise.
It is Customs position that in applying the Generra standard, if payments for merchandise
sold for export are recognized as part of the transaction value, that this be the case regardless
whether the payments were made directly to the seller or to a party related to the seller. This
position is consistent with the definition of the "price actually paid or payable" as the total
payment made directly or indirectly by the buyer to, or for the benefit of, the seller. In our
opinion, payments to a party related to the seller represent indirect payments made to, or, at the
very least, for the benefit of, the seller. We note that the same rebuttable presumption discussed
above, that is, that such payments are part of the price actually paid or payable, would equally
apply in such instances. For these reasons, numerous Customs decisions have recognized that
payments made from the buyer to a party other than the seller, particularly to a party related to
the seller, may also be included as part of the price actually paid or payable. See HRLs 542169,
TAA No. 6, issued September 18, 1980; 542150, TAA No. 14, issued January 6, 1981; 544388,
issued July 13, 1990; 544221, issued June 3, 1991; 544684, issued July 31, 1992; 557331, issued
September 9, 1993; 544971, issued October 20, 1993; 544972, issued October 20, 1993; 544764,
issued January 6, 1994; 545490, issued August 31, 1994; and 544694, issued February 14, 1995.
In this case, the fees are paid to YJ, a party related to the seller, SYC, for the engineering
services, tools, and dies used in the production of the merchandise sold for export. Whereas
information has not been presented to rebut the presumption that such payments are part of the
price, it is our position that the payments, if not found to constitute assists, would be part of the
total payment for the goods and therefore, by statute, part of the dutiable value of the
merchandise.
In any event, it is our position based on the information submitted, that even if not
considered to be an assist nor included as part of the total payment for the goods, the payments
for the imported meter elements would be dutiable as proceeds. The amount of the fee, or
proceed, directly relates to the imported merchandise insofar as it is based on the subsequent
resale of the imported merchandise and accrues, at the very least, indirectly to the seller since it is
paid to YJ, a party related to the seller.
HOLDING:
The royalty payments made by YCA to YJ pursuant to Agreements I, II, and III, except
for those payments which pursuant to Agreement III were for products finished at the time of
importation, are not included within the transaction value of the imported merchandise as part of
the price actually paid or payable nor as royalties or proceeds of subsequent resale. The payments
for the products finished at the time of importation are an addition to the price actually paid or
payable under either the royalty or proceeds provision. The fees paid by YCA to YJ pursuant to
Agreement IV are included within the transaction value of the imported merchandise either as
assists or as part of the price actually paid or payable and, alternatively, could be considered
proceeds of subsequent resale.
This decision should be mailed by your office to the internal advice requester no later than
sixty days from the date of this letter. On that date 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