VAL RR:IT:VA 545998 LR
Robert L. Eisen, Esq.
Karen Bysiewicz, Esq.
Coudert Brothers
114 Avenue of the Americas
New York, N.Y. 10036-7703
RE: Price Actually Paid or Payable; Royalties; Pharmaceuticals
Dear Mr. Eisen and Ms. Bysiewicz:
This is in response to your letter dated May 9, 1995, on
behalf of your client, Pfizer Inc. ("the importer/buyer"),
requesting a ruling on the dutiability of payments to UCB
Pharmaceuticals, Inc., now Pharma, Inc. ("the licensor") for
royalties, research studies, and co-promotion fees relating to
the imported product, cetirizine ("the imported product"). The
arguments presented in the meeting on April 15, 1996, and
summarized in your supplemental submission dated May 28, 1996
were also taken into account in rendering this decision. This
ruling does not contain any of the information which you claim is
confidential as set forth in your letters dated May 17, 1995 and
May 28, 1996, and clarified in your November 11, 1996 fax. We
regret the delay in responding.
FACTS:
The imported product is a pharmaceutical active ingredient.
The importer/buyer purchases it in bulk form from UCB, S.A. ("the
seller), an unrelated company located in Belgium. Upon
importation, the importer/buyer combines the imported product
with other ingredients of U.S. origin in the manufacture of
Zyrtec ("the finished product"), an antihistamine available to
consumers by doctor's prescription only. After receiving FDA
approval in 1995, the finished product was launched commercially
in the U.S. market in February, 1996. A portion of the imported
product was also used to conduct research and to prepare samples
of the finished product. There is one licensor-owned, U.S.
patent for the imported product which will expire in 2002. This
patent concerns the chemical composition of the imported product.
You indicate that the imported product and the finished
product have different forms, functions and physical
characteristics. The former is a powdered, chemical bulk
material which is not suitable for use as a pharmaceutical end-product because of its unpleasant taste and lack of reliable
dosage form. In contrast, the finished product contains precise
amount of the imported product in combination with other
ingredients presented in the form of a film-coated tablet. You
state that in this form, the finished product can be relied upon
to achieve the desired antihistamine benefits for which it has
been tested and approved by the FDA. You point out that FDA
approval was required for both products.
The importer/buyer has entered into five agreements with
respect to the imported product: the "License Agreement," "Supply
Agreement", "Combination Agreement", "Trademark Agreement" and a
"Co-Promotion Agreement". Copies of these agreements were
submitted. These agreements are summarized below. The various
payments provided for in three of these agreements are the
subject of this ruling. The Supply Agreement is between the
importer/buyer and the seller. The other agreements are between
the importer/buyer and the licensor, a party related to the
seller.
The License Agreement
On August 15, 1983, the importer/buyer and the licensor, a
U.S. subsidiary of the seller, entered into a license agreement
("the License Agreement"). Under its terms, the licensor granted
the importer/buyer (1) the exclusive right under the imported
product patent to sub-license, make, use and sell within the
United States Licensed Products in the United States and (2) an
exclusive license to use the licensor's Technical Information in
connection with the manufacture, use and sale of the Licensed
Products in the United States. These rights are subject to the
licensor's own rights to make, use and Licensed Products in the
U.S.
The term "Licensed Products" is defined as "any of the
Products the manufacture, use or sale of which would, in the
absence of a license, infringe the Licensed Patents or which
utilize the licensor's Technical Information. The term "Licensed
Patents" is defined as all U.S. patents owned or acquired by the
licensor or its affiliates related to the Products, or methods of
use or intermediates or processes for the manufacture thereof.
As noted above, you indicate that there is one licensor-owned,
U.S. patent for the imported product which is currently in force
pertaining to the composition of ceterizine. Thus, "Licensed
Products" means the imported product, together with all
pharmaceutical compositions and dosage units containing
ceterizine as the sole therapeutically active ingredient.
Under the License Agreement, the importer/buyer shall, at
its own expense, take all steps and make all efforts necessary or
desirable to obtain FDA approval to market Licensed Product for
all appropriate indications as determined by the importer/buyer
after consultation with the licensor and shall use its best
efforts to promote and market the Licensed Products in the United
States. The License Agreement further provides that the first
commercial sale of Licensed Products will occur within six months
from the date of FDA approval.
In consideration of the licenses described above, the
importer/buyer has agreed to pay the licensor advance royalties
and continuing royalties based on the net sales of the Licensed
Products in the U.S. (The advance royalties are to be credited
against any continuing royalties). The License Agreement provides
for the payment of minimum royalties. The continuing royalties
begin to accrue on the date of the first commercial sale of the
Licensed Products to third parties.
Also, under the License Agreement the importer/buyer agreed
to pay the licensor a fixed sum within sixty days of receiving
the results of two preclinical studies conducted by the licensor.
The two studies concerned the long-term toxicity of the imported
product and were conducted in the early 1980's outside the United
States. In addition, the licensor conducted two chronic (two-year) carcinogenicity studies and ten toxicology studies of the
imported product which it conducted outside the United States.
The importer/buyer reimbursed the licensor for the results of
these studies. All fourteen studies concern the general safety
of the imported product and were necessary in order to obtain FDA
approval for the finished product.
The Combination License Agreement
On November 10, 1987, the importer/buyer and the licensor
entered into a Combination License Agreement ("Combination
Agreement,") in which the licensor granted to the importer/buyer
the exclusive license under the Licensed Patents to make, use and
sell combinations in the United States and an exclusive license
to use the licensor's Technical Information in connection with
the manufacture, use and sale of combinations in the United
States. This agreement differs from the License Agreement in
that the earlier agreement applies only to products containing
the imported product as the sole active ingredient, whereas the
Combination Agreement applies to products containing the imported
product and at least one other active ingredient (the latter
products will be referred to as "Combinations").
In exchange for the right to combine the imported product
with other pharmaceutical active ingredients, the importer/buyer
is obligated to pay a royalty to the licensor, a percentage of
the importer/buyer's net sales of the Combinations in the U.S.,
which would infringe the licensor's licensed patent (for the
imported product or the licensor-developed Combinations) and a
percentage of net sales of Combinations whose manufacture, use or
sale in the U.S. involves the licensor technical information.
You indicate that to date, the importer/buyer has conducted
research in the U.S. to develop Combinations, but presently has
not obtained FDA approval for any such products.
The Supply Agreement
On the date the Combination Agreement was executed, the
importer/buyer also entered into a supply agreement ("Supply
Agreement") with the seller, the licensor's foreign parent.
Under the Supply Agreement, the importer/buyer agreed to purchase
its requirements of the imported product from the seller for five
years from the date of the first commercial sale of a Licensed
Product. Thereafter, the importer/buyer agreed to purchase all
its requirements except for any bulk of the imported product
produced by the importer/buyer itself. The price of the imported
product is established in the Supply Agreement and is based on
the seller's costs of production plus a specified percentage.
The Supply Agreement provides that "all terms used herein that
are defined in the License Agreement or in the Combination
Agreement will have, unless otherwise specified herein, the
meanings set forth in the License Agreement or the Combination
Agreement."
With regard to patents, the Supply Agreement provides that
the seller represents and warrants that neither the manufacture,
use or sale of the imported product to the importer/buyer nor the
manufacture, use or sale by the importer/buyer of products
incorporating the imported product will infringe any valid and
subsisting United States patent other than any such patent
licensed to the importer/buyer under the License Agreement or the
Combination Agreement or owned by or licensed to the
importer/buyer. The Supply Agreement provides that if the
License Agreement and Combination Agreement are both terminated,
the Supply Agreement will terminate.
Co-Promotion Agreement
The importer/buyer and the licensor entered into an
agreement on June 20, 1995 (the "Co-Promotion Agreement") which
permits the licensor to assist the importer/buyer in marketing
the "Product" in the United States. The Co-Promotion Agreement
defines the term "Product" as "cetirizine". Under the
agreement, the licensor has the opportunity to make sales
presentations to licensed prescribers of medications. In
exchange for its marketing and promotion efforts in the U.S., the
licensor will earn a fee ("Co-Promotion Fee") in accordance with
a formula provided in the agreement.
Trademark Agreement
The importer/buyer and the licensor entered into a Trademark
License Agreement ("Trademark Agreement") on June 20, 1996.
Under the terms of the Agreement, the licensor grants the
importer/buyer the use of its U.S. trademarks, "Zyrtec" and
"Zirtek". You indicate that the grant of the exclusive right to
use, and to license the use of, these trademarks is royalty-free
and poses no customs valuation issues.
ISSUES:
Whether the following fees are part of the transaction value
of the imported product:
1) initial and continuing royalties which the
importer/buyer must pay the licensor under the
license and combination agreements;
2) payments the importer/buyer must pay the licensor
under the license agreement relating to the
various clinical studies performed by licensor;
3) [payments the importer/buyer must pay the licensor
under the Co-Promotion Agreement].
LAW AND ANALYSIS:
For the purpose of this ruling, we assume that transaction
value is the proper basis of appraisement. Transaction value,
the preferred method of appraisement, is defined by 402(b)(1) 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...." plus certain additions specified in
402(b)(1)(A) through (E).
1. Royalties
Section 402(b)(1)(D) of the TAA provides for an addition 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.
In a General Notice on the Dutiability of "Royalty" Payments
(Vol. 27 Cust. Bull. No. 6, dated February 10, 1993) (hereinafter
referred to as the "General Notice") Customs set forth a three-part analysis designed to provide importers and Customs with a
uniform approach to determine whether certain payments constitute
dutiable royalties. This analysis identifies the following three
questions, the answers to which assist in determining 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?
General Notice at pages 9-11.
Negative responses to the first two questions and a positive
response to the third points to nondutiability.
Question 1
In this case, there is one licensor-owned U.S. patent
covering the imported product. It concerns the composition of
ceterizine. Nonetheless, your contention is that based on the
language in the Statement of Administration Action (SAA) adopted
by Congress upon passage of the TAA, and as interpreted by
Customs, the answer to question one is "no". You base this
conclusion on the fact that the patent does not cover processes
to manufacture the imported product. In this regard, you note
that the SAA provides that royalties paid for patents covering
processes to manufacture the imported merchandise will generally
be dutiable (emphasis added). Statement of Administrative
Action, H.R. Doc. No. 153, Reprinted in Customs Valuation Under
the Trade Agreements Act of 1979, at pp.46-69 (1981). You also
cite HRL 545379, July 7, 1995, which held that license fees paid
for rights to use an ornamental design in connection with U.S.
sales of hair bands were not dutiable as royalties or proceeds of
subsequent resale. The decision notes that the design patent was
linked more to the appearance of the article, and thus was not
for rights associated with its manufacture. You indicate that
the patent at issue merely protects the chemical structure of the
compound much in the same way as the design patent protects the
appearance of the hair bands in HRL 545379.
We do not consider the patent covering the imported product
to be comparable to the patent covering the hair bands in HRL
545379. The hair bands were covered by a design patent pertaining
to "the ornamental design for a hair or foot band as shown and
described".
35 U.S.C. 171, entitled Patents for Designs, provides for the
patentability of "any new, original and ornamental design for an
article of manufacture"(emphasis added). To be patentable, a
design must be new, inventive, and ornamental; it must be the
product of aesthetic skill and artistic conception. See Bliss v.
Gotham Industries, Inc., 316 F.2d 848 ( 9th Cir., 1963). HRL
545379 concluded that the design patent at issue was akin to
royalties and license fees paid for the right to use copyrights
and trademarks.
In contrast to the design patent covering the hair bands,
the licensor-owned patent concerns the chemical composition of a
pharmaceutical active ingredient. This is obviously not a design
patent covering a product's ornamental design. Nor is the patent
comparable to royalties and license fees paid for the right to
use copyrights and trademarks. We find that the patent at issue
is the type of patent that was intended to come within the
purview of question one. Thus, even if this patent does not
technically cover the process by which the imported product is
manufactured, we find that in the circumstances presented, the
imported product was "manufactured under patent" and that the
answer to question one is "yes".
Question 2
You indicate that the response to the second question,
whether the royalty is involved in the production or sale of the
imported merchandise, is "no." You base this conclusion on the
fact that a portion of the royalties is paid for unpatented
Technical Information necessary to manufacture the finished
product in the United States. Thus, you argue the royalties are
paid not for ownership rights to the imported product, but for
the right to use the imported product in conjunction with other
ingredients to make a finished end-product. You also indicate
that the importer/buyer's internal accounting procedure requires
that the royalties be booked as cost of U.S. sales, as opposed to
costs of the imported product. Finally, you contend that the
subject royalty payments are not inextricably intertwined with
the imported product as demonstrated by the fact that the License
Agreement was negotiated and signed nearly four years before the
Supply Agreement for the imported product. You contend that the
four-year time span indicates the lack of relationship between
the royalty payments and the imported product.
While the royalties are paid in part for the right to use
the imported product in conjunction with other ingredients to
make a finished end-product, they are also involved in both the
production and sale of the imported merchandise. The royalties
are involved in the production of the imported merchandise
because as discussed above such product is "manufactured under
patent" and the license for which royalties are paid specifically
covers those patent rights. Under the License and Combination
Agreements, the licensor granted the importer/buyer the exclusive
right under the imported product patent to sub-license, make, use
and sell within the U.S. Licensed Products in the U.S.
The royalties are also involved in the sale of the imported
product. We reach this conclusion on the basis of the various
agreements discussed above. First, we note that the imported
product is one of the Licensed Products as that term is defined
in the License and Combination Agreements for which royalties are
paid. As discussed above, the term "Licensed Product" includes
any of the Products the manufacture, use or sale of which would,
in the absence of a license, infringe the Licensed Patents.
Also, the Supply Agreement covering the imported product requires
the importer/buyer to purchase its requirements of the imported
product from the licensor's parent, except for any of the product
produced by the importer/buyer itself. In addition, the Supply
Agreement specifically provides that "if the License Agreement
and Combination Agreement are both terminated, this Agreement
will terminate." These facts demonstrate that the royalties are
involved in the sale of the imported merchandise. See HRL
545331, January 19, 1996 (Royalties are involved in the sale of
the imported merchandise because the supply agreement provides
that it is only in effect as long as the license agreement is in
effect, and there would be no sale for exportation to the
importer without the license agreement). The fact that the
Supply Agreement was executed four years after the License
Agreement does not negate the fact that the agreements are inter-related. We also note that the Supply Agreement and the
Combination Agreements were executed on the same date.
Question 3
You indicate that the response to the third question,
whether the buyer could purchase the product without paying the
fee, is "yes." According to the General Notice, this question
goes to the heart of whether a payment is considered a condition
of sale. You take the position that the answer to this question
is "yes" because the importer/buyer's royalty payments to the
licensor only accrue on the commercial sale of the finished
products. You indicate further that the imported product differs
in material ways, and possesses different properties than the
finished products. Unlike the imported product, the finished
product is in a stable, durable form which is capable of being
swallowed by consumers. In addition, it may be consumed with the
assurance that the dosage is precise and exact.
You also note that the royalty on the imported product is
not due on each and every ounce of imported merchandise sold to
the importer/buyer. Rather, there are numerous occasion where no
royalty accrues. You note that when the importer/buyer fails to
produce the royalty product with the imported product, no royalty
payment will be owing to the licensor. You also note that if no
sale of the finished products occurs, no royalty is owing. Also,
you state that sales between the importer/buyer and its
affiliates do not trigger the royalty obligation. Finally, the
amounts of imported product used in the importer/buyer's research
and development of Combinations that do not yield Royalty
Products would not trigger the royalty obligation. You also
point out that the royalty payments may be incurred even if the
importer/buyer does not import any cetirizine, e.g., when it
produces its own cetirizine.
Based on the facts presented, we find that the payment of
the royalty is a condition of sale of the imported product.
First, Customs has concluded that the method of calculating the
royalty-e.g. on the resale price of the goods - is not relevant
to determining the dutiability of the royalty payment. See
General Notice; HRL 545331, January 19, 1996 Second, as
indicated above, the Supply Agreement requires the importer to
purchase all its requirements for the imported product from the
licensor's parent company and terminates upon termination of the
License Agreement and Combination Agreement. In HRL 545331, this
fact supported the conclusion that the payment of the royalties
is a condition of sale of the imported product. The decision
notes that without the license agreements which call for the
payment of royalties, there would be no sale for exportation of
the imported product. The payment of the royalties is closely
tied to the sale of the imported product. These facts support
the conclusion that the importer/buyer may not buy the imported
product without paying the fee. See HRL 544978, April 27, 1995;
HRL 544991, September 13, 1995. The fact that the importer/buyer
must pay royalties even if it does not import cetirizine but
produces it itself does not warrant a different conclusion. The
importer/buyer would obviously not pay any duties (including
royalties) on any product which it manufactures completely in the
United States.
Although royalties are not incurred when the importer/buyer
sells the imported product to its affiliates, royalties are
incurred upon resale to independent third parties. The
importer/buyer remains responsible for royalties on sales of the
imported product through its affiliates. Thus, royalties will
ultimately be due on all imported products which are sold in the
United States.
You contend that the facts presented are similar in material
respects to HRL's 545114, September 30, 1993 (C.S.D. 93-26) ,
544656, June 19, 1991, and 545770, June 21, 1995, all of which
found that the payments in question were not dutiable. These
cases involved the payment of royalty/license fees to the foreign
supplier in exchange for the rights to use technical information
and know-how in the manufacture of a finished product
incorporating the imported product. Customs found that such
royalty/license fees were not dutiable based in part on the fact
that the royalty was for technical information and know-how
related to using the imported products in the process of
manufacturing the royalty product in the United States. Thus,
Customs concluded that the royalties did not relate to the
imported merchandise.
However, none of these cases involved an imported product
which was covered by a patent. We consider this to be an
important difference. In addition, none of those rulings
addressed the question of whether the payment of royalties was
linked to the sale of the imported product. In HRL 544991,
September 13, 1995, royalty payments were paid in consideration
of licensed technology and technical assistance provided by the
seller/licensor to the importer/buyer. The imported merchandise
(parts) was used to manufacture a finished product (machine) and
the royalties were based on the selling price of the finished
product. An agreement between the seller/licensor and the
importer/buyer effectively linked the payment of the royalties to
the purchase of the imported parts. For example, the license and
sublicense agreement specifically referred to the purchase of
parts. In addition, a separate agreement between the parties
makes reference to both the license agreement and the sale of
parts. Consequently, it was determined that since the importer
could not buy the imported merchandise without paying the fee,
the royalties were a condition of sale. Therefore, Customs ruled
that the royalties were dutiable under 402(b)(1)(D) of the TAA.
Thus, the fact that the imported product undergoes further
processing after importation is not determinative of whether the
payment of royalties is a condition of the sale of the imported
merchandise. Other relevant considerations are whether the
imported product is manufactured under patent, whether the
royalties are related to the sale of the imported merchandise and
whether the payment of the royalty is a condition of the sale of
the imported product.
Here, not only is the imported product manufactured under
patent and the royalties are paid in part for such patent rights,
the Supply Agreement is conditioned upon the continued existence
of the license agreement. In these circumstances, we find that
the royalties are related to the imported merchandise and that
the buyer is required to pay them as a condition of the sale of
the imported merchandise for exportation to the United States.
As such, the royalties are to be added to the price actually paid
or payable of the imported ceterizine under 402(b)(1)(D) of the
TAA. Based on this finding, there is no need to address the
question of whether these payments they could alternatively be
considered dutiable as proceeds under 402(b)(1)(E) of the TAA.
2. Payments for Pre-Clinical Studies
The next issue to be addressed is whether the payments from
the importer/buyer to the licensor for pre-clinical studies
pertaining to the safety of the imported product are part of the
price actually paid or payable of the imported the imported
product.
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."
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, 664 F. Supp. 527
(CIT, 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.
It has been our position that 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 completely unrelated to the imported
merchandise. It is also Customs position that the Generra
standard applies whether payments are made directly to the seller
or to a party related to the seller. Thus, in HRL 545663, July
14, 1995, Customs determined that foreign warehousing costs paid
to the warehouse proprietor, a party related to the seller, are
part of the price actually paid or payable for the imported
merchandise. In this regard, the ruling states that:
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, also
may be included as part of the price actually paid or
payable.....
Thus, Customs has ruled that the price actually paid or
payable for the imported merchandise includes payments for
tooling, research and development, testing as well as payments
for samples and prototypes. See HRL's 545320; February 28, 1995
(and the rulings cited therein); 544381, November 25, 1991. The
rationale for these decisions is that these costs are necessary
for the production of the imported product and part of the total
payment.
In this case, the payments at issue were made to the
licensor (the seller's subsidiary) pursuant to a provision in the
License Agreement. The agreement provides that in consideration
of the granting of the licenses and the disclosure of technical
information, in addition to royalties discussed above, the
importer/buyer agrees to pay the licensor a sum of money for the
results of two pre-clinical studies conducted by the licensor and
to pay the licensor all costs incurred for certain long term
toxicity and/or carcinogenicity studies to be performed by the
licensor. You indicate that fourteen such studies were performed
all of which concerned the general safety of the imported
product.
Your position is that these payments are not part of the
price actually paid or payable for the imported merchandise
because the studies are not necessary for the manufacture of the
imported product. Rather, you indicate that the studies were
conducted for the purpose of obtaining FDA approval of the
finished product which is manufactured in the U.S. from the
imported product. You believe that the payments are akin to U.S.
marketing expenses. You also indicate that the payments were not
linked to any transaction for the sale or importation of the
imported product.
We find that the payments are related to the imported
merchandise and are part of their total payment. Pre-clinical
studies to test the safety of an imported pharmaceutical product
are crucial steps in the production and sale of a pharmaceutical
product. They are essentially research and development costs
relating to that product and are an important element of the cost
of the pharmaceutical. While these studies may have been
necessary in order to obtain FDA approval of the final product,
this does not mean that they do not also relate to the production
and sale of the imported product. Without studies confirming the
safety of the imported pharmaceutical product, it would have been
of little value to the importer. Language in the License
Agreement that the importer/buyer may terminate the agreement if
the results of the studies are unsatisfactory, shows the
importance of these studies to the importer/buyer's subsequent
agreement to purchase its requirements for the imported product
from the seller. The studies facilitated the subsequent
production and sale for exportation of the imported product
The cost of testing and other research and development costs
incurred by the seller (or in this case by the seller's
subsidiary) can be recouped in various ways, e.g., by including
them directly in the purchase price, by charging royalties or by
a separate payments covering these costs. When the seller or its
related company passes along these costs to the buyer, they
become part of the price actually paid or payable for the
imported merchandise, or in the case of royalties, an addition
thereto. In this case, the parties agreed in the License
Agreement that the importer/buyer would make separate payments
covering these costs. As noted above, the License Agreement
specifically provides that these payments along with royalties
were in consideration of the granting to the importer/buyer of
the licenses and the disclosure to the importer/buyer of the
licensor's technical information. Had the license agreement not
provided for payment by the importer/buyer to obtain the results
of the clinical studies, these costs would have been recouped
either as part of the purchase price of the imported merchandise
or as royalties. In either case, these costs would be dutiable.
In the pre-Generra ruling you cited, HRL 542831 (TAA 52),
September 21, 1982, there was a service agreement between the
importer and the seller which provided that the importer would
pay the seller for services rendered for ensuring the delivery
and inspection of fabric used in the assembly of the imported
wearing apparel. The payments were to be made periodically and
were not tied to the sale for exportation of any specific
merchandise. Customs found that payments for services related to
inspection and delivery were not part of the price actually paid
or payable for the imported merchandise. We do not consider
payments for incidental inspection services to be comparable to
payments for the result of the safety studies relating to the
imported product. Nor do we consider the payments at issue to be
U.S. marketing expenses. The studies were conducted abroad prior
to the importation and sale of the imported merchandise and
relate to the safety of such product.
Based on the above considerations, we find that the evidence
presented is insufficient to rebut the presumption that the
payments to the seller's subsidiary for the results of pre-clinical studies are part of the price actually paid or payable.
3. Co-Promotion Fees
Under the Co-Promotion Agreement the importer/buyer and the
licensor agreed to co-promote the "product(s)" on an exclusive
basis in the United States. Under the agreement, the term
"product(s)" is defined as cetirizine. In exchange for its
marketing and promotion efforts in the United States, the
licensor will earn a fee from the importer/buyer in accordance
with a complex formula set forth in the Co-Promotion Agreement.
You contend that the Co-Promotion fees paid by the importer/buyer
are not part of the transaction value of the imported merchandise
either as part of price actually paid or payable, or as an
addition thereto.
You claim that the Co-Promotion Fees are not included in the
price actually paid or payable of the imported product because
they are not paid "for the imported merchandise". Rather, you
contend that they result directly from the licensor's marketing
and promotion efforts with respect to Zyrtec, not cetirizine.
You note that these Co-Promotion fees are booked by the
importer/buyer as cost of goods sold in the United States, and
not for the imported cetirizine. You contend that the Co-Promotion fees are similar to certain brand marketing expenses
discussed in HRL 544638, July 1, 1991. In that case, the
agreement between the manufacturer and the importer required the
importer to develop and execute a brand marketing plan for the
imported vodka. Brand marketing included advertising,
merchandising, promotion, market research, etc. The arrangement
required the importer to make the expenditures and for the
manufacturer to reimburse a specified portion the following year.
Customs held that payments for brand marketing to be made by the
importer and the manufacturer were not part of the price actually
paid or payable for the merchandise. Specifically, Customs ruled
that pursuant to 19 CFR 152.103(a)(2) there is no legal
authority to treat these expenses as part of the price actually
paid or payable for the imported merchandise.
While we agree that the types of brand marketing expenses
involved in HRL 544638 appear to be similar to those involved
here, in that case, the finding that these expenses were not part
of the price actually paid or payable for the imported
merchandise was based on the application of 19 CFR 152.103(a)(2)
which provides in pertinent part that:
activities such as advertising, undertaken by the buyer on
his own account, other than those for which an adjustment is
provided in section 152.103(b), will not be considered an
indirect payment to the seller though they may benefit the
seller. The costs of those activities will not be added to
the price actually paid or payable in determining the
customs value of the imported merchandise (emphasis added).
In the present case, the importer/buyer is to pay Co-Promotion fees to the licensor for marketing activities to be
undertaken by the licensor. Since these activities are not
"undertaken by the buyer on his own account" neither 19 CFR
152.103(a)(2) nor HRL 544638 is controlling.
Nonetheless, we agree that the Co-Promotion fees are not
properly included in the transaction value of the imported
merchandise because such fees are not "for the imported
merchandise." Although there is a presumption that payments from
the buyer to the seller or a party related to the seller are part
of the price actually paid or payable for the imported
merchandise, this presumption may be rebutted by evidence that
the payments are for something else.
In this case, the evidence indicates that these fees are not
payments associated with the sale for exportation of the imported
merchandise. The evidence indicates that the Co-Promotion fees
result from the specific undertakings of the licensor in
promoting the sale of the product in the United States and that
the amount the licensor receives under the agreement directly
relates to its specific undertakings. This is set forth in
detail in the Co-Promotion Agreement. This conclusion is
supported by the manner in which these costs are treated by the
importer/buyer in its accounting records. According to counsel,
the Co-Promotion fees are booked by the importer/buyer as cost of
goods sold in the United States, and not for the imported
cetirizine. Moreover, there is nothing in the Supply Agreement
or in the other agreements provided which suggests that the Co-Promotion fees are part of the total payment for the imported
merchandise. To the contrary, it appears that the price actually
paid or payable by the importer/buyer to the seller is entirely
separate from any amounts the importer/buyer pays to the licensor
as a result of the latter's participation in marketing events.
Therefore, even though the Co-Promotion fees are made to a party
related to the seller, based on the evidence presented, we
conclude that they do not constitute payments for the imported
merchandise and thus are not part of the price actually paid or
payable for the imported merchandise.
You also contend that the Co-Promotion Fees are not one of
the enumerated statutory additions to the transaction value of
the imported merchandise. Your position is that they are neither
selling commissions incurred by the buyer with respect to the
imported merchandise under section 402(b)(1)(B) nor proceeds of a
subsequent resale of the imported merchandise under 402(b)(1)(E)
because they are incurred not with respect to the imported
product, but with respect to and upon resale of the finished
product.
We agree that the Co-Promotion fees do not constitute
"selling commission(s) incurred by the buyer with respect to the
imported merchandise" within the meaning of section 402(b)(1)(B).
Selling commissions are fees paid to a selling agent for the
services it performs on behalf of the seller in the sale of the
imported goods. In this case, the services performed by the
licensor are for marketing functions performed in the United
States subsequent to the sale of the imported merchandise. The
fees incurred directly relate to the specific activities
performed by the licensor in the United States rather than to
activities performed abroad in the sale of the imported
merchandise. They are not the type of fees which are
contemplated under section 402(b)(1)(B).
We also agree that the Co-Promotion fees do not constitute
"proceeds of any subsequent resale, disposal, or use of the
imported merchandise that accrue, directly or indirectly, to the
seller" within the meaning of 402(b)(1)(E) of the TAA. As stated
in the General Notice, generally proceeds are defined as "issues;
income; yield; receipts; produce; money or article or other thing
of value arising or obtained by the sale of property; the sum,
amount or value of property sold or converted into money or into
other property. Black's Law Dictionary, 6th ed., 1990 at p.
1204. Another definition of proceeds is "what is produced by or
derived from something (as a sale, investment, levy, business) by
way or total revenue; the total amount brought in ***" Webster's
Third New International Dictionary 1986. In this case, the Co-Promotion fees to be paid by the importer/buyer, while paid upon
the resale of the finished product, are based upon the specific
undertakings of the licensor in the United States to promote such
product and are not issues, income yield, receipts, etc. arising
or obtained by the sale of property. We do not consider these
fees to be "proceeds of any subsequent resale" within the meaning
of section 402(b)(1)(E) of the TAA.
HOLDING:
Based on the information provided, the royalty payments at
issue constitute additions to the price actually paid or payable
for the imported product under 402(b)(1)(D) of the TAA. Having
reached this conclusion, it is not necessary to address the issue
of whether the payments could alternatively be considered
proceeds under 402(b)(1)(E) of the TAA. The payments relating
to the pre-clinical studies are included in the transaction value
of the imported product as part of the price actually paid or
payable. The Co-Promotion fees to be paid under the Co-Promotion
Agreement are not included in the transaction value of the
imported product.
Sincerely,
Acting Director
International Trade
Compliance Division