RR:IT:VA 546034 KCC
Port Director
U.S. Customs Service
JFK Airport
Building #77, Room 228
Jamaica, New York 11430
RE: IA 15/95; transaction value; 402(b)(1)(D); royalties;
General Notice, Dutiability of Royalty Payments; SAA; HRLs
545321 and 545776; proceeds of subsequent resale;
insufficient information; 402(h)(5); HRL 545504
Dear Port Director:
This is in regard to your memorandum of March 14, 1995,
under cover of which you forwarded a request for internal advice
(IA 15/95), dated February 9, 1995, submitted by Ross and Hardies
on behalf of CIBA-GEIGY Corporation ("the Company"), concerning
whether certain payments constitute non-dutiable charges under
402 of the Tariff Act of 1930, as amended ("TAA"; 19 U.S.C.
1401a). The "Licence Agreement" and the "Supply Agreement" were
submitted with the internal advice request. We regret the delay
in responding.
FACTS:
The royalty payments at issue are made pursuant to a Licence
Agreement between CIBA-Geigy Limited ("Limited") and Henkel KGaA
("Henkel") executed by both parties in early 1990. Pursuant to
2 of the Licence Agreement, Limited and its affiliates, which
includes the Company, acquired from Henkel the exclusive
worldwide "...license to make, use and sell the Compound and the
Product(s) under the Patent Rights in the Field." The Compound
is defined in 1(a) of the License Agreement as "1-hydroxy -3
aminopropane-1, 1-diphosphonic acid, "ADP" and its N substituted
derivatives and its salts respectively (e.g. di-sodium
pamidronate)...." 1(e) of the License Agreement defines the
term Product(s) as any pharmaceutical product containing the
Compound as the only Active Substance or in combination with
other Active Substances (and ready for sale to third parties)."
The imported product at issue is Aredia, put up in vials for
intravenous administration, which is the trade name for a
medicament containing the active ingredient pamidronate disodium
(the "Compound"), a drug used to inhibit the resorption of bone.
Although the use of the Compound in humans was developed by
Limited, Henkel is the owner of the patent rights. However,
Limited and Henkel have joint patent protection. The imported
product was manufactured by Limited under the patent held by
Henkel. The Company purchased Aredia from Limited and imported
it into the U.S.
In exchange for the exclusive license, Limited is required
to pay Henkel a royalty based on a percentage of the net sales
value. 3 of the License Agreement. The net sales value is
defined in 1(h) of the License Agreement as "the value which
results from the gross sales of the Product(s) by [Limited] or
its Affiliates to third parties in finished specialty form, i.e.
ready for sale to patients, less trade, cash, or, volume
discounts and the legal added value tax separately shown." The
royalty is accounted for on a semi-annual basis and payment is
due within two months after the end of the half-year. 5 of the
License Agreement.
The purchase of the product is governed by a Supply
Agreement between the Company and Limited dated April 1, 1994.
The Supply Agreement was written because the Company desired to
purchase and Limited desired to sell certain "Agreement
Products." Henkel is not a party to the Supply Agreement and is
not related to Limited or the Company. Limited and the Company
are related and as defined by the License Agreement, the Company
is considered an affiliate of Limited. The Supply Agreement
states that "the proprietary rights, including patent rights,
trademarks, etc. with respect to such products within the Untied
States are owned by or licensed to [Company]...." 2(b) of the
Supply Agreement states that "[Limited] will use its best efforts
to fill all [Company's] orders for Agreement Products placed
hereunder..." for a set price as determined by 3 of the Supply
Agreement. The term "Agreement Products" is defined in 1(a) of
the Supply Agreement as "specialty chemicals or other products,
including compounds, composititions and formulations thereof, and
raw materials, intermediates and components for the manufacture
or formulation thereof, which shall be supplied by [Limited] to
[Company]."
Additionally, 3(e) of the Supply Agreement states that
"[u]nless it is otherwise impractical or precluded from doing so
by reason of the agreement with the third party, all royalty
payments due to third parties on account of the Agreement
Products shall be paid by [the Company] to such third party."
However, Counsel for the Company states that the royalty payments
are actually made from the Company to Limited, who then remits
the payments to Henkel. Counsel states that the royalty payments
from the Company to Henkel are transmitted through Limited only
as a matter of convenience, a mere pass through. Henkel relies
on Limited to ensure that the payments from the Affiliates are
correct. Counsel contends that the substance of the payments, as
opposed to the form, is that the payments are made to Henkel.
You contend that the royalty payments constitute "proceeds"
from the subsequent resale of the imported product that accrue,
directly or indirectly, to the seller (Limited) and are to be
added to the price actually paid or payable pursuant to
402(b)(1)(E) of the TAA. Counsel for the Company contends that
the royalty payments are not dutiable as proceeds because they do
not directly relate to the imported product. Additionally,
citing 402(b)(1) of the TAA, Counsel states that, if the
payments are dutiable as proceeds, transaction value is an
unacceptable method of appraisement because of the lack of
sufficient information.
ISSUE:
1. Whether the royalty payments made by the Company to Henkel
are included in the transaction value of the imported
product under 402(b)(1)(D) of the TAA.
2. Whether the royalty payments made by the Company to Henkel
are included in the transaction value of the imported
product as proceeds of subsequent resale under 402(b)(1)(E)
of the TAA.
3. Whether there is sufficient information to determine the
amount of the royalties.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into
the U.S. is transaction value pursuant to 402(b) of the TAA,
codified at 19 U.S.C. 1401a. 402(b)(1) of the TAA provides, in
pertinent part, that 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. 402(b)(1) of the TAA provides for additions 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; and
(E) the proceeds of any subsequent resale, disposal or
use of the imported merchandise that accrue,
directly or indirectly, to the seller.
1. Royalty Payments
With regard to royalties, the Statement of Administrative
Action ("SAA"), adopted by Congress with the passage of the TAA,
provides 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. In this regard, royalties and license fees for
patents covering processes to manufacture the imported
merchandise will generally be dutiable, whereas
royalties 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. However, the dutiable
status of royalties and license fees paid by the buyer
must be determined on case-by-case basis and will
ultimately depend on: (i) whether the buyer was
required to pay them as a condition of sale of the
imported merchandise for exportation to the United
States; and (ii) to whom and under what circumstances
they were paid.
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 (October 1981), at 48-49.
In General Notice, Dutiability of Royalty Payments, 27 Cust.
Bull. 12 (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
related to the imported merchandise and a condition of sale and,
therefore, dutiable as royalty payments.
Regarding the first factor, the imported product was
manufactured under patent held by Henkel. The Licence Agreement
indicates that Henkel is the owner of the patent rights relating
to the "Compound", and as Limited developed the Compound for use
in humans, it obtained joint patent protection with Henkel.
Therefore, Limited and its affiliates hold and/or were granted
the right to use any patents that exist for the Compound and its
Products in the designated territorial area.
Next, it has been submitted that the royalty payments are
not involved in the production or sale of the imported Aredia
vials, since the royalty payments become due only after the
Company sells the product to third parties. We disagree. It is
our opinion that the royalty payments are involved in the
production and sale of the imported product. The Licence
Agreement grants both Limited and the Company, "an exclusive
license in the Territory to make, use, and sell the Compound and
the Product(s) under the Patent Rights..." held by Henkel.
Limited legally carried forth this obligation in the Supply
Agreement by stating that the Company was to pay all royalty
obligations to third parties which in this case is Henkel. It is
our understanding that the imported product, manufactured by
Limited, is manufactured using the patent rights referred to in
the License Agreement for which the royalties are paid. In
effect, the royalty payment relates to the technical information
involved in the patented process to manufactured the imported
Product. As such, the royalty, which is paid upon the sale of
the imported product is involved in its production of the
imported product. See, HRL 545321 dated June 30, 1995.
Additionally, it is our position that the payment of the
royalties is closely related to the sale of the imported product.
As previously stated, the Licence Agreement grants Limited "an
exclusive license in the Territory to make, use, and sell the
Compound and the Product(s) under the Patent Rights..." held by
Henkel. By definition in the License Agreement, the "Compound"
is the active ingredient found in the "Product" Aredia which is
the imported product at issue. In executing the Licence
Agreement Limited obligated its affiliates to the terms of the
license agreement, including the obligation to make royalty
payments. Thereafter, the Company and Limited entered into the
Supply Agreement which obligated Limited to supply all of
Company's product needs. In 3(e) of the Supply Agreement
Limited legally carried over the royalty payment stating that
"[u]nless it is otherwise impractical or precluded from doing so
by reason of the agreement with the third party, all royalty
payments due to third parties on account of the Agreement
Products shall be paid by [the Company] to such third party"
i.e., Henkel. As stated by Counsel, pursuant to an arrangement
with Henkel, the royalty payments are made to Limited, who
thereafter remits them to Henkel. Without paying the royalty fee
to Limited pursuant to the Licence and Supply Agreements, as well
as the informal royalty payment agreement between all three
parties, Company could not import the merchandise into the U.S.
for sale to third parties. Thus, we find that the royalty
payments pertain to the sale for exportation of the imported
product.
With regard to the third question, i.e., could the importer
buy the product without paying the fee, Customs acknowledged that
the answer goes to the heart of whether a payment is considered
to be a condition of sale. In this case, pursuant to the License
Agreement, the royalty is to be paid by Limited on "the Net-Sales
Value" which is defined as "the value which results from the
gross sales of the Product(s) by [Limited] or its affiliates [the
Company] to third parties...." Pursuant to 3(e) of the Supply
Agreement, the Company is obligated to pay the royalty on the
sale of the imported product to Henkel. However, as stated by
Counsel, the Company pays the royalty to Limited who remits the
royalty payment to Henkel. The Supply Agreement obligates the
Company to pay the royalty fee for the imported product.
Although the Supply Agreement states that the Company is to pay
third parties any necessary royalty payments, the Company pays
Limited the royalty fees. Thus, Company can not import the
merchandise unless it pays the royalty fees. Pursuant to the
License and Supply Agreements, as well as the informal royalty
payment agreement between all three parties, royalty payments are
due on each item that is purchased, imported and sold. Thus, the
answer to question three is that the Company could not purchase
the imported product without paying the royalty fee.
Additionally, we have held that royalty payments made
directly to, or indirectly to patent holders, who were not the
seller or related to the seller, were additions to the price
actually paid or payable as royalties pursuant to 402(b)(1)(D)
of the TAA when such payments were related to the imported
merchandise and were a condition of their sale. In HRL 545321
dated June 30, 1995, the importer had purchased merchandise from
a related seller. The importer's parent company paid certain
royalties to two licensors and the importer reimbursed its parent
for such payments. In HRL 545776 dated September 1, 1995, the
importer purchased merchandise from an unrelated seller and was
making royalty payments to its parent which the parent paid to
the licensor. In both of these cases, the importer paid royalty
fees for the right to use patented technologies in the
manufacture of the imported merchandise. Without the licensing
agreements with their corresponding royalty payments the imported
merchandise could not have been produced by the manufacturer.
Both cases determined that royalty payments were related to the
imported merchandise and a condition of sale of the imported
merchandise for purposes of 402(b)(1)(D) of the TAA.
Based on the above considerations, we find that the royalty
payments are included in the transaction value of the imported
product under 402(b)(1)(D) of the TAA. The payments are related
to the imported merchandise which the buyer is required to pay as
a condition of sale.
2. Proceeds of Subsequent Resale
The next issue is whether the royalty payments constitute
proceeds of subsequent resale, disposal or use, pursuant to
402(b)(1)(E) of the TAA. The SAA addresses the dutiability of
proceeds of subsequent resale as follows:
Additions for the value of any part of the proceeds of
any subsequent resale, disposal, or use of the imported
merchandise that accrue 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.
The instant case involves the type of situation described by
Congress where "certain elements called 'royalties' may fall
within the scope of the language under either new section
402(b)(1)(D) or 402 (b)(2)(E) or both." See, The General Notice
on the Dutiability of "Royalty" Payments.
In this case, Counsel for the Company states that the
royalty payment is made to Limited and then is passed through to
Henkel. Pursuant to the Supply Agreement, Counsel states that
the Company is contractually obligated to pay the royalties to
Henkel. Counsel maintains that payment of the royalties through
Limited is solely done as a collection agent for Henkel. Based
on the information submitted, the royalty payments accrue
directly to Limited, the seller. In the Licence Agreement,
Limited and its affiliates are obligated to pay royalties. The
Company, through the Supply Agreement, agreed to pay these
royalties. However, in spite of the contract, the Company makes
the royalty payments to Limited. It is not necessary to
establish whether the seller, Limited, benefits. The SAA states
that the payments must only accrue directly or indirectly to the
seller. See also, Generra Sportswear Co. v. United States, 8
CAFC 132, 905 F.2d 377 (1990). The proceeds of the subsequent
resale clearly inure to the benefit of the seller.
There is no dispute that the royalty payment becomes due
upon the Company's resale of the imported product. The amount of
the royalty payments is based on the "Net-Sales Value" which is
defined as the gross sales of the Aredia vials to third partes.
Counsel for the Company contends that the payment made is not
proceeds of subsequent resale because, pursuant to the Licence
Agreement, the payments are made on the sale of any royalty
product whether imported or not. However, the Supply Agreement
obligated Limited to supply all of Company's product needs. 2
of the Supply Agreement. The Company is acquiring all of its
product needs from Limited and thereafter making the royalty
payments to Limited for the sold imported merchandise.
Therefore, the proceeds of the subsequent resale apply to the
imported product. The royalty payments in this situation
directly relate to the imported product and, thus, are statutory
additions to the price actually paid or payable as proceeds of a
subsequent resale pursuant to 402(b)(1)(E) of the TAA.
3. Sufficient Information
The next issue to be addressed is whether there is
sufficient information to determine the amount of the royalties.
This issue arises because the continuing royalties are not due
until the Aredia is sold in the U.S.
402(b) of the TAA provides that the price actually paid or
payable for imported merchandise shall be increased by the
amounts attributable to the enumerated items only to the extent
that such amount is based on sufficient information. If
sufficient information is not available, for any reason, the
transaction value of the imported merchandise concerned shall be
treated, for purposes of 402(b) of the TAA, as one that cannot
be determined. The term "sufficient information" is defined as
"information that establishes the accuracy of such amount,
difference, or adjustment." See, 402(h)(5) of the TAA.
In Headquarters Ruling Letter (HRL) 545504 dated May 4,
1995, involving proceeds under 402(b)(1)(E), counsel argued that
there was a lack of sufficient information to establish
transaction value because the proceeds cannot be quantified in a
reasonable period of time. In that case, the buyer was required
to account for sales on a quarterly basis, with an accounting and
payment due 30 days after the end of the quarter. Customs
rejected counsel's argument noting the following:
The TAA is designed to accommodate situations in which a
purchase price is established, but not paid, at the time
merchandise is imported into the United States. For
purposes of the transaction value provision, a bona fide
sale may be found to exist even though actual payment has
not been made for goods at the time of importation, provided
that the purchase agreement includes fixed terms which make
the purchase price either determined or determinable at that
time.
Two situations in which a buyer and a seller have
potentially agreed to a price without full payment being
made prior to or at the time of importation involve
royalties and proceeds of subsequent resale, disposal or use
of the imported merchandise. In both of these instances,
Customs must determine whether payments - which inure to the
benefit of a foreign seller after importation has occurred -- should be added to the "price actually paid of payable"
for purposes of calculating the duty owed. Such amounts
should be added provided there is sufficient information
upon which to determine the amounts therefor.
...we do not find that such a payment arrangement indicates,
prima facie, that the proceeds cannot be quantified in a
reasonable period of time and, hence, that there is a lack
of sufficient information. It is our position that the term
"subsequent resale," by its very nature, implies that
proceeds may not be paid, or even quantifiable, for some
time after importation of the merchandise. Furthermore, we
do not believe the payment structure agreed to by the
parties is uncommon in such transaction. To hold otherwise
could render transaction value unacceptable in numerous
cases in which proceeds subsequently accrue to the seller.
Cf. HRL 542701, TAA No. 47, issued April 28, 1982, and HRL
542746, issued March 30, 1982.
In this case, even though the amount of the royalty addition
is not known at the time of importation, we believe that there is
sufficient information to determine the amount of the addition.
The License Agreement clearly specifies how the royalties are to
be calculated. As such, there is information that establishes
the accuracy of such amount.
Additionally, we note that there is a rebuttable presumption
that all payments made by a buyer to a seller, or party related
to a seller, are part of the price actually paid or payable.
See, Headquarters Ruling Letter (HRL) 545663 dated July 14, 1995.
This position is based on the meaning of the term "price actually
paid or payable" as addressed in Generra Sportswear Co. v. United
States, 8 CAFC 132, 905 F.2d 377 (1990). In this case, as the
payments are made to the seller, Limited, they could be viewed as
part of the total payment for the goods and, therefore, part of
the price actually paid or payable in determining transaction
value.
HOLDING:
Based on the information submitted, the payments made to
Limited are included as a statutory addition to the price
actually paid or payable under 402(b)(1)(D) of the TAA, or under
402(b)(1)(E) of the TAA.
This decision should be mailed by your office to the
internal advice requester no later than 60 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,
Acting Director
International Trade Compliance
Division