RR:IT:VA 546660 KCC
Port Director
U.S. Customs Service
2nd & Chestnut Streets
Philadelphia, Pennsylvania 19106
RE: Internal Advice 7/96; royalties, Generra; Chrysler; price actually paid or payable; proceeds of any subsequent resale; value of imported merchandise not included in calculation of the royalty payment
Dear Port Director:
This is in regard to your request for Internal Advice 7/96 concerning the dutiablity of certain royalty payments made by Rolm Company to its related party, Siemens Aktiengesellschaft. A memorandum from the Chief, Metals and Machinery Branch, National Commodity Specialist Division, dated February 11, 1997, was taken into consideration in reaching this decision. We regret the delay in responding.
FACTS:
The buyer/licensee, Rolm Company (“Rolm”) is a wholly-owned subsidiary of Siemens Aktiengesellschaft (“Siemens”), the seller/licensor, from which it purchases and imports components and assemblies for use in the manufacture, in the United States, of certain finished products, including 9200 Private Branch Exchange, models 210 and 230 (“9200 PBXs”). You state that the 9200 PBXs are the same as the HCM 200 (Hydrid Communicator Module) which was previously imported from Germany. The imported components, backplanes and power supply modules, are combined with other merchandise to produce the finished PBXs. It is not known whether the imported merchandise is manufactured under patent. Additionally, you state that Rolm is obligated to import the backplanes and power supply modules which you state are necessary to complete each 9200 PBX. However, no evidence in the form of contracts or agreements was submitted to support this statement.
In connection with these importations, the buyer and licensor have concluded a "Basic Agreement on Manufacturing Assistance" (the "Basic Agreement"), effective on
October 1, 1989. The Basic Agreement was not submitted with the IA request, nor were we unable to obtain a copy of the Basic Agreement from Counsel despite repeated attempts to obtain this agreement. Rolm and Siemens also entered into two other individual agreements which reference the Basic Agreement. These two individual agreements modify the terms of the Basic Agreement as set forth below. Copies of the two agreements were provided for our examination.
The first agreement is the “Patent-Crosslicense Agreement No. 1 concerning ‘Medium and Large Private Branch Telephone Exchanges’” (“Agreement No. 1") effective October 1, 1993. §3.1 of Agreement No. 1 grants Rolm a non exclusive and non-transferable license to develop, manufacture and/or have manufactured” and “to use, sell, lease or otherwise dispose of” the licensed products. §1.5 and Annex I of Agreement No. 1 appears to describe the 9200 PBXs, which are the finished products manufactured by Rolm in the U.S., as licensed products.
In consideration of the rights granted by Siemens, §4.2 of Agreement No. 1 provides that Rolm will pay Siemens an “overall royalty of 2 percent to be computed from the net sales prices of the total turnover attained by Rolm” less certain deductions. The term "net sales" is defined in §4.2 of Agreement No. 1 as the sum of all amounts invoiced to customers for the licensed products less: (1) the value of all items supplied by Siemens Private Communication Systems Group which are incorporated in the licensed products; and (2) amounts for insurance, freight, and taxes on the licensed products.
The second agreement at issue is the “Individual Agreement III to the Basic Agreement on the Manufacturing Assistance effective as of October 1, 1989” (“Individual Agreement III”). §2.1 of the Individual Agreement III grants Rolm the right to “manufacture, use, sale, lease and other disposition” of the hardware of the contract apparatus. §1.1 and Annex I of the Individual Agreement III provide that the Hicom 200 PABXs family are the contract apparatus.
In consideration of the rights granted by Siemens, §6.1 of the Individual Agreement III provides that Rolm will pay Siemens an “a royalty of 6 percent of the net sales of contract apparatus” less certain deductions. The term "net sales" is defined in §6.2 of Individual Agreement III as the sum of all amounts invoiced to customers of the contract apparatus less: (1) the value of all items supplied by Siemens Private Communication Systems Group which are incorporated in the contract apparatus; and (2) amounts for insurance, freight, and taxes on the licensed products.
Thus in both agreements, the value of the imported components and assemblies is not included in the calculation of the royalty payments.
ISSUE:
The issue presented is whether the royalty payments made by the buyer/licensee, Rolm, to the seller/licensor, Siemens, are included in the transaction value of the imported merchandise.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with §402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary basis of appraisement is transaction value, defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions thereto, including: any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States; and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. §402(b)(1)(D) (E) of the TAA. Such additions will be made only if amounts in respect of royalties, proceeds, etc. are not otherwise included in the price actually paid or payable.
However, as you know, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values," e.g., the deductive or computed value of identical or similar merchandise determined pursuant to actual appraisements of imported merchandise. §402(b)(2)(B) of the TAA. In the instant case, the buyer/licensee and the licensor/seller are related but no information has been presented as to whether the relationship influences the price actually paid or payable; consequently, we are unable to determine whether transaction value is an appropriate basis of appraisement. Nevertheless, assuming that transaction value is the appropriate basis of appraisement, the following constitutes our position in regard to the dutiablity of the royalty payments at issue.
In regard to the dutiablity of royalties, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:
Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of 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.... However, the dutiable status of royalties and license fees paid by the buyer must be determined on a 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.... [A]n addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States.
Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48 49.
Price actually paid or payable
As the language of the SAA makes clear, an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise. The term "price actually paid or payable" is defined as "the total payment (whether direct or indirect...) made, or to be made, by the buyer to, of for the benefit of, the seller." §402(b)(4)(A) of the TAA. Thus, the first inquiry is whether the payments at issue are part of the price actually paid or payable for the imported merchandise.
Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Court of Appeals 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 stated:
Congress did not intend for the Customs Service to 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, are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir.1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact finding task, envisioned by [appellant].
Generra, 905 F.2d at 380 (brackets in original).
However, the presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The Court found that the evidence established that these 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, the royalty payments at issue will not be considered part of the price actually paid or payable if the evidence clearly establishes that, like those in Chrysler, they are totally unrelated to the imported merchandise. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer. Generra, 905 F.2d at 380.
Based on the information submitted, we find that the royalty payments at issue are not an element of the price actually paid or payable. Pursuant to the Agreement No. 1 and the Individual Agreement III, the rights for which the royalties are paid relate solely to the manufacture and sale in the U.S. of finished products made in part from the imported merchandise. Moreover, the value of the imported merchandise is not included in calculating the amount of the royalty payments at issue. See, e.g., Headquarters Ruling Letter (HRL) 546478 dated February 11, 1998; But see, e.g., HRL 545194 dated September 13, 1995 (license fees held to be part of the price actually paid or payable where payments were made to the sellers or parties related to the sellers, the sellers’ invoices specifically indicated that the importer was to pay the fees, and the only agreements provided merely indicated that the fees were to be paid to one of the sellers).
Royalties and License fees
Despite having concluded that the payments at issue are not part of the price actually paid or payable, it still remains to be determined whether they should be added to the price actually paid or payable under the provision for royalties or proceeds. After reviewing the legislative history of the TAA, Customs has identified three questions that are relevant in determining whether royalty payments are dutiable under §402(b)(1)(D) of the TAA. General Notice, "Dutiablity of Royalty Payments," 27:6 Cust. B. & Dec 1 (February 10, 1993) (the "General Notice"). The questions are: (1) was the imported merchandise manufactured under patent? (2) was the royalty involved in the production or sale of the imported merchandise? and (3) could the importer buy the product without paying the fee? Id. at 9 11. Negative responses to the first and second questions, and an affirmative response to the third, suggest non dutiablity. The notice states that royalties may be dutiable either as part of the price actually paid or payable, or as additions thereto under §402(b)(1)(D) (E) of the TAA. Id. at 11. For purposes of this decision, we have assumed that the royalty payments at issue are distinct from the price actually paid or payable for the imported merchandise. In view of this, the remainder of this decision only addresses whether the payments made by the buyer are dutiable under §402(b)(1)(D) (E) of the TAA.
In analyzing these factors, Customs in most recent rulings has taken into account certain considerations which flow from the language set forth in the SAA. These include, but are not limited to:
(i) the type of intellectual property rights at issue (e.g., patents covering processes to manufacture the imported merchandise will generally be dutiable);
(ii) to whom the royalty was paid (e.g., payments to the seller or a party related to the seller are more likely to be dutiable than are payments to an unrelated third party);
(iii) whether the purchase of the imported merchandise and the payment of the royalties are inextricably intertwined (e.g., provisions in the same agreement for the purchase of the imported merchandise and the payment of the royalties; license agreements which refer to or provide for the sale of the imported merchandise, or require the buyer’s purchase of the merchandise from the seller/licensor; termination of either the purchase or license agreement upon termination of the other, or termination of the purchase agreement due to the failure to pay the royalties); and
(iv) payment of the royalties on each and every importation.
See, HRL 546478, dated February 11, 1998; see also, HRL 546433 dated January 9, 1998, and HRL 544991 dated September 13, 1995 (and cases cited therein).
In regard to the payments at issue, it is unclear what the answer is to the first question posed by the General Notice. Based on the information available, there is no evidence available to indicate whether the imported merchandise is manufactured under patent.
As to the second question, based on our review of the information submitted there is no linkage between the sale for exportation of the imported merchandise and the payment of the royalties by the buyer, notwithstanding the fact that the payments are made to the licensor/seller. In the first instance, as set forth in both Agreement No. 1 and the Individual Agreement III, the royalty is paid for the right to manufacture, use and sell the licensed products or contract apparatus. This right appears to be separate from the purchase price of the imported merchandise. We note that we were unable to obtain a copy of the Basic Agreement. Therefore, we do not know if the Basic Agreement sets forth an obligation for Rolm to purchase the imported merchandise from Siemens, or a party related to Siemens, for use in the manufacture of the finished 9200 PBXs which are the subject of the royalty payments. Without evidence of a linkage between the supply of the imported merchandise and the payment of royalties based on net sales of the manufactured PBXs, we do not find that the royalty payment was involved in the production or sale of the imported merchandise.
Moreover, §4.2 of Agreement No. 1 and §6.2 of the Individual Agreement III exclude the value of the imported merchandise from the royalty calculation. In particular, both §4.2 of Agreement No. 1 and §6.2 of the Individual Agreement provide that the term “net sales” means the sum of all amounts invoiced to customers for licensed products or contract apparatus manufactured less the value of components or assemblies supplied by Siemens Private Communication Systems Group. The fact that the value of the imported merchandise is excluded from the royalty calculation also establishes that the royalty is not related to the sale for exportation to the U.S. of the imported merchandise. See, HRL 546478 at 9. See also, HRL 542900, dated December 9, 1982 (TAA No. 56) (royalty payment not dutiable where the amount of the payment was based solely on the value added in the United States, the value of the imported components having been specifically excluded from the computation of the royalty amount). Accordingly, we find that the royalty payments at issue are not involved in the production or sale of the imported merchandise.
The third question posed by the General Notice, i.e., whether the importer could buy the merchandise without paying the fee, is central to the question of whether a royalty payment is a condition of sale. Payments that must be made for each imported item are a condition of sale. However, the method of calculating the royalty, e.g., on the resale price of the goods, is not relevant to determining the dutiablity of a royalty payment. 27:6 Cust. B. & Dec 12. In HRL 544991, for example, royalty payments were paid in consideration of licensed technology and technical assistance provided by the seller/licensor to the importer/buyer. An agreement between the licensor/seller and the importer/buyer effectively linked the payment of the royalties to the purchase of the imported parts by providing that the licensor/seller would supply the licensee/buyer with parts in accordance with such terms and conditions as were separately agreed. Consequently, it was determined that the importer could not buy the imported merchandise without paying the fee and that the royalties were a condition of sale.
In the instant case, there does not appear to be a linkage of the payment of the royalties to the purchase of the components and assemblies imported by the buyer. Thus, unless there are other agreements between the buyer/licensee and seller/licensor, i.e., the Basic Agreement, which link the payment of the royalties to the purchase of the imported goods, we find that the payment of the royalties is not a condition of the sale for exportation to the U.S. of the imported merchandise. Thus, the royalty payments are not added to the price actually paid or payable in determining the transaction value of the imported merchandise.
Proceeds of any subsequent resale, disposal or use
As noted previously, royalty payments may also be dutiable under §402(b)(1)(E) of the TAA, which provides that the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller, are to be added to the price actually paid or payable. However, Customs has held that payments based on the resale of a finished product made in part from the imported merchandise are not dutiable as proceeds under §402(b)(1)(E). E.g., HRL 544656 dated June 19, 1991, HRL 545770 dated June 21, 1995. The royalty payments at issue are not based on the sale of the imported merchandise. Instead, the payments are based on the sale of "licensed products" or “contract apparatus”, finished products which may or may not contain the imported merchandise. Accordingly, the payments at issue are not dutiable under the proceeds provision.
Assuming that transaction value is the appropriate basis of appraisement, it is our position based on the evidence submitted that the royalty payments at issue should not be included in transaction value as additions to the price actually paid or payable under §402(b)(1)(D) (E) of the TAA. However, if other evidence, such as the Basic Agreement, other contracts or supply agreements, or information, such as whether the imported merchandise is manufactured pursuant to a patent, becomes available, the analysis presented in this decision may no longer be applicable to the imported components.
HOLDING:
In conformity with the foregoing, if transaction value is determined to be the appropriate basis of appraisement, royalties paid in respect of the licensed products or contract apparatus covered by Agreement No. 1 and the Individual Agreement III are not part of the price actually paid or payable for the imported merchandise, nor do they constitute additions thereto under §402(b)(1)(D) (E) of the TAA.
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch