CLA-2 CO:R:C:T 951887
District Director
U.S. Customs Service
555 Battery Street
P.O. Box 2450
San Francisco, California 94126
RE: Internal Advice (IA) 23/92; Classification and valuation of
software programs, instruction manuals and "right to copy"
certificate
Dear Sir:
This is in reply to your memorandum of March 30, 1992
(APP:SF:CO:3 (REP)), requesting Internal Advice (IA) on the
classification and valuation of imported software, instruction
manuals and a "Right to Copy" certificate or license relating to
the software.
FACTS:
You received an inquiry, dated March 9, 1992, from the
Hewlett-Packard Company, Menlo Park, California, requesting
classification and valuation rulings on imported software and
associated software products.
The articles involved are: Software- programs recorded on
5 1/4" magnetic floppy disks - sales price $1,000.00; Manuals-
instructional manuals for using the software programs - sales
price $50.00; and Certificates- a printed document that is a
"right to copy" license allowing the buyer to make and install
additional copies of the purchased software program on additional
systems - sales price $10,000.00.
The importer proposes to import the following three software
packages:
Shipment #1 - Software program, manuals, and "Right to Copy"
certificate packaged and shipped together - total sales price of
$11,000.00.
Shipment #2 - Only the manuals and the "Right to Copy"
certification are packaged and shipped together - total sales
price of $10,050.00.
Shipment #3 - Only the "Right to Copy" certificate is shipped -
total sales price of $10,000.00 (shipment consists of a single
piece of printed paper).
ISSUE:
How are the articles properly classified under the
Harmonized Tariff Schedule of the United States Annotated
(HTSUSA)? What is the appraised value of the imported
merchandise?
LAW AND ANALYSIS:
Classification
The General Rules of Interpretation (GRI's) taken in
appropriate order provide a framework for classification of goods
under the Harmonized Tariff Schedule of the United States
Annotated (HTSUSA). The majority of imported goods are
classified by application of GRI 1, that is according to the
terms of the headings of the tariff schedule and any relative
Section or Chapter Notes. Further, the Explanatory Notes (EN's)
to the Harmonized Commodity Description and Coding System, which
are the official interpretation of the tariff at the
international level, while not legally binding, facilitate
classification under the HTSUSA by offering guidance in
understanding the scope of the headings and GRI's.
Since classification of merchandise is determined based upon
its condition as imported, each of the various shipping
alternatives requires a separate classification analysis.
Software, Manuals, Certificate
GRI 2(b) states in pertinent part, "The classification
of goods consisting of more than one material or substance shall
be according to the principles of rule 3."
GRI 3 states, in pertinent part:
When, by application of rule 2(b) or for any other reason,
goods are, prima facie, classifiable under two or more headings,
classification shall be effected as follows: (a) The heading which provides the most specific
description shall be preferred to headings providing a more
general description. However, when two or more headings
each refer to ... part only of the items in a set put up for
retail sale, those headings are to be regarded as equally
specific in relation to those goods, even if one of them
gives a more complete or precise description of the goods.
Since there is no single tariff provision applicable to the
software, manuals and certificate and they are instead provided
for in several headings of the HTSUSA, GRI 3(b) applies as
follows:
(b) ... goods put up in sets for retail sale, which cannot
be classified by reference to 3(a), shall be classified as
if they consisted of the material or component which gives
them their essential character...
Explanatory Note X to GRI 3(b) (pg. 4), provides in part:
(X) For the purposes of this Rule, the term "goods put up
in sets for retail sale" shall be taken to mean goods which:
(a) consist of at least two different articles which are,
prima facie, classifiable in different headings. ...;
(b) consist of products or articles put up together to meet
a particular need or carry out a specific activity; and
(c) are put up in a manner suitable for sale directly to
users without repacking (e.g., in boxes or in cases or on
boards).
The articles at issue here satisfy the criteria of
paragraphs (a), (b) and (c). At least two of the articles are
classifiable in different headings: the software in Heading 8524,
HTSUSA, Records, tapes and other recorded media for sound or
other similarly recorded phenomena..., and the manuals in Heading
4901, HTSUSA, Printed books, brochures, leaflets and similar
printed matter. The articles are put up together to permit
maximum usage of the software and they are saleable directly to
users without repackaging.
Since the articles constitute a set and classification
cannot be made pursuant to GRI 3(a), the essential character of
the set must be determined in accordance with GRI 3(b). EN VIII
to GRI 3(b) (pg. 4) states that:
The factor which determines essential character will
vary as between different kinds of goods. It may, for
example, be determined by the nature of the material or
component, its bulk, quantity, weight or value, or by
the role of a constituent material in relation to the
use of the goods.
After due consideration of the matter, it is the opinion of
this office that the software imparts the essential character of
the set. The software is what makes a purchaser choose the set.
As to the relation of the software to the use of the other goods,
a purchaser must get the software before instruction manuals or a
"right to copy" certificate are of any use whatsoever.
The software is classifiable in subheading 8524.90.4080,
HTSUSA, as follows:
8524 Records, tapes and other recorded media for sound
or other similarly recorded phenomena, including
matrices and masters for the production of records,
but excluding products of chapter 37:
* * *
8524.90 Other:
* * *
8524.90.40 Other...
* * *
8524.90.4080 Other...
See for example HQ 950675 (January 7, 1992), "Recorded media in
the form of software has been consistently classified by Customs
in subheading 8524.90.40, HTSUS, whether or not it is entered
with apparatus for which it is intended."
Manuals, Certificate
Where manuals and certificates are shipped together, we are
presented with a situation requiring the analysis outlined above.
No single tariff provision provides for both the manuals and
certificate. The articles are considered a set for tariff
purposes with the manuals providing the essential character.
Someone already having access to the software but lacking
instructional manuals would find the software useless.
The manuals are considered technical books and are
classifiable in subheading 4901.99.0050, HTSUSA, as follows:
4901 Printed books, brochures, leaflets and similar
printed matter, whether or not in single sheets:
* * *
Other:
* * *
4901.99.00 Other...
* * *
4901.99.0050 Technical, scientific and
professional books...
Certificates
The certificate, or "right to copy" license is classifiable,
pursuant to a GRI 1 analysis in subheading 4907.00.0000, HTSUSA,
as a "similar document of title", as follows: 4907.00.0000Unused postage, revenue or similar stamps of
current or new issue in the country to which they
are destined; stamp-impressed paper; banknotes;
check forms; stock, share or bond certificates and
similar documents of title
The certificates fit within the description in EN 49.07 (pg.
697):
These products comprise:
* * *
(F) Stock, share or bond certificates and similar documents
of title. These are formal documents issued, or for
issue, by public or private bodies conferring ownership
of, or entitlement to, certain financial interests,
goods or benefits named therein. * * *
* * *
VALUATION
Transaction value 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).
The term "price actually paid or payable" is defined in TAA
402(b)(4)(A) as:
...the total payment (whether direct or indirect...)
made, or to be made, for imported merchandise by the
buyer to, or for the benefit of, the seller.
Of the enumerated additions set forth in the statute, only the
provision pertaining to the royalty and license fee set forth in
402(b)(1)(D) is relevant, which requires the addition to the
price actually paid or payable of:
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....
The valuation of software was addressed in T.D. 85-124,
which advised that Customs will continue to value imported
carrier media bearing data or instructions for use in data
processing equipment exclusive of a value element for the data,
instructions, or information component contained on such
software. More specifically, Customs reaffirmed its position
that "software be valued only on the basis of the value of the
carrier medium" and that for valuation purposes: [C]arrier media bearing data or instructions (i.e.,
software) does not include data or instructions
recorded or encoded by means of integrated circuits,
semiconductors and similar devices, or articles
incorporating such circuits or devices.
In order to value the carrier medium exclusive of the value
of the data or instructions contained therein, the value of the
data or instructions must be distinguished from the value of the
carrier medium. With regard to the software described by the
importer, only one price is given for the total software
component. Without a separate value for the carrier medium
distinct from the value of the data and instructions, the
presumption is that the price actually paid or payable for the
carrier medium is $1,000.00. The price actually paid or payable
for the certificate is $10,000.00, however this amount is not to
be included in the transaction value of the software because the
license grants rights pertaining to the software, not the carrier
medium which is the imported merchandise. The certificate
licenses the buyer to make and install additional copies of the
software "program," which right is related to the data or
instructions recorded onto the carrier medium, as opposed to
relating to the right to copy the carrier medium. The license is
not related to the carrier medium which is the imported
merchandise. The license is also not payable as a condition of
the sale of the carrier medium, as opposed to being payable as a
condition of the sale of the "program."
HOLDING:
When software, manuals and a certificate are shipped
together, the articles are treated as a set for tariff purposes
with the software imparting the essential character. The proper
classification is at subheading 8524.90.4080, HTSUSA, currently
carrying a duty rate of 9.7 cents/ m2 of recording surface.
Manuals and a certificate shipped together are treated as a
set with the manuals imparting the essential character.
Classification is at subheading 4901.99.0050, HTSUSA, currently
free of duty.
A certificate shipped alone is classifiable at subheading
4907.00.0000, HTSUSA, currently free of duty.
The license fee is not included in the transaction value of
the software and the transaction value of the imported software
is $1,000.00, assuming no additions pursuant to 402(b)(1)
(A),(B),(C)or(E) of the TAA are made to the price actually paid
or payable.
Assuming no additions to the price actually paid or payable
for the certificate and manuals is made pursuant to 402(b)(1)
(A),(B),(C)or(E) of the TAA are made, the transaction value of
the certificate is $10,000.00 and the transaction value of the
manuals is $50.00.
The transaction value of each shipment is the price actually
paid or payable for it. Thus the transaction value of shipment
#1, #2 and #3 is $11,000.00, $10,050.00 and $10,000.00
respectively.
Sincerely,
John Durant, Director
Commercial Rulings Division