OT:RR:CTF:VS H236746 YAG
Mr. Sidney H. Kuflik
Lamb & Lerch
233 Broadway. Suite 2702
New York, New York 10279
RE: Dutiability of Royalty Payments
Dear Mr. Kuflik:
This is in response to your letter, dated December 13, 2012, on behalf of your client, [***] (“Importer/Licensee”), requesting a ruling with respect to the dutiability of certain royalty fees paid by the Importer/Licensee to the related Licensor, pursuant to the Brand License Agreement, dated December 10, 2012.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as your request conforms to the requirements of 19 CFR §177.2(b)(7), your request for confidentiality is approved. The information concerning the names of the parties and all attachments to your submission, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The Importer/Licensee is a U.S. company whose primary business is the importation and sale of [***] and parts thereof. The Importer/Licensee sources the finished goods, as well as the materials and parts, from domestic and foreign suppliers. When the company imports the goods, it imports them from four related manufacturers, located in China, Japan, Korea, and the Czech Republic. The Importer/Licensee recently entered into a Brand License Agreement, dated December 10, 2012, with another related company, [***] (“Licensor”). Under the terms of the Brand License Agreement, the Importer/Licensee received a non-exclusive, non-transferable, revocable license to use the brand. Pursuant to Article 1.1 of the Brand License Agreement, the brand “means the trademark [“***”] and any other marks made available to the Licensor from time to time to use in the operation of the business in the territory, including, but not limited to, signs, logos, and marketing materials.”
Pursuant to Article 8.1 of the Brand License Agreement, in consideration for the license granted, the Importer/Licensee pays the Licensor a royalty fee equal to [***]% of the “net purchase price.” Article 1.1 of the Brand License Agreement defines the “net purchase price” as “the purchase price which Licensee pays to the seller to acquire and have delivered to the Licensee’s facility inputs, materials, and/or finished items, whether such goods are imported or purchased in the United States, which result in a product to be sold by Licensee that utilizes the [***] brand.” Therefore, the Brand License Agreement applies to all goods marketed, distributed, and sold by the Importer/Licensee in the United States, regardless of whether such items have been imported from the related manufacturers or domestically sourced from the unrelated suppliers.
Moreover, the Licensor entered into Manufacturing Know-How License Agreements (provided for our review) with three of the Importer/Licensee’s related suppliers. According to these agreements, the related suppliers pay the royalty fees directly to the Licensor for the non-exclusive, non-transferable, and revocable license to manufacture, use, and sell or otherwise supply the imported goods. The intellectual property rights covered by these agreements consist of the following: all patents and utility models, all inventions (whether patentable or not), technical information, specifications, all copyrights, copyright registration, database rights, design rights, software, and applications therefore, and any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world. According to your submission, these royalty fees are reflected in the price of the goods that these factories charge the Importer/Licensee. Thus, you only seek a prospective ruling regarding the royalty fee paid by the Importer/Licensee to the Licensor pursuant to the Brand License Agreement.
Finally, there were no purchase orders provided for our review because no purchase orders are generated at this time due to the computerized ordering system adopted by the parties to the transactions at issue; however, you submitted four (4) Distribution Agreements for our consideration. We note that all four (4) Distribution Agreements set forth the terms for the purchase of the imported goods and specifically reference trademarks that are applied to the products supplied by the four (4) related manufacturers/sellers. Article 1 (Definitions), which appears in all Distribution Agreements defines trademarks as follows: trademarks mean the trademark registrations, applications, or unregistered trademarks owned by or licensed to the Supplier relating to the products together with any further trademarks that the Supplier may permit or procure permission for the Distributor by express notice in writing to use in respect of the Products. Schedule 3 (Article 8) of the Distribution Agreements states that “seller’s trademarks and names and those of its associated companies shall not be used otherwise than as applied by seller to equipment or associated documentation.” You state that the trademark rights referenced in the Distribution Agreements are for a more limited right with respect to the [***] name appearing on goods produced by the four (4) related suppliers and associated documentation. These Distribution Agreements do not give the Importer/Licensee the rights to operate or function as a business under the [***] brand. These rights are provided for in the Brand License Agreement. In accordance with your request, we limit our analysis to the rights set forth in the Brand License Agreement.
ISSUES:
Whether the royalty payments made by the Importer/Licensee to Licensor are part of the price actually paid or payable for the imported merchandise;
Whether the royalty payments should be included in the transaction value of the imported merchandise as either royalties under section 402(b)(1)(D) or proceeds of subsequent resale under section 402(b)(1)(E).
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”) and codified at 19 U.S.C. §1401a. The preferred method of appraisement under the TAA 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, 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 the 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.” 19 U.S.C. §1401a(b)(1)(D) and (E). These additions apply only if they are not already included in the price actually paid or payable. For purposes of this ruling, we assume that transaction value is the appropriate method of appraisement.
Price Actually Paid or Payable
The first issue is whether the royalty payments are included in the price actually paid or payable for the imported goods. The “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any charges, costs, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. §1401a(b)(4)(A).
It is CBP’s position that payments made by the buyer to a party related to the seller are indirect payments made to, or for the benefit of, the seller. All such payments are included in transaction value unless it is established that they were made in exchange for something other than the imported goods. See Generra Sportswear Company v. United States, 905 F.2d 377(CAFC 1990), and Chrysler Corporation v. United States, 17 CIT 1049 (CIT 1993).
In this case, the royalty payments are made by the buyer (Importer/Licensee) to the Licensor, a party related to the foreign suppliers of the Importer/Licensee. Nevertheless, the Brand License Agreement in question permits the Importer/Licensee to use the brand (trademark) in the operation of its business in the United States, and the payments made for this right, even though calculated on the basis of the purchase price, are made regardless of whether the Importer/Licensee imports the merchandise or sources the merchandise from the domestic suppliers. Accordingly, based on these facts, we find that the payment under the Brand Licensee Agreement is not made for the imported goods, and, therefore, is not part of the price actually paid or payable.
Additions to Value as Either Royalties Under Section 402(b)(1)(D) or Proceeds of Subsequent Resale Under Section 402(b)(1)(E).
A royalty payment may be added to the price actually paid or payable as either a royalty payment, pursuant to 19 U.S.C. §1401a(b)(1)(D), or as a proceed of a subsequent resale, disposal, or use of the imported merchandise, pursuant to 19 U.S.C. §1401a(b)(1)(E), if it is not included in the price actually paid or payable. Under 19 U.S.C. §1401a(b)(1)(D), an addition to the price actually paid or payable is made for 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.”
After reviewing the language of the statute along with the legislative history and prior case law, CBP looks to the following three questions as relevant in determining whether the requirements of 19 U.S.C. § 1401a(b)(1)(D) are met:
Was the imported merchandise manufactured under patent?
Was the royalty involved in the production or sale of the imported
merchandise? and,
Could the importer buy the product without paying the fee?
Affirmative answers to questions one and two and a negative answer to question three suggest that the payments are dutiable; negative answers to questions one and two and an affirmative answer to question three suggest that the payments are non-dutiable. Question three goes to the heart of whether the payment is considered to be a condition of sale. See General Notice entitled “Dutiability of “Royalty” Payments,” published in the Customs Bulletin and Decisions on February 10, 1993 (the “General Notice”; also sometimes referred to as “Hasbro II”) (stating these questions in discussing previously-issued Headquarters Ruling Letter (“HRL”) 544436, dated February 4, 1991).
In analyzing these factors, CBP has taken into account certain considerations that flow from the language set forth in the Statement of Administrative Action (“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.
HRL W548649 (citing HRL 546478, dated February 11, 1998; see also, HRL 546433, dated January 9, 1998; HRL 544991, dated September 13, 1995; and HRL 545951, dated February 12, 1998).
In this case, based on the information provided, we conclude that the answer to the first question is no. The Brand License Agreement specifically refers to the use of trademarks, and the manufacturing know-how and patents are covered by a separate set of contracts, with the royalty fees under those contracts already reflected in the price of the goods sold to the Importer/Licensee. Furthermore, with respect to the second question, the answer is also no. We find that the royalty fee is not involved in the production or sale of the imported merchandise. According to the Brand License Agreement, Licensor grants the Importer/Licensee the right to use the trademark to market the merchandise in the United States or operate and function as a business under the tradename after the importation and regardless of whether the merchandise is imported or not. Based on our review, we find no linkage between the sale for exportation of the imported merchandise and the payment of royalties by the Importer/Licensee.
The answer to the third question goes to the heart of whether a payment is considered a condition of sale. See General Notice, “Dutiability of Royalty Payments,” supra, at 11. Royalty payments and license fees are a condition of sale when they are paid on each and every importation and are inextricably intertwined with the imported merchandise. If the payments are optional and not inextricably intertwined with the imported merchandise, or are paid solely for the exclusive right to manufacture and sell in a designated area, they do not constitute additions to the price actually paid or payable under 19 U.S.C. §1401a(b)(1)(D). See HRL 546675, dated June 23, 1999.
.
In this case, we find that the Importer/Licensee could buy the product without paying the fee. While the fact that the payments are made to a party related to the seller is an indicator that the royalties are closely tied to the purchase of the imported merchandise, and, therefore, are a condition of sale, this fact does not necessarily serve as prima facie evidence that they are a condition of such sale. HRL 546478, dated February 11, 1998. In this case, even though the royalty payments are made to the party related to the sellers, there is nothing in the Distribution Agreements that obligates the Importer/Licensee to purchase the merchandise from the related sellers and pay the royalties on the imported merchandise. The Distribution Agreements reference the trademarks, but these trademarks pertain to the limited right granted to the sellers to place the trademarks on the produced goods and associated documentation. This right is different from the rights granted to the Importer/Licensee under the Brand License Agreement. The license rights for which the royalty fees are paid relate solely to the distribution and sale of the merchandise in the United States and not the sale for exportation. This fact remains true, even if we consider that the royalty fees are calculated on the basis of the net purchase price. In HRL H077419, dated April 5, 2011, CBP ruled that the method of calculating the royalty might be relevant in determining whether the royalty or license fees are inextricably intertwined with the imported merchandise in certain circumstances, as specified in HRL 545194 and HRL 546513. However, this is not the case here. In this case, the royalty is paid on the purchase price of the imported merchandise as well as the merchandise sourced domestically. Therefore, what matters in this instance is not how the payment is calculated, but whether it is related to the imported merchandise at all. In line with our prior finding, we determine that the payments are not related to the imported merchandise, are not linked with the sale for exportation of the imported merchandise, and, thus, are not a condition of the sale under 19 U.S.C. §1401a(b)(1)(D).
As the royalty payments paid pursuant to the Brand License Agreement are not dutiable as royalties under 19 U.S.C. §1401a(b)(1)(D), it is necessary to determine if the payments are dutiable as proceeds pursuant to 19 U.S.C. §1401a(b)(1)(E). 19 U.S.C. §1401a(b)(1)(E) 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.
With regard to proceeds, the SAA provides that:
Additions for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.
Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 49 (1981). Additionally, CBP has ruled that in order for proceeds of a subsequent resale to be dutiable under this section, they must pertain to the resale of the imported merchandise, and they must accrue directly or indirectly to the benefit of the seller. See HRL 545035, dated August 23, 1995.
In this case, the royalty fees are paid to the party related to the sellers. However, these fees are tied to the use of trademarks in the United States in the operation of the business, including, but not limited to, signs, logos, and marketing materials, and are derived from a separate transaction and not from any subsequent resale, disposal or use of the imported merchandise. Accordingly, the payments by the Importer/Licensee to the Licensor do not pertain to the imported goods at issue. Therefore, we find that the license fees in question are not dutiable as proceeds pursuant to 19 U.S.C. §1401a(b)(1)(E).
HOLDING:
Based upon the information provided, we find that the royalty payments made pursuant to the Brand License Agreement are not dutiable as part of the price actually paid or payable, nor are they additions to value as royalties, pursuant to 19 U.S.C §1401a(b)(1)(D), or proceeds, pursuant to 19 U.S.C. §1401a(b)(1)(E).
Please note that 19 C.F.R. §177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch