VAL CO:R:C:V 544611 ML
District Director
Savannah, Ga 31401
RE: Application for Further Review of Protest No. XXXX;
Dutiability of Royalty Payment
Dear Sir:
This protest was filed against your appraisement decision in
the liquidation of an entry made August 9, 1989, by High Voltage
Breakers, Inc., (hereinafter referred to as the "importer"). The
importer is disputing the inclusion of a royalty payment in the
transaction value of the imported merchandise pursuant to section
402(b) of the Tariff Act of 1930, as amended by the Trade
Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)).
FACTS:
The importer, in a letter dated July 2, 1990, stated that it
was a joint venture company formed by Hitachi, Ltd., (hereinafter
referred to as the "seller"), a Japanese company, and General
Electric Company, a United States company. The importer produces
circuit breakers in the United States. To produce or repair
circuit breakers the importer purchases parts from various
companies, and some of the parts used to produce circuit breakers
were the parts imported from Hitachi by the importer. The
imported merchandise covered by this protest consists of parts,
such as the interrupter, operating mechanism, interpole links,
closing spring, and dashpot. Circuit breakers were produced
using technology from the seller. The technology was also used
in servicing and maintaining the circuit breakers.
The parties to the joint venture agreement entered into a
Patent License and Technical Assistance Agreement, hereinafter
referred to as the "agreement"), dated March 14, 1977. Article V
of the agreement stated that in consideration of licenses
granted, and technical information and assistance, the importer
agreed to pay the seller; (1) a service charge of X percent of
the net selling price of "products" sold by the importer until
such service charges totalled $XX million, and (2) X percent of
the net selling price of such products subsequently sold by the
importer. The agreement defined "net selling price" as the
importer's gross invoice price to the end-user of the "products"
packed for shipment, with deductions for items specified, to the
extent to which they were included in the gross invoice price.
Subsequent to the March 14, 1977 agreement, the parties
agreed to change the percentage of the royalty rate expand the
meaning of "products", and eliminate the ceiling price on service
charges.
The "technical information" consisted of material lists,
test data, engineering and performance specifications,
engineering instructions, and training in the United States The
"technical assistance" provided by the seller to the importer
consisted of engineering support and instructions regarding
production of the circuit breakers in the United States.
In Article IV of the agreement, the seller granted to the
importer a non-exclusive license to make and have made Products,
and to make and have made for the importer's own use and to use
Machines and Processes, under all Patents of the United States
owned or controlled by the seller during the life of the joint
venture agreement.
The importer paid a royalty or license fee of X percent of
the resale price of the circuit breaker made by the importer or X
percent of the replacement part sold by the importer.
ISSUE:
Whether the royalty payment made by the importer to the
seller for technical assistance was a dutiable addition to the
"price actually paid or payable".
LAW AND ANALYSIS:
Transaction value, the method of appraisement used for the
imported merchandise, is defined in section 402(b) of the TAA as
the "price actually paid or payable for imported merchandise when
sold for exportation to the United States" plus certain
enumerated additions. The "price actually paid or payable" is
more specifically defined in section 402(b)(4) of the TAA as the
"total payment...made, or to be made, for imported merchandise by
the buyer to, or for the benefit of, the seller."
One of the statutory additions to the "price actually paid or
payable" is section 402(b)(1)(D) of the TAA which provides for
the inclusion in transaction value 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 importer contends that the royalty payment is not
dutiable under section 402(b)(1)(D) of the TAA since the payment
is made for rights that are separate and apart from the right of
ownership. Thus, the importer concludes that the royalty payment
is not dutiable because the payment was not a condition of sale
of the imported merchandise. The importer cites Headquarters
Ruling Letters (HRL's), 543773, dated August 28, 1986, 544105,
dated March 25, 1988, 544129, dated August 31, 1988 (C.S.D. 88-
35), and 542881, dated November 23, 1982.
In each of those rulings, Customs concluded that the royalty
payments were based upon net sales, were not a condition of the
sale of the imported merchandise and were not connected to the
ownership or importation of the merchandise.
In the instant case, the X percent royalty paid by the
importer to the seller was triggered by technical assistance
furnished by the seller after the importation of the merchandise
and in most instances, in connection with the further processing
of these parts into completed circuit breakers. We find that the
royalty payment for technical assistance by the importer to the
principal was not dutiable. Additionally, the payment was not
connected to the right of ownership, rather it was paid for
technical assistance with regard to the finished product in the
United States.
The entry at issue was made in 1989, predating HRL 544436,
dated February 4, 1991, which was published in C.S.D. 91-6, dated
May 1, 1991. Therefore, there can be no retroactive application
of HRL 544436 to the entry in question. Insofar as the
application of HRL 544436 to post February 4, 1991, entries is
concerned, your attention is directed to Headquarters'
solicitation of comments and ruling requests set forth in the
June 19, 1991 Customs Bulletin. This comment period has been
extended to September 3, 1991.
HOLDING:
In view of the foregoing, it is our conclusion that the
royalty payment made by the importer to the seller pursuant to a
patent license and technical assistance agreement was not a
dutiable addition to the "price actually paid or payable" for the
imported merchandise.
Accordingly, you are directed to grant protest no. XXXX. A
copy of this decision should be attached to Form 19, Notice of
Action, to be sent to the protestant.
Sincerely,
John Durant, Director