VAL RR:IT:VA 546072 LPF
Port Director
U.S. Customs Service
JFK Airport - Building #77
Jamaica, NY 11430
RE: Internal Advice 22/95 concerning dutiability of payments for
trademarks; Related party transactions and applicability of
transaction value; Dividends as royalties or proceeds of subsequent resale; 19 U.S.C. 1401a(b)(1)(D) and (E); BBR
Prestressed Tanks; Imperial Products; HRLs 545813, 544991,
545528
Dear Director:
This is in response to a letter received from your office
requesting internal advice on behalf of [***************]
(Importer) regarding the dutiability of payments made for
trademarks incorporated in their imported merchandise. This
inquiry emanates from an audit conducted by the Regulatory Audit
Division concerning the Importer's entries filed during its
fiscal years ending December 1992 and 1993 as well as during the
first four months of its fiscal year ending December 1994. A
meeting was held with counsel and the Importer on October 2,
1996. As designated by the bracketed portions of this decision,
confidentiality has been granted for any references to the
Importer or related companies and to the country of exportation,
consistent with counsel's June 24, 1997 letter. We regret the
delay in reply.
FACTS:
As a result of corporate reorganization in 1990,
[***************] (U.S. Holding Company), a wholly-owned
subsidiary of [***************] (Foreign Parent) of [**********],
was incorporated in Delaware. The U.S. Holding Company
established [***************] and [***************] (Sister
Company). The U.S. Holding Company retained the exclusive rights
to the [***************] (Company) trademark, related trade name
and copyrights as well as the responsibilities in issuing
dividends to the Foreign Parent, which previously were held by
the U.S. Holding Company's predecessor, also known as
[***************] (Predecessor Company). Until the
reorganization, the Predecessor Company, also a wholly-owned
subsidiary of the Foreign Parent, comprised the entire U.S.
operation. The Importer also is a wholesaler and retailer of
various commodities including perfume, leather handbags and
wallets, silk ties, handkerchiefs, and girls'/women's blouses,
primarily imported from related foreign suppliers such as
[***************] (Foreign Supplier) who supplies merchandise on
behalf of the Foreign Parent.
As part of its 1949 licensing agreement with the Foreign
Supplier, the Predecessor Company promised to establish a market
for Company merchandise and obtained exclusive rights to sell
Company merchandise in the U.S. This agreement did not require
the payment of any royalties. Rather, profits, if any, were
repatriated as dividends based on the Predecessor Company's
earnings and capital needs as determined by the Predecessor
Company's board of directors.
In 1990, the Predecessor Company underwent corporate
reorganization to enhance management of the Foreign Parent's U.S.
operations, create a U.S. structure to facilitate future
investments, protect the Foreign Parent's assets in possible
joint ventures, and lawfully minimize state tax liability. The
Importer provides unequivocally that the reorganization did not
change the relationship between the U.S. operation and the
Foreign Parent/Seller. Specifically, through a March, 1990
license agreement the U.S. Holding Company transferred to the
Sister Company its trademark rights used in connection with the
sale and distribution of the products manufactured by or for, or
dealt in by, the U.S. Holding Company's affiliates. Upon
obtaining the trademark rights, the Sister Company entered into a
license agreement with the Importer on the same day to facilitate
merchandise distribution. As consideration for the rights to use
the trademarks in connection with the sale and distribution of
Company products, the Importer agreed to pay the Sister Company a
royalty based on its net sales.
As a result of the corporate restructuring, the Importer
advises that the consolidated earnings and consolidated cash flow
of the U.S. Holding Company and its subsidiaries did not change.
Moreover, the income available for distribution to the overseas
parent was unchanged by the license agreements, creating no
additional benefit. The Importer adds that the royalty payments
currently at issue do not change the prices the U.S. company pays
the Foreign Parent for imported merchandise or, stated
differently, that the gross margin earned prior to and after the
restructuring are similar. In essence, the Importer submits that
the royalty payments simply represent the splitting of what
previously were the Predecessor Company's earnings between the
Importer and the Sister Company.
Invoices and purchase orders between the Importer and the
Foreign Parent as well as a payment statement were submitted for
our review. It is our understanding that although the Importer
receives its merchandise from the Foreign Supplier, it submits
payment to the seller, the Foreign Parent. A portion of the
money paid to the Sister Company as royalties is returned to the
Importer as loans. Other amounts described as loans, submitted
by the Importer to the U.S. Holding Company, are transferred by
the latter to the Foreign Parent as dividends. The Importer
explains that the U.S. Holding Company pays its parent a dividend
only when authorized by its Board of Directors after considering
the U.S. operation's consolidated earnings and projected cash
needs. In fact, in the year of restructuring and the following
year the U.S. Holding Company issued no dividends because funds
were needed for continued investment in fixed assets. However,
after completion of the new store expansion program, the Foreign
Parent accrued surplus cash from its consolidated operations and
the U.S. Holding Company declared dividends. Thus, the Importer
provides that the dividend distributions are the result of
cashflow management and needs and other investments, as opposed
to the license agreements. Your office provided documentation
illustrating the manner in which the money flows from one entity
to another, as largely directed by the Importer.
The Importer provides that the payments made under the
license agreement merely represent intercompany transactions, or
a transfer of funds among the U.S. entities, and are eliminated
in consolidation in accordance with generally accepted accounting
principles (GAAP). Because such transactions have no effect on
the U.S. Holding Company's consolidated earnings and cash flow
nor on the dividend payments made to the Foreign Parent, the
Importer submits that none of the royalty payments directly or
indirectly benefit the Foreign Parent or are related to the
imported merchandise. The Importer submits that the instant
scenario is distinguishable from that addressed in the General
Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B.
& Dec. at 1 (February 10, 1993), commonly known as "Hasbro II"
because, among other reasons, the payments at issue merely
separate money belonging to the seller's operation between two of
its subsidiaries, rather than generating additional revenue for
the seller from an unrelated company. The Importer adds that in
any event the dividend payments themselves do not represent
payments made under a profit sharing agreement nor directly
relate to the imported merchandise. Your office disagrees with
the Importer's position.
ISSUE:
If the relationship between the parties did not influence
the price actually paid or payable such that transaction value is
the appropriate method of appraisement, whether the submitted
evidence demonstrates that the subject royalty payments are not
included within the transaction value of the imported merchandise
as royalties or proceeds of subsequent resale.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into
the U.S. is transaction value pursuant to 402(b) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979
(TAA), codified at 19 U.S.C. 1401a. However, imported
merchandise is appraised under transaction value only if the
buyer and seller are not related or, if related, the transaction
value is deemed to be acceptable. In this case the Foreign
Parent, the seller, and the Importer, the buyer, are related
pursuant to 402(g)(1)(G) of the TAA. Section 402(b)(2)(B) of
the TAA provides that a transaction value between related parties
will be deemed acceptable if an examination of the circumstances
of sale indicates that the relationship between the parties did
not influence the price actually paid or payable or where the
transaction value closely approximated certain "test" values.
Initially, we note that no previously accepted values, which
could serve as test values in the instant case, have been shown
to exist. However, under the circumstances of sales approach, if
the parties buy and sell from one another as if they are
unrelated, transaction value will be considered acceptable.
Thus, if the price is determined in a manner consistent with
normal industry pricing practice, or with the way the seller
deals with unrelated buyers, the price actually paid or payable
will be deemed not to have been influenced by the relationship.
Furthermore, the price will not be considered to have been
influenced if it is shown that the price is adequate to ensure
recovery of all costs plus a profit that is equivalent to the
firm's overall profit realized over a representative period of
time in sales of merchandise of the same class or kind.
Statement of Administrative Action (SAA), 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 54 (1981); section 152.103(j)(2), Customs Regulations (19
CFR 152.103(j)(2)).
In this regard, the Importer has asserted that the price
paid for the imported merchandise reflects a list price,
including a discount for wholesaler expenses, which is consistent
with the Foreign Parent's sales to other related and unrelated
purchasers in third countries. Further, the Importer has
indicated that its gross profit margin has remained constant
prior to and after restructuring. However, these statements in
and of themselves do not establish the acceptability of the
related party price as the appropriate basis for the transaction
value. Specifically, the SAA provides that a price will not be
considered to have been influenced if it is shown that the price
is adequate to ensure recovery of all costs plus a profit that is
equivalent to the firm's overall profit realized over a
representative period of time in sales of merchandise of the same
class or kind (emphasis added). No such comparison of profit has
been provided for our review. In fact, some of the submitted
evidence indicates that the subsidiary Importer did not enjoy any
net profit.
Furthermore, if evidence was to be submitted confirming that
the initial list prices actually reflect world-wide, universal
prices, insofar as Customs would understand such prices merely to
reflect a starting price for the imported merchandise,
information concerning the deductions or discounts made from the
list prices in ultimately arriving at the final price would
remain essential. See HRL 545813, issued September 11, 1996. In
sum, based on the evidence provided, we cannot verify the
acceptability of the related party price. Although we have
concerns regarding the related party pricing and, hence, with
appraisement of the merchandise under transaction value, we
nevertheless will address the questions posed to our office
concerning the dutiablity of the subject royalty payments.
The "price actually paid or payable" is defined in
402(b)(4)(A) as the "total payment (whether direct or indirect,
and exclusive of any costs, charges, or expenses incurred for
transportation, insurance, and related services incident to the
international shipment of the merchandise...) made, or to be made
for the imported merchandise by the buyer to, or for the benefit
of, the seller." Customs presumes that all payments made by the
buyer to the seller, or a party related to the seller, form part
of the price actually paid or payable of the imported
merchandise, in accordance with Generra Sportswear Co. v. United
States, 8 CAFC 132, 905 F.2d 377 (1990) and Chrysler Corporation
v. United States, 17 CIT 1049 (1993). See also HRL 545194,
issued September 13, 1995. This presumption may be rebutted by
evidence which clearly establishes that the payments are
completely unrelated to the imported merchandise.
In HRL 545194, supra, which also involved license fees paid
by the importer to a party related to the seller, Customs
analyzed whether the fees were dutiable as part of the price
actually paid or payable. In that case, Customs determined that
such fees were part of the total payment for the imported
merchandise. Citing to HRL 545663, issued July 14, 1995, Customs
concluded that the Generra standard applies regardless whether
payments are made directly to the seller or to a party related to
the seller. The decision explains that such "position is
consistent with the definition of the price actually paid or
payable' as the total payment made directly or indirectly by the
buyer to, or for the benefit of, the seller. In our opinion,
payments to a party related to the seller represent indirect
payments made to, or, at the very least for the benefit of, the
seller."
A price actually paid or payable analysis is relevant to the
dutiability of royalties or licensing fees. Although
402(b)(1)(D) and (E) are relevant in determining when royalty
payments are proper additions to the price actually paid or
payable under the language of 402(b)(1), this provision also
specifically states that the price actually paid or payable for
imported merchandise shall be increased by the amounts
attributable to the items described in subparagraph (A) through
(E), including royalties and proceeds, only to the extent that
each such amount is not otherwise included within the price
actually paid or payable. . . . " (emphasis added). Based on the
emphasized language, we conclude that it is appropriate to
consider whether certain payments are included within the price
actually paid or payable before determining whether they are to
be added to the price actually paid or payable. However, we
agree that a payment made by the buyer to the seller or a party
related to the seller is not part of the price actually paid or
payable if the importer can demonstrate that it does not
represent payment for the imported merchandise and/or if the
importer can demonstrate that the payments are not paid to or for
the benefit of the seller.
Customs adheres to its position that payments made to a
party related to the seller are presumed to be part of the price
actually paid or payable and that the burden is on the importer
to provide evidence to rebut this presumption. Absent such
presumption, payments for the merchandise could easily be
funneled through an affiliated company and Customs would be
engaged in endless fact finding in order to ascertain the nature
of such payments and whether they are to be included in
transaction value. This is the type of fact-finding which the
court in Generra determined was not required by Customs. Rather,
the burden is on the importer to provide Customs with sufficient
evidence to determine whether such payments are dutiable.
Upon review of the submitted information, we find that the
subject royalties are not an element of the price actually paid
or payable for the imported merchandise. As such amounts
represent dividend distributions resulting from cashflow
management and needs as well as other investments, we find that
they do not relate to the sale for exportation of the imported
merchandise. Moreover, nothing links the payment of the
royalties to the sale for exportation of the imported
merchandise. Thus, based on the evidence presented, we find that
the payment of the royalties is not related to the sale for
exportation of the imported merchandise.
With regard to royalties the SAA, adopted by Congress with
the passage of the TAA, explains 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.
SAA, supra, at 48-49.
In the General Notice, Dutiability of Royalty Payments,
"Hasbro II," supra, 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 a
condition of sale and, therefore, dutiable as royalty payments.
When analyzing the Hasbro II factors, Customs, in its more
recent ruling decisions, has taken several considerations into
account which follow 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 imported merchandise generally will be
dutiable); ii) to whom the royalty is paid (e.g., payments to the
seller or party related to the seller more likely are dutiable
than payments to an unrelated third party); iii) whether the
purchase of the merchandise and payment of royalties are
inextricably intertwined (e.g., provisions in the same agreement
for the purchase of the merchandise and payment of royalties;
license agreement refers to, or provides for, the sale of the
imported merchandise or requires 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 failure to pay
royalties); and iv) payment of royalties on each and every
importation. See Headquarters Ruling Letter (HRL) 544991, issued
September 13, 1995, and cases cited therein.
Based on the information provided, we do not find the
subject payments to constitute royalties comprising part of the
transaction value of the merchandise. First, it is our
understanding that the imported merchandise is not manufactured
under patent. Rather, the subject licensing agreements address
the payment of royalties in connection with trademark and
licensing rights.
Second, we find the royalty not to be involved in the
production or sale of the imported merchandise. To the contrary,
a portion of the money paid to the Sister Company as royalties is
returned to the Importer as loans while other amounts, described
as loans which are paid to the U.S. Holding Company, is
transferred to the Foreign Parent as dividends. Based on the
facts presented and the manner in which the money flows to the
companies, we agree that such dividend distributions appear to be
the result of cashflow management and needs as well as other
investments as opposed to the license agreements. Our
examination of the licensing agreements further supports a
finding that without the agreements and the attendant royalty
payments the imported merchandise as such still would have been
produced and sold by the foreign seller. Specifically, we note
that the licensing agreements address the royalty payments
separate and apart from the purchase and supply of the
merchandise itself. Although counsel provides that no purchase
or supply agreements exist for the merchandise in question, we do
not find a nexus between the submitted transaction documents,
that is, the invoices and purchase orders, and the licensing
agreements. We assume that an examination of any other pertinent
transaction documents would support such a conclusion. In
particular, this finding is based on the assumption that
corporate books, records and statements would reflect such
amounts to constitute loans and dividends.
Finally, we concur that the Importer could buy the imported
merchandise without paying the fee. While royalties paid to
third parties for the use, in the United States, of trademarks
related to the imported merchandise generally are not dutiable,
the SAA provides that such payments nevertheless will be treated
as dutiable if they represent a condition of the sale for
exportation. Customs has considered payments that must be made
for each imported item to constitute a condition of sale. This
would not be the case, however, where the payments are optional,
not inextricably intertwined with the imported merchandise, or
paid solely for the exclusive right to manufacture and sell a
product using the imported merchandise in the United States. See
HRL 545528, issued August 3, 1995, citing BBR Prestressed Tanks,
Inc., v. United States, 60 Cust. Ct. 885, R.D. 11536 (1968),
aff'd, 64 Cust. Ct. 787, A.R.D. 265 (1970) and Imperial Products,
Inc. v. United States, 77 Cust. Ct. 66, 425 F. Supp. 852 (1976).
Once again, our review of the license agreements and
transaction documents supports a finding that the Importer could
buy the merchandise without paying the fee. The language
included in the agreements does not suggest that the payment of
the royalties is closely tied to the purchase of the goods.
Moreover, in some instances it is our understanding that the U.S.
Holding Company issued no dividends to the Foreign Parent because
funds were needed for continued investment in fixed assets.
Finally, the fact that the payments are made to parties related
to the foreign seller, while an indication that the royalties are
tied to the purchase of the goods and, therefore, a condition of
sale does not necessarily mandate such a finding in this case.
Insofar as counsel's evidence demonstrates that the royalty
payments actually are made manifest as intercompany loans and
dividends, which in some cases never find its way, in any form,
to the Foreign Supplier or the Foreign Parent, the subject
royalty payments do not constitute a condition of sale.
Furthermore, we do not find the payments, alternatively, to
constitute proceeds to be added to the price actually paid or
payable as proceeds pursuant to 402(b)(1)(E).
With regard to proceeds, the SAA provides that:
[a]dditions 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.
SAA, supra, at 49; section 152.103(g), Customs Regulations (19
CFR 152.103(g)).
We are in accord with the Importer's assertion that the
payments at issue represent dividends or other payments which do
not directly relate to the imported merchandise. In particular,
we concur that the subject payments constitute intercompany loans
and dividends the distribution of which do not relate to the
imported merchandise and which, in many cases, do not appear to
yield any financial benefit to the foreign seller. Counsel has
shown that the payments made under the license agreement
represent, in effect, a transfer of funds among the U.S. entities
which are eliminated in consolidation in accordance with GAAP.
For these reasons, regardless of the fact that the subject
payments are made to parties related to the seller, such amounts
are not dutiable as proceeds. This finding likewise is based on
the assumption that corporate books, records and statements would
reflect such amounts to constitute loans and dividends.
We do note, however, that sufficient information has not
been provided which currently would enable us to determine the
effect, if any, that the manner in which the subject royalty
payments are made and accounted for by the parties has on the
acceptability of the related party pricing as a basis for
transaction value.
HOLDING:
Based on the evidence presented, we cannot find that the
relationship between the parties did not influence the price
actually paid or payable such that transaction value is the
appropriate method of appraisement. However, if transaction
value is the appropriate method of appraisement, the subject
royalty payments would not be included within the transaction
value of the imported merchandise as royalties or proceeds of
subsequent resale.
This decision should be mailed by your office to the
internal advice requester no later than sixty 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