VAL RR:IT:VA 546203 CRS
Director, Trade Compliance
U.S. Customs Service
610 South Canal Street
Chicago, IL 60607
RE: IA 61/95; dutiability of royalty payments; price actually paid
or payable; condition of sale
Dear Sir:
This is in reply to your memorandum of October 25, 1995, under
cover of which you forwarded, through the National Commodity
Specialist Division, a request for internal advice (I/A), dated June
6, 1995, submitted by counsel Arent Fox Kintner Plotkin & Kahn on
behalf of Alpine Electronics Manufacturing of America (USA), Inc.
("AOMA"), concerning the dutiability of certain royalty payments
made by AOMA to related parties. Additional submissions made by
counsel regarding this matter were also forwarded with your
memorandum. The request for internal advice arose in connection
with a prior disclosure submitted by AOMA on February 10, 1995, and
an audit of AOMA conducted by the Cincinnati office of the
Regulatory Audit Division. Regulatory Audit contends that the
royalty payments in question are dutiable, and your office concurs
with this position. We regret the delay in responding.
Counsel has requested that certain specifically identified cost
and financial information submitted in connection with this matter
be treated as confidential. After reviewing the information in
question, we have granted counsel's request for confidentiality
pursuant to section 177.8(a)(3), Customs Regulations (19 C.F.R.
177.8(a)(3)).
FACTS:
AOMA purchases and imports parts and components from Alpine
Electronics, Inc. ("AOJ"), a related Japanese seller, and also, but
to a lesser extent, from other related party sellers including Alps
Electric Co., Ltd ("Alps"). AOMA uses the imported merchandise
together with domestic components to manufacture in the United
States certain switches and clock spring cables, and car audio
products. The corporate structure of AOMA and its related parties
is as follows. Alps owns 100 percent of the stock of AOJ. AOJ owns
100 percent of Alpine Electronics of America, Inc., which, in turn
owns seventy percent of AOMA. The balance of AOMA's stock is owned
by Alps.
The Alps Agreement
On March 16, 1994, AOMA and Alps executed a "Technology License
and Technical Assistance Agreement" covering the following products
produced by AOMA: mode control switches; cruise switches; and clock
spring cable with flat assembly (the "Alps licensed products").
Under the terms of the agreement (hereinafter, the "Alps
agreement"), Alps, the licensor, granted AOMA the right to use Alps'
"technical data" in the manufacture and sale of the Alps licensed
products. In exchange for these rights, AOMA agreed to pay Alps a
royalty equal to a fixed percentage of the gross sales value of the
Alps licensed products manufactured by AOMA. Based on the
information submitted, specifically, the Alps agreement and
counsel's letter of August 23, 1995, none of the imported
merchandise used to manufacture the Alps licensed products was
manufactured under patent. In addition, Regulatory Audit advises
that imported Alps parts represent from [***] percent to [***]
percent of the value of the Alps licensed products manufactured by
AOMA in the U.S.
The term "technical data", as defined in Article 1.2 of the
Alps agreement, refers to "manufacturing and engineering data,
techniques, methods, information and know-how relating to the
design, engineering, manufacture, assembly and testing" of the Alps
licensed products. It includes: assembly drawing; piece part
drawings; technical specifications for licensed products including
but not limited to piece parts supplied by Alps to AOMA; test and
inspection standards; drawings for manufacture of piece parts and
assembly jigs; line layout for manufacturing and inspection;
standard work time; manufacturing methods and processes; other
pertinent information in written and photographic form or maintained
in computer software programs; and equipment information (structure,
size and other information). The term also covers cost calculation
information in respect of: the price of piece parts supplied by
Alps to AOMA for use in the manufacture of the licensed products;
the price of piece parts that Alps buys from third parties; and the
rate of material costs for the prices of the licensed products
manufactured and sold by Alps.
The AOJ Agreement
On April 1, 1994, AOMA executed a separate "Technical
Assistance Agreement" (hereinafter the "AOJ Agreement") with AOJ
covering the following finished products produced in the U.S.:
radio-cassette players; radio-CD players; CD changers; amplifiers;
and CD and cassette mechanisms (hereinafter, the "AOJ licensed
products"). Under the terms of the agreement, AOJ, the licensor,
granted AOMA a license to use AOJ's technical information in the
design, engineering, testing, assembly and manufacture of the
products described above. Pursuant to Article 1.2 of the agreement
(hereinafter, the "AOJ agreement"), the term "technical information"
refers to any information, including certain patents and utility
models described in Exhibit A, provided by AOJ in regard to the
design, engineering, testing, assembly, and manufacturing of the AOJ
licensed products. In return for the right to use the technical
information, AOMA agreed to pay AOJ a royalty equal to a percentage
of the selling price of the AOJ licensed products made from the
imported merchandise. Based on the information submitted, AOJ parts
represent approximately [***] percent to [***] percent of the AOJ
licensed products manufactured by AOMA in the U.S.
Pursuant to article 5 of the AOJ agreement, AOMA agreed to
purchase certain key parts from AOJ or its designated suppliers.
The key parts consist of: printed circuit boards; tuners; cassette
mechanisms; and central processing unit integrated circuit chips.
The AOJ Agreement provides that AOMA may also purchase key parts
from third parties if AOJ so consents. Since April 1, 1994, all key
parts with the exception of the printed circuit boards have been
procured from AOJ or AOJ affiliates. The printed circuit boards
have been sourced either from AOJ or an unaffiliated U.S. supplier
approved by AOJ. In a letter dated August 23, 1995, counsel for
AOMA advised that AOMA does not have to obtain AOJ's approval to
procure non-key parts from suppliers other than AOJ or Alps and that
as to key parts, AOMA must comply with paragraph 5 of the Technical
Assistance Agreement which requires AOMA to obtain AOJ's consent'
before purchasing from other suppliers.
Exhibit A of the AOJ agreement lists some eighty-five patents
that are covered by the definition of technical information.
According to counsel's letter of August 31, 1995, the patents apply
to a broad range of technology. Some of the patents are related to
the AOJ licensed products; others are unrelated. In respect of the
imported merchandise sold by AOJ to AOMA, counsel noted that AOMA is
uncertain whether patent rights applied to every imported part. As
a general matter, however, counsel stated that none of the parts
manufactured or purchased by AOJ (and imported by AOMA for use in
the production of the AOJ licensed products) are subject to a patent
or patented process with the exception of certain cassette
mechanisms which are subject to the so-called "Dolby Patent".
Parts Supply Agreement
As noted above, article 5 of the AOJ agreement requires AOMA to
purchase certain key parts from AOJ or its designated suppliers. In
contrast, there is no such requirement under the Alps agreement.
The terms and conditions governing purchases of parts from AOJ are
set forth in a "Basic Agreement Regarding Parts Supply"
(hereinafter, the "parts supply agreement"), dated January 1, 1987.
The parts supply agreement provides that individual sales contracts
will be concluded in respect of orders placed by AOMA. The prices
of parts and components purchased from AOJ are the prices in effect
for those goods at the time individual sales contracts are
concluded.
ISSUE:
The issue presented is whether the payments in question should
be included in the transaction value of the imported merchandise.
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; 19 U.S.C. 1401a). The
preferred 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. 19 U.S.C. 1401a(b)(1)(D)-(E).
However, 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." 19 U.S.C.
1401a(b)(2)(B). In the instant case, the buyer, AOMA, is related
to Alps and AOJ, the sellers of the imported merchandise. No
information regarding the acceptability of transaction value has
been submitted; accordingly, we do not address this issue.
Nevertheless, assuming the appraising officer determines that
transaction value is the applicable basis of appraisement, the
following constitutes our position in respect of the royalty
payments in question.
In regard to the dutiability of royalty payments, 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. Thus, under the TAA, any royalty paid by the buyer to the
seller will be included in transaction value unless the buyer can
establish that the payment is distinct from the price actually paid
or payable and not a condition of the sale for exportation to the
U.S.
In reviewing the legislative history of the TAA Customs has
identified three questions that are relevant in determining the
dutiability of royalty payments under section 402(b)(1) of the TAA.
General Notice, "Dutiability of Royalty Payments," 27:6 Cust. B. &
Dec 1 (February 10, 1993). The questions are as follows: (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? Negative responses to the first and second
questions, and an affirmative response to the third, suggest non-dutiability. 27:6 Cust. B. & Dec. at 9-11. The method of
calculating the royalty, e.g., on the resale price of the goods, is
not relevant in determining the issue of dutiability. Id. at 12.
Furthermore, the notice reaffirmed that royalty payments may be
dutiable as part of the price actually paid or payable, under the
"royalties" provision pursuant to section 402(b)(1)(D) of the TAA,
or as proceeds under 402(b)(1)(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).
As both the Statement of Administrative Action and the General
Notice make clear, royalty payments are dutiable as part of the
price actually paid or payable, or as an addition thereto. The TAA
defines the term "price actually paid or payable" as meaning "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." 19 U.S.C. 1401a(b)(4)(A). As a general matter, all
payments made by the buyer to the seller are presumed to be part of
the price actually paid or payable. Generra Sportswear Co. v.
United States, 905 F.2d 377 (Fed. Cir. 1990).
However, this presumption may be rebutted by evidence which
clearly establishes that the payments are totally unrelated to the
imported merchandise. In Chrysler Corporation v. United States, 17
CIT 1049, No. 93-186 (1993), the Court of International Trade
applied the Generra standard 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. Instead, the court found that the evidence
established that the fees were independent and unrelated costs which
were assessed because the buyer failed to purchase other products
from the seller and not a component of the price of the imported
engines.
The Alps Agreement
Under the Alps agreement AOMA pays a royalty as consideration
for the right to manufacture the Alps licensed products, and for the
right to use Alps' research and development, or technical data, in
the manufacture of the licensed products. Alps Agreement, art. 2.1,
at 2. The term "technical data" as defined by the Alps agreement
means manufacturing and engineering data, techniques, methods,
information and know-how relating to the design, engineering,
manufacture assembly and testing for the licensed products. Alps
agreement, art. 1.2, at 1. None of the imported merchandise used to
manufacture the Alps licensed products was manufactured under
patent. Based on the information submitted, we find that the rights
for which the royalties are paid relate to the manufacture of the
Alps licensed products in the U.S. rather than for rights connected
with the manufacture of the imported merchandise.
As to whether the royalty was involved in the sale of the
imported merchandise we note that the royalty was paid to Alps, a
seller of the imported merchandise. Royalties are involved in the
sale of imported merchandise where the sales agreements or purchase
contracts are subject to the terms of the royalty agreement. 27:6
Cust. B. & Dec. at 12. For example, in HRL 544991, dated September
13, 1995, royalties were paid in consideration of licensed
technology and technical assistance provided by the licensor/seller
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 importer/buyer with parts in
accordance with such terms and conditions as were separately agreed.
Moreover, as noted above, there is a presumption under Generra
that all payments made by the buyer to or for the benefit the
seller, or a party related to the seller, are part of the price
actually paid or payable for the imported merchandise. This may be
rebutted, however, by evidence which shows that the payments are not
a component of the price actually paid or payable. In the instant
case, the royalty payments were made by the buyer to a related party
seller of components used in the Alps licensed products. However,
the evidence does not support a finding that the royalty payments
are part of the price actually paid or payable for the imported
parts and components. Instead, the evidence indicates that the
payments relate to the design and manufacture of the Alps licensed
products. There is no information, such as invoices, for example,
which would link the payment of the royalty fees to the sale for
exportation of the imported merchandise. Based on our review, we
therefore find no linkage between the sale for exportation of the
imported merchandise and the payment of the royalties to Alps.
Finally, we find that AOMA could buy imported merchandise
purchased from Alps without paying the royalty. There is nothing in
the Alps agreement which inextricably links the payment of the
royalty to the purchase of the imported merchandise as there was in,
e.g., HRL 544991 and HRL 546433. Accordingly, we find that the
royalty payments made under the Alps agreement are neither part of,
nor an addition to, the price actually paid or payable for the
imported merchandise.
The AOJ Agreement
Under the AOJ agreement, AOMA pays a royalty as consideration
for the right to use AOJ's technical information in the design,
engineering, manufacturing and testing of the AOJ licensed products.
The term "technical information" as defined by the AOJ agreement
means "any information, including patents and utility models
described in Exhibit A, which are provided by ALPINE from time to
time, concerning the design, engineering, testing, assembly and
manufacture of the Products." AOJ agreement, art. 1.2, at 1.
Counsel has advised that while it is generally the case that
none of the imported parts and components used to manufacture AOJ
licensed products is patented, AOMA and AOJ are uncertain that this
is true in all instances. Indeed, counsel has advised that certain
cassette mechanisms, used in the AOJ licensed products and subject
to the so-called "Dolby patent", are in fact manufactured under
patent. However, because the evidence on this point is inconclusive
with respect to all the imported merchandise, we are unable to
determine whether the royalties were involved with the production of
imported merchandise purchased from AOJ.
The royalty is involved in the sale of the imported
merchandise, however. Article 5 of the AOJ agreement provides for
the purchase of certain key parts and components used in the
manufacture of the licensed products. Specifically, article 5
provides:
To meet the standard quality of ALPINE's products and for
the sake of preservation of the reputation and name value
of ALPINE, LICENSEE [AOMA] agrees to purchase certain key
parts from ALPINE or its designated suppliers at
reasonable prices and terms. Considering price, quality,
percentage of country origin, etc., in accordance with the
mutual agreement between ALPINE and LICENSEE, LICENSEE may
purchase key parts from third parties.
AOJ agreement, art. 5, at 4. This provision is similar to the
provisions at issue in the agreements under review in HRL 544991.
In that case, as discussed above, an agreement between the
licensor/seller and the importer/buyer linked the payment of the
royalties to the purchase of imported parts by providing that the
licensor/seller would supply the importer/buyer with parts.
Similarly, section 5 of the AOJ agreement links the payment of
the royalty to the purchase of the imported parts. We also note
that the imported AOJ parts and components on which royalties are
paid under the AOJ agreement comprise between [********] and
[**********] percent of the total cost of the parts used by AOMA in
the production of finished car audio products in the U.S. In
addition, the payments are made by the AOMA to AOJ, the seller of
the imported parts and components and the information presented
supports the Generra presumption. Consequently, it is our position
that AOMA could not purchase the imported merchandise without paying
the royalty fee and that the royalties are included in the
transaction value of the imported parts and components.
HOLDING:
In conformity with the foregoing, royalty payments made
pursuant to the Alps agreement are not included in transaction value
as part of, or an addition to, the price actually paid or payable
for the imported merchandise.
In contrast, royalty payments made pursuant to the AOJ
agreement are included in transaction value as either part of the
price actually paid or payable, or as an addition thereto under
section 402(b)(1)(D) of the TAA.
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 to the public via the Diskette
Subscription Service, the Freedom of Information Act and other
public access channels.
Sincerely,
Acting Director
International Trade Compliance Division