VAL RR:IT:VA 546376 CRS
Port Director
U.S. Customs Service
423 Canal Street
New Orleans, LA 70130
RE: AFR of Protest No. 2002-96-100378; price actually paid or payable; additional payments; royalties; classification of ladle turrets; heading 8428, HTSUS; Mitsubishi; harbor maintenance tax; U.S. Shoe; Carnival Cruise Lines
Dear Sir:
This is in reply to your memorandum of May 7, 1996, under cover of which you forwarded an application for further review (AFR) of the above-referenced protest. The AFR was submitted by counsel on behalf of the protestant and importer of record, [************** Inc.], concerning the classification and appraisement of twenty-one entries filed at the ports of New Orleans and Memphis between January 13, 1992, and March 20, 1993. The imported merchandise consists of components of continuous casting machines for a compact strip production steel mill. A meeting with the importer’s counsel was held at Customs Headquarters on January 28, 1998. Pursuant to protestant’s request, the bracketed portions of this letter will be treated as confidential and deleted from any published versions of the decision. We regret the delay in responding.
FACTS:
The AFR concerns a transaction between the protestant’s parent, [***************] (hereinafter, the "seller") and [*********** Corporation] (hereinafter, the "buyer"), pursuant to a purchase agreement dated January 28, 1991, and a letter agreement dated January 29, 1991. Under the purchase agreement the buyer contracted to purchase certain "equipment." As defined in paragraph 2 of the purchase agreement, the "equipment" is a compact strip production steel mill consisting of a thin slab continuous caster and six stand hot strip mill, and other components thereof. The protested entries comprise only part of the steel mill, or the "equipment" as described in paragraph 2 of the purchase agreement. In addition to the imported merchandise, certain components of the compact strip production steel mill were sourced in the United States.
Valuation
Pursuant to paragraph 1 of the purchase agreement, the total price of the steel mill is [$****] million, payment of which is made in accordance with the terms set forth in paragraph 5 of the agreement. Paragraph 5 specifies as follows: ten percent of the price is due at the time of entering into the agreement; seventy percent is due in the form of quarterly progress payment in accordance with a payment schedule attached to the agreement; ten percent is due after delivery of the equipment to the buyer’s plant site; and the final ten percent is due after the buyer’s acceptance of the equipment. The imported merchandise represents approximately [$****] million of the total purchase price; domestic components represent the balance, or approximately [$****] million. The imported merchandise was appraised under the transaction value method.
In addition to the payments for the imported merchandise made under the terms of the purchase agreement, the buyer agreed pursuant to the letter agreement of January 29th to make certain other payments to the seller. Paragraph 1 of the letter agreement provides that the buyer agrees to pay the seller a specified amount for each complete week the equipment was completely delivered prior to November 4, 1992.
Furthermore, under paragraph 2 of the letter agreement, the buyer agreed to pay the seller a royalty of [$*****] for each ton of prime hot rolled steel produced by the equipment and shipped for a period of fifty-four months after the successful commissioning of the equipment. It is your position that the portion of the delivery bonus and the royalty attributable to the imported merchandise, respectively [$*******] and [$*********], are dutiable.
Classification
The ladle turret and related components of the casting machine imported under entry no. [***-*******-*] were classified in subheading 8428.90.0090, Harmonized Tariff Schedule of the United States (HTSUS). The subject merchandise was classified in accordance with Headquarters Ruling Letter (HRL) 955700 dated December 8, 1994, which was our response to an application for further review involving the classification of substantially similar merchandise. The classification of ladle turrets was the subject of litigation in the Court of International Trade subsequent to the filing of the instant protest.
Counsel states that the ladle turret is the component of the casting machine that lifts and orients the ladle of molten steel to the casting position. It consists of two “U” shaped articulating arms mounted on a turntable, or ladle rotor. A ladle containing molten steel is moved by ladle cars from the furnace to the aisle to the caster aisle where it is initially subjected to certain essential treatments, whereupon it is then placed on the turret. The ladle turret performs the additional task of holding the ladle in place, thereby allowing the monitoring and regulating of the flow of molten steel into the tundish, of shrouding the liquid metal stream with the shroud tube, and creating an inert atmosphere by dispersing argon gas. The ladle turret also regulates the immersion depth of the shroud tube into the molten steel. Counsel maintains that the ladle turret and the other components of the casting system, including the shroud tube, tundish, tundish car and slag box, are properly classified in subheading 8454.90.0080, HTSUS.
Harbor Maintenance Tax
The protestant paid harbor maintenance taxes of [$********] in connection with the imported merchandise. Protestant contends that the fees should be refunded.
ISSUES:
The issues presented are whether: the additional payments made to the seller pursuant to the letter agreement are included in the appraised value of the imported merchandise; whether the ladle turret and the related components of the casting system were properly classified; and whether the harbor maintenance tax was correctly assessed.
LAW AND ANALYSIS:
Initially, we note that the protest and application for further review was timely filed under the statutory and regulatory provisions for protests (19 U.S.C. § 1514; 19 C.F.R. pt. 174). We also note that the issues protested are protestable issues (19 U.S.C. § 1514).
Valuation
As you know, 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 primary 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 amounts for certain statutorily enumerated additions to the extent that they are not already included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). The additions to the price actually paid or payable include: 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)-(E).
It is our understanding that your office and the protestant agree that transaction value is the appropriate basis on which to appraise the imported merchandise. However, protestant contends that neither the delivery bonus nor the royalty payments made by the buyer to the seller pursuant to the terms of the letter agreement should not included in the transaction value of the imported merchandise, either as part of the price actually paid or payable, or as an addition thereto.
The Delivery Bonus
In the first instance, protestant challenges your determination that the payments made by the buyer pursuant to paragraph 1 of the letter agreement, i.e., the delivery bonus, are included in the transaction value of the imported merchandise. As you know, the term "price actually paid or payable" is defined as "the total payment (whether direct or indirect . . .) made, for imported merchandise by the buyer to, or for the benefit of, the seller." 19 U.S.C. § 1401a(b)(4)(A). In Generra Sportswear Co. v. United States, the court held in regard to quota payments that:
[a]s long as the...payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods. The focus of transaction value is the actual transaction between the buyer and seller....
905 F.2d 377, 380. It is the position of this office that, under Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for imported merchandise. This may be rebutted, however, by evidence which clearly establishes that such payments are unrelated to the imported merchandise. Chrysler Corporation v. United States, 17 CIT 1049, 1054-1055 (1993).
In regard to the delivery bonus, the buyer is obligated under paragraph 1 of the letter agreement to pay the seller a fixed amount for each week the "equipment" was "completely delivered" prior to November 4, 1992. The term “equipment,” as defined in the purchase agreement, refers generally to the finished compact strip production steel mill plus certain additional items referenced in various annexes of the purchase agreement. Thus, the delivery bonus is not linked to the imported goods, but to the completion of the finished steel mill. Accordingly it is our position that the delivery bonus paid by the buyer to the seller is not part of the price actually paid or payable for the imported merchandise.
The Royalty Payments
The protestant also contends that the royalty payments made by the buyer to the seller are not dutiable. In regard to the dutiability of royalties, 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.
After reviewing the legislative history of the TAA, Customs has identified three questions that are relevant in determining whether royalty payments are dutiable under section 402(b)(1)(D) of the TAA. General Notice, "Dutiability of Royalty Payments," 27:6 Cust. B. & Dec 1 (February 10, 1993) (the "Notice"). However, the approach set forth in the Notice is effective only for merchandise entered on or after May 11, 1993. The entries associated with this AFR were filed between January 13, 1992 and March 20, 1993 and, therefore, predate the effective date of the Notice. Consequently, in determining the dutiability of the subject royalty payments we will apply Customs’ position with respect to royalties as it was prior to the effective date of the Notice.
Prior to the Notice, Customs looked to such factors as whether the payments were connected to the importation or ownership of the imported merchandise, as well as the method by which the royalty fee was calculated in order to determine the dutiability of royalty payments. For example, in Headquarters Ruling Letter (HRL) 544656 dated June 19, 1991 (published as C.S.D. 92-12), royalties were paid on the invoice sales price of certain textile machines made in the U.S. from both imported and domestic components. In regard to the question of dutiability, we held that because the payments were based on the “ex works” price of a finished product made from both imported and domestic components they were neither related to the imported merchandise not a condition of sale thereof and thus were not dutiable under section 402(b)(1)(D) of the TAA. Similarly, we found that the payments were not dutiable under as proceeds under section 402(b)(1)(E) of the TAA. HRL 544656 at 7. See e.g., HRL 543529 dated October 7, 1985.
Here, the royalties were paid by the buyer pursuant to the terms of the letter agreement, paragraph 2 of which provides that the buyer will pay the seller "a royalty of [$*****] U.S. for each ton of prime hot rolled steel coil produced by the Equipment and shipped (net of returns)...for 54 months after successful commissioning of the Equipment." As in, e.g., HRL 544656, the payments are not connected to the importation or ownership of the imported merchandise. Moreover, the royalties are not based the resale of the imported merchandise but on the production of steel produced in the U.S. at a factory built in part from the imported merchandise. Consequently, applying Customs’ pre-Notice position with respect to the dutiability of royalties, we find that the instant payments are not related to, nor a condition of sale of, the imported merchandise. As a result, the royalty payments paid by the buyer to the seller should not be included in transaction value as additions to the price actually paid or payable of the imported merchandise under sections 402(b)(1)(D)-(E) of the TAA.
Classification
Protestant contends that the ladle turret and its component parts should be classified in subheading 8454.90.0080, Harmonized Tariff Schedule of the United States (HTSUS), rather than as entered, in subheading 8428.90.0090, HTSUS.
Subheading 8428.90.0090, HTSUS, provides for other lifting, handling, loading or unloading machinery. The classification of ladle turrets was the subject of recent litigation in the Court of International Trade in Mitsubishi International Corp. v. United States, 5 F.Supp.2d 991 (Ct. Int’l Trade 1998). The court held that ladle turrets and various other components of casting machines, similar to those at issue, were properly classified in subheading 8428.90, HTSUS. The court noted:
This Court finds Customs properly classified the ladle turret under subheading 8428.90, HTSUS, as “Other lifting, handling, loading or unloading machinery: ... Other machinery:” dutiable at 2% ad valorem. Plaintiff’s description of the ladle turret as “the component that lifts and orients the ladle of molten steel”...supports this Court’s conclusion that the ladle turret’s primary function is lifting or handling materials.
Id. at 1009. Accordingly, it is our position that the ladle turret and other components of the caster were correctly classified in subheading 8428.90.0090, HTSUS, in accordance with Mitsubishi and HRL 955700. Consequently, the protest should be denied in respect of the classification issue raised by the protestant.
Harbor Maintenance Tax
The statutory authority for the harbor maintenance tax (HMT) is found in the Water Resources Development Act of 1986 (Public Law 99 662; 100 Stat. 4082, 4266; 26 U.S.C. § 4461-4462). Under this statute (the “HMT statute”), a fee is imposed for the use of a port, defined as any channel or harbor or component thereof in the United States which is not an inland waterway, is open to public navigation, and at which Federal funds have been used since 1977 for construction, maintenance, or operation.
In United States Shoe Corp. v. United States, 907 F.Supp. 408 (Ct. Int’l Trade 1995), aff’d, 114 F.3d. 1564 (Fed. Cir. 1997), aff’d, 118 S.Ct. 1290 (1998), the court held that the imposition of the HMT on exports was unconstitutional. Counsel asserts that because of the decision in U.S. Shoe, the entire HMT statute is unconstitutional. In this regard, counsel asserts that the imposition of the tax on imports, but not on exports, would violate the United States’ international treaty obligations in respect of the national treatment of foreign origin merchandise and the bound rates of duty applicable to imported merchandise. For that reason, counsel asserts that the statute is not severable.
The protest does not identify which treaty provisions would be subject to the asserted violations and, therefore, an analysis of that argument would be speculative. However, we note that in Carnival Cruise Lines, Inc. v. United States, 929 F. Supp. 1570 (Ct. Int’l Trade 1996), the court found that the unconstitutional export portions of the HMT statute were severable from the remainder of the statute. Consequently, on this ground the protest is to be denied.
HOLDING:
The protest should be denied in part and allowed in part. In conformity with the foregoing, the protest should be denied in respect of the classification of the imported merchandise and the HMT. The imported merchandise was properly classified in subheading 8429.90.0090, HTSUS.
The protest should be denied with respect to protestant’s arguments concerning the HMT.
The protest should be allowed in regard to the dutiability of both the delivery bonus and the royalty payments. Neither payment should be included in the transaction value of the imported merchandise.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550 065, dated August 4, 1993, this decision and the Customs Form 19 are to be mailed to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch