VAL RR:IT:VA 546478 LR
John M. Peterson, Esq.
Neville, Peterson & Williams
80 Broad Street 34th Floor
New York, New York 10004
RE: Request for Reconsideration and Clarification of HRL 545526;
price actually paid or payable; royalties; proceeds
Dear Mr. Peterson:
This is in response to your letters dated August 16, 1996,
July 2, 1997 and July 3, 1997, submitted on behalf of your
client, [xxxxxxxxxxxxxxxxxxxxxxxxxxxx] (the "importer"), seeking
reconsideration and clarification of Headquarters Ruling Letter
("HRL") 545526, November 30, 1996. That ruling held that certain
sublicensee fees paid by the importer to a related affiliate,
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] (the "sublicensor"), were
included in the transaction value of merchandise the importer
purchased from a related foreign manufacturer. Specifically,
Customs held that the payments form part of the price actually
paid or payable for such merchandise. We regret the delay in
replying.
You disagree with Customs' determination that the fees in
question are part of the price actually paid or payable for the
imported merchandise. You also seek clarification of the
following issues: the scope of HRL 545526, and assuming it is
upheld, its effective date and the proper method of declaring the
fees. A meeting was held with you and representatives of the
importer on June 4, 1997.
Subsequent to the issuance of HRL 545526, you submitted
additional information concerning the subject sublicense fees.
For this reason, your request is being treated as a request for a
new ruling based on the additional facts presented.
In accordance with your letter dated July 3, 1997, we
continue to grant the request for confidential treatment of the
identities of the parties, the description of the merchandise
covered by the applicable agreements, and the rates and amounts
of royalties and license fees paid products and the amount of the
royalties involved in the subject transactions. In the public
version of this decision, we have excised the bracketed
confidential information.
FACTS:
You advise that the importer is part of the worldwide group
of companies, (hereinafter referred to as "Group X") whose
ultimate parent company is headquartered in France. Group X
established [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] (the licensor), a
Swiss company, which is the owner of substantially all of Group
X's proprietary patents, trade secrets, trademarks, copyrights
and trade names (Licensed Rights) in countries other than France.
The licensor licenses the technology to other Group X companies
around the world. Using revenues received from licensing, the
licensor is responsible for funding all Group X research and
development activities.
In the United States, the licensor has licensed all of its
technology rights to its wholly-owned subsidiary, the
sublicensor, which in turn sublicenses that technology to Group X
manufacturing and sales subsidiaries throughout North America,
including the importer. You indicate that the sublicense fees
which the sublicensor receives are used to fund another
affiliate, [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
(Company A), based in South Carolina, and which conducts research
and development activities designed to support Group X's
manufacturing activities in North America. You advise that the
ultimate responsibility for funding Company A lies with the
licensor. Thus, in any year where the sublicensor's revenues are
insufficient to fund Company A, the licensor is required to make
up the difference. Similarly, where the sublicensor's revenues
exceed those needed to fund Company A, the balance is remitted to
the licensor, which uses it to fund other Group X research.
The sublicense fees in question arise under a 1985
Sublicense and Technical Assistance Agreement (Sublicense
Agreement) executed by the importer and the sublicensor. Under
the Sublicense Agreement, the sublicensor has granted the
importer a "sublicense" to use the licensed rights, e.g. patents,
trademarks and technology (the licensed rights) it obtained from
the licensor for the purpose of manufacturing, selling and using
[xxxxxxxxxxxxxxxxx]" (the licensed products) in a territory
comprising the United States and Puerto Rico.
An analysis of the Sublicense Agreement indicates that it
requires the payment of sublicense fees in connection with two
classes of covered importer activity in the United States: (1)
the manufacture of Licensed Products from raw materials and
components, and (2) the resale of imported Licensed Products
acquired from other sublicensees of the Licensed Rights.
In consideration of the sublicense, Article 8.2 of the
Sublicense Agreement requires the importer to pay the sublicensor
a yearly sublicense fee in an amount "equal to [x]% of Annual Net
Sales", which is defined as "the total amounts invoiced during a
calendar year by the importer for its sale of all licensed
products in any country in the territory, exclusive of any sales
tax and after deducting therefrom all discounts, returns,
refunds, credits and reduction of any nature." However, Article
8.2 of the Agreement also specifies that:
...for that portion of licensed products purchased by the
importer from another Licensee of the licensed products and
resold within or outside the Territory, "Annual Net Sales"
shall also include that portion but shall be calculated only
on the value added by the importer.
Thus, you indicate that when the importer produces in the United
States a product featuring the Licensed Rights, the sublicense
fee is measured as [x]% of the net sale price of the finished
article. However, when the importer resells an imported finished
article which already incorporates the Licensed Rights at the
time of entry, the royalty is [x]% of the "value added", that is
the importer's resale mark-up.
The importer purchases various finished Licensed Products
from foreign affiliate/sellers for resale in the United States.
You indicate that these foreign affiliate/sellers are licensed by
the licensor to use the Licensed Rights in connection with the
manufacture and sale of such products for which they pay
royalties to the licensor. You advise that these payments are
included in the foreign affiliate/seller's price to the importer.
Upon resale of these products in the United States, the importer
pays sublicense fees to the sublicensor, as described above. It
is the sublicense fees which are at issue here. In HRL 545526,
November 30, 1995, Customs held that sublicense fees paid by the
importer to the sublicensor form part of the "price actually paid
or payable" for imported merchandise [xxxxxxxxxxxxxxxxx] which
the importer purchases from its foreign affiliate/sellers.
Although the sublicensor is the not "seller" of the imported
merchandise, Customs concluded that the importer's sublicense
fees are paid "to the sublicensor who is related to the foreign
affiliate/sellers of the imported merchandise and represent part
of the total payment made to or for the benefit of the foreign
affiliate/sellers."
Based on this finding, Customs did not determine whether the
payments could alternatively be dutiable royalties under 19
U.S.C. 1401a(b)(1)(D) or "proceeds of resale" which accrue to the
benefit of the seller under 19 U.S.C. 1401a(b)(1)(E).
ISSUES:
1. What is the scope of HRL 545526?
2. Whether the sublicense fees paid by the importer to the
related party sublicensor are dutiable as part of the price
actually paid or payable of the merchandise the importer
purchases from its foreign affiliate/sellers.
3. If not, whether the sublicense fees are dutiable as additions
to the price actually paid or payable either as royalties or
proceeds.
4. Whether HRL 545526 applies to entries filed prior to its
issuance?
5. Assuming the sublicense fees are dutiable, how should they be
reported to Customs?
LAW AND ANALYSIS:
1. Scope of HRL 545526
You first seek clarification regarding the scope of HRL
545526. Although the Sublicense Agreement covers the payment of
fees to the sublicensor for both products manufactured by the
importer in the U.S. (in part from imported raw materials and
components) and finished products which the importer purchases
from the foreign affiliate/sellers, you seek confirmation that
the ruling covers only finished products which the importer
purchases from its foreign affiliate/sellers. The Sublicense
Agreement specifies that on these products, the importer is to
pay a sublicense fee of a specified percentage on the importer's
markup.
HRL 545526 was intended to cover only the sublicense fees
paid by the importer to the sublicensor in connection with the
resale of imported finished merchandise. The ruling was not
intended and did not address the dutiability of the sublicense
fees paid up resale of the imported merchandise that undergoes
further processing by tin the United States. Insufficient
information was provided regarding the dutiability of sublicense
fees paid by the importer in connection with the products it
manufactures in the United States using some imported components.
If the importer would like a ruling on the dutiability of such
sublicense fees, specific information regarding the imported
components that are incorporated into the finished product,
whether such components are themselves licensed products, whether
any domestic components are utilized, and the manufacturing
operations performed by the importer, should be provided.
2. Price Actually Paid or Payable
The "price actually paid or payable" is defined in 19 U.S.C.
1401a(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." The determination in HRL 545526 that the
sublicense fees the importer paid to the sublicensor, a party
related to the seller, were dutiable as part of the price
actually paid or payable was based on Customs' position that
there is a presumption 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, citing
Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377
(1990); Chrysler Corporation v. United States, CIT Slip Op.
93-186 (September 22, 1993); and, HRL 545194, 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, 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."
You disagree with this analysis. Your position is that the
dutiability of royalties should be determined only by the
application of 19 U.S.C. 1401a(b)(1)(D) and (E). You argue that
to do otherwise would effectively revoke much of the transaction
value law, as applied to related party transactions in general,
and transactions involving multinational companies in particular.
This is because virtually any transfer of funds or other
consideration from the buyer to another related entity within the
multinational group could be presumed to have been made to, or
for the benefit of the seller, and included in transaction value.
This, you claim, would render largely nugatory the provisions of
19 U.S.C. 1401(a)(b)(1)(A) through (E), pertaining to additions
to the price actually paid or payable, in related party
situations.
You indicate that payments made to a "related party" as that
term is defined in 19 U.S.C. 1401a(g) should not be automatically
be deemed part of the "price actually paid or payable" to the
seller for the imported goods but should be examined regarding
whether the payments are permissible additions to the "price
actually paid or payable" pursuant to 19 U.S.C. 1401a(b)(1)(D) or
(E).
We do not agree with your argument that a price actually
paid or payable analysis is not relevant to the dutiability of
the sublicense fees. Although 19 U.S.C. 1401a(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 19 U.S.C. 1401a(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 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 such as the shortfall and Special
Application fees payments in the Chrysler case and/or if the
importer can demonstrate that the payments are not paid to or for
the benefit of the seller.
Although you contend that Customs has an affirmative duty to
inquire into the circumstances of the transaction to determine
whether the third party remitted the funds, in whole or in part,
to the seller, or whether the third party payments were for the
benefit of the seller, we adhere to our 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.
You contend that the presumption is overcome in the instant
case. As set forth in the Sublicense Agreement, in the case of
the finished merchandise the importer purchases from a company in
Group X (the imported merchandise at issue) the sublicense fees
paid by the importer to the sublicensor are a specified
percentage of the value added by the importer (which you explain
is the importer's markup). See Article 8. For example, if the
importer purchases a product from the foreign affiliate/seller
for $40 and resells it for $50, the importer must pay royalties
based on the application of the specified percentage to the $10
markup. You explain that this reflects the fact that the importer
is only exploiting the marketing-related intellectual property
(i.e., trademarks) in the territory and not any production-related intellectual property (e.g. patents, trade secrets) which
may be incorporated in the imported products. You state that the
related entity which manufactured and sold the product to the
importer will have already paid to the licensor the royalty due
on production-related intellectual property. In addition, you
state that the manufacturing company treats this royalty payment
as a cost of manufacture and includes it in its selling price.
Thus, you state that the price actually paid or payable which the
importer declares to Customs upon importation of the product
already reflects this amount.
You indicate that none of the sublicense fees which the
importer pays to the sublicensor are ever remitted to the seller.
In fact, you indicate that the principal beneficiary of these
payments is ultimately the buyer, since via its licensing
agreement with the sublicensor, the importer's payments are used
by the sublicensor to fund another related company, which
performs research and development work related to North American
operations.
Upon review of the submitted information, we agree that the
sublicense fees are not an element of the price actually paid or
payable of the imported merchandise. Since the licensed rights
for which the sublicense fees are paid relate solely to the
distribution and sale of the products in the United States and
the value of the imported products is not taken into account when
determining the amount of the sublicense fees, we find that such
fees do not relate to the sale for exportation of the imported
merchandise. In contrast, the payments at issue in HRL 545194,
supra, were based on the price the importer pays to the seller.
In addition, there is nothing which links the payment of the
sublicense fee to the sale for exportation of the imported
merchandise. Unlike HRL 545194, supra, there is no reference on
the seller's invoices to the payment of the sublicense fees and
you have advised that there are no supply agreements between the
importer and the foreign affiliate/sellers. Thus, based on the
evidence presented, we find that the payment of the sublicense
fees is not related to the sale for exportation of the imported
merchandise.
You also argue that the payments in question are neither
direct nor indirect payments made to, or for the benefit of, the
seller since none will be paid over to the seller. Rather, they
are used mainly to fund Company A's research and development
activities in the U.S. which are designed to support Group X's
manufacturing activities in North America. However, in view of
the fact that the ultimate responsibility for funding Company A
lies with the licensor rather than the sublicensor and any excess
funds paid to the sublicensor may be used to fund another
research group within Group X, it appears that at least some of
the royalties at issue may benefit the seller. Without
documentary evidence tracing the payments in question, we cannot
conclude that such payments do not indirectly benefit the seller.
Nonetheless, as discussed above, since the sublicense fees are
not related to the imported merchandise, we find that they do not
form part of the price actually paid or payable of the imported
merchandise.
3. Royalties/Proceeds
Having determined that the payments in question are not part
of the price actually paid or payable for the imported
merchandise, we must address whether they should be added to the
price actually paid or payable as royalties under 19 U.S.C.
1401a(b)(1)(D). Under this provision, an addition is to be made
for the value of any royalty or license fee related to the
imported merchandise that the buyer is required to pay as a
condition of the sale for export to the United States.
With regard to royalties, the Statement of Administrative
Action ("SAA"), adopted by Congress with the passage of the TAA,
provides 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.
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 (October 1981), at 48-49.
In the General Notice, Dutiability of Royalty Payments, 27
Cust. Bull. 12 (1993), commonly know as "Hasbro II," Customs
articulated three factors, based on prior court decisions, for
determining whether a royalty was dutiable. These factors are
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 in its more recent
rulings, Customs 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
required 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 an every importation.
See HRL 546433, January 9, 1998 and HRL 544991, September 13,
1995 (and cases cited therein)
In this case, although some of the imported products may be
covered by patents, we conclude that the royalties in question do
not relate to such patents. You explain that the subject
royalties relate to marketing-related intellectual property
rights (e.g.. trademark) associated with distribution of the
product in the territory rather than production-related
intellectual property rights incorporated in the imported product
(e.g. patents, and trade secrets). The fact that royalties are
based only on a percentage of the importer's markup, and exclude
the value of the imported product, is consistent with this
explanation. For the same reason, we find that the royalty
payments are not involved in the production of the imported
product. Furthermore, we conclude that the royalty payments are
not involved in the sale for exportation of the imported
merchandise. 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. While the payment of royalties by
the foreign affiliate/seller for intellectual property rights
associated with the manufacture and sale of the imported products
would be linked to the sale for exportation, you explain that
such payments are already included in the price actually paid or
payable for the imported merchandise.
Finally, we find that the importer could buy the product
without paying the fee. While the fact that the payments are made
to a party related to the foreign affiliate/sellers is an
indicator that the royalties are closely tied to the purchase of
the imported merchandise, and therefore are a condition of sale,
as stated in HRL 546433, supra, this fact does not necessarily
serve as prima facie evidence that they are a condition of such
sale. In that case, Customs determined that the payments at
issue were a condition of sale based on the fact that the license
agreement was replete with requirements relating to the sale of
the imported merchandise. In contrast, in this case, there is
only a brief reference in the Sublicense Agreement to the
importer's purchase of merchandise. In addition, there is
nothing which requires the importer to purchase specified
products from specific Group X companies. Assuming there are no
supply agreements or other contracts between the parties which
link the payment of the royalties to the purchase of the imported
merchandise, we find that the payment of the sublicense fees is
not a condition of the sale for exportation of the imported
merchandise.
Based on the above considerations, we find that the royalty
payments are not a proper addition under 19 U.S.C.
1401a(b)(1)(D).
Nevertheless, the payments still may be added to the price
actually paid or payable as proceeds pursuant to 19 U.S.C.
1401a(b)(1)(E). General Notice, supra, at 6-7. Under this
provision, an addition is to be made for "the proceeds of any
subsequent resale, disposal, or use of the imported merchandise
that accrue, directly or indirectly, to the seller. 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.
(emphasis added)
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).
In this case, as discussed above, whether the payments in
question accrue, directly or indirectly, to the seller, cannot be
determined based on the evidence presented. However, for the
reasons discussed above, we conclude that the payments in
question do not directly relate to the imported merchandise.
Therefore, we find that they are not a proper addition under 19
U.S.C. 1401a(b)(1)(E).
In view of the above determinations, it is not necessary to
address either the effective date of HRL 545526 or the
appropriate way to report the sublicense fees to Customs.
HOLDING:
Based on the additional information provided, we find that
sublicense fees which the importer pays to the sublicensor
pursuant to the Sublicense Agreement in connection with finished
products purchased from the importer's foreign affiliate/sellers
for resale in the United States and which are based only on a
percentage of the importer's markup and exclude the value of the
imported product, are not included in the transaction value of
the imported merchandise.
Because this decision is based on additional information
regarding the nature of the sublicense fees, the manner of
payment, and the structure of Group X, which was not previously
available for Customs' consideration, modification or revocation
or HRL 545526 pursuant to section 625, Tariff Act of 1930 (19
U.S.C. 1625), as amended by section 623 of Title VI (Customs
Modernization) of the North American Free Trade Agreement
Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993),
is not warranted. However, for entries on which liquidation has
not become final, including pending protests, as well as for
future entries, appraisement is to be fixed in accordance with
the foregoing.
Sincerely,
Acting Director
International Trade Compliance Division