OT:RR:CTF:VS H285848 CMR
Matthew Caligur, Esq.
Baker & Hostetler LLP
811 Main Street, Suite 1100
Houston, TX 77002-6111
RE: Dutiability of certain license fees; 19 U.S.C. § 1401a(b)(1)(D)
Dear Mr. Caligur:
This is in response to your request, on behalf of your client, Umicore Optical Materials USA, Inc. (“UOM”), for a prospective ruling on the dutiability of certain license fees it pays to its parent company, Umicore, located in Brussels, Belgium (“Umicore Belgium”). In issuing this ruling, CBP considered the information and legal arguments provided to CBP in your submissions of April 21, 2017, and August 23, 2017, a telephone conference held with you and your client on August 9, 2017, and subsequent email communications.
FACTS:
UOM and Umicore Belgium produce and sell a variety of intermediate and finished germanium metal and related products, including germanium dioxide, germanium tetrachloride, germanium bars (ingots), metal crystals, blanks, wafers, rectangular flat and circular flat lenses, and lens assemblies. The companies also manufacture similar items from chalcogenide glass that are marketed under the trade name GASiR. UOM imports various germanium and GASiR® products, as well as machinery, equipment, and other items used in its manufacturing operations.
UOM purchases and imports, from a related entity, GASiR® cores, rods & bars, ingots, and pre-shapes. It uses these intermediate stage goods, and Umicore Belgium’s molding technology, to make, in the United States, finished chalcogenide glass optical lenses, lens assemblies, and, in rare cases, discs, marketed under the tradename GASiR®.
With regard to some of the lenses and lens assemblies, after production in the U.S., UOM applies a coating to them using Umicore Belgium’s coating technology on one or both sides of the lenses. In some cases, UOM sends the lenses or lens assemblies to UCS in Scotland, after production in the U.S., for coating on one side of the lens. UOM pays UCS a fee for the coating services. If upon return, coating is required on both sides, the coating on the second side is performed by UOM before delivery to its customers. You indicate that the majority of coating operations are performed in the United States by UOM. On occasion, UOM imports finished lenses and lens assemblies from its related supplier. These finished imported goods are subject to a license fee payable to Umicore Belgium when sold by UOM based on UOM’s net sales. The related supplier also pays Umicore Belgium a license fee for these finished goods that are sold to UOM.
With regard to Umicore Belgium’s molding and coating technologies utilized by UOM, Umicore Belgium entered into an Intellectual Property Rights Assignment Agreement (“IPR Agreement”) with a related entity, Umicore Coating Services Ltd. (“UCS”) in Dundee, Scotland, effective January 1, 2006. The agreement assigns to Umicore Belgium, in exchange for a cash payment to UCS, the exclusive ownership of UCS’s knowledge, expertise and know-how in the field of coating technology, and all related rights, title and interests (including priority rights) in inventions made by UCS related to the coating technology, as well as any patent or patent applications, trademarks, or other IPR held by UCS at the date of the agreement in connection with the coating technology. Under the IPR Agreement, Umicore Belgium also has the right to license this IPR to third parties and to commercialize or sell, directly or indirectly, any products or materials which would result from development activities made by UCS on the coating technology.
UOM entered into a Technology License Agreement (“TLA”) with Umicore Belgium, effective January 1, 2006, although it was not signed until January 2012. The TLA grants to UOM a non-exclusive, non-transferable right to make use of Umicore Belgium’s proprietary knowledge, expertise, and know-how, whether patented or not and whether patentable or not, as well as any other Umicore Belgium intellectual property rights in connection with the use, manufacture, marketing, and sale of coated and uncoated lenses and discs, and optical assemblies (“Products”). Imported finished lenses and lens assemblies which contain a GASiR® product are included in the scope of “Products” and are subject to the license fee.
You provided a copy of the IPR Agreement and the TLA for our review. You indicate that the molding and coating technologies are not patented. The GASiR® trademark is registered. Under the TLA, UOM pays Umicore Belgium a percentage of UOM’s total worldwide net sales revenue of the Products generated by the molding or coating technology. The percentage differs based upon the technology. The costs of intermediate goods supplied to UOM are not deducted from this calculation. In addition, whether the Products are sold after manufacture at UOM’s facility, or after manufacture at UOM’s facility and subsequent coating in Scotland, is of no consequence to the license fee calculation. The license fee payments are invoiced to UOM by Umicore Belgium and paid by UOM on a monthly basis.
A copy of the sales agreement between UOM and its related party supplier was provided to CBP, along with purchase orders and invoices for imported goods. You assert that the license fees for the molding and coating technology paid by UOM to Umicore Belgium are not part of the dutiable value of the imported intermediate stage goods. You also assert that the license fee is limited to GASIR® products.
ISSUE:
Whether, under 19 U.S.C. § 1401a(b)(1)(D), the license fees paid by UOM for use of Umicore Belgium’s molding and coating technologies in the production or sale of finished goods in the United States are dutiable as royalties and additions to the price actually paid or payable for the GASiR® cores, rods & bars, ingots, pre-shapes, lenses and lens assemblies imported by UOM. In addition, whether such fees are dutiable additions under 19 U.S.C. § 1401a(b)(1)(E), as proceeds.
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) codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA 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, 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 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) and (E). These additions apply only if not already included in the price actually paid or payable. For purposes of this decision, we assume that transaction value is the appropriate method of appraisement.
In 1993, the U.S. Customs Service (now, U.S. Customs and Border Protection (CBP) established a three-part test for determining the dutiability of royalty payments in the General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) ("Hasbro II ruling"). The formulation of the test was based upon a review of court cases under the valuation law prior to the TAA and the factors the courts used in determining whether a royalty was dutiable. The legislative history of the Trade Agreements Act of 1979 in the General Notice, supra, was discussed and the House and Senate Reports were cited for their language regarding the treatment of royalties. In House Report No. 317, 96th Congress, 1st Session (1979), at 80, the Ways and Means Committee report states, in relevant part:
Since transactions involving royalties, license fees, patents, and copyrights are complex business arrangements tailored to cover a specific set of conditions, each case must be carefully examined before the U.S. Customs Service can reach a final decision.
The existing treatment under law of royalties for customs purposes is intended to continue under the operation and administration of section 402(b)(1). Therefore, certain elements called “royalties” may fall within the scope of the language under either new section 402(b)(1)(D) or 402(b)(1)(E) or both. Similarly, some elements called “royalties” may not be dutiable under either 402(b)(1)(D) or 402(b)(1)(E). [Emphasis added.]
See also Senate Report No. 249, 96th Congress, 1st Session (1979), at 120, which also stated that:
. . . the provisions for additions for certain royalties and license fees and for the proceeds accruing to the seller of any subsequent resale, disposal or use of the imported merchandise generally would follow current practice. Customs Service officials will make a decision as to whether an addition will be made on a case-by-case basis.
Based on the language in both reports, Congress expressed its intent that the existing treatment under the law, at the time the Trade Agreements Act of 1979 was enacted, was to continue with respect to the dutiability of royalties. In the General Notice, Customs acknowledged this and formulated a test consisting of three questions:
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?
Under the three-part test, 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.
Was the imported merchandise manufactured under patent?
In this case, the imported merchandise, i.e., the GASiR® cores, rods & bars, ingots, pre-shapes, lenses and lens assemblies, are not manufactured under patent. “None of the molding or coating technology was, or is, patented, nor are there any patent applications pending.” See Counsel’s April 21, 2017 submission at 7. Therefore, the answer to the question of whether the imported merchandise was manufactured under patent is no.
Was the royalty involved in the production or sale of the imported merchandise?
As the license fee is for UOM’s use in the United States of Umicore Belgium’s molding and coating technologies, the fee is not related to the production of the imported merchandise. A review of the sales contract between UOM and its related party supplier and the licensing agreement between UOM and Umicore Belgium reveals that neither agreement is contingent on the other. Therefore, the license fee is not related to the production or sale of the imported merchandise.
Could the importer buy the product without paying the fee?
The obligation to pay the license fee arises with the sale of finished goods, after processing in the United States. As such, UOM could import GASiR® cores, rods & bars, ingots, pre-shapes, and lenses and lens assemblies, without triggering any obligation to pay the license fee. Therefore, the answer to whether the importer could buy the imported merchandise without paying the license fee is yes.
Headquarters Rulings Letter (HQ) W548649, dated September 5, 2006, involving the question of the dutiability of royalties paid for the use of intellectual property in the domestic manufacturing and marketing of products, is directly on point with this matter and supports our finding that the license fee is not dutiable.
Proceeds
Having determined that the license fee is not dutiable as a royalty to be added to the price actually paid or payable for the imported merchandise, it is necessary to determine whether the license fee may be dutiable as proceeds under 19 U.S.C. 1401a(b)(1)(E).
Imported intermediate goods, i.e., GASiR® cores, rods & bars, ingots, and pre-shapes, are used in the production of finished goods sold by UOM. The finished goods consist of, not only the imported merchandise, but additional components or materials not the subject of the licensing agreement. The license fee, in the case of these goods, is not based on sales of the imported merchandise, but is based on sales of finished goods, which contain the imported merchandise. As stated in HQ W548649, “CBP has held that payments based on the resale of a finished product made in part from the imported merchandise are not dutiable as proceeds under section 402(b)(1)(E).” See also, HQ 544656, dated June 19, 1991; HQ 545951, February 12, 1998; HQ 546660, dated June 23, 1999; and HQ H024566, dated October 15, 2008.
In the case of imported lenses and lens assemblies which are sold in their condition as imported, CBP must determine whether the portion of the license fee paid by UOM to Umicore Belgium on these imported GASiR® products is dutiable as proceeds under 19 U.S.C. § 1401(b)(1)(E). Although the fee is paid to Umicore Belgium, the licensor, and not to the seller of the imported goods, Umicore Belgium and the seller are related parties. As stated in HQ 548560, dated September 3, 2004, “CBP has held in previous rulings that if the seller of imported merchandise is related to a licensor, payments made to the licensor in connection with the sale of the imported merchandise constitute proceeds of a subsequent resale, disposal or use within the meaning of 19 U.S.C. § 1401a(b)(1)(E), unless the buyer/importer can establish that no portion of the proceeds accrued directly or indirectly to the seller.” See also, HQ 545361, dated July 20, 1995; and HQ 545035, dated August 23, 1995.
You submit in your August 23, 2017, supplemental submission that the payment of the license fee from UOM to Umicore Belgium does not inure to the benefit of the related entity from whom UOM purchases the imported goods. You cite HQ H160935, dated February 11, 2015, regarding the dutiability of a royalty fee paid for the use of a trademark, as support. In that decision, CBP stated with regard to proceeds that “[o]ther than the fact that the sellers are related to the license holder and contract to use the trademark, there is no evidence that the sellers benefit from the payment of the royalties to the license holder.” This finding must be construed in the context of the facts and license agreement at issue in that case. In that ruling, imported goods were used by the U.S. importer to build manufacturing process equipment. The importer paid a license fee for the use of a trademark on the merchandise it produced and sold in the United States incorporating the imported goods, and for the use of the trademark in the marketing, advertising and promotion of its goods. It was a license fee on the use of the trademark in the United States in operating its business and selling goods it produced in the United States using imported and domestically sourced equipment, machinery and components. See also, HQ H236746, dated July 1, 2013. Although the license fee was calculated as a percentage of total net sales, those sales were not based on the imported goods, but on the goods produced in the United States incorporating such goods. As such, the proceeds provision of 19 U.S.C. § 1401a(b)(1)(E) did not apply.
CBP believes there is support for your assertion that the related supplier does not derive an indirect benefit from the payment of the fee to Umicore Belgium. As stated earlier in this decision, the related supplier also pays Umicore Belgium a royalty when it sells finished lenses and lens assemblies to UOM. Then, UOM pays a royalty to Umicore Belgium when it sells these same goods. The fact that both the supplier and buyer pay the licensor a royalty based on the sale of the same goods supports an inference that the supplier does not derive an indirect benefit by the buyer’s payment to the licensor. Thus, we find the license fee is not dutiable as a proceeds.
HOLDING:
The license fee paid by UOM for use of Umicore Belgium’s molding and coating technologies in the production of finished goods in the United States from intermediate GASiR® cores, rods & bars, ingots, and pre-shapes are not dutiable as royalties or proceeds and are not additions to the price actually paid or payable for these imported GASiR® products. In addition, the license fee paid by UOM to Umicore Belgium for the sale of GASiR® lenses and lens assemblies that are sold in their condition as imported, is not dutiable as proceeds under 19 U.S.C. § 1401a(b)(1)(E).
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch