OT:RR:CTF:VS W563354 GG
Mr. Thomas M. Keating
Hodes Keating & Pilon
39 South La Salle Street, Suite 1020
Chicago, Il 60603 – 1731
RE: Reconsideration of HRL 548573; Transaction Value; Price Actually Paid or
Payable; Royalties and License Fees.
Dear Mr. Keating:
This is in response to your letter of September 16, 2005, submitted on behalf of [XX] (Importer 1), requesting reconsideration of Headquarters Ruling Letter (“HQ”) 548573 dated July 25, 2005. The issue in HQ 548573 was whether license fees paid by importers to a royalty owner pursuant to certain intellectual property agreements should be included in the transaction value of the merchandise either as part of the price actually paid or payable or as a statutory addition thereto.
You have requested confidential treatment for information related to the names of the parties, exhibits, and the terms of the agreements. U.S. Customs and Border Protection (“CBP”) will extend confidential treatment to such information in accordance with this request. Confidential information will be bracketed in this ruling and will be redacted in the public version.
FACTS:
The importers have been identified as [XX] (“Importer 1”) and [XX] (“Importer 2”). At issue in this case is the appraisement of merchandise sold by [XX] (“Seller 1”), [XX] (“Seller 2”), [XX] (“Seller 3”), and [XX] (“Seller 4”) to Importer 1 and Importer 2.
As noted in HRL 548573, based on a memorandum from the Regulatory Audit Division, Chicago Field Office, transaction value is the proper basis of appraisement. An inquiry from the Chicago Field Office specifically requested a decision from this office regarding the dutiability of payments made by Importer 1 and Importer 2 to [XX] (“Royalty Owner”) pursuant to intellectual property license agreements.
Customs Transactions:
Importer 1 and Importer 2 primarily, but not exclusively, purchase and import merchandise manufactured by Seller 1, Seller 2, Seller 3, and Seller 4. Importer 1 and Importer 2, in addition to payments made to the sellers, also pay Royalty Owner fees for the use of specified intellectual property rights. The royalties are paid on products sourced domestically and internationally and are paid on products imported from related and unrelated parties.
Importer 1 and Importer 2 advised CBP that Royalty Owner is neither an importer nor seller (or re-seller) of merchandise and, therefore, no purchase agreement exists between these parties. CBP was further advised that “Royalty Owner owns and manages Importer 1’s and Importer 2’s intellectual property rights.” Importer 1 and Importer 2 pay fees to Royalty Owner through an intercompany netting process. The fees are assessed based on estimates of the amounts due pursuant to the license agreements. Payments are made to Royalty Owner on a monthly basis with a quarterly “true up” to address any difference between the estimated payments and the actual fees due.
Relationship of the Parties:
Importer 1 is owned by [XX] (“Parent 1”) [XX]% and [XX] (“Parent 2”) [XX]%. Parent 1 is a wholly-owned subsidiary of Parent 2.
Importer 2 is a wholly-owned subsidiary of Royalty Owner.
Royalty Owner is a wholly-owned subsidiary of [XX] (“Royalty Owner-Parent”). Royalty Owner-Parent is a wholly-owned subsidiary of Importer 1. Seller 1, Seller 2, Seller 3, and Seller 4, the manufacturers/sellers, are related to Importer 1, Importer 2, and Royalty Owner. Seller 1 is a wholly-owned subsidiary of Importer 1.
Intellectual Property License Agreements:
Importer 1 and Importer 2 entered into essentially identical agreements with Royalty Owner for the licensing of intellectual property rights. The agreements are entitled: [XX] Intellectual Property License Agreement and [XX] Intellectual Property License Agreement. The Importer 1 – Royalty Owner agreement was executed December 28, 1999. The Importer 2 – Royalty Owner agreement was executed on December 31, 1999.
The intellectual property license agreements cover trademark licenses, patent licenses, and other intellectual property rights. “Licensed Products” are defined in the agreements as any products that in the absence of the intellectual property agreements would infringe at least one claim of a licensed patent, or products made
using a process or machine covered by a claim of the licensed patents, or products, processes, or machines that at least in part use other intellectual property rights. “Licensed Territory” is defined in the agreements as the entire world. “Net Sales” is defined in the agreements as the importer’s invoice price for all products and services less refunds, product returns, credits, volume rebates, co-op advertising, cash discounts, and allowances, freight, sales and excise taxes.
Paragraph 2 of the intellectual property license agreements, pertaining to trademark licenses, provides:
Trademark License
Royalty Owner hereby grants to Importer a non-exclusive license to use the Trademarks on the Goods and on advertising and promotional materials during the term of this Agreement throughout the Licensed Territory. Royalty Owner shall retain sole and exclusive ownership of the trademarks and goodwill and rights related thereto in the Licensed Territory. All goodwill created as a result of the use of the Trademarks pursuant to this Agreement shall inure to the benefit of the Royalty Owner. The Importer shall have the right to sublicense the rights herein with prior approval from the Royalty Owner, based on terms and conditions acceptable to Royalty Owner. The Importer understands and agrees that nothing in this Agreement shall be interpreted as conferring any proprietary rights upon the Importer or any sublicensee with respect to the Trademarks. The Royalty Owner reserves the right to use the Trademarks within the Licensed Territory. The license granted herein shall terminate upon the expiration or termination of this Agreement.
Paragraph 3 of the intellectual property license agreements, pertaining to patent licenses, provides:
Patent License
Royalty Owner hereby grants to Importer a non-exclusive license to make, use, offer to sell, sell, have made, or import any product, method, or apparatus covered by the Licensed Patents. Importer shall have the right to sublicense the rights herein with prior approval from Royalty Owner, based on terms and conditions acceptable to Royalty Owner. Importer understands and agrees that nothing in this Agreement shall be interpreted as conferring any proprietary rights upon Importer or any sublicensee with respect to the Licensed Patents. Royalty Owner reserves the right to use the Licensed Patents within the Licensed Territory. The license granted herein shall terminate upon the expiration or termination of this Agreement.
Paragraph 4 of the intellectual property license agreements, pertaining to other intellectual property, provides:
Other Intellectual Property License
Royalty Owner hereby grants to Importer a non-exclusive license to use the Other Intellectual Property Rights to make Licensed Products. The Importer shall have the right to sublicense the rights herein with prior approval from Royalty Owner, based on terms and conditions acceptable to Royalty Owner. Importer understands and agrees that nothing in this Agreement shall be interpreted as conferring any proprietary rights upon Importer or any sublicensee with respect to the Other Intellectual Property Rights. Royalty Owner reserves the right to use the Other Intellectual Rights within the Licensed Territory. The license granted herein shall terminate upon the expiration or termination of this Agreement.
Paragraph 5 of the intellectual property license agreements sets forth the terms pertaining to the royalty payments. Importer 1, in accordance with its agreement, contracted to pay Royalty Owner “a Royalty of [XX] of its Net Sales.” Importer 2, in accordance with its agreement, contracted to pay Royalty Owner “a Royalty of [XX] of its Net Sales.” Paragraph 5 of the intellectual property license agreements further provides that “[t]he parties agree that the Royalty is based upon total Net Sales to eliminate the costs associated with the tracking of individual Net Sales of Goods and Licensed Products.” The total Net Sales is of all products, including but not limited to articles subject to any licensing agreement as well as products sourced domestically or imported from unrelated parties.
In HQ 548573, CBP determined that the payment of the fees for use of those patented processes, trademarks, copyrights, or other intellectual property rights addressed in the license agreements were payments made by a buyer to a party related to the seller. As such, CBP concluded that the fees paid by Importer 1 and Importer 2 to Royalty Owner pursuant to the intellectual property license agreements were a part of the price actually paid or payable pursuant to the transaction value method of appraisement.
In the request for reconsideration of September 16, 2005, you contend that: (1) CBP is required to analyze whether the subject royalty payments would be considered a statutory addition to the transaction value of the imported merchandise; (2) the royalty payments were not paid directly or indirectly to the related foreign sellers of the imported merchandise; and, (3) CBP ignored HRL 546072 dated May 21, 1998, and mischaracterized HRL 547623 dated February 21, 2002.
ISSUES:
Whether CBP improperly failed to analyze the royalty payments as additions to the price actually paid or payable; and
Whether CBP’s determination that the fees paid by Importer 1 and Importer 2 to Royalty Owner pursuant to the intellectual property license agreements are included in the transaction value of the merchandise was correct.
Whether the royalty payments constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D) or (E).
LAW AND ANALYSIS:
Whether CBP improperly failed to analyze the royalty payments as additions to the price actually paid or payable
In the internal advice decision under reconsideration (HQ 548573), CBP determined that the royalty payments were indirect payments to the seller, because they were made by the buyer to a party related to the seller of the imported merchandise. Accordingly, they were found to be part of the price actually paid or payable pursuant to the transaction value method of appraisement. CBP did not then review whether the subject payments were additions to the price actually paid or payable pursuant to 19 U.S.C. § 1401a(b)(1)(D) or (E). You argue in your reconsideration request that CBP is required to conduct such a review whenever royalty payments are at issue. We disagree. The valuation statute provides that the price actually paid or payable shall be increased by any amounts attributable to the five statutory additions enumerated in 19 U.S.C. § 1401a(b)(1)(A) through (E) only to the extent that each such amount is not otherwise included within the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). In deference to this statutory language, it has been and remains CBP’s position that whenever a determination is made that a royalty payment is included in the price actually paid or payable, then it is unnecessary to address whether the payment would also be an addition thereto. See HQ 546478, dated February 11, 1998; HQ 545194, dated September 13, 1995; and HQ 545526, dated November 30, 1995.
Whether CBP’s determination that the royalty payments made by Importer 1 and Importer 2 to Royalty Owner are included in the transaction value of the merchandise as part of the price actually paid or payable was correct
As explained in HQ 548573, the preferred method of appraisement is transaction value. Under 19 U.S.C. §1401a (b)(1), the transaction value of imported merchandise is the price actually paid or payable for merchandise when sold for exportation to the United States, plus certain enumerated statutory additions. The two additions of possible relevance here are 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. The statutory additions will be made only if they are not otherwise included in the price actually paid or payable.
The “price actually paid or payable” is defined 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 from the country of exportation to the place of importation in the United States) 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).
It is CBP’s position that payments made by the buyer to a party related to the seller are indirect payments made to, or for the benefit of, the seller. All such payments are included in transaction value unless it is established that they were made in exchange for something other than the imported goods. See Generra Sportswear Company v. United States, 905 F.2d 377(CAFC 1990), and Chrysler Corporation v. United States, 17 CIT 1049 (CIT 1993). In Generra, the court held that the term “total payment” in the definition of the phrase “price actually paid or payable” was intended to be all-inclusive and that “as long as the quota 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 court also stated:
Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or something else. As we said in Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), the “straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs’ appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].
Generra, 905 F. 2d at 380 (brackets in original).
In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard set forth in Generra and determined that certain shortfall and special application fees that the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines.
Citing to Generra and Chrysler, CBP in HQ 548573 determined that Importer 1 and Importer 2 had not established that the royalty payments were unrelated to the imported merchandise, and accordingly, were part of the price actually paid or payable for the imported merchandise. In requesting reconsideration, counsel for the Importers attempts to distinguish their situation from that in Generra by indicating that, unlike the quota payments in Generra, the royalty payments never transfer to the sellers. Instead, they are paid to the domestic Royalty Owner, and are eventually consolidated into Importer 1’s earnings.
CBP has previously held that royalty payments that are made by the buyer to a U.S.-based licensor that is related to the seller are part of the price actually paid or payable. See e.g., HQ 548560, dated September 3, 2004, and HQ 545526, dated November 30, 1995. We are not persuaded by the argument that the royalty payments are not included in transaction value because they do not transfer to the sellers, as this overlooks the fact that the payments are made for the benefit of the seller. This is because the patent license provisions of the intellectual property agreements specifically authorize Importer 1 and Importer 2 to have the patented products made and to import them. Without that authority, the Importers could not lawfully purchase the products from the foreign sellers, resulting in fewer sales for the sellers. Taking these factors into consideration, it is our determination that the royalty payments that Importer 1 and Importer 2 make to the Royalty Owner following the purchase and importation (and subsequent resale) of patented merchandise indirectly benefit the foreign sellers, and accordingly, are part of the price actually paid or payable for the goods.
In its reconsideration request, counsel argues that the situation of its clients is similar to one in which the importer pays buying commissions to a buying agent who is related to the manufacturer of the imported goods. Citing to several rulings and to Bushnell International, Inc. v. United States, 60 C.C.P.A. 157, 477 F.2d 1402 (1973), counsel notes that CBP and the courts have previously determined that a relationship between the buying agent and manufacturer does not necessarily negate the agency arrangement or render bona fide buying commissions dutiable. Counsel draws attention to HQ 544895, dated July 22, 1992, which was a case involving a related buyer, buying agent and manufacturer/seller. The agency agreement provided that none of the buying commissions would inure to the benefit of the manufacturer/seller. Counsel maintains that just as the buying commissions in HQ 544895 were found to be non-dutiable notwithstanding their payment to an agent who was related to the seller, so too its own clients’ royalty payments should not be included in transaction value. This argument overlooks the fact that, unlike the buying commissions in HQ 544895, the royalty payments at issue do inure to the benefit of the sellers, for the reason stated above. Further, the attempted analogy between buying commissions and royalties fails because it is well recognized that buying commissions are generally not dutiable provided they are distinct from the price for the goods and are not paid to or for the benefit of the seller. See, Moss Manufacturing Co., Inc. v. United States, 896 F.2d 535 (CAFC 1990); and Jay-Arr Slimwear Inc. v. United States, 12 CIT 133, 681 F. Supp. 875 (1988) (although the alleged buying agent’s ownership of the assembler does not per se disqualify the agency relationship, there must be proof of a financial detachment from the manufacturer with respect to the commissions paid). In contrast, the valuation statute specifically provides for the addition of royalties to the price actually paid or payable, to the extent they are not already included therein.
CBP failed to consider the applicability of HQ 546072, dated May 21, 1998, in the internal advice decision under reconsideration
The requester indicates that in its internal advice request it had specifically called attention to HQ 546072 as being directly on point. Yet, CBP failed to analyze this ruling in its ensuing decision. We will do so now. The importer in HQ 546072 was related to a foreign parent company, foreign supplier, U.S. holding company, and U.S. sister company. The importer received merchandise from the foreign supplier but provided payment to the foreign parent. The importer entered into a license agreement with the sister company, which managed the trademark rights used in connection with the sale and distribution of the imported merchandise. A portion of the money paid to the sister company as royalties was returned to the importer as loans. Other amounts described as loans, submitted by the importer to the U.S. holding company, were transferred by the holding company to the foreign parent as dividends. The importer represented that the payments made under the license agreement constituted intercompany transactions, or a transfer of funds among the U.S. entities, and were eliminated in consolidation in accordance with generally accepted accounting principles (“GAAP”). CBP determined that the subject royalties were not part of the price actually paid or payable for the imported merchandise because such amounts represented dividend distributions resulting from cash flow management and needs as well as other investments. Moreover, nothing linked the payment of the royalties to the sale for exportation of the imported merchandise.
HQ 546072 is distinguishable from the current case in several respects. The former concerned rights associated with the use of trademarks in the sale and distribution of merchandise in the United States. Nothing linked the royalty payments to the sale for exportation of the imported products. In contrast, the intellectual property agreements in this case, in addition to granting a license to use trademarks on the goods and on advertising and promotional materials, also authorize the importers to have the patented products made, to import them, and to sell them. As noted in the discussion above, these provisions enable the importers to purchase the patented products from the related sellers, thus creating a link between the sale for exportation of the imported products and the royalty payments. In addition, in this case the royalty payments are mandatory, whereas in HQ 546072 the dividend distributions were discretionary. Based on these differences, we do not find HQ 546072 to be controlling here.
CBP mischaracterized HQ 547623 in its internal advice decision.
In the internal advice decision, CBP cited to HQ 547623 as an example of a case where we have found royalty payments made to a party related to the seller to constitute indirect payments to the seller. In its request for reconsideration, counsel contends that CBP failed to distinguish the circumstances of both cases. In HRL 547623, an importer made payments to a party related to the seller of merchandise for services rendered in the importation of such merchandise. The importer claimed that the payments made to the party related to the seller were not additions to the price actually paid or payable because the related party was a bona fide buying agent operating on behalf of the importer and none of the commissions inured to the benefit of the seller. One of the issues considered by CBP in this particular case was whether the subject payments made by the importer should be treated as a part of, or an addition to, the price actually paid or payable for the merchandise. CBP ultimately determined that the payments were part of the total payment for the merchandise and that the payments to the party related to the seller constituted indirect payments to the seller. As the payments were included in the transaction value of the merchandise as part of the price actually paid or payable, CBP declined to consider whether the payments could also be considered as an addition to the price actually paid or payable for the merchandise under the transaction value method of appraisement. Counsel argues that the factual differences between its case and HQ 547623 render the latter uncontrolling here.
We agree that there are factual differences between the two cases, but adhere to the view that HQ 547623 stands for the general proposition that royalty payments made to a party related to the seller constitute indirect payments to the seller and are part of the price actually paid or payable. We have previously cited to other rulings that arrive at the same conclusion but may be more on point, for example, HQ 548560 and HQ 545526, supra. As applied to the case at hand, the royalty payments are part of the price actually paid or payable for the goods.
Addition to the Price Actually Paid or Payable as a Royalty
Having determined that the royalty payments are included in transaction value, the law does not compel a review of the issue of whether the royalty payments would be dutiable as statutory additions. However, it also does not preclude such an examination. Under 19 U.S.C. § 1401a(b)(1)(D), an addition to the price actually paid or payable is made for 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."
The Statement of Administrative Action (“SAA”), H.R. Doc. No. 153, 96 Cong., St. 1st Sess., reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49, which forms part of the legislative history of the TAA, distinguishes payments to third parties from payments to the seller of imported merchandise. It provides:
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 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 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. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the imported merchandise, and such payment was not a condition of the sale of the merchandise for exportation to the United States, such payment will not be added to the price actually paid or payable. However, if such payment was made by the buyer as a condition of the sale of the merchandise for exportation to the United States, an addition will be made. As a further example, an 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 for the United States.
After reviewing the language of the statute along with the legislative history and prior case law, Customs and Border Protection (“CBP”) looks to the following three questions as relevant in determining whether the requirements of 19 U.S.C. § 1401a(b)(1)(D) are met: 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? Affirmative answers to questions 1 and 2 and a negative answer to question 3 suggest that the payments are dutiable; negative answers to questions 1 and 2 and an affirmative answer to question 3 suggest that the payments are nondutiable. Question 3 goes to the heart of whether the payment is considered to be a condition of sale. See General Notice entitled “Dutiability of “Royalty” Payments,” published in the Customs Bulletin and Decisions on February 10, 1993 (the “General Notice”; also sometimes referred to as the “Hasbro II ruling”), which stated these questions in discussing previously-issued HQ 544436, dated February 4, 1991.
In the General Notice (the Hasbro II ruling where HQ 544436 was discussed), CBP determined that the royalty paid to the seller in the matter under consideration was involved in the sale of imported merchandise because the individual sales agreements and purchase contracts were subject to the terms of the royalty agreement. In HQ 544991 of September 13, 1995, CBP held that a royalty was involved in the sale of the imported merchandise because payment of the royalty was closely tied to the purchase of the imported product. For example, in that case the terms and conditions related to the purchase of the imported products were set forth in the license agreements. See also HQ 545380, supra, where CBP found the royalty to be related to the production or sale of the imported merchandise where, under the terms of the licensing agreement, the importer was required to purchase components from the seller.
Some factors which CBP has considered in answering question three (i.e., Could the importer buy the product without paying the fee?) include to whom the royalty is paid (e.g., payments to the seller, as opposed to a unrelated third party, are generally dutiable); whether the purchase of products and the payment of royalties are inextricably intertwined (e.g., Are they set forth in the same agreement? Do the agreements make reference to one another? Is the purchase agreement terminated if the buyer fails to pay the royalties?); and whether royalties are paid on each and every importation. See HQ 544991, HQ 545380; HQ 545361, dated July 20, 1995; and the General Notice.
The first question is whether the imported merchandise is manufactured under patent. The answer to this question is “yes.” However, in its internal advice request, counsel for the importer argues that this case is distinguishable from one in which the importer is required to pay a royalty to the seller of the imported product manufactured under patent. It reiterates that the payments to the Royalty Owner are not mandatory payments to the seller but remain with the U.S. group of companies. Also, the royalty payments are triggered by the sale in the United States of all products (including but not limited to articles subject to a licensing agreement as well as products sourced domestically or imported from unrelated parties), and are made to a domestic licensor that is not the seller of the imported product. With regard to the latter point, counsel cites to several rulings, HQ 542818, dated May 27, 1982, and HQ 542152, dated December 4, 1980, for the proposition that royalty payments made to a patent holder located in the United States are not dutiable.
The arguments that counsel raises are nearly identical to those made in HQ 548560, supra. That case also involves a situation where the buyer, seller, and U.S. royalty owner were related. In response to the importer’s claim that its royalty payments were not dutiable because they were made to a patent holder in the United States, CBP stated the following:
In the submission, the importer cites HQ 542818 (May 27, 1982) for the proposition that “royalty payments made to patent holder in the United States [are] not dutiable.” This 1982 ruling involved royalty payments made to a U.S. patent holder, who was an unrelated third party, and not to the seller of the merchandise. Moreover, the licensor, seller and importer were all unrelated to each other. This ruling, in relying on an even earlier ruling (HQ 542152 of December 4, 1980), held that the payments were not “a condition of the sale of the imported merchandise for exportation to the United States but rather (for the most part) for the right to obtain and use the U.S. patent, and for other related rights. To this extent, such royalty payments are not dutiable.” This ruling does not deal with the specific issue of whether the merchandise was manufactured under patent (as articulated in the above-mentioned general notice concerning the dutiability of royalty payments, See General Notice, “Dutiability of Royalty Payments,” at 9, supra). Moreover, the facts in the instant case are distinguishable from those in HQ 542818 insofar as the parties are all related in the instant case. Thus, this ruling cannot serve as a precedent for finding that the imported merchandise is not manufactured under patent in the instant case.
We find the analysis in HQ 548560 to be directly on point, and therefore apply it here. Further, we would add that with respect to royalties and license fees, the valuation statute is silent as to the location of the intellectual property owner, thus leading us to conclude that it was intended for such location to be irrelevant in ascertaining whether royalties and license fees are dutiable. We contrast this with the provision in 19 U.S.C. § 1401a(h)(1)(A)(iv) that specifically exempts engineering, development, artwork, design work, and plans and sketches from being an assist if undertaken in the United States. The absence of a similar exemption respecting royalties and license fees reinforces our conclusion that the location of the parties is not a factor in determining their dutiability. With regard to counsel’s assertion that these royalty payments should be discounted because they are triggered by sales in the United States of all products, including those made domestically or by unrelated parties, we note that the Intellectual Property agreements explain that the decision to base royalties on total Net Sales was made “to eliminate the costs associated with the tracking of the individual net Sales of Goods and Licensed Products.” In other words, this amalgamation was done for the convenience of the parties to the agreements. As we agree that only those amounts paid that relate to the sale of the imported products manufactured under the Intellectual Property agreements are at issue, we find this argument on this particular issue to be largely irrelevant.
With regard to the second question, i.e., whether the royalties are involved in the production or sale of the imported product, counsel argues that the language of the Intellectual Property agreements supports a finding that the foreign sellers’ production or sale of merchandise to the United States is not contingent on the agreements or on the payment of royalty fees. Counsel emphasizes that the Royalty Owner grants rights that are non-exclusive, and that the agreements are devoid of any requirement to purchase imported products or parts. Furthermore, neither Importer 1 nor Importer 2 tracks their royalty expenses as part of the cost of goods sold.
We disagree with counsel’s contention that the production or sale of the imported merchandise does not hinge on the Intellectual Property agreements or on the payment of the royalties. The patent license of the Intellectual Property agreements allows Importer 1 and Importer 2 “to make, use, offer to sell, sell, have made, or import any product, method, or apparatus covered by the Licensed Patents.” Importer 1 and Importer 2 would be unable to contract with the related manufacturers to have the patented products made, and would not be able to import and sell those products in the United States, without having entered into these licensing agreements. The exercise of the rights conferred by the patent license triggers the payment of the royalties. There is a clear nexus between the production and sale of the imported licensed products and the payment of the royalty by the buyers, and thus the royalty is involved in the production and sale of the imported merchandise for exportation to the United States. See HQ 548560, supra, and HQ H024980, dated July 22, 2008. (In H024980, CBP found a positive response to the second question notwithstanding the fact that the applicable license agreement was non-exclusive.)
The third question is whether the purchaser can buy the imported products without paying the subject license fees. Counsel asserts that the royalties are not related to the imported merchandise and are not a condition of sale, but instead reflect the U.S. companies’ management of their intellectual property rights and their transfers of payments earmarked as royalty expenses and profits associated with managing such rights. We do not agree. The royalties relate to the imported merchandise for the reasons articulated earlier, i.e., the exercise of the rights granted under the patent license that results in the payment of royalties allows the Importers to order and import the products from the related foreign sellers. The royalty payments are not optional by the terms of the Intellectual Property agreements, but must be paid to the licensor upon production, importation and subsequent resale of the imported merchandise in the United States. Additionally, as the parties are all related to each other, there is clearly a connection between the payment of the royalties and the purchase of the merchandise imported by the buyers. Therefore, the response to the third question is no—the importer could not purchase the merchandise without paying the fee.
In light of the above, the royalty payments under consideration constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C.
§ 1401a(b)(1)(D). Since we have found them to be additions as royalties, there is no need to review the issue of whether the royalties would also constitute an addition as a proceed under 19 U.S.C. § 1401a(b)(1)(E).
HOLDING:
The royalty payments are included in transaction value as part of the price actually paid or payable, and also constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D).
Sincerely,
Monika R. Brenner
Chief, Valuation and Special Programs Branch