Application for Further Review of Protest No. 3401-91- 100006; Dutiability of License Fee

HQ 544950 May 28, 1992 VAL CO:R:C:V 544950 ILK CATEGORY: Valuation District Director of Customs Federal Building P.O. Box 610 Pembina, ND 58271 RE: Application for Further Review of Protest No. 3401-91- 100006; Dutiability of License Fee Dear Sir: This protest was filed against your decision in the liquidation of an entry made by xxxx x xxxx xxxx, Inc. on behalf of xxxxxxxxx xxxxxx xxxxxxxxxxxxxxxxxxxxxxx (hereinafter referred to as "the importer"). The importer is disputing the inclusion of a license fee payment in the transaction value of the imported merchandise pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(b)). FACTS: The importer has entered into a license agreement (hereinafter referred to as the "agreement") with xxxxxx xxxxxxxxxxxxx (hereinafter referred to as "the seller"), a Canadian company, pursuant to which the importer is licensed to manufacture and market the products of the seller. The seller is engaged in the design, promotion and use of plastic molds and products relating to the construction of buildings, fences, walks, streets and other projects and has the right to distribute and sell those products and to provide technical assistance under the trade name of Cretex Panels and Products. The agreement provides that for $20,000.00, the seller grants to the importer "the right to continued use of the [seller's] moulds, equipment and procedures for the purpose of casting CRETEX PANELS and PRODUCTS" in certain territory within South Dakota. One-half of the $20,000.00 was to be paid at the time the agreement was entered into, and the balance was to be paid upon delivery to the importer of the machines and equipment described in the agreement (compression machines, plastic molds, support forms, corner molds, brick wafer molds and pattern spray pistol). Pursuant to the agreement, title to the machines and equipment passes to the importer only upon the balance of the license fee being paid to the seller. The agreement describes the equipment, molds and tools to be provided to the importer "as part of the aforesaid License Fee." The entry documents included an invoice and an export declaration describing the imported merchandise as substantially the same machines, equipment, molds and tools as described in the agreement, with a total invoice price of $6,443.00 Canadian. The total shipment was appraised at $26,443.00 Canadian to include the license fee paid. The $20,000.00 license fee was not apportioned among the various items imported, but was added to the value of the compression machines. The invoice value of the compression machines was listed as $3,375.00 Canadian. With the inclusion of the royalty, the appraised value of the compression machines became $23,375.00 Canadian. The importer does not dispute the appraisal of the remaining invoiced items at $3,068.00 Canadian. The importer claims that the compression machines should be appraised at $3,375.00 Canadian, as opposed to $23,375.00 Canadian. ISSUE: Whether the license fee paid to the seller, for the right to manufacture and market the product, and for the equipment, molds and tools provided by the seller is to be included in the transaction value of imported equipment, molds and tools. LAW AND ANALYSIS: Transaction value is the preferred method of appraisement and is defined in section 402(b) of the TAA as: ... the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts equal to ... 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 .... In prior rulings, in order to make the determination of whether the license fee payment is "related to the imported merchandise" and is paid "as a condition of the sale of the imported merchandise," Customs has looked to whether the fees are connected to the importation or ownership of the imported merchandise. See Headquarters Ruling Letter (HRL) 543773 dated August 28, 1986. In its protest, the importer cites U.S. v. Rohner Gehrig & Co., Inc., 9 Cust. Ct. 591, R.D. 5724 (1942) for the test set forth therein, that a fee is not dutiable when it "is not inextricably intertwined with the production of the imported merchandise or is optional or is paid for the exclusive right to manufacture and sell in a designated area." This case law precedes the TAA and is not a separate basis for determining dutiability under the TAA. In the instant case, the license fee relates to the importation and ownership of the imported merchandise. The agreement specifically provides that the machines, equipment, tools, and molds are provided as "part of the aforesaid License Fee," and title to the merchandise does not pass to the importer until the total license fee has been paid to the seller. The importer has not provided any evidence that the machines, equipment, molds and tools could have been purchased without payment of the license fee. Thus, the license fee payment is related to the imported merchandise and is an amount that the importer is required to pay as a condition of sale of the imported merchandise for exportation to the United States, and should be included in the transaction value of the merchandise. HOLDING: The license fee payment is related to the imported merchandise and is a condition of the sale of the imported merchandise, therefore the payment must be included in the appraised value of the merchandise. Consistent with the decision set forth above, you are hereby directed to deny the subject protest. A copy of this decision should be attached to Customs Form 19 and mailed to the protestant as part of the notice of action on the protest. Sincerely, John Durant, Director, Commercial Rulings Division