License Fees

HQ 546966 November 5, 1999 RR:IT:VA 546966 DWS CATEGORY: Valuation Mr. Steven P. Sonnenberg Sonnenberg & Anderson 200 South Wacker Drive Chicago, IL 60606 RE: License Fees Dear Mr. Sonnenberg: This is in response to your letter dated January 16, 1998, on behalf of [XXXXXXXXX], in which you request a ruling regarding the dutiablity of certain license fees. In the letter, you requested confidential treatment for certain information contained in the letter, as well as the provided distribution and licensing agreement (“Agreement”) relating to the payment of the license fees. In conversations with a member of my staff, we agreed to keep certain information in your letter and the contents of [XXXXXXX] of the Agreement confidential, and the subject information is either bracketed in this ruling or deleted and will not be disclosed in copies of this ruling made available to the public. We note that on July 20, 1999, you met with me and a member of my staff to discuss the merits of the case. In response to the meeting, you provided us with a supplemental submission dated September 24, 1999. FACTS: [XXXXXXXXXXX] (“Licensor”) is the manufacturer of aluminum electrolytic capacitors, plastic film capacitors, and noise filters. Licensor and its wholly-owned subsidiary, [XXXXXXXXXXX] (“Licensee”), executed the Agreement on October 1, 1994. It is our understanding that Licensee is the importer of record. Pursuant to the Agreement, Licensor sells and delivers to Licensee products ordered by Licensee which are in the current catalog of Licensor. Licensee is required to submit purchase orders to Licensor for the products required. The Agreement grants Licensee the exclusive right to sell [XXXXXXXX] products manufactured by Licensor in the U.S., Canada, and Mexico. In addition, Licensee receives the exclusive right to use the trademark and tradename [XXXXXXXX] in its effort to promote, market, and sell [XXXXXXXXX] products in the U.S., Canada, and Mexico. In exchange, Licensee agrees to pay Licensor license fees, as outlined in [XXXXXXXX] of the Agreement. Pursuant to Section [XXX] of the Agreement, Licensee agrees to pay Licensor [XXXXXXXXXXXXXXXXXXXXX] of [XXXXXX] products. The fee is payable annually, within 60 days of the end of Licensee’s September 30 fiscal year. However, Section [XXX] of the Agreement waives the payment of royalty fees on sales made at a gross profit margin of less than [XXXXXXX], to be determined by [XXXXXXXXXXXXXXXXXXXXXX]. The parties to the Agreement executed and Addendum to the Agreement pursuant to Article [XXX] on September 30, 1997. The Addendum identifies the customers for whose sales fall within the Article [XXX] exemption. ISSUE: Whether, under the present circumstances, the license fees paid by Licensee to Licensor are included in the transaction value of the imported merchandise. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. §1401a. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus enumerated statutory additions. For purposes of this ruling, we will assume that transaction value is the proper basis of appraisement. Although it is our understanding that the parties are related within the meaning of section 402(g)(1) of the TAA, because that particular issue currently is not before us and we do not possess specific information or documentation in this regard, this decision will not address the acceptability of the related party pricing. The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA 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." Two court cases have addressed the meaning of the term "price actually paid or payable." In Generra Sportswear Co. v. U.S., 8 CAFC 132, 905 F.2d 377 (1990), the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is allinclusive 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 explained that it did not intend that Customs engage in extensive factfinding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else. In Chrysler Corporation v. U.S., Slip Op. 93186 (Ct. Int'l Trade, decided September 22, 1993), the Court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the 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. Accordingly, it has been our position that, based on Generra, there is a presumption that all payments made by a buyer to a seller, or a party related to the seller, are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise. See HQ 545663, dated July 14, 1995. [XXXXXXXXXX] is both the licensor of the trademark and tradename [XXXXXXXX] and seller of the imported merchandise. [XXXXXXXXXXXXX] is the licensee and buyer of the merchandise. Therefore, after the goods are re-sold in the U.S., the license fees are paid by Licensee, the buyer, to Licensor, the seller. We also find that the license fees are related to the imported merchandise, as Section [XXX] of the Agreement provides that Licensee must pay Licensor [XXXXXXXXXXXXXXXXXXXXX] of [XXXXXXXXXXX] products, the imported merchandise. It is our position that [XXXXXXXXXXXX] has not overcome the rebuttable presumption that the license fees are completely unrelated to the imported merchandise. Consequently, the license fees are part of the price actually paid or payable for the imported merchandise in that they are part of the total payment made for the imported merchandise by the buyer to the seller. Having concluded that the license fees at issue are part of the price actually paid or payable for the imported merchandise, we do not address whether they could alternatively be considered royalties or proceeds under sections 402(b)(1)(D) or (E) of the TAA. See HQ 545194, dated September 13, 1995. The instant case is distinguishable from cases such as HQ 547226, dated July 27, 1999, in that the payments are made to the seller instead of unrelated third parties. HOLDING: Under the present circumstances, the license fees paid by Licensee to Licensor are included in the transaction value of the imported merchandise under section 402(b) of the TAA. Sincerely, Thomas L. Lobred Chief, Value Branch