Dutiability of license fees; community development premiums

March 23, 2015 HQ H262685 OT:RR:CTF:VS H239671 YAG CATEGORY: Valuation Mr. Ian Moss Goulston & Storrs PC 400 Atlantic Avenue Boston, Massachusetts 02110-3333 RE: Dutiability of license fees; community development premiums Dear Mr. Moss: This is in response to your letter, dated March 2, 2015, on behalf of your clients, Fair Trade USA (“Fair Trade USA”) and Patagonia, Inc. (“Patagonia”), requesting a ruling with respect to the dutiability of certain community development premiums paid by Patagonia for the benefit of a Fair Trade account, controlled by factory workers who use the funds for socio-economic development, as well as the dutiability of the license fee paid by Patagonia to Fair Trade USA, an unrelated third party licensor. FACTS: Patagonia purchases and imports various garments from Pratibha Syntex (“Pratibha”), located in India. Pratibha, which operates three textile and garment manufacturing facilities in India, has recently been certified by Fair Trade USA as a Fair Trade Certified Manufacturing Facility. Fair Trade USA, through its apparel and home goods certification process, is a non-profit organization seeking to improve the lives of factory workers, their families, and surrounding community through a market based approach. Patagonia, Pratibha, and Fair Trade USA are not related within the meaning of 19 U.S.C. §1401a(g). In early 2014, Patagonia decided to market a selection of ten different women’s sportswear items purchased from Pratibha as Fair Trade Certified. In order to do so, Patagonia entered into a Certification and License Agreement (“License Agreement”) with Fair Trade USA to use Fair Trade USA certification trademarks on the sportswear sold in the U.S. market. A copy of the License Agreement is provided for our review. Pursuant to this License Agreement, Patagonia, as the licensed brand holder, is obligated to pay Fair Trade USA a base license fee. In exchange for this fee, Fair Trade USA granted Patagonia a worldwide, non-exclusive, non-transferable license to display Fair Trade USA’s certification trademarks. In addition, Patagonia is also obligated to pay a community development premium to the Fair Trade Committee, an account controlled by a committee of factory production workers, working for Pratibha, the seller of the imported merchandise. This Fair Trade Committee, not Pratibha, has the exclusive control over the use of the Fair Trade account, separate from the manufacturer’s account, which funds the democratically chosen social, economic, or environmental investment programs. The funds are used for the benefit of all factory production workers. Pratibha has an obligation to report to Fair Trade USA how the premiums are utilized. The community development premium is calculated by Fair Trade USA and is based on a percentage of the Free Carrier (“FCA”) unit price paid by Patagonia for the select covered products that Patagonia has elected to market as Fair Trade Certified and to which Patagonia affixes the Fair Trade certification mark. The percentage for the premium is based on a sliding scale that varies from 10% (if the factory only pays a minimum wage) to 1% (if the factory pays better than a living wage). Upon exportation, Pratibha issues a commercial invoice that describes the merchandise and states the quantity, FCA unit price, extended cost, and total invoice value. The company uses transaction value method of appraisement in declaring its values to U.S. Customs and Border Protection (“CBP”). The FCA unit price on the commercial invoice is the price of the merchandise that Patagonia and Pratibha have agreed to by contract, and the premium is separate and distinct from the FCA price and arises by virtue of Patagonia’s License Agreement with Fair Trade USA. Pratibha issues a separate invoice for the premium amount, on behalf of the Fair Trade Committee because the laws of India prohibit the Fair Trade Committee from issuing an invoice and receiving payment against that invoice, as it is not a registered charitable entity. Nonetheless, the funds received are immediately paid into the Fair Trade Committee account and used in accordance with Factory Standards and Fair Trade Committee Constitution. The following information has been provided for our review: (1) Affidavit of Senior Manager (Supply Chain Services) for Fair Trade USA, with exhibits (Exhibit A, Fair Trade Factory Standards for Apparel and Home Goods; Exhibit B, Certification and License Agreement between Patagonia and Fair Trade USA; and, Exhibit C, Fair Trade Committee Functional Rules); and (2) Affidavit of Director of Social and Environmental Responsibility of Patagonia, Inc., with exhibits (Exhibit A, Description and photographs of items covered by the License Agreement; Exhibit B, Commercial invoices between Patagonia and Pratibha for the sale of the imported merchandise; and, Exhibit C, Fair Trade Committee invoices issued by Pratibha for the community development premium associated with covered products). ISSUES: Whether the community development premiums, paid by Patagonia, are part of the price actually paid or payable for the imported merchandise or are an addition to the price actually paid or payable as proceeds of subsequent resale under section 402(b)(1)(E); Whether the base license fee paid by Patagonia to Fair Trade USA, an unrelated third party licensor, should be included in the transaction value of the imported merchandise as royalties under section 402(b)(1)(D). 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”) and 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 they are not already included in the price actually paid or payable. Whether the community development premiums, paid by Patagonia, are part of the price actually paid or payable for the imported merchandise or an addition to the price actually paid or payable as proceeds of subsequent resale under section 402(b)(1)(E) The “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any charges, costs, 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). In this case, the community development premiums are initially paid to the seller, Pratibha, in response to an invoice; however, these premiums are not part of the price actually paid or payable. Pratibha issues two separate commercial invoices: one presenting the negotiated and agreed upon contractual price for the imported merchandise and the second invoice, issued on behalf of the Fair Trade Committee, and referencing the amount of the premium to be paid. The community development premiums are not paid for the imported merchandise, but rather represent payments to the Fair Trade Committee, an account controlled by factory workers and not the seller of the merchandise, to be used for the benefit of all factory production workers. The entire amount of the premiums is deposited by Pratibha into the Fair Trade Committee’s separate account and is utilized to improve the lives of factory workers, their families, and surrounding community. Additionally, the premium payments, which are routed directly to the Fair Trade Account by Pratibha, are executed in this manner only because Indian law precludes the Fair Trade Committee from receiving any form of charitable donation without registering as an independent non-governmental organization. It is stated that the community development premiums are calculated by Fair Trade USA on the basis of a percentage of the FCA unit price of the imported merchandise paid by Patagonia to Pratibha. We recognize the alleged nexus between the premium payments and the imported merchandise; nevertheless, considering the nature and the purpose of these payments, we find that the method of calculating the premiums is not relevant in determining whether these payments are part of the price actually paid or payable in this case. Finally, 19 U.S.C. §1401a(b)(1)(E) provides that “the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller,” are to be added to the price actually paid or payable. With regard to proceeds, the Statement of Administrative Action (“SAA”) provides that: Additions 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. SAA, 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, the community development premiums are paid to the seller. Nevertheless, these premiums are tied to Patagonia’s License Agreement with Fair Trade USA and are derived from a separate transaction and not from any subsequent resale, disposal or use of the imported merchandise. Accordingly, the premium payments by Patagonia to Pratibha, which get deposited to the Fair Trade Committee’s separate account, do not pertain to the imported goods at issue. Additionally, even though these premium payments are made in response to the seller’s invoices, the premiums are forwarded directly to a separate account controlled by the Fair Trade Committee. As previously stated, the premiums are routed this way because the Fair Trade Committee cannot issue an invoice and receive payment against that invoice since it is not a registered charitable entity und Indian law. Therefore, we find that the community development premiums are not dutiable as proceeds pursuant to 19 U.S.C. §1401a(b)(1)(E). Whether the base license fee paid by Patagonia to Fair Trade USA, an unrelated third party licensor, should be included in the transaction value of the imported merchandise as royalties under section 402(b)(1)(D). 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.” After reviewing the language of the statute along with the legislative history and prior case law, 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: Was the imported merchandise manufactured under patent? Was the royalty involved in the production or sale of the imported merchandise? and, Could the importer buy the product without paying the fee? Affirmative answers to questions one and two and a negative answer to question three suggest that the payments are dutiable; negative answers to questions one and two and an affirmative answer to question three suggest that the payments are non-dutiable. Question three 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 “Hasbro II”) (stating these questions in discussing previously-issued HRL 544436, dated February 4, 1991). In this case, based on the information provided, we conclude that the answer to the first question is no. The base license fee, paid by Patagonia to Fair Trade USA, an unrelated third party licensor, for the worldwide, non-exclusive, non-transferable right to display Fair Trade USA’s certification trademarks, has nothing to do with patents (if any) to manufacture the imported merchandise. Furthermore, the response to the second questions is also no. Since the license fee is paid for displaying the certification trademark, it is not involved in the production of the imported merchandise. Similarly, the license fee is not involved in the sale of the covered garments into the United States. Furthermore, the answer to the third question is yes; Patagonia could still buy the product without paying the fee. In this case, Patagonia is free to opt out of the Fair Trade Certification program and cease the payments at any time. Doing so would result in the loss of the right to certify covered goods as Fair Trade Certified and to display the certification marks. However, Patagonia would still be able to purchase, and Pratibha would be obligated to sell, the sportswear in question, as agreed by the parties in their purchase and sale contract. Accordingly, the base license fee should not be included in the transaction value of the imported merchandise as royalties under section 19 U.S.C. §1401a(b)(1)(D), provided that the companies keep payment records to show that the premiums in question are routed directly to a separate Fair Trade Committee account and used for their intended purpose. HOLDING: Based upon the information provided, we find that the community development premiums, paid by Patagonia are not part of the price actually paid or payable for the imported merchandise and should not be included in the transaction value of the imported merchandise as proceeds of subsequent resale under 19 U.S.C. §1401a(b)(1)(E). Additionally, we determine that the base license fee paid by Patagonia to Fair Trade USA, an unrelated third party licensor, should not be included in the transaction value of the imported merchandise as royalties under 19 U.S.C. §1401a(b)(1)(D). Please note that 19 CFR §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 Customs Service 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 are 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 and Special Programs Branch