CBP Ruling W548305

HQ W548305 RR:IT:VA W548305 AH 11 AUG 2003. Category: Valuation Richard H. Abbey Miller & Chevalier 655 Fifteenth Street, N.W., Suite 900 Washington, DC 20005-5701 Dear Mr. Abbey , This is in response to your letter, dated March 27, 2003, requesting reconsideration of Headquarters Ruling Letter (HRL) 547662 , dated September 20, 2002, on behalf of L'Oreal USA, Inc. ("importer"). HRL 547662 was issued in response to the importer's request for internal advice, dated May 3, 1999, concerning royalty payments made by the importer to various affiliated and unaffiliated entities in connection with the sale in the United States of imported products or products made with imported raw materials. In HRL 547662 , we indicated that the submitted record contained insufficient information upon which to rule on the relevant transactions. In response you provided additional information in this request for reconsideration . In accordance with 19 C.F.R. §177.2(b)(7) , you request confidential treatment of certain information included in your request. Accordingly, we will bracket this confidential information and will redact it from the public version of this response. In addition, we will identify it as confidential in our file. FACTS: Procedural History In HRL 547662 , dated September 20, 2002 we examined the importer's various importation transactions , which included the importation of both finished products and raw materials. In the previous case, various importation scenarios were at issue , but in most instances the buyer and seller of the merchandise were related as defined in Section 402(g)(1) of the TAA . As we had insufficient information to determine whether the relationship influenced the price actually paid or Vigilance * Service * Integrity payable for the imported merchandise , we were unable to assess whether transaction value was the appropriate basis of appraisement. Another central concern in HRL 547662 was the dutiability of certain payments made by the importer pursuant to various agreements that granted the importer the use of trademark and patent rights and certain technical assistance in regard to the manufacture and sale of licensed products in the United States. These licensed products included cosmetic , hair care and other similar products. The importer's royalty payments equaled a percentage of the importer's net sales of the licensed products in the United States. In HRL 547662 we examined the differing importation scenarios separately in an effort to determine whether payments made pursuant to the various agreements were dutiable royalty payments. With respect to the payment of fees to the seller or a party related to the seller, we concluded the evidence indicated that the payments were part of the total payment for the imported merchandise, and therefore dutiable . We based our conclusion on the Generra presumption wherein payments made to a seller or to a third party related to the seller in regard to imported merchandise are deemed part of the total payment for the imported merchandise. We concluded the record did not provide the evidence necessary to rebut the Generra presumption pursuant to Chrysler, which requires the importer to demonstrate that fees are independent and unrelated costs not associated with imported goods. In addition, we noted the payments may also constitute dutiable additions to the price actually paid or payable pursuant to section 402(b)(1)(D) of the TAA. With regard to payments made to a third party not related to the seller we concluded that the payments did not constitute part of the price actually paid or payable. However, in examining whether the payments were dutiable additions to the price actually paid of payable, we were unable to determine whether the payment of the fees was a condition of the sale for the imported merchandise . We noted that it was impossible to determine whether there was linkage between the payment of the fees and the purchase of the imported merchandise, as the importer did not provide sufficient documentation of the sales transaction such as sales agreements and invoices. As to whether payments constituted proceeds of a subsequent resale, disposal or use of the imported merchandise pursuant to Section 402(b)(1)(E) of the TAA, we likewise concluded that the information was insufficient to make a determination. We placed the onus on the importer to provide the additional evidence needed to prove the payments should not be included in the price actually paid or payable or added to the price actually paid or payable pursuant to section 402(b)(1 )(0) or (E) of the TAA. In addition, we required the submission of evidence sufficient to determine whether transaction value is the appropriate basis of appraisement. Importer's Submission In its request for reconsideration of HRL 547662, counsel provided sample transactional packages to support the use of the transaction value method of appraisement of the subject imported merchandise and to demonstrate that all purchases by the importer from related foreign suppliers of raw materials were unrelated to and independent of the royalty payments. The transactional packages relate to recent importation transactions that counsel states are representative of the importer's importation transactions at issue. Although the transactions which were the subject of HRL 547662 occurred during the period from January 1, 1993 to December 31, 1998, counsel asserts the importer's commercial transactions have remained essentially unchanged since that period, making more recent transactional documentation and data relevant to the instant case. Counsel notes our request made in HRL 547662 for copies of sales agreements , relevant contracts or supply agreements between the buyer and seller, but states that an extensive search of the importer's records reveal that no such agreements exist. Counsel asserts that purchase orders and sale invoices constitute the sales agreement between the importer and its foreign suppliers . Although the scope of HRL 547662 included the importer's importations of both finished and unfinished products, counsel states that it is limiting the scope of its current submission to purchases of raw materials from related foreign companies. Counsel notes that the importer does not contest the dutiability of royalty payments related to the importation of finished goods. Related Party Transactions Although the importer purchases imported products from various related suppliers, the importer's primary affiliated supplier during the period from 1993-1998 was Chimex, SA Chimex's sales of raw materials accounted for [xx%] of the importer's purchases of raw materials from affiliated sellers in 1999, [xx%] in 2000 and [xx%] in 2001. As purchases from Chimex constitute the majority of the importer's related party transactions, counsel provided an in-depth analysis of the manner in which the importer and Chimex conducted sales transactions between them to serve as an illustration of the importer's related party transactions. In addition to transactional documentation, counsel provided two affidavits providing further elucidation of the subject importation transactions. The first affidavit is provided by Fred C. Theile ("Theile Affidavit" ), the Vice President, Corporate Purchasing & Technical Package Development of the importer, who is responsible for raw material purchasing. The second is provided by Lou Sturniolo ("Sturniolo Affidavit") the Assistant Vice President, Tax of the importer whose duties include the gathering and analysis of financial and intercompany trading information and the reporting of affiliate transactions to the Internal Revenue Service. Derivation of Transfer Prices The following is an account of the manner in which transfer prices between the importer and Chimex are determined, according to counsel. Chimex sets its prices based on input costs and the prices of comparable products on the open market, and sells on normal commercial terms . Chimex forecasts the costs of producing each product based on the cost of inputs, by setting operating budgets with forecasted values (including depreciation costs, fixed costs, energy, containers, etc.) and evaluating the demand for different quantities of each output raw material. After determining the cost of each product category, Chimex designates a working committee to compare like generic products sold by companies in the same industry and to evaluate the costs and market conditions with respect to each raw material. After calculating the price of the products, Chimex publishes and periodically updates a price list for all of its customers. The importer's purchases of raw materials from Chimex are based on the price list, a periodic forecast of the importer's specific chemical requirements and purchase orders issued against the forecast. Id. Counsel provided a sample Chimex price list, the importer's forecast and order and Chimex's sales invoice to illustrate the transfer price determination and the way in which the parties conduct their sales transactions . Comparison of Profit Margins According to the Sturniolo Affidavit , the average operating profit margin of Chimex during the 1999-2001 period was [xx.x%]. Chimex's average return on assets during this same period was [xx.x%]. Id. Counsel asserts Chimex's profit margin is as great or exceeds that of several similar European manufacturers of industrial chemicals that also sell to the importer. Id. As evidence, counsel offers publicly available data concerning the average profit margin of two European chemical manufacturers over the 1999-2001 period to serve as a point of comparison in assessing the sufficiency of Chimex's profitability in its sales to the importer. Spec ifically , counsel notes that the average profit margin of BASF Group was 6.4% of this period, while Cognis Group averaged 6.3% over the same period. According to the Sturniolo Affidavit , Chimex's average profit margin for 2001 was [xx.x%]. The profit margins for each category of product sold to the importer in 2001 range from [x.x% to xx.x%]. Purchasing Process and Commercial Terms of Related Party Transactions as Compared with Unrelated Suppliers Counsel contends the importer does business with Chimex on standard commercial terms, a factor which counsel regards as further evidence of the arm's length nature of the importer's related party transactions. According to the Theile Affidavit , the purchasing process in transactions between the importer and Chimex runs as follows . Whenever the importer purchases finished products and raw materials, whether the supplier be foreign or domestic, related or unrelated, the importer uses the same standard purchase order, which sets forth the terms and conditions of the sale. Thiele Affidavit, 5-6. The purchase order does not contain any terms or conditions regarding price, royalties, licensee fees or other matters relating to the price of the goods. Id. The purchase orders constitute the sales agreement between the importer and its suppliers of imported merchandise, as the importer, for the most part does not have supply or distribution agreements with suppliers of finished products and/or raw materials. Id., 6. In 2000, however, the importer executed three supply or distribution agreements for finished products with related companies, but these agreements also do not include provisions regarding price other than references to a price list and to revisions to that price list. Id. Nor do the agreements include provisions regarding royalties. Id. To serve as a point of reference, counsel provided sample documentation pertaining to the importer's transactions with unrelated suppliers of both finished products and raw materials. Counsel contends the sales documentation demonstrates the importer does business in a similar manner with unaffiliated suppliers of finished products and raw materials as it does with affiliated. In addition to using identical documentation and procedures, counsel points out that the importer's related party transactions use the same sales terms as its does with unrelated suppliers. The normal payment terms for purchases from related companies is 60 days and payment is made through a L'Oreal Group "netting system" by which amounts due to and from all affiliates are netted as of a certain date, with a single payment made to one of the parties. Thiele Affidavit, 8. Payment for purchases from unrelated foreign suppliers are generally paid by wire transfer of funds; domestic unrelated suppliers are paid by check. Terms are either "60 days due net" or "30 days due net", depending on the supplier. In addition, the importer uses the same shipping terms. The documentation provided by counsel corroborates counsel's assertion that the importer conducts and documents its transactions with affiliated suppliers as it does with unaffiliated suppliers of imported merchandise. Royalty Payments Counsel explains the importer purchases and imports raw materials from various affiliated foreign suppliers, which are incorporated, along with raw materials purchased from unaffiliated vendors and raw materials purchased domestically, into finished products. The manufacture of these finished products in the United States involves the use of proprietary processes licensed to the importer by various affiliated patent, trade secret and know­ how owners. In addition, the finished products are marketed in the United States, often under trademarks licensed to the importer in exchange for royalties paid pursuant to a license agreement. Thus, explains counsel, royalty payments ultimately paid by the importer may be in exchange for the use of a licensed manufacturing process, the provision of technical assistance, or the use of a licensed trademark, or all three. Royalty Agreements The importer and various related entities entered into numerous royalty agreements 1 Given the number of agreements at issue, a separate account of each agreement's terms in this response would not be practical. However, after reviewing the terms of each agreement we are able to summarize their general terms and relevancy to the instant case. As counsel notes, the relevant agreements pertain to the licensing of particular manufacturing processes, patent rights, and trademark rights, etc. to the importer relating to the manufacture and sale of finished products in the United States by the importer. In exchange for the rights granted in the various agreements, the importer agrees to pay royalty fees that equal a certain percentage of the importer's net sales of the licensed products in the United States. The license agreements contain typical provisions regarding the licensee's obligations in maintaining certain quality standards in the use of the rights
 1 Although a couple of the importer's licensors are not related entities, the overwhelming majority of them are affiliates of the importer. granted in each agreement. None of the relevant agreements pertain to the payment of royalties in regard to the manufacture and sale for exportation to the United States of the imported raw materials at issue. Instead, the agreements pertain solely to the manufacture and sale of licensed products in the United States that may or may not contain the imported raw materials at issue. The only reference, if any, to the purchase of the imported raw materials contained in the license agreements runs typically as follows. "In the event of [xxxxxxx] not being easily able to obtain the raw materials necessary for the manufacture of the licensed products LANCOME agrees that it will use its reasonable efforts to supply, or to procure the supply of, the necessary raw materials to [xxxxx] at prices to be agreed upon between the parties from time to time". Article 111.3 Lancome Know-How and Technical Assistance Agreement . The license agreements do not contain references to supply or purchase agreements between the importer and its suppliers of the imported raw materials at issue. The importer's obligation to pay royalty payments created in each agreement relates only to the importer's manufacture and sale of licensed products, both of which occur in the United States. Relevancy of Royalty Agreements to Imported Raw Materials Counsel asserts the license agreements at issue only have indirect relevancy, if any, to the importer's importation of raw materials. As illustration of this assertion, counsel provided a detailed account of the manner in which certain examples of imported raw materials are incorporated into manufactured products in the United States and to demonstrate the relevancy, if any, of the royalty agreements to the purchase of the imported raw materials. Specifically, counsel provided examples of four finished products manufactured by the importer in the United States. Counsel traced the path of the various inputs incorporated into the finished product, which included certain imported raw materials and indicated which royalty agreements relate to any royalties paid upon the ultimate sale of the finished product in the United States containing imported raw materials. A compositional break-down of the various inputs incorporated into the finished product produced by the importer reveals the percentage of raw materials purchased by the importer from foreign affiliated suppliers ranges from [.xx%] to [xx.xx%] of the volume of the finished product produced by the importer. The license agreements which counsel identifies as relevant to the imported raw materials pertain to the license of manufacturing processes, know-how, and the trademark rights to the importer in regard to finished products produced by the importer in the United States. These agreements do not contain any provisions requiring the importer to purchase raw materials from the foreign affiliated suppliers nor do they appear to have any direct bearing upon the raw materials themselves . In addition, counsel notes the value of imported raw materials incorporated into all finished products produced at the importer's main manufacturing facility comprises only [x.xx%] of the total value of the cost of goods sold, and [x.xx%] of the value of the ultimate selling price to the importer's retail customers in the United States. ISSUES: Whether, given the relationship between the buyer and the various sellers of the imported merchandise, transaction value is the appropriate basis of appraisement for the imported merchandise. Whether the royalty payments made by the importer to various licensors constitute part of the price actually paid or payable for the imported merchandise. Whether the royalty payments made by the importer constitute dutiable additions to the price actually paid or payable pursuant to Section 402(b)(1)(D) or (E) of the TAA. LAW AND ANAL YS/ S: The primary method of appraising imported merchandise is transaction value. The transaction value of imported merchandise is defined as the price actually paid or payable for merchandise when it is sold for exportation to the United States plus certain enumerated items contained in the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a(b)(1)). Pursuant to section 402(b)(2)(A)(iv), the transaction value of imported merchandise shall be the appraised value of that merchandise only if the buyer and seller are unrelated. However, if the buyer and the seller are related, the transaction value is acceptable under 402(b)(2)(8) if the buyer demonstrates that the declared transaction value meets one of the following tests: 1) Circumstances of Sale; or 2) Test values . These tests are applied in order to determine that transactions, although between related parties, are conducted at arm's length or that the transaction value approximates that which would have occurred between unrelated parties. As regards the circumstances of sale test, the Statement of Administrative Action contains the following language in explication of the test: [t]he Customs Service will examine relevant aspects of the transact ion, including the way in which the buyer and seller organize their commercial relations and the way in which price the in question was arrived at, in order to determine whether the relationship influenced the price. If it is shown that the buyer and seller, although related, buy and sell to each other as of they were not related, this will demonstrate that the price has not been influenced by the relationship and the transaction value will be accepted. H.R. Doc. No. 96-153 , 95th Cong., 151 Sess. 6A (1979), at 333, reprinted in 1979 U.S. Code Cong. & Ad. News 388; see also 19 CFR 152.103(1). The Statement of Administrative Action also sets out three examples for determining whether the transaction value meets the circumstances of sale test: 1) is the price determined in a manner consistent with normal industry pricing practice; or, 2) is the price determined in the same way in which the seller deals with unrelated buyers; or, 3) is the price adequate to ensure recovery of all costs plus a profit equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Acceptability of the Transaction Value Method of Appraisement for the Importer's Related Party Transactions Counsel avers Chimex uses a pricing methodology for transactions with related companies that is based on objective criteria, entirely uninfluenced by its relationship to its affiliated customers. Counsel asserts that the arm's­ length nature of the importer's transactions is evident by comparing Chimex's profit margin with that of European manufacturers of similar industrial chemicals who also sell their products to the importer. Counsel states the average profit on the five chemical groups purchased by the importer from Chimex in 2001 equaled or exceeded Chimex's average profit margin on total sales during 2001, a representative period. As further evidence of the arm's length nature of transactions between the importer and Chimex, counsel compares the sales terms and payment terms applicable to the importer's other suppliers and to standard commercial practices and notes their similarities indicate that the sales terms are also unaffected by the importer's relationship to its suppliers. Addit ionally, counsel explains that the Chimex is the only affiliated foreign supplier that manufactures the raw materials it sells to the importer. Counsel elaborates that the importer's other related suppliers purchase the raw materials from an unrelated third party and resell them without profit to the importer, because they are able to obtain quantity discounts that would be unavailable directly to the importer, which buys small quantities of certain raw materials. Therefore, counsel contends, the prices paid by the importer for third-party manufactured goods are determined by unaffiliated suppliers, which sell to the importer's affiliates at arm's length. Counsel considers the above as adequate substantiation that the circumstances of the sale between the importer and its foreign related suppliers indicate the relationship between the importer and its affiliated foreign suppliers did not influence the price actually paid or payable for the imported merchandise. We are satisfied that the importer has met its burden of proof in regard to the arm's length nature of its transactions with its related suppliers. As the importer's primary affiliated supplier's profit figures are comparable to other companies selling like products to the importer and given that the sales documentation and terms used in the importer's affiliated transactions mirror those of the importer's unaffiliated transactions, we conclude that the circumstances of the sales between the importer and its related suppliers demonstrate the importer's transfer prices are acceptable for use as the price actually paid or payable for Customs appraisement purposes. Royalty Payments Part of Price Actually Paid or Payable Counsel explains that with few exceptions the licensors to whom the importer pays various types of royalty fees are related to both the importer and the seller of the imported raw materials. Insofar as royalty payments are made to a party related to the seller of the imported merchandise, they may constitute an indirect payment to the seller of the merchandise and therefore part of the price actually paid or payable for the imported merchandise. This assumption is based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), wherein the Court of Appeals for the Federal Circuit established a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, in applying the Generra standard the Court of International Trade concluded this presumption may be rebutted by evidence that clearly establishes that the payments were totally unrelated to the imported merchandise. Chrysler v. United States, 17 C.l.T. 1049 (1993). As the royalty payments at issue relate to the manufacture and sale of finished licensed products in the United States, which may or may not contain imported raw materials, we conclude the payments are unrelated to the imported merchandise and therefore do not constitute part of the price actually paid or payable. See HRL 545381, dated May 4, 1998; 545951, dated February 12, 1998; 547532, dated November 2, 2001. Additions to the Price Actually Paid or Payable § 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 certain statutorily enumerated additions . §402(b)(1) of the TAA provides for additions to the price actually paid or payable 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 proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly, or indirectly, to the seller. With regard to royalties, the Statement of Administrative Action ("SAA"), adopted by Congress with the passage of the TAA, provides that: [a]dditions 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, or 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 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 to the United States. Statement of Administrative Action, H.R. Doc. 153, Pt II, 961 Cong., 151 Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49 . In General Notice, Dutiability of Royalty Payments, 27 Cust. Bull. 12 (1993), Customs articulated three factors, based on prior court decisions , for determining whether a royalty was dutiable. These factors were whether: 1) the imported merchandise was manufactured under patent; 2) the royalty was involved in the production or sale of the imported merchandise; and 3) the importer could buy the product without paying the fee. Affirmative responses to factors one and two and a negative response to factor three would indicate the payments were related to the imported merchandise and a condition of sale, therefore, making the royalty payments dutiable additions. Counsel claims the royalty fees at issues are unrelated to the production and sale for exportation to the United States of the imported raw materials. Counsel notes that the importer's obligation to pay royalty fees relates only to the use of the licensors' trademarks, patents, and trade secrets in the United States and arises only upon the importer's sale of the finished product in the United States. Counsel emphasizes the royalty fees are paid whether or not the finished licensed products contain the imported raw materials at issue and regardless of whether the inputs are imported or procured domestically. Counsel asserts the circumstances of the instant case are akin to those in HRL 545381, dated May 4, 1998 wherein Customs determined that certain royalty payments were not dutiable under Section 402(b)(1 )(D) or (E) of the TAA. Counsel states that Customs based its decision regarding the dutiability of royalty payments upon the conclusion that the royalty fees were unrelated to the imported merchandise. Counsel also avers the pertinent facts of HRL 546478 , dated February 11, 1998 are virtually indistinguishable from the importer's situation. Counsel notes that in HRL 546478 Customs found that the royalties were unrelated to the sale for exportation of the imported merchandise. Counsel avers that the license agreement terms at issue in that case were identical to those at issue in this case.  Counsel asserts that none of the contractual terms contained in the subject royalty agreements or in the importer's purchase order and the seller's invoice, the only commercial documents that apply to the purchase of raw materials, establish linkage between the payment of royalties and the purchase of imported raw materials. Therefore, concludes counsel, there is not a basis upon which to consider the royalties dutiable under section 402(b)(1 )(D) of the TAA. We disagree with counsel as to the indistinguishable nature of the present case to HRL 546478. In HRL 546478, we specifically excluded from our analysis royalty fees paid by the importer in connection with products it manufactured in the United States using some imported components , as we had insufficient information upon which to base a determination regarding the dutiability of the fees. Our examination in that case was limited to royalty fees paid in connection with finished products imported and resold by the importer in the United States. More importantly, however, was the principal distinguishing factor in that case, that the royalty fees equaled a percentage of the value added by the importer, i.e., the importer's mark-up. Thus, the value of the imported merchandise itself was not subject to a royalty payment obligation in that its value was not included in the royalty fee calculation. In the instant case, the value of the imported merchandise is included in the value upon which the importer is obligated to pay royalty fees. However, we agree with counsel that the royalty fees in questions are not related to the production and sale of the imported merchandise, nor are they a condition of sale for the imported merchandise. We agree that the facts of the instant case warrant the same conclusion as in HRL 545381. In HRL 545381, Customs concluded that the royalty fees at issue in that case did not represent part of the price actually paid or payable and did not constitute an addition to price actually paid or payable pursuant to (D) or (E). Customs concluded the royalty fees were unrelated to the imported merchandise as they concerned the manufacture and sale of finished products in the United States, and, therefore, were not part of the price actually paid or payable. As to whether the royalty fees qualified as dutiable additions to the price actually paid or payable, Customs considered the fact that the importer could manufacture the licensed products using components from the supplier of its choice and the lack of linkage between the sales and royalty agreements as suggesting the importer was under no obligation to purchase the imported merchandise from the seller/licensor in that case. Examination of the sales documentat ion, namely the purchase orders and sales invoices does not reveal any linkage between the sale for exportation to the United States and the payment of the royalty fees. The sales documentation does not contain any references to the importer's payment of royalty fees. Likewise, the royalty agreements do not place an obligation on the importer to purchase raw materials from any particular source. The only applicable reference made to the purchase of imported raw materials in the various royalty agreements, provides only that the licensor will use reasonable efforts to aid the importer in procuring raw materials in the event of the importer's difficulty in sourcing its raw materials needs. Clearly this reference is intended as an accommodation to the importer and does not place any obligations upon the importer in terms of the source of the importer's raw materials. Given the above and the fact that the contents of the licensed products upon which the importer is obligated to pay royalty fees contain only a minute portion of the subject imported merchandise and at times, contain none at all, we conclude that the payment of royalty fees bears only a remote connection to the imported merchandise. Thus, we conclude the royalty payments do not qualify as dutiable additions to the price actually paid or payable pursuant to 402(b)(1)(D). Proceeds of Subsequent Resale As the royalty fees are based on net sales of finished products manufactured with the imported raw materials and sales of the imported raw materials themselves, counsel argues they do not constitute "proceeds of subsequent resale" of the imported merchandise pursuant to Section 402(b)(1)(E). Counsel emphasizes that the raw materials at issue constitute a small component of the licensed finished products manufactured by the importer and that the manufacturing operations entail more than mere assembly of finishing operations. We note the imported raw materials lose all of their character as they are incorporated into the finished product produced and sold by the importer and the fact that the finished products contain only a small amount of the raw materials at issue as proof that the royalty fees concern the sale of finished products and not the resale of the imported merchandise. Accordingly, we agree that the royalty fees do not constitute proceeds of subsequent resale under (E). HOLDING: Given the circumstances of the sale between the importer and its related suppliers, we conclude that transaction value is the appropriate method of appraisement for both imported finished products and raw materials.  We conclude that the royalty payments made by the importer to various licensors do not constitute part of the price actually paid or payable for the imported raw materials and do not constitute dutiable additions to the price actually paid or payable for the imported merchandise . Sincerely, Virginia L. Brown Chief, Value Branch