Transaction Value; Price Actually Paid or Payable; Royalties and Licensee Fees; Payments to a Related Party.

HQ W548573 July 25, 2005 VAL:RR:IT:VA W548573 jsj CATEGORY: Valuation Field Director Regulatory Audit Division Chicago Field Office U.S. Customs and Border Protection 610 South Canal Street Chicago, Ilinois 60607 Attn.: Mr. Thomas H. Kudelka Port File Number: AUD-1-ST:RA:FO 321 KJB Re: Transaction Value; Price Actually Paid or Payable; Royalties and Licensee Fees; Payments to a Related Party. Dear Field Director: The purpose of this letter is to respond to your request for Internal Advice (I.A.), forwarding correspondence from Hodes Keating & Pilon, on the behalf of xxxxxxxxxxxxx. (Importer 1) and xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (Importer 2). The correspondence in issue requested internal advice concerning the appraisement of merchandise sold by xxxxxxxxxxxxxxxxxxxxxxxxxx (Seller 1), xxxxxxxxxxxxxxxxxx (Seller 2), xxxxxxxxxxxx xxxxxxxxx (Seller 3) and xxxxxxxxxxxxxxxxxxxxxxxxxx1 (Seller 4) to Importer 1 and Importer 2. It is the understanding of this office derived from a reading of the memorandum of the Regulatory Audit Division, Chicago Field Office, that transaction value is the proper basis of appraisement. The 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 xxxxxxx xxxxxxxxxxxxxxxxx (Royalty Owner) pursuant to intellectual property license agreements. This I.A. memorandum is being issued subsequent to a review of the following: (1) The correspondence of counsel for Importer 1 and Importer 2 dated October 7, 2003; (2) The 1 Counsel for Importer I, in response to electronic correspondence from CBP dated March 25, 2005, requesting that the importer confirm "precisely who the sellers are," advised CBP that the "primary related foreign sellers of merchandise to [Importer I] and [Importer 2]" were the above-named entities. memorandum of the Field Director, Regulatory Audit Division, Chicago Field Office, including all attachments/exhibits; and (3) The correspondence of counsel for Importer 1 and Importer 2 dated April 25, 2005, including the attachments. Customs and Border Protection (CBP) specifically reviewed the intellectual property license agreements between Importer 1 and Royalty Owner, and Importer 2 and Royalty Owner, which agreements were provided with the submission of the Regulatory Audit Division Field Director. Importer 1 and Importer 2 requested confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) for the names of the parties, the exhibits, and the terms of the agreements. Customs and Border Protection will, therefore, extend confidential treatment in accordance with the request of counsel for the importers. Information determined to be confidential will be underscored in this I.A. response and will be redacted in the public version. FACTS: Customs Transactions: Importer 1 and Importer 2 primarily, but not exclusively, purchase 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. Customs and Border Protection sought copies of sales contracts between Importer 1, Importer 2 and the sellers or, if sales contracts did not exist, requested to be advised "of the manner in which the sales are undertaken and confirmed."2 Counsel for the importers responded by providing an example of a purchase order. No further details were provided. Importer 1 and Importer 2 advise 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 is further advised that "[Royalty Owner] owns and manages [Importer 1's] and [Importer 2's] intellectual property rights."3 Importer 1 and Importer 2 pay fees to Royalty Owner through an "inter-company 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 xxxxxxxxxxxxxxxxxxxxxxxxxxxxx (Parent 1) (13.2%) and xxxxxx xxxxxxxxxxxxxxx (Parent 2) (86.8%). 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 xxxxxxxxxxxxxxxxxxxxxxxxxxxx (Royalty Owner-Parent). Royalty Owner-Parent is a wholly owned subsidiary of Importer 1. 2 Electronic Correspondence to counsel for Importer 1, Mar. 25, 2005. 3 This statement was made to CBP on two occasions: Correspondence of Counsel, Oct. 7, 2003, at 2 and Correspondence of Counsel, April 25, 2005, at 2. 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: xxxxxxxxxxxxxxx Intellectual Property License Agreement and Intellectual Property License Agreement. The Importer 1 - Royalty Owner agreement was executed December 28, 1999. The Importer 2-Royalty Owner agreement was executed December 31, 1999. xxxxxxxxxxxx, a Vice President of both Importer 1 and Importer 2 executed the agreements for Importer 1 and Importer 2. xxxxxxxxxxxxxxxxxxxx, a Vice President of Royalty Owner, executed both agreements for Royalty Owner. The licensing agreements cover a broad range of intellectual property.4 Importer 1, in accordance with its agreement, contracted to pay Royalty Owner "a Royalty of xxxxxxxxxxxxxxx of its Net Sales." Importer 2 agreed to Royalty Owner "a Royalty of xxxxxxxxxxxxxxxxxxx of its Net Sales." Paragraph 5 of both licensing agreements state 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." ''Net Sales" is defined in both licensing agreements as the "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." "Licensed Products" for both agreements is defined as "any product that in the absence of this Agreement 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." ISSUE Are the fees paid by Importer 1 and Importer 2 to Royalty Owner pursuant to the intellectual property license agreements included in the transaction value of the merchandise either as part of the price actually paid or payable or as a statutory addition that must be added to the price actually paid or payable? LAW AND ANALYSIS The federal agency responsible for interpreting and applying the United States Code and the regulations of the Bureau of Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection.5 Customs and Border Protection, in accordance with its legislative mandate, fixes the final appraisement of imported merchandise in accordance with Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA).6 4 See: xxxxxxxxxxxxxxx Intellectual Property license Agreement and xxxxxxxxxxxx Intellectual Property License Agreement, arts. 1 - 4. s See 19 U.S.C. 1500 (West 1999) (providing that Customs and Border Protection is responsible for fixing the final appraisement, classification and amount of duty to be paid); See also Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 100-576, at 549 (1988) reprinted in 1988 U.S. Code Cong. and Adm. News 1547, 1582. The preferred method of appraisement is transaction value. The transaction value of imported merchandise is: the price actually paid or payable for merchandise when sold for exportation to the United States, plus amounts equal to - the packing costs incurred by the buyer with respect to the imported merchandise. any selling commissions incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; (D) 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 (E) 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)(l). The "price actually paid or payable," as defined in the Trade Agreements Act, is: 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). Based on Generra Sportswear Co. v. United States, 905 F. 2d. 377 (Fed. Cir. 1990), rehearing denied, (Fed. Cir. 1990), Customs and Border Protection presumes that all payments made by a buyer to a seller are part of the price actually paid or payable for imported merchandise. See also HQ 547532 (Nov. 2, 2001). The court in Generra held that the term "total payment" in the definition of the phrase "price actually paid or payable" was intended to be all inclusive. See id. at 379. The reasoning underlying the Court's decision stems from the language of section 1401a (b)(4)(A) which announces that the price actually paid or payable is the "total payment" made for imported merchandise whether the payments are "direct or indirect." 19 U.S.C. 1401a(b)(4)(A). The Generra court further held that: Congress did not intend for [Customs and Border Protection] to engage in extensive fact-finding to determine whether separate charges, all resulting in 6 See 19 U.S. C. 1401a (West 1999); See generally, What Every Member of The Trade Community Should Know About: Customs Value, an Informed Compliance Publication of Customs and Border Protection available on the World Wide Web site of Customs and Border Protection at www.cbp.gov.  payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. Id. at 380. The court, quoting Moss Mfg. Co. v. United States, 896 F. 2d 535,539 (Fed. Cir. 1990), concluded that the "straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of [CBP's] appraisal procedure; it would be frustrated were we to parse the statutory language... and require [CBP] to engage in [a] formidable fact-finding task...." Id. at 380. Although the presumption that payments made by a buyer to a seller are part of the price actually paid or payable is rebuttable, the burden of establishing that the payments are unrelated to the imported merchandise rests on the importer. See id. HQ 547532. See also Chrysler Corp. v. United States, 17 C.I.T. 1049 (Ct. Int'l Trade 1993). The information brought forward by Importer 1 and Importer 2 has not persuaded CBP that the payments in issue should not be part of the price actually paid or payable. · Importer 1 and Importer 2 suggest that since Royalty Owner is neither an importer nor seller and since the fees are calculated based on the sale of all products and services in the United States, not just on those products subject to the licensing agreements, that the payments should not be statutory additions to the price actually paid or payable. The importers further suggest that the accounting and tax practices of Importer 1 warrant the exclusion of the payments from the price actually paid or payable. According to counsel’s submission, "[w]hen [Royalty Owner's] profits are rolled up to the federal tax level, the profits are eliminated in consolidation in accordance with GAAP." Importer 1 and Importer 2 also advise CBP that the "royalty payments never leave the U.S. or the [Importer 1] (USA) group" and that Importer 1 does not pay dividends to Parent 1 or to Parent 2. Although Importer 1 and Importer 2 offer a number of reasons for suggesting that the fees paid to Royalty Owner pursuant to the intellectual property licensing agreements should not be part of or an addition to the price actually paid or payable, these reasons are not supported by the valuation statute. It is the conclusion of CBP that the payment of the fees for use of those patented processes, trademarks, copyrights, or other intellectual property rights addressed in the license agreements are payments made by a buyer to a party related to the seller. We have found that royalty payments made to a party related to a seller constitute indirect payments to the seller and are part of the price actually paid or payable. See HQ 547623 (Feb. 21, 2002). Thus the royalty payments paid by Importer 1 and Importer 2 to Royalty Owner are part of the price actually paid or payable. HOLDING The fees paid by Importer 1 and Importer 2 to Royalty Owner pursuant to the intellectual property license agreements should be part of the price actually paid or payable pursuant to the transaction value method of appraisement. You are to mail this decision to the Internal Advice applicant no later than 60 days from the date of this letter. On that date, this office will make a public version of the ruling available to Customs personnel and to the public on the Customs Home Page on the World  6 Wide Web at: www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution. Sincerely, Virginia L. Brown, Chief Value Branch