HQ 544420: Application for Further Review of Protest No. XXXXX Regarding a License Fee as a Dutiable Addition to the Price Actually Paid or Payable

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

       



                                   HQ 544420

                                   July 8, 1991

VAL CO:R:C:V  544420 ML

CATEGORY:  Valuation

District Director
Pembina, North Dakota  58271

RE:  Application for Further Review of Protest No. XXXXX
     Regarding a License Fee as a Dutiable Addition to the Price
     Actually Paid or Payable

Dear Sir:

     This protest was filed against your appraisement decision in
the liquidation of various entries made by Itex Corporation, the
importer of Ferroscope instruments and the holder of exclusive
licensing rights regarding technology associated with ferroscope
instruments.  The merchandise was manufactured in Canada by
Cyberscope Industries.  The merchandise was appraised 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:

     Itex Corporation, (hereinafter referred to as the
"importer"), paid a license fee in 1988 of $XXX,000 (cdn) to
obtain the exclusive right to use "technology" and "licensed
products" developed by Cyberscope Industries, Inc., (hereinafter
referred to as the "manufacturer").  The "technology" is a unique
inspection method for detecting flaws in steel tubing.  Clause
2.01 of the agreement, dated March 21, 1988, grants to the
importer, among other things, an exclusive right and license:

          "(a)  to enjoy, commercialize, exploit, practice and to
          otherwise utilize any portion of the Technology and to
          use, distribute, lease, rent, enjoy, commercialize and
          exploit the Licensed Products only in the Territory;

          (b)  to utilize, commercialize, exploit and enjoy the
          Tradename solely and exclusively and only upon and in
          connection with the use, lease, rent, enjoyment,
          advertising, marketing, exploitation and distribution
          of the Licensed Products in the Territory; and

          (c)  to make, manufacture, produce, maintain,
          calibrate, service, repair, rebuild, redesign,
          reproduce and otherwise deal with the Licensed Products
          using the Technology subject to the terms and
          conditions herein contained."

     This license fee calls for $XXX,000 (cdn) to be paid yearly,
for 5 years for a total of $XXX,000 (cdn).  The importer also
agreed to purchase the "equipment" that utilized that
"technology", in clause 9.02.  The same contract states that the
importer shall purchase from the manufacturer " a minimum of
fifty (50) Instruments between the day of March 21, 1988 and the
20th day of March, 1993."  No similar commercial equipment is
manufactured in the United States.  The first shipment of
"equipment" was covered by this contract, which as stated,
includes the license fee which is paid by the importer to the
manufacturer.

     The contract also states in clause 8.01, that in the event
of any non-payment by the importer of any material amounts due
under the Agreement or in the case of the importer not purchasing
the equipment required to be purchased under the Agreement, the
manufacturer may terminate the Agreement and the license.

ISSUE:

     Whether a license fee paid by the importer to the
manufacturer for the use of technology necessary to operate the
imported equipment is a dutiable addition to the "price actually
paid or payable" for the imported merchandise.

LAW AND ANALYSIS:

     The primary basis of appraisement is transaction value. 
Transaction value is defined as the "price actually paid or
payable" for imported merchandise when sold for exportation to
the United States, plus certain enumerated additions.  This is
more specifically defined in section 402(b)(4)(A) of the TAA as
the following:

          The term "price actually paid or payable" means the
          total payment ... made, or to be made, for imported
          merchandise by the buyer to, or for the benefit of, the
          seller.

     The relevant portion of the TAA is section 402(b)(1)(D)
which provides for the inclusion in transaction value of:

          ... 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 Statement of Administrative Action (SAA), specifically
approved by Congress, provides additional information pertaining
to royalties.  It states that:

          Additions for royalties and license fees will be
          limited to those that the buyer is required to pay,
          directly or indirectly, as a condition of sale of the
          imported merchandise for exportation to the United
          States (Statute).  In this regard, royalties and
          license fees for patent 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, of
          copyright and trademarks related to the imported
          merchandise, will generally be considered as selling
          expenses of the buyer and therefore would not be
          dutiable.  However, the dutiable status of royalties
          and license fees paid by the buyer must be determined
          on case-by-case basis and will ultimately depend on: 
          (i) whether the buyer was required to pay that 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, as such payment was not a
          condition of the 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 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.  (emphasis added)

     In Internal Advice No. 42/83, Headquarters Ruling Letter
(HRL) 543070, dated August 19, 1983, Customs responded to a
question regarding the dutiability of a license fee made for
technology known as the "Hoboken Process".  The fee was paid by
the importer to the seller, who then paid the fee to the
licensor.  The fee was part of the contract.  The contract also
covered the prices for the equipment as well as the process.  In
HRL 543070, we stated that if the royalty or license fee relates
to the imported merchandise and the buyer is required to pay the
royalty or license fee as a condition of the sale of the imported
merchandise for exportation to the United States, then such a fee
will be added to the price actually paid or payable for the
merchandise when sold for exportation to the United States,
unless otherwise contained in such a price.  Customs held that
the license fee for the "Hoboken Process" was related to the
imported merchandise and the buyer was required to pay the fee as
a condition of sale of the imported merchandise for exportation
to the United States.

     In support of your belief that the license fee is paid as a
condition of the sale of the imported merchandise, and
consequently, a dutiable addition to the "price actually paid or
payable", you point to Clause 3 of the contract between the
importer and the manufacturer.  The relevant portion of that
clause relates to the payment schedule of the $XXX,000.  The
amount of $XXX,000 was to be paid upon the execution of the
contract, with the other $XXX,000 to be paid upon the delivery of
the instruments.  The timing of these payments lends support to
your position that the payment for the license and the sale of
the instruments are connected.  Clause 9.02 also ties the
purchase of equipment to the purchase of licensed technology. 
The termination clause, clause 8.01, allowing the manufacturer to
cease deliveries of the contracted for merchandise in the event
of the importer's inability to complete payment for the license,
clearly establishes that the fee paid by the importer to the
seller was paid "as a condition of the sale of the imported
merchandise."  The license fee was for the technology and the
licensed products which are part of the imported merchandise. 
The license fee was related to the imported merchandise and the
buyer was required to pay the fee as a condition of sale of the
imported merchandise for exportation to the United States.  

     For the reasons stated above, we are of the opinion that
this case is different from the circumstances described in HRL
543529, dated October 7, 1985, HRL 543062, dated November 8,
1983, HRL 544047, dated March 8, 1988, and HRL 542844, dated June
17, 1982 as cited in this Application for Further Review.  The
payment owed was paid for rights which are not separate and apart
from the right of ownership on payment of the purchase price.  As
such, it should be an addition to the "price actually paid or
payable."

HOLDING:

     The License Fee was paid by the licensee for the territorial
exclusivity to manufacture, use and sell in the licensed
territory, as a condition of the ownership or importation of the
merchandise.  The buyer was required to pay the fee as a
condition of sale of the imported merchandise for exportation to
the United States.  Therefore, these payments made from the
importer to the manufacturer are part of the transaction value of
the imported merchandise.

     You are directed to deny this protest.  A copy of this
decision should be attached to Form 19, notice of action, to be
sent to the protestant.

                                   Sincerely,


                                   John Durant, Director
                                   Commercial Rulings Division


cc:  Director, Customs Information Exchange