HQ 544129: Decision on Application for Further Review of Protest No. 3901-7-000473

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 544129

                                  August 31, 1988

          CLA-2 CO:R:C:V   544129 EK

          CATEGORY:  Valuation

          District Director of Customs
          Chicago, Illinois

          RE:  Decision on Application for Further Review of
               Protest No. 3901-7-000473

          Dear Sir:

                This protest was filed against your decision in the
          liquidation of Entry No. 64092 dated January 9, 1987, made by
          (company name) (hereinafter referred to as importer).  The
          importer is disputing the inclusion of a royalty payment in the
          transaction value of the imported merchandise 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:

                The importer is a manufacturer of pharmaceutical products
          in the United States.  The royalty payments at issue in this case
          are made to (company name) (hereinafter referred to as licensor).
          The seller in the transaction is a Swedish corporation.  The
          licensor and seller are related within the meaning of section
          402(g) of the TAA.  The agreement provides for the importer to
          pay a royalty to the licensor for the use and sale of a drug. The
          amount owed to the licensor is reduced by payments made to an
          unrelated company in the United States (also unrelated to the
          seller) who was originally involved in the early development of
          the product.  These payments, when made, reduce the amount owed
          to the licensor.

                The license agreement provides for an exclusive right and
          license to use and sell the license products within the United
          States.  The amount of the royalty is 5% of the importer's net
          sales.  The royalty is payable as long as the patent rights
          continue.  The licensor further agrees to undertake litigation,
          at its expense, to stop others from infringing on the rights
          conveyed by the agreement.  

















                                        - 2 -


                The importer further acquired the right to manufacture the
          drug in the United States if the manufacturer could not fulfill
          the requirements in the supply agreement.  This, however, does
          not relieve the obligation to pay the royalty for sale and use to
          the licensor.  The importer may also use the drug for its own
          purposes, i.e., give away samples without paying a royalty.

                The agreement further provides for the importer to use
          know-how possessed by the licensor.  It covers know-now in
          existence at the time of the contract as well as future know-how.
          The purpose of this is to keep the importer connected with
          developments and test results in alternative dosage forms of the
          product.


          ISSUE:

                Whether the royalty payments made by the importer to the
          licensor are to be included in the transaction value of the
          imported merchandise.


          LAW AND ANALYSIS:

                Transaction value is the preferred method of appraisement
          and is defined in section 402(b) of the TAA as:

                . . . the price actually paid or payable for the
                merchandise when sold for exportation to the
                United States, plus amounts equal to . . . 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 . . .

                An addition for a royalty fee paid by the buyer will be
          made to the "price actually paid or payable," unless the buyer
          establishes that such payment is distinct from the price for the
          imported merchandise, and that it is not a condition of the sale
          of the imported merchandise.

                In this case, is appears as if the royalties at issue are
          not a condition of the sale of the imported merchandise.  The
          payment owed is paid for rights which are separate and apart from
          the right of ownership on payment of the purchase price.  The
          royalty payments are triggered upon the resale of the product
          rather than the importation of the product.













                                        - 3 -


                In a similar situation, Headquarters ruled that royalty
          payment by the importer to the licensor for the use, sale, and
          manufacture of the product in the United States was not part of
          the transaction value of the imported merchandise.  In that case,
          the payment was not a condition of the sale nor was it tied to
          the importation of the product.  See, Headquarters Ruling No.
          544061 dated May 27, 1988.


          HOLDING:

                In view of the foregoing, it is our conclusion that the
          payments made by the importer pursuant to the royalty agreement
          at issue are not part of the transaction value of the imported
          merchandise within the meaning of section 402(b)(1)(D) of the
          TAA.  Please grant the protest and attach a copy of this decision
          to the Form 19, Notice of Action, to be sent to the protestant.


                                  Sincerely,




                                  John Durant, Director,
                                  Commercial Rulings Division