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

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