HQ 545824: Internal advice request 53/94 regarding royalty paymentsmade to a trademark holder for a license to manufacture andsell products with the trademark in the United States; Proceeds

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 545824
                         August 28, 1995

VAL R:C:V 545824   RSD

CATEGORY: Valuation

District Director of Customs
1000 2nd Avenue
Room 2200
Seattle, Washington 98104

RE:    Internal advice request 53/94 regarding royalty payments
made to a trademark holder for a   license to manufacture and
sell products with the trademark in the United States;           Proceeds

Dear Sir:

     This is in response to your memorandum dated September 9,
1994, concerning  an internal advice request 53/94 submitted by
Milton Bradley Co./Parker Brothers, a division of  Hasbro Inc.,
regarding the dutiability of royalties related to the "Clue
Mystery Puzzle" game paid to Waddingtons Games, Ltd. of Great
Britain.  Your memorandum was forwarded to our office by the
National Import Specialist who also prepared a memorandum dated
November 1, 1994, on this matter.  A copy of the Milton Bradley's
internal advice request and licensing agreement accompanied your
memorandum.  We regret the delay in responding.

FACTS:

     Milton Bradley Co.  (Milton Bradley) purchases and imports a
bagged magnifying glass  from Waddingtons Games, LTD.
(Waddingtons) of Great Britain.  The magnifying glass is
incorporated into a game called "Clue Mystery Puzzle."  The game
is a jigsaw puzzle, which is sold with a booklet giving clues to
solve a mystery.  The magnifying glass is used to enable the
puzzler to observe the clues in the book.  The only imported part
for the game is the magnifying glass and all other parts of the
game are made in the United States. 

     Milton Bradley is affiliated with Kenner Parker Toys Inc.,
which is also related to Parker Brothers.  In 1987, Parker
Brothers entered into a licensing agreement with Waddingtons 
concerning the use of the CLUE or CLUEDO trademarks.  These
trademarks are owned by Waddingtons and relate to board games,
which are also copyrighted by Waddingtons.  In the 1987
agreement, Waddingtons granted to Parker Brothers the exclusive
right and license to manufacture or to have manufactured and to
sell, in the countries listed in a schedule A incorporated into
the agreement, the national versions of a board game for sale
under the trademark Clue or Cluedo. The term "game" was defined
in the agreement to include not only the complete boxed game but
also all parts and components.  In exchange for these rights,
Parker agreed to pay Waddingtons ten percent of the net sales
value of the complete packaged units of Clue sold by  Parker
Brothers under the agreement and five percent of the net sales
value of all parts and components of Clue separately packaged and
sold by Parker Brothers under the agreement.  The importer did
not separately package and sell the magnifying glass.  Rather, it
was included as part of the complete packaged game.

     In December 1992, the parties extended the license agreement
to apply to the Clue Mystery Puzzle game.  This addendum to the
license agreement sets forth the terms and conditions applicable
to this game.  Specifically, it provides that Parker Brothers pay
Waddingtons ten percent of the net sales value of each item of
the Clue Mystery Puzzle game sold by Parker Brothers or a Parker
Brothers affiliate in the licensed territory.  In addition, each
Parker Brothers' affiliate in the extended license territory was
required to pay Waddingtons a ten percent royalty on sales of the
Clue Mystery Puzzle game.  There were no minimum royalties with
respect to the Clue Mystery Puzzle game.  In the third quarter of
1993, the amount of royalties paid to Waddingtons was $20,747.47. 
Based on information provided by the importer, it is our
understanding that royalties are paid only on the sales of the
complete Clue Mystery Puzzle games in the United States and not
on sales of the individual pieces or components included in the
complete packaged games.

ISSUE:

     Are the royalties paid by Milton Bradley to Waddingtons
additions to the price actually paid or payable for the imported
merchandise either as royalties or proceeds under sections
402(b)(1)(D) or (E) of the TAA?   

LAW AND ANALYSIS:

     As you know merchandise imported into the United States is
appraised in accordance with section 402 of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979 (TAA: 19
U.S.C.  1401a).  The preferred method of appraisement is
transaction value, which is defined as the "price actually paid
or payable for merchandise when sold for exportation to the
United States," plus certain enumerated additions.  Two of the
statutory additions to the price actually paid or payable are
found in sections 402(b)(1)(D) and (E) which provide for
additions to the price actually paid or payable for:

          (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. 

      The issue of whether transaction value is proper in this
case has not been raised in the internal advice request.  For
purposes of this ruling, we will assume that transaction value is
the proper basis of appraisement.   

     In regard to the dutiability of royalties the Statement of
Administrative Action provides in relevant part:

          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.  In this
     regard, royalties and license fees for patents covering
     processes to manufacture the imported merchandise will
     generally be dutiable, where as royalties and license fees
     paid to third parties for use, in the United States, of
     copyrights and trademarks related 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 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. 

Statement of Administrative Action , H.R. Doc. No. 153 96 Cong.,
1st Sess., pt 2 reprinted in, Department of the Treasury, Customs
Valuation under the Trade Agreements Act of 1979 (October 1981)
at 48-49.
     
     The question of whether the royalty payments are dutiable or
not was analyzed in our notice on the dutiability of royalty
payments, which was published in the Custom Bulletin on February
10, 1993, commonly referred to as "Hasbro II".  In that notice we
indicated that several questions must be answered in order to
determine whether a royalty payment is related to the  imported
merchandise and thus required as a condition of sale.  As set
forth in the notice the questions are:  (1) was the imported
merchandise manufactured under the patent?  (2) was the royalty
involved in the production or sale of the imported merchandise?
and (3) could the importer buy the product without paying the
fee?  27:6 Cust. B. &  Dec. 1 at  9-11.   Negative responses to
the first and second questions, and an affirmative response to
the third, suggest that a royalty payment is non-dutiable under
section 402 a(b)(1)(D) of the TAA.

     In this case, the imported merchandise, the magnifying
glass, was not manufactured under patent.  The royalty payment
was made for the use of a trademark on the complete game and was
not involved in the production or sale for exportation of the
imported merchandise.  Finally, it appears the importer could buy
the magnifying glass without having to pay the royalty because
there is no indication that the sale of the product is subject to
the terms of the license agreement.  The royalty agreement has no
provisions regarding the purchase of any portion of the puzzle
game, including the magnifying glass.  Accordingly, based on the
information presented we find that the royalty payments made to
Waddingtons are not dutiable as royalties under section
402((b)(1)(D).

     Although the payments are not dutiable as royalties, we must
also determine whether they would be considered proceeds of a
subsequent, resale, disposal, or use of the imported merchandise
under section 402(b)(1)(E).  In HRL 544436 (C.S.D. 91-6; Vol 25
Cust. Bull. No. 18 dated February 4, 1991), commonly know as the
"Hasbro ruling", the importer was required to pay a percentage of
the "resale price" to the seller, for the imported merchandise,
in addition to the price originally paid.  The importer had been
paying duties on these additional payments as "royalties' under
section 402(b)(1)(D).  Customs held that the payments were not
dutiable under this royalty provision, but were dutiable under
section 402(b)(1)(E) as "proceeds of subsequent resales" of the
imported merchandise that accrued to the seller.

     Customs subsequently reviewed the Hasbro ruling, by
soliciting public comments thereon and published the General
Notice on the Dutiability of "Royalty" Payment, referred to above
and commonly known as the "Hasbro II" decision. Customs
incorporated the analysis of the comments received.  Hasbro II
upheld the first Hasbro ruling and modified it to the extent the
subject payment were found to be dutiable as either royalties
under section 402(b)(1)(D) or as proceeds under section
402(b)(1)(E).

     Regarding proceeds, SAA provides the following:

     Additions for the value of any part of the proceeds of any
     subsequent resale, disposal or use of the imported
     merchandise that accrue directly or indirectly to the
     seller, do not extend to the flow of dividends or other
     payments from the buyer to the seller that do not directly
     relate to the imported merchandise.  Whether an addition
     will be made must be determined on a case-by-case basis
     depending on the facts of each individual transaction. 

Statement of Administrative Action, H.R. Doc No. 153 96 Cong. 1st
Sess.,  Pt. 2. reprinted in, Department of Treasury, Customs
valuation under the Trade Agreement Act of 1979 (October 1981),
at 49.

     In your memorandum, you state that you believe that the
royalties paid to Waddingtons should be partially dutiable as
proceeds of subsequent sales in proportion to the value of the
magnifying glass to the complete Clue Mystery Puzzle game.  In
prior cases where imported articles have been combined with U.S.
components to make the finished goods, Customs has not attempted
to apportion the proceeds of subsequent sales when royalties were
paid based on the sale of the finished articles.  In C.S.D. 92-12, 26 Cust. Bull. 424 (1992), HRL 544656, dated June 19, 1991,
the importer was purchasing components for textile machines and
combining them after importation with the U.S. components to
produce the finished textile machines.  The importer paid
royalties to the overseas seller based on the "ex works" price of
the finished machines which included U.S. components, not solely
on the value of the imported components.  We noted that a
substantial portion of the payment was based on components that
were not imported.  As a result, we held that the royalty
payments made by the importer to the overseas seller were not
dutiable as proceeds under section 402(b)(1)(E) of the TAA. 
Similarly, in HRL 545770, June 21, 1995, fees were paid on the
sale price of the final products made from both imported and
domestic components.  Because the payments were not based on the
resales of the imported products and a substantial portion of the
payments were based on domestic components incorporated into the
end product, we held that the fees were not dutiable as proceeds. 
In either case, no attempt was made to apportion the potential
proceeds based on the resale of the imported components used in
making the finished articles.  

     In this case, royalties are paid to Waddingtons for the
right to use a trademark on the finished Clue Mystery Puzzle
game.  The only imported component of the game, the magnifying
glass, is combined with parts made in the United States to
produce the complete Clue Mystery Puzzle game.  The royalties are
paid based on the sales in the United States of the entire
finished Clue Mystery Puzzle games, not on sales of the imported
magnifying glass.  In other words, the licensing fees paid to
Waddingtons are not based on resales, disposal, or use of the
imported merchandise, but on sales of a different article, the
complete game, which is overwhelmingly composed of domestic
components.  Accordingly, we find that the royalty payments made
to Waddingtons also are not dutiable as proceeds under section
402(b)(1)(E) of the TAA.

HOLDING:

     The royalty payments made by the importer to Waddingtons are
not includable in transaction value as royalties or proceeds
under either section 402(b)(1)(D) or 402(b)(1)(E).

                         Sincerely,



                         John Durant, Director
                         Commercial Rulings Division