HQ 546146: Dutiability of royalty and premium payments for use of trademarks and copyrights; royalty; proceeds of any subsequent resale; 402(b)(1(D) and (E); SAA; General Notice, Dutiability of Royalty Payments; Imperial Products; HRL 544436; BBR Prestressed Tanks; Distribution, License and Supply Agreement

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 546146

                           May 10, 1996

RR:IT:VA  546146 KCC

CATEGORY:  Valuation

Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, New York 10016

RE:  Dutiability of royalty and premium payments for use of
     trademarks and copyrights; royalty; proceeds of any
     subsequent resale; 402(b)(1(D) and (E); SAA; General
     Notice, Dutiability of Royalty Payments; Imperial Products;
     HRL 544436; BBR Prestressed Tanks; Distribution, License and
     Supply Agreement

Dear Ms. Friedman:

     This is in response to your letter dated September 15, 1995,
submitted on behalf of [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
("Importer/Distributor"), requesting a ruling concerning the
dutiability of royalty and premium payments made for trademarks
and copyrights.  Your request that, pursuant to 177.2(b)(7),
Customs Regulations (19 C.F.R. 177.2(b)(7)), certain information
provided in connection with this decision be treated as
confidential is granted.  Accordingly, the portions of this
decision that appear in brackets will be deleted from any copies
that are made available to the public.  We regret the delay in
responding.  A copy of the Supply Agreement pertaining to the
sale of the imported merchandise was submitted for our
examination on April 26, 1996.

FACTS:

     [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] ("the
Importer/Distributor") and [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] ("the
Licensor") entered into a Distribution Agreement on February 8,
1995, wherein the Importer/Distributor acquired from the Licensor
the right to utilize certain names, representations, logos,
movements, personalities, artwork, photographs and other material
("names and characters") in connection with the distribution and
sales in the
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] of a wide range of
consumer electronic and household products ("the
imported/licensed products").  See, 1(a), (b) and (c) of the
Distribution Agreement.  The names and characters covered under
this agreement are well-known [xxxxxxxxxxxxxx] characters: 
[xxxxxxxxxxxx], [xxxxxxxx], [xxxxxxxxxxxx], [xxxxxxxxxxx],
[xxxxxxxxxxxxxxxxx], [xxxxxxxxxxxxx], [xxxxxxxxxxxxxxxx] and
[xxxxxxxxxxxxxxxxxxxx], and will be used in conjunction with
marketing the merchandise.

     Pursuant to 10(c) of the Distribution Agreement, the
Importer/Distributor is to purchase the imported/licensed
products from the Importer/Distributor's parent corporation,
[xxxxxxxxxxxxxxxxxxxxxxxxxxxx] ("the Parent") or from an
authorized supplier.  However, you state that the
imported/licensed products will actually be manufactured by, and
purchased from independent manufacturers.  Thus, the authorized
supplier will be the independent manufacturer.  Although you
state that the imported/licensed products will be manufactured by
and produced from independent manufacturers, you only provided a
Supply Agreement between [xxxxxxxxxxxxxxxxxxxxxxxxxx], the
independent manufacturer, and the Importer/Distributor.  A copy
of a Supply Agreement between [xxxxxxxxxxxxx], an independent
manufacturer, and the Importer/Distributor dated October 1, 1994,
was submitted for our examination.  You add that the Parent will
not be manufacturing any of the imported/licensed products nor
will it or any of its subsidiary companies be selling components
to the independent manufacturers.  However, you state that the
independent manufacturers may acquire Parent components from
independent parties, which will be incorporated into the
imported/licensed products.   This ruling is limited to the facts
presented, i.e., the situation where the Importer/Distributor
purchases the imported/licensed products from [xxxxxxxxxxxxx],
the independent manufacturer unrelated to the Licensor.

     In return for the right to use the names and characters, the
Importer/Distributor agrees to pay the Licensor a royalty fee of
[xxxx] percent of the net sales of the imported/licensed
products, which will be set off against a pre-determined
"Targeted Consideration".  See, 1(f), 1(g), 3(a) and 3(b) of the
Distribution Agreement.  The "Targeted Consideration" or, as you
describe it, the minimum royalty is set at [xxxxxxxxxxx] dollars,
payable over the term of the Distribution Agreement and is
divided into yearly payments of varying amounts.  Thus, you state
that if [xxxx] percent of the net sales for a given year falls
short of the "Targeted Consideration" required for that year, the
difference is still owed by the Importer/Distributor.

     Additionally, the Distribution Agreement requires that the
Importer/Distributor pay the Licensor [xxx] percent of all
"premium sales" of the imported/licensed products, even when
those premium sales are made by the Importer/Distributor's
customers.  Premium sales are defined as "combination sales, free
or self-liquidating items offered to the public in conjunction
with the sale or promotion of a product or service, including
traffic building or continuity visits by the consumer/customer,
or any similar scheme or device, the prime intent of which is to
use the Licensed Products in such a way as to promote, publicize
and/or sell the products, services or business image of the user
of such item."  See, 4(b) of the Distribution Agreement.  

     Finally, the Distribution Agreement states that the Parent
is secondarily liable to the Licensor in the event that the
Importer/Distributor fails to submit sales reports for the
imported/licensed products, and/or fails to make royalty and
premium payments and/or the "Targeted Consideration."  See, 3(d),
5(d), 6(c) of the Distribution Agreement.  However, 8(h) and
9(k) of the Distribution Agreement holds the Parent primarily
liable and the Importer/Distributor secondarily liable for proper
use of artwork, proper notice of copyrights and trademarks and
for approval of and quality control of the imported/licensed
products.

     The Parent and the Licensor entered into a License Agreement
on February 8, 1995, wherein the Parent or Licensee acquired from
the Licensor the right to utilize the names and characters in
connection with the manufacture, distribution and sale in the
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx], of the imported/licensed products. 
See, 1(a), (b) and (c) of the License Agreement.  The names and
characters covered under this agreement are the same as those
defined in the Distribution Agreement.

     In return for the right to use the names and characters, the
Parent agrees that if the distributors, including the
Importer/Distributor, fail to pay the Licensor the [xxxx] percent
royalty fee on the net sales of the licensed products, as set off
against the "Targeted Consideration", it will be liable.  See,
1(f), 1(g), 3(a), 3(b) and 3(e) of the License Agreement.  You
note that 1(g) and 3(a) of the License Agreement provides for a
"Guaranteed Consideration", which is similar to the Distribution
Agreement's "Targeted Consideration", but is set at [xxxxxxxxx]
dollars, payable over the term of the License Agreement and is
divided into yearly payments of varying amounts.  You state that
the larger amount is due to the fact that the License Agreement
covers additional distributors and territories than those set
forth in the Distribution Agreement.  Thus, you state that in the
event one of the Parent's distributors fails to pay either its
pro rata share of the "Guaranteed Consideration", or [xxxx]
percent of the net sales of the licensed products, then the
Parent is responsible for these payments.

     1(h) of the License Agreement states that the Parent or its
approved suppliers may sell the licensed products only to the
distributors, including the Importer/Distributor.  Additionally,
4(b) of the License Agreement requires the Parent to pay the
Licensor [xxx] percent of all "premium sales" of the licensed
products, when those premium sales are made by the Parent.  The
definition of premium sales is the same as the definition of
premium sales in the Distribution Agreement.  The License
Agreement states that the Parent is secondarily liable to the
Licensor in the event that the distributors fail to submit sales
reports for the licensed products  See, 5(d) and 6(c) of the
License Agreement.  Finally, like the Distribution Agreement,
8(h) and 9(k) of the License Agreement holds the Parent
primarily liable and the distributors secondarily liable for
proper use of artwork, proper notice of copyrights and trademarks
and for approval of and quality control of the licensed products.

     We note that the Supply Agreement does not contain any
reference to the royalty and premium payments set forth in the
Distribution and License Agreements.  Moreover, there is nothing
in the Supply Agreement which suggests that the purchase of the
imported merchandise is subject to or conditioned upon payment of
the royalty and premiums.  We found no reference in the Supply
Agreement and the Distribution or License Agreements which would
link the agreements to one another.

     You contend that the payments are not dutiable as royalties
under 402(b)(1)(D) of the TAA because they are not a condition
of sale of the imported products, nor are they dutiable as
proceeds of a subsequent resale under 402(b)(1(E) of the TAA. 
You state that the Licensor is not related to the
Importer/Distributor, the Parent or the independent manufacturer.

ISSUE:

     Whether the royalty and premium payments, paid primarily by
the Importer/Distributor and secondarily by the Parent to the
Licensor for the right to distribute and sell the imported
products which bears the Licensor's trademarks and copyrights,
are included within the transaction value of the imported
merchandise as royalties or proceeds of subsequent resale.

LAW AND ANALYSIS:

     The preferred method of appraising merchandise imported into
the United States is transaction value pursuant to 402(b) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1979 (TAA), codified at 19 U.S.C. 1401a.  402(b)(1) of the TAA
provides, in pertinent part, that the transaction value of
imported merchandise is the "price actually paid or payable for
the merchandise when sold for exportation to the United States"
plus enumerated statutory additions.  402(b)(1) of the TAA
provides 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.

     For purposes of this decision, we assume that transaction
value is the appropriate method of appraisement and that the
royalty and premium payments are not part of the price actually
paid or payable for the imported merchandise because they are not
part of the total payment, directly or indirectly, made, or to be
made, for the imported merchandise by the buyer to, or for the
benefit of, the seller.  See, 402(b)(4)(A) of the TAA.  We note
that the Distribution and License Agreements state that the
distributors, including the Importer/Distributor, are to purchase
the licensed products from the Parent or an authorized supplier. 
However, you state that the licensed products will actually be
manufactured by, and purchased from [xxxxxxxxxxxxx], an
independent manufacturer.  You add that the Parent will not be
manufacturing any of the licensed products nor will it or any of
its subsidiary companies be selling components to the independent
manufacturer.  You do acknowledge that the independent
manufacturer may acquire Parent components from independent
parties which could be incorporated into the licensed products. 
Based on the facts submitted, the royalty and premium payments
will be made to the Licensor, who is a third party, unrelated to
the seller, i.e., the independent manufacturer, and are distinct
from the price actually paid or payable.  Thus, the issue to be
resolved is whether the royalty and premium payments are 

part of transaction value from the perspective of whether they
constitute additions to the price actually paid or payable.

     With regard to royalties, the Statement of Administrative
Action (SAA), adopted by Congress with the passage of the TAA,
provides that:

     [a]dditions for royalties and license fees will be
     limited to those 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.  In this regard, royalties and license fees for
     patents 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 copyrights and trademarks
     related to 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 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.

Statement of Administrative Action, H.R. Doc. No. 153, Pt. II,
96th Cong., 1st Sess. (1979), reprinted in Department of the
Treasury, Customs Valuation under the Trade Agreements Act of
1979 at 48-49 (1981).

     In the General Notice, Dutiability of Royalty Payments, Vol.
27, No. 12, Cust. B. & Dec. at 1 (February 10, 1993), Customs
articulated three factors, based on prior court decisions, for
determining whether a royalty was dutiable.  These factors were
whether: 1) the imported merchandise was manufactured under
patent; 2) the royalty was involved in the production or sale of
the imported merchandise and; 3) the importer could buy the
product without paying the fee.  Affirmative responses to factors 
one and two and a negative response to factor three would
indicate that the payments were related to the imported
merchandise and a condition of sale and, therefore, dutiable as
royalty payments.

     The first question is whether the imported merchandise is
manufactured under patent.   You state that it is possible that
the imported products are manufactured under patent, but that the
patents are not the subject of either the Distribution or License
Agreements.  Thus, you contend that the imported/licensed
products are not manufactured under patent. Both the Distribution
and License Agreements involve the right to use the Licensor's
trademarks and copyrights, which have nothing to do with the
patents associated with the manufacture of the imported products. 
We agree that the imported products are produced by a foreign
manufacturer independently from, and without regard to, the
trademarks or copyrights.

     The second question is whether the payments are involved in
the production or sale of the imported merchandise.  Under the
terms of the Distribution and License Agreements, the royalty
payments, including the Targeted and Guarantee Considerations,
and the premium payments are paid to the Licensor in
consideration for the right to sell merchandise which bears the
Licensor's trademarks and copyrights.  Thus, the royalty and
premium payments are not paid for rights associated with the
manufacture of the imported products.

     Additionally, the royalty and premium payments are not
subject to the terms of the sale for exportation to the United
States.  In Imperial Products, Inc. v. United States, 425 F.
Supp. 852, 77 Cust. Ct. 66 (1976), aff'd 570 F.2d 337, 65 CCPA 38
(1978), the court held that a royalty paid on imported brush
heads for the exclusive right to manufacture and sell a product
using the imported brush heads in the United States was a right
separate from the purchase price of the merchandise and therefore
not dutiable.  Additionally, in Headquarters Ruling Letter (HRL)
544436 dated February 4, 1991, we held that a royalty was
involved in the sale of imported merchandise because the
individual sale agreements and purchase contracts were subject to
the terms of the royalty agreement.  An examination of the Supply
Agreement between the independent manufacturer, [xxxxxxxxxxxxx],
and the Importer/Distributor reveals that the royalty and premium
payments are not involved in the sale of the imported/licensed
products.  The Supply Agreement does not contain any reference to
the royalty and premium payments set forth in the Distribution
and License Agreements.  Moreover, there is nothing in the Supply
Agreement which suggests that the purchase of the imported
merchandise is subject to or conditioned upon payment of the
royalty and premiums.  No reference in the Supply Agreement and
the Distribution or License Agreements was found which would link
the agreements to one another.  Based on the facts submitted, the
right to use the Licensor's trademarks and copyrights is not only
separate from the production process, but is also separate from
the sale for exportation to the United States given that the
Licensor and independent manufacturer are unrelated.

     The third question posed by the notice is whether the
importer could buy the imported merchandise without paying the
royalty and premium payments, i.e., whether the payments are a
condition of sale.  As pointed out in the General Notice, supra,
the answer to this question goes to the heart of whether a
payment is considered to be a condition of sale.  While royalties
paid to third parties for the use, in the United States, of
trademarks related to the imported merchandise are generally not
dutiable, the SAA provides that such payments will nevertheless
be treated as dutiable if they represent a condition of the sale
for exportation.  Payments that must be made for each imported
item are a condition of sale.  In a pre-TAA case, BBR Prestressed
Tanks, Inc., Frank P. Dow Co., Inc., of L.A. v. United States, 60
Cust. Ct. 885, R.D. 11536 (1968), aff'd, 64 Cust. Ct. 787, A.R.D.
265 (1970), the buyer of imported merchandise was required to pay
a lump-sum royalty in addition to the price.  The court held that
such a mandatory payment was dutiable, based primarily on the
fact that the payment went to the seller.  Under the TAA, such
payments may be dutiable as royalties, as part of the price
actually paid or payable, or as proceeds.  Royalty payments are
also a condition of sale when they are paid on each and every
importation and are inextricably intertwined with the imported
merchandise.

     In this case, the royalty and premium payments are not
optional, because they must be paid to the extent that the
Importer/Distributor earns revenue by reselling the
imported/licensed products.  On the other hand, the royalty and
premium payments are not paid to the seller.  Additionally,
pursuant to the submitted Supply Agreement, the royalty and
premium payments are not linked to individual sales agreements or
purchase contracts for the imported/licensed products, e.g., a
requirement by the seller that the buyer pay the royalty to the
licensor.  However, if there were evidence, which established
that it was the payment of the royalties by the
Importer/Distributor that enabled the licensed products to be
manufactured, we would regard this as an indication that the
royalty and premium payments were a condition of sale. 
Nevertheless, this is not the case.

     It is our position that the importer can buy the imported
merchandise without paying the royalty and premium payments.  The
payments are payable only on merchandise sold which bears the
Licensor's trademark or copyright.  The imported products can and
are manufactured and sold without the licensed names and
characters.  The payments at issue are only triggered when the
Importer/Distributor decides to add a licensed image to the
imported article.  The Distribution and License Agreements do not
restrict the Importer/Distributor or the Parent from distributing
and selling the imported products, but are for the separate right
to use the Licensor's trademarks and copyrights on the imported
products.  Accordingly, the royalty and premium payments at issue
are not a condition of sale of the imported merchandise and,
therefore, do not constitute an addition to the price actually
paid or payable for the imported merchandise pursuant to
402(b)(1)(D).

     Nevertheless, we must also consider whether the payments may
be added to the price actually paid or payable as proceeds of any
subsequent resale pursuant to 402(b)(1)(E).  General Notice,
supra, at 6-7.  The SAA addresses the dutiability of proceeds of
any subsequent resale as follows:

     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.

     Based on the facts presented, we do not find that the
proceeds of any subsequent resale, disposal, or use of the
merchandise accrues directly or indirectly to the seller.  The
royalty and premium payments are paid to the Licensor, who is not
related to either the Importer/Distributor, the Parent, or the
independent manufacturer.  There is nothing which suggests that
such payments will accrue directly or indirectly to the seller. 
Accordingly, in this instance, the royalty payments do not
constitute proceeds of any subsequent resale, disposal or use of
the merchandise pursuant to 402(b)(1(E).

     We note that our decision in this case is based on the
specific facts submitted, in particular the Supply Agreement,
Distribution and License Agreements and the fact that the
Importer/Distributor purchases the imported/licensed products
from [xxxxxxxxxxxxx], an independent manufacturer unrelated to
the Licensor.  If any of the facts should change in any material
respect, a different conclusion may result.

HOLDING:

     Based on the facts submitted, the payments made to the
Licensor do not constitute dutiable royalties pursuant to
402(b)(1)(D) of the TAA, or proceeds of any subsequent resale,
disposal or use of the merchandise pursuant to 402(b)(1)(E) of
the TAA, to be included within the transaction value of the
imported merchandise.

                              Sincerely,




                              Acting Director
                              International Trade Compliance
Division