H302184

HQ H302184 December 7, 2021 OT:RR:CTF:VS H302184 RMC CATEGORY: Valuation Field Director Regulatory Audit and Agency Advisory Services U.S. Customs and Border Protection 1100 Raymond Boulevard Newark, NJ 07102 Re: Internal Advice Request; Transaction Value; Service Fees; Royalties and License Fees Dear Field Director: This is in response to your correspondence dated August 2, 2018, requesting internal advice on the dutiability of certain service fees that the importer, [ ] (“the Importer”), pays to the related seller, [ ] (“the Parent”), and royalties that the Importer pays to [ ] (“the Related Licensor”). The Importer has asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: The Importer is a wholly-owned subsidiary of the Parent, a foreign entity that develops, produces, and sells flavors and fragrances. According to the information provided, the Importer manufactures thousands of products from raw materials such as vanilla, citrus products, or plant and flower materials. Its customers include companies in the perfume, cosmetics, and food industries, as well as manufacturers of household products. The imported merchandise primarily consists of raw materials such as fruit, vegetable, or other plant extracts and concentrates; essential oils; special aroma molecules; and aroma chemicals that the Importer purchased from the Parent. The merchandise was appraised based on the transaction value in the sale between the Parent and the Importer. As explained in further detail below, the Importer subsequently used the imported merchandise (along with other imported materials and domestically sourced ingredients) to manufacture products for resale in the United States. This internal advice request arose during an audit by U.S. Customs and Border Protection’s (“CBP”) Regulatory Audit and Agency Advisory Services (“RAAS”). During its review of the Importer’s transactions, RAAS discovered that the Importer made additional payments to the Parent for service fees and to the Related Licensor for royalty fees, and that neither of these payments was included in the declared value of the imported merchandise. RAAS questioned whether these additional payments should be included in the price actually paid or payable for the merchandise or added as an addition to the price actually paid or payable. In response to RAAS’s request for information, the Importer noted that there is no sales contract, sales agreement, or distribution agreement between itself and the Parent, and that the sales are based solely on purchase orders. However, the Importer provided complete copies of the applicable license agreement and service agreement. The facts relating to the service fee payments royalty payments, as well as excerpts from the relevant agreements, are set forth below. Service Fees Pursuant to Cost Sharing Agreement According to the information provided, the Importer makes additional payments pursuant to a service agreement with the Parent dated August 14, 2008. Relevant sections of the service agreement are as follows: Services. During the term of this Agreement the Parent shall provide to the Importer, or otherwise make available to the Importer Services to assist the Importer in the proper and efficient conduct and control of its business and in its leading function. In Particular (but without prejudice to the generality of the foregoing statements) the Parent shall provide, subject to the availability of its personnel, Services as listed and more precisely described in Appendix A. Service Fee. In consideration of the Services provided or made available by the Parent to the Importer under this Agreement, the Importer shall pay the Parent a fee for its Services (hereinafter called “the Service Fee”), which shall be levied by reference to the total cost borne by the Parent from executing its duties hereunder (hereinafter called “the Service Costs”) plus a mark-up of 10% . . . Term In December 2007, the Parties agreed verbally that this Agreement becomes effective on January 1, 2008, and shall remain in force for an indefinite period of time. Appendix A – Scope of General Administration and Support Services The Parent shall support the Importer in its leading role providing comprehensive and superordinated services relating to the following: Business Development and Marketing The provision of business development and marketing support services on behalf of the Importer to facilitate and promote the growth of sales in the Region through: Marketing techniques and strategies; Public relations; Pricing and product development; Bids and contract negotiations; Customer relations; and Other marketing related matters. Finance and Legal The provision of finance and legal support services on behalf of the Importer to facilitate the co-ordination of accurate and up-to-date financial reporting data, tax and legal liaison and currency management through: Accounting and financial reporting support; Budgeting and controlling support; Financing and hedging support; External audit support; Internal audit support; Tax and legal support. Human Resource The provision of human source services on behalf of the Importer to facilitate the recruitment and management of key personnel in the Region, including: Sourcing of key personnel for the operations in the Region; Other HR compliance issues relating to personnel in the Region. Product Management The provision of product management services on behalf of the Importer to facilitate cost effective purchasing and cost savings for the Importer through: Pricing and product development; Negotiations with key suppliers for the operations in the Region; Bids and contract negotiations; Other product management related matters. Royalties The Importer states that it uses a number of licensed manufacturing processes to produce finished products in the United States. The licensed processes include liquid compounding, spray dry technology, and reaction flavors. In addition, the Importer uses licensed technology in its production facilities to carry out distillation and other chemical extraction processes. As described in further detail below, the license agreement covers, among other technologies, the “information in respect to the manufacturing techniques and applications engineering of the molecules” that the Importer needs to manufacture the finished products in the United States. In exchange for these rights, the Importer pays the Related Licensor a royalty payment of 3% of the Importer’s net U.S. sales price of products manufactured in the United States using the know-how provided for in the license agreement. The license agreement dated March 28, 2014, contains the following relevant terms: THIS AGREEMENT is dated 3/28/2014 and is entered into BETWEEN [ ] (“the Related IP Holding Company”] acting on behalf of the partnership in the process of the Related Licensor . . in the following the “LICENSOR” and the Importer . . . in the following of LICENSEE. 1.3 – “CONTRACT PRODUCTS” means the products to be developed, produced, sold and advertised by the LICENSEE listed in the applicable (latest) version of Schedule III – which is subject to changes according to Section 15. 1.5 – “KNOW-HOW” shall mean all know-how as specified in the applicable (latest) version of Schedule I which is subject to changes according to Section 15. All KNOW-HOW licensed herein derives its economic benefit and value by being not generally known or reasonably ascertainable. 2.1 – LICENSOR hereby grants LICENSEE a non-exclusive, non-perpetual, revocable, chargeable, non-transferable, non-subl

Merchandise imported into the United States is appraised for customs purposes 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 primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” See 19 U.S.C. § 1401a(b)(2)(B). Here, although the buyer and the seller are related, the request for internal advice focused solely on the dutiability of royalty payments and service payments. Accordingly, we assume for the purposes of this decision that transaction value is the appropriate method of appraisement. Service Fees Part of the Price Actually Paid or Payable The term “price actually paid or payable” is defined as “the total payment (whether direct or indirect…) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. § 1401a(b)(4)(A). Here, the Importer makes the service fee payments directly to the Parent, which is the seller of the imported merchandise. In determining whether the service fee payments at issue here are part of the price actually paid or payable, the question is therefore whether the payments are part of the “total payment . . . for imported merchandise.” Regarding the scope of the term “total payment,