H309127

HQ H309127 August 3, 2020 OT:RR:CTF:VS H309127 AP CATEGORY: Valuation James L. Rogers, Esq. Nelson Mullins Riley & Scarborough LLP 104 South Main Street, Ninth Floor Greenville, SC 29601 RE: First sale; dutiability of royalty payments; educational materials Dear Mr. Rogers: This is in response to your letter, dated February 13, 2020, on behalf of Company A, [ ], requesting a ruling regarding: (1) the acceptability of the “first sale” between a seller located in Country S ([ ]) and a related middleman located in Country M ([ ]); and (2) the dutiability of royalty payments paid to a third-party license holder after importation. You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), your request for confidentiality is approved. The information contained within brackets and all attachments to your request for a binding ruling, forwarded to our office, will not be released to the public and will be withheld from the published version of this ruling. FACTS: Company A, located in Columbia, South Carolina, will import educational products, such as printed books, brochures, leaflets and recorded optical media, from Country S to the United States through Country M. Company A is a wholly-owned subsidiary of [ ] (“parent company”) in Country P ([ ]). Following sales from Country S-based manufacturer/seller [ ] to [ ], a Country M-based wholesaler/middleman and affiliate of Company A, the products will be stored in the middleman’s warehouse in Country M. You explain that the products will then be sold by the middleman to Company A, at which point they will be shipped to the United States and entered through various U.S. ports. You state that Company A will serve as the ultimate consignee and beneficial owner. Company A will import the merchandise though FedEx Trade Networks Transport & Brokerage, Inc. (“FedEx”) who will serve as the U.S. importer of record. The manufacturers in Country S are unrelated to the middleman. The sample purchase order from the middleman to the manufacturer and the sample invoice from the manufacturer to the middleman indicate the products will be transferred from the manufacturer in Country S to the middleman in Country M for consideration and will be delivered at the middleman’s warehouse in Country M. You state that upon completion of the transaction with the manufacturer, the middleman will hold title to, and will bear all the risk of loss for the products. You advise that the terms of the sale between the middleman and the manufacturer will be Free on Board (“FOB”) Place of Destination (the middleman’s warehouse in Country M). Unless otherwise agreed by the parties, title and risk of loss will pass from the foreign seller to the middleman when the merchandise is delivered to the middleman’s warehouse in Country M. The terms of the sale between the middleman and Company A will be Delivered at Place (“DAP”) Place of Destination. You do not specify the place of destination. Under Incoterms 2020 DAP, the middleman will bear cost, risk, and responsibility for the goods until their delivery to Company A at the named place of destination. Company A will be responsible for the costs associated with import clearance and will assist the middleman with export clearance. The sample purchase order from Company A to the middleman and the sample invoice from the middleman to the ultimate consignee indicate that the products will be transferred from the middleman to the ultimate consignee for consideration. At the time of sale by the manufacturer to the middleman, the products will be given specific product codes by the middleman, which will begin with either “U.S.” or “SPA,” when deposited into the middleman’s warehouse in Country M. The code “U.S.” indicates that the products are destined for the English-speaking market in the U.S. The code “SPA” indicates that the products are destined for the Spanish-speaking market in the U.S. The sample FedEx air waybill indicates that the merchandise will be shipped from Country M to an address in the U.S. You note that on rare occasions, products with the U.S. and SPA codes may be sent to destinations outside of the U.S. by “special order.” You advise that the packing costs of the products will be included in the sales price between the manufacturer and the middleman, and that there are no selling commissions incurred by the middleman and no assists associated with the products. You also advise that there are no proceeds of subsequent resale or other use that will accrue, directly or indirectly, to the manufacturer. You state that Company A will pay royalties in connection with the imported educational materials. You have provided a redacted copy of the License Agreement between the parent company and a third-party license holder. Company A’s parent company in Country P is the licensee and will make royalty payments to the licensor, the technology transfer company of a university in Country P. The licensee is granted a license by the licensor to use its trademark and logo outside of Country P. Specifically, the licensee has been granted an exclusive license in the U.S. by the licensor to “exploit, use, publish, market, sell and reproduce” certain educational materials and the licensor’s copyright in the materials, and to “use and reproduce the Trade Mark and Logo” upon the materials. Royalties will be paid to the licensor after importation of the educational materials in the U.S. based on the value of the retail sale made by Company A in the U.S. market. Company A will serve as a sub-licensee and will compensate the licensee for the royalties via an inter-entity transaction, which in turn will pay to the licensor. The royalties will represent a percentage of the sale price of each material sold by Company A in the U.S. on behalf of the licensee. No royalties will be paid to the foreign supplier. Company A will bear the royalty expense and it will not be shared with the middleman. The licensor is not related to the foreign supplier and the middleman. The License Agreement states that the licensee must reasonably try to maximize the sales of the products and to promote and commercialize them. Upon termination of the License Agreement, the licensee must stop using the licensor’s trademark and logo. You inquire whether the “first sale” price between the middleman and the foreign supplier can be used to determine the transaction value of the imported goods. You also ask whether the royalties paid by Company A to the licensor after importation to the U.S. should be included in the calculation of the transaction value of the goods. ISSUES: Whether the transaction between the foreign supplier and the middleman may be used to determine the transaction value of the imported merchandise. Whether the royalty payments paid to the licensor should be included in the transaction value of the imported merchandise. LAW AND ANALYSIS: First Sale: 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, codified at 19 U.S.C. § 1401a. The primary method of appraisement is transaction value. For purposes of this ruling, we accept that transaction value is the proper method of appraisement for the imported merchandise. Transaction value is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutorily enumerated additions such as royalties. You seek to utilize the transaction value of the sale between the manufacturer and the middleman. In Nissho Iwai American Corp. v United States, 982 F.2d 505 (Fed. Cir. 1992), the court reviewed the standard for determining transaction value in a multi-tiered transaction. The court case involved a foreign manufacturer, a middleman, and a U.S. purchaser. The court held that the price

First Sale: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, codified at 19 U.S.C. § 1401a. The primary method of appraisement is transaction value. For purposes of this ruling, we accept that transaction value is the proper method of appraisement for the imported merchandise. Transaction value is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutorily enumerated additions such as royalties.You seek to utilize the transaction value of the sale between the manufacturer and the middleman. In Nissho Iwai American Corp. v United States, 982 F.2d 505 (Fed. Cir. 1992), the court reviewed the standard for determining transaction value in a multi-tiered transaction. The court case involved a foreign manufacturer, a middleman, and a U.S. purchaser. The court held that the price paid by the middleman to the foreign manufacturer was the proper basis for transaction value. The court stated that in order for the foreign manufacturer’s price to be a valid transaction value, the transaction between the manufacturer and the middleman needed to be a sale negotiated at “arm’s length” that was free from any non-market influences, and involved goods clearly destined for exportation to the U.S. In accordance with the Nissho Iwai court decision and our own precedent, we presume that transaction value is based on the price paid by the importer. An importer may request appraisement based on the price paid by the middleman/intermediary to the foreign manufacturer (the “first sale” price) in situations where the middleman/intermediary is not the importer. It is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai. The U.S. importer must present sufficient evidence that the alleged sale is a bona fide (good faith) “arm’s length sale” and th