HQ 545380

March 30, 1995

VAL CO:R:C:V 545380 RSD

CATEGORY: VALUATION

District Director of Customs

555 Battery Street

San Francisco, California 94111

RE: Internal Advice 55/93; regarding license fee payments made by a U.S.
manufacturer and seller of main frame computer systems to a related
company in Japan for technology connected to imported components used in
manufacturing the computers; price actually paid or payable; royalties

Dear Sir:

This is in response to your memorandum dated July 1, 1993, forwarding a
request for internal advice from the corporate counsel for Fujitsu
America, Inc., concerning whether license fee payments made by Amdahl
Corporation, to Fujitsu Limited in Japan are dutiable. The file also
contains a memorandum from the National Import Specialist on this matter
dated July 13, 1993, and a copy of a licensing agreement between Amdahl
and Fujitsu Limited for SIMTEC Technology used in the manufacture of
mainframe computer systems. We regret the delay in responding to your
request.

FACTS:

There are three parties involved in the relevant transactions, Fujitsu
America Inc. (\"FAI), Fujitsu Limited (\"FJ\"), and Amdahl Corporation
(\"AC\"). FAI, a California Corporation based in San Jose, California
imports certain computer components from FJ, a Japanese manufacturer of
computers. AC is the U.S. customer of FAI. FJ, FAI, and AC are \"related
parties\" within the meaning of that term under the value statute (19
U.S.C. 1401a(g)). FAI is a wholly-owned subsidiary of FJ. FJ also own a
percentage of AC\'s equity. This case occurs in the context of an audit
conducted by the Office Regulatory Audit of FAI, and it concerns issues
that arose in the course of that audit regarding license fee payments
from AC to FJ.

The imported merchandise in question consists of components for a
mainframe computer

system, the \"5995M\". The 5995M is the successor model to older
computer systems, M780 and 5990. FJ manufactures components for the
5995M, which are imported by FAI and purchased by AC. AC uses the
imported components to manufacture the 5995M computer systems. The
importations of these components occurred during 1992 and the first half
of 1993.

The issue raised in this internal advice request concerns the
dutiability of license fee payments from AC to FJ made pursuant to a
June 7, 1991, licensing agreement. According to the licensing agreement,
FJ has developed proprietary technical information and know-how relating
to the development of the 5995M, known as SIMTEC Technology. According
to the agreement, SIMTEC Technology means proprietary technical
information and know-how developed mainly by FJ for use in Central
Processing Unit (CPU), Memory Control Unit (MCU), and a component
identified by the initials CHP of the 5995M and consists of:

. design technology of using custom semiconductor devices (Devices),

. packaging technology to incorporate devices into multiplay glass
ceramic and to connect such multi-layer glass ceramics,

. cooling technology of cooling module device mounted on multi-layer
glass ceramic including piping parts,

. technical information and know-how including assembly process flow,
manufacturing data interface, and external specification of assembly and
test equipment.

FJ provides AC SIMTEC technology by furnishing : (1) circuit manual, (2)
packaging manual, (3) external specification, technical information and
know-how related to eight SIMTEC components and subassemblies and three
non-SIMTEC components and units described in paragraphs 2.1 and 2.2 of
the SIMTEC License Agreement, and (4) technical information and know-how
related to assemble and test MLG and motherboard assembly referred to
below. The SIMTEC components are

. Custom Semiconductor Device which is packaged in Single Micro Package
(SMP)

. Multi-layer Glass Ceramic (MLG) Board

. Interposer and components for attachment of device of MLG

. Conductive Cooling Module (CCM)

. Mother Board for MLG

. ZIF Connector which connects MLG and MLG mother board

. cable and I/O Connector which connects to MLG

. piping parts which connect CCM\'s etc. in the frame (not including the
system dependent parts)

The license agreement provides that AC must pay a licensing fee to FJ as
payment for the acquisition of the SIMTEC technology. The agreement
further declares that the total amount of the license fee is XXXXXXXX
\"by way of an adjustment to the AC\'s cost of 5995M.\" (See section 4
of the Licensing Agreement). The agreement provides that \$XXXXXX of the
license fee is to be paid by the AC\'s U.S. operations in Sunnyvale,
California. The remainder of the \$XXXXXXX license fee is to be paid by
AC\'s Irish affiliate for manufacturing conducted in Ireland. Under the
terms of the agreement, after a 5995M system is shipped to an external
Customer, AC shall pay FJ the sum of \$XXXXXXX until the total license
fee paid to FJ reaches XXXXXXXX. At issue in this case is the \$XXXX
paid by AC in Sunnyvale to FJ. The remainder of the \$ XXXXXX does not
relate to the imported components, but to components used in
manufacturing done in Ireland.

In the license agreement each party grants to the other party a
world-wide, non-exclusive and non-transferable license to make, have
made, use, lease, sell and otherwise dispose of any product, including
devices and components used for SIMTEC Technology, under all patents
covering SIMTEC Technology. FJ also grants to AC a world-wide
non-exclusive non-transferable license with the right to grant
sublicenses to utilize for development of AC product, including but not
limited to 5995M, the technical information and know-how of SIMTEC
technology.

There is also a purchase commitment provision in the license agreement
in which AC agrees to purchase from FJ and FJ agrees to sell to AC
subassemblies, semiconductor devices, and components at quality levels,
delivery schedules for 50% or more of AC\'s total requirements for
assembly of SIMTEC subsystems for 5995M, and 100% of AC\'s total
requirements for custom semiconductor device, glass ceramic board,
conductive cooling module at prices that are mutually agreed upon. (See
Section 5 of the Licensing Agreement). According to counsel for FAI, the
components of the 5995M systems involved are subassemblies,
semiconductor devices and components including a custom semiconductor
device, glass ceramic board, and conductive cooling device. Counsel
further indicates that imports of such components have been made at San
Francisco.

We have been informed by an official from the Office of Regulatory Audit
that there is no separate purchase agreement for the imported
merchandise. A letter to your office from FAI indicates that in
accordance with the license agreement, AC made a series of license fee
payments

to FJ, in the period from April 1992 through June 1993, which totaled
XXXXXXXXX. These payments were paid quarterly based on the number of
finished manufactured goods that AC delivered in the U.S.

Counsel contends that the license fee payments are not dutiable as part
of the price actually paid or payable because they are not for the
imported merchandise and they are not made by the buyer, which it claims
is FAI, and not AC. Counsel further maintains that they are not dutiable
as royalties because they do not relate to the imported merchandise and
they are not required to be paid by the buyer directly or indirectly and
they are not a condition of sale of the imported merchandise.

In HRL 544793, dated February 16, 1995, involving FJ, FAI, and AC,
Customs addressed an issue pertaining to the valuation of certain
imported computer products. The products at issue were computer
subassemblies (5890 series); communication control processors (system
4725) and Magnetic storage units (Models 6380 and 6380E) and storage
control units (Model 6880-G2). In that case, there were a series of
complex purchase agreements as well as other written contracts between
the parties, such as a fundamental agreement and an administrative
agreement. We concluded in HRL 544793, that the purchase agreements were
valid sales contracts which set forth the legal obligations of FJ and AC
with respect to the covered products; that of a buyer and a seller. We
further found that the evidence, including the purchase agreement
between AC and FJ, the Fundamental agreement between FJ and FAI, and the
conduct of the parties, demonstrated that there was a sale for
exportation for transaction value purposes between FJ and AC, and that
FAI acted as FJ\'s selling agent. Therefore, the amount retained by FAI
from the invoiced price to AC were considered dutiable selling
commissions. The ruling covered products imported by FAI for
distribution to AC and which were covered by the purchase agreements
discussed in the ruling. The imported products involved in this case,
the components for 5995M, were not covered by the separate purchase
agreements mentioned in HRL 544793. Therefore, the findings of HRL
544793 regarding the issue of whether there is a sale for exportation
between FJ and AC are not specifically applicable to this case.

ISSUES:

Whether the license fee payments for the SIMTEC Technology made by AC to

FJ are part of the price actually paid or payable for the imported
merchandise?

Whether the license fee payments for the SIMTEC Technology are an
addition to the price actually paid or payable for imported merchandise
as a royalty under section 402(b)(1)(D)?

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. The term \"price actually
paid or payable\" is defined in the section 402(b)(4)(A) of the TAA 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.\"

For purposes of this ruling, we will assume that transaction value is
the proper basis of appraisement. Although we recognize that the parties
are related within the meaning of section 402(g)(1), this issue has not
been raised in the internal advice request and we will not address it in
this ruling.

In its request for internal advice, FAI argues that the license fee
payments should not be considered part of the price actually payable to
the seller because 1) the payments are not for the imported merchandise,
2) AC may purchase the imported merchandise from FAI without accruing
the license fee, and 3) they are not made by the buyer. It is claimed
that FAI, not AC is the buyer of the imported merchandise.

Although as explained above, the findings in HRL 544793 regarding the
sale issue do not

specifically apply to this case, the June 7, 1991 license agreement
between FJ and AC implies that the sale likewise is between FJ and AC.
Specifically, Section 5 of the licensing agreement provides that with
respect to the imported components for the system 5995M, AC agrees to
purchase from FJ and FJ agrees to sell to AC; subassemblies,
semiconductor devices, and components at quality levels, delivery
schedules for quantities of 50% or more of AC\'s total requirements for
assembly of SIMTEC subsystems for 5995M, and 100% of AC\'s total
requirements for custom semiconductor device, glass ceramic board,
conductive cooling module at a price that are mutually agreed upon.
(emphasis added) Based on this language it appears that AC purchases the
imported components from FJ. Accordingly, for purposes of this ruling we
will assume that there is a sale between FJ and AC for the computer
components involved in the 5995M and that the license fee payments from
AC to FJ were made from the buyer to the seller. However, even if there
was no sale between AC and FJ, payments by an ultimate purchaser in the
United States to an overseas seller on behalf of the buyer are
considered indirect payments and are part of price actually paid or
payable under section 402(b)(4)(A) of the TAA. See HRL 544694, dated
February 14, 1995 and HRL 543967, dated December 17, 1987.

Consequently, the question that must be decided in determining if the
license fee payments are part of the price actually paid or payable, is
whether those payments were part of the \"total payment for the imported
merchandise\" within the meaning of section 402(b)(4)(A) of the TAA. Two
court cases have addressed the meaning of this term. In Generra
Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), the
issue before the court was whether quota charges paid to the seller on
behalf of the buyer were part of the price actually paid or payable for
the imported goods. In reversing the decision of the lower court, the
appeals court held that the term \"total payment\" is all-inclusive and
that \"as long as the quota payment was made to the seller in exchange
for merchandise sold for export to the United States, the payment
properly may be included in transaction value, even if the payment
represents something other than the per se value of the goods.\" The
court also stated:

Congress did not intend for the Customs Service to engage in extensive
fact-finding to determine whether separate charges, all resulting in
payments to the seller in connection with the purchase of imported
merchandise, are for the merchandise or for something else. As we said
in Moss Mfg. Co. V. United States, 896 F.2d 535, 539 (Fed. Cir.1990),
the \"straightforward approach \[of section 1401a(b)\] is no doubt
intended to enhance the efficiency of Customs\' appraisal procedure; it
would be frustrated were we to parse the statutory language in the
manner, and require Customs to engage in the formidable fact-finding
task, envisioned by \[appellant\].

Id. At 380.

In Chrysler Corporation v. United States, Slip Op. 93-186 (Ct. Int\'l
Trade September 22, 1993), the Court of International Trade applied the
standard in Generra and determined that certain shortfall and Special
Application fees which the buyer paid to the seller were not a component
of the price actually paid or payable for the imported merchandise. The
court found that the evidence established that these fees were
independent and unrelated costs assessed because the buyer failed to
purchase other products from the seller and not a component of the price
of the imported engines.

Based on Generra, there is a presumption that all payments made by a
buyer to a seller are part of the price actually paid or payable for the
imported merchandise. However, this presumption may be rebutted by
evidence which clearly establishes that the payments, like those in
Chrysler, are totally unrelated to the imported merchandise.

In this case, the evidence does not clearly establish that the license
fees are totally unrelated to the imported merchandise. To the contrary,
the language in the license agreement indicates that the fees are
closely related to the imported merchandise. The agreement provides that
the license fees are for the SIMTEC Technology and technical know-how
used in the production of the 5995M computer system. The preamble of the
agreement explains that FJ has developed proprietary technical
information and know-how relating to semiconductor packaging technology,
cooling technology and components therefor for the development of the
M1800 and also for 5995M. (emphasis added). The next paragraph declares
that AC intends to utilize and FJ intends to provide AC with FJ\'s
proprietary technical information and know-how and components therefor
for the development of 5995M. (emphasis added) Section 2.1 of the
agreement further indicates that FJ shall provide SIMTEC Technology
which includes external specifications and the technical information and
know-how related to components which are listed in the section.

The language in these sections of the agreement indicates that FJ will
supply and AC will obtain both SIMTEC technology and the components
related to that technology. The apparent reason for these clauses in the
agreement is that the technology and the components are closely linked
together. SIMTEC Technology was developed in conjunction with the
referenced imported components and they are clearly designed to be used
together. Because the SIMTEC

Technology and the imported components referenced in the agreement are
so closely intertwined, we believe that it is impossible to separate
payment for the imported components from the payments for the technology
and know-how which is necessary to properly use them.

Moreover, the section of the license agreement regarding payment states
that as a consideration of the license grant of SIMTEC Technology AC
shall pay to FJ the license fee up to fifteen million U.S. dollar by way
of an adjustment to AC\'s cost of 5995M. (Emphasis added). This language
indicates that it is understood the license fee is considered a part of
the payment that AC will make to FJ for the 5995M computer products
purchased from FJ.

We also disagree with counsel\'s contention that AC may purchase the
imported merchandise without accruing the license fee. As indicated
above, the license agreement includes a purchase commitment, in which AC
agrees to purchase from FJ and FJ agrees to sell to AC subassemblies,
semiconductor devices and components. In other words, in the licensing
agreement, AC agreed to buy both the SIMTEC technology and the
referenced imported computer components related to the technology from
FJ. The license fee was specifically included as part of the purchase
price of the imported components. The fact that AC was not obligated to
pay FJ the license fees until AC sells the 5995 M is not dispositive of
whether such payment was a condition of sale of the imported
merchandise. While there is no requirement under Gennera that the
payment to the seller must be a condition of sale in order for it to be
part of the price actually paid or payable, it appears that in this case
payment of the license fees was indeed such a condition.

Based on the above considerations, we conclude the license fees at issue
are part of the price actually or payable for the imported merchandise.
Since we have concluded that this payment is part of the price actually
paid or payable, it is not necessary to address the second issue
presented.

HOLDING:

The license fee payments for the SIMTEC Technology and know-how that AC
made to FJ are dutiable as part of transaction value as part of the
price actually paid or payable for the imported merchandise.

The Office of Regulations and Rulings will take steps to make this
decision available to Customs personnel via the Customs Rulings Module
in ACS and the public via the Diskette Subscription Service, Freedom of
Information Act, and other public access channels 60 days from the date
of this decision.

Sincerely,

John Durant, Director

Commercial Rulings Division