A look at royalties and adjustment of the customs value of the goods in the light of judicial practice

(April 2015)

Oksana L. Kurochkina, a member of the Board of Chamber of Commerce of Russia on customs policy, the lawyer

Increasingly, companies – providers of so-called “Of branded” products are faced with the fact that the customs authorities of the customs value of goods are adjusted to include the royalties. At the same time increase the base of the customs value can be both license agreements and other contractual obligations between suppliers, manufacturers, owners and third parties.

It should be noted that the jurisprudence of this category of disputes is different and is characterized by heterogeneity of the different approaches to the issue of the inclusion of vessels license fees in the customs value of goods. Consider the most significant and characteristic examples of court decisions on the subject.

Relevance, in my opinion, will begin with an overview of the position of the lighting of the Judicial Board on Economic Disputes of the Supreme Court of the Russian Federation.

Interesting definition of the Supreme Court case number 307-KG14-427 (case number A56-31657 / 2013) from 03.05.2015, reversed a lower arbitration courts to invalidate the decision of the customs post of Pulkovo customs of the North-West Customs Directorate of the Federal Customs Service on the adjustment of customs value Item.

As follows from the case, the importation into the territory of the Russian Federation of the goods company (hereinafter – the declarant, the buyer) has been declared customs value of goods on the transaction value of the imported goods in accordance with Article 4 of the Agreement between the Government of the Russian Federation and the Government of the Republic of Belarus and the Government of the Republic Kazakhstan dated 25.01.2008 “On the determination of the customs value of goods transported through the customs border of the Customs Union” (hereinafter – the Agreement of 25.01.2008). The customs authority in the course of further testing found that manufactured and sold by the foreign vendor-marked goods producer trademark «Angry Birds», the right to use is granted to the declarant in accordance with the licensing agreement with the copyright holder. Therefore, the customs authority concluded that the declarant to be paid to the right holder royalties under a license agreement is a condition of sale of the imported goods purchased from a foreign seller, the manufacturer, and therefore, pursuant to subparagraph 7 of paragraph 1 of Article 5 of the Agreement of 25.01.2008 specified royalties to be included in the customs value of the imported goods. These circumstances have led to the decision on adjustment of customs value of the disputed goods.

The courts came to the conclusion that the obligations of the declarant on foreign trade contract and licensing agreements are not interdependent though arose in respect of the same goods as payment of royalties to the right holder is a prerequisite for an independent separate license agreement that is not associated with the Company’s obligations to a foreign seller-producer arising from the foreign trade contract and the actual payment or non-payment of royalties to the right holder does not affect the appearance, modification or termination of obligations of the foreign seller – producers and consumers of a foreign trade contract. In the absence of the relationship between the franchisor and the foreign seller, manufacturer, payment of royalties under the license agreement is not a condition of sale of the disputed goods under foreign trade contracts. Based on the above, the provisions of paragraph 7 b) of paragraph 1 of Article 5 of the Agreement of 25.01.2008, the courts have come to the conclusion about the absence of the customs authority to the grounds for the inclusion of royalties in the customs value of the goods and declared null and void the contested decision of the customs authority.

Overturned a lower arbitration courts, the Supreme Court stated the following.

According to the provisions of subparagraph 7 of paragraph 1 of Article 5 of the Agreement of 25.01.2008 in determining the customs value of imported goods on the transaction value of them to the price actually paid or payable for the goods, are added to the license, and similar payments for the use of intellectual property (including payments for patents, trademarks, copyrights), which are being evaluated (imported) goods and which directly or indirectly made or should make the buyer as a condition of sale of the goods being valued, to the extent not included in the price actually paid or payable for the products. In determining the customs value of imported goods shall not be added to the price actually paid or payable: a) payments for the right of reproduction (replication) of the imported goods in the common customs territory of the Customs Union; b) payments for the right to distribute or resell the imported goods if such payments are not a condition of sale of the imported goods for export to the single customs territory of the Customs Union. Presented as evidence in the case file suggests that the imported goods are marked with the trademark holder and with the further implementation of the buyer of this product in the territory of the Russian Federation, the declarant shall be obliged to pay royalties to the right holder in accordance with the terms of the license agreement. The terms of the license agreement on the implementation of copyright evidence of indirect control over the production process to foreign vendor-producer of the product and selling it to the declarant, and the seller is a foreign manufacturer specified in the license agreement, the manufacturer of the goods. In addition, the license agreements contain an obligation for the buyer to pay the right holder as a pre-payment of minimum guarantees payment of royalties, which eliminates the possibility for the seller does not pay royalties to the right holder, while receiving the rights provided under license.

Based on the above, the Supreme Court held that these circumstances indicate that in this case the payment of royalties by the buyer the right holder of the license agreement is a condition of sale of goods to the declarant in the Russian Federation, acquired from a foreign seller of the manufacturer. At the same time the Russian Federation indirectly buyers disputed goods will have to implement it, taking into account the payment of costs for the buyer to license fees payable to the legal owner.

Thus, to be paid by the buyer to the right holder royalties for the right to sell the disputed goods in the territory of the Russian Federation to be included in the customs value of the imported goods under the provisions of sub-paragraph 7 of paragraph 1 of Article 5 of the Agreement of 25.01.2008, therefore the adjustment of customs value of goods was justified made by the customs authority.

Noteworthy is also the position of the Supreme Court on the case number 305-ES14-1441, which was considered the cassation appeal of ZAO “Mary Kay” (hereinafter – Company, the declarant) the decisions of arbitration courts of Moscow District to invalidate the decision of the customs authority on the adjustment of customs value of goods and offset cash collateral on the basis that the Company payable rightholder royalties are a condition of the sale of goods purchased from a foreign seller-producer whose activity is indirectly controlled by the right holder, and therefore, pursuant to subparagraph 7 of paragraph 1 of Article 5 of the Agreement of 25.01.2008 specified royalties to be included in the customs value of the imported goods.

The declarant when applying to the Supreme Court pointed out that the supplier was acquired not cosmetic products, with the main purpose of JSC was not profit from the resale of purchased goods to the Russian market, and sales promotion basic goods – cosmetics “MARY KAY”, purchased from Corporation “MARY KAY INC.” (USA). In this connection, as a rule, products or spread not cosmetic ZAO free as gifts or sold at a conventional price. If the declarant and the supplier of the goods are not related persons in terms of customs legislation.

The Supreme Court upheld the lower courts’ decisions, pointing to the fact that imported goods are labeled with the trademark holder and with the further implementation of the Company of this product in the territory of the Russian Federation, it is obliged to pay royalties to the right holder in accordance with the terms of the license agreement. At the same time based on the conditions of the license agreement, providing for the obligation of the declarant to perform accounting data necessary to calculate and check the amounts of royalties that must be provided to the legal owner in the report documentation for inspection as well as the content of the reports submitted by the right holder Company, based on previously used for calculating the royalties payments, and where there is evidence of a foreign seller – producers, the courts have come to the conclusion that the right holder, in this case, provides indirect control over a foreign seller – the manufacturer, and therefore the payment of license fees is a condition of the sale of the declarant of goods purchased from Seller of this foreign manufacturer.

Also notably the decision of the Supreme Court (case number 305-KG14-78) of 16 December 2014 to the sensational dispute between the company “Oriflame Cosmetics” and the customs authorities to invalidate the decision on adjustment of customs value of goods Moscow regional customs, decorated in 2010 335 GTE, and invalidating the decisions of higher customs authorities of the applicant company.

The Supreme Court upheld the lower courts of arbitration arguments on the legality of actions of the Moscow Regional Customs for inclusion in the structure of the customs value of payments for use of intellectual property, to be paid by the right holder within the commercial sub-contract. Under the terms of the said contract for the use of the complex of exclusive rights, including the right to a commercial designation “Oriflame”, as well as a unique system of sales and accounting for the sale of goods intended for cosmetic purposes, and be labeled trademarks of the right holder and transferred during the term of the contract the user, campaign is obliged to pay the right holder a monthly license fee, the amount of which is determined as a percentage of total revenue in the rightholder by the rate of 5% (by volume of sales of goods, the accompanying printed materials and related services in the selling price without VAT, but without deduction of any discounts and allowances). This license fees are paid not directly to the seller on foreign trade, and at his request – to a third party.

However, the Supreme Court pointed to erroneous conclusions of lower courts of arbitration regarding the appeal period passes by normative acts of state agencies specified in subsection 4 of article 198 of the Arbitration Procedure Code of the Russian Federation (hereinafter the Code), as a violation of the rights and legitimate interests in the contested decision, actions and requirements adopted by the Customs, the company became known in 2011, according to the contested decision CTS – in August 2012, the decision of the Federal Customs Service of Russia – 01.11.2012, a petition was filed 15.02.2013.

Concluding pass by deadline to submit an application challenging the non-legislative acts, decisions, actions (inaction) of customs bodies and officials, the courts of three instances numbered deadline to submit an application to the tribunal with the receipt of the texts of the contested decisions society downline customs authorities. At the same time the courts proceeded from the fact that the treatment in pretrial settlement of the dispute with complaints to the higher customs authorities does not preclude application to the Court of Arbitration.

The Supreme Court noted that the established part 4 of article 198 of the Arbitration Procedure Code of the three-month period of application challenging the non-legislative acts, decisions and actions (inaction) of bodies exercising public powers in cases of consideration of cases on challenging non-normative legal acts, decisions, actions (inaction ) of customs bodies and officials shall apply subject to the provisions of the Federal Law “On Customs Regulation” (hereinafter – the Law on Customs Regulation “). In accordance with paragraph 2 of Article 37, Paragraph 1 of Article 38 of the Act the decision, actions (inaction) of customs bodies or their officials may be appealed to a superior customs authority and (or) to the court, the arbitral tribunal. Making a complaint to the higher customs authorities do not exclude the possibility of a simultaneous or subsequent complaint to the court with the same content, the arbitral tribunal. The complaint filed to the higher customs authorities and the court, the arbitral tribunal shall be considered by the court, the court of arbitration. Part 8 of Article 48 of the Law on Customs Regulation found that the decision of the customs authority that received the complaint, may be appealed to a superior customs authority or to the court, the arbitral tribunal. The conclusion of the vessels are no obstacles to access to the Arbitration Court at the same time filing a complaint in a higher customs authority deprives the applicant’s rights under Article 37, 48 of the Law on Customs Regulation, to contest the decisions, actions (inaction) of customs authorities in the pretrial order. Such an approach is contrary to the legal nature of pre-trial dispute resolution aimed at ending the conflict without court involvement and the alleged exhaustion of the parties of all possible ways and means of extrajudicial resolution of the conflict before resorting to the courts. However, after the exhaustion of all means of pre-trial settlement of disputes, a party cannot be deprived of the right of access to court guaranteed by Article 46 of the Constitution of the Russian Federation. Thus, the courts have incorrectly identified the expiry of the time limit for appeal of the court proceedings.

Also, the Supreme Court declared valid the arguments of the adoption of decisions on the adjustment of customs value of goods imported by GTE, registered before 01.07.2010, outside specified in paragraph 2 of Article 361 of the Customs Code of the Russian Federation (hereinafter – the LC RF) year term of customs control after release of goods . Points 1-2 of Article 361 of the LC RF, to act on 30/06/2010 inclusive, it was found that after the release of goods and (or) means of transport, customs authorities are entitled to check the reliability of the declared at the customs clearance information, within one year from the date of loss of the status of goods are under customs control. Clause 1 of Article 360 TC RF it was determined that the goods and vehicles imported into the customs territory of the Russian Federation, lose the status of being under customs control at the time of their release for free circulation. Entered into force on 01.07.2010 TC TC was introduced another term of customs control after the release of the goods. According to Article 99 of the CC CU customs authorities carry out customs control after the release of the goods within three years after the end of the goods under customs control.

The courts of three instances, refusing to meet the requirements of the company, proceeded from the fact that Article 99, paragraph 2 of Article 366 and paragraph 1 of Article 370 CC CU in their interpretation of the system lead to the conclusion that the effect of the new legal regulation, which establishes a three-year term for an enlarged Customs control purposes, may extend to relations which have arisen before the entry into force of the CC CU, if by this time (July 1, 2010) has not expired year term of customs control established by the same customs regulations (Article 361 of the LC RF). However, the Supreme Court pointed out that the rights and obligations of the parties disputed relationship arose before entry into force of the CC CU. On these relations can not extend the general principles of law in time, space and number of persons, in particular arising from Article 54 (part 1) of the Constitution of the Russian Federation, the inadmissibility of retroactive norms worsen the position of persons to whom they apply . The participants of the relevant legal should be able to reasonably foresee the consequences of their behavior and be confident in the immutability of his officially recognized status, as well as the acquired rights and obligations.

Next, take a closer look arbitral awards made in favor of the customs authorities.

1. The arbitration courts of Moscow District considered the case number A40-23260 / 2014 on the application of “ITF-Line” (hereinafter – the Company, the declarant) to Moscow customs on challenging non-normative legal acts on the adjustment of customs value of goods containing labeling trademark “FINN FLARE”, produced by the inclusion in the customs value of imported goods royalties.

Challenging the decision of the customs authority, the declarant was referring to the fact that the royalties relate to the activities of the society, but not to the imported goods, with the introduction of license fees is not a condition of sale of goods.

Courts, recognizing the legality of the decision of the customs authority referred to the prisoner by the declarant with foreign copyright licensing agreement, according to which society uses the system of exclusive rights in the implementation of activities related to the offer for sale or sale of goods and the payment of monthly remuneration “royalties” in a fixed amount.

2. The decision of the Moscow Arbitration Court on 23 October 2014 in the case number A41-28552 / 14 at the request of OOO “Region Cargo Service” to the Domodedovo Customs to invalidate and cancellation of the administrative liability under Part. 2 tbsp. 16.2 of the Code of Administrative Offences (hereinafter – the Code of Administrative Offences).

This case is interesting because the administrative responsibility was attracted customs representative, according to the customs authority has declared false information about the customs value of the goods to be included in the structure of the customs value of goods imported into the territory of the Customs Union, the license fees for the right to use the trademark «Finn Flare “. In the course of the desk audit by the customs authority has been established that the declaration of goods in boxes 9 (a) and 15 TPA-1 no mark of a commitment to pay the fees for use of intellectual property. That is, the structure of the customs value of goods additional charges to the price actually paid or payable, were not included.

In deciding in favor of the customs authority the court stated that the customs representative knew of a license agreement entered into between the franchisor and the buyer of the goods and, therefore, had the opportunity to enforce obligations under the customs legislation, for which infringement administrative responsibility, but not accepted all measures dependent on it to comply with them.

3. The decision of the Arbitration Court of St. Petersburg and Leningrad region from 10.13.2014 at the request of OOO “Foxconn RUS” (hereinafter – the company, the buyer) to the Pulkovo customs. As part of the cameral customs inspection customs authority concluded that the company declared at customs clearance cost of imported goods – each label “label rectangular self-adhesive paper with printed text, and color pattern on a paper substrate,” designed to adhere to the outer surface of the computer is certified Authentication means having a license to use the software Microsoft (manufacturer – Moduslink Ltd., the object of copyright – Microsoft), shall be increased by the amount of the license fee paid by the company for one-time downloading of software (operating system Microsoft Windows 7) to the Company in Russian PC Hewlett-Packard. According to the customs authority, a royalty relates to the label, and is a condition of sale stickers society.

The Company disagreed with the decision of the customs authority, as considered that the royalties are not related to labels and refer to computers manufactured by the company in the Russian Federation, and are not a condition of sale labels.

The Court disagreed with the decision of the customs authority, drew attention to the conditions of the supply agreement with the company by Hewlett-Packard GmbH (hereinafter – HP), according to which the buyer produces, assembles or repair for HP computer products, which use operating systems and Microsoft applications. This HP delivers digital society product key that is provided by Microsoft or an authorized Microsoft affiliates parties for the implementation of the motherboard to the buyer of the product, as well as certificates of authenticity operating software Microsoft. Also, the contract provides for the provision of the purchaser the right to use Microsoft software for the production and distribution of computers “Hewlett Packard Factory.” The total amount of the royalties payable by the Company for the right to use the software Microsoft, depending on the number of copies of the software downloaded or transferred to the end user, and is calculated as the sum of royalty for every download or send a copy of the software, determined on the basis of relevant proposals society.

The court also pointed out that the stickers are a certificate of authenticity and indicate the presence of a license to use the software Microsoft. In addition, each label contains its own identification number, which determines the appearance of the final product, logo, barcode and text confirming that the product is genuine software and is the commercial designation, that is, the means of individualization of software products of Microsoft.

In view of the above, the Court rejected the arguments of the company that the license fees are in no way related to the imported goods and not a condition of sale.

In addition, it is worth noting the argument of the court to the effect that the contract of supply of goods was made on the basis of a license issued by HP distributor and supplier to give the buyer the right to sub-license limited to certain products Microsoft, which resulted in the fact that the royalties and similar payments for the use of intellectual property, under sub-paragraph 7 of paragraph 1 of Article 5 of the Agreement and not paid for imported goods, and for the passed law, the determination of the customs value of imported goods are added to the price actually paid or payable for the goods, in an amount not included in the price actually paid or payable for the goods.

As a result of the interpretation of the contract, as well as analyze the actual established between the company and its contractors relationship, the court concluded that the disputed purchase of the buyer of goods (labels) is inextricably linked to the acquisition and licensing rights. As a result, the company paid royalties for purchased software to be included in the price of goods for customs declaration.

In addition, the court stated that in relation to legal disputes, taking into account the characteristics of the product and its use, does not have any legal value method, which loads the software on computers made by the company.

However, the practice of arbitration courts there are a number of cases examined in favor of traders.

As such an example of the Supreme Court of the Russian Federation in the case number 305-KG14-7937 from 02.09.2015 year. The Supreme Court considered the complaint of Sheremetyevo customs decisions of appellate and cassation courts of Moscow District in the case of adjustment of customs value of goods carried out on the grounds that the implementation of the customs territory of the Russian Federation, the company imported products (USB-key), payable royalties.

Evaluated the evidence in the case files, analyzed the terms of the contract for the provision of the public the right to use the software in relation to intellectual property rights for the use which society is obliged to pay royalties, and finding that the disputed imported goods – USB-key is used as the hardware for access to different computers and licensed software by itself (USB-key) is not the subject of intellectual property and does not contain information that could be viewed as an object of intellectual property, the Supreme Court came to the conclusion about the absence of the customs authority bases for adjustment of customs value of the goods. Also, the court noted that the software itself, which is licensed to use the acquired company under this agreement, and for convenience, which is the disputed goods, imported by society, and was granted by downloading from the Internet site of the manufacturer using the license file.

As seen from the cut of judicial practice on disputes on the inclusion of royalties in the customs value of the goods, the participants of foreign economic activity is necessary to take a cautious approach to the choice of how to form relationships with the franchisor, and the content of concluded license agreements and distribution contracts.