On 9 July 2020 the European Court of Justice gave its judgment in case C‑76/19 (Curtis Balkan EOOD). The case deals with the question if, when and how a royalty should be taken into account when determining the customs value.
Facts (simplified):
Curtis Balkan, a company established in Bulgaria, is wholly owned by Curtis Instruments Inc., a company established in the United States (‘Curtis USA’). The legal relations between those companies are governed, inter alia, by two contracts, the first relating to the right to use a patent, the second relating to the supply of management services.
Under the patent use agreement, Curtis USA allocates at a standard price to Curtis Balkan kits for the manufacture of fuel supply indicators and high-frequency speed regulators based on its own patented technology. Curtis Balkan is entitled to produce, using those components, and to sell engine speed regulators and components for electric vehicles for which it pays a fee for the right to use the patent. That payment is paid quarterly on the basis of the quarterly sales reports for the products. Under an amendment to the contract Curtis USA receives royalties in the amount of 10% of the net sale price of the goods covered by the contract and sold by Curtis Balkan.
Under a contract for the supply of services, Curtis USA undertakes, inter alia, to carry out the operational activity for Curtis Balkan, namely management, including marketing, advertising, preparing budgets, financial reports, information systems and human resources for an agreed monthly fee.
During an inspection of the customs declarations made by Curtis Balkan relating to the import of goods from third countries, the Bulgarian customs authorities found that the ‘parts and components’ imported goods had been used by Curtis Balkan for the manufacture of products in respect of which Curtis Balkan USA pays royalties to Curtis USA. It was also found that the declared customs value of the imported goods did not include those royalties.
In that context, explanations were provided both by Curtis USA and by Curtis Balkan, from which it is apparent, inter alia, that Curtis USA controls the entire production line, from the negotiation and centralised purchase of the components required for production up to the sale of the finished products. The components incorporated in the products are manufactured in accordance with specifications imposed by Curtis USA and are designed specifically for those products. In addition, the selection of another supplier must be approved by Curtis USA. However, for any order of a value not exceeding USD 100 000 (approximately EUR 85 000), Curtis USA does not need to be notified or give its approval.
The Director of Customs at Sofia Airport revised the declared customs value for all the customs declarations examined, including in that review the royalties which he considered were due under Article 32(1)(c) of the Customs Code and Article 157 of Regulation No 2454/93, read in conjunction with Article 158(1) and (3) and Article 160 of that regulation.
Curtis Balkan challenged that decision by an administrative appeal. In support of its appeal, that company submitted letters from suppliers seeking to show that the prices of the goods ordered by Curtis Balkan from those suppliers did not depend on the royalties which it paid to Curtis USA and that Curtis USA was not in a position to direct or restrict the activities of those suppliers.
The Varhoven administrativen sad (Supreme Administrative Court) decided to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) Is Article 158(3) of Regulation No 2454/93 to be interpreted as meaning that it provides an independent basis for the adjustment of the customs value via the addition of royalties or licence fees to the price actually paid or payable for the imported goods, irrespective of the rule in Article 157 of Regulation No 2454/93?
(2) Is Article 158(3) of Regulation No 2454/93 to be interpreted as meaning that it makes provision for two alternative scenarios for the adjustment of the customs value: firstly, the scenario in which the royalties or licence fees, such as those at issue here, relate partly to the imported goods and partly to other component parts added to the goods after their importation, and, secondly, the scenario in which the royalties or licence fees relate to post-importation activities or services?
(3) Is Article 158(3) of Regulation No 2454/93 to be interpreted as meaning that it makes provision for three scenarios for the adjustment of the customs value: firstly, the scenario in which the royalties or licence fees relate partly to the imported goods and partly to other component parts added to the goods after their importation; secondly, the scenario in which the royalties or licence fees relate partly to the imported goods and partly to post-importation activities or services; thirdly, the scenario in which the royalties or licence fees relate partly to the imported goods and partly to other component parts added to the goods after their importation, or to post-importation activities or services?
(4) Is Article 158(3) of Regulation No 2454/93 to be interpreted as meaning that it always allows an adjustment of the customs value if it is established that the royalties or licence fees paid relate to activities or services following the importation of the goods being valued, which, in this specific case, are services that are provided to the Bulgarian company by the American company (and are connected with manufacturing and management), irrespective of whether the requirements for the adjustment pursuant to Article 157 of Regulation No 2454/93 have been met?
(5) Is Article 158(3) of Regulation No 2454/93 to be interpreted as meaning that it constitutes a special case of customs value adjustment under the arrangements and conditions of Article 157 of Regulation No 2454/93, whereby the special nature resides solely in the fact that the royalties or licence fees relate only partly to the goods being valued, meaning that they are to be apportioned appropriately?
(6) Is Article 158(3) of Regulation No 2454/93 to be interpreted as meaning that it is also applicable if the buyer pays a fee or royalties or licence fees to a third party?
(7) If both of the preceding questions are answered in the affirmative, must the court assess, for the appropriate apportionment of the royalty or licence fee pursuant to Article 158(3) of Regulation No 2454/93, whether both conditions of Article 157(2) have been met, namely that the royalty or licence fee relates, even if only partly, to the imported goods and that it constitutes a condition of sale of those goods, and, if so, does the rule under Article 160, pursuant to which the conditions of Article 157(2) are met if the seller or a person related to him requires the buyer to make that payment, have to be taken into account in that assessment?
(8) Is Article 160 of Regulation No 2454/93 applicable only to the fundamental rule of Article 157 of Regulation No 2454/93 in the case where the royalties or licence fees are payable to a third party and relate wholly to the product being valued, or is it also applicable in cases in which the royalties or licence fees relate only partly to the imported goods?
(9) Is Article 160 of Regulation No 2454/93 to be interpreted as meaning that the term ‘relationship’ between licensor and seller should be understood to refer to cases in which the licensor is related to the buyer, because he exerts direct control over the buyer that goes beyond quality control, or is it to be interpreted as meaning that the relationship between licensor and buyer described above is not sufficient to assume an (indirect) relationship between licensor and seller, in particular if the latter disputes the view that the prices for the buyer’s orders for the imported goods were dependent on the payment of royalties or licence fees and likewise disputes the view that the licensor was in a position to direct or restrict its actions operationally?
(10) Is Article 160 of Regulation No 2454/93 to be interpreted as meaning that it allows an adjustment of the customs value only if both of the conditions set out in Article 157 of Regulation No 2454/93 are met, namely that the royalty or licence fee that is paid to a third party is related to the goods being valued and constitutes a condition of sale of those goods, and the condition that the seller or a person related to him requires the buyer to pay the royalty or licence fee is also met?
(11) Is the requirement under the first indent of Article 157(2) of Regulation No 2454/93 — that the royalty or licence fee be related to the goods being valued — to be regarded as having been fulfilled in the case where there is an indirect connection between the royalty or licence fee and the imported goods, such as that in the present case, if the goods being valued are component parts of the licensed end product?’
Considerations
By its 11 questions, which it is appropriate to examine together, the referring court asks, in essence, whether Article 157(2), Article 158(3) and Article 160 of Regulation No 2454/93 must be interpreted as meaning that a proportion of the royalties paid by a company to its parent company in consideration for the supply of know-how for the manufacture of finished products must be added to the price actually paid or payable for imported goods in circumstances where those goods are intended to be included, along with other component parts, in the composition of those finished products and are purchased by the former company from sellers separate from the parent company.
Judgment
The ECJ rules as follows:
Article 32(1)(c) of Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code, read in conjunction with Article 157(2), Article 158(3) and Article 160 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of Council Regulation (EEC) No 2913/92, must be interpreted as meaning that a proportion of the royalties paid by a company to its parent company in consideration for the supply of know-how for the manufacture of finished products must be added to the price actually paid or payable for imported goods in circumstances where those goods are intended to be included, along with other component parts, in the composition of those finished products and are purchased by the former company from sellers separate from the parent company, where:
- the royalties were not included in the price actually paid or payable for those goods;
- they relate to the imported goods, which presupposes that there is a sufficiently close link between the royalties and those goods;
- the payment of royalties is a condition of the sale of those goods, so that, had it not been for that payment, the contract of sale relating to the imported goods would not have been concluded and, consequently, they would not have been delivered; and
- it is possible to make an appropriate apportionment of the royalties based on objective and quantifiable data,
which is for the referring court to ascertain, taking into account all the relevant facts, in particular the relationships of law and of fact between the buyer, the respective sellers and the licensor.
Source Curia
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Comments
This is an important judgment of the Court of Justice, as it clarifies that the decisive element in determining whether royalties are dutyable, is that they represent a “condition of sale” of the goods. It is Customs that has to demonstrate that, in the absence of the payment of licensing rights, the conclusion of the sales contracts in the chosen form and, consequently, the delivery of the goods would or would not take place.
A great part of the judgment is a mere reiteration of what had been said by the Court in the GE Healthcare case (C-173/15). This being said, however, there are valuable insights to be gained from the Curtis Balkan ruling.
For example — the Court considers that a ‘sufficiently close link’ between the paid royalties and license fees on the one hand, and the imported goods, on the other, exists when the know-how supplied under the licensing agreement is necessary for the manufacture of the imported goods. According to the Court, that is indicative of the fact that the imported goods were specifically designed for incorporation into the licensed product without any other reasonable use being envisaged. By contrast, the fact that know-how is necessary only for the completion of the licensed goods leads to the conclusion that there is no sufficiently close link.
See also here: Slide
