The court’s position
The appellate court took the Importer’s side, basing its decision on the following arguments:The royalties do not relate to the imported Packaging:
a) The Importer does not manufacture Packaging in Russia or sell it separately from confectionery products, i.e., the Packaging is not a separate product for the Importer.
b) The goods covered by the licensing agreements are confectionery products bearing the trademarks in question, not the imported Packaging. The trademarks do not relate to the Packaging. The trial court incorrectly interpreted the subject of the licensing agreement.
c) The licensing agreements do not require the approval of or consultation with the licensors for the use of a particular brand, model or item of packaging or packaging that is manufactured or sold by particular persons.The payment of royalties by the Importer is not a condition of sale of the Packaging in order for it to be exported to Russia:
a) The foreign manufacturers of the Packaging are not parties to the licensing agreements.
b) The provisions of the licensing agreements and foreign trade agreements do not indicate any control on the part of the licensors over the manufacture or sale of the Packaging beyond quality control:
- The territorial scope of the licence is limited to Russia and CIS countries (i.e., control over production can only be exercised in those states), while the Packaging is produced in other states, making it impossible for the licensor to exercise any control over the production of the Packaging.
- The Importer is free to choose the brand, model, item, manufacturer and supplier of the Packaging independently based on parameters for the Packaging which have been agreed upon with the rights holder and which relate exclusively to quality control of the finished products (confectionery). It is interesting to note the court’s opinion that agreeing on the parameters of the Packaging does not go beyond the scope of quality control.
- The licensors do not and cannot exert any influence or pressure in relation to transactions entered into by the Importer to purchase the Packaging (including the terms of purchase, prices, basic parameters, etc.). The Importer provided a letter from the licensor confirming that this was the case.
c) The supply contracts and licensing agreements do not contain provisions requiring the payment of royalties for the Packaging. The licence agreements relate to other products, and specifically confectionery and toys produced in Russia.
It is also worth mentioning that the court cites the Explanatory Notes to paragraph 3 of Article 8 of the Agreement on the Implementation of Article VII of GATT 1994, which state that, "if the royalty is based partially on the imported goods and partially on other factors which have nothing to do with the imported goods (such as when the imported goods are mixed with domestic ingredients and are no longer separately identifiable, or when the royalty cannot be distinguished from special financial arrangements between the buyer and the seller), it would be inappropriate to attempt to make an addition for the royalty
In particular, the court observed that royalties could not be added to the structure of the customs value by reason of the following considerations:
- The Packaging is sold exclusively with finished confectionery products manufactured in Russia.
- The royalties are paid specifically in connection with the sale of finished products (i.e., they are dependent on sales of finished products).
- There are no separately identifiable royalties for the imported Packaging.
- The customs authorities failed to specify an amount of royalties that could be lawfully calculated specifically for the Packaging separately from the finished products.