Date: 19990113
Docket: A-291-97
CORAM: STRAYER J.A.
LÉTOURNEAU J.A.
ROBERTSON J.A.
BETWEEN:
THE DEPUTY MINISTER OF NATIONAL REVENUE
Appellant
(Respondent)
AND:
MATTEL CANADA INC.
Respondent
(Appellant)
Heard at Ottawa, Ontario, Tuesday and Wednesday, December 8 and 9, 1998
Judgment delivered at Ottawa, Ontario, Wednesday, January 13, 1999
REASONS FOR JUDGMENT BY: LÉTOURNEAU J.A.
CONCURRED IN BY: STRAYER J.A.
ROBERTSON J.A.
Date: 19990113
Docket: A-291-97
CORAM: STRAYER J.A.
LÉTOURNEAU J.A.
ROBERTSON J.A.
BETWEEN:
THE DEPUTY MINISTER OF NATIONAL REVENUE
Appellant
(Respondent)
AND:
MATTEL CANADA INC.
Respondent
(Appellant)
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1] These proceedings involve an appeal by the Deputy Minister of National Revenue (DMNR) pursuant to section 68 of the Customs Act (Act) and a cross-appeal by the respondent, Mattel Canada Inc., against a decision of the Canadian International Trade Tribunal (Tribunal) rendered on January 15, 1997 partly in favour of the respondent.
[2] With respect to the appeal, this Court is called upon to determine:
| a) whether the Tribunal correctly applied subparagraph 48(5)(a)(iv) of the Act when it held that the amounts paid by the respondent to Licensor X, pursuant to royalty agreements, were not royalties within the meaning of that subparagraph and, therefore, did not have to be added to the transaction value of the goods sold for export to Canada; |
| b) whether the Tribunal erred in its interpretation of subparagraphs 48(5)(a)(iv) and (v) of the Act when it decided that the reimbursements, by the respondent to its parent company, Mattel Inc., of royalty payments that the parent company was obligated to make to Master Licensors with respect to the sales of goods in Canada which bore the Licensors' trade-mark, did not have to be included in the transaction value of these goods either as royalties and licence fees or, in the alternative, as subsequent proceeds of the resale of the goods in Canada. |
[3] The cross-appeal requires a determination, in case of multiple sales of the goods for export to Canada, of which sale ought to be used as a basis for the determination of the transaction value. In this regard, the respondent takes issue with the Tribunal's finding that, in the present instance, there was one single multi-stage sale of goods instead of three separate sales as claimed by the respondent.
[4] The present appeal and cross-appeal raise controversial legal issues of importance that have been the subject of adjudication by the Tribunal in a number of other instances which are now either pending before or on their way to this Court.
[5] Under the Act, duties are imposed on goods at a percentage rate calculated by applying the rate to a value determined in accordance with sections 45 to 55. The value for duty of goods is appraised on the basis of the transaction value of the goods. Such transaction value is determined by ascertaining the price paid or payable for the goods sold for export to Canada and by adjusting the said price with the amounts mentioned in subsection 48(5). I reproduce the relevant provisions in both languages for a better understanding of the functioning of the Act and the submissions of the parties to these proceedings.
PART III
CALCULATION OF DUTY
Duties Based on Percentage Rates
Valuation for Duty
PARTIE III
CALCUL DES DROITS
Droits basés sur un pourcentage
Valeur en douane
44. Where duties, other than duties or taxes levied under the Excise Tax Act or the Excise Act, are imposed on goods at a percentage rate, such duties shall be calculated by applying the rate to a value determined in accordance with sections 45 to 55.
44. Les droits, autres que les droits ou taxes prévus par la Loi sur la taxe d'accise ou la Loi sur l'accise, qui sont imposés sur des marchandises selon un certain pourcentage se calculent par l'application du taux à une valeur déterminée conformément aux articles 45 à 55.
Interpretation
45. (1) In this section and sections 46 to 55,
Définitions et champ d'application
45. (1) Les définitions qui suivent s'appliquent au présent article et aux articles 46 à 55.
"price paid or payable", in respect of the sale of goods for export to Canada, means the aggregate of all payments made or to be made, directly or indirectly, in respect of the goods by the purchaser to or for the benefit of the vendor;
"prix payé ou à payer" En cas de vente de marchandises pour exportation au Canada, la somme de tous les versements effectués ou à effectuer par l'acheteur directement ou indirectement au vendeur ou à son profit, en paiement des marchandises.
Determination of Value for Duty
46. The value for duty of imported goods shall be determined in accordance with sections 47 to 55.
Détermination de la valeur en douane
46. La valeur en douane des marchandises importées est déterminée conformément aux articles 47 à 55.
Order of Consideration of Methods of Valuation
47. (1) The value for duty of goods shall be appraised on the basis of the transaction value of the goods in accordance with the conditions set out in section 48.
Ordre d'application des méthodes d'appréciation
47. (1) La valeur en douane des marchandises est déterminée d'après leur valeur transactionnelle dans les conditions prévues à l'article 48.
Transaction Value of the Goods
48. (1) Subject to subsection (6), the value for duty of goods is the transaction value of the goods if the goods are sold for export to Canada and the price paid or payable for the goods can be determined and if
Valeur transactionnelle des marchandises
48. (1) Sous réserve du paragraphe (6), la valeur en douane des marchandises est leur valeur transactionnelle si elles sont vendues pour exportation au Canada, si le prix payé ou à payer est déterminable et si les conditions suivantes sont réunies:
| (a) there are no restrictions respecting the disposition or use of the goods by the purchaser thereof, other than restrictions that |
| a) il n'existe pas de restriction concernant la cession ou l'utilisation des marchandises par l'acheteur, autre qu'une restriction qui: |
| (i) are imposed by law, |
| (ii) limit the geographical area in which the goods may be resold, or |
| (iii) do not substantially affect the value of the goods; |
| (i) soit est imposée par la loi, |
| (ii) soit limite la zone où les marchandises peuvent êtres revendues, |
| (iii) soit n'a pas d'effet notable sur la valeur des marchandises; |
| (b) the sale of the goods by the vendor to the purchaser or the price paid or payable for the goods is not subject to some condition or consideration, with respect to the goods, in respect of which a value cannot be determined; |
| b) la vente des marchandises ou le prix payé ou à payer pour celles-ci n'est pas subordonné à des conditions ou à des prestations dont la valeur n'est pas déterminable en ce qui concerne les marchandises; |
| (c) where any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser thereof is to accrue, directly or indirectly, to the vendor, the price paid or payable for the goods includes the value of that part of the proceeds or such price is adjusted in accordance with subparagraph (5)(a)(v); and |
| c) aucune partie du produit de toute revente, cession ou utilisation ultérieure des marchandises par l'acheteur ne revient directement ou indirectement au vendeur, sauf s'il a été tenu compte de cette ristourne dans le prix payé ou à payer ou si ce prix est ajusté conformément au sous-alinéa (5)a)(v); |
| (d) the purchaser and the vendor of the goods are not related to each other at the time the goods are sold for export or, where the purchaser and the vendor are related to each other at that time, |
| d) l'acheteur et le vendeur ne sont pas liés au moment de la vente des marchandises pour exportation ou, s'ils le sont: |
| (i) their relationship did not influence the price paid or payable for the goods, or |
| (i) ou bien le lien qui les unit n'a pas influé sur le prix payé ou à payer, |
| (ii) the importer of the goods demonstrates that the transaction value of the goods meets the requirement set out in subsection (3). |
| (ii) ou bien l'importateur démontre que la valeur transactionnelle des marchandises à apprécier répond aux exigences visées au paragraphe (3). |
(2) In the application of paragraph (1)(d), where the purchaser and the vendor of goods being appraised are related to each other at the time the goods are sold for export and the officer who is appraising the value for duty of the goods has grounds to believe that the requirement set out in subparagraph (1)(d)(i) is not met, the officer shall notify the importer of the goods of such grounds and, on the written request of the importer, the notification shall be in writing.
(2) Pour l'application de l'alinéa (1)d), lorsque l'acheteur et le vendeur des marchandises à apprécier sont liés au moment de la vente des marchandises pour exportation, l'agent qui apprécie la valeur en douane des marchandises, ayant des motifs de croire qu'il n'est pas satisfait aux exigences visées au sous-alinéa (1)d)(i), avise l'importateur des marchandises de ces motifs et, sur demande écrite de celui-ci, il doit l'aviser par écrit.
(3) For the purposes of subparagraph (1)(d)(ii), the transaction value of goods being appraised shall, taking into consideration any relevant factors including, without limiting the generality of the foregoing, such factors and differences as may be prescribed, closely approximate one of the following values that is in respect of identical goods or similar goods exported at the same or substantially the same time as the goods being appraised and is the value for duty of the goods to which it relates:
(3) Pour l'application du sous-alinéa (1)d)(ii), la valeur transactionnelle des marchandises à apprécier doit, compte tenu des facteurs pertinents, notamment des facteurs et différences réglementaires, être très proche de l'une des valeurs ci-après prise comme valeur en douane d'autres marchandises identiques ou semblables qui ont été exportées au même moment ou à peu près au même moment que les marchandises à apprécier:
| (a) the transaction value of identical goods or similar goods in a sale of those goods for export to Canada between a vendor and purchaser who are not related to each other at the time of the sale; |
| a) la valeur transactionnelle de marchandises identiques ou semblables vendues pour l'exportation au Canada par un vendeur à un acheteur avec qui il n'est pas lié au moment de la vente; |
| (b) the deductive value of identical goods or similar goods; or |
| b) la valeur de référence de marchandises identiques ou semblables; |
| (c) the computed value of identical goods or similar goods. |
| c) la valeur reconstituée de marchandises identiques ou semblables. |
(4) The transaction value of goods shall be determined by ascertaining the price paid or payable for the goods when the goods are sold for export to Canada and adjusting the price paid or payable in accordance with subsection (5).
(4) Dans le cas d'une vente de marchandises pour exportation au Canada, la valeur transactionnelle est le prix payé ou à payer, ajusté conformément au paragraphe (5).
(5) The price paid or payable in the sale of goods for export to Canada shall be adjusted
(5) Dans le cas d'une vente de marchandises pour exportation au Canada, le prix payé ou à payer est ajusté:
| (a) by adding thereto amounts, to the extent that each such amount is not already included in the price paid or payable for the goods, equal to |
| a) par addition, dans la mesure où ils n'y ont pas déjà été inclus, des montants représentant: |
| (i) commissions and brokerage in respect of the goods incurred by the purchaser thereof, other than fees paid or payable by the purchaser to his agent for the service of representing the purchaser abroad in respect of the sale, |
| (i) les commissions et les frais de courtage relatifs aux marchandises et supportés par l'acheteur, à l'exclusion des honoraires versés ou à verser par celui-ci à son mandataire à l'étranger à l'occasion de la vente, |
| (ii) the packing costs and charges incurred by the purchaser in respect of the goods, including the cost of cartons, cases and other containers and coverings that are treated for customs purposes as being part of the imported goods and all expenses of packing incident to placing the goods in the condition in which they are shipped to Canada, |
| (ii) les coûts et frais d'emballage relatifs aux marchandises et supportés par l'acheteur, y compris le prix des cartons, caisses et autres emballages considérés à des fins douanières comme faisant partie des marchandises importées, et les frais accessoires de conditionnement de celles-ci en vue de leur expédition au Canada, |
| (iii) the value of any of the following goods and services, determined in the manner prescribed, that are supplied, directly or indirectly, by the purchaser of the goods free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods, apportioned to the imported goods in a reasonable manner and in accordance with generally accepted accounting principles: |
| (iii) la valeur, déterminée de façon réglementaire et imputée d'une manière raisonnable et conforme aux principes de comptabilité généralement acceptés aux marchandises importées, des marchandises et services ci-après, fournis directement ou indirectement par l'acheteur des marchandises, sans frais ou à coût réduit, et utilisés lors de la production et de la vente pour exportation des marchandises importées: |
| (A) materials, components, parts and other goods incorporated in the imported goods, |
| (A) matières, composants, pièces et autres marchandises incorporés dans les marchandises importées, |
| (B) tools, dies, moulds and other goods utilized in the production of the imported goods, |
| (B) outils, matrices, moules et autres marchandises utilisés pour la production des marchandises importées, |
| (C) any materials consumed in the production of the imported goods, and |
| (C) matières consommées dans la production des marchandises importées, |
| (D) engineering, development work, art work, design work, plans and sketches undertaken elsewhere than in Canada and necessary for the production of the imported goods, |
| (D) travaux d'ingénierie, d'étude, d'art, d'esthétique industrielle, plans et croquis exécutés à l'extérieur du Canada et nécessaires pour la production des marchandises importées, |
| (iv) royalties and licence fees, including payments for patents, trade-marks and copyrights, in respect of the goods that the purchaser of the goods must pay, directly or indirectly, as a condition of the sale of the goods for export to Canada, exclusive of charges for the right to reproduce the goods in Canada, |
| (iv) les redevances et les droits de licence relatifs aux marchandises, y compris les paiements afférents aux brevets d'invention, marques de commerce et droits d'auteur, que l'acheteur est tenu d'acquitter directement ou indirectement en tant que condition de la vente des marchandises pour exportation au Canada, à l'exclusion des frais afférents au droit de reproduction de ces marchandises au Canada, |
| (v) the value of any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser thereof that accrues or is to accrue, directly or indirectly, to the vendor, and |
| (v) la valeur de toute partie du produit de toute revente, cession ou utilisation ultérieure par l'acheteur des marchandises, qui revient ou doit revenir, directement ou indirectement, au vendeur, |
| (vi) the cost of transportation of, the loading, unloading and handling charges and other charges and expenses associated with the transportation of, and the cost of insurance relating to the transportation of, the goods to the place within the country of export from which the goods are shipped directly to Canada; |
| (vi) les coûts de transport des marchandises jusqu'au lieu du pays d'exportation d'où elles sont expédiées directement au Canada, les frais de chargement, de déchargement, de manutention et autres frais, ainsi que les coûts d'assurance, relatifs à ce transport; |
Facts
[6] The respondent is a Canadian corporation part of the Mattel Group. It is a wholly owned subsidiary of Mattel Holdings, Ltd. which is in turn a wholly owned subsidiary of the American parent company, Mattel Inc. Mattel Inc. also wholly owns Mattel Trading Company Limited (Mattel Trading) and Mattel International Trading, both located in Hong Kong as well as several manufacturing plants located in Asia and Mexico. Mattel Trading Vendor Operations Hong Kong is also a subsidiary of the Mattel Group owned by Mattel Inc. It assists Mattel Trading when goods sold for export are bought from unrelated manufacturers. All these subsidiaries are independent, distinct legal entities.
[7] The respondent acquires goods through an ordering system, the Demand Planning and Availability Management System (DPAMS) which is controlled by the American parent company who also controls the selection of goods available and the prices for such goods. When the goods ordered by the respondent are ready for shipment to Canada, Mattel Trading of Hong Kong is initially invoiced for such goods. Then Mattel Trading invoices the American parent company which in turn invoices the respondent. Both Mattel Trading and the American parent company take title to the goods prior to such title being transferred to the respondent. However, the goods are shipped directly to the respondent who insures them from the moment they leave the factory. The invoices of Mattel Trading and the American parent company reflect a mark-up for services and profit of the initial invoice from the manufacturer.
[8] The products imported by the respondent include goods bearing the trade-marks of Licensor X as well as the trade-marks of a group referred to as the Master Licensors. For the right to manufacture or have manufactured, distribute and sell products based on certain trade-marks or licensed materials, the respondent is required to pay royalties to Licensor X. Such royalties are equal to a specified percentage of the respondent's net invoiced billings for the goods sold to customers in Canada.
[9] In addition, Mattel Inc., pursuant to agreements with Master Licensors to obtain licence rights with respect to various products, pays licence fees to the Master Licensors. The respondent reimburses such fees to Mattel Inc. by way of periodic payments.
[10] In determining the transaction value of the items imported to Canada and, therefore, the amount of duty payable, the DMNR took the position that the sums paid to Licensor X were royalties that needed to be added to the price paid or payable for the goods as they were paid by the respondent, directly or indirectly, as a condition of the sale of the goods for export to Canada. With respect to the reimbursements of the licence fees paid by Mattel Inc. to the Master Licensors, the DMNR used the last sale between Mattel Inc. and the respondent as the basis for determining the transaction value.
Whether the royalties paid to Licensor X are royalties within the meaning of subparagraph 48(5)(a)(iv) of the Act
[11] Subparagraph 48(5)(a)(iv) is part of a series of customs valuation provisions contained in Part III of the Act. These provisions were enacted by Parliament in 1985 as a result of the Government's undertaking in 1979 to implement its treaty obligations under the GATT Customs Valuation Code. The need for a fair, uniform and neutral system for the valuation of goods for customs purposes that precludes the use of arbitrary or fictitious customs values was recognized internationally and led to the development of the said Code to which Canada as a contracting party adhered. Subparagraph 48(5)(a)(iv) is based on Article 8.1(c) of the Code whose wording is analogous to the Canadian provision:
| In determining the customs value under the provisions of Article 1, there shall be added to the price actually paid or payable for the imported goods:... |
| (c) royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued to the extent that such royalties and fees are not included in the price actually paid or payable. |
[12] A plain reading of subparagraph 48(5)(a)(iv) of the Act indicates that three criteria must be met before payments made to licensors can and must be added to the price paid or payable by the purchaser in a sale of goods for export to Canada: such payments must be royalties or licence fees, they must be paid in respect of the goods so exported and they must be paid, directly or indirectly, as a condition of the sale of the goods for export to Canada.
[13] There is no dispute amongst the parties to the proceedings that the amounts paid to Licensor X are royalties or licence fees. In addition, the Tribunal properly found that the royalties were royalties in respect of goods sold for export to Canada. In my view, the link between the payment of the royalties and the goods sold for export to Canada is obvious and clear. As the Supreme Court of Canada said in Norwegijick v. The Queen1, the phrase "in respect of" is "probably the widest of any expression intended to convey some connection between two related subject matters".
[14] The only real contentious issue relates to the third criterion, i.e., whether the royalties were paid as a condition of the sale of the goods for export to Canada.
[15] Before I address the submissions of the appellant, I wish to dispose of the respondent's contention that subparagraph 48(5)(a)(iv) requires that the payment of royalties by the purchaser ought to be made to the vendor. As the payment in the present instance to Licensor X was not made to the vendor, but to a third party, it follows, according to the respondent, that the royalties are not dutiable under the Act.
[16] In my view, there is no requirement under subparagraph 48(5)(a)(iv) that the royalties be paid to the vendor. Indeed, when the terms of subparagraph 48(5)(a)(iv) are read in connection with the definition of "price paid or payable" found in section 45, it becomes evident that the adjustments to such price mandated by subparagraph 48(5)(a)(iv) are not confined to payments to the vendor.
[17] The price paid or payable for the goods to be exported is already inclusive of all payments made, directly or indirectly, to or for the benefit of the vendor. Therefore, additional payments under subparagraph 48(5)(a)(iv) must necessarily refer to payments to other parties. This is confirmed by the introductory words of that subparagraph which state that the royalties are to be added to "the extent that the amount is not already included in the price paid or payable for the goods", which, as previously stated, is made to or for the benefit of the vendor.
[18] Finally, the type of additions to the sale price required to be made under subparagraphs 48(5)(a)(i) (commissions and brokerage costs), (ii) (packing costs and charges) and (vi) (costs of transportation, loading, unloading and handling expenses and charges) undoubtedly evidences payments to third parties as part of the transaction value.
[19] Counsel for the appellant submits that the purpose of the Customs valuation is to determine the actual value of the goods entering Canada for the purposes of Customs duties. He contends that an item bearing a trade-mark carries with it an intangible value consisting of goodwill, research, development, marketability and prestige. Therefore, such intangible value present in the goods at the time of importation must always be added to the price paid or payable although the additional value of the intellectual property becomes evident only when the goods are later sold in Canada. He claims support for his position in the decision of the Trial Division of this Court in Reebok Canada Inc. v. Deputy Minister of National Revenue for Customs and Excise2. In addition, he submits that the inclusion of royalties in the price paid or payable and, therefore, in the value of the imported goods, is based on commercial reality since a purchaser would not import goods to Canada unless he intends to resell them in Canada.
[20] In Reebok Canada, the Trial Division upheld a decision of the Tribunal that payments made under certain exclusive distribution agreements were royalty payments to be added to the declared value for duty of the imported goods pursuant to subparagraph 48(5)(a)(iv) of the Act. In coming to such conclusion, the Trial Judge, at page 108 of the decision, asserted:
| In this case, the royalties in question, though payable in accord with an agreement other than the contract for purchase of the goods, and in the case of the Reebok footwear, payable to a party other than the supplier of the footwear, were payable in relation to each sale of the footwear in Canada. Failure to pay, though payment be subsequent to importation of the goods, clearly would give rise to a remedy on the part of RILUS (Reebok International Ltd.) under the Reebok Agreement, or on the part of Rockport under the Rockport Agreement, in damages and in the possibility of loss of the exclusive or any right to market the trade-marked footwear in Canada in future. |
[21] The Trial Judge also approved the interpretation given by the Tribunal to the words "directly or indirectly" which, in subparagraph 48(5)(a)(iv), precede "as a condition of the sale". He used these words to assert, at pages 7 and 8, that "although a licence fee may not be required pursuant to the terms of the purchase itself, such fee may still be considered to be a condition of the sale as long as there is some connection between it and the goods purchased".
[22] The overall effect of the appellant's submission, in my view, is to make the payment of royalties on the sale of the imported goods in Canada an implied condition of the sale of these goods for export to Canada. In other words, the payment of royalties in respect of imported goods, by and of itself, creates a condition of the sale for export of these goods to Canada. Under such an approach, all goods imported into Canada would be dutiable pursuant to subparagraph 48(5)(a)(iv) when royalties are subsequently paid on their resale in Canada.
[23] With respect, to adopt the appellant's submission requires a whole rewriting of subparagraph 48(5)(a)(iv) whereby the words "as a condition of the sale of the goods for export to Canada" would be deleted so that the payment of royalties would simply be made in respect of the goods, or the word "in" would be substituted for the words "for export to" so that the payment of royalties would simply be made as a condition of the sale of the goods in Canada. Subparagraph 48(5)(a)(iv) would now have to read:
| (iv) royalties and licence fees, including payment for patents, trade-marks and copyrights, in respect of the goods that the purchaser of the goods must pay, directly or indirectly,... |
| or |
| (iv) royalties and licence fees, including payment for patents, trade-marks and copyrights, in respect of the goods that the purchaser of the goods must pay, directly or indirectly, as a condition of the sale of the goods in Canada. (my emphasis) |
[24] This is obviously not what was intended by Parliament in the Act nor by the signatories to the international agreement to implement the GATT Customs Valuation Code. Not every payment of royalties is or is intended to be dutiable under the Act. The value for duty is the transaction value of the imported goods which, pursuant to sections 45, 47 and 48 of the Act, is to be determined by ascertaining the price paid or payable by the purchaser to which a certain number of adjustments in terms of additions have to be made. However, royalties paid in respect of the imported goods must be added to the purchase price only when their payment is a condition of the sale of the goods for export to Canada. (my emphasis)
[25] These words in subparagraph 48(5)(a)(iv) require more than a simple connection of the royalties with the goods imported. This simple connection test, which is evidenced by the words "in respect of the goods", in fact refers to the second criterion enumerated in subparagraph 48(5)(a)(iv). Pursuant to this criterion, the payment of the royalties has to be made in respect of the imported goods and, as previously mentioned, this test is easily satisfied.
[26] I do not think that the Trial Judge in the Reebok Canada case intended to eliminate the requirement that the payment of royalties be a condition of the sale of the goods for export to Canada. Nor do I believe that he was of the view that such stringent condition was met by the mere resale of the goods in Canada. In my opinion, the payment of royalties pursuant to subparagraph 48(5)(a)(iv) is a condition of the sale of goods for export first if it appears as such in the contract of sale between the vendor and the importer. Second, it is also a condition of the sale of these goods for export if either the licensor because it owns or controls the vendor, or the vendor when it holds the trade-marks rights or copyrights, can prevent the importation of the goods by the purchaser or seriously compromise the ability of the purchaser to buy the goods for export in cases where he has failed to pay the royalties. The wording of subparagraph 48(5)(a)(iv) (as a condition of the sale) does not refer to a "condition of the contract for sale" and, therefore, it is not a requirement of the subparagraph that the payment of royalties be expressly stipulated in the sale contract. Like the Trial Judge in the Reebok Canada case, I believe that the word "condition" is not used in the Act as a term of art which carries the meaning generally ascribed to it in the law of sales. Rather, the word is used in its ordinary and common sense way to mean that the payment of royalties has to be made as a prerequisite or requirement for the export of the goods.
[27] In earlier and subsequent decisions3, the Tribunal has referred to the need for a measure of control over the importation of the goods. This is not an inappropriate way of expressing in a practical way the meaning of the words "condition for the sale of the goods for export" as long as it is understood that such control must be capable of jeopardizing the importation. I hasten to add that it need not be actually exercised for it to be a condition of the sale of the goods for export. The condition is met if the possibility of such control exists even though not resorted to to enforce the payment of the royalties. To put it differently, a condition of the sale of the goods for export to Canada does not cease to be such a condition because its beneficiary has decided not to avail itself of its terms or the means of enforcing it.
[28] In his argument, counsel for the appellant relied on the previously cited passage of the Trial Judge's decision in Reebok Canada that the payment of royalties may still be considered to be a condition of this sale as long as there is some connection between it and the goods. I have already concluded that more than a connection test is required. In addition, this conclusion is premised on the fact that the words "directly or indirectly" in subparagraph 48(5)(a)(iv) qualify not the payment made, but the condition of the sale. The effect of these words would be to enlarge the meaning of "condition" in the sense that the condition of the sale could be direct or indirect. I have no doubt that the words "directly or indirectly" refer to the payment made by the purchaser and are meant to cover instances of indirect payment such as where the buyer receives a price reduction on a current importation as a means of settling a debt owed him by the seller, or where the buyer settles in whole or in part a debt owed by the seller4.
[29] Counsel for the appellant submitted that, if an element of control is required in order that the payments of royalties be considered a condition of the sale of the goods for export to Canada, such control exists in the case at bar.
[30] First, according to counsel, such control could be found in the licence agreements between Licensor X and the respondent. Under such agreements, the royalties are due for the non exclusive right to reproduce the licensed material and use the trade-marks as well as manufacture, sell and distribute for sale in Canada wares bearing the trade-marks of the licensor5. The agreements, it is true, give the licensor a certain control, but it is a control over the quality of the products which takes the form of pre-production approvals and an inspection of the material used as well as the production facilities and processes. In the present instance, Licensor X is unrelated to the manufacturer and had no control over it so as to prevent the importation of the goods by the respondent.
[31] Second, counsel for the appellant submitted that it is not required that control by the licensor be over the vendor or the manufacturer: it is sufficient that control can be exerted over the licensee, i.e., in this case, the respondent. Such control would also be found in the licence agreements and culminates in the licensor's right to terminate the agreement for failure to pay the royalties6. In my view, such control is not associated with an importation of the goods to Canada, but rather with their subsequent resale in Canada. It cannot be said that such licensor's right is a condition of the sale of the goods for export to Canada. Indeed, the Agreement refers to the sale of the goods in the Territory and Territory means Canada7. I agree with the Tribunal's finding, at page 6 of its decision, that "the payments were more closely related to rights, in respect of the goods, exercised in Canada and quantified with reference to resales in Canada".
[32] For these reasons, I have come to the conclusion that the payments of royalties to Licensor X were not payments made as a condition of the sale of the goods for export to Canada within the meaning of subparagraph 48(5)(a)(iv) of the Act. Therefore I would dismiss that part of the appeal.
Whether the reimbursements, by the respondent to Mattel Inc., of the royalty payments that Mattel Inc. was obligated to pay to Master Licensors should have been included in the transaction value of the imported goods
[33] The Tribunal found that the reimbursements to Mattel Inc. of the royalty payments made by Mattel Inc. to the Master Licensors were indirect royalty payments within the meaning of subparagraph 48(5)(a)(iv). I entirely agree with such finding. However, the Tribunal concluded, as it did for the royalty payments to Licensor X, that they were not made as a condition of the sale of the goods for export to Canada.
[34] Furthermore, with regard to subparagraph 48(5)(a)(v) of the Act, the Tribunal found as follows:
| the economic benefit or value of the indirect royalty payments passed through Mattel and accrued to the master licensors. Though the indirect royalty payments were made from the proceeds of sales in Canada, the value of such payments did not accrue to Mattel, the vendor of the goods. |
[35] Consequently, it concluded that the conditions of subparagraphs 48(5)(a)(iv) and (v) of the Act were not met.
[36] I intend to review the Tribunal's finding with respect to subparagraph 48(5)(a)(v) only as I think the Tribunal erred both in the interpretation of that subparagraph and its application to the facts of the case.
[37] Broadly stated, subparagraph 48(5)(a)(v) requires that the value of the proceeds of a resale of the imported goods that accrues to the vendor, directly or indirectly, be added to the price paid or payable. It is not disputed that Mattel Inc. who received the reimbursements was the vendor of the imported goods to the respondent.
[38] By definition, the royalties always revert, and therefore accrue, to the licensor, that is to say the vendor of the trade-marks rights or copyrights, whether it be through a direct or an indirect payment. Under the Tribunal's reasoning, such royalties would never have to be added to the price paid or payable for the imported goods unless the licensor is also the vendor of the imported goods. Subparagraph 48(5)(a)(v) is not so limited in its scope. What makes the payment of such royalties accrue to the vendor of the goods in the present circumstances is the fact that it is not the respondent, but Mattel Inc., who as the vendor of the imported goods to the respondent, is by contract the debtor of the Master Licensors in respect of the royalties.
[39] As a matter of fact, Mattel Inc. was under a legal obligation to pay the royalties to the Master Licensors. It was liable to pay, and indeed paid, the amount of the licence fees to the Master Licensors. However, at page 6 of its decision, the Tribunal found as a fact that Mattel Inc. had passed to the respondent the burden of the royalty payments in respect of sales in Canada. Were it not for the reimbursement of such fees by the respondent, the income or assets of Mattel Inc. would necessarily have been reduced by that amount. With the respondent reimbursing it, its income or assets accrued by as much. The indirect payment of the royalties by the respondent to the Master Licensors, through their reimbursements to Mattel Inc., accrued to Mattel Inc. in that in the end it paid for and extinguished the vendor's debt owed to the Master Licensors.
[40] For these reasons, I believe that this second ground of appeal is well founded and, consequently, the appeal should be allowed with costs with respect to the indirect payments of the royalties made by the respondent to the Master Licensors.
The Cross-appeal: Which sale ought to have been used as the basis for the determination of the transaction value of the goods imported by the respondent
[41] The respondent who acquired the imported goods from Mattel Inc. submitted to the Tribunal that it is the first of the three sales that should form the basis for the determination of the transaction value of the goods. Such value for duty would have been determined by the price paid to the manufacturer by Mattel Trading of Hong Kong who acquired title over the goods before reselling them to Mattel Inc., the American Parent company. In support of his position, counsel for the respondent relied upon US judicial precedents which determined that, where there are two or more qualifying sales for export, it is the lowest transaction value which shall apply for valuation purposes8. In addition, he drew by analogy an argument from subsections 49(5) and 50(2) of the Act which, in his view, indicate a legislative intent to apply the lower of two or more prices to the determination of the transaction value.
[42] Under subsection 49(5), where it is not possible to appraise the value for duty of goods sold for export according to the principles established in section 48, and where there are two or more transaction values of identical goods, the value for duty of the goods being appraised, provided certain conditions are met, is to be determined on the basis of the lowest transaction value.
[43] Section 50 of the Act provides for the appraisal of the value for duty of goods which cannot be appraised under sections 48 and 49 of the Act. In such case, the value for duty of the goods is the transaction value of similar goods sold for export to Canada. Again, a number of stringent conditions have to be met before this rule can apply.
[44] The Tribunal, at page 6 of its decision, properly found that subsections 49(5) and 50(2) of the Act had no application in the present instance as the sale of goods did not involve two or more sales of identical or similar goods. The Tribunal was rather of the view that the sale of the goods by the manufacturer to Mattel Trading of Hong Kong and their subsequent resales to Mattel Inc. and then the respondent were "two or more stages in a single, multi-stage transaction involving one sale for export". The respondent takes issue with the Tribunal's finding which, it says, is not supported by the evidence. On the contrary, the respondent submits that the record shows three different sales with transfer of title over the goods for export between three distinct legal entities. I am willing to assume that counsel for the respondent is right in his submission, but, as we shall see, it does not assist him under the Act.
[45] In my view, subsections 49(5) and 50(2) of the Act have no direct application to the case at bar as the transactions involved the sale and resale of the same goods rather than multiple sales of similar goods. Moreover, these provisions are of no assistance by way of analogy in view of the clear and unambiguous language of subsections 48(4) and 45(1) of the Act.
[46] A review of the American precedents relating to the lowest transaction value rule shows that "the rule only applies where there is a legitimate choice between two statutorily viable transaction values" and "the manufacturer's price constitutes a viable transaction value when... the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price"9.
[47] Counsel for the respondent argued that, in the case at bar, the DMNR was satisfied in conformity with paragraph 48(1)(d) of the Act that the respondent and Mattel Inc. were either not related to each other or, if they were related, that their relationship did not influence the price paid or payable for the imported goods. Otherwise, the DMNR would have required the respondent to demonstrate that the transaction value of the goods meets the requirements set out in subsection 48(3). That subsection fixes a different method of determining the transaction value in cases where sales occur between related purchasers and vendors. From there, he submitted that the American precedents are persuasive and the DMNR should have applied the lowest transaction value rule.
[48] I think it is fair to conclude that the DMNR was satisfied that the relationship between the respondent and Mattel Inc. did not influence the price paid or payable for the goods. However, such conclusion is of no assistance to the respondent because Parliament has clearly indicated in subsection 48(4) that the transaction value is determined by the price paid or payable for the goods sold for export to Canada. Under subsection 45(1), "price paid or payable" is defined as the amount paid in respect of the goods by the purchaser to or for the benefit of the vendor. In this instance, the purchaser was the respondent and Mattel Inc. was the vendor. It is, therefore, this sale that determines the price paid by the purchaser to the vendor. The American judicial precedents cited by the respondent, as attractive as they may be, run counter to the Canadian legislative intention expressed in the Act. For these reasons, the cross-appeal will be dismissed with costs.
[49] In conclusion, the appeal should be allowed in part with costs, the decision of the Tribunal not to include the payments to the Master Licensors in the value for duty of the imported goods
should be set aside and the decision of the Deputy Minister with respect to such payments should be affirmed. The cross-appeal should be dismissed with costs.
"Gilles Létourneau"
J.A.
"I agree,
B.L. Strayer J.A."
"I agree:
J.T. Robertson J.A."
__________________1 [1983] 1 S.C.R. 29 at p. 39.
3 See Leeds Neckwear Inc. and Leeds International Inc. v. The Deputy Minister of National Revenue , CITT, Appeal no. AP-99-182; Style-Kraft Sportswear Limited v. The Deputy Minister of National Revenue and PMI Food Equipment Group, CITT, Appeal nos. AP-96-096 and AP-96-103.
4 See the US Statements of Administrative Action with respect to their Trade Agreements Act of 1979 , a draft of proposed legislation which contained a similar provision, 96th Congress, 1st Session, House Document No. 96-158, p. 442; see also the explanatory note to the meaning of price paid or payable found in article 1 of the Customs Valuation Code which also clearly states that the words qualify the payment made, p. 185.
5 See Confidential Appeal Book, vol. II, p. 333.
8 See E.C. McAfee Co. and St. Paul Fire and Marine Insurance Co. v. United States, U.S. Customs Service and Commissioner of Customs , 842 F. 2d, 314, 6 Fed. Cir. (T) 92 (1988); Nissho Iwai American Corp. v. United States, 982 F. 2d 505 (Fed. Cir. 1992).