Reebok Canada v. Canada (National Revenue), docket T-864-94

     T-864-94

BETWEEN:

     REEBOK CANADA,

     a division of Avrecan International Inc.

     Appellant

     - and

     THE DEPUTY MINISTER OF NATIONAL REVENUE

     FOR CUSTOMS & EXCISE

     Respondent

     REASONS FOR JUDGMENT

MacKAY J.:

     This is an appeal from a decision of the Canadian International Trade Tribunal ("CITT") dated September 1, 1993 by which certain payments made by the appellant, in accord with exclusive distribution agreements, were determined to be part of the value for duty and therefor dutiable under the Customs Act, R.S.C. 1985, c.1 (2nd supp.). In so holding the CITT upheld two decisions of the Deputy Minister of National Revenue for Customs and Excise (the "Deputy Minister"), made November 11, 1992 which decisions reappraised the declared value for duty of footwear imported into Canada by the appellant.

     The appellant, Reebok Canada, is a division of Avrecan International Inc. ("Avrecan"), a Canadian corporation with its offices in Aurora, Ontario. Reebok Canada, at all relevant times, was an importer and distributor of apparel and footwear products. Avrecan is wholly owned by Reebok International Ltd. ("RIL US"), a United States corporation which also wholly owns the British company that owns the Reebok trade-mark, and the Rockport Company, a United States company that is the owner of Rockport trade-marks.

     The decisions of the Deputy Minister held that payments made under certain exclusive distribution agreements were royalty payments to be added to the declared value for duty of the goods pursuant to subparagraph 48(5)(a)(iv) of the Customs Act (the "Act").

     The decisions appealed to the CITT were, respectively, in regard to Customs Entry No. 15362-550106014 dated July 11, 1991 involving imported "Rockport" brand footwear (the "Rockport customs entry"), and in regard to Customs Entry No. 14183-511269963 dated September 24, 1991 involving imported "Reebok" brand footwear (the "Reebok customs entry").

     As successor to Reebok Canada Inc., Avrecan, and thus Reebok Canada, was a party to an agreement with RIL US with respect to Reebok footwear (the "Reebok Agreement"), and it was also a party to an agreement with Highland Import Corporation, doing business as The Rockport Company, with respect to Rockport footwear (the "Rockport Agreement"). Under both agreements Reebok Canada was granted "the sole and exclusive right to and license to use" certain trade-marks, of Reebok International Inc. and of the Rockport Company, in connection with the manufacture, advertising, merchandising, promotion, use, distribution and sale, throughout all of Canada, of products or goods bearing Reebok or Rockport trade-marks.

     In return for the exclusive rights under the two agreements, Reebok Canada agreed under the Reebok Agreement to pay a royalty to RIL US based on a percentage of the "Net Sales Price" as defined in that Agreement, and under the Rockport Agreement to pay a royalty to the Rockport Company based on a percentage of the "Gross Sales Price" as defined in that Agreement.

     Under both agreements Reebok Canada was permitted to use the trade-marks in connection with goods obtained from any source, including goods manufactured by or for it. Reebok Canada sold in Canada both imported products and products manufactured in Canada, and paid fees in accord with each agreement based on the selling prices in Canada of goods bearing Reebok or Rockport trade-marks. In the case of the Reebok Agreement, practice was for payments of the fee for exclusive rights to be made on a quarterly basis and no fee was payable with respect to the first $100,000. of sales of Reebok trade-marked goods. The Rockport Agreement provided for payments to be made quarterly, and apparently no payments were made in relation to the first $10,000. of Canadian sales. In promoting its sales and the value of the exclusive distribution rights Reebok Canada undertook extensive promotion and development of Reebok and Rockport trade-marks, by advertising, by sponsorship of athletic activities and by giving free samples of the trade-marked products to individual athletes.

     In the transaction to which the Reebok customs entry related, Reebok Canada purchased footwear bearing Reebok trade-marks from two unrelated factories in Taiwan, each of which had a Manufacturing Agreement and a Trim Agreement with RIL US. Under those agreements RIL US controlled the process and quality of production by the manufacturers of shoes bearing Reebok trade-marks, and it also controlled, by its designation, the purchasers authorized to buy that footwear from the Taiwanese manufacturers. Reebok Canada ordered the footwear from, and paid the prices charged by the manufacturers to, subsidiaries of RIL US. Finally, Reebok Canada declared the value for duty of the imported footwear on the basis of the price charged by the factories in Taiwan for the footwear. Royalty payments in accord with the Reebok Agreement were separately and subsequently paid as a fixed portion of the net sales price of Reebok marked goods sold in Canada.

     The Rockport customs entry related to the purchase by Reebok Canada of footwear from the Rockport Company, which footwear was manufactured in Korea and shipped directly to Reebok Canada. The latter declared the value for duty of the imported footwear on the basis of the price it paid to the Rockport Company for the goods, without including the royalty payment due under the Rockport Agreement, which was subsequently paid as a percentage of the gross sales price of the imported Rockport shoes sold in Canada.

     Reebok Canada stresses that whether any fee would be payable, and if so the amount of any fee that would be payable by it, with respect to any imported footwear was unknown and unascertainable at the time of importation since the fees payable under both agreements were based on selling prices of the goods in Canada. In its own accounting records, Reebok Canada treated payments due under the two agreements as part of the general selling and administrative expenses of the company, accounting for the payments as expenses, on a monthly basis in accord with each month's sales. It is the respondent's view that the Agreements characterize the payments as royalties, paid for the benefit of selling goods with the Reebok and Rockport trade-marks, and that the obligation to pay the royalties existed at the time of purchase of the trade-marked footwear for export to Canada. While calculation of the amount of the royalties then depended on the sale prices of trade-marked shoes sold in Canada, these amounts were payable, even though not precisely ascertainable, at the time the goods in question were imported into Canada.

The Customs Act

     Relevant provisions of the Customs Act include the following.

45. (1) In this section and sections 46 to 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;

...

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.

...

48. (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).

(5) The price paid or payable in the sale of goods for export to Canada shall be adjusted

(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

...

(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,.

(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,...

...

The CITT decision

     In its Reasons the CITT identified three main issues in the plaintiff's appeals from the decisions of the Deputy Minister. First, it found that the method of valuation to be used for determining the value for duty in this case was the transaction value method, as provided by s-s. 47(1) of the Act, and it confirmed that the conditions established by s. 48 for that method to apply were here met, in particular that the goods were sold for export to Canada and the price paid or payable could be determined.

     Second, it held that the royalties paid by Reebok Canada pursuant to the agreements were royalties or license fees as described in subparagraph 48(5)(a)(iv) of the Act and were correctly added, by the Deputy Minister's reappraisal, to the price paid or payable for the imported footwear. The CITT stated:

...In the Tribunal's view, the royalties that were paid for the sole and exclusive right and licence to use the "Reebok" and "Rockport" trademarks in connection with the manufacture, advertising, merchandising, promotion, use, distribution and sale of "Reebok" and "Rockport" footwear were paid for "trade-marks" and, therefore, constitute royalty and licence fees under subparagraph 48(5)(a)(iv) of the Act.

     Thirdly, the CITT found that the royalties were paid as a condition of sale of the footwear covered by the Reebok and the Rockport customs entries. The tribunal's reasons state:

...The fact that the phrase "as a condition of the sale" in subparagraph 48(5)(a)(iv) of the Act is preceded by the words "directly or indirectly" suggests that, although a fee may not be required pursuant to the terms of the purchase itself, it may still be considered to be a condition of the sale, as long as there is some connection between it and the goods purchased. Applying this interpretation to the facts of this appeal, the Tribunal concludes that the royalties were paid indirectly as a condition of the sale of "Reebok" and "Rockport" footwear for export to Canada.

     Finally, in support of its conclusions, the CITT made the following findings of fact.

With respect to Entry A, the testimony of Mr. Bellchambers and the provisions of the "Manufacturing Agreement" and the "Trim Manufacturing Agreement" indicate that RIL US exercises a substantial degree of control over the production of the "Reebok" footwear and that manufacturers are only permitted to produce "Reebok" footwear for subsidiaries of RIL US or purchasers that have been approved by RIL US. Thus, if the appellant did not pay the royalties pursuant to the Reebok Agreement, the Tribunal is of the view that the appellant would not be able to purchase the "Reebok" footwear.

With respect to Entry B, the connection between the payment of the royalties and the sale of the "Rockport" footwear is clearer, since RC is both the vendor and the manufacturer. In the Tribunal's view, if the appellant did not pay the royalties to RC, the latter would simply refuse to manufacture the "Rockport" footwear for purchase by the appellant.

The issues

     The appellant sets out five issues raised by the CITT decision, as follows.

A.      Whether the CITT erred in law in interpreting subsection 48(5)(a)(iv) of the Customs Act by misinterpreting the phrase "as a condition of the sale of the goods for export to Canada" as used in that paragraph.

B.      Whether the CITT erred in law in determining that Section 48 was the appropriate method for determining the value for duty of the imported shoes.

C.      Whether the CITT erred in law in interpreting subsection 48(5)(a)(iv) of the Customs Act by misinterpreting the phrase "royalties and license fees" used in that paragraph.

D.      Whether the CITT erred in law in finding that the payments in question were "royalties...in respect of goods" within the meaning of subparagraph 48(5)(a)(iv).

E.      Whether the CITT erred in law in making erroneous findings of fact in the absence of any supporting evidence and contrary to the evidence submitted.

     For the record I note the respondent urged in written submissions and at the hearing that the decision of the CITT raised a sixth issue, concerning the application of subparagraph 48(5)(a)(v) to Rockport royalties but subsequently, in writing, the respondent advised this issue was not relied upon. It is not further discussed in these Reasons.

     I turn to each of the issues raised by the appellant.

The meaning of "a condition of the sale of the goods

for export to Canada in subparagraph 48(5)(a)(iv)"

     The subparagraph in question provides for addition to the sale price paid or payable in the sale of goods for export to Canada the amounts of "royalties and licence fees, including payments for patents, trade-marks and copyrights...that the purchaser of the goods must pay, directly or indirectly, as a condition of the sale of the goods for export to Canada...".

     The CITT found the payments in issue in this case were royalties paid as a condition of the sale of the footwear. In so doing it noted that the words "directly or indirectly" suggest that, "although a fee may not be required pursuant to the terms of the purchase itself, it may still be considered to be a condition of the sale, as long as there is some connection between it and the goods purchases".

     The appellant urges that this misinterprets the subparagraph in two important respects, by ignoring the meaning of "condition" as that word is understood in the law concerning contracts of sale, and by adopting as a test for "a condition" whether there is some connection between the fee in question and the goods purchased. In the purchase of Reebok shoes, the manufacturer of footwear in Taiwan was not a party to the Reebok Agreement under which royalties were to be paid by the appellant, and the manufacturer could not cancel the sale to the appellant if the royalties were not paid. In that sense it is urged the requirement for payment of royalties was not a condition of the contract of sale for export to Canada, for a true condition in the sale of goods would permit, if the condition were not met, cancellation of the contract.

     I am not persuaded that the CITT erred in law in the respect here urged by the appellant. Assuming for purposes of argument, without so finding, that the word "condition" may have a generally understood meaning in the law of sales, meaning a term of the contract which if not met may give rise to an option to cancel the contract, the word is not so defined in the Customs Act. The meaning to be attributed to it depends upon the context in which it is used and the general purposes of the legislation in question.

     The parties essentially agree on the general purposes of s. 47 of the Act, to set out the value for duty of goods imported into Canada, and in accord with s-s. 47(1) in the ordinary case that is the transaction value of the goods as set out in s. 48, including, in accord with subparagraph 48(5)(a)(iv) the price paid or payable in the sale of goods for export to Canada adjusted by adding royalties and licence fees as set out in that subparagraph. 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 RIL US 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.

     In my opinion the royalties or fees required were clearly fees related to the exclusive use and sale of goods bearing trade-marks of value, and were payments related to the valuable intellectual property rights associated with the purchase and each sale of the goods in question. The royalties required under the agreements in question, to RIL US and to Rockport, were payments within the meaning of royalties, as defined in subparagraph 48(5)(a)(iv). In so finding the CITT did not err; rather, its determination was consistent with evolving jurisprudence in regard to the subparagraph in question, and its predecessor.

     In Polygram Inc. v. The Deputy Minister of National Revenue for Customs and Excise, et al., CITT Appeal Nos. AP-89-151 and AP-89-165, leave to appeal denied, Court file 92-T-1967, 18 December 1992, [F.C.T.D.], the CITT found, and this Court denied leave to appeal, that a royalty fee payable to a foreign owner of intellectual property rights in compact discs was a fee paid as a condition of sale of goods for export to Canada, though not payable to the foreign manufacturer of the goods and not payable under the contract of sale of those goods. In the tribunal's view, the royalties payable under another agreement made it possible for the Canadian importer to purchase the goods for export to Canada. As noted, that decision was not permitted to be appealed, under legislation then applicable, by this Court.

     In Signature Plaza Sport Inc. v. Minister of National Revenue (Customs and Excise) (1990), 32 F.T.R. 287, my colleague Mr. Justice Joyal dealing with the provision that was the predecessor to subparagraph 48(5)(a)(iv), and in identical terms, found that a royalty payable under a license agreement giving the Canadian importer of goods exclusive selling and distribution rights for clothing bearing certain trade-marks, was a proper addition to the price paid to the vendor of goods for export to Canada. The addition of the royalty to the purchase price paid was there found to be appropriate in calculating the transaction value for calculating customs duty. While the decision was overturned on appeal on other grounds, the determination of Joyal J. in regard to royalties payable under the Canadian importer's exclusive license agreement was specifically upheld, and royalties there payable, comparable in my opinion, to the royalties here payable to RIL US and to Rockport, were there found to be properly included in the transaction value for calculating duty.

Determination of the transaction value of the goods pursuant to s. 48 of the Act

     The appellant submits the CITT erred in determining that the transaction value of the goods in question was determinable under s. 48 of the Act. As we have seen, s. 47 directs that the value for duty of imported goods shall be appraised on the basis of the transaction value of the goods in accord with s. 48. The latter section provides in part by s-s. (1) that subject to s-s. (6) the value for duty is the transaction value of the goods "if the price paid or payable for the goods can be determined" and if

48. (1) ...

(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;

(6) Where there is not sufficient information to determine any of the amounts required to be added [e.g. pursuant to subparagraphs of s-s. 48(5)(a)(iv)] to the price paid or payable in respect of any goods being appraised, the value for duty of the goods shall not be appraised under this section.

     The appellant's submissions in this regard, set out in writing but not dealt with at the hearing though expressly then said to be relied upon, were based on an interpretation of s-s. 48(1)(b) and of s-s. 48(6) that implied the amount of the royalty required to be added to the purchase price of the goods in question in each case, was not determinable, and there was insufficient information to determine the amount to be added as royalty, at the time the goods were imported.

     I agree with the respondent that neither of the provisions referred to in s. 48 requires determination of the actual amount at that time, of importation, or at any other specific time. So long as the amount can be determined, as it can in this case from the record of the appellant's payments to RIL US and to Rockport. Those payments are subsequent to importation of the goods, but the department's practice may be to assess duty in relation to the transaction value, including an estimate at the time of importation of the royalties payable in relation to the goods, subject to subsequent adjustments of duty in relation to the amounts of royalties actually paid. That departmental practice is not precluded by the Act, so long as the practice permits subsequent adjustment of the duty paid or payable in light of the actual payments of royalties.

     In my opinion, the CITT did not err in its determination that the transaction value of the goods, including royalties payable under Reebok and Rockport Agreements, was determinable pursuant to s. 48, in particular with regard to royalties under subparagraph 48((5)(a)(iv).

The interpretation of "royalties and license fees" in subparagraph 48(5)(a)(iv)

     The appellant contends the CITT erred in failing to first define "royalties and licence fees" as those words are used in subparagraph 48(5)(a)(iv) and also in determining that the payments here made were royalties under that provision. As we have seen, the tribunal concluded the royalties paid under the Reebok and Rockport Agreements were paid for "trade marks" and constituted royalty licence fees under subparagraph 48(5)(a)(iv).

     I am not persuaded the CITT had any responsibility, as the appellant suggested, to define royalties and licence fees as used in that provision. The words used are broad in scope, "royalties and licence fees, including payments for patents, trade-marks and copyrights, in respect of the goods...". The tribunal's task was to determine whether the payments here in issue were within the meaning of that phrase. That the CITT, did and in my opinion, it did not commit error in doing so.

     The appellant contends that the payments under the Reebok and Rockport Agreements, referred to in both of those as made for the right to use the trade-marks "in connection with the manufacture, advertising, merchandising, promotion, use, distribution and sale..." of the footwear bearing trade-marks, were really for distribution rights in Canada and the use of trade-mark rights. The latter could only be "used" in Canada in the context of the Trade-marks Act by or on behalf of the owner of the trade-mark, or by the appellant if it were to manufacture goods in Canada and use the trade-mark in that process in which event the goods, and the royalty could not be subject to customs duties.

     In my opinion, the appellant puts too limited a construction on the words used in subparagraph 48(5)(a)(iv). The provision does not speak of "use" of trade-marks, rather it speaks of payments "including those for patents, trade-marks and copyrights, in respect of the goods". The agreements provide a grant to the licensee, i.e. the appellant, of the sole and exclusive right and licence to use the trade-marks "in connection with manufacture, advertising, merchandising, promotion, use, distribution and sale of the products". In my view, the CITT cannot be said to have erred by determining that under the Reebok and Rockport Agreements the royalties provided for were paid for trade-marks and constituted royalties within subparagraph 48(5)(a)(iv).

     The appellant also argued that the payments under the agreements were an expense of Reebok Canada Inc., an expense of marketing which would not be included within the value for duty if that were to be calculated by alternative methods, provided for under the Act, where the transaction value of the goods was not ascertainable (see, e.g. ss. 51 and 52 of the Act, providing for the deductive value of goods and the computed value of goods). That argument is based on speculation, even if it be a rational approach, for the appraisal of value here done, and subject to question on appeal, is of the transaction value, the primary method of appraisal under the Act, which the CITT found could here be determined.

     It is urged that the CITT decision would lead to arbitrary results for the value for duty of identical goods would depend upon events after importation. Thus, the price of sale in Canada, and whether or not the goods are sold in Canada, would affect the value for duty. In my view, the argument is based on an assumption that the value for duty must be finally ascertained at the time of importation of the goods, an assumption not established under the Act and one that is apparently contrary to practice in appraising goods for customs duties subject to later adjustments where warranted.

     The appellant's fourth ground of appeal relates to the same determination of the CITT that the payments here in question were royalties within subparagraph 48(5)(a)(iv), but it is urged the tribunal erred in finding the payments to be "royalties...in respect of goods" as provided in that subparagraph. The appellant submits that this issue which it raised before the CITT was not directly dealt with in the tribunal's decision. It is urged the payments were in relation to exclusive distribution rights, not payments in relation to trade-marks or their use, and thus not in respect of the goods.

     Implicitly, the CITT's finding was that the payments under the Reebok and Rockport Agreements were royalties in respect of the goods which were imported. The agreements described those payments as "royalties", paid for the benefit derived from sale of goods which bear the trade-marks, and provision was made for payment to be related to net or gross sale prices of the goods in question. In my opinion, the CITT's decision in this regard was clearly not perverse or made without regard to evidence.

Findings of fact by CITT and the evidence before it

     The appellant submits that the CITT erred in making erroneous findings of fact in the absence of supporting evidence, and contrary to the evidence. The findings objected to in particular are those set out earlier in these reasons, whereby the CITT found that breach by non payment of royalties under the Reebok or Rockport Agreement by the appellant would result in the appellant being unable to purchase Reebok or Rockport footwear.

     Clearly there was no direct evidence supporting the tribunal's findings. The appellant urges that the only evidence on the issue was disregarded by the CITT, that is the evidence that failure to pay under the Reebok Agreement would not affect the sale here in question by manufacturers in Taiwan who had no interest in payment of the royalties to RIL US. For the appellant it is admitted that evidence was before the CITT that failure to pay royalties could cause termination of the licensing agreement preventing the appellant from selling Reebok footwear on an exclusive basis in the future. Further, it was urged there was no evidence that the vendor of Rockport footwear would cease supply of goods to the appellant if the latter failed to pay royalties to the supplier as required.

     The respondent urges that the relationships of the parties, the licence agreements, and the Manufacturing and Trim Agreements of RIL US with its foreign manufacturers support the conclusion that payment of royalties under the Reebok Agreement was an indirect condition of the applicant obtaining trade-marked shoes, and the same may be said under the Rockport Agreement. In my opinion, the inferences and conclusions of fact drawn by the CITT in respect of the royalties and the licence Agreements was within the discretion of the CITT on the basis of the evidence before it. The conclusion was commercially sensible and logical on the basis of the evidence.

     In the case of the Reebok Agreement, RIL US controlled supply by its third party manufacturers in Taiwan of trade-marked Reebok shoes. The conclusion drawn by CITT, was that failure of the appellant to pay royalties under its agreement with RIL US would result in termination of supply of footwear to the appellant. In the case of the Rockport Agreement, the relationship was even clearer, if the royalty were not paid to Rockport, the supplier, it is not illogical or perverse to conclude that supply to the appellant of Rockport footwear would be cut off. In either case, failure to pay would also result in remedies being opened for recovery against the appellant.

Conclusion

     On none of the grounds urged by the appellant am I persuaded that the CITT erred and that this Court should intervene and allow the appeal of Reebok Canada.

     Both on the issues of law raised by the appellant and the issues of fact, I am conscious of the general deference the Court, in my opinion, owes to the decision of the CITT. It is a specialized tribunal with substantial experience in the law, and its administration, in regard to international trade and customs duties. Unless a court on appeal is persuaded that the tribunal has clearly erred in law, recognizing substantial scope for the tribunal in interpreting the law applicable within its area of expertise, or that this tribunal's findings of facts, essential for its decision, are perverse or without regard to the evidence, in my opinion the Court has no basis to allow an appeal. In this case, this Court is not persuaded that the tribunal erred in law or in its findings of fact in any manner that would warrant allowing the appeal.

     The appeal from the decision of the CITT, rendered on September 1, 1993, is dismissed.

     _________________________________

     JUDGE

Ottawa, Ontario

June 30, 1997.