JUDGMENT OF 14. 7. 1977 - CASE 1/77 BOSCH v HAUPTZOLLAMT HILDESHEIM

In Case 1/77 Reference to the Court under Article 177 of the EEC Treaty by the Finanzgericht Hamburg for a preliminary ruling in the action pending before that court between:

THE COURT (First Chamber) composed of: A. M. Donner, President, J. Mertens de Wilmars and G. Bosco, Judges, Advocate-General: J.-P. Warner Registrar: A. Van Houtte

gives the following

JUDGMENT

Facts and issues

The facts of the case, the procedure and the observations submitted under Article 20 of the Protocol on the Statute of the Court of Justice of the EEC may be summarized as follows:

I — Facts and procedure

The main action concerns the valuation for customs purposes of a COS (cast-on strap) machine which, by means of a process protected by a patent, manufactures terminal bridges for lead-acid batteries. The machine itself is protected by two patents. The dispute is concerned with the inclusion of the royalties paid by the plaintiff in the main action in the valuation for customs purposes. The COS process, which is protected by a patent, is a process for the manufacture of electric storage battery cell components wherein assemblies of cell plates and spacers are in assembled relationship; parts thereof are fluxed and cleaned: molten metal is formed in a mould and solidified to support rigidly and electrically interconnect certain of the said plates. The undertaking Globe-Union Inc., Milwaukee/USA (hereinafter referred to as ‘Globe’) is the manufacturer of the COS machine and also the proprietor of the patented process. On 20 May 1965 the plaintiff in the main action concluded with the undertaking Globe-Union Overseas Ltd., London (hereinafter referred to as ‘G-UO’), an associated company of the manufacturer which is competent to dispose of the COS patents, a licence agreement (the ‘COS Licence Agreement’, hereinafter referred to as “the Licence Agreement”) which was amended by an agreement dated 12 December 1968. Under the Licence Agreement, the plaintiff in the main action was granted the right to manufacture, acquire and operate the COS machines and also to exploit the COS process, certain technical information and patent rights commercially. The information and the aid to be given to G-UO comprised in particular:

a) advice concerning the introduction of the COS process and also the construction of the batteries manufactured under the COS process,

b) discussions of problems during visits by experts from Globe and the plaintiff in the main action to Globe's works and to Hildesheim,

c) the handing over or the dispensing of prescriptions for the flux, the temperature of the lead baths and the composition of the lead alloys, which are used when the COS process is operated.

In addition, the plaintiff in the main action was granted a non-assignable, non-exclusive licence to manufacture, use and market the licensed batteries (that is to say the batteries manufactured by using the technical information, whether patented or not, relating to the COS machine and the COS process) in all countries of the continent of Europe and in a few African and Asian countries. The plaintiff had to pay G-UO as consideration for the various benefits it provided a lump sum of US$10000 and for each battery sold under the licence during the first five years of the agreement a royalty of 1.15 cents for each 6-volt battery and of 2.30 cents for each 12-volt battery with a minimum royalty of US$7000 for each year of the agreement (Article V 5.2 of the Licence Agreement). As from the beginning of the sixth year of the Licence Agreement under Article V thereof royalties were only payable on those licensed batteries in the manufacture or design of which one or more of the patents under Article I of the Licence Agreement were used. Moreover the scale of the royalties was reduced to one half of the scale mentioned in Article V 5.2. The obligation to pay a minimum royalty did not apply (Article V 5.3).

On 4 June 1974, the plaintiff in the main action imported into Germany a COS machine from Globe. According to the provisional customs assessment of 5 June 1974, the customs duties amounted to DM 20333. An additional charge of DM 42631 for royalties had been included in the valuation for customs purposes (DM 271107.27) which served as the basis of the calculation for this amount.

The calculation of this additional charge was based on a report of 15 March 1974 drawn up by the audit section of the customs valuation branch of the federal customs administration. As a result of a further report by the customs valuation branch of 7 August 1974, the final assessment to customs duty was issued on 23 August 1974.

On 5 September 1974 the plaintiff in the main action lodged an objection against this assessment, which objection the defendant in the main action rejected as unfounded by a decision of 4 March 1975 with the exception of a point raised which is no longer relevant to the main action and as a result of which the disputed additional charge was reduced to DM 27099.43. As a result of this rejection, the plaintiff in the main action brought proceedings before the Finanzgericht Hamburg on 4 April 1975. It substantiated its case in the following way: the patents relating to the machine have been paid for in the purchase price. The patented process is not embodied in the COS machines in the same way as it is in the cases decided by the Bundesfinanzhof. The imported COS machine cannot be used without knowing how to dispense prescriptions for the flux and without knowledge of the temperature of the lead baths and the composition of the lead alloys. The machine can only be used for the COS process and not for any other manufacturing processes. Knowledge of the method of dispensing prescription for the flux, of the temperature of lead baths and of composition of lead alloys has been imported as an item of intangible industrial property.

The royalties under Article V 5.2 and 5.3 were only paid for the patents covering the COS process, the information, the technical aid and the rights granted under Article IV 4.1 of the Licence Agreement but not for the patent covering the machine, which was paid for in the purchase price. The value of the patented process, the information and the technical aid should not form part of the valuation of the product for customs purposes. However, in so far as royalties are to be included in the valuation for customs purposes the additional charge must be substantially reduced.

The defendant in the main action takes the view that the patents covering the machine have in no way been paid for in the purchase price. The purchase price which has been paid and the proportion of the royalties payable for using the patent rights relating to the machine are commercially the consideration for the acquisition and use of the machine. According to the preamble to the Licence Agreement the plaintiff was to have been enabled, for the purpose of manufacturing lead-acid batteries, to manufacture or acquire COS equipment and to acquire the right to use the COS process commercially and to use the necessary technical information and patent rights. The purchase and the unfettered right to dispose of the COS equipment (the machine and the appliances) was conditional on the conclusion of the Licence Agreement. The process which is protected by patents is performed on the COS machine. The machine has only been made so that this process can be carried out. Consequently it embodies this process.

So far as the valuation for customs purposes of goods is concerned, Article 1 of Regulation (EEC) No 803/68 of the Council of 27 June 1968 (OJ English Special Edition 1968 (I), p. 170) provides that:

‘1. For the purpose of applying the Common Customs Tariff, the value for customs purposes of the goods imported shall be taken to be the normal price, that is to say, the price which they would fetch, at the time referred to in Article 5, on a sale in the open market between a buyer and a seller independent of each other. 2. The normal price of any imported goods shall be determined on the following assumptions: (a) that the goods are delivered to the buyer at the place of introduction into the customs territory of the Community; (b) that the seller bears all costs, charges and expenses incidental to the sale and to the delivery of the goods at the place of introduction, which are hence included in the normal price; (c) that the buyer bears any duties or taxes applicable in the customs territory of the Community, which are hence not included in the normal price.’

Article 3 (1) of that regulation provides that:

‘1. When the goods to be valued (a) are manufactured in accordance with any patented invention or are goods to which any protected design has been applied; or (b) are imported under a trade-mark; or (c) are imported for sale, other disposal or use under a foreign trade-mark, the normal price shall be determined on the assumption that it includes the value of the right to use the patent, design or trade-mark in respect of the goods. This provision shall also apply in the case of copyright or any other intellectual or industrial property right.’

By order of 5 November 1976 the Finanzgericht Hamburg stayed the proceedings and referred the following question to the Court of Justice of the European Communities under Article 177 of the EEC Treaty for a preliminary ruling: ‘Is Article 3 (1) of Regulation (EEC) No 803/68 of the Council (a regulation on valuation for customs purposes) to be interpreted as meaning that the normal price also includes the value of a patented process embodied in an appliance within the meaning of the judgment of 7 August 1962 of the Bundesfinanzhof (Federal Finance Court), File No VII 89/60 U, Bundessteuerblatt (Federal Tax Journal) III 1962, p. 549?’

The order for reference was entered in the Court Register on 3 January 1977.

In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted by the plaintiff in the main action, represented by Mr Uhl, and by the Commission of the European Communities, represented by its Legal Adviser Jean Amphoux, acting as Agent, assisted by Manfred Beschel, Member of the Legal Service.

The Court, having heard the report of the Judge-Rapporteur and the views of the Advocate General, decided to open the oral procedure without a preparatory inquiry.

By order of 27 April 1977 the Court, in application of Article 95 (1) of the Rules of Procedure, decided to assign the case to the First Chamber.

II — Summary of the written observations submitted to the Court

The Plaintiff in the main action emphasizes that from the point of view of the legislation on the valuation of goods for customs purposes, the question raised is only important if, in addition to the purchase price of the machine, it was necessary to pay a purchase price for the patent or patents (in the case of the assignment of the right to the patented process) or royalties (in the case of the grant of a licence for the use of the right to the patented process).

It is necessary to distinguish the following cases:

1) The imported patented machine is made in such a way that a person who uses it in accordance with the instructions automatically carries out the patented process. There is technically no possibility of carrying out the patented process in any way other than by using the patented machine.

2) As under (1) above; the patented process may however also be carried out in another way, for example by hand or by using other machines.

3) As under (1) or (2) above; however only part of the patented process may be carried out by the machine and the other part must be carried out by hand or by using other machines.

4) the patented machine is made in such a way that the patented process may only be carried out with the aid of that machine if the special features of the patented process are known and applied.

5) As under (2) to (4) above; the machine may however also be used for purposes which have no connexion with the patented process.

6) As under (1) to (5) above; the machine is however not (or is no longer) patented.

As to (1)

Article 3 (1) of Regulation No 803/68 justifies the inclusion in the valuation for customs purposes of royalties which are to be paid separately in addition to the purchase price for the patent (appliance). The inclusion of royalties in respect of one or several patents for a process may not in principle be based on that provision.

As to (2)

In this case, the patenting of the process is an absolute necessity for the inventor. Therefore a derogation from the above-mentioned principle is not justified.

As to (3)

The observations made under (1) and (2) above apply by analogy to the part of the royalties paid for the patented process which concerns the operations which may be carried out and are in fact carried out with the aid of the patented machine. However it is extremely difficult to ascertain that part of the royalties. On the other hand, the liability to pay royalties for the licence for the process only arises if the licensee performs all the operations involved in the patented process and only at the date on which the last operation has been carried out. It therefore seems justified in this case not to include in the value for customs purposes royalties paid in respect of the patented process.

As to (4)

The patented process is not ‘embodied’ in the machine in such a way that a person who uses the machine (or more exactly, who tries to use it) following the instructions can therefore also apply the patented process. In this case, the inclusion (in whole or in part) of the royalties paid for the patented process is not justified. It would mean that in the last analysis intangible industrial property which was not ‘embodied’ in the machine would be subject to customs clearance on importation.

As to (5)

It is uncertain if and, if so, for how long the imported machine is used to carry out the patented process. This uncertainly, together with the reasons indicated under (2) to (4) above, precludes in principle the inclusion in the value for customs purposes of the royalties paid for the patented process.

As to (6)

The fact that the imported machine is not patented has no influence on the decision from the point of view of the legislation on the value for customs purposes.

The Commission considers that it is necessary to understand the question which has been referred for a preliminary ruling as asking under what conditions the ‘embodiment’ of a patented process in an article must be accepted in Community law. For the purpose of the solution of this problem it is necessary to take into consideration Article 1 of Regulation No 803/68, in addition to the provision quoted by the national court.

1. Under Article 3 (1) (a) of Regulation No 803/68 the value of the right to use the patent must be included in the value of the goods for customs purposes when the goods are manufactured in accordance with any patented invention. This is the case where the goods as such are the object of a patent called a product patent so that, whatever method is used, this product may only be manufactured by the patentee. Goods are also ‘manufactured in accordance with any patented invention’ when they are the direct result of a patented process. In this respect it is possible to state that Article 3 (1) (a) also concerns patents for processes. However this provision indicates clearly that it only applies to patented processes used for the manufacture of the imported goods. On the other hand, it does not authorize the inclusion in the value for customs purposes of patents for processes which are used after the importation within the context of the user of the goods. This restriction of the field of application which already follows from the clear wording of Article 3 (1) (a) seems appropriate. In fact, for the purposes of determining the value of the goods for customs purposes it is important to calculate the economic value of the imported goods, that is, the value of the foods in the state in which they have been imported. Although it is impossible to base the inclusion in the value for customs purposes of patents for processes used within the context of the user of the imported goods on Article 3 (1) (a) of Regulation No 803/68, the problem of the ‘embodiment’ of such patents in the goods is not finally resolved for all that. If there are cases in which the possibility of or the necessity for using a patented process is inherent in the goods themselves, it would be necessary to examine whether it is not already necessary to include the value of that process in the value for customs purposes under the basic rule laid down in Article 1 of Regulation No 803/68. The Commission therefore examines the concept of ‘imported goods’ within the meaning of the latter provision.

2. Regulation No 803/68 is based on the principle of ‘customs duties on goods: the duty to obtain the customs clearance relates to the goods, that is, to tangible objects, but not to intangible industrial property. The normal price’ on which the value for customs purposes is based varies according to the economically relevant and measurable characteristics of the goods. If goods are acquired at the normal price, it is necessary to accept that their purchaser has in addition acquired at the same time the right to use them freely in a certain way. If, in addition to the purchase price ‘properly so-called’ of goods, a royalty is paid for the use of these goods for their purpose that royalty forms part of the normal price. Conversely, special know-how which is independent of the goods and protected where appropriate by a patent must not be evaluated from the point of view of the value for customs purposes even if the goods are used within the context of such a process. In this case the special process does not form part of the goods themselves but constitutes at most an additional condition for the economic use of the goods. Any royalty paid for such a process must not therefore be included in the value for customs purposes. However, in the case of an appliance whose function, determined by its design, is to carry out a process protected by a patent, it is possible to accept that the process is inherent (embodied) in the design of the article. If the process is embodied in the appliance it seems logical to include in the value for customs purposes of the appliance the consideration paid for the use of the process. The Commission considers however that this argument can only be accepted under stricter conditions than those laid down by the Bundesfinanzhof (see the judgment quoted in the question referred to the Court for a preliminary ruling). In order to accept physical incorporation it is not sufficient for the person using the imported machine to be able to carry out the patented process with that machine. In fact, this possibility is not sufficient to make the patent an integral part of the article. It is possible to imagine that the machine might be used in another way which is just as profitable. Moreover, there is no reason for stating that the patented process relates precisely to the state and the characteristics of the machine. The position is different when it is impossible to use the machine profitably without at the same time using a patented process because it is necessary to accept in principle that the purchase of an article also includes the purchase of the right to use it for its purpose. If separate consideration is required for the right of use, it is necessary to consider that the purchase price has been divided and to take that into account accordingly when the value for customs purposes is determined. In conclusion, in order to be able to include the value of the process in the value for customs purposes, it is necessary for the use of the appliance always and necessarily to involve the implementation of the patented process. But even that is not sufficient to accept that this is a process which is embodied in the machine. In fact, a process carried out by means of an appliance can only be embodied in this appliance if it concerns the operations carried out directly by the appliance itself. In that case, the condition of the essential identity between the right of use of the article for its purpose (as part of the article) and the exercise of the patent for the process is fulfilled. When the use of the machine in this sense and the complete use of the patented process correspond entirely, the total value of the patent for the process should then be included in the value for customs purposes. The Commission however considers that it is unlikely, at least in German patent law, that such a case would arise when the machine itself is protected by a product patent. In cases in which, on account of its content, the patent for the process is not restricted to the description of the operating method of the patented appliance but also relates to other additional operations it is necessary to make a distinction between the part of the protected process which is necessarily identified with the method of operation of the machine and that which concerns independent know-how in connexion with the invention which relates to the goods which are manufactured by means of the machine. This payment must be taken into consideration for the purpose of the determination of the normal price only in cases in which a separate payment is required for the first part of the process. In the case of a lump-sum payment it is normally necessary to apportion it. It is therefore for the national court to examine and settle the question whether and to what extent the use of the machine necessarily involves the use of a patent for a process. The Commission suggests that the question referred for a preliminary ruling should be answered as follows. (1) Article 3 (1) (a) of Regulation No 803/68 of the Council provides no legal basis for taking into consideration for the purposes of the determination of the value for customs purposes of certain machines manufactured in accordance with a patented invention patents for processes concerning the use of those machines after their importation. (2) When, in addition to the purchase price paid for the imported machine, the use of such a patent for a process gives rise to the payment of consideration, the latter must only be taken into account for the purpose of the determination of the value for customs purposes of the imported machine if the imported machine may only be used by carrying out that process and the patent for the process relates exclusively to the operations carried out by the machine itself.

III — Oral procedure

The plaintiff in the main action, represented by Messrs Schneider and Uhl, and the Commission of the European Communities, represented by its Legal Adviser, Jean Amphoux, assisted by Manfred Beschel, presented oral argument at the hearing on 26 May 1977.

The Advocate General delivered his opinion at the hearing on 22 June 1977.

Decision

1. By order of 5 November 1976, which was received at the Court Registry on 3 January 1977, the Finanzgericht Hamburg referred to the Court of Justice under Article 177 of the EEC Treaty a preliminary question on the interpretation of Regulation No 803/68 of the Council of 27 June 1968 on the valuation of goods for customs purposes (OJ English Special Edition 1968 (I), p. 170) and in particular Article 3 thereof. The question has arisen in the context of a dispute concerning the valuation for customs purposes of a COS (cast-on strap) machine protected by an invention patent called a product patent (Sachpatent) while, on the other hand, the process enabling the machine to be used for the manufacture of terminal bridges for lead-acid batteries is also protected by another invention patent called a process patent (Verfahrenspatent). The question concerns whether, in the determination of the ‘normal price’, that is, of the value for customs purposes of the machine, it is necessary to take into account the patent for the process relating to its use, or more particularly: ‘Is Article 3 (1) of Regulation (EEC) No 803/68 of the Council (a regulation on valuation for customs purposes) to be interpreted as meaning that the normal price also includes the value of a patented process embodied in an appliance within the meaning of the judgment of 7 August 1962 of the Bundesfinanzhof (Federal Finance Court), File No VII 89/60 U, Bundessteuerblatt (Federal Tax Journal) III 1962, p. 549’ ?

2. The abovementioned judgment of the Bundesfinanzhof was given in application of national rules and case-law relevant at that time which have meanwhile been replaced by Community rules and it is therefore necessary to examine the problem solely in the light of the rules of Community law which are applicable.

3. Article 1 of Regulation 803/68 provides that: ‘For the purpose of applying the Common Customs Tariff, the value for customs purposes of the goods imported shall be taken to be the normal price, that is to say, the price which they would fetch … on a sale in the open market between a buyer and a seller independent of each other’. The following articles lay down how that basic provision is to be applied in detail so as to take into account various factors which are capable of influencing the price of the goods. Article 3 (1) (a) provides that: ‘When the goods to be valued are manufactured in accordance with any patented invention or are goods to which any protected design has been applied … the normal price shall be determined on the assumption that it includes the value of the right to use the patent … [or] design … in respect of the goods. This provision shall also apply in the case of copyright or any other intellectual or industrial property right’.

4. The Common Customs Tariff by its nature concerns only the importation of goods, that is, tangible property, and does not apply to the importation of incorporeal property such as processes, services or know-how, which are, owing to their nature, already difficult for the customs mechanisms to cover. Therefore, for the purpose of the determination of the value for customs purposes, it is in principle necessary to concentrate only on the intrinsic value of the article and to disregard the value of processes, which may be patented, in which it may be used. If this were not so there would be a risk of extending the application of the Common Customs Tariff, by too wide an interpretation of the concepts of value and price, to the introduction into the Community of ideas underlying inventions as such, which are not embodied in tangible property. Such application would necessarily be arbitrary because it would not be capable of covering the more or less uncertain connexion between the idea underlying the invention and the articles concerned.

5. By only mentioning patented inventions in accordance with which goods are manufactured, Article 3 seems to exclude patented inventions which relate to the process of use of the article. However, this distinction loses its meaning in cases in which the manufactured article and the process of use thereof are so closely linked that the manufactured article and the process of use are embodied in one and the same article. In fact the result of an interpretation of Article 3 in accordance with the objectives of the basic provision laid down by Article 1 of the regulation is that a patented process, the carrying out of which constitutes the only economically viable use of the goods and which is only put into effect by the use of those goods, is regarded as embodied in the imported goods.

6. It is therefore necessary to reply that Article 3 (1) (a) of Regulation No 803/68 of the Council is to be interpreted as meaning that the normal price of goods includes the value of a patented process where the protected process is inseparably embodied in and constitutes the only economically viable use of the goods.

Costs

7. The costs incurred by the Commission of the European Communities, which submitted observations to the Court, are not recoverable. Since the proceedings are, so far as the parties to the main action are concerned, a step in the action pending before the Finanzgericht Hamburg, the decision on costs is a matter for that court.

On those grounds, THE COURT (First Chamber) in answer to the question referred to it by the Finanzgericht Hamburg by order of 5 November 1976 hereby rules.