VAL OT:RR:CTF:VS H062635 FP
Patrick D. Gill, Esq.
Rode & Qualey
55 West 39th Street
New York, New York 10018
RE: Transaction Value; Price Actually Paid or Payable; Appraisement of Generic Drugs
This is in response to your letter requesting a ruling on behalf of [drug company] ("the importer") as to the appropriate method of appraisement for certain imported generic drugs.
You claim that the value question presented in the ruling request will not have any dutiable impact since the pharmaceutical products in question are duty free under various provisions of Chapter 30, where they are specifically classified, or under the Pharmaceutical Appendix. This ruling is sought, nevertheless, in order for the importer to meet its informed compliance obligations of correctly valuing its imports for appraisement purposes under 19 U.S.C. § 1401a.
Pharmaceutical products are manufactured and sold to the importer or one of its affiliates by related parties outside the United States. In a typical transaction, an active pharmaceutical ingredient ("API"), is manufactured by a related or an unrelated company, Company A, and sold to a related entity outside the United States, Company B, the seller. In many cases, Company B will ship the API to another related facility outside the United States, Company C, for manufacture of the API into a finished drug product on a toll basis. After manufacture, the finished product is returned to the seller, Company B, for sale and export to the United States by Company B to importer or another related affiliate in the United States.
Initially, these products were sold for export to the United States under a patented, branded proprietary trademark. You state that the inter-company (transfer) pricing of these products has consistently been accepted for appraisement on the basis of transaction value under 19 C.F.R. § 1401a(b) notwithstanding the relationship between the parties inasmuch as the Customs ports have been satisfied that the relationship between the buyer and seller did not influence the price actually paid or payable within the meaning of 19 U.S.C.
§ 1401a(b)(2)(B). Furthermore, you claim that the Regulatory Audit Division considered the relationship between the parties at the time the importer entered into the Importer Self-Assessment Program and that Customs' ISA Team accepted importer's position on the legitimacy of transaction value for the related party transactions.
As a number of importer's branded pharmaceutical products go off patent, unrelated manufacturers throughout the world start to produce non-branded generic products for sale to the United States that directly compete with the importer's branded products. In response, the importer will also produce non-branded generic products which are chemically identical to the branded products and produced in the same related party manufacturing chains described above for the patented, branded drugs. Although the generic products will be chemically identical, they will have a different color and appearance and will have different names and generic packaging. In order to be competitive with other generic products, the importer will sell its generic products at prices which are competitive with other unrelated generic manufacturers. As a result, related Company B will sell the generic products at prices which are less than the prices for the branded products in order to be competitive with the generic manufacturers. You claim the importer is able to sell the generic products at a lower price since they do not incur, among other costs, the heavy advertising and marketing expenses associated with their branded counterparts. Also, generic sales result in significantly lower profit margins.
The importer asserts that it will continue to import the branded products at the higher prices and appraise those products for Customs purposes on the basis of transaction value under 19 U.S.C. § 1401a.
You argue that the generic products should also be appraised on the basis of transaction value but at the lower prices since the relationship between the parties did not influence the lower price. The lower price is influenced solely by competitive market conditions in the sale of generic drugs and lower advertising and marketing costs.
Whether transaction value is an appropriate basis of appraisement for the generic pharmaceutical products?
LAW AND ANALYSIS:
Imported merchandise is appraised in accordance with section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. § 1401a), and the preferred method of appraisement is transaction value. Transaction value is the "price actually paid or payable for merchandise when sold for exportation to the United States," plus five statutorily enumerated additions.
The term "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as:
...the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.
If there are no statutory limitations that preclude the use of transaction value, and there is sufficient information to determine the value of any statutory additions to the price actually paid or payable, then transaction value is applicable.
The issue arises regarding the acceptability of those transaction values for the generic drugs between the related parties. 19 U.S.C. § 1401a(b)(2)(B) provides that the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between the parties did not influence the price actually paid or payable, or if the transaction value of the imported merchandise closely approximates certain test values. See also 19 CFR
According to your letter, you claim that Customs ports have been satisfied with regard to the branded products that the relationship between the buyer and seller did not influence the price actually paid or payable within the meaning of 19 U.S.C.
§ 1401a(b)(2)(B). Now, based on the low prices of the generic products, you wonder if Customs will question whether the relationship between the importer and the sellers influences the prices of the generic drugs. You set forth a plausible explanation as to why the importer may purchase the generic products at prices that are substantially lower than those charged for the branded products. Specifically, you note that the heavy advertising and marketing expenses associated with the sale of branded products are absent from the sale of generic products. You also indicate that generic products are sold at lower profit margins due to competitive market conditions.
Section 152.103(l), Customs Regulations, provides that:
[t]he port director shall not disregard a transaction value solely because the buyer and seller are related. There will be related person transactions in which validation of the transaction value, using the procedures contained in § 152.103(j)(2), may not be necessary.
In this case, you indicate that Customs has been satisfied that the relationship between the seller and the importer did not influence the price actually paid or payable of the branded products, and that the Regulatory Audit Division considered the relationship of the parties. Therefore, we find that absent evidence to the contrary it may be appropriate to appraise the generic products under transaction value and for Customs to continue to recognize that the relationship between the buyer and the seller also does not influence the price of the generic products. See also Headquarters Ruling Letter 548065, dated September 6, 2002.
Please note, however, that you did not provide information concerning the circumstances of the sale or any test values. Therefore, if the appraising officer has doubts about the acceptability of the price and is unable to accept the price without further inquiry, you will be required to supply such further detailed information as may be necessary to validate the transaction value using the procedures in 19 CFR §152.103(j)(2).
With the limitations set forth in the foregoing, the lower price for the generic drugs, as paid by the buyer to the seller, constitutes a valid transaction value pursuant to 19 U.S.C.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs official handling the transaction.
Monika Brenner, Chief
Valuation and Special Programs Branch