OT:RR:CTF:VS H083960 GG
Port Director
U.S. Customs and Border Protection
3150 Tchulahoma Road, Suite 1
Memphis, Tennessee 38118
Dear Port Director:
This is in response to an internal advice request dated October 23, 2009, submitted by the law firm of Dewey & LeBoeuf on behalf of Millipore Corporation (“Millipore”), with respect to the proper valuation method for certain imported bioscience products. Your office forwarded the request to our office. We also received a supplemental letter, dated June 14, 2010, which provided answers to certain questions we had asked following our preliminary review. Furthermore, we have incorporated additional information disclosed during a conference call that took place on August 12, 2010, between counsel for Millipore, company representatives, and attorneys from this office. Counsel for Millipore submitted comments electronically on August 27, 2010, confirming the issues discussed during the conference call.
FACTS:
This internal advice request involves the importation of bioscience products by Millipore. The internal advice request also identified two other related companies, Chemicon International Inc. (“Chemicon”) and Upstate USA, Inc. (“Upstate), as importers. The conference call and confirmation email clarified, however, that since at least March 23, 2007, Millipore has been the sole importer. Counsel for Millipore explains that a company called Serologicals Corporation (“Serologicals”) acquired Chemicon in 2003 and Upstate in 2004. Serologicals then was acquired by Millipore in July 2006 and was merged into Millipore effective December 31, 2006. Millipore now imports all shipments formerly destined for Serologicals, Chemicon or Upstate. Starting in April, 2008, all entries have been flagged for reconciliation.
Millipore is a bioscience company providing products and services used in life sciences, such as in immunodetection and drug discovery research. The imported merchandise consists principally of two types of bioscience products, which are used in research and clinical applications: (i) antibodies or related items, such as serums, imported for resale in the condition as imported (“Finished Products”); and (ii) cell lines, growth media cells, proteins, and reagents, imported to be cultivated to yield viable antibodies, some of which may later be sold for use in research, if and when any such use is found for them.
The merchandise is imported pursuant to licensing agreements with unrelated foreign vendors, academic institutions and laboratories. During the conference call that took place on August 12, 2010, company representatives advised that notwithstanding the corporate restructuring and ensuing merger, licensing agreements entered into by Chemicon and Upstate still remain in effect. Millipore confirms that it makes the royalty payments on those contracts entered into by Chemicon and Upstate prior to the merger. Counsel for Millipore has provided copies of a representative Finished Product antibody licensing agreement and a representative cell line licensing agreement. Under the first type of agreement, the licensor (a foreign university) agrees to supply antibodies to one of the aforementioned companies, and grants a non-exclusive license to sell the antibodies for use worldwide in the licensed field. The payment terms of the license agreement require the company to pay a fixed sum within 15 days of receipt of the Finished Product, and to pay a royalty on each sale of the imported Finished Product based on the Net Sales Value of the Finished Product. The Net Sales Value is the net invoice price appearing on the invoices prepared for the U.S. customers. In other cases, a minimum annual royalty payment, in addition to a fixed payment and percentage of net sales value royalty payment, must be made.
The submitted cell line licensing agreement is between another foreign university and Millipore. It grants Millipore the non-exclusive license to manufacture, have manufactured, use, have used, sell and/or have sold the licensed products within the licensed territory for use within the licensed field. The licensor is also obligated to provide the cell lines to Millipore. Under this particular agreement, Millipore agrees to pay a fixed amount non-refundable license fee within a certain time following its successful completion of antibody performance validation, as well as a running royalty equal to a certain percentage of net sales of licensed product.
Some of the imported items are never sold after importation. Since they are biological materials, the imported cell lines sometimes turn out not to be effective in producing antibodies usable in research. Similarly, the imported Finished Products are sometimes found to be inactive or non-conforming following importation. Thus, although the potential use of the imported products, in the case of both the cell lines and the Finished Products, is known at the time of importation, many of the Finished Products may never actually be sold, or may
not be sold until years later, and many cell lines will never be processed successfully to produce saleable antibodies. As payment for both types of subject merchandise is often contingent on there being a sale of either imported Finished Products, on the one hand, or the antibodies produced from the imported cell lines, on the other, there will sometimes be imported merchandise for which no payment is ever made.
Additionally, the potential yield of antibodies from a particular cell line is not ascertainable. That is, there is no known or theoretical maximum or minimum yield. Some cell lines may be used by Millipore for a number of years to produce many antibodies, while other cell lines will not cultivate successfully for some reason, or may produce antibodies for which there is no current customer.
The invoices accompanying both types of shipments will generally reflect the amount of the up-front payment to be made, where the agreement makes provision for an up-front payment. Otherwise, the invoice will generally reflect a nominal amount.
ISSUE:
What is the proper method of appraisement of the imported bioscience products?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions. The additions include “any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States,” and “the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller”. 19 U.S.C. §§ 1401a(b)(1)(D) and (E). These additions apply only if they are not already included in the price actually paid or payable.
As a preliminary matter, we must determine whether the imported bioscience products are sold for exportation to the United States. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term "sold" for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration, (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). However, several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of imported merchandise. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See Headquarters Ruling Letter (“HQ”) 547197, dated August 22, 2000; and HQ 546602, dated January 29, 1997.
It is Millipore’s contention that a bona fide sale for exportation does not occur between the foreign licensors/suppliers and the importer. This is because title remains with the licensor at the time of importation, and no consideration is paid unless and until a sale in the United States has taken place. Moreover, because of the long shelf life of some of the products, the total amount of royalties paid with respect to any particular entry may not be known for many years thereafter. The importer expresses the opinion that these types of transactions are similar to importing on consignment.
Under a typical consignment arrangement, the goods are entrusted to the consignee, who then sells them after they are already in his possession. If this type of situation involves imported merchandise, the sale is considered a domestic sale and not a sale for exportation to the United States, ruling out the use of transaction value. See, e.g., HQ 548574, dated March 17, 2005; HQ 546602, dated January 29, 1997; HQ 545755, dated May 18, 1995.
In certain situations, however, there may be a sale for exportation even though a transaction is described as, or has attributes of, a consignment. For example, in HQ H012659, dated November 14, 2007, imported automotive components were delivered to a designated logistics service provider, and were held in inventory until they were transferred to the buyer for production into transmissions. The contract between the seller and buyer required the buyer to issue payment to the seller on the 63rd day after the issuance of the pro forma invoice, regardless of whether the parts had been placed in production or remained in inventory. Title transferred from the seller to the buyer either when the parts were delivered to the buyer or on the 63rd day, whichever occurred earliest. The buyer assumed risk of loss of the parts when they were placed on board the exporting carrier for shipment to the United States. In determining that the sales were sales for exportation to the United States, CBP considered the following factors: the buyers were obligated to purchase the imported merchandise and to pay within a specified time frame; the price paid conformed to the prices on the pro forma and commercial invoices; and risk of loss transferred at the place of shipment. See also HQ H092448, dated May 4, 2010. Millipore’s transactions do not appear to have many of these factors, as there is no prescribed time frame in which the sales must occur, and the invoices that accompany the shipments typically will not reflect the full amount that is eventually paid. We agree with Millipore that the bioscience products are not sold for exportation to the United States. Therefore, transaction value is eliminated as an appraisement method.
The second method of appraisement is the transaction value of identical and similar merchandise. See 19 U.S.C. § 1401a(c). The transaction value of identical and similar merchandise refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. In this case, there are no transaction values of identical or similar merchandise available to appraise the imported bioscience products, and consequently, this appraisement method also cannot be used.
The next method of appraisement is deductive value. See 19 U.S.C. § 1401a(d). Under the deductive value method, merchandise is appraised on the basis of the price at which the “merchandise concerned” is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). “Merchandise concerned” means the merchandise being appraised, identical merchandise, or similar merchandise. 19 U.S.C. § 1401a(d)(1). Where post-importation processing occurs before sale, deductive value can be based on sales prices within 180 days of importation, with an additional deduction for the value added by the processing. 19 U.S.C. § 1401a(d). Millipore argues that deductive value is not an appropriate basis of appraisement, because some of the imported products will never result in sales (either of the Finished Products or of antibodies produced from cell lines), or the sales may occur long after importation. Millipore representatives also indicated during the conference call that the antibodies that are sold vary widely, a fact that is reflected in their disparate selling prices. It would therefore be difficult, if not impossible, to identify sales of identical or similar antibodies after importation. We find Millipore’s arguments persuasive and agree that deductive value is not a viable appraisement method.
Computed value is the next method of appraisement, and it is based upon, among other things, information regarding the cost of materials, processing, profit, and general expenses. 19 U.S.C. § 1401a(e). Millipore indicates that computed value is inapplicable, because all of the foreign licensors are unrelated, and therefore it has no access to information concerning the costs of production. We agree that under these circumstances computed value may not be used to appraise the imported bioscience products.
Where merchandise cannot be appraised under the methods set forth in
19 U.S.C. § 1401a(b)-(e), the value is to be determined in accordance with the “fallback” method of section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. 19 U.S.C. § 1401a(f)(1). Millipore proposes a fallback method for valuing its merchandise. Pursuant to this proposed method, it would flag its entries for reconciliation, and then reconcile the value of the flagged entries shortly after the end of the calendar year. It would do so by first ascertaining the total royalty/license fees that it pays to foreign licensors/suppliers during that year, as a result of either: (i) sales of previously imported Finished Products, and separately, (ii) sales of merchandise produced from previously imported cell lines. It would then allocate the total amount of the year’s payments for sales of previously imported Finished Products to the year’s entries of Finished Products, and would allocate the year’s payments for sales of antibodies produced from cell lines to the year’s entries of cell lines. The allocations would be pro-rata, based on the quantity of each import. To these totals, Millipore would similarly add any allocable initial license fees or related payments that may have been paid for the type of merchandise in question.
Millipore advocates this approach – allocating the aggregate of the year’s payments with respect to each product type to the year’s total entries of each product type – rather than allocating the year’s payments to a particular licensor to the year’s entries from that licensor, because there could be occasions when it will make a payment to a licensor for previously imported merchandise in a year in which there is no corresponding entry of merchandise from that licensor. In that situation, the company would have no entry to which it could allocate the payment made. According to Millipore, the proposed method avoids that outcome and ensures that all payments made for the subject merchandise will be fully allocated to entries of the type of merchandise in question.
The proposed valuation methodology as it was originally presented in the internal advice request initially raised concerns because it would have combined royalty payments made by three different importers – Millipore, Chemicon and Upstate –and then allocated the aggregated amount on a pro-rata basis across all of the entries. Although the importers were related, they were nonetheless separate importers, and as such were precluded from pooling payments to arrive at the value of their imported merchandise. Our concerns on this issue were alleviated during the conference call when it was explained that since March 2007 Millipore has been the sole importer and has been the only party making payments to the suppliers of the bioscience products.
The approach proffered by Millipore appears to be a reasonable way to determine the appropriate value of imported bioscience products under the fallback method. The issue of the allocation of license fees across reconciled entries has been previously approved by CBP in HQ H078555, dated December 18, 2009.
HOLDING:
The use of the fallback method as proposed by Millipore is acceptable as a means of appraising the imported bioscience products. Please mail this decision to counsel for the internal advice applicant no later than sixty days from the date of this letter. Sixty days from the date of this letter, Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, and by means of the Freedom of Information Act as well as by other means of public distribution.
Sincerely,
Monika R. Brenner
Chief
Valuation and Special Programs Branch