OT:RR:CTF:VS H301049 JMV
Craig Lewis
Hogan Lovells US LLP
555 Thirteenth Street, NW
Washington, DC 20004
Re: Ruling Request; First Sale Appraisement
Dear Mr. Lewis,
This is in response to your letter dated September 19, 2018, on behalf of [XXXXXX] (“Company”) and its affiliates. In your letter, you request a ruling pursuant to 19 C.F.R. Part 177 regarding whether the sale between [XXXXXXXXXXX] (“Foreign Manufacturer”) and [XXX XXXXXXXXXXXXX] (“Foreign Related Company”) qualifies as an acceptable basis for appraisement of the subject merchandise.
You have asked that certain information submitted in connection with this request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in this ruling or in the attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
At issue is a multi-tiered transaction for the importation of [XXXXXX], an Active Pharmaceutical Ingredient (“API”) that is ordered and purchased by Foreign Related Company, manufactured by Foreign Manufacturer, and ultimately shipped to and imported by [XXXXXX] (“Related Importer”) in the United States with the logistical support of [XXXXXXXXXXXXXX XXXXXXXXXXXXXXX] (“Related Logistics Company”). You state that Company, Foreign Related Company, Related Logistics Company, and Related Importer are all related companies. Foreign Manufacturer is unrelated to any of the other entities involved in the subject transaction.
The API is used to produce [XXXXXXX] (“the medication”), which is a dermatological cream approved by the U.S. Food and Drug Administration (“FDA”) and manufactured in the United States. The medication is not currently approved for use by any other foreign pharmaceutical regulator and is only approved for sale in the United States by the FDA. The medication was originally developed by [XXXXXXX] (“Predecessor Company”), which was acquired by Company in 2016. Predecessor Company had a preexisting Manufacturing Service Agreement with Foreign Manufacturer, which was novated to Foreign Related Company upon acquisition. The price and terms of sale of the API were originally negotiated by Predecessor Company. You state that, since Predecessor Company and Foreign Manufacturer were unrelated, the Manufacturing Service Agreement was negotiated “at arm’s-length.”
Foreign Related Company is a manufacturer and distributor of pharmaceutical products based in Ireland. You state that Foreign Related Company is tasked with the responsibility of managing global sourcing and manufacturing for all the other related companies. You further state that Foreign Related Company acts as the purchasing coordinator and “planner” on behalf of the affiliated companies involved in the transaction at issue. Foreign Related Company develops plans for sourcing, manufacturing, and processing of the API and downstream pharmaceutical products. Foreign Related Company executes these plans by independently making decisions on price negotiation, purchase quantities, and production and delivery scheduling.
Related Logistics Company is based in Belgium and is the logistics service provider for the group and operates warehousing facilities in Belgium. Related Logistics Company’s role in the transaction at issue is as logistics coordinator.
The transaction at issue begins when Foreign Related Company issues a purchase order for the API to Foreign Manufacturer. Foreign Related Company purchases the API for its own account, and pays Foreign Manufacturer directly. You state that, after taking title to the goods from Foreign Manufacturer, Foreign Related Company invoices Foreign Logistics Company to facilitate the shipment of goods to the United States. Related Logistics Company then invoices Related Importer. In a telephone call with this office, you indicated that Related Logistics Company takes title and risk of loss of the API when Foreign Related Company delivers the API and issues an invoice to Related Logistics Company.
You provided this office with documentation of a past transaction to serve as an illustrative example. The following documents have been provided for our review:
The Manufacturing Services Agreement between Foreign Manufacturer and Predecessor Company;
The Novation of Manufacturing Services Agreement from Predecessor Company to Foreign Related Company;
Purchase Order between Related Importer and Related Logistics Company;
Purchase Order between Related Logistics Company and Foreign Related Company;
Purchase Order between Foreign Related Company and Foreign Manufacturer;
Airway Bill;
Packing List;
Commercial Invoice from Foreign Manufacturer to Foreign Related Company;
Commercial Invoice from Foreign Related Company to Related Logistics Company;
Commercial Invoice from Related Logistics Company to Related Importer;
Proofs of Payment from Related Importer to Related Logistics Company;
Proofs of Payment from Related Logistics Company to Foreign Related Company; and
Proofs of Payment from Foreign Related Company to Foreign Manufacturer.
The purchase order issued by Foreign Related Company to Foreign Manufacturer provides a “ship to” and “final destination” address to Company’s manufacturing facility or Company’s contract manufacturing facility, both located in the United States. The purchase orders and invoices between Foreign Manufacturer and Foreign Related Company, and the waybill include Incoterms of “FCA Supplier Location” or “Ex-Works.” Additionally, the Incoterms of the Manufacturing Services Agreement, which was novated to Foreign Related Company from Predecessor Company, are “Ex-Works.” The Manufacturing Services Agreement also states:
Customer shall procure, at its cost, insurance covering damage or loss of the Product during shipping. Customer agrees to (i) collect (or have its designee collect) each Batch of Product or (ii) request in writing that [Foreign Manufacturer] store each Batch of Product (as further described below), in each case, as soon as reasonably practicable once [Foreign Manufacturer] has notified Customer in writing that such Batch of Product is available for delivery. . . . If collection has not taken place within thirty (30) days from the date on which [Foreign Manufacturer] has notified Customer in writing that the Product has been cleared for delivery, or upon Customer’s written request to store any Batch of Product available for delivery, [Foreign Manufacturer] shall store such Batch of Product on Customer’s behalf in accordance with industry standards, cGMPs, the Specifications and Applicable Law and shall be entitled to charge Customer a reasonable storage fee as set forth in Schedule B. Subject to [Foreign Manufacturer]’s insurance obligations under Section 15, during such period of storage, title and risk of loss shall be deemed to have vested with Customer.
Emphasis added.
The re-invoices between Foreign Related Company and Related Logistics Company include the Incoterms, “FCA Supplier Location.” The re-invoices between Related Logistics Company and Related Importer include the Incoterms, “CIP Destination.”
Finally, in a telephone call with this office, you stated that while the facts in each individual transaction may differ from the sample transaction provided, Foreign Related Company takes possession of the API for at least 12 hours, but it will usually be between one and two days when the API is either stored with the Foreign Manufacturer on behalf of Foreign Related Company or when it is transferred from the Foreign Manufacturer to a second location, a DHL storage facility.
ISSUE:
Whether the transaction at issue may be appraised using the transaction value between Foreign Manufacturer and Foreign Related Company as a bona fide sale for export to the United States.
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. § 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. § 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.
In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the Court of Appeals for the Federal Circuit and the Court of International Trade (“CIT”), respectively, reviewed the standard for determining transaction value when there is more than one sale which may be considered as being a sale for exportation to the United States. Both cases involved a foreign manufacturer, a middleman, and a United States purchaser. In each case, the court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. Each court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale conducted at arm’s length, free from any non-market influences, and involving merchandise clearly destined for export to the United States at the time of the first sale. In accordance with the Nissho Iwai and Synergy decisions, we presume that transaction value is based on the price paid by the importer. In further keeping with the courts’ holdings, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it will be the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai and Synergy. That is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States,” within the meaning of 19 U.S.C. § 1401a.
In Treasury Decision (“T.D.”) 96-87, 30 Cust. Bull. 52/1 (January 2, 1997), CBP set forth the documentation and information needed to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer or other seller rather than on the sale in which the importer was a party. CBP advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payment, contracts, and any additional documents (e.g. correspondence) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value.
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. Id. (citing J.L. Wood v. United States, 505 F.2d 1400). No single factor is decisive in determining whether a bona fide sale has occurred. CBP makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise.
Since Foreign Manufacturer is not related to the purchaser, Foreign Related Company, the sale between them is presumed to be at arm’s length. Further, we find Company has shown that the sale between Foreign Related Company and the Foreign Manufacturer was a sale for export to the United States. The purchase order from the Foreign Related Company indicates the API is to be shipped to Michigan, USA, and the corresponding Airway Bill and Packing List indicate that the API should be shipped from [XXXX] directly to Michigan, USA. Additionally, the API is not approved for use in any country other than the United States. Thus, the transaction meets the requirement of being an arm’s length transaction for goods clearly destined to the United States for purposes of transaction value. However, we must also consider whether a bona fide sale occurs.
Several factors may indicate that a bona fide sale exists between the purported buyer and seller. 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 purported 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 (“HQ”) 545474, dated August 25, 1995; and HQ 545709, dated May 12, 1995 (examining the circumstances of the transaction when considering whether the parties functioned as buyer and seller).
We find that Company has sufficiently demonstrated that Foreign Related Company and Foreign Manufacturer are functioning as buyer and seller. Company provided the purchase orders and invoices between Foreign Manufacturer and Foreign Related Company and the proof of payment from Foreign Related Company to Foreign Manufacturer. Company also provided the manufacturing agreement and novation. These documents demonstrate that consideration is passed from Foreign Related Company to Foreign Manufacturer in exchange for the merchandise. Additionally, Foreign Related Company is the entity responsible for negotiating prices and determining purchase quantities. Therefore, we are satisfied that circumstances of the transaction indicate that Foreign Manufacturer and Foreign Related Company function as buyer and seller
While Foreign Related Company and Foreign Manufacturer function as buyer and seller, what remains unclear is whether Foreign Related Company assumes the risk of loss and receives title to the imported merchandise. A determination of when title and risk of loss pass from the seller to the buyer in a particular transaction depends on whether the applicable contract is a “shipment” or “destination” contract. FOB point of shipment contracts and all CIF and C&F contracts are “shipment” contracts, while FOB place of destination contracts are “destination” contracts. Unless otherwise agreed by the parties, title and risk of loss pass from the seller to the buyer in “shipment” contracts when the merchandise is delivered to the carrier for shipment, and in “destination” contracts when the merchandise is delivered to the named destination.
The commercial invoice from the sample transaction between Foreign Related Company and Foreign Manufacturer, include shipment contract with the terms of FCA Supplier Location, meaning title and risk of loss transfer when the goods are made available at the supplier location. The terms of the Manufacturing Services Agreement and the invoice from Foreign Manufacturer to Foreign Related Company are “Ex-Works.”
In the sample transaction provided, Foreign Related Company did not pick up the goods within 30 days of the date that Foreign Manufacturer made the goods available for delivery. At this time, pursuant to the Manufacturing Services Agreement, Foreign Manufacturer begins storing the API on Foreign Related Company’s behalf, and title and risk of loss transfer to Foreign Related Company. Over a month later, Foreign Related Company moved the API to a storage facility where an unrelated company stored the API on Foreign Related Company’s behalf. At this point, Foreign Related Company invoices Related Logistics Company and title and risk of loss transfers to Related Logistics Company. Based on the Manufacturing Services Agreement and the shipping terms, we find that Foreign Related Company did receive and retain title and risk of loss.
You further state that, while the facts in each individual transaction may differ from the sample transaction provided, Foreign Related Company generally retains title and risk of loss for at least 12 hours, but usually for a period between one and two days. Foreign Related Company retains title and risk of loss either when the API is stored with the Foreign Manufacturer on behalf of Foreign Related Company or when it is transferred from the Foreign Manufacturer to a second location, a DHL storage facility.
We find that the facts, as presented, demonstrate that title and risk of loss transfers to Foreign Related Company. In the sample transaction, we find that Foreign Related Company received title and risk of loss of the merchandise 30 days after the Foreign Manufacturer made the API available for delivery. Additionally, we find that Foreign Related Company holds title and risk of loss of the API while, when consistent with the terms of the Manufacturing Service Agreement, it is stored at the Foreign Manufacturer and when transferred to a secondary storage facility. Thus, we find the transaction between Foreign Manufacturer and the Foreign Related Company is a bona fide sale. The parties also clearly intend for the merchandise to be shipped directly to the United States, and the information submitted reveals that Foreign Related Company and the Foreign Manufacturer are not related; accordingly, we will assume that the sales between them are independent, arm’s length transactions. Therefore, based on the evidence presented, we conclude that the sale between Foreign Related Company and Foreign Manufacturers is a bona fide “sale for exportation to the United States” within the meaning of section 402(b)(1) of the TAA.
HOLDING:
Based on the information presented, the sale between Foreign Related Company and the Foreign Manufacturer is a bona fide sale for exportation to the United States. Therefore, Company may declare the sale price between Foreign Related Company and the Foreign Manufacturer as the basis for transaction value.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
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 CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch