VAL RR:CTF:VS 563417 DCC
Mr. Carl D. Cammarata
Law Offices of George R. Tuttle
Three Embarcadero Center, Suite 1160
San Francisco, CA 94111
RE: Price Actually Paid or Payable
Dear Mr. Cammarata:
This is in response to your letter dated December 5, 2005, requesting a ruling on behalf of Guidant Corporation (“Guidant”). Your request concerns the treatment of certain payments paid to a party related to the seller for customs valuation purposes.
FACTS:
Guidant holds a worldwide exclusive license from Novartis Pharma AG (“Novartis Pharma”) and Novartis AG (“Novartis”) to use Everolimus to develop and sell coronary stents that incorporate the pharmaceutical compound Everolimus. Everolimus is a pharmaceutical agent approved for use as an immunosuppressant to prevent the rejection of transplanted human organs. Stents coated with Everolimus are designed to inhibit cell proliferation that causes re-narrowing of stented arteries.
Everolimus is manufactured in Switzerland by Novartis Pharma. Novartis Pharma’s parent corporation, Novartis AG, owns the intellectual property rights for the use of the drug. In exchange for a supply of Everolimus, as well as rights to use the drug to produce coronary stents, Guidant will issue three types of payments to Novartis Pharma and Novartis: Development Milestone Payments, Commercialization Milestone Payments, and Royalty Payments.
The Development Milestone Payments are a series of four one-time payments made by Guidant to Novartis for the right to use Everolimus to develop stents coated with Everolimus. These payments are tied to certain milestones in the development, testing, and Food and Drug Administration approval process. The payments will be as follows:
[
]
These payments were reported previously at the time of entry in the value of 16 prior entries of Everolimus, which were imported for research and development purposes. Because these payments were declared previously to Customs and Border Protection (“CBP”), it is not necessary to include these payments in the value of the merchandise once commercial importations begin.
In addition to the Development Milestone Payments, Guidant will make payments, referred to as “Commercialization Milestone Payments,” to Novartis for certain intellectual property rights including the patent license, trademark license, and registration dossier to allow Guidant to use Everolimus to develop, manufacture or have manufactured, use, and sell coronary or vascular stents that incorporate the imported Everolimus. The Commercialization Milestone Payments will be recurring and based on annual sales of Guidant’s Everolimus coated stents. These payments will begin once Guidant receives product approval from the U.S. Food and Drug Administration (or approval from other government agencies outside the United States), begins commercial importations, produces Everolimus coated stents, and makes sales of such stents. The payments will be as follows:
[
] Because the amount of each payment will not be known until the end of each annual period, we understand Guidant will apply to use the CBP reconciliation program to report the value of the imported Everolimus.
Guidant also will make Royalty Payments to Novartis Pharma in exchange for a supply of Everolimus, as well as services and know-how provided by Novartis Pharma. [
]. Because part of the Royalty Payments represents payment for a supply of Everolimus, Guidant intends to determine the transaction value of the imported merchandise based on these payments.
We understand that Guidant has submitted separately an advance ruling request concerning the proper tariff classification of Everolimus. Consequently, the classification issue will not be addressed in this ruling.
ISSUE:
Whether the Commercialization Milestone Payments should be included in the price actually paid or payable for the imported merchandise.
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: 19 U.S.C. § 1401a). Section 402(b)(1) of the TAA (19 U.S.C. § 1401a(b)(1)) provides that the preferred method of appraisement is transaction valuation, which is defined as the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus certain enumerated additions, including any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States (Section 402(b)(1)(D) of the TAA); and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller (Section 402(b)(1)(E) of the TAA).
The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) 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.”
Because the Development Milestone Payments were previously declared, and the Royalty Payments will be declared, these payments are not an issue and therefore not addressed in this ruling.
With regard to the Commercialization Milestone Payments, Counsel states that in consideration of the patent license, trademark license, registration dossier, and other intellectual property rights, Guidant is required to pay Novartis this fee based on net sales of the Everolimus coated stents. Counsel contends that the Commercialization Milestone Payments are not involved in the production or sale of the imported merchandise, and contends that the fact that a supply of Everolimus could be purchased within the United States proves that the Commercialization Milestone Payments are not related to the importation. Counsel also notes that the Commercialization Milestone Payments are not made to the manufacturer/exporter of the imported merchandise but rather to Novartis, a party related to the manufacturer/exporter. Finally, counsel claims the Commercialization Milestone Payments should not be included in the appraised value of the merchandise because these payments are not a condition of the sale of Everolimus to Guidant.
Under Customs Valuation Statute, codified at 19 U.S.C. § 1401a(b)(1)(D), royalty payments are an addition to the price actually paid or payable if the buyer is required to pay them, directly or indirectly, as a condition of sale. See also 19 CFR § 152.103(b)(1)(vi). Moreover, the Statement of Administrative Action to the Trade Agreements Act of 1979, provides, in pertinent part, that:
Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable, whereas royalties and license fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise will generally be considered as selling expenses of the buyer and therefore will not be dutiable. However, the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the sale of the merchandise, and such payment was not a condition of sale of the merchandise for exportation to the United States, such payment will not be added to the price actually paid or payable. However, if such payment was made by the buyer as a condition of the sale of the merchandise for exportation to the United States, an addition will be made. As a further example, an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States.
Statement of Administrative Action, Trade Agreements Act of 1979, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49.
Counsel claims that the Commercialization Milestone Payments are not a condition of the sale because Guidant could supposedly purchase the Everolimus on the domestic market in the United States. However, the fact that merchandise identical to the imported article is available within the United States does not prove the payment is unrelated to the Everolimus. Indeed, we would expect that Guidant would be required to make this payment whether the Everolimus was purchased in the United States or purchased abroad and imported. Consequently, the Commercialization Milestone Payments represent a condition of the sale whether the Everolimus is purchased domestically or internationally.
Furthermore, Customs and Border Protection has long held that all royalties paid to a foreign seller, or to a party related to a seller, are part of the price actually paid or payable for imported merchandise pursuant to the transaction value method of appraisement. See Headquarters Ruling Letter (“HRL”) 545361, dated July 20, 1995; HRL 542169, dated September 18, 1980, TAA # 6; and HRL 547532, dated November 2, 2001.
The presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for imported merchandise was affirmed by the Court of Appeals for the Federal Circuit in Generra Sportswear Co. v. United States, 905 F. 2d. 377 (Fed. Cir. 1990), rehearing denied, (Fed. Cir. 1990). The court in Generra held that the term “total payment” in the definition of the phrase “price actually paid or payable” was intended to be all inclusive. See Generra at 379. See also United States v. Ford Motor Co., 395 F. Supp. 2d 1190 (Ct. Int’l Trade 2005) (lump sum shortfall payments made by the importer were related to the price actually paid or payable and, therefore, were dutiable). The reasoning underlying Generra stems from the language of section 1401a (b)(4)(A) which states that the price actually paid or payable is the “total payment” made for imported merchandise whether such payments are “direct or indirect.” 19 U.S.C. 1401a (b)(4)(A).
Generra further held that:
Congress did not intend for [Customs and Border Protection] to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else.
Id. at 380.
The court, quoting Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990), concluded that the “straightforward approach [of section 1401a (b)] is no doubt intended to enhance the efficiency of [CBP’s] appraisal procedure; it would be frustrated were we to parse the statutory language . . . and require [CBP] to engage in [a] formidable fact-finding task . . . .” Moss Mfg. at 539.
Although the presumption that payments made directly or indirectly by a buyer to or for the benefit of a seller are part of the price actually paid or payable is rebuttable, the burden of establishing that the payments are unrelated to the imported merchandise rests on the importer. See Chrysler Corp. v. United States, 17 C.I.T. 1049 (Ct. Int’l Trade 1993).
In the present case, the Commercialization Milestone Payments are paid by the importer to Novartis, a party related to the manufacturer/exporter. Thus, there is a presumption that these payments are part of the price actually paid or payable. Although this presumption may be rebutted by evidence that clearly establishes that these payments are completely unrelated to the imported merchandise, the burden of proof is on the importer.
We find that Guidant has not presented sufficient evidence to clearly demonstrate that the Commercialization Milestone Payments are completely unrelated to the imported Everolimus. The amount of each Commercialization Milestone Payment is based on the net sales of Guidant’s stents which are coated with Everolimus. The higher the net sales of the Everolimus coated stents, the more Everolimus Guidant must import to meet those sales. Consequently, there is a direct relationship between the amount of each Commercialization Milestone Payment and the quantity of Everolimus used to produce the stents. We also note that the single license agreement specifically refers to Guidant’s coronary or vascular stent product.
Furthermore, although counsel maintains the Commercialization Milestone Payments are not paid to the seller/exporter, we note that the Novartis Pharma and Novartis are related companies. Moreover, all payments by Guidant to Novartis Pharma and Novartis are covered by a single license agreement that collectively refers to the seller/exporter (Novartis Pharma) and the licensor (Novartis) as a single entity, “Novartis.”
Based on the information presented, Guidant has failed to rebut the presumption that the Commercialization Milestone Payments paid to Novartis are related to the Everolimus. Therefore Commercialization Milestone Payments should be included in the transaction value of the imported merchandise. HOLDING:
The payment of the Commercialization Milestone Payments constitute a royalty that is paid as a condition of the sale under 19 U.S.C. § 1401a(b)(1)(D). Furthermore, the importer has failed to overcome the presumption that the Commercialization Milestone Payments paid to Novartis are related to the Everolimus, and consequently, the Commercialization Milestone Payments should be included in the transaction value of the imported merchandise.
A copy of this ruling 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