VAL:RR:IT:VA 548306 jsj
Port Director
Customs and Border Protection
Port of New Orleans
423 Canal Street
Room 245
New Orleans, Louisiana
70130
Port File No.: ADM-01 IPD:IS RLR
Attn.: Mr. Ralph Riemer, FNIS
Re: Request for Internal Advice; Appraisement; Research and Development; Transaction Value; Price Actually Paid or Payable; Related Party Transaction; 19 U.S.C. 1401a (b)(4)(A).
Dear Port Director:
The purpose of this correspondence is to respond to the request for Internal Advice (I.A.) from Ross & Hardies, on the behalf of Syngenta Crop Protection, Inc. (Syngenta). The correspondence in issue requested internal advice concerning the appraisement of merchandise sold by Syngenta Crop Protection AG (Syngenta AG) to Syngenta for which research and development costs are apportioned between the companies pursuant to a cost sharing agreement, but not included in the merchandise transfer price. Syngenta AG is the foreign parent company of the domestic Syngenta.
This ruling is being issued subsequent to the following: (1) A review of the submissions of counsel for Syngenta dated: May 2, 2002, January 10, 2003, and June 9, 2003; (2) A review of the submission of Customs and Border Protection, Port of New Orleans; (3) A review of a document entitled: “Advanced Pricing Agreement between CIBA-GEIGY Corporation, CIBA Specialty Chemicals Corporation and the Internal Revenue Service,” (CIBA-GEIGY APA) submitted to Customs and Border Protection, Port of New Orleans, by way of facsimile from Syngenta; (4) A review of a document entitled “Supply Agreement” executed between Novartis Crop Protection AG, Novartis Produkte AG and Novartis Crop Protection, Inc.; and (5) A telephone conference conducted on June 3, 2003, between a representative of the Office of Regulations and Rulings, Customs and Border Protection and counsel for Syngenta. Counsel for Syngenta advises CBP that Syngenta and Syngenta AG are the result of mergers, spin-offs, asset acquisitions and business name changes of the entities that are parties to the documents and agreements provided CBP. Syngenta and Syngenta AG, although not identified as parties in the agreements, are the successor entities that bear legal obligation pursuant to the agreements.
Syngenta initially requested confidential treatment pursuant to 19 C.F. R. 177.2 (b)(7) in correspondence sent to the Port of New Orleans. The importer perfected its request for confidentiality subsequent to the receipt of correspondence from CBP dated May 15, 2003. Customs and Border Protection will, therefore, extend confidential treatment in accordance with the request of counsel for Syngenta received on June 3, 2003. Information determined to be confidential will be denoted in brackets in this I.A. response and will be redacted in the public version.
The Port of New Orleans advises this office that the relationship between Syngenta and Syngenta AG has not adversely affected its ability to determine an acceptable transaction value, with the exception of the issue presented in this I.A. request. This internal advice response, in accordance with the request of the Port, will not address the relationship between the companies.
FACTS
Syngenta Crop Protection, Inc. is a corporation in the United States that markets crop protection herbicides, fungicides and insecticides. Syngenta Crop Protection AG is the foreign, related parent company of Syngenta. Syngenta purchases merchandise from Syngenta AG and imports that merchandise into the United States. The entered value of the merchandise Syngenta purchases from Syngenta AG and imports into the United States does not include research and development expenses paid by Syngenta to Syngenta AG.
Customs and Border Protection is advised by counsel that Syngenta and Syngenta AG are parties to an agreement entitled a “Cost Sharing Research Agreement” (CSRA). Customs and Border Protection was not provided with a CSRA executed by Syngenta and Syngenta AG, but has been directed to “Appendix A, Transfer Pricing Method” of the CIBA-GEIGY APA to understand the relationship between Syngenta and Syngenta AG as it relates to the sharing of research and development expenses. The CSRA, as CBP is advised, addresses the rights and obligations of Syngenta and Syngenta AG with regards to research and development undertaken by both Syngenta and Syngenta AG in the United States and in other countries.
Discussion of the financial relationship between Syngenta and Syngenta AG that results from the CSRA arose between Customs and Border Protection’s auditors and Syngenta during a Port Account Management review. This request for Internal Advice, unlike most I.A.’s, does not, therefore, address a specific, current transaction..
The CIBA-GEIGY APA transfer pricing agreement “concerns four interrelated agreements.” CIBA-GEIGY APA at Appendix A, II, A. The four agreements include: (1) A “Research Agreement” described as “an all-inclusive cost sharing agreement;” (2) A “Supply Agreement,” an example of which CBP has been provided; (3) A “Sales Agreement;” and (4) An “Intercompany Pricing Agreement.” Id. The later three agreements are collectively referred to as the “Mutual Export Supply Agreement” (MESA). Id. The MESA, according to the CIBA-GEIGY APA, is intended to provide[xxxxx] Id. According to the CIBA-GEIGY APA, “a cost-plus method is employed to determine the arm’s length price for these intercompany transactions.” Id.
The Research Agreement, according to the CIBA-GEIGY APA, “governs the joint research and development activities.” CIBA-GEIGY APA, Appendix A, II, B. Customs and Border Protection understands this statement as intended to explain, by comparison, the research and development relationship between Syngenta and Syngenta AG. According to the CIBA-GEIGY APA, the[xxxxx] Id. See also Submission of counsel, p. 1 (May 2, 2002). “Intangibles,” pursuant to CIBA-GEIGY APA Appendix, are “for example, marketing.” CIBA-GEIGY APA, Appendix, II, D, 2. Customs and Border Protection understands “marketing” to mean marketing rights. No additional explanation was provided to Customs and Border Protection.
Subparagraph II, B of the CIBA-GEIGY APA Appendix A further describes the research and development costs that are to be shared, as well as, how those costs are divided. The research and development expenses include both “direct and indirect expenses that arise from covered research and development activities,” except specifically excluded expenses. CIBA-GEIGY APA, Appendix A, II, B. According to the interpretation of the Research Agreement in the CIBA-GEIGY APA,[xxxxx] CIBA-GEIGY APA, Appendix A, II, B, 3. The equation, as set forth in the CIBA-GEIGY APA, provides that the[xxxxx] Id. The agreement indicates that both Syngenta and Syngenta AG bear research and development costs in relation to their respective operating incomes for relevant time periods.
According the CIBA-GEIGY APA [xxxxx] transfer pricing methodology, “for tax purposes, within its respective market [Syngenta or Syngenta AG as the purchaser] is the owner of the intangibles associated with covered products produced” by the other as the manufacturer. CIBA-GEIGY APA, Appendix A, II, D, 2. As set forth in the agreement, [xxxxx]Id.
The Supply Agreement presented to CBP sets forth, among other matters, the merchandise encompassed within the arrangement and the pricing methodology. Section 1 (a) provides, in part, that the “Agreement Products” include “agro-chemicals and other products…which shall be supplied to [Syngenta] by [Syngenta AG] and which shall have been (a) discovered under the Cost Sharing Research Agreement….” Supply Agreement, Sec. 1 (a). Section 3 of the Supply Agreement, entitled “Determination of Prices,” establishes the manner in which the transfer prices will be set. According to counsel’s interpretation,
[xxxxx] Submission of Counsel (May 2, 2002); See also Supply Agreement, Sec.3.
Counsel for Syngenta advises Customs and Border Protection, by means of an example, that the combined total research expenditures of Syngenta and Syngenta AG for the year [xxxxx]. Syngenta’s research expenses for the year [xxxxx]. Syngenta’s “average operating income” for [xxxxx]. Syngenta, based on [xxxxx] was responsible for [xxxxx] in research expenses. [xxxxx]
ISSUE
Should the appraised value of merchandise sold by Syngenta Crop Protection AG, the foreign, related parent, to Syngenta Crop Protection, Inc., the United States domestic subsidiary, include in the price actually paid or payable pursuant to the transaction value method of appraisement costs incurred for the research and development of imported merchandise ?
LAW AND ANALYSIS
The federal agency responsible for interpreting and applying the United States Code and the regulations of the Bureau of Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection. Customs and Border Protection, in accordance with its legislative mandate, appraises imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. See 19 U.S.C. 1401a.
The preferred method of appraisement is transaction value. The transaction value of imported merchandise is:
the price actually paid or payable for merchandise when sold for exportation to the United States, plus amounts equal to –
(A) the packing costs incurred by the buyer with respect to the imported merchandise;
(B) any selling commissions incurred by the buyer with respect to the imported merchandise;
the value, apportioned as appropriate, of any assist;
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
(E) 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). (Emphasis added).
The “price actually paid or payable,” as defined in the Trade Agreements Act, is:
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. 19 U.S.C. 1401a (b)(4)(A). (Emphasis added).
Syngenta and Syngenta AG, the parties involved in the instant Internal Advice request, are a related buyer and seller necessitating consideration of 19 U.S.C. 1401a (b)(2)(B). The Trade Agreements Act in section (b)(2)(B) provides that:
The transaction value between a related buyer and seller is acceptable for the purposes of this subsection if an examination of the circumstances of the sale of imported merchandise indicates that the relationship between the buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates-
(i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or
(ii) the deductive value or computed value for identical or similar merchandise;
but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise. 19 U.S.C. 1401a (b)(2)(B).
Although this office does not have information which independently confirms that the relationship between Syngenta and Syngenta AG did not influence the price actually paid or payable, CBP personnel at the Port of New Orleans have advised this office that the relationship between the buyer and the seller has not adversely affected their ability to establish an acceptable transaction value, with the exception of the issue presented in this I.A. We are, therefore, not ruling on the acceptability of transaction value.
The payments made by Syngenta to Syngenta AG for research and development are not encompassed within the enumerated transaction value additions of subparagraphs (A) through (E) of section 1401a (b)(1), nor are they expressly excluded pursuant to section 1401a (b)(3). The resolution of this issue is, therefore, dependent on the interpretation of the phrase “price actually paid or payable” of section 1401a (b)(4)(A).
Customs and Border Protection has long held the position that all monies 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 HQ 542169 (Sept. 18, 1980), TAA #6; HQ 547532 (Nov. 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). See also HQ 547532 (Nov. 2, 2001). 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 id. at 379. The reasoning underlying the Court’s decision stems from the language of section 1401a (b)(4)(A) which announces that the price actually paid or payable is the “total payment” made for imported merchandise whether the payments are “direct or indirect.” 19 U.S.C. 1401a (b)(4)(A).
The Generra court 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….” Id. at 380.
Although the presumption that payments made by a buyer to 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 id. HQ 547532. See also Chrysler Corp. v. United States, 17 C.I.T. 1049 (Ct. Int’l Trade 1993). Syngenta has failed to carry this burden.
The price charged for the sale of merchandise between Syngenta and Syngenta AG, according to the transfer pricing methodology in the CIBA-GEIGY APA, is [xxxxx]. CIBA-GEIGY APA Appendix A, II, D, 2. Customs and Border Protection has not been advised by Syngenta of the items that are included in the costs, but notes that they are based on [xxxxx] with no relation to the volume of merchandise sold between the respective companies. CIBA-GEIGY APA Appendix A, II, B, 3. It is CBP’s understanding from a review of counsel’s submission and the CIBA-GEIGY APA that research and development expenses are not included in the cost figure and, consequently, not included in the sales price or the entered value. See CIBA-GEIGY APA Appendix A, II, D, 2.
Customs and Border Protection’s review of the Supply Agreement confirms that merchandise sold by Syngenta AG to Syngenta includes merchandise “discovered under the Cost Sharing Research Agreement.” Supply Agreement, supra. at Section 1 (a). The information presented to CBP offers no basis to conclude that the “price actually paid or payable” by Syngenta to Syngenta AG for imported merchandise developed through the research program funded by both companies includes any sums for the recovery of research and development.
Syngenta states through counsel that “[u]nder the CSRA, the Company [Syngenta] owns rights to use the intangibles created by the research within the United States and its possessions” and that AG [Syngenta AG] owns the rights for all other countries.” Submission of Counsel, May 2, 2002, p.1. The importer further maintains that “when AG supplies a product to the Company, or the Company supplies one to AG, the seller receives an arms-length manufacturing profit, because it, the buyer, not the seller, owns the product rights in the importing country in which the products will be sold.” Id.
Syngenta fails, however, to directly address paragraph II, D, 2, of Appendix A of the CIBA-GEIGY APA which specifically states that [xxxxx] CIBA-GEIGY APA Appendix A, II, D, 2. Customs and Border Protection’s reading of this aspect of the cost-sharing arrangement establishes that the sales price of merchandise sold by Syngenta AG to Syngenta only includes the manufacturing cost, plus an additional charge understood by CBP to represent profit. A plain reading of the agreement presented to CBP confirms that research and development expenses have not been include in the invoice price and, therefore, have not been included in the transaction value.
Syngenta states that the research and development payments it makes to Syngenta AG “are not connected to the imported merchandise….” Submission of Counsel, Id. at p. 3; See also Memorandum of Counsel, June 9, 2003, p.1. The importer suggests that the “payments made pursuant to the provision of the CSRA are not linked to individual invoices or importations” and for that reason they are not part of the price paid or payable. Submissions, supra.
Counsel, during the telephone conference, maintained that the link between the research and development payments and subsequently imported merchandise is too tenuous to support the conclusion that payments made by Syngenta to Syngenta AG pursuant to the CSRA should be included within the price actually paid or payable. Counsel suggests that the research and development expenses paid pursuant to the CSRA are too indirect to be included in the price actually paid or payable. The payments, to be included with in the price actually paid or payable, pursuant to Syngent’s position, must be related to a specific product or quantity, or possibly a specific shipment.
Customs and Border Protection’s review of section 1401a and the relevant jurisprudence causes it to conclude otherwise. Section 1401a (b)(4), defining “price actually paid or payable,” states, as previously noted, that the phrase means “the total payment” whether “direct or indirect,” provided the payments are “made, or are to be made, for imported merchandise by the buyer to, or for the benefit of the seller.” The Generra court, subsequent to reviewing section 1401a (b)(4) and the pertinent regulations, 19 C.F.R. 152.103 (a), stated that:
as long as the…payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in the transaction value, even if the payment represents something other than the per se value of the goods. The focus of transaction value is the actual transaction between the buyer and the seller…. Generra, supra at 380.
Considering the transactions between Syngenta and Syngenta AG, a part of the research and development costs born by Syngenta and paid to Syngenta AG are payments made in exchange for merchandise sold for export to the United States. Absent payment to Syngenta AG for research and development costs, Syngenta AG would not have recovered its research and development expenses from the transfer price. Syngenta has not offered CBP a reason to conclude, contrary to the presumption that all payments made to a seller from a buyer are part of the price actually paid or payable. See HQ 544972 (Oct. 20, 1993).
Syngenta’s statements in its submission of counsel, contrary to its position, provide support for CBP’s conclusion. Counsel states that “a substantial portion of the [research and development] activity does not lead to the production of merchandise” and that “the activities which do result ultimately in the production of merchandise do so only in the future.” Submission of Counsel, supra. at p.3. The submission further states that “under the most favorable of circumstances, some current CSRA activities will result in merchandise purchases in the year 2012.” Id. at p.3-4. Counsel for Syngenta directed the attention of Customs and Border Protection to Headquarters Ruling Letter 542703 (Aug. 25, 1982) (TAA # 50). Headquarters Ruling Letter 542703 held that payments for “permanent quota” recorded in the financial records of the importer as a capital asset and expensed over the life of the quota were not part of the price actually paid or payable. Syngenta interprets HQ 542703 to conclude that since the payment for the “permanent quota” was too distantly related to imported merchandise, it was not part of the price actually paid or payable.
Customs and Border Protection has reviewed HQ 542703 and concludes that the decision of the Court of Appeals in Generra decided in 1990 has the effect of judicially overruling the decision of this office issued in 1982. The phrase “total payment” in the meaning of the price actually paid or payable, according to the court in Generra, was intended to be all-inclusive. If the issue raised in HQ 542703 were presented to CBP today, relying on the Generra decision, a different result would be reached.
Syngenta’s counsel additionally directs CBP’s attention to that aspect of the Generra decision in which the court stated that Congress did not intend for Customs to be engaged in an extensive fact-finding mission to determine whether payments made by a buyer to a seller are connected to imported merchandise. See Generra Id. at 380. Counsel interprets Generra as holding that if there is no readily identifiable connection between a payment and imported merchandise, the payment is not part of the price actually paid or payable.
Customs and Border Protection disagrees with counsel’s interpretation. The Court in Generra, appreciating the limited resources available to CBP and the frequently complex financial relationships that exist between importers and foreign sellers, placed the burden on the importer to rebut the presumption that payments made to a foreign seller are presumed to be part of the price actually paid or payable. Congress, according to the court, did not intend to place the “formidable fact-finding task” of untangling factual and financial relationships on CBP. Id. at. 380.
We leave the determination of the appropriate allocation of the payments to the entries of imported merchandise to you and counsel. We are available to assist if questions arise.
HOLDING
The appraised value of merchandise sold by Syngenta Crop Protection AG, the foreign, related parent, to Syngenta Crop Protection, Inc., the United States domestic subsidiary, should include in the price actually paid or payable pursuant to the transaction value method of appraisement the costs incurred pursuant to the Cost Sharing Research Agreement for research and development of merchandise imported into the United States.
Sincerely,
Virginia L. Brown, Chief
Value Branch