VAL RR:IT:VA 546112 CRS
Port Director
U.S. Customs Service
JFK International Airport
Building #77
Jamaica, NY 11430
RE: IA 43/95; transaction value not applicable; section 402(f);
pharmaceutical products
Dear Sir:
This is in reply to your memorandum VAL-2-K:C:A2 KC, dated
August 14, 1995, under cover of which you forwarded, through the Food
and Chemicals Branch, National Commodity Specialist Division, the
above-referenced request for internal advice filed by Ross & Hardies
on behalf of Ciba-Geigy Corporation (the "importer"). Counsel made
an additional submission in a letter dated December 7, 1995, and
subsequently met with members of my staff regarding this matter. We
regret the delay in responding.
FACTS:
The importer is a subsidiary of Ciba-Geigy Ltd. ("Ltd"), a Swiss
company, from which it imports certain pharmaceutical products, in
particular, the drugs Trileptal and Valsartan, the appraisement of
which is the subject of this internal advice request. Both drugs are
imported solely for purposes of testing and research since neither
has been approved for sale in the United States. Trileptal is
produced in Britain and is being tested for use in the treatment of
epilepsy; Valsartan is produced in Switzerland and is being tested
for use in the treatment of hypertension.
On November 23, 1994, the importer filed an entry for a shipment
of Trileptal and Valsartan that was supplied to the importer free of
charge by Ltd. The total declared value for both drugs was U.S.
$1.00. Your office determined that the declared values were
unacceptable and rejected the entry. The importer resubmitted the
entry several times, the last occasion being in January 1995.
However, you also determined that the revised values submitted by the
importer were unacceptable and, subsequently, on May 19, 1995,
notified the importer via a Form 29 Notice of Action of a proposed
value advance. In response, counsel for the importer filed the
instant request for internal advice.
Both your office and counsel acknowledge that transaction value
is inapplicable since the imported merchandise was not the subject of
a sale and that, consequently, one of the alternative methods of
appraisement must be used. In this regard, counsel contends that the
appraised value of the imported merchandise should be determined with
reference to a protocol on "research and development materials"
between the importer and Ltd that became effective on April 20, 1995.
The protocol establishes a "declaration value" to be used as the
customs value in respect of research and development materials such
as the imported pharmaceuticals. The "declaration value" would apply
only to research and development materials that were not approved for
sale to the United States. Products which have been approved for
sale but are supplied to the importer free of charge will be assigned
a value equal to the intended resale price of the product.
A copy of the protocol was submitted for our review but does not
explain how the declaration value is derived. However, according to
counsel, the "declaration value" represents the average cost
(material inputs and direct processing costs) of the products.
Average cost is calculated by allocating gross costs to all such
items by means of simple averaging. In his letter of December 7,
1995, counsel proposed increasing the "declaration value" by a factor
of eight percent in order to incorporate some form of profit factor.
It is your position that the importer's "declaration value" is not an
acceptable means of appraising the imported merchandise.
ISSUE:
The issue presented is whether the importer's "declaration
value" represents an acceptable basis for determining the appraised
value of 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). The
primary method of appraisement under the TAA is transaction value,
which is defined as the "price actually paid or payable for
merchandise when sold for exportation to the United States," plus
five statutorily enumerated additions thereto. 19 U.S.C.
1401a(b)(1). However, imported merchandise must have been sold for
exportation to the United States in order for transaction value to be
acceptable. A "sale" is a transfer of ownership in property from one
party to another for a price or other consideration. J.L. Wood v.
United States, 62 CCPA 25, C.A.D. 1139 (1974); J.H. Cottman & Co. v.
United States, 20 CCPA 344, T.D. 46114 (1932). In the instant case,
the imported merchandise was not sold to the importer but was
supplied free of charge by Ltd, a related person as defined by
section 402(g) of the TAA. Accordingly, transaction value is
inapplicable.
When imported merchandise cannot be appraised on the basis of
transaction value, it is to be appraised in accordance with the
remaining methods of valuation, applied in sequential order. The
alternative bases of appraisement, in order of precedence, are: the
transaction value of identical merchandise; the transaction value of
similar merchandise; deductive value; and computed value. If the
value of imported merchandise cannot be determined under these
methods, it is to be determined in accordance with section 402(f) of
the TAA. 19 U.S.C. 1401a(a)(1).
The first and second alternative bases of appraisement are the
transaction value of identical merchandise and the transaction value
of similar merchandise, as determined in accordance with section
402(c) of the TAA. Appraised values of identical and similar
merchandise are based on values that are acceptable as appraised
values under section 402(b) of the TAA. 19 U.S.C. 1401a(c)(1).
However, your office has advised that it is unaware of any
merchandise that would be considered "identical" or "similar" to the
merchandise being appraised pursuant to section 402(c) of the TAA.
Consequently, neither the transaction value of identical merchandise,
nor the transaction value of similar merchandise, is an acceptable
basis of appraisement.
Deductive value pursuant to section 402(d) of the TAA is the
next sequentially applicable basis of appraisement and is based on
the unit price at which the merchandise concerned is sold in the
greatest aggregate quantity, generally in the condition as imported
and at or about the time of importation of the merchandise being
appraised. However, the imported merchandise is used for testing and
is not sold after importation. As a result, the deductive value
method of appraisement is also inapplicable under the circumstances
of the instant case.
The computed value method, set forth in section 402(e) of the
TAA, is the next potentially applicable basis of appraisement.
Computed value is defined as the sum of, inter alia: the cost or
value of the materials and the fabrication and other processing of
any kind employed in the production of the imported merchandise; and
an amount for profit and general expenses equal to that usually
reflected in sales for export to the U.S., by producers in the
country of exportation, of merchandise of the same class or kind. 19
U.S.C. 1401a(e)(1). Counsel contends that an amount for profit and
general expenses cannot be reflected in the computed value
calculation because the subject pharmaceutical products are not sold
for export to the U.S. Thus, counsel argues, there is no amount for
profit and general expenses and, this element of value lacking,
computed value is not an acceptable basis of appraisement.
As noted above, section 402(e)(1)(B) provides that the amount
for profit and general expenses is to be equal to that usually
reflected in sales of merchandise of the same class or kind. Customs
will accept the producer's figure, however, provided it is not
inconsistent with the amount usually observed in sales of same class
or kind merchandise. 19 U.S.C. 1401a(e)(2)(A). See also, 19
C.F.R. 152.106.
In this regard, we note that in certain circumstances the TAA
recognizes that the profit component of the amount for profit and
general expenses may be zero. Section 152.106(c), Customs
Regulations, provides in pertinent part:
The amount for profit and general expenses will be taken
as a whole. If the producer's profit figure is low and
general expenses high, those figures taken together
nevertheless may be consistent with those usually reflected
in sales of imported merchandise of the same class or kind.
(1) Interpretative note 1. A product is introduced into
the United States, and the producer accepts either no
profit or a low profit to offset the high general expenses
required to introduce the product into this market. If the
producer can demonstrate that there is a low profit on
sales of the imported merchandise because of peculiar
commercial circumstances, the actual profit figures will
be accepted provided the producer has valid commercial
reasons to justify them and his pricing policy reflects the
usual pricing policies in the industry.
19 C.F.R. 152.106(c). See also Statement of Administrative Action
(SAA), 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 62.
The language cited above illustrates that in certain situations,
such as the one presented by the unusual circumstances of the instant
case, computed value could still be used to appraise the imported
merchandise despite the fact that the amount for profit and general
expenses, taken as a whole, does not reflect any profit. As noted
above, the regulations and the Statement of Administrative Action
recognize that due to peculiar commercial circumstances Customs may
accept the producer's figures, provided the producer has valid
commercial reasons to justify them and the pricing policy reflects
the usual pricing policies in the industry. In this case, based on
the information presented, the fact that the imported merchandise is
not approved for sale and is used only for testing constitute valid
commercial reasons why the amount for profit and general expenses,
taken as a whole, does not include profit. It is therefore our
position that computed value is an acceptable basis of appraisement
in the instant case. Nevertheless, since the importer has declined
to provide any computed value information, we are unable to appraise
on this basis.
If merchandise cannot be appraised under the above methods, its
value is to be determined in accordance with section 402(f) of the
TAA which provides that merchandise should be appraised on the basis
of a value derived from one of the previous methods, reasonably
adjusted to the extent necessary to arrive at a value. 19 U.S.C.
1401a(f)(1). To the greatest extent possible, values determined
under section 402(f) should be based on previously determined values.
SAA at 63. Section 402(f) precludes the use of certain methods,
however, such as methods based on minimum values, or arbitrary or
fictitious values. Moreover, section 402(f) specifically provides
that merchandise may not be appraised on the basis of "a cost of
production, other than a value determined under subsection (e) of
this section for merchandise that is identical merchandise or similar
merchandise to the merchandise being appraised." 19 U.S.C.
1401a(f)(2)(D).
Under section 402(f), the importer has proposed appraising the
imported merchandise on the basis of the "declaration value"
described above. Based on the limited information provided by the
importer, we understand that the "declaration value" represents the
average cost of the products and is calculated by allocating gross
costs to all such items by means of simple averaging. While the
"declaration value" is an attempt at some form of modified computed
value, section 402(f)(2)(D) of the TAA unambiguously prohibits using
a cost of production, other than a value determined under section
402(e) for merchandise that is identical or similar to that being
appraised. The importer's "declaration value", which is not
determined in accordance with section 402(e), is therefore patently
unacceptable under section 402(f). Moreover, in regard to the
proposed "declaration value", we note once again that an actual
computed value could have been derived under section 402(e) had the
necessary information been provided.
However, absent this data the imported merchandise must be
appraised pursuant to section 402(f) of the TAA on the basis of a
method derived from one of the methods set forth in sections 402(b)-(e). Under section 500 of the Tariff Act of 1930, as amended, which
sets forth Customs' general appraisement authority, the appraising
officer may use "all reasonable ways and means in his power" to fix
the final appraisement of imported merchandise. 19 U.S.C. 1500.
Accordingly, if the value of imported merchandise cannot be
determined on the basis of a method derived from sections 402(b)-(e),
it is our position that the value of the imported merchandise may be
determined using all other reasonable ways and means so long as the
method is not precluded by section 402(f)(2)(D).
HOLDING:
In conformity with the foregoing, the importer's "declaration
value" is not an acceptable basis of determining the appraised value
of the imported merchandise under section 402(f) of the TAA. The
imported merchandise should be appraised using all other ways and
means consistent with 19 U.S.C. 1401a(f), 1500.
This decision should be mailed by your office to the internal
advice requester no later than sixty days from the date of this
letter. On that date the Office of Regulations and Rulings will take
steps to make the decision available to Customs personnel via the
Customs Rulings Module in ACS and to the public via the Diskette
Subscription Service, the Freedom of Information Act and other public
access channels.
Sincerely,
Acting Director
International Trade Compliance Division