Customs Ruling HQ H291761 - Appraisement of Pharmaceuticals Imported and Sold on Consignment to Related Parties; Wholesale Acquisition Cost; Fallback Method of Appraisement; Modified Deductive Valuation; 19 U.S.C. § 1401a(f)

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HQ H291761
Feb 27, 2019

Type : VALUATION • HTSUS :
Related: 548574; 546602; 545755; 546979; 548233; H275056; H218916; H233789

OT:RR:CTF:VS H291761 RSD

Mr. Robert Schadt
Ernst & Young Global Trade
1101 New York Avenue N.W.
Washington, D.C. 20005

RE: Appraisement of Pharmaceuticals Imported and Sold on Consignment to Related Parties; Wholesale Acquisition Cost; Fallback Method of Appraisement; Modified Deductive Valuation; 19 U.S.C. § 1401a(f)

Dear Mr. Schadt: This is in response to a letter dated October 27, 2017, submitted by [XXXX XXXXXXXXXXXXX] requesting a ruling concerning the proper method of appraisement for pharmaceutical products that are imported on consignment from related party suppliers. On June 26, 2018 and October 5, 2018, meetings were held with members of my staff to discuss a proposed valuation method for the products that your client will be importing into the United States. Additional information was submitted in emails dated July 9, 2018 and October 10, 2018. The U.S. healthcare company has requested that confidential treatment be given for certain identifying information, such as names and business locations, as well as for prices, costs, and profit figures contained in their submissions. Inasmuch as the request conforms to the requirements of 19 C.F.R. §177.2(b)(7), the company's request for confidentiality is approved. The information contained within brackets and all attachments to the ruling request and the supplemental submissions and materials, forwarded to our office will not be released to the public and will be withheld from published versions of this ruling. FACTS: [XXXXXXXXXXXXXX] (hence forth U.S. Healthcare Company) is a leading healthcare company that sells, markets, and distributes pharmaceutical products for a number of health ailments and conditions, including [XXXXXXXXXXXXXXXX, XXXXXXXXXXX XXXXXXXX] and other health conditions. U.S. Healthcare Company is based in [XXX XXXXXX] and is a wholly owned subsidiary of [XXXXXXXXXXXXXXXXXXXXXXXXX], which in turn is wholly owned by a [XXXXXX] public limited company [XXXX XXXXXXXXXXX]. U.S. HealthCare Company purchases products from two related entities, one Country A [XXXXXXX] and one in Country B [XXXXXXXXXXX]. U.S. Healthcare Company acts as the U.S. importer of record, and imports products through various ports of entry in the United States including [XXXXXXX] and [XXXXXXX]. The merchandise that U.S. Healthcare Company purchases from its foreign affiliates are unconditionally duty-free pharmaceutical products and accessories (such as needles). The products fall into seven general categories of products or therapies which are: (1) [XXXXXXX and XXXXXXXX XXXX], (2) [XXXXXXXXXXXX XXXXXXX], (3) [XXXXXXXXXXXXXXXXX], (4) [XXXXXXXXXXXXXXXXXXXXXXXXXX], (5) [XXXXXXXXXXXXXX XXXXXXX], (6) [XXXXXXXXXXX] and (7) other healthcare. In September 2016, U.S. Healthcare Company instituted a new sales structure. Under this sales structure, the company obtains pharmaceuticals and related products for sale in the United States from its foreign related sellers. These foreign related sellers retain title to the products after they are imported into the United States while they are stored in warehouses located in the United States. The products are shipped to the United States under what is described as a consignment arrangement between U.S. Healthcare Company and its related foreign suppliers. Title to the goods transfers from the foreign sellers to U.S. Healthcare Company at the point at which the goods are removed from the U.S. warehouses, where the products are being stored. After that, U.S. Healthcare Company sells the products to multiple unrelated customers in the United States. The transactions between U.S. Healthcare Company and its two related foreign affiliated companies are conducted in accordance with Distribution and Consignment Agreements with these entities. The two agreements with both foreign affiliates are mostly the same. They outline the terms and conditions on how the parties conduct business with each other, including title transfer, risk of loss, and the roles of the parties. Copies of both agreements were submitted for our review. Section 3.7 of the agreements provides that: Title, risk and ownership of the PRODUCTS shall be and remain with [XXXX] as long as the PRODUCTS have not been sold to the DISTRIBUTOR in accordance with the terms of this agreement.

Section 3.8 of the agreements provides that:

Title risk and ownership of the PRODUCTS shall transfer to the DISTRIBUTOR upon exit from consignment stock warehouse, e.g. (…) when loaded for shipment to a specific end customer based on that customer’s specific order for PRODUCTS. Section 3.9 of the agreements provides that:

Unless otherwise agreed by Foreign Affiliates and [XXX], Foreign Affiliates shall maintain insurance coverage on the PRODUCTS up to the point of ownership transfer to the Distributor.

Section 3.13 of the agreements provides that: DISTRIBUTOR will be listed as the importer of record and will hold the customs bond. DISTRIBUTOR will be listed on all customs invoices and as such will act as the primary point of contact for any customs-related questions or issues and will fulfill any relevant reporting, filing, or other administrative requirements.

According to U.S. Healthcare Company’s submission, the International Commercial Terms (Incoterms) are specified on the commercial invoices. For most transactions between U.S. Healthcare Company and the Foreign Affiliates, the Incoterms are Delivered at Place (“DAP”) warehouses. In addition, the Incoterm Carriage and Insurance Paid (CIP) is also used selectively. Title and risk of loss are transferred to U.S. Healthcare Company at the time the goods leave U.S. warehouse and are loaded for shipment to U.S. Healthcare Company’s end customer. The risk of loss transfers to U.S. Healthcare Company’s end customer at the time the product reaches the customer’s facility (i.e. warehouse, dock, etc.). Specifically, the title transfers when a truck is docked and the door is opened for unloading of the products.

The related foreign sellers are responsible for the international and U.S. domestic transportation arrangements and the associated costs through to the warehouse. Further, the foreign affiliates are responsible for insuring the merchandise in the warehouses up until the point that ownership of the merchandise transfers to U.S. Healthcare Company and the goods exit the warehouse. Since U.S. Healthcare Company has a financial interest in the transactions, it acts as the importer of record. U.S. Healthcare Company is the consignee and is compensated for its warehousing and handling activities conducted for all imports into the United States, as well as purchases of all products that are made post-importation.

You indicated in one email that U.S. Healthcare Company operates on a first-in, first-out inventory basis, and its inventory will turn over on average every 2.5 weeks. As such, it is uncommon that U.S. Healthcare Company would have products remaining in its inventory that are not sold within their expiration timeframe. However, in the event there are products that have not been sold close to their expiration date, the company’s policy is to remove the products from inventory, place them in a storage location, and destroy them at an offsite location. U.S. Healthcare Company sells all the imported products to unrelated wholesalers. It sells most, but not all merchandise, in the condition that it is imported, and most sales occur within 90 days of importation.

The prices for the imported products are annually set with the wholesalers, using what is known as the product’s Wholesale Acquisition Cost (WAC). The WAC is the list price charged by U.S. Healthcare Company to unrelated wholesalers, but it does not include various discounts and rebates that are given to buyers by the seller. WAC prices are available at the product Stock Keeping Unit, (SKU) level. Prospectively, any changes to the WAC are anticipated to be infrequent for any given year. Current WAC information is maintained in U.S. Healthcare Company’s enterprise resource planning system, (ERP).

A number of subsequent transactions will occur after U.S. Healthcare Company’s sale to its unrelated wholesalers in the pharmaceutical supply chain. These subsequent transactions are subject to a variety of rebates and/or discounts provided to the subsequent purchasers/sellers including pharmacies, insurers, and/or pharmacy benefit managers.

U.S. Healthcare Company’s financial information is prepared for inclusion in its parent company’s audited financial statements, which are reported in accordance with International Financial Reporting Standards. The parent company’s financial statements are audited annually, and the company is publicly listed. It is explained that in the routine course of conducting its business, U.S. Healthcare Company does not maintain profit and cost information at the product or the SKU level. Instead, the costs are maintained at an enterprise level as part of its financial reporting process.

According to the submission, there are a number of complexities related to the multiple transactions in the pharmaceutical supply chain which are often the subject of discounts and rebates, and that in the ordinary course of business, U.S. Healthcare Company maintains expense and profit information at an enterprise level for financial reporting purposes. This results in the unavailability of expense and profit information on a product basis. It is stated, however, that U.S. Healthcare Company is able to calculate the average therapy level cost and profit information by retrieving financial information from its trial balance in its System Applications and Products (SAP) system. Working with the information from its trial balance, it is possible to identify expenses, and calculate both expenses and profits through allocations at the therapy level.

U.S. Healthcare Company also provided bilateral Advance Pricing Agreements (“APA”) between it, the United States Internal Revenue Service, and two foreign tax authorities for our review. One APA applies to the taxable years ending December 31, 2015 through December 31, 2019. The other APA applies to taxable years ending December 31, 2017 through December 31, 2021. The APA indicates that it contains the Parties’ agreement on the best method for determining arm’s length prices of the Covered Transactions under I.R.C. section 482, the Treasury Regulations thereunder, and any applicable tax treaties. The taxpayer and IRS previously entered into an APA covering taxable years ending December 31, 2004 to December 31, 2014. The APA utilizes the Comparable Profits Method (CPM) methodology, with U.S. Healthcare Company as a tested party. To report the valuation of the imported merchandise under the Customs valuation law, U.S. Healthcare Company suggests that it use a form of modified deductive value under 19 U.S.C. 1401a(f) based on the wholesale acquisition cost (WAC). The deductions for profits and general expenses would be derived by calculating the deductions for general expenses and average profits at the therapy level rather than on the product level. In the first proposed approach for valuing the imported merchandise, the sales revenue included all total WAC price revenue before various discounts, rebates and other price reductions were applied in calculating the revenue. This was subsequently modified so that the financial information provided was changed from the sales revenue to a net sales revenue. This means that the sale revenue data now includes the various discounts and other price deductions. In the specific example given, the proposed deductions are also separately broken out.

ISSUE:

Whether the imported merchandise may be appraised using a modified deductive value under section 402(f) of the Valuation law.

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 basis of appraisement is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. 1401a(b)(1). The term “price actually paid or payable” means 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). In determining transaction value, the price actually paid or payable is considered without regard to its method of derivation. Pursuant to section 402(b)(2)(A)(iv), the transaction value of imported merchandise shall be acceptable only if the buyer and the seller are not related, or if the buyer and the seller are related, the transaction value is acceptable under section 402(b)(2)(B). U.S. Healthcare Company indicates that the transactions, in which it obtains merchandise from its related foreign entities, are consignments and not sales for exportation. CBP has consistently stated that transactions involving goods shipped on consignment do not constitute bona fide sales. See, Headquarters Ruling Letter (HQ) 546602 dated January 29, 1997. Therefore, it is necessary to examine whether the transactions between U.S. Healthcare Company and its related foreign affiliates to obtain the imported pharmaceutical products constitute true consignments of merchandise, rather than sales for exportation to the United States. In HQ H275056 dated July 1, 2016, CBP explained that in a typical consignment arrangement, the goods are entrusted by a consignor to the consignee, who then sells them on behalf of the consignor after the goods are already in the possession of the consignee. Often, if the goods are not sold to a subsequent buyer within a designated time period, the goods are returned to the consignor or otherwise disposed of. In a consignment involving imported merchandise, the sale that occurs is after the importation of the merchandise, and it is considered a domestic sale, 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; and HQ 545755, dated May 18, 1995. In other words, a sale on consignment usually involves three parties: a consignor, who furnishes the merchandise; the consignee, who takes custody and holds the merchandise without actual title to it until it is sold at a future time; and a buyer who purchases the merchandise and takes title to it upon completion of the sale by making payment for the merchandise that eventually goes to the consignor. When merchandise is sold, the consignee will usually earn a fee for the services it has performed on behalf of the consignor. Thus, the merchandise is not sold to the buyer until after it is imported into the United States and if the merchandise is not sold within a designated time period, it can be returned to the consignor. In this case, there are Distribution and Consignment Agreements between the Foreign Affiliates and U.S. Healthcare Company. We note that the agreement, in each case, is titled “Distribution and Consignment Agreement” (emphasis added). The agreement indicates that title ownership and risk of loss transfers upon exit from the consignment stock warehouse, when loaded for shipment to a specific end customer based on that customer’s specific order for PRODUCTS. The agreements also indicate that the foreign affiliates shall maintain insurance on the products until the point when ownership to the products transfer. In addition, the commercial invoices between the Foreign Affiliates and U.S. Healthcare Company show the terms of sale for the imported products as Delivered at Place (DAP) Warehouse. Under this arrangement, the Foreign Affiliates are responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyance, at the named place, which in this case would be the warehouse. Risk transfers from the seller (foreign affiliate) to the buyer when the goods are available for unloading; so unloading is at the buyer’s risk. After importation, the risk of loss transfers from U.S. Healthcare Company to the end customer at the time the product reaches the customer facility (warehouse, dock, etc.). Title to the goods transfers to U.S. Healthcare Company when the truck is docked and the door is open for unloading. According to your most recent email, if the merchandise is not sold before its expiration date, it will destroyed, and there is no indication that U.S. Healthcare Company ever takes title to the merchandise until it is released from the U.S. warehouses. In addition, the fact that title to the imported merchandise is held by the foreign seller after it is imported into the United States, is demonstrated by the foreign affiliates’ maintenance of insurance while the goods are in the U.S. warehouse. In HQ H218916 dated April 29, 2014, an importer of industrial robots imported products from a related party in Sweden. The importer stated that in all cases it did not acquire title until the goods were shipped from the warehouse in the United States. Title and risk of loss would then transfer from the importer to the end customer at the moment when the goods were delivered to the customer. CBP stated that since there was no obligation on the part of the importer at the time of importation to pay for the goods or a promise to pay for the goods, there was no sale for Customs purposes. Since a sale for exportation did not occur, CBP held that the subject merchandise could not be appraised on the basis of transaction value pursuant to 19 U.S.C. § 1401a(b). Similarly in this case, in accordance with the Distribution and Consignment Agreements between the Foreign Affiliates and U.S. Healthcare Company and terms of sale indicated on the invoices, U.S. Healthcare Company is not obligated to pay the foreign affiliates for the merchandise at the time of importation. Accordingly, we find that the transactions between U.S. Healthcare Company and the foreign affiliates are not sales for exportation to the United States that can serve as the basis of transaction value. Moreover, even if it could be established that there are bona fide sales for exportation, we note that the transaction will be between related parties. 19 U.S.C. 1401a(b)(2)(B) provides that transaction value between a related buyer and seller is only acceptable if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between the parties did not influence the price actually paid or payable, or if the transaction value of the imported merchandise closely approximates certain test values. U.S. HealthCare Company described a rather complicated process how the actual prices paid for the imported merchandise are determined. While U.S. Healthcare Company presented bilateral APA agreements that the company has with IRS and foreign tax authorities, these agreements pertain to U.S. Federal income tax on a company-wide basis, and thus the APAs by themselves are insufficient evidence for Customs valuation purposes. 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 methods 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). We have no information regarding any merchandise that would be considered "identical" or "similar" to the merchandise being appraised in this case pursuant to section 402(c) of the TAA. We note that the products under consideration are highly specialized pharmaceuticals that are produced under specific patents. Thus, no such comparable identical or similar merchandise is available for the purposes of appraisement. Consequently, in this situation 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, or before the close of the 90th day after the date of importation. Provided the merchandise is not further processed, the unit price at which imported merchandise is sold in the greatest aggregate quantity means the unit price at which it is sold to unrelated persons at the first commercial level after importation. See 19 U.S.C. 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. Significantly, in order to be able to appraise merchandise using deductive value method there must be sufficient information regarding the actual profits and expenses on which to base the deduction. U.S. Healthcare Company alleges that it does not maintain and does not have the information related to actual deductions on a product level. For example, one of the deductions relates to “the usual costs and associated costs of transportation and insurance incurred with respect to shipments of such merchandise from the place of importation to the place of delivery in the United States, if such costs are included as a general expense.” 19 U.S.C. § 1401a. Further, the international transportation and insurance costs (international and post importation in the U.S.) are unavailable as they are the responsibility of the foreign sellers in accordance with the Incoterms of DAP and CIP indicated on the invoices. The expenses are not maintained on the books of U.S. Healthcare Company, and it does not have of the information related to these expenses.

In HQ H233789 dated June 21, 2013, CBP did not allow deductions based on the profit and general expenses calculated from a transfer pricing study because the information presented in the study did not account for the actual amount of profits realized and costs incurred for each imported merchandise.

In this case, since U.S. Healthcare maintains expenses and profit information at an enterprise level for financial reporting purposes, information regarding profits and expenses is not available at the actual product level for the imported merchandise. Because U.S. Healthcare Company cannot provide the actual deductible expenses in connection with the U.S. sales of the imported merchandise, the deductive value method of appraisement is inapplicable.

The next method of appraisement is the computed value method, set forth in section 402(e) of the TAA. 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). In this instance, according to U.S. Healthcare Company, the computed value method cannot be used because all of the cost and profit/general expenses information necessary to determine a computed value is kept by the overseas suppliers and is not available to U.S. Healthcare Company. Again, because the necessary information is not available, the computed value cannot be used to determine the value of the imported merchandise.

When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b) through § 1401a(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the "fallback" valuation method. However, certain limitations exist under this method. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108. Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may: fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding….19 U.S.C. § 1500(a). In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part: Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations….Section 500 authorize [XXX] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract. Statement of Administrative Action, 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 67. Section 152.107(a) of the CBP Regulations (19 C.F.R. § 152.107(a)) provides:

Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used.

U.S. Healthcare Company proposes to use the WAC price as the basis of its deductive value. The WAC price is the price charged by a wholesaler for drugs purchased from its wholesaler’s supplier, typically the manufacturer of the drug. Publicly disclosed or listed WAC amounts may not reflect all available discounts. In other words, the WAC is a list price for the imported merchandise before the various discounts and rebates are applied. The actual imported goods will be sold in most cases throughout the year based on the WAC price declared at their importation. It is anticipated that there will be very infrequent changes to the WAC price during the course of any given year. In your email dated July 9, 2018, you indicate that the resale price used as the basis of the deductive price, in addition to the WAC price, will include the discounts that U.S. Healthcare Company will provide to its customers.

U.S. Healthcare Company represents that the subject goods are generally sold in the condition as imported, and are typically sold within 90 days after importation by the importer to unrelated parties in the United States. The WAC price will be used for each imported good that is in place on the date of importation. In addition, the WAC price will be listed on the commercial invoices. U.S. Healthcare Company indicates that there may be a few adjustments to the WAC because there is a desire to have a consistent and predictable method of pricing during the course of a year. However, there would be limited instances in which WAC will be adjusted (i.e. adjustments to WAC are typically done annually) after the goods are imported, but before they are removed from the warehouse and resold to U.S. Healthcare Company’s wholesale customers. We note that for purposes of calculating the modified deductive value, you have now provided more accurate pricing because all of the various discounts and rebates received by the U.S. unrelated customers will be added to the WAC. Consequently, we believe that the WAC plus the discounts and rebates will provide an appropriate basis for determining the modified deductive value.

With respect to determining the appropriate deductions from the WAC price with sales offsets for profit and general expenses, U.S. Healthcare Company proposes calculating the deductions by using the general expenses and average profits at the therapy level rather than at the product level. As mentioned previously, U.S. Healthcare Company manages its expenses and profit information at an enterprise level for financial reporting purposes. As such, U.S. Healthcare Company proposes to use its financial/accounting data to identify the applicable general expenses at a therapy level and prorate the relevant expenses. Similarly, U.S. Healthcare Company can calculate an average profit per therapy based on its financial data. The therapy level is the grouping of general categories of products or therapies that U.S. Healthcare Company has categorized together to treat or to provide care for a particular health related condition or conditions. As mentioned previously, U.S. Healthcare Company has broken down its products into seven therapy categories.

You have identified a number of expense categories that U.S. Healthcare Company believes should be deducted from the WAC price to determine the modified deductive value. Among the expenses included for the deductions are: import costs and costs of distribution between production site and distribution warehouse; freight and forwarding costs for shipping goods to external customers; distribution licenses; third party storage costs; third party distributor service fees; freight on customer returns of a product; product tracking and management software; advertising including internet advertising and webpage management; printed media; television and radio advertisements; handouts to doctors; mailing campaigns to doctors; mailing campaigns to patients/public; activities to increase product accessibility to patients (e.g. putting product on approved drug lists); payments of salaries and benefits involved in selling the pharmaceutical products; IT equipment (IPads) used by field personnel, office supplies; phones used by field personnel; and federal fee paid under the Affordable Care Act necessary to sell drug products in the United States. Some of these expenses will be prorated so that they are appropriately allocated to their use in the selling of the products after importation. In reviewing these expenses, we believe that the specified costs are the result of necessary business activities that are undertaken in order to be able to sell the merchandise in the United States, and thus they are properly included as general expenses that can be deducted from the WAC price.

The other concern in determining the acceptability of the proposed modified deductive value approach is whether the profitability is consistent with the valuation law. The rules for deducting profit and general expenses for deductive value are set forth in 19 C.F.R. 152.105(e). The regulation specifies that the deduction made for profits and general expenses shall be based upon the importer’s profits and general expenses, unless such profits and general expenses are inconsistent with those reflected in sales in the United States of imported merchandise of the same class or kind, in which case the deduction shall be based on the usual profit and general expenses reflected in such sales, as determined from sufficient information and 19 C.F.R. 152.105(e)(1). For the year 2017, you have provided financial data at the therapy level for the merchandise that U.S. Healthcare Company imports and sells in the United States. The information indicates the sales of products in each therapy levels, the cost of the goods sold, the deductions, the profit or loss, and the profits calculated as a percentage of sales. You have also presented the profits of other competing pharmaceutical companies for the years 2015, 2016, 2017, and the average of the operating margin for these companies for those three years. The range of the operating margin for these companies is from 7.8% to 46.7%. It is also explained that the profit figures for these pharmaceutical companies may not be entirely comparable because they are calculated on a company wide basis and may include products that are quite different than the products that U.S. Healthcare Company is selling in the United States. For example, the profit figures for other pharmaceutical companies may include over-the-counter health related products, while the profit figures for U.S. Healthcare Company in this case concern only prescription drugs, which are often more costly to produce, since they may be patented and require greater research and development costs. For these reasons, the products that U.S. Healthcare Company sells in the United States may also have a greater profitability level than over-the-counter medications. Nevertheless, the profit figures from these other pharmaceutical companies provide guidance on whether U.S. Healthcare Company’s profits are in line with profits of imported merchandise of the same class or kind as the merchandise under consideration, and whether the profits from the U.S. sales of the merchandise under consideration should be deducted in calculating the proposed modified deductive value approach. Information presented indicates that the profitability in 6 of the 7 therapy categories for the latest year are within the range of the profits for the other major presented pharmaceutical companies. Products involved in the 7th therapy level only constitutes a very minor or insignificant amount of the U.S. sales of U.S. Health Care Company. Thus, in determining the modified deductive value for applicable merchandise, we find that the average profits at the therapy level from the WAC price would be an acceptable deduction from the WAC price.

Additionally, information has been presented that shows that U.S. Healthcare Company has entered into two bilateral APAs with the IRS and the foreign tax authorities. We note that the two APAs concern transactions between U.S. Healthcare Company and its overseas related suppliers, while the proposed modified deductive value would be based on sales of the merchandise to customers in the United States after its importation. Nevertheless the information submitted to the IRS in the two bilateral APAs that covers the Importer’s imported products constitutes valuable information regarding the transactions and does reduce the possibility of profit manipulation. See HQ 546979, dated August 30, 2000 and HQ 548233, dated November 7, 2003.

After reviewing the information presented, we find that U.S. Healthcare Company’s proposed method of valuing the imported merchandise, under 19 U.S.C. 1401a(f), using a form of modified deductive value based on the WAC price with deductions for profit and general expenses derived by calculating deductions for general expenses and average profit at the therapy level would satisfy the requirements of the Customs valuation law, 19 U.S.C. § 1401a. Accordingly, we also find that U.S. Healthcare Company’s proposed valuation of the imported merchandise utilizing a modified deductive value approach under the fallback provision of 19 U.S.C. §1401a(f) of the valuation law is an acceptable method of appraisement for the imported merchandise under consideration.

HOLDING: In accordance with the above analysis, we find that appraising the imported merchandise under the fallback method, using a modified deductive value, as proposed by the importer would be acceptable under the Customs valuation law of 19 U.S.C. § 1401a. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.

Sincerely,
Monika R. BrennerChief, Valuation and Special Programs Branch