Some of the most important adjustments in every anti-dumping case relate to the particular circumstances of the sale. The law recognizes that different prices in the United States when compared to prices in other countries can result from the different conditions under which a company sells in various markets.

 

Circumstance-of-sale adjustments are made for the differences in selling expenses between the United States and comparison markets. The treatment of these selling expenses under the United States anti-dumping law depends on two factors. First, the treatment depends on whether the expense is classified as a 'direct' or an 'indirect' expense. This distinction is critical because it is more difficult to claim adjustments for indirect expenses. Second, different rules apply depending on whether the basis of the United States price is export price (EP) or constructed export price (CEP).

 

The Commerce Department recognizes various categories of expenses that could be considered for circumstance-of-sale adjustments, including:

 

- Credit expenses

- Inventory carrying costs

- Commissions

- Warranty and servicing expenses

- Advertising

- Technical services

- Warehousing

 

Each of these adjustments is discussed briefly below. Our goal is to provide enough background for a foreign company to understand the nature and calculation of the adjustment. Each case, however, will raise its own unique issues.

 

Credit expenses

 

The Commerce Department adjusts its comparison of United States price and normal value to account for differences in credit costs between the two markets being compared.

 

Credit cost adjustments are one of the most common sale adjustments, and arise in virtually every anti-dumping case. Credit costs incurred after a sale are considered a direct selling expense. Pre-sale credit costs (inventory carrying costs) are considered an indirect selling expense.

 

The Commerce Department calculates the difference in credit costs by using what is known as 'imputed interest'. The Commerce Department does not measure the actual interest costs incurred in each market. Rather, the Commerce Department calculates the hypothetical interest cost that the company would have incurred, and then 'imputes' that cost to the individual sales transaction. This imputation is done on a sale-by-sale basis.

 

Although the questionnaire does not explain Commerce Department practice very well, the Commerce Department's policy for calculating post-sale credit costs is well settled. Post-sale credit costs are considered a direct selling expense, and can thus always be claimed as a circumstance-of-sale adjustment. The Commerce Department uses the following formula in its calculations of credit costs:

 

(interest rate) x (transaction amount) x (number of days/360)

 

This formula is based on three elements. The 'interest rate' is the average short-term interest rate paid by the company. Note that the figure '360' varies depending on the period base of the interest rate. For annual interest rates, the figure 360 is used. For monthly interest rates, the figure 30 is used. The `transaction amount' is the value of the individual sale in question. The Commerce Department always calculates credit costs on a transaction-by¬transaction basis. The 'number of days' can either be an average number of days between sale and payment, or a precise number of days, if such a calculation is possible.

 

Many believe that the Commerce Department's approach is unfair. Suppose a company does not actually borrow from banks to finance its accounts receivable — the promise from the customer to pay at some time in the future. Such a company does not incur any actual credit costs, regardless of how long the sale is outstanding, so why should the Commerce Department impute a hypothetical cost? Indeed, the Commerce Department's prior policy in the early 1980s was to limit the amount of the credit adjustment to the actual borrowing of the company.

 

However, the Commerce Department has rejected its old policy, as well as this argument about unfairness. The Commerce Department's current position is that its policy determines the effect of different credit terms in different markets, and it does not care how (or even whether) a company chooses to finance its credit terms. If a company offers longer credit terms in a particular market, the period during which the customer does not have to pay provides some 'value' to the customer and has the effect of lowering the price to the customer. This rationale, and the Commerce Department policy of using hypothetical rather than actual credit costs, has been upheld by the Court of International Trade.

 

Imputed inventory carrying cost

 

The Commerce Department also imputes a credit cost associated with pre-sale credit expenses — the imputed cost of carrying inventory. The inventory carrying cost attempts to measure the cost of holding finished goods inventory. Inventory carrying expenses are typically calculated using the following formula:

 

A x (B/360) x R= C

where

C=       inventory carrying expense

A=       sales price

B=       average number of days between end of production

and shipment (on a model-specific basis) (inventory period)

R=       weighted average short-term interest rate

 

Imputed inventory carrying cost is considered an indirect expense. Accordingly, although such expense will always be deducted from United States (CEP) sales price, the imputed inventory carrying expense will be deducted from home market sales only if there are different levels of trade between the two markets.

 

Commissions

 

Different commissions paid in different markets can significantly affect the comparability of prices. The Commerce Department therefore makes adjustments to United States price and nonnal value to reflect these differences. Since commissions by their nature vary on a sale-by-sale basis, they are always considered to be a direct expense. The way in which the adjustment is made depends on whether the United States price is based on export price (EP) or constructed export price (CEP).

 

When the United States price is based on export price, the Commerce Department makes the following adjustments:

 

- If the commission is paid only in the United States market, the Commerce Department adds the amount of this commission to the normal value. The United States price is higher to reflect the cost of the commission, and adding this same amount to the normal value ensures that the prices being used for United States price and normal value are comparable.

- If the commission is paid only in the domestic or third country market, the Commerce Department subtracts the amount of the commission from the normal value to ensure comparability of the prices.

- If the commission is paid in both the United States and comparison markets, the Commerce Department deducts the comparison market commission from the normal value and adds the amount of the United States commission to the normal value. In the past, the Commerce  Department sometimes subtracted the commission amounts from both prices, but the Commerce Department has since recognized that it does not have statutory authority to adjust the United States price in this situation.

 

When the United States price is based on constructed export price sales price, different rules apply because of a specific statutory provision requiring the Commerce Department to subtract commissions from the exporter's sales price:

 

- If the commission is paid only in the United States market, the Commerce Department subtracts the amount of the commission from the United States price.

- If the commission is paid only in the domestic or third country market, the Commerce Department subtracts the amount of the commission from the normal value.

- If the commission is paid in both the United States and comparison markets, the Commerce Department deducts the commissions from both markets. This treatment is possible for CEP but not purchase price, because of special statutory provisions.

 

Generally, the Commerce Department makes adjustments only for commissions paid to unrelated parties. The underlying concern is that commission payment between related parties could be used to hide dumping margins. In some cases foreign companies have been able to convince the Commerce Department that the sale on which the commission was earned was an 'arm's-length' transaction, and the Commerce Department therefore granted the adjustment even though the parties were related. It is safer to assume, however, that the Commerce Department will reject such arguments. The courts have upheld this Commerce Department policy.

 

The existence of commissions also affects the treatment of indirect expenses. As noted above, if a commission is paid in one market, but not the other, the Commerce Department allows a 'commission offset' in the other market to ensure that the prices remain comparable. In such a situation, the Commerce Department suspends the basic rule that circumstance-of-sale adjustments are made only for direct selling expenses. Any selling expenses — direct or indirect —can be used to offset the commission. In an export price (EP) situation, this suspension of the basic rule means that indirect selling expenses can be used for a circumstance-of-sale adjustment, up to the amount of the commission in the other market. In a constructed export price (CEP) situation, the commission has the effect of raising the limit on the exporter's sales price offset to all United States indirect selling expenses plus the amount of the commission.

 

Commissions, if paid in one market but not the other, thus have a dual affect. The commission, as a direct selling expense, leads to a circumstance-of-sale adjustment — usually the subtraction of the commission from the gross price. The commission also triggers a circumstance-of-sale adjustment for the indirect selling expenses in the other market — up to the amount of the commission.

 

Whether the offset helps or hurts the foreign company depends on the market in which the commissions are paid. If the company pays commissions in the United States market, the offset to the comparison market price lowers the dumping margin. If the commission is paid in the comparison market, the offset to the United States price raises the dumping margin. Note, however, that if the United States price is based on exporter's sales price, the Commerce Department already reduces the United States price by the full amount of any indirect selling expenses.

 

Warranty expenses

'

The Commerce Department also makes a circumstance-of-sale adjustment for warranty expenses incurred for each market's sales. For consumer products, such as colour television sets, this adjustment can be rather significant. Warranty costs incurred during the period of investigation are used to estimate the eventual warranty costs for the sales under consideration.

 

The Commerce Department's warranty expense adjustment concerns only the `direct' portion of the expenses. Direct expenses are those that vary with the quantity sold, and typically include the cost of parts and payments made to unaffiliated service companies (if paid by the respondent). Any indirect warranty expenses, such as the salaries and benefits of employees in an in-house after-sale service centre, are included in the calculation of indirect selling expenses. This distinction could be important because, although all indirect selling expenses are deducted from the United States price (in CEP situations), indirect selling expenses are deducted from home market sales prices only if the Commerce Department finds that the home market sales are made at a different level of trade.

 

To the extent possible, the adjustment for direct warranty expenses should be calculated on a model-specific basis, less any reimbursement received from the customer or unaffiliated parts supplier. If it is not practical to report the expenses on a model-specific basis, then direct warranty expenses should be calculated on the most product-specific basis possible.

 

Advertising expenses          

 

The advertising expense adjustment consists of expenses for advertising and sales promotion only to the extent that these expenses are incurred on behalf of the customer's customer (e.g. advertising aimed at the ultimate end-user of the product). Expenses incurred to advertise to the respondent's customer, e.g. the retailers, should be included in the calculation of indirect selling expenses (detailed below).

 

Technical services

 

Technical services include service advice, repair work, or other customer consultations relating to the product under investigation. Such work is typically outside the scope of the warranty coverage. The principal issue concerning technical services has been whether the expenses are related to the particular sales under investigation. Sometimes a company can specifically link particular technical services expenses to particular sales (usually when the expenses relate to a specific project). In such cases, the Commerce Department allows the technical services expenses as a circumstance-of-sale adjustment. More commonly, the technical services are related to future sales, or to the company's products in general. In such cases, the Commerce Department disallows the technical service expense.

 

Even if the expenses are related to particular sales, the company must also show that they are direct expenses. The Commerce Department considers non-variable costs, such as the technicians' salaries, to be part of a company's fixed costs. Such expenses are indirect and the Commerce Department does not allow an adjustment. The Commerce Department considers variable expenses, such as material costs and travel expenses of the technicians, to be directly related to sales. Other kinds of expenses may not be so clear-cut, and the parties can argue about the proper characterization.

 

Even if the technical service expense is disallowed as a circumstance-of-sale adjustment because it is indirect, it may be possible to claim the expense nonetheless. The expense could be included with an ESP offset, or with a commission offset, if either of them is involved in the investigation. Depending on the circumstances of the particular case, claiming the technical service expense as an offset may have the same effect for the company.

 

Warehousing

 

The treatment of warehousing expenses depends on whether the warehousing is pre-sale or post-sale, and on the way in which the foreign company uses warehousing. Pre-sale warehousing is always considered to be an indirect expense; by definition, pre-sale warehousing cannot be linked to specific sales.

Post-sale warehousing depends much more on the circumstances. If the post-sale warehousing is considered part of the production process, and units of the finished merchandise are stored routinely regardless of whether they have been sold, the Commerce Department does not grant a circumstance-of-sale adjustment. In contrast, if the post-sale warehousing is a condition of the sale and the merchandise is stored while waiting for shipment to a particular customer, then the Commerce Department may consider the warehousing to be a direct expense of the selling process rather than the production process, and grant a circumstance-of-sale adjustment.

 

Post-sale warehousing expenses that are not directly linked to specific sales can be treated as indirect selling expenses, provided the foreign company can link the warehousing expenses to a particular market. If not, the Commerce Department ignores the expenses.

 

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures