AOC INTERN., INC. v. US, Court No. 87-01-00122.

• Decision Date: 11 September 1989
• Docket Number: Court No. 87-01-00122.
• Citation: 721 F. Supp. 314,13 CIT 716
• Parties: AOC INTERNATIONAL, INC., Fulet Electronic Industrial Co., Ltd., Sampo Corp., and Tatung Co., Plaintiffs, v. UNITED STATES of America, Defendant, Zenith Electronics Corporation, Defendant-Intervenor.
• Court: U.S. Court of International Trade

721 F. Supp. 314

13 CIT 716

AOC INTERNATIONAL, INC., Fulet Electronic Industrial Co., Ltd., Sampo Corp., and Tatung Co., Plaintiffs, v. UNITED STATES of America, Defendant, Zenith Electronics Corporation, Defendant-Intervenor.

Court No. 87-01-00122.

United States Court of International Trade.

September 11, 1989.

Willkie Farr & Gallagher, Christopher Dunn, Washington, D.C., William J. Clinton, Zygmunt Jablonski and William B. Lindsey, for plaintiffs.

Stuart E. Schiffer, Acting Asst. Atty. Gen., David M. Cohen, Director, Washington, D.C., Commercial Litigation Branch, Civ. Div., U.S. Dept. of Justice, Jeanne E. Davidson, Dept. of Commerce, Leila J. Afzal, for defendant.

Frederick L. Ikenson, P.C., J. Eric Nissley, Washington, D.C., for defendant-intervenor, Zenith Electronics Corp.

WATSON, Judge:

In this action, plaintiffs AOC International ("AOC"), Fulet Electronic Industrial Co. ("Fulet"), Sampo Corporation ("Sampo") and Tatung Company ("Tatung") challenge the final results of the first administrative review by the Department of Commerce, International Trade Administration ("ITA" or "Commerce") covering importations of color television receivers ("CTVs"), except for video monitors, from Taiwan which are subject to an antidumping duty order. See 51 Fed.Reg. 46895 (December 29, 1986).

Plaintiffs are the manufacturers and exporters of the CTVs to the United States and respondents in the administrative proceeding below. As such, plaintiffs have the standing to bring this action under 19 U.S.C. § 1516. Zenith Electronics Corporation, a defendant-intervenor, is a domestic manufacturer of the subject merchandise, and has also participated in the administrative review below as petitioner.

The Court has jurisdiction to review the final results of the administrative review under 28 U.S.C. § 1581(c).

CALCULATIONS OF WARRANTY EXPENSES

Plaintiffs challenge the ITA's methodology of calculating the circumstance-of-sales adjustment for the differences in warranty expenses between the United States and home markets. The ITA made a determination that plaintiffs qualified for this adjustment pursuant to the applicable law. In calculating the adjustment, however, the ITA included the cost of labor incurred in servicing warranties through an outside contractor in the U.S. market, while excluding the cost of labor incurred in servicing warranties by the in-house servicemen in the home market. Thus, the total amount of warranty expenses in the home market was limited to the spare part costs of servicing the warranty repairs during the review period. The ITA explained that the in-house labor costs are "fixed", rather than "variable", costs which, by definition, do not qualify as "directly-related" selling expense.

As a result of the ITA's calculations, the amount of warranty expenses in the U.S. market greatly exceeded those in the home market, even though plaintiffs offered longer warranty terms in the home market. This adjustment resulted in a corresponding increase of dumping margins.

Plaintiffs allege that the distinction made by the ITA in treating warranty-labor costs incurred by the outside servicing company in the United States as directly-related selling expenses, while treating the in-house labor costs in the home market as indirect selling expenses is arbitrary, and that it leads to absurd results. Plaintiffs argue that an overall eligibility of warranty expenses as directly-related selling expense under the applicable law extends to all warranty-related costs including the in-house labor costs in the home market.

Defendant argues that each element of an adjustment for the differences in warranty expenses must independently qualify as a directly-related selling expense in order to be included in the calculations of the adjustment, and that the overall eligibility of warranty expenses for an adjustment as directly-related selling expense does not per se qualify every component of warranty expenses to be included in the calculations.

Defendant refers to the established administrative practice as restated in the Study of Antidumping Adjustments Methodology and Recommendations for Statutory Change (U.S. Department of Commerce, 1985 "Adjustment Study"), page 46:

Direct expenses incurred include travel expenses of a servicemen going to and from the location of the servicing, hotel expenses incurred in travel to perform servicing, and payments to unrelated firms for performing servicing. Indirect warranty expenses include a servicemen's wages, depreciation on a service truck, and welfare, bonuses, retirement, depreciation, utilities, rent, and other G & A general and administrative expenses incurred by the service department.¹

Defendant also refers to the ITA's explanation of the difference in treatment between "fixed" and "variable" expenses in Industrial Phosphoric Acid from Israel, 52 Fed.Reg. 25440 (July 7, 1987), which states:

We consider these fixed costs to be general overhead expenses which the company incurs regardless of whether a particular sale is made. We deducted only the variable costs incurred at the facility which qualify as direct selling expenses because these costs are directly related to specific sales.²

Defendant argues that in-house labor costs are "fixed" costs which are incurred regardless of whether a particular sale is made and which, therefore, do not bear a direct relationship to the sales under consideration.

The Court does not accept the ITA's rationale that the in-house labor costs, which are incurred in servicing of warranty repairs, are fixed overhead costs which a company incurs irrespective of the terms of the sales under consideration. It would be contrary to common sense to maintain a warranty servicing department and to pay salaries to the in-house servicemen, if no warranty terms were offered on the CTV sales. Similarly, a much smaller servicing department would be necessary to service warranties with more limited terms. The mere fact that in-house servicemen receive "fixed" salaries does not mean that the warranty-labor cost of the company is a fixed overhead expense which a company must incur irrespective of the terms of the sales under consideration. A per sale allocation of warranty-labor costs would vary depending on the terms offered with regard to each sale.³

The statutory purpose of the circumstance-of-sales adjustments is to allow for a fair "apple-to-apple" comparison of sales in the two markets "at the specific `common' point in the chain of commerce" when the merchandise is leaving the "factory gates". Smith-Corona Group, SCM Corp. v. U.S., 713 F.2d 1568, 1572 (CAFC, 1983), cert. denied, 465 U.S. 1022, 104 S.Ct. 1274, 79 L.Ed.2d 679 (1984).

The circumstance-of-sales adjustments are intended to negate the distortive impact of the diverse commercial forces in the two different markets. Instead of negating this distortion, the ITA's differentiation in treatment of warranty-labor in the two markets clearly aggravates these distortions. The absurd result of the ITA's differentiation between the labor costs incurred through an outside servicing company in the United States and the in-house labor costs of the same nature is obvious. The ITA's calculations were bound to distort the price comparisons by including in the calculations the high labor-servicing costs in the U.S. market, without giving any credit for the labor costs which were incurred in the home market.

Similarly, the Court finds that the logic of defendant's reasoning that each individual component of a directly-related selling expense must independently qualify as a directly related selling expense is convoluted. First of all, the Court finds no such requirement in the statute or the administrative regulations. According to 19 C.F.R. § 353.15a:

In comparing the United States price with the sales, or other criteria applicable, on which a determination of foreign market value is to be based, reasonable allowance will be made for bona fide differences in the circumstance of sales compared. Differences in circumstances of sale for which such allowances will be made are limited, in general, to those circumstances which bear a direct relationship to the sales which are under consideration.

The ITA does not dispute that plaintiffs met the requirement of this provision and established to its satisfaction that the bona fide differences in warranty expenses existed between the two markets. In fact, the ITA did make a determination to make an adjustment for the differences in warranty expenses.

The restrictive language of the regulations which requires "a direct relationship to the sales" refers to the bona fide differences in warranty expenses for which "a reasonable allowance will be made". There is no further requirement that each cost component of the directly-related selling expense must independently qualify as a directly-related selling expense in order to be included in the calculation of an adjustment.

It is difficult to follow the logic of the ITA's decision to grant an adjustment for the difference in warranty expenses, while disallowing a major cost component of this directly-related selling expense.

The ITA's failure to consider costs of warranty-labor in the home market as a reasonable measurement of the allowance is also contrary to 19 C.F.R. § 353.15(d), which states specifically that "in determining the amount of the reasonable allowances for any differences in circumstances of sale, the Secretary will be guided primarily by the cost of such differences to the seller."

In view of these regulations, the Court does not need to hold that the eligibility of warranty expenses as directly-related selling expense per se qualifies the labor cost component of the warranty expenses as directly-related selling expense. The Court does find, however, that a cost component of a directly-related expense is not a separate selling expense which must independently meet the "direct relationship" test...