IMPORT ADMINISTRATION POLICY BULLETIN

Number: 94.2

Date of Issue: 3/25/94

Topic:         Treatment of Inventory Carrying Cost in
Constructed Value

Author:        David Mueller


Approved:      (signed 3-25-94)
               Joseph A. Spetrini
               Acting Assistant Secretary
                for Import Administration


Statement of Issue

Treatment of inventory carrying cost in constructed value. 

Analysis

Inventory carrying expenses measure the expense of financing
merchandise from the time it enters finished goods inventory to
the time it is shipped to the first unrelated customer.  Although
the Department has generally held that inventory carrying
expenses should be included in the buildup of constructed value
in exporter's sales price situations, such expenses have not
always been included in the build up of constructed value in
purchase price situations.

After including inventory carrying expenses in the buildup of
constructed value, the next step is to determine whether or not
inventory carrying expenses should be subtracted from the
constructed-value-based foreign market value (FMV) as an offset. 
According to Section 773(a)(4) of the Tariff Act of 1930, as
amended ("the Act"), "due allowance" should be made when it is
established that any difference between U.S. price (USP) and FMV
is due to differences in the circumstances of sale.  Because the
Act does not distinguish constructed value from any other basis
for determining FMV (i.e., home-market/third country price), we
have consistently interpreted the Act as requiring us to perform
circumstance of sale adjustments in certain situations where
constructed value is used as a basis for FMV.
For example, when constructed value is used in an exporter's
sales price situation, an adjustment for U.S. and home market
inventory carrying expenses, as a part of indirect selling
expenses, should be made to both USP and FMV, respectively.  In a
purchase price situation, however, determining whether to perform
an adjustment for inventory carrying expenses depends on whether
the respondent is claiming a commission adjustment to USP.  If
there is a commission in the United States but not the home
market, then home market indirect selling expenses -- including
inventory carrying expenses -- should be subtracted from FMV up
to the amount of the U.S. commission as an offset.  Likewise, if
the constructed value includes a commission and the U.S. sale
does not, U.S. inventory carrying expenses and other indirect
selling expenses should be added to FMV up to the amount of the
commission deducted from FMV.  No other adjustment to FMV for
inventory carrying costs should be made in a purchase price
situation. 

Typically, per-unit inventory carrying expenses costs would be
imputed in the following manner:

          Average days in inventory - 15     
          Short term interest rate - 10%
          Per unit cost of goods - 500 LCUs
     
          Per unit inventory carrying cost:
               (15/365) * 0.10 * 500 = 2.05 LCUs
 
Statement of Policy

Inventory carrying costs should be reported and included in
calculating constructed value for both exporter's sales prices
and purchase prices in cases where constructed value is used.  An
adjustment for U.S. and home market inventory carrying costs
should be made to both USP and FMV, respectively, for exporter's
sales price sales.  In purchase price sales, the adjustment is
contingent on the respondent's claim for a commission adjustment
to USP.  If there is a commission in the United States but not
the home market, then home market indirect selling expenses --
including inventory carrying costs -- should be subtracted from
FMV up to the amount of the U.S. commission.  If there is not a
U.S. commission but there is a commission in the home market,
U.S. inventory carrying costs and other indirect selling expenses
should be added to FMV (i.e., included in constructed value) up
to the amount of the commission deducted from FMV.  
  
Implementation

The above policy will be implemented on all future cases and
current administrative reviews and investigations.  If these
policies are challenged in comments after a preliminary
determination, the response of the Department should use the
reasoning in this bulletin, as well as citing to any appropriate
cases.  However, the bulletin itself, standing alone, cannot be
cited as authority for an action, as it is not a regulation.