IMPORT ADMINISTRATION POLICY BULLETIN Number 94.3 Date of Issue: 3/25/94 Topic: Disregarding Sales Below Cost-Extended Period of Time Author: David Mueller Approved:(Signed 3-25-94) Joseph A. Spetrini Acting Assistant Secretary for Import Administration Statement of Issue Determination of an extended period of time for cost of production cases. Summary of Policy An extended period of time for cost analysis is normally three months. Discussion Section 773(b) of the Tariff Act of 1930, as amended, requires the Department to disregard sales below cost in determining foreign market value (FMV) when such sales have been made over an extended period of time and in substantial quantities. The statute gives little guidance on the meaning of extended period of time. However the legislative history (Senate Finance Committee Report on the Trade Reform Act of 1974) states that "These standards would not require the disregarding of below-cost sales in every instance, for under normal business practice in both foreign countries and the United States, it is frequently necessary to sell obsolete or end-of-model year merchandise at less than cost . . . Thus, infrequent sales at less than cost, or sales that will permit recovery of all costs based upon anticipated sales volume over a reasonable period of time would not be disregarded. However, the practice of systematically selling at prices which will not permit recovery of all costs would be covered by this amendment and such sales would accordingly be disregarded." (Nearly identical language is in the House Ways and Means Committee report on the legislation.) Although the statutory language may have been motivated by consideration of obsolete or end-of-model year merchandise it does not allow disregarding below cost sales, whether obsolete or not, unless they occur over an extended period of time. Since the statute does not define an extended period, the Department must exercise its authority to interpret the law. The Department has often used three months to define an extended period, although there have also been instances in which two months were used. Although the length of the extended period could be defined relative to the length of the period of investigation or review, we consider this less appropriate than a period which is fixed. The period of review or investigation can vary from as few as six, to as many as 18 months. Yet this variance has nothing to do with expected patterns of sales. Thus, use of a variable period could lead to anomalous results. For example, if the extended period of time were twice as long in a review as in an investigation, the very same pattern of below-cost sales might result in disregarding such sales in one segment of the proceeding, but including them in the other. However, rejection of the notion of relativity vis-a-vis the length of the period of investigation or review does not mean the length of the extended period should not be relative to the pattern of total sales encountered. The standard definition of extended period, applied in most cases, should make sense for the pattern of sales normally experienced. A consistent length of the extended period for normal sales patterns is highly desirable for efficient and predictable administration of the law. This does not preclude adopting a different extended period on a case-specific basis when we find unusual patterns, such as infrequently sold goods (e.g., some capital equipment), highly seasonal merchandise, or an exceptional concentration of below cost sales in a very short period (particularly when the goods are not obsolete or "distressed" merchandise). An extended period cannot exceed the period of examination because the necessary cost and price data is not available to the Department for examination. An extended period should be long enough so that sporadic, non-systematic sales below cost would not be disregarded, but short enough to avoid the anomalous result of having a very large portion of total sales be below cost, yet be used in calculating FMV. (We express the extended period as the number of months during which below cost sales of a particular product are made.) For example, if the extended period were to be as long as six months, massive sales below cost could occur in five months, with only a few sales, all above cost, in the sixth month, resulting in no sales at less than cost being disregarded. This would not conform to the concern of Congress that FMV not be based on below-cost sales. In view of these considerations, three months is a reasonable period. It also corresponds to the period many corporations use to report financial results. Two months is probably too short as a general rule, since below-cost sales could be considered as occurring over an extended period of time even if they were made on the last day of one month and the first day of the following month, thus counting as two months. Occasionally, sales occur in less than three months of an investigation or review. This is not an expected normal pattern, but an exception from the pattern of sales for which the three month guideline was developed. If three months were defined as the extended period of time when such a pattern occurred, sales below cost would never be disregarded. This result does not reflect Congressional intent, unless the goods were obsolete or end of model year. Therefore, when we do find that all sales only occur in one or two months, the extended period will be the months in which sales occur. Sales below cost will then be disregarded when they occur in each month for which sales exist. As with the 10/90/10 test, the extended period test is made on a model-specific basis for the reasons stated in Policy Bulletin 92.3 of December 15, 1992. Statement of Policy Ordinarily, sales below cost will be considered to have occurred over an extended period when they occur in three or more months of the period of investigation or review. When all sales occur in less than three months, the extended period of time is the number of months in which sales occur. Implementation The above description of an extended period of time should be used in all investigations and reviews for which a preliminary determination has not been reached by the issue date of this bulletin, and in all final determinations in which the issue has been raised in comments from interested parties. If an action following this policy is challenged in comments after a preliminary determination, you should use the reasoning expressed in the bulletin, as well as citing to any appropriate cases. In responding to the comment, the bulletin itself, standing alone, cannot be cited as authority for an action, as it is not a regulation.