Trade Court Says Indirect Selling Expenses Need Not Be Incurred in US

Judge Stephen Vaden said Commerce failed to address one of Assan's arguments regarding its raw material costs during the investigation, despite doing so during litigation, and that it also impermissibly changed its answer to the hedging revenue element during litigation. The judge additionally sent the case back, at Commerce's request, so that the agency can review the denominator it used in its duty drawback adjustment for Assan.

However, the court sustained Commerce's treatment of Assan's late fees as part of the duty drawback adjustment, as well as management fees the respondent's affiliated reseller, Kibar Americas, paid to Assan. Vaden said the management fees didn't need to be incurred in the U.S. to be considered indirect selling expenses.

Duty Drawback Adjustment

In the investigation, Assan received an adjustment for a duty drawback it received in Turkey as part of the Turkish govenrment's Inward Processing Regime -- a system subject to much litigation at CIT (see 2404110062). As part of the scheme, the Turkish government issues Inward Processing Certificates, which grant the holder refunds of import duties paid on manufacturing inputs when the certificate closes.

Commerce accounts for the drawback by adjusting the company's export price accordingly. To make the adjustment, Commerce picked a numerator, which was the amount of exempted or rebated duties, and a denominator, which was the quantity of total U.S. sales, then divided these numbers to land on a per-unit adjustment, which was applied to every U.S. sale.

Assan urged Commerce to set the denominator as sales of goods exported under the closed certificates, which would have been a smaller number. Commerce acknowledged that it used the respondent's preferred methodology in later proceedings, and it asked the court for a remand to do as Assan suggested. Vaden consented, given that "Commerce has done an about-face and stated that any methodology other than Assan's proposed methodology 'would likely introduce inaccuracies.'"

As part of the drawback system, the Turkish government also lets companies receive drawback for untimely exports if the exporter pays a late fee. Commerce offset the drawback adjustment for Assan by the amount of late fees it paid -- a move contested by the exporter as going against the words of the applicable statute. The law tells Commerce to increase the company's export price by the amount of duties imposed by the country of export that have been rebated or not collected by reason of export to the U.S.

Commerce interpreted the law to allow for an offset for late fees. Vaden said this reading is "both correct and common sense."

The fees "are part of the Inward Processing Regime," the judge wrote. "Assan acknowledged at oral argument that it only paid the late fees because of its participation in the Inward Processing Regime.” The exporter's claim "rests on a semantic decision," Vaden said. Assan claims that the fees aren't part of the amount of any import duties that have been rebated given that the penalty is "stylized as a separate ledger item rather than as a reduction of the drawback granted by the Turkish government," he said. The judge said this reading "does not comport with the statute."

The judge said the word "amount" means the "sum total of two or more sums or quantities," meaning it's "not a single number standing alone." Vaden found that Assan "would have the Court read ‘amount’ to mean the single number that is labeled as a drawback, ignoring the related number labeled as a late fee" -- a move that "would not fairly reflect the entirety of Assan's participation" in the drawback scheme.

Raw Material Costs

Assan buys raw inputs as either scrap, sheet or primary aluminum, noting that its inputs vary in cost, labor and other expenses. The exporter said its aluminum costs contain the "market price for aluminum on the London Metal Exchange and the raw material premium," which is an adjustment to the exchange price that reflects the "conversion cost plus profit of the raw material supplier." For both parts, Commerce used an average cost from across the investigation period instead of the cost Assan reported for each product.

The respondent contested only the use of the average cost for the raw material premium. Among other things, it said that Commerce should have examined the cost differences using the total cost of manufacturing, instead of centering on raw material costs since the differences in labor and other costs offset differences in the raw material costs.

Vaden said Commerce took note of this claim administratively but "otherwise failed to engage with it," only addressing it at the trade court. The judge said he can't "consider post hoc rationalizations to justify an agency's decisions," remanding it for the agency to contemporaneously address the claim. He ruled that he won't address Assan's other claims regarding raw material costs until after the remand period.

Management Fees

Commerce included as indirect selling expenses management fees Assan's affiliated reseller Kibar paid to the exporter for "overall group support," deducting the expenses from Assan's export price.

The judge noted that CIT, in the 1995 decision Aramide Maatschappij V.o.F. v. U.S., said that Commerce properly treated administrative charges, including for legal and audit services, as indirect selling expenses. “The management fees here are exactly the type of administrative expenses Aramide found properly classifiable as indirect selling expenses," Vaden held, adding that "logic dictates that an affiliate’s expenses are all selling expenses if the affiliate’s only commercial activity is selling.”

Assan claimed that the expenses were improperly treated as indirect selling expenses since they were "incurred in Turkey" and not the U.S. Vaden said the statutory language doesn't so limit the treatment of indirect selling expenses, since it tells the agency to deduct from the export price "expenses generally incurred by or for the account of the producer or exporter, or the affiliated seller in the United States, in selling the subject merchandise.”

Employing the "nearest-reasonable-referent canon," Vaden said the phrase "in the United States" modifies "seller" and not "expenses" or "incurred." The judge said this reading "makes sense in context" since it "would be strange indeed if a company were rewarded with a lower duty rate for offshoring its American operations.”

Hedging

Assan uses "mark-to-market accounting," meaning the value of its inventory is periodically adjusted to match the inventory's current market value. The exporter hedges against the value dropping with aluminum futures contracts, which obligate the company to either buy or sell aluminum at a fixed price at a point in the future when the contract matures. The company profits from this practice if the price of aluminum dips between the contract's start and its maturation, reducing the risk it faces in buying raw aluminum for conversion into aluminum foil.

The gains and losses recorded from this practice were recorded as part of Assan's cost of production. Since the exporter saw a profit from its futures contracts, Commerce lowered the company's cost of production. The petitioner, the Aluminum Association Trade Enforcement Working Group and its members, challenged this move, claiming that hedging protects against a future risk and that the contracts only opened after the company bought the raw materials, at which time the raw material costs were set.

Vaden took issue with how Assan and Commerce changed their position regarding hedging between the investigation and litigation. Administratively, the agency "explicitly rejected the notion that Assan’s hedging is related to Assan’s sales" and it rejected the claim that the hedge mitigates risks from mark-to-market accounting.

The court found that the exporter "now admits that the Aluminum Association’s arguments have some merit but says Commerce was still correct to accept Assan’s books," claiming that hedging is used to "maintain a consistent cost for its raw material inputs." It agrees "in a certain sense" that its hedges pertain to the eventual sale of the goods, the court said, noting that the agency explicitly rejected this contemporaneously.

Vaden said "post hoc rationalizations will not suffice," especially when such rationalizations "directly contradict Commerce’s original explanation."

(Assan Aluminyum Sanayi ve Ticaret v. United States, Slip Op. 24-56, CIT Consol. # 21-00616, dated 05/08/24; Judge: Stephen Vaden; Attorneys: Leah Scarpelli of ArentFox Schiff for plaintiff Assan Aluminyum; Emma Bond for defendant U.S. government; John Herrmann of Kelley Drye for defendant-intervenors led by Aluminum Association Trade Enforcement Working Group)