[Federal Register Volume 64, Number 249 (Wednesday, December 29, 1999)]
[Notices]
[Pages 73196-73214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33234]
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DEPARTMENT OF COMMERCE
INTERNATIONAL TRADE ADMINISTRATION
[A-580-836]
Notice of Final Determination of Sales at Less Than Fair Value:
Certain Cut-To-Length Carbon-Quality Steel Plate Products from Korea
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
EFFECTIVE DATE: December 29, 1999.
FOR FURTHER INFORMATION CONTACT: Howard Smith, Frank Thomson, or Lyman
Armstrong, Office 4, Group II, Import Administration, International
Trade Administration, U.S. Department of Commerce, 14th Street and
Constitution Avenue, NW, Washington, DC 20230; telephone: (202) 482-
5193, (202) 482-4793 or (202) 482-3601, respectively.
The Applicable Statute
Unless otherwise indicated, all citations to the statute are
references to the provisions as of January 1, 1995, the effective date
of the amendments made to the Tariff Act of 1930 (``the Act'') by the
Uruguay Round Agreements Act (``URAA''). In addition, unless otherwise
indicated, all references are made to the Department's regulations at
19 CFR part 351 (1998).
Final Determination
We determine that certain cut-to-length carbon-quality steel plate
products (``CTL plate'') from Korea are being, or are likely to be,
sold in the United States at less than fair value (``LTFV''), as
provided in section 733 of the Act. The estimated margins of sales at
LTFV are shown in the ``Suspension of Liquidation'' section of this
notice.
Case History
Since the preliminary determination in this investigation (Notice
of Preliminary Determination of Antidumping Investigations: Certain
Cut-To-Length Carbon-Quality Steel Plate from Korea, 64 FR 41224 ( July
29, 1999) (``Preliminary Determination'')), the following events have
occurred:
In August, September, and October 1999, the Department conducted
verifications of Pohang Iron & Steel Co., Ltd. (``POSCO'') and Dongkuk
Steel Mill Co., Ltd. (``DSM''), the respondents in the instant
investigation. A public version of our analysis and report of the
results of this verification is on file in room B-099 of the main
Department of Commerce building, under the appropriate case number.
On October 15, 1999, and October 27, 1999, respondents submitted
revised databases. Petitioners 1 and respondents submitted
case briefs on November 12, 1999, November 15, 1999, and November 16,
1999, and rebuttal briefs on November 22, 1999. On November 23, 1999,
the Department held a public hearing concerning this investigation.
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\1\ The petitioners are Bethlehem Steel Corporation, Gulf States
Steel, Inc., IPSCO Steel Inc., Tuscaloosa Steel Corporation, the
United Steelworkers of America, and the U.S. Steel Group (a unit of
USX Corporation).
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Subsequent to the hearing on November 29, 1999, petitioners
submitted a letter alleging that respondents' rebuttal brief contained
untimely filed new factual information that must be rejected.
Specifically, petitioners stated that an opinion from an expert on
accounting issues was new information. On December 3, 1999, respondents
submitted a letter arguing that this opinion was not new factual
information. The opinion in question is that of Dr. Charles T.
Horngren, and was found at attachment 4 to respondent's cost rebuttal
brief. We agree with petitioners that this opinion constitutes new
factual information because it is offered as an ``expert opinion,'' and
as such, constitutes testimony rather than a general opinion.
Therefore, we find that the information in question is new factual
information untimely submitted pursuant to section 351.301(b) of the
Department's regulations. Normally such new factual information is
returned to the submitter. However, given that this issue was raised so
late in the proceeding--less than two weeks before the final
determination--for administrative convenience we have not returned
these data. We have not considered them in making our final
determination in this case. Rather, all copies were removed from the
record and destroyed, except that, pursuant to section
351.104(a)(ii)(A), of the Act, we have kept one copy solely for the
purpose of documenting the reason for rejecting the new information.
Scope of Investigation
The products covered by the scope of this investigation are certain
hot-rolled carbon-quality steel: (1) Universal mill plates (i.e., flat-
rolled products rolled on four faces or in a closed box pass, of a
width exceeding 150 mm but not exceeding 1250 mm, and of a nominal or
actual thickness of not less than 4 mm, which are cut-to-length (not in
coils) and without patterns in relief), of iron or non-alloy-quality
steel; and (2) flat-rolled products, hot-rolled, of a nominal or actual
thickness of 4.75 mm or more and of a width which exceeds 150 mm and
measures at least twice the thickness, and which are cut-to-length (not
in coils). Steel products to be included in this scope are of
rectangular, square, circular or other shape and of rectangular or non-
rectangular cross-section where such non-rectangular cross-section is
achieved subsequent to the rolling process (i.e., products which have
been ``worked after rolling'')--for example, products which have been
beveled or rounded at the edges. Steel products that meet the noted
physical characteristics that are painted, varnished or coated with
plastic or other non-metallic substances are included within this
scope. Also, specifically included in this scope are high strength, low
alloy (``HSLA'') steels. HSLA steels are recognized as steels with
micro-alloying levels of elements such as chromium, copper, niobium,
titanium, vanadium, and molybdenum. Steel products to be included in
this scope, regardless of Harmonized Tariff Schedule of the United
States (``HTSUS'') definitions, are products in which: (1) Iron
predominates, by weight, over each of the other contained elements, (2)
the carbon content is two percent or less, by weight, and (3) none of
the elements listed below is equal to or exceeds the quantity, by
weight, respectively indicated: 1.80 percent of manganese, or 1.50
percent of silicon, or 1.00 percent of copper, or 0.50 percent of
aluminum, or 1.25 percent of chromium, or 0.30 percent of cobalt, or
0.40 percent of lead, or 1.25 percent of nickel, or 0.30 percent of
tungsten, or 0.10 percent of molybdenum, or 0.10 percent of niobium, or
0.41 percent of titanium, or 0.15 percent of vanadium, or 0.15 percent
zirconium. All products that meet the written physical description, and
in which the chemistry quantities do not equal or exceed any one of the
levels listed above, are within the scope of these investigations
unless otherwise specifically excluded. The following products are
specifically excluded from these investigations: (1) Products clad,
plated, or coated with metal, whether or not painted, varnished or
coated with plastic or other non-metallic substances; (2) SAE grades
(formerly AISI grades) of series 2300 and above; (3) products made to
ASTM A710 and A736 or their proprietary
[[Page 73197]]
equivalents; (4) abrasion-resistant steels (i.e., USS AR 400, USS AR
500); (5) products made to ASTM A202, A225, A514 grade S, A517 grade S,
or their proprietary equivalents; (6) ball bearing steels; (7) tool
steels; and (8) silicon manganese steel or silicon electric steel.
The merchandise subject to these investigations is classified in
the HTSUS under subheadings: 7208.40.3030, 7208.40.3060, 7208.51.0030,
7208.51.0045, 7208.51.0060, 7208.52.0000, 7208.53.0000, 7208.90.0000,
7210.70.3000, 7210.90.9000, 7211.13.0000, 7211.14.0030, 7211.14.0045,
7211.90.0000, 7212.40.1000, 7212.40.5000, 7212.50.0000, 7225.40.3050,
7225.40.7000, 7225.50.6000, 7225.99.0090, 7226.91.5000, 7226.91.7000,
7226.91.8000, 7226.99.0000.
Although the HTSUS subheadings are provided for convenience and
Customs purposes, the written description of the merchandise under
investigation is dispositive.
Period of Investigation
The period of investigation (POI) is January 1, 1998, through
December 31, 1998.
Product Comparisons
In accordance with section 771(16) of the Act, we considered all
products produced by POSCO and DSM covered by the description in the
``Scope of Investigation'' section, above, and sold in Korea during the
POI to be foreign like products for purposes of determining appropriate
product comparisons to U.S. sales. We compared U.S. sales to sales made
in the home market, where appropriate. Where there were no sales of
identical merchandise in the home market made in the ordinary course of
trade to compare to U.S. sales, we compared U.S. sales to sales of the
most similar foreign like product made in the ordinary course of trade.
In making the product comparisons, we matched foreign like products
based on the physical characteristics reported by respondents in the
following order of importance (which are identified in Appendix V of
the questionnaire): painting, quality, grade specification, heat
treatment, nominal thickness, nominal width, patterns in relief, and
descaling.
Because neither POSCO nor DSM had sales of non-prime merchandise in
the United States during the POI, we did not use home market sales of
non-prime merchandise in our product comparisons. See, e.g., Final
Determination of Sales at Less Than Fair Value: Stainless Steel Wire
Rod from Sweden 63 FR 40449, 40450 (July 29, 1998) (``SSWR'').
Changes From the Department's Preliminary Determination
The following is a summary of changes from the Department's
Preliminary Determination. For a full explanation of DSM and POSCO
sales, see Dongkuk Steel Mill Co., Ltd. Calculation Memorandum, dated
December 13, 1999 and Pohang Iron & Steel Co., Ltd. Memorandum, dated
December 13, 1999. For POSCO, the Department utilized the most recent
affiliated service center data submitted. For DSM, the Department
revised certain codes reported for PLQUAL2H/U in accordance with
corrections submitted on July 16, 1999. Additionally, the Department
made the following changes to DSM's sales database: for certain U.S.
sales observations we revised the per-unit international freight as a
result of verification, for a certain U.S. sales observation we revised
the amount reported for other discounts, and for a certain U.S. sales
observation we revised the order date.
For DSM cost we made changes to the following general areas: scrap
offset, affiliated input costs, start-up cost depreciation, inventory,
and foreign exchange gains and losses. See Cost of Production and
Constructed Value Calculation Memorandum, dated December 13, 1999.
Verification
As provided in section 782(i) of the Act, we verified all
information provided by POSCO and DSM with respect to its sales and
costs, including on-site inspection of facilities, the examination of
relevant accounting and financial records, and selection of original
documentation containing relevant information. Our verification results
are outlined in the cost verification and sales report. See Cost
Verification Report--Pohang Iron and Steel Company, Ltd., from James
Terpstra to Official File (November 4, 1999); Cost Verification
Report--Dongkuk Steel Mill Co., Ltd., from Garri Gzirian and Lauren Van
Houten to Neal Harper (October 21, 1999); Sales Verification Report--
Pohang Iron and Steel Company, Ltd. from Frank Thomson to James
Terpstra (November 10, 1999); Sales Verification Report--Dongkuk Steel
Mill Co., Ltd., from Howard Smith and Lyman Armstrong to James Terpstra
(November 10, 1999).
Currency Conversion
We made currency conversions into U.S. dollars based on the
exchange rates in effect on the dates of the U.S. sales as certified by
the Federal Reserve Bank.
Section 773A(a) of the Act directs the Department to use a daily
exchange rate in order to convert foreign currencies into U.S. dollars
unless the daily rate involves a fluctuation. It is the Department's
practice to find that a fluctuation exists when the daily exchange rate
differs. When we determine a fluctuation to have existed, we substitute
the benchmark rate for the daily rate, in accordance with established
practice. Further, section 773A(b) of the Act directs the Department to
allow a 60-day adjustment period when a currency has undergone a
sustained movement. A sustained movement has occurred when the weekly
average of actual daily rates exceeds the weekly average of benchmark
rates by more than five percent for eight consecutive weeks. (For an
explanation of this method, see Policy Bulletin 96-1: Currency
Conversions 61 FR 9434 (March 8, 1996).
Particular Market Situation
On October 8, 1999, petitioners submitted an allegation that a
``particular market situation'' exists within the meaning of section
773(a)(1)(C)(iii) of the Act. This allegation was based on a variety of
information sources that, according to petitioners, show that the
Government of Korea (``GOK'') controls the price of steel in the home
market to such an extent that the prices cannot be considered to be
competitively set, such that home market prices cannot be used as a
basis for normal value. Petitioners supplemented this allegation on
October 29, 1999.
Petitioners provided four types of evidence to support their
allegations: (1) Market research, including interviews with steel
industry indicating GOK control of steel prices; (2) a time series of
transaction prices showing flat prices (indicative of price controls
according to petitioners); (3) a GOK document related to steel prices;
and (4) a variety of media articles related to this topic.
On October 19, 1999, respondents submitted a rebuttal to this
allegation. Respondents asserted that the allegation was untimely and
should be rejected. Respondents also stated that this allegation was
fully evaluated in a previous case and found to be without merit.
Finally, respondents submitted home market prices data for showing
variation in home market prices, which
[[Page 73198]]
they claimed to be indicative of market forces operating freely.
Regarding timeliness, 19 CFR 351.301(d)(1) requires that an
allegation must be submitted within 40 days after the date on which the
original questionnaire was transmitted, unless the Secretary extends
the time limit. In this case, the questionnaire was transmitted on
March 17, 1999, and thus this allegation would normally have been due
on or before April 26, 1999.
In considering whether to extend the deadline for this allegation,
as permitted by the regulations, we consider, inter alia, how the
allegation would affect the schedule of the case. See 19 CFR
351.302(b). The regulations state that ``unless expressly precluded by
statute, the Secretary may, for good cause, extend any time limit
established by this part. Furthermore, with regard to the allegation
itself, the regulations regarding this provision foresee that such an
allegation would lead to the rejection of an otherwise viable home
market in favor of sales to a third country as the basis for normal
value. See 19 CFR 351.404(c)(1). As such, the deadlines are predicated
on the assumption that we would need sufficient time to collect and
analyze third country sales. Whatever the merits of the allegation in
this case, the timing of petitioners allegation would not have allowed
for sufficient time to collect and analyze third country sales data.
Therefore, we have not extended the deadline for filing the allegation
in this case. Consequently, we find petitioners allegation to be
untimely filed and have not considered it in our final determination.
Analysis of the Comments Received
We gave interested parties an opportunity to comment on the
preliminary results. We received case and rebuttal briefs from
petitioners and case and rebuttal briefs from respondents.
Home Market and U.S. Sales
DSM
Comment 1: Physical Characteristics of Subject Merchandise
Petitioners argue that the methodology DSM used for reporting its
plate specification information is flawed and cannot be accepted.
Petitioners state that DSM's claim of producing high-strength
shipbuilding plate from ``general'' quality slabs demonstrates an error
in the physical characteristics designated by either DSM's slab
supplier or DSM itself. Under either scenario, petitioners feel that
DSM's reported plate specification and quality information must be
considered unreliable. Petitioners argue that the Department's sales
verification report says nothing about manufacturing a high strength
product from general quality slab. See Department's Sales Verification
of DSM at 12. Petitioners contend that it is not possible to create a
high-strength plate from non-high strength slab. Petitioners argue that
all the chemical properties (such as carbon content) which engenders a
CTL plate product with high-strength qualities are added prior to the
production of slab. According to petitioners, while the subsequent
rolling and finishing of a slab (in the production of CTL plate) may
improve the mechanical attributes of the product, they cannot alter the
chemical composition of the product. Given these assumptions,
petitioners claim that the Department cannot have any confidence in any
of the plate quality and specification information submitted by DSM.
Petitioners also argue that DSM's claim that general quality plates
are produced from high-strength shipbuilding slabs is inconsistent with
the statute, the Department's questionnaire, and past practice.
Petitioners claim that pursuant to 19 U.S.C. 1667b(a), the Department
must compare products that are identical in physical characteristics,
and not merely identical in the assigned product specification.
In addition, petitioners contend that there is the potential for
manipulation stemming from the use of a methodology that relies on
something other than physical characteristics. Petitioners argue that
if the Department were to determine that the actual physical
characteristics of a finished product are not relevant and the only
relevant information is the specification designated on the sales
invoices, then companies could legally sell their products in the
United States at the lesser specification, when in fact the products
actually possess significantly different physical characteristics.
Petitioners recommend that the Department use partial facts available
given that DSM did not assign costs to the merchandise actually
produced; but rather to the merchandise as ordered by the customer.
According to petitioners, this would lead to a distorted comparison
between home market sales and U.S. sales. Petitioners claim that, as
partial facts available, the Department should designate all of DSM's
U.S. sales as sales of high-strength shipbuilding plate, to account for
the fact that under the flawed reporting methodology, any of the
company's U.S. sales could actually be of a high-strength shipbuilding
specification.
DSM claims that they reported subject merchandise correctly and
that the Department verified the information. DSM asserts that it
seldom produces general quality plate using high strength slab, except
in order to avoid delays in meeting a customer's order. Further, DSM
states that a customer cannot use plate with a general quality
certification for a high strength application. Citing the Verification
Report, DSM argues that the Department randomly selected two months,
June and July 1998, and found no instances in which general plate was
produced using slabs that were not of general quality.
Department's Position
We disagree with petitioners. During verification, Department
officials found one instance where DSM used slabs that were certified
to a general quality specification to produce plates that were
certified to a high-strength specification. In addition, DSM reported
that during the POI, it used both general quality and high-strength
slabs to produce plates that were certified to a general quality
specification. For the following reasons we have not rejected the
reported product characteristics. First, the evidence on the record
supports DSM's claim that it produced high-strength plates from slabs
certified to a general quality specification, and that it properly
reported the quality and specification of such plates. The Department
verified that the slabs in question were certified to a general quality
specification, and hence DSM classified them as general quality slabs
in its inventory system. See Sales Verification Report at 9 and exhibit
32. However, the mill test certificate for the slabs showed that their
chemical characteristics satisfied the chemical standards of the high-
strength specification to which the plates were produced.2
The fact that the slabs had only been tested in accordance with the
general quality specification and, thus, only certified to that
specification does not change the fact that, chemically, they also
satisfied the requirements of a high-strength specification and were
used to produce that specification. Moreover, the plates that were
produced from these slabs were tested and found to meet the high-
strength specification that DSM reported to the Department. Thus, this
method of production does
[[Page 73199]]
not demonstrate that DSM's submitted product characteristics are
unreliable. Second, at verification the Department found no evidence to
indicate that DSM had incorrectly reported the physical characteristics
of the plates sold. Furthermore, it is inappropriate to conclude, based
solely on the quality of the slabs, that plates that were produced from
high-strength slabs and certified to a general quality specification
are in fact high-strength plates. The record shows that the production
of high-strength plates may involve special hot-mill processing which
improves the mechanical properties of certain high-strength steels.
Thus, additional factors must be considered before concluding that such
plates are high-strength. Moreover, there is no information on the
record to show that these products were marketed or sold as a
specification other than that for which they were tested and to which
they were certified. Finally, the record shows that only a very small
percentage of the slabs that DSM used to produce general quality plates
were high-strength slabs. For the foregoing reasons, we have accepted
the product characteristics as reported.
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\2\ At verification, DSM officials explained that they select
the slabs to be used to produce a plate order based on similarities
between the physical characteristics of the slab and the ordered
plate irrespective of the quality assigned to the slab in DSM's
inventory system.
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Comment 2: Commission Expense
DSM focuses a statement in the Department's verification report
that one of the selling agents received a lesser commission for each
sale. While DSM admits this selling agent received less of a commission
for each U.S. sale it was involved in, DSM argues that this agent also
received a salary which was reported in DSM's indirect selling expense.
This additional compensation was not considered in the Department's
analysis.
DSM argues that it is Departmental practice to report commissions
paid to independent sales agents, as a direct selling expense and
employee's salary, as an indirect selling expense. Accordingly, DSM has
properly reported its commission expenses in the United States.
Petitioners did not comment on this issue.
Department's Position
We agree with DSM. We recognize that the sales agent in question
received a salary in addition to his commission and that the amount of
the salary was properly included in the reported indirect selling
expense.
Comment 3: CEP Offset
DSM argues that a CEP offset is warranted because (1) NV is
established at a Level of Trade (``LOT'') which constitutes a more
advanced stage of distribution than the LOT of the CEP; and (2) the
data available do not provide an appropriate basis to determine a LOT
adjustment. See 19 CFR 351.412(c)(2); Notice of Preliminary
Determination of Stainless Steel Sheet and Strip from the United
Kingdom, 64 FR 90 (January 4, 1999). At verification, DSM demonstrated,
and the Department verified, that DKA, not DSM, was responsible for
negotiating prices with customers and for invoicing customers in U.S.
Channels 1 and 3. In those CEP channels, DSM argues that DKA was also
responsible for market research and all interactions with the U.S.
customers, including arranging for freight and delivery in the United
States and, in Channel 1, U.S. Customs clearance. See Sales
Verification Report at 8-9; Sales Verification Exhibit 9.
Accordingly, DSM states that there is no reseller in Korea that
fulfills the role on home market sales that DKA performs on U.S. sales
in Channels 1 and 3. As a result, when DKA's selling activities are
excluded for purposes of the LOT analysis (CEP LOT), the home market
comparison price becomes incomparable because it included significant
expenses, communication expenses, rent, and market research. As such, a
CEP offset is warranted in this case.
Petitioners claim that a CEP offset adjustment is not warranted in
this case. First, petitioners argue that the record evidence fails to
indicate that there are significant differences in selling functions
between DSM's home market and CEP LOTs. Second, petitioners argue that
there is no effect on price comparability on the LOT in this case. As
such, the Department should uphold its preliminary determination that
U.S. and home market sales were made at the same LOT.
Petitioners claim that, in the event that the Department
erroneously determines to make a CEP offset adjustment to normal value
for home market sales matched to CEP sales, it must ensure any
adjustment is properly applied and not double-counted with the
commission offset adjustment. Citing Static Random Access Memory
Semiconductors From Taiwan, 63 FR 8909 (February 23, 1998), petitioners
argue that the Department must ``offset any commission paid on U.S.
sale by reducing the NV by any home market indirect selling expense
remaining after the deduction for the CEP offset, up to the amount of
the U.S. commission.''
Department's Position:
We agree with the petitioners. In accordance with section
773(a)(1)(B)(i) of the Act, to the extent practicable, we determine NV
based on sales in the comparison market at the same LOT as the EP or
CEP transaction. The NV LOT is that of the starting-price of sales in
the comparison market or, when NV is based on CV, that of the sales
from which we derive selling general and administrative expenses and
profit. For EP sales, the LOT is also the level of the starting-price
sale which is usually from the exporter to the importer. For CEP sales,
the Department makes its analysis at the level of the constructed
export sale from the exporter to the affiliated importer.
Because of the statutory mandate to take LOT differences into
consideration, the Department is required to conduct a LOT analysis in
every case, regardless of whether or not a respondent has requested a
LOT adjustment or a CEP offset for a given group of sales. To determine
whether NV sales are at a different LOT than EP or CEP sales, we
examine stages in the marketing process and selling functions along the
chain of distribution between the producer and the unaffiliated
customer. If the comparison market sales are at a different LOT, and
the difference affects price comparability, as manifested in a pattern
of consistent price differences between the sales on which NV is based
and comparison market sales at the LOT of the export transaction, we
make a LOT adjustment under section 773(a)(7)(A) of the Act. Finally,
for CEP sales, if the NV level is more remote from the factory than the
CEP level and there is no basis for determining whether the differences
in the LOTs between the NV and the CEP sales affects price
comparability, we adjust NV under section 773(A)(7)(B) of the Act (the
CEP offset provision). See Certain Cut-to-Length Carbon Steel Plate
from South Africa, 62 FR 61731 (November 19, 1997).
As stated in the preliminary determination notice, Dongkuk reported
one channel of distribution in the home market through which it sold to
distributors and affiliated and unaffiliated end-users. Dongkuk
reported no appreciable differences in the functions performed in
selling to different types of customers in the home market. Thus, sales
to these customers constitute a single marketing stage and, therefore,
we continue to find that all of DSM's home market sales were made at
one LOT.
In the U.S. market, DSM reported four sales channels: (1) CEP sales
through Dongkuk Industries Co., Ltd. (``DKI''), Dongkuk's affiliated
trading company in Korea, to Dongkuk International, Inc. (``DKA''),
Dongkuk's U.S. affiliate, to unaffiliated customers; (2) EP sales
through DKI, to unaffiliated customers;
[[Page 73200]]
(3) CEP sales through DKA, to unaffiliated customers; and (4) EP sales
from Dongkuk to unaffiliated customers. After adjusting CEP sales in
accordance with section 772(d) of the Act, we find no substantial
differences in selling activities between EP and CEP sales. Moreover,
in comparing home market sales to EP sales and CEP sales, as adjusted
under 772(d), we find that DSM performs many of the same functions in
selling to its U.S. and home market customers. Therefore, we find that
there is no difference in the LOT for NV, EP, or CEP sales. Because
there is no difference in the LOT for NV and CEP sales we have not
granted DSM a CEP offset. See Dongkuk Steel Mill Co., Ltd: Level of
Trade Analysis, dated December 13, 1999.
Comment 4: Minor Adjustments Made at the Preliminary Determination Are
No Longer Needed
DSM argues that minor adjusts to DSM's database made at the
Preliminary Determination are no longer needed. First, the Department
recalculated credit expense in the home market database because of a
database programming error. At the start of verification, DSM corrected
the programming that had resulted in incorrect payment dates for a
number of their home market sales. See Sales Verification Report at 3.
Second, the Department had found several missing payment dates and used
the signature date as payment date for those sales. Again, at
verification, DSM provided the correct payment dates for the invoices
that were paid subsequent to the Preliminary Determination and the
payment date for any remaining unpaid sales. As a result, DSM claims
that the Department should have no need to create new payment dates or
to make any other adjustments to the sales database.
Petitioners did not comment on this issue.
Department's Position
We agree with the DSM that the minor adjustments to its database
are no longer needed. At verification, DSM provided the Department with
the correct payment dates for the invoices that were paid subsequent to
the Preliminary Determination and the payment date for any remaining
unpaid sales. See Sales Verification Report at 3 and exhibit 1.
Comment 5: Gross Unit Price for Home Surprise Sales 6 and 7
DSM argues that the verification report incorrectly stated that the
prices for home market surprise sales 6 and 7 were understated. DSM
argues that the value for freight revenue was not included in the
variable gross unit price (GRSUPRH); rather for both sales this value
was reported in freight revenue (FRTREVH) and was verified as such. See
Sales Verification Report at Exhibit 24 and 25. However, in the normal
course of business, freight revenue and gross unit price are recorded
as a single line item in DSM's invoice. In its questionnaire response,
DSM reported freight revenue separately from gross unit price and if it
was included in gross unit price it would double the amount reported
for freight revenue. DSM maintains that the freight revenue accounted
for an insignificant percentage of the total value of sales for the two
sales, and that the Department found no discrepancies in the reported
sales values for the other sales reviewed at verification. As the
Department also verified the total reported value and tested the
accuracy of DSM's reported data in a variety of ways, DSM argues no
adjustment is needed.
Petitioners argue that when errors are discovered at verification,
it is the Department's practice to adjust the untested portion of the
data in line with the verified findings based on facts available.
According to petitioners, these errors are fundamental to the
Department's analysis as they relate directly to the prices charged for
the foreign like product and as such the Department should increase the
gross unit price for all home market sales.
Department's Position
We agree with DSM that no adjustment is needed to the gross unit
price of home market surprise sales 6 and 7. At verification we found
that the value of freight revenue for both sales was captured in the
variable FRTREVH rather than GRSUPRH. Moreover, this discrepancy does
not necessitate the use of adverse facts available for all home market
sales, as petitioners suggest. If the Department added the difference
between the invoice gross unit price and the reported gross unit price,
it would double the amount of freight revenue reported for each sale,
as this is already captured in another variable, i.e., FRTREVH.
Consequently, the Department has made no adjustment to home market
surprise sales 6 and 7.
Comment 6: DSM's Model Matching Methodology
Petitioners claim that a comparison of the plate specifications
(i.e., PLSPECH) for the home market matching hierarchies to the plate
specifications for the U.S. market (PLSPECU) submitted by DSM and POSCO
revealed significant discrepancies in the two respondents'
methodologies. These discrepancies indicate that DSM's and POSCO's
respective specification concordances for ``similar'' products are
unreliable. Therefore, the Department should rely on facts available in
determining the margins for all U.S. sales not matched to identical
PLSPECHs in the home market. Specifically, the Department should assign
the highest reported home market price to all sales of non-identical
PLESPECHs matching to U.S. sales.
DSM contends that petitioners are most concerned that DSM and POSCO
did not report the same suggested matching hierarchy in their
questionnaire responses. DSM states that it is unaware of any
requirement that respondents report identical matching hierarchies.
Further, DSM argues that their company and POSCO were precluded from
consulting with one another on this issue due to the proprietary nature
of the information. Instead, the companies reviewed the physical
characteristics guidelines in the Department's questionnaire; discussed
it with their engineers; and made an informed assessment of the most
reasonable hierarchy for all specifications sold in the home market.
According to DSM, the hierarchy for the subject merchandise is
moot. Both companies sold sufficient quantities of the identical
merchandise above cost in the home market to eliminate the necessity of
selecting the next most similar product. DSM states that the Department
verified the underlying product characteristics associated with DSM's
model matching hierarchy. Because this information has been verified as
accurate, and because the Department has the discretion to alter the
hierarchy, there is no basis for utilizing facts available.
Department's Position
We disagree with petitioners that the reported model matching
hierarchies proposed by DSM are flawed and must be rejected. The
questionnaire in this case instructed respondents to identify, for
every specification sold to the United States, the identical and four
or five most similar specifications sold in the home market. In the
questionnaire, respondents are requested to explain their identical and
similar selections. The Department normally relies on this information
in developing its model match concordance. However, if we disagree with
any selection of similarity, we can rearrange this hierarchy as
appropriate. In this case, petitioners, have not disputed any of these
hierarchies at any time prior to the submission of case briefs.
Moreover, we have not questioned either party on the
[[Page 73201]]
use of these hierarchies in any supplemental questionnaire or found
specific faults with any chosen selection.
We also note that the similarity in hierarchies can vary based on
the fact that each company sells a different mix of specifications in
the home market. Moreover, in this case, the great majority of all of
the U.S. sales were matched to either identical, or functionally
identical, home market specifications. Thus, for the majority of the
reported U.S. transactions, second and third next most similar
specifications were not relevant to the margin calculations, as they
were not utilized as matches.
Comment 7: Application of Adverse Facts Available to DSM's Cost of
Production Data
Petitioners contend that the Department should apply total facts
available with an adverse inference in making its final determination
in this case. According to petitioners, the Department has resorted to
the facts otherwise available in similar cases. See Final Results of
Antidumping Duty Administrative Review: Fresh Cut Flowers from Mexico,
60 FR 49569 (Sept. 26, 1995) (``Flowers from Mexico''); Final Results
of Changed Circumstances Antidumping Duty Administrative Review:
Sweaters Wholly or in Chief Weight of Man-Made Fiber from Taiwan, 58 FR
32644 (June 11, 1993) (``Sweaters from Taiwan'').
Petitioners assert that DSM's financial statements are materially
misstated and, therefore, are unreliable. They question the credibility
of DSM's auditors by citing articles published in 1999 in the Korean
press, which indicate that this accounting firm ceased operations
because of the repeated sanctions imposed by the Korean oversight
authorities for poor audits of the companies it audited. Additionally,
they claim that, in the course of this investigation, the Department
has detected numerous examples where DSM's financial statements are
either not compiled in accordance with Korean Generally Accepted
Accounting Principles (GAAP), misrepresent relevant financial
information, or utilize unreasonable accounting methods. According to
petitioners, these problems demonstrate that DSM's financial statements
are materially misstated and artificially understate the company's true
costs and overstate its income. Furthermore, petitioners argue that
these examples also indicate the unreliability of DSM's auditors and
their audit report with respect to DSM's financial statements.
Petitioners list four instances of such material misstatements:
1. Petitioners argue that DSM violated Korean GAAP by materially
overstating the value of its raw materials inventory. Specifically, DSM
did not state raw materials inventory at the lower of cost or market
value. Petitioners point out that DSM misstated its actual accounting
practice in the footnotes to its audited financial statements, by
stating that it had valued its inventories at the lower of cost or
market value, when in fact it did not do so. To refute DSM's defense
that the company's independent auditors did not require this
adjustment, petitioners refer to the U.S. Securities and Exchange
Commission's (``SEC'') pronouncements on the issue of materiality of
misstatements in the financial statements. Petitioners claim that DSM's
failure to write-down its raw materials inventory value constitutes a
material misstatement.
2. Petitioners argue that DSM, in its treatment and reporting of
capitalized 1997 foreign exchange losses, misrepresented its accounting
policies, mistranslated certain Korean text, violated Korean GAAP, and
employed an unreasonable accounting practice. Specifically, petitioners
point out that the company's 1998 financial statements footnote claimed
that foreign exchange losses related to debt are amortized over the
corresponding maturity periods. In 1998, however, the vast majority of
these deferred expenses was transferred to fixed assets and subject to
depreciation over asset lives. In addition, according to petitioners,
DSM mistranslated Korean GAAP by omitting the fact that the
capitalization of certain financial type expenses, other than interest
expenses related to certain asset acquisitions, should be disclosed in
the footnotes to the financial statements. Therefore, petitioners
contend that by not disclosing the transfer of the capitalized foreign
exchange losses to fixed assets DSM violated Korean GAAP.
3. Petitioners assert that DSM, in its treatment and reporting of
1998 foreign exchange gains, misrepresented its accounting policies,
mislead the Department as to the information in the footnotes of the
company's Korean financial statements, and employed an unreasonable
accounting practice. Specifically, petitioners point out that the
footnotes to the company's financial statements submitted to the
Department claimed that foreign exchange gains and losses are amortized
over the corresponding maturity periods. However, in fact, the gross
amount of the gain was reported on the company's financial statements.
4. Petitioners contend that DSM's extension of the useful lives of
its asset represent an unreasonable accounting practice. They note that
to support the reasonableness of adopting these asset lives, DSM
referred the Department to several sources, none of which, provide an
adequate justification for DSM's adoption of longer asset lives for its
machinery and equipment.
Petitioners summarize their arguments by asserting that each of the
issues presented above represents a material misstatement and alone is
a sufficient ground for not relying on DSM's financial statements.
Moreover, the cumulative effect of each issue requires the Department
to reject DSM's financial statements and to use total facts available.
Petitioners argue that, if the Department found these material
misstatements based on its limited examination, numerous other
instances of material misstatement may also be present in DSM's 1998
financial results. Petitioners contend that these issues demonstrate
that DSM has failed to cooperate by not acting to the best of its
ability to comply with a request for information, and, therefore, the
Department should apply total adverse facts available.
DSM argues that petitioners' request for the use of total adverse
facts available is without merit, and should be rejected by the
Department. According to DSM, it cooperated fully with the Department
in this investigation, and its data submissions were fully verified by
the Department. DSM contends that the alleged misstatements identified
by petitioners are no more than instances in which petitioners are
attempting to second-guess the interpretation and application of Korean
GAAP. DSM maintains that the Department should rely on the certified
Korean financial auditor's opinion that its financial statements were
fairly stated. Furthermore, DSM argues that even if petitioners could
identify misstatements in DSM's financial statements, the Department
has held that such errors cannot form the basis for the use of adverse
facts available absent a showing that the errors prevented the
verification of submitted data or otherwise impeded the Department's
investigation. DSM argues that no such showing has been, or can be,
made in this investigation.
DSM contends that the two cases cited by petitioners in support of
their position (i.e., Flowers from Mexico and Sweaters from Taiwan) are
far from being on point. According to DSM, in both cases the Department
resorted to
[[Page 73202]]
facts available only where the Department had determined that the
financial statements in question were unreliable, and that it was
impossible to verify the accuracy of fundamental questionnaire response
data. DSM claims that these cases stand in stark contrast to facts of
record in this investigation because, according to DSM, the Department
verified without exception each and every element of DSM's antidumping
questionnaire responses. DSM contends that the Department was able to
link DSM's reported data not only to its accounting ledgers and its
audited financial statements and income tax return, but also to journal
vouchers, invoices, mill certificates, sales order summaries, and other
underlying source documents. Therefore, DSM claims that the Department
may not resort to facts available in such a situation. See Sulfanilic
Acid From the People's Republic of China; Final Results of Antidumping
Duty Administrative Review, 61 Fed. Reg. 53711, 53713 (October 15,
1996) (``Sulfanilic Acid from China'').
DSM objects to petitioners attempt to impugn the legitimacy of its
audit by noting that the accounting firm that performed DSM's audit was
subsequently sanctioned by the Korean authorities for deficiencies in
unrelated audits conducted for other companies. DSM calls this argument
``guilt by association'', and asserts that the Department may not
refuse to accept the professional opinion of DSM's auditor that DSM's
financial statements were fairly stated under Korean GAAP in the
absence of any indication of irregularities in its audit of DSM. It
points out that the Korean Securities and Exchange Commission (KSEC)
has never questioned the accuracy or validity of DSM's audited
financial statements. DSM also notes that its financial statements were
reconciled by the Department to DSM's income tax returns, which were
accepted without adjustment by the Korean tax authorities.
DSM rebuts each specific allegation of misstatement in the
financial statements made by petitioners:
1. DSM claims that its inventory was properly valued on its
financial statements and no adjustment should be made to its costs on
account of this issue. DSM argues that petitioners' claim is misguided,
and is contradicted by the proper application of the lower-of-cost-or-
market rule, under both Korean and U.S. GAAP. DSM points out that its
profits in the first-half 1999 are precisely opposite of the
substantial losses that would have been incurred had DSM in fact
overstated the value of its inventory on hand at the end of 1998.
2. DSM argues that its deferral and transfer to fixed asset value
of the 1997 exchange gains and losses associated with the financing of
fixed assets was in accordance with Korean GAAP. According to DSM,
prior to 1997, Korean GAAP required that foreign currency gains and
losses incurred on long-term debt be fully recognized in the year they
were incurred. Effective for fiscal year 1997, Korean Financial
Accounting Standards were amended to provide that such gains and losses
could be accounted for as deferred charges or credits and amortized.
The company claims that it followed this accounting treatment in 1997
and amortized both gains and losses on long-term foreign currency
obligations in that year. DSM maintains that it also followed Korean
GAAP when the deferred losses associated with the financing of capital
assets were subsequently transferred to the capitalized cost of those
assets when they were placed into service in 1998. The company cites
relevant articles of Korean Financial Accounting Standards to support
this treatment.
DSM disagrees with petitioners assertion that DSM's accounting
treatment of these items was not properly disclosed in DSM's audited
financial statements. DSM also disagrees that the translation of the
relevant section of the Korean GAAP prepared internally by DSM and
submitted to the Department misstates the original text. DSM argues
that Korean GAAP does not require a separate disclosure in the notes of
the subsequent transfer of previously deferred charges (i.e., foreign
exchange loss capitalized in 1997) from one balance sheet account
(i.e., deferred charges account) to another (i.e., fixed assets
account). Moreover, DSM argues that the issue of disclosure in the
financial statements is simply irrelevant because, according to DSM, it
fully disclosed to the Department the methodologies it used both in the
financial statements and in its submitted data, and the Department
verified both the methodologies and the underlying figures. DSM further
points out that the Korean Securities and Exchange Commission has never
questioned the adequacy of DSM's financial statement disclosure.
3. DSM argues that its accounting treatment of 1998 exchange gains
and losses was also in accordance with Korean GAAP. DSM points out that
in 1998 the Korean Financial Accounting Standards were amended again,
which allowed DSM to make an election to return to the previous rule
which prescribed that foreign exchange gains and losses on long-term
assets and liabilities ``shall be recognized in the current year.'' DSM
claims that it followed this accounting treatment in its 1998 financial
statements, and thus recognized the full amount the long-term foreign
exchange gains and losses incurred during that year. Due to a
translation error, however, according to DSM, the footnote to the
English language version of the 1998/1997 unconsolidated financial
statements failed to include a reference to this latter change in
accounting standards. Thus, according to DSM, while long-term foreign
exchange gains and losses were in fact accounted for differently in
1998 than in 1997, this was due to a change in Korean Financial
Accounting Standards and does not in any way call into question the
consistency and reasonableness of DSM's choice of accounting policies.
4. DSM argues that its useful lives for fixed assets are fully in
accordance with Korean GAAP. It asserts that not only were the useful
lives specifically concurred with by DSM's financial auditors, but they
are supported by an appraisal performed by a certified appraisal firm,
by a survey conducted by the Korean Iron & Steel Association, and by
statements by the manufacturers of the equipment, all of which attest
to the reasonableness of the useful lives adopted by DSM.
Department's Position
We disagree with petitioners that the issues raised concerning
DSM's audited financial statements warrant the application of total
adverse facts available. The examples of alleged material misstatement
cited by petitioners are issues of accounting conventions and
principles adopted by company management, as opposed to the reliability
of the underlying financial data. At verification, we noted no
instances which raise doubts as to the reliability of DSM's underlying
financial data. Although the Department agrees that an audit entails a
much more thorough testing of the source financial data as compared to
a verification, we noted no inconsistencies in the underlying cost
information reviewed (e.g., financial accounting system, cost
accounting system, and production records). While there are legitimate
concerns about whether the specific accounting practices identified by
petitioners result in unreasonable per unit costs for antidumping
purposes, we find that after reviewing DSM's treatment, of the
identified issues, DSM's management applied the requirements of Korean
GAAP in a reasonable manner.
[[Page 73203]]
Korean GAAP specifies that the market value of inventory as used in
the lower-of-cost-or-market adjustment should be based on the net
realizable value of the inventory. See DSM's Rebuttal Brief,
Attachments 2. Korean GAAP is not clear as to whether the net
realizable value should be determined based on the estimated sales
value for the raw material in question or by starting with the
estimated sales value of the finished goods the raw material will be
used to produce. Specifically, it states that the net realizable value,
``shall be determined as estimated selling price, less estimated
expenses that can ordinarily be expected to occur.'' See Cost
Verification Exhibit 25. We consider DSM's approach of starting with
the estimated sales value of the finished goods a plausible
interpretation of Korean GAAP because the ``estimated selling price''
referred to by Korean GAAP could be interpreted as being of the
finished good as well as the raw material. Thus, we disagree with
petitioners that DSM's decision not to make an adjustment to its
inventory for the lower of cost or market supports the position that
DSM's audited financial statements are unreliable.
Effective for fiscal year 1997, Korean GAAP provided that all
foreign exchange gains and losses related to long-term debt should be
capitalized and amortized over the corresponding maturity period for
the loans. Effective for fiscal year 1999 and 1998, if a company
elected to do so (emphasis added), Korean GAAP provides that all
foreign exchange gains and losses related to long-term debt may be
recognized in full, in the year incurred. While we have concerns about
the inconsistent treatment of the foreign exchange gains and losses in
1998 (recognizing the gains over a shorter period than the losses) and
its effect on the antidumping duty analysis (see Comment 9), the
treatment of exchange gains and losses fall within the confines of
Korean GAAP. That is, it appears that the capitalization of the foreign
currency losses associated with acquisition of equipment and the
subsequent depreciation of these losses over the life of the equipment,
as opposed to the corresponding maturity period of the loans, is an
acceptable interpretation of Korean GAAP.
While we also have concerns about the timing and magnitude of
useful life changes adopted by DSM during 1998, we do not consider
these changes to constitute grounds for rejecting a company's audited
financial statements in their entirety. The new useful lives adopted by
DSM were largely approved by a certified independent appraiser and were
fully disclosed by the company in its financial statements. While the
Korean tax laws prescribe a rigid limit on depreciable lives, Korean
GAAP does not set such strict constraints. Korean GAAP stipulates that
companies may select estimated useful lives that differ from those in
the tax law. It allows the management of a company to use its
judgement, within certain guidelines, in determining useful life and
depreciation methodology. Based on this, we do not find the new lives
adopted by DSM necessarily conflict with Korean GAAP. See discussion in
Comment 10.
Lastly, we disagree with petitioners that the fact that DSM's
auditors have ceased operations due to repeated sanctions imposed by
the Korean oversight authorities for poor audits automatically
impeaches the DSM audit. Despite the problems identified by the Korean
oversight committee related to audits performed on other companies,
there is no evidence that similar types of problems are present with
regard to DSM's audit. Absent factual evidence specific to DSM, we have
no grounds to reject their audited financial statements.
Comment 8: Ending Inventory Balance Valuation
Petitioners assert that DSM has understated its true cost of
production by failing to value ending inventory at the lower of cost or
market value (which, according to Korean GAAP, should be determined at
net realizable value). Petitioners also point out that the net
realizable value as it is defined under Korean GAAP, would actually
differ from the acquisition cost because it should be net of certain
other costs (e.g., selling expenses). Therefore, petitioners argue,
because the Department does not have information on how much DSM has
understated its costs due to this particular error, the Department
should apply the highest known difference between DSM's stated year-end
inventory value and DSM's December acquisition cost to DSM's total
year-end inventory value and allocate that calculated amount over costs
of goods sold.
Petitioners contend that DSM's suggested definition of the ``net
realizable value'' of slab is unreasonable. According to petitioners,
DSM's definition of the net realizable value of slab (a raw material
input to the CTL plate under investigation) ignores the known market
value of slab (i.e., the value of year-end purchases of slab by DSM
from unaffiliated parties) and instead relies on a derivation involving
several estimated values--the estimated value of the finished plates
that will be produced from the particular slabs in inventory at the
time of valuation, the estimated fabrication costs associated with
producing those finished plates, and the estimated general expenses
associated with producing those finished plates. Petitioners argue that
the Department should not ignore the known market value of the raw
material being valued and instead resort to a derived value based on
estimates and presumptions. Petitioners also claim that DSM provides no
reference to any authority supporting its slab valuation methodology.
DSM contends that its inventories are appropriately valued in its
audited financial statements, and, therefore, no adjustment to DSM's
inventory value is required or permitted. DSM argues that the
Department may not substitute its own judgment on the application of
Korean GAAP for that of DSM's outside auditors. According to DSM, the
purpose of verification is not to conduct a ``super audit'' of the
company's financial statements, but rather to determine (1) that the
submitted costs reconcile with the audited financial statements, and
(2) that the resulting costs fairly reflect the actual unit costs of
producing subject merchandise, as required for calculating COP and CV.
DSM argues that any attempt on the part of the Department to override
the accounting treatment specified in a company's audited financial
statements is directly contrary to section 773(f)(1)(A) of the Act.
DSM argues that any conclusion that DSM or its auditors failed to
follow Korean GAAP in the valuation of DSM's raw materials inventory is
unsupported by any information on the record in this investigation.
According to DSM, under Korean GAAP, the correct valuation of raw
materials inventory for purposes of applying the lower-of-cost-or-
market rule is net realizable value, and not the replacement value. The
net realizable value, in turn, would be determined by calculating an
estimated selling price for the finished product (i.e., plate) and
subtracting fabrication and general expenses. DSM disagrees with the
method where the average purchase price for slab in December of 1998 is
used as raw material year-end inventory value because DSM is not in the
business of selling slab. DSM claims that the year-end raw material
inventory value when determined according to its method provides no
grounds to conclude that there was a sharp decline in value that would
have required a write-down under Korean GAAP. DSM argues that any
decline in value of raw materials was due to the fact that the majority
of DSM's slab was imported, and the fluctuation in the Korean won
[[Page 73204]]
and the general instability caused by the Asian crisis led to
significant fluctuations in the won-denominated price for slabs. DSM
asserts that, even assuming that the market value of its raw materials
inventory had declined sharply as of the end of 1998, the decline would
not produce a loss material enough to require an adjustment to
inventory under Korean GAAP.
DSM claims that the Department's normal policy regarding the
treatment of inventory write-downs that have been made in a DSM's
audited financial statements appears to be that such write-downs are
normally included in cost of production for the period. At the same
time, according to respondent, write-downs that are not reflected in
the company's cost of goods sold for financial accounting purposes are
not included in COP or CV. See Final Determination of Sales at Less
Than Fair Value: Canned Pineapple Fruit From Thailand, 60 FR 29553,
29571 (June 5, 1995) (``Pineapple from Thailand''); Antifriction
Bearings (Other Than Tapered Roller Bearings) and Parts From France,
Germany, Italy, Japan, Singapore, and the United Kingdom; Results of
Antidumping Duty Administrative Reviews, 62 FR 2081, 2118 (January 15,
1997) (``Antifriction Bearings-1997''); Antifriction Bearings (Other
Than Tapered Roller Bearings) and Parts Thereof From France, Germany,
Italy, Japan, Singapore, Sweden, and the United Kingdom; Final Results
of Antidumping Duty Administrative Reviews and Partial Termination of
Administrative Reviews, 61 FR 66472, 66495 (December 17, 1996)
(``Antifriction Bearings-1996''). DSM argues that if the Department
makes an inventory adjustment where no write-down was made for
financial accounting purposes, this would violate the requirement that
COP and CV be based on the actual costs of the company. See IPSCO, Inc.
v. United States, 965 F.2d. 1056 (Fed. Cir. 1992).
Finally, DSM claims that, even if the Department were to
erroneously determine that some adjustment is appropriate to DSM's
reported costs to account for an apparent decline in the value of DSM's
raw materials inventory, the adjustment proposed by petitioners would
wildly exaggerate any possible decline in inventory value and would
amount to an unjustified and punitive overstatement of DSM's actual
costs.
Department's Position
We disagree with DSM that the Department's practice is to only
consider the write-downs that are reflected in the company's cost of
goods sold for financial accounting purposes. The antidumping law
requires the Department to base its calculation of costs upon the costs
recorded in respondent's books and records unless doing so would be
distortive. Section 773(f)(1)(A) of the Act provides that for purposes
of calculating COP and CV, ``[c]osts shall normally be calculated based
on the records of the exporter or producer of the merchandise, if such
records are kept in accordance with the generally accepted accounting
principles of the exporting country (or the producing country, where
appropriate) and reasonably reflect the costs associated with the
production and sale of the merchandise.''
In the instant case, Korean GAAP requires the application of the
lower-of-cost-or-market rule to the company's inventory valuation. The
purpose of this rule, which is also a part of the U.S. GAAP, and
International Accounting Standards, as well as many other national
accounting systems, is to comply with the one of the basic accounting
measurement principals--the ``matching principle''. This accounting
principle, in the context of inventory valuation, requires that a loss
of inventory value be reflected as a charge against the revenues of the
period in which it occurs. Different accounting systems, though, may
differ on the specifics of the lower-of-cost-or-market rule, including
the definition of the term ``market.'' The information on the record
demonstrates that the Korean GAAP defines this term as ``net realizable
value.'' However, as we noted above, Korean GAAP is not clear as to
whether the net realizable value should be determined based on the
estimated sales value for the inventory item in question (i.e., raw
materials in this case), or by starting with the estimated sales value
for the finished goods the raw material will be used to produce.
We agree that choice of the method, just like the application of
the lower-of-cost-or-market rule in general, may depend upon the
specific facts and circumstances under consideration, and calls for the
application of professional judgement. We believe that it is
conceivable that both methods of calculating net realizable value may
be acceptable under Korean GAAP. However, in this specific case, the
method utilized by DSM distorts the costs because, the estimated future
profits from the finished product sales mask the loss in raw materials
inventory value that occurred during the POI. In the current case, we
found that the method based on the sales value for raw materials is
more appropriate because it more accurately reflects the costs the
company incurred during the POI by utilizing the market prices readily
available for this particular inventory item. Therefore, we adjusted
DSM's costs to include the loss in raw materials inventory value that
occurred during the period of investigation.
Comment 9: Foreign Exchange Gains and Losses
Petitioners argue that, while DSM's reclassification of 1997 long-
term foreign exchange losses incurred on monetary liabilities related
to specific capitalized assets may be allowed under Korean GAAP, it
nevertheless is unreasonable and distorts the company's costs.
Accordingly, petitioners assert that reclassification should be
rejected by the Department. They contend that gains or losses incurred
on monetary liabilities such as loans (or financial obligations) should
remain tied to those liabilities, rather than being re-assigned to non-
monetary assets. In addition, petitioners assert that DSM's treatment
of its foreign exchange losses is inconsistent with its treatment of
foreign exchange gains (i.e., DSM's foreign exchange gains are
amortized over the terms of the underlying financial instruments while
its foreign exchange losses are depreciated over the useful life of its
assets). This, according to petitioners, may lead to miscalculation of
carry forward amounts from prior years that should be reflected in the
current year. Therefore, petitioners contend that, the Department does
not have the information to make the treatment of its foreign exchange
gains consistent with the treatment of its foreign exchange losses and
cannot reasonably determine the accurate amount of foreign exchange
gains and losses for the current year. Accordingly, petitioners argue
that the Department should apply adverse facts available with respect
to this claimed adjustment by disallowing any foreign exchange gains
and assuming the largest amount of foreign exchange losses incurred in
the current year. The petitioners contend that, at a minimum, the
Department should assume that all of these foreign exchange losses
relate to the current period, and increase DSM's submitted G&A costs by
the full amount related to the reclassification.
DSM argues that its accounting treatment of 1998 exchange gains and
losses was in accordance with Korean GAAP. According to DSM, while
long-term foreign exchange gains and losses were in fact accounted for
differently in 1998 than in 1997, this was due to a change in Korean
Financial Accounting Standards and does not in any way call into
question the consistency and reasonableness of DSM's choice of
[[Page 73205]]
accounting policies. In addition, DSM argues that its deferral and
transfer to fixed asset values of the 1997 exchange gains and losses
associated with the financing of fixed assets was in accordance with
Korean GAAP. DSM objects to petitioners suggestion that the gains or
losses incurred on long-term obligations should remain tied to those
liabilities as lacking any accounting authority, and points out that
this treatment would not be supported by either Korean or U.S. GAAP.
DSM points out that, notwithstanding the fact that DSM, in accordance
with Korean GAAP, recognized the full amount of the long-term foreign
currency gains and losses in its 1998 income statement, for purposes of
the antidumping response, DSM amortized the gain over the remaining
life of the underlying obligations and reported only the current
portion of this gain as an offset to its reported interest expense for
COP and CV.
Department's Position
Section 773(f)(1)(A) of the Act requires the Department to base its
calculation of costs upon the costs recorded in the books and records
of the respondent, provided such records are kept in accordance with
the local GAAP, unless doing so would be distortive. In the instant
case, while we agree with DSM that its treatment of foreign exchange
gains and losses for the purposes of financial reporting may be
consistent with Korean GAAP, we consider the inconsistent treatment of
foreign exchange gains and losses to be distortive.
DSM's inconsistent treatment of foreign exchange gains and losses
results in losses being amortized over the life of fixed assets,
whereas the gains are being amortized over the life of loans. This
inconsistency is of particular concern when the same loans which
generated the 1997 foreign exchange losses assigned to fixed assets
also generated a portion of the foreign exchange gains recognized in
1998. As a result, the foreign exchange losses from those loans are
being depreciated over a significantly longer period than the foreign
exchange gains from the same loans. This results in the smoothing out
of losses and the recording of gains (i.e. income) in the current
period of time. In order to neutralize this inconsistent treatment, we
consider it appropriate to amortize the foreign exchange losses in
question over the life of the loans, as opposed to the life of the
equipment. This treatment is both consistent with DSM's reported
treatment of its 1998 foreign exchange gains and with the Department's
preferred method for foreign exchange gains and losses related to long-
term debt.
Comment 10: Extension of Useful Lives of Depreciable Assets
DSM contends that the Department erroneously overstated its
depreciation expense in the preliminary determination. DSM states that
the antidumping law requires the Department to base its calculation of
costs (including depreciation expense) upon the costs recorded in the
books and records of the respondent unless doing so would be
distortive, citing Notice of Final Determination of Sales at Less Than
Fair Value: Stainless Steel Sheet and Strip in Coils From France, 64 FR
30820, 30836 (June 8, 1999) (``Sheet and Strip from France''); Silicon
Metal from Brazil: Notice of Final Results of Antidumping Duty
Administrative Review, 64 FR 6305, 6321 (February 9, 1999) (``Silicon
Metal from Brazil'').
DSM maintains that the equipment acquired for Plate Mill #2 had
never been operated and remained in mint condition at the time DSM
acquired it. DSM claims that petitioners' reliance on POSCO to define
an industry practice is misplaced because the shorter useful lives used
by POSCO reflect a different election under Korean GAAP, and not a
different practice with respect to the determination of the actual,
economic useful lives of the assets.
DSM refers to Notice of Final Determination of Sales at less than
Fair Value: Stainless Steel Sheet and Strip in Coils from the Republic
of Korea, 64 FR 30664, 30684 (June 8, 1999) (``Sheet and Strip from
Korea'') as having similar circumstances and outcome. DSM claims that
in that case the Department accepted the respondent's depreciation
expense as reflected on the audited financial statements, even though
there has been a change in depreciation methodology and useful lives
from prior periods, because the respondent in that case ``provided
evidence that its change in depreciation methods and useful lives were
reasonable, and that the change occurred in a time period prior to the
initiation of the investigation.'' DSM contends that it, too, has
demonstrated that the depreciation methodology and useful lives it has
used are reasonable, and that the changes in question were adopted well
before the POI and before the initiation of this antidumping
investigation.
DSM also claims that a major portion of the Department's adjustment
to DSM's depreciation expense in the preliminary determination is
unrelated to the determination of the appropriate useful lives for
fixed assets. Rather, it relates to the change in depreciation
convention used for determining the depreciation expense. Specifically,
prior to 1998, DSM followed the ``six-month convention'' for
determining depreciation. Beginning in 1998, however, DSM began
calculating depreciation on a monthly basis, so that depreciation was
determined with reference to the month the asset was actually placed
into service. DSM argues that, while both conventions are permissible
under Korean Financial Accounting Standards, the monthly convention
applied by DSM is inherently more accurate than the six-month
convention. DSM presents an example where, under the monthly
convention, a machine installed in November of 1998 would be
depreciated in 1998 only for the two months in which it was actually in
service during the year. Under the six-month convention, however, the
same machine would be depreciated for a full six months, as if it had
been installed on July 1. Similarly, machinery installed in June of
1998 would, under the six-month convention, be depreciated for a full
year, as if it had been installed on January 1. DSM also points out
that this change in depreciation convention was determined to be a
reasonable change in accounting methodology for fiscal year 1998 by
DSM's outside auditor.
According to DSM, the Department's adjustment in the preliminary
determination ignored the fact that DSM also revalued upward its fixed
assets in 1998. This upward revaluation increased DSM's depreciation
expense. DSM claims that if the Department intends to rely upon the
previous useful life figures used by DSM prior to 1998, then it must
also use the original asset values.
In conclusion, DSM asserts that, for the reasons stated above, and
consistent with the Department's decision in Sheet and Strip from Korea
and long-standing precedents, the Department should eliminate the
adjustment to DSM's depreciation expense made in the preliminary
determination and instead use the actual depreciation expense for the
subject merchandise reported by DSM and verified by the Department.
Petitioners assert that DSM has massively understated its
depreciation costs by extending the useful lives of depreciable assets,
using new asset lives that are unreasonable. Petitioners argue that the
revaluation of assets and the restatement of asset lives are not
inextricably linked, but rather independent decisions having no direct
bearing on one another. Therefore, according to petitioners, the
Department
[[Page 73206]]
should reject DSM's extension of asset lives.
Petitioners assert that claims by manufacturers of equipment that
their machinery and equipment is still functional after 20 years are
irrelevant because the functionality of equipment over an extended
period relates to the magnitude of repair and maintenance performed.
For the same reason, petitioners maintain, the KSA's survey is not
relevant to the issue at hand, because different companies may have
different policies on equipment maintenance. In addition, petitioners
point out that the asset lives referred to by DSM relate to new assets,
while most of the DSM's newly acquired assets had not been operated for
fourteen years, and not been maintained for six years. They also note
that it is unclear from the information provided by the respondent
exactly which of the fourteen-year old equipment was in ``mint
condition,'' and which had already been installed in Mexico by the
previous owners.
Petitioners argue that the finding of the certified appraiser that
provided the basis for DSM's change in useful lives should be ignored
because, the appraisal was not conducted with professional due
diligence. Petitioners claim that the appraiser was unaware of the fact
that the equipment in question spent over a decade in Mexico before it
was purchased by DSM. They also contend that the appraiser did not
examine any information on POSCO's plate equipment to compare it to
DSM's equipment. Petitioners claim that DSM in several instances did
not follow the useful lives guidelines established by the Korean
Appraisal Board (``KAB''). Petitioners note that, for example, the
lives assigned to certain equipment exceed the limits indicated in KAB
guidelines.
Petitioners claim that by adopting extended asset lives DSM
violated a fundamental accounting convention. That convention,
according to petitioners, is the practice of following particular
accounting techniques applicable to the company's industry.
Specifically, petitioners refer to useful lives used by POSCO (i.e., up
to 9 years), which is the only other major producer of CTL plate in
Korea, as being indicative of the useful lives that would have been
used by other Korean producers of the same products.
Petitioners also claim that, even though DSM changed its useful
lives policy prior to the initiation of the case, it was already clear
at that point to all the parties involved in the investigation, based
on the statistics and dynamics of the DSM sales in the United States,
that an antidumping investigation was practically unavoidable.
Petitioners assert that this was at least one of the factors DSM
considered in switching to an accounting policy reducing the reported
costs.
Petitioners contend that the cases cited by DSM in support of
retaining the company's submitted depreciation expenses are
distinguishable from the current situation. According to petitioners,
in Sheet and Strip from France, Silicon Metal from Brazil and Sheet and
Strip from Korea, the respondents' submitted costs were not found to be
unreasonable (i.e., distorted), while in the instant investigation
petitioners claim that DSM's submitted depreciation expenses do distort
the company's actual costs.
Department's Position
Sheet and Strip from Korea represents one of the most recent cases
where the Department identified the factors it considers in deciding
whether a change in an accounting method, or estimate, should be
allowed for the purposes of COP and CV calculations. That is, the
Department, while relying on a company's normal books and records,
analyzes the reasonableness of the newly adopted accounting method, and
considers if the fact, or an expectation, of being involved in an
antidumping investigation might have played a role in the company's
decision to change its accounting practice (see Sheet and Strip from
Korea, 64 FR 30664, 30684 (June 8, 1999)). In the instant case, within
months of initiation of the investigation, DSM made three changes
affecting its depreciation expense calculations: revaluation of fixed
assets, change in depreciation convention, and extension of useful
lives.
We agree with DSM that revaluation of fixed assets and a change in
depreciation convention may result in more accurate cost reporting. The
revaluation of fixed asset values restates amounts recorded in prior
years to current currency levels. We also agree with DSM that the new
month-of-acquisition convention for when to start depreciating an
asset, being in conformity with Korean GAAP, reasonably reflects the
costs, and is generally more accurate than the six-month convention
previously used by the company. Therefore, we allowed these two changes
to the company's depreciation methodology.
However, we disagree with DSM's assertion that it has demonstrated
that the new useful lives are reasonable. Pursuant to section
773(f)(1)(A) of the Act, the Department ``shall consider all available
evidence on the proper allocation of costs, * * *, if such allocations
have been historically used by the exporter or producer in particular
for establishing appropriate amortization and depreciation periods.''
(emphasis added) In 1998, DSM departed from its historical useful life
policy by aggressively extending asset lives, which resulted in a
dramatic reduction in depreciation expenses. This is distortive because
it understates the actual depreciation expense incurred during the POI
as well as understating the depreciation expense for the current fiscal
year.
DSM refers to useful life guidelines established by the Korean
Appraisal Board (``KAB'') as support for the company's revised asset
lives. However, we agree with petitioners that the useful lives DSM
assigned to certain equipment exceed the limits indicated in KAB
guidelines. Furthermore, the KAB guidelines require that the condition
of the equipment in question should be taken into account when choosing
an appropriate life within the established range. As we stated in our
Cost Verification Report, all the opinions and guidelines provided by
DSM to support the extended useful lives referred to the lives of new
equipment. See Cost Verification Report at 12. However, it has been
established in the course of investigation that the equipment DSM
acquired for Plate Mill #2 was not new. The September 1998 article from
Steel Times International supplied by DSM shows that some of the
equipment was already installed by the Mexican company and had to be
dismantled (see DSM's November 8, 1999, submission at Attachment 1).
Therefore, we agree with petitioners that it is unclear from the
information provided by DSM exactly which components of the fourteen-
year-old equipment were in ``mint condition.''
Moreover, even if we were to assume that, as DSM claims, this
equipment had never been operated, fourteen year old equipment is still
subject to obsolescence, if not other factors commonly associated with
a ``moth balled'' asset. Nevertheless, DSM assigned to these assets the
useful lives that in certain cases even exceeded the upper limits
established by KAB for these types of assets. See Cost Verification
Exhibit 8. For these reasons, we believe that the longer useful lives
distort the reported costs of production by allowing respondent to
recognize a small amount of depreciation in a given year. The resulting
distortion understates the true actual depreciation expense for the
period, thereby resulting in lower reported total cost of production.
Therefore, we have adjusted the new extended useful lives, and
[[Page 73207]]
applied to both the COP and CV calculations the lives historically used
by the company because this approach more consistently and accurately
captures the costs.
Comment 11: Startup Adjustment
DSM argues that its audited financial statements reasonably
accounted for the costs of construction, test, and start-up of Plate
Mill #2. DSM claims that this is the accounting treatment followed by
DSM for financial accounting purposes, which is in accordance with
Korean GAAP, and which has been accepted by the Department in previous
cases.
DSM argues that it did not request the startup adjustment provided
for in section 773(f)(1)(C) of the Act because, according to DSM, the
purpose of section 773(f)(1)(C) is to adjust costs for purposes of
calculating COP and CV under the antidumping statute when a
respondent's normal accounting system fails to account for the effects
of start-up operations. DSM contends that this is an exception to the
general rule in section 771(f)(1)(A) that costs shall be calculated
based on the books and records of the producer, when those books are
maintained in accordance with GAAP. Therefore, according to DSM,
because its normal costs already reasonably account for the effects of
start-up operations, no adjustment to DSM's normal costs under section
773(f)(1)(C) is necessary. See Notice of Final Determination of Sales
at Less Than Fair Value: Dynamic Random Access Memory Semiconductors of
One Megabit and Above (``DRAMs'') From Taiwan, 64 FR 56308, 56318-
56319, (October 19, 1999) (``DRAMs from Taiwan''); Micron Technology,
Inc. v. United States, 893 F. Supp. 21, 36 (CIT 1995); Notice of Final
Determination of Sales at Less Than Fair Value: Steel Wire Rod From
Canada, 63 FR 9182, 9186-9187 (February 24, 1998) (``Wire Rod from
Canada''); and Micron Technology, Inc. v. United States, 893 F. Supp.
21, 36 (Ct. Int'l Trade 1995).
DSM also argues that even if the Department were to determine that
the criteria for an adjustment under section 773(f)(1)(C) are relevant
to this case, DSM's new plate mill clearly satisfies the criteria for
startup operations under the statute (i.e., it is a new production
facility and requiring substantial new investment). Furthermore, DSM
asserts that it has demonstrated that its production levels at Plate
Mill #2 during the first five months of 1998 were limited by technical
factors uniquely associated with the start of commercial production.
Therefore, DSM contends that no adjustment should be made to its
reported costs, as reflected in DSM's audited financial statements.
Petitioners contend that the Department should adjust DSM's COM to
eliminate DSM's startup adjustment. Petitioners note that, according to
19 U.S.C. Sec. 1677b(f)(1)(C)(ii), ``Adjustments shall be made for
startup operations only where--(I) a producer is using new production
facilities or producing a new product that requires substantial
additional investment, and (II) production levels are limited by
technical factors associated with the initial phase of commercial
production.'' Petitioners argue that DSM did not satisfy the first
prong of the statute because the opening of the Plate Mill #2
production in the first half of 1998 represented simply an expansion of
the capacity of an existing production line (i.e., extension of
existing plate production in Pohang). With respect to the second prong,
petitioners argue that DSM did not satisfy it either because: (a) DSM
did not provide evidence demonstrating that production quantities were
limited; (b) the company's operations were not limited by technical
factors, but rather, were limited because its employees were on
vacation; (c) the capacity utilization DSM defined as commercial was
actually achieved in the middle of the claimed startup period; and, (d)
DSM failed to link the three technical factors it claimed to have
limited production levels with the production process, or explain how
these factors actually limited the production. Therefore, according to
petitioners, DSM has failed to satisfy either prong of the startup
adjustment test under the statute and the Department should deny the
claimed startup adjustment entirely.
Petitioners disagree with DSM's position that the statutory
criteria for a startup adjustment is not relevant and that the only
criteria is whether the Plate Mill 2's treatment was consistent with
Korean GAAP. Petitioners contend that, even if this is true, the
Department must reject DSM' startup calculations, because DSM has not
shown that the mill's treatment was in accordance with the Korean GAAP
(which, according to petitioners, distinguishes the current case from
DRAMs from Taiwan and Wire Rod from Canada cited by DSM) and that its
treatment reasonably reflect DSM's actual costs.
Department's Position
We agree with DSM, in part. Section 773(f)(1)(C) of the Act
provides for a claimed start-up adjustment in cases where a respondent
has not already done so in its normal books and records. Nevertheless,
under section 773(f)(1)(A) of the Act, the Department is directed to
follow the normal records of the exporter or producer if such records
are kept in accordance with the producer's home country GAAP and
reasonably reflect the costs associated with the production of the
merchandise. Therefore, because DSM's normal records already accounted
for the start-up operation, we must follow such treatment if it
reasonably reflects the costs associated with the production of the
merchandise.
However, we have determined that the DSM's accounting method for
startup period costs is distortive in two respects: First, it
overstated the period of startup and, therefore, understated the
reported costs. DSM asserted that its production levels at Plate Mill
#2 were limited by technical factors uniquely associated with the start
of commercial production during the first five months of 1998. However,
at verification, we found that, from the end of March through May, the
daily production quantities were relatively the same as the daily
production levels for the three months subsequent to DSM's designated
end to the start-up period. Therefore, we identified the point at which
DSM reached normal production levels and have adjusted the start-up
period costs accordingly.
Second, under DSM's method, the company capitalized the startup
period costs net of startup period sales. We agree that this approach
may be acceptable for financial accounting purposes because, if a
company does not include the same sales in its gross sales figure on
its financial statements, the effect of such treatment on the company's
net income figure is minimal. However, for COP and CV calculations, we
consider this methodology to be distortive because the same startup
period sales that are included in the home and U.S. sales files, are,
at the same time, used as an offset to the costs. Therefore, in
calculating our adjustment, we eliminated the effect of the startup
period sales on the startup period costs. For further explanation of
our findings at verification, see DSM Cost Verification Report, dated
October 21, 1999. Consequently, we have adopted DSM's treatment of
startup costs except for these two corrections, because its
methodology, otherwise accurately reflects costs associated with
production of the subject merchandise.
Comment 12: Transactions with Affiliated Entities
DSM contends that, in the final determination, the Department
should eliminate the adjustment it made in the
[[Page 73208]]
preliminary determination on purchases of slab through two affiliated
trading companies, Dongkuk International, Inc. (``DKA'') and Dongkuk
Corporation (``DKC''), and should base its valuation of DSM's slab
costs on the prices reported by DSM for these slab purchases as
reflected in DSM's normal cost accounting system. DSM argues that the
major input rule does not apply to these slab purchases because DKA and
DKC did not produce the slabs. According to DSM's interpretation of the
Act, while section 773(f)(2) of the Act--the ``Transactions
Disregarded'' rule applies to transactions between any affiliated
persons, section 773(f)(3)--``the Major Input Rule'' applies only to
situations when an affiliated person is involved in production of a
major input to the merchandise. DSM cites section 773(f)(3) which
refers to the case ``of a transaction between affiliated persons
involving the production by one of such persons of a major input to the
merchandise'' (emphasis added). DSM asserts that there is an apparent
contradiction between this section of the Act and section 351.407(b) of
the Department's antidumping regulations, which refer to ``a major
input purchased from an affiliated person'' (emphasis added). DSM notes
that, in the event of a conflict between section 773(f)(3) and the
Department's regulations, the statutory language governs.
DSM argues that the intent of major input rule, as explained in SAA
to the Uruguay Round Agreement Act, is to prevent manipulation of costs
between affiliated producers, and not just any affiliated parties. DSM
disagrees with the Department's reasoning in such cases as Notice of
Final Determination of Sales at Less Than Fair Value--Stainless Steel
Round Wire from Canada, 64 FR 17324 (April 9, 1999) (``SSRW from
Canada''), where the Department explained that the intent of major
input rule and the related regulations is ``to account for the
possibility of shifting costs to an affiliated party. This possibility
arises when an input passes to the responding company through the hands
of an affiliated supplier, regardless of the value added to the product
by the affiliated supplier.'' DSM contends that the Department's
decision in SSRW from Canada is directly contrary to the language and
intent of section 773(f)(3) and should not be followed in this
investigation. DSM further asserts that the statutory language with
regard to the major input rule is unambiguous, and allows for only one
interpretation: the affiliated person must be engaged in the
``production'' of the merchandise, or the rule does not apply. As to
the ``possibility of shifting costs to an affiliated party'', DSM
claims that where the Department knows the actual price charged by an
unaffiliated producer of the input (i.e., the market value), and where
the affiliated supplier performs no substantive role in the
transaction, such a possibility does not exist.
DSM proceeds with an argument that DSM should be even entitled to
value the purchases it made through DKA and DKC at the price paid by
the affiliates to the unaffiliated suppliers, not the higher transfer
price paid to DKA or DKC, and cites AK Steel Corporation v. United
States, 34 F. Supp. 2d, 756, 765 (Ct. Int'l Trade 1998) (``AK Steel
Corporation''), where the Court upheld the Department's determination
not to apply 19 U.S.C. 617b(f)(2)-(3) to transactions between collapsed
entities.
DSM asserts that because DKA and DKC are not the manufacturers of
the merchandise, the Department's calculations of their cost of
production for the purposes of major input rule err by including costs
and expenses incurred by these trading companies in unrelated lines of
business. DSM also claims that, in fact, DKA and DKC simply provide a
service to DSM which is limited to the resellers' minor commission or
margin on the exchange and does not rise to the level required for an
adjustment to be permitted under the major input rule. See Final
Determination of Sales at Less Than Fair Value; Stainless Steel Sheet
and Strip in Coils From Germany, 64 FR 30710, 30747 (Comment 29) (June
8, 1999) (``Sheet and Strip from Germany'').
Furthermore, DSM argues that no adjustment to the transfer prices
reported by DSM is permitted under Section 773(f)(2) of the Act. DSM
claims that if, however, the Department decides to disregard the
transfer price in this situation, the price paid by DKA and DKC to its
unaffiliated suppliers should be used by the Department as the amount
that ``would have been if the transaction had occurred between persons
who are not affiliated'' under the alternative valuation rule of
Section 773(f)(2) of the Act. According to DSM, the Department should
compare the price DSM paid to DKA or DKC (i.e., transfer price) to a
``market value'' based on the actual price the affiliates paid to their
unaffiliated slab suppliers for that particular slab, but not based on
DSM's purchases of slabs from other suppliers. Finally, DSM argues that
because the transfer price paid by DSM to its affiliates is greater
than the price paid by the affiliates to their unaffiliated suppliers
for those very slabs, there can be no basis for the Department to
determine that the transfer price ``does not fairly reflect the amount
usually reflected'' in sales of such slabs.
Petitioners contend that the Department should follow its decision
in SSRW from Canada and revise DSM's submitted costs to properly value
its slab inputs that were purchased through its affiliates to reflect
the higher of transfer price, cost of production, or market value. They
argue that, just as in SSRW from Canada, the possibility of shifting of
costs exists in this case because, while the price at which the
affiliated party purchased the input from an unaffiliated party may
represent a ``market'' value of the input, the transfer price may or
may not reflect all costs related to the input.
Petitioners contend that the Department should adjust it for the
following items: (a) Indirect selling expenses of the affiliates should
be included in their cost of production; (b) any offset for the
interest income should be excluded from the affiliates' finance cost
calculations since DSM improperly included long-term interest income in
the offset amount; (c) interest expenses of DKA, which were included in
DSM's consolidation, and were improperly excluded by the Department in
its preliminary determination; and, (d) the highest of transfer price,
cost of production, or market value, determined on quarterly basis.
Department's Position
We disagree with respondents, in part. Section 773(f)(2) of the Act
allows for the Department to disregard transactions between affiliates
if the transfer price does not fairly reflect the amount usually
reflected in sales of merchandise under consideration in the market
under consideration. Because the affiliate is providing an input
(slabs) into the production of subject merchandise, as well as services
related to the acquisition of the slab input, the selling, general and
administrative expenses (``SG&A'') of the affiliate must be included.
We disagree with respondent that the trading company's overhead should
not be added to its purchase price (i.e., its cost of sales) in
determining the value of the input. The trading company purchases the
material, takes title to the item, and provides for the sale and
transport of the good to the affiliated respondent. All of these
activities have costs associated with them that must be taken into
account in order to calculate a total actual cost.
Finally, we disagree with the respondent that in identifying a
market value, the Department's preference
[[Page 73209]]
should be to look to the prices that the affiliated suppliers paid to
their unaffiliated suppliers, and not to the prices paid by the
respondent to its unaffiliated suppliers from whom it directly
purchased the major input. Both sets of transactions may constitute a
usable market value. Respondent seems to suggest that because the
affiliated supplier's supplier is providing the specific input, the
price between them would be the preferable standard. We disagree. The
price that a respondent pays directly to a supplier might be preferable
since the statute, at section 773(f)(2), specifically refers to
transactions ``in the market under consideration.'' The prices paid by
the respondent in an investigation by definition represent the market
under consideration. Therefore, we have valued the inputs received from
affiliates at the higher of the affiliate's average acquisition cost
plus SG&A, average market price, or transfer price.
Comment 13: Production Quantities During ``Test'' Period
Petitioners claim that while DSM did not include any production
costs incurred in the ``test'' period, it did include the related
production quantities. Petitioners argue that the Department should
revise DSM's manufacturing costs to exclude these quantities from per-
unit cost calculations.
DSM notes that it did include in the reported costs the material
cost associated with the ``test'' period, as well as the related
quantities. Only fabrication costs associated with this production were
ultimately capitalized and added to Plate Mill #2 fixed assets. While
DSM agrees that petitioners' argument has certain merit, it argues that
the production quantities during the test period are so small as to
have virtually no effect on the per-unit costs. DSM claims that it
ignored the impact of these test period quantities and material costs
simply as a matter of convenience and, also, to facilitate verification
of total production quantity and total costs by remaining consistent
with DSM's internal accounting treatment.
Department's Position
We agree with DSM that although the production quantities during
the test period were small, as noted in our Cost Verification Report at
14, there is an inconsistency in DSM's treatment of the ``test'' period
quantities and costs: all the quantities are included in the reported
production quantity, only a portion of the related costs was included.
Moreover, for accurate per-unit cost calculations, any exclusion of the
production quantities should be accompanied by the exclusion of the
related costs, which would result in an adjustment that has virtually
no effect on the per-unit costs. Section 351.413 of the Regulations
addresses the Department's authority to disregard insignificant
adjustments under section 777A(a)(2) of the Act. ``[A]n ``insignificant
adjustment'' is any individual adjustment having an ad valorem effect
of less than 0.33 percent, or any group of adjustments having an ad
valorem effect of less than 1.0 percent of the export price,
constructed export price or normal value, as the case may be.'' See 19
C.F.R. 351.413 (1997). In the instant case, the effect of the
individual adjustment on an ad valorem basis is less than 0.33 percent
of normal value (i.e., Constructed Value). See DSM Cost Verification
Report; see also Final Cost of Production Analysis Memo, dated December
13, 1999.
Comment 14: Gain from Disposal of Certain Fixed Assets
DSM argues that the Department should not adjust its reported G&A
expenses to eliminate gains from the disposal of fixed assets that
included certain non-depreciable assets. According to DSM, it is the
Department's long-standing policy that gains and losses on the disposal
of fixed assets, including the sale of an entire manufacturing
facility, should be included in COP and CV as part of G&A expenses,
provided that these assets had been used to produce subject
merchandise. See Antifriction Bearings (Other Than Tapered Roller
Bearings) and Parts Thereof From France, Germany, Italy, Japan,
Romania, Sweden, and the United Kingdom; Final Results of Antidumping
Duty Administrative Reviews, 64 FR 35,590, 35,614 (July 1, 1999)
(``Antifriction Bearings--1999''); Final Determination of Sales at Less
Than Fair Value: Fresh Cut Roses from Ecuador, 60 FR 7019, 7042
(February 6, 1995) (``Roses from Ecuador'').
Petitioners contend that the Department should continue to disallow
DSM's offset to G&A expenses generated by the sale of the above
mentioned fixed assets. They point out that DSM reported negative G&A
expenses, based largely on the large gain the company received on the
sale of certain non-depreciable fixed assets. See Certain Internal-
Combustion, Industrial Forklift Trucks from Japan; Final Results of
Antidumping Duty Administrative Review, 57 FR 3167 (January 28, 1992)
(comment 57) (``Forklift Trucks from Japan''). Petitioners, argue, as
evidenced by the above-mentioned cases, that the Department has never
allowed this type of negative SG& A reported in its calculation of COP.
Petitioners assert that, according to Final Determination of Sales
at Less Than Fair Value: Certain Welded Stainless Steel Pipe From the
Republic of Korea, 57 FR 53693, 53704 (November 12, 1992) (``Stainless
Steel Pipe from Korea''), the Department's practice on treatment of
dispositions of fixed assets is that in order to be included in the
reported costs, these dispositions should be a normal part of the
company's operations and a routine disposition of fixed assets.
Petitioners argue that in the current case, the sale of assets in
question is outside of DSM's ordinary course of business and is not a
``routine disposition'' of fixed assets, and the resulting gain is not
income from activities related to the company's general operations.
Petitioners argue that the cases cited by DSM (Antifriction Bearings--
1999, Roses from Ecuador, et al.) are easily distinguished from the
present case because in those cases the Department found that the
assets were used to manufacture the subject merchandise and their sale
were a normal part of operations, or did not address whether the
transaction at issue was routine.
Department's Position
We disagree with DSM that the Department should include, as an
offset to G&A expense, the gain incurred on the sale of certain non-
depreciable fixed assets. We also disagree that this asset's
relationship to production is the standard for whether to include the
gain in G&A expense. U.S. Steel Group v. United States, 998 F.Supp.
1151 (CIT 1998). G&A expenses are those expenses which relate to the
general operations of the company as a whole, rather than to the
production process. Therefore, it is not relevant whether or not the
particular asset was used to produce subject merchandise.
In analyzing whether to include an item in G&A, the Department
considers the nature of the activity and whether the activity is
significant enough to be treated separately from the respondent's other
business activities. ``[I]n determining whether it is appropriate to
include or exclude a particular item from the G&A calculation, the
Department reviews the nature of the G&A activity and the relationship
between this activity and the general operations of the company.'' See
Notice of Final Determination of Sales at Less Than Fair Value: Dynamic
Random Access Memory Semiconductors of One Megabit and Above
(``DRAMs'') From
[[Page 73210]]
Taiwan, 64 FR 56308, 56323 (October 19, 1999). In cases where the
activity is comparatively small in relation to the company's primary
activities, the Department has included the occasional miscellaneous
gain or loss in G&A expense. However, at the point where an activity
becomes significant enough to constitute a separate business activity,
the Department treats it as such. ``However, the gain SMP is claiming
as an offset to G&A expenses is related to the sale of a significant
manufacturing plant and adjacent land area. This sales transaction is
not a routine disposition of fixed assets' (emphasis added). Stainless
Steel Pipe from Korea, 57 FR 53693, 53704 (November 12, 1992). See,
also, Notice of Final Determination of Sales at Less Than Fair Value;
Certain Hot-Rolled Flat-Rolled Carbon-Quality Steel Products From
Brazil, 64 FR 38756, 38791 (July 19, 1999). In past cases, the portion
of the sale of facilities related to certain non-depreciable fixed
assets has not been specifically addressed, indicating that the
particular treatment of those assets must not have been significant to
the overall gain or loss. See, e.g., Roses from Ecuador, 60 FR 7019,
7042 (February 6, 1995). In the instant case, the gain on the sale of
these non-depreciable assets constitutes the bulk of the gain from the
sale of the facility and, as noted above, is greater than DSM's entire
G&A expense.
A gain or loss on the sale of a non-depreciable asset, particularly
one as significant as that incurred by DSM, warrants separate
treatment. This is due to the fact that no depreciation expense
associated with this asset were accounted for in the calculation of the
cost of production. This is especially true in light of the fact that
non-depreciable assets, which are not consumed in the production
process and generally retain their value regardless of the state of a
particular industry, are normally not treated as a depreciable asset.
Depreciation expense is generally not calculated on these assets, which
means that no costs associated with these expenses are included in COP
or CV. Therefore, it would not be reasonable to include the associated
gain or loss on disposal of this kind of assets when they are sold. As
a result, we have continued to exclude the gain for the final
determination.
POSCO
Comment 1: Whether POSCO's home market and U.S. sales were made at
a different LOT than sales by POSCO's affiliated service centers.
POSCO asserts that, based on the information on the record, the
Department should conclude that POSCO's home market sales are at a
different LOT than the service centers' sales because each sells to
purchasers at different stages in the chain of distribution and each
performs qualitatively and quantitatively different selling functions.
POSCO argues that the differences in the LOT between POSCO and the
service centers is demonstrated by significant differences in their
marketing positions, quantity sold, customer base, selling activities,
warranty services, and sales expenses.
POSCO states that it is an integrated manufacturer which produces a
wide range of steel products, sells subject merchandise on a large
scale, and has adapted its expense structure in order to maximize
profit by selling on a large scale. On the other hand, according to
POSCO, the service centers are small resellers which sell out of
inventory on a much smaller scale.
In addition, POSCO asserts that it sold significantly more subject
merchandise than the service centers during the POI. According to
POSCO, its customers are large end-users, resellers or wholesalers, and
service centers that buy in large quantities and process the products.
The service centers' customers, on the other hand, are typically small
resellers and end-users who cannot hold inventory or shear products,
and therefore, tend to order small quantities. POSCO argues that these
differences in customer base and customer purchasing power are
significant indications that POSCO sells merchandise at a different
point in the distribution chain than the service centers and, thus, at
a different LOT.
POSCO states that the regulations, at 19 CFR 351.412(c)(2), require
the Department to look for differences in selling activities when
conducting a LOT analysis, and that the differences in the LOT between
POSCO and service centers is demonstrated by significant differences in
their selling functions. POSCO states that the service centers maintain
inventory for sales of subject merchandise, while POSCO sells subject
merchandise to order. Another difference, according to POSCO, is that
it usually produces subject merchandise in standard lot sizes because
its customers later process the merchandise, while the service centers
typically process the merchandise into different sizes for small
customers who are unable to perform this function. POSCO also states
that it provides more delivery options and more differentiated freight
arrangements than the service centers. POSCO argues that, while the
company and the service centers do provide some similar delivery terms,
the mere fact that certain selling activities are performed in a
similar manner does not preclude a finding of different LOTs.
POSCO argues that the Department has also emphasized differences in
warranty services, technical services and other sales-related
activities when examining LOTs, and cite Carbon Steel Products from
Germany, 64 F.R. at 16,703, 16,705 (April 6, 1999); Steel Wire Rod from
Canada, 63 F.R. at 9191-9193 (April 1, 1999); Stainless Steel Sheet and
Strip in Coils from Mexico, 64 F.R. 30790, 30807-30810 (June 8, 1999).
POSCO argues that while it provides warranty services for base metal
and provides technical services to its customers, the service centers
do not.
POSCO next argues that the differences in the LOT between POSCO and
the service centers is demonstrated by differences in their sales
expenses. POSCO argues that its selling expense structure is very
different from that of the service centers, in that it spends
significantly more on sales expenses. POSCO further argues that the
service centers assume the risk of finding a customer for the products
they purchase from POSCO, while POSCO has a commitment from its
customer before production. Respondent states that the Department noted
no discrepancies in the data POSCO presented in support of POSCO's
arguments regarding the different LOTs, and that the Department's
findings at verification confirm its analysis.
Petitioners argue that there is no significant difference between
the levels of selling activity performed by POSCO and its affiliated
service centers because, while the service centers may inventory
products longer than POSCO, POSCO provides such selling functions as
warranty, technical advice and market research for all customers.
Petitioners claim that, contrary to POSCO's assertion, no
significant difference exists between sales quantities and customer
categories sold upstream and those downstream. Petitioners further
argue that, in any case, differences in sales quantities and customer
categories are irrelevant for purposes of determining separate LOTs.
According to petitioners, without evidence that significant differences
in selling functions exist between sales channels, there is no basis
for the Department to determine that different LOTs exist.
Department's Position
We agree with petitioners. In accordance with section
773(a)(1)(B)(i) of the Act, to the extent practicable, we determine NV
based on sales in the
[[Page 73211]]
comparison market at the same LOT as the EP or CEP transaction. The NV
LOT is that of the starting price sales in the comparison market or,
when NV is based on CV, that of the sales from which we derive SG&A and
profit. For CEP sales, the Department makes its analysis at the level
of the constructed export sale from the exporter to the affiliated
importer. See sections 773 (a)(7)(A) and 772 (b) of the Act.
Because of the statutory mandate to take LOT differences into
consideration, the Department is required to conduct a LOT analysis in
every case, regardless of whether a respondent has requested a LOT
adjustment or a CEP offset for a given group of sales. To determine
whether NV sales are at a different LOT than EP or CEP sales, we
examine stages in the marketing process and selling functions along the
chain of distribution between the producer and the unaffiliated
customer. If the comparison market sales are at a different LOT, and
the difference affects price comparability, as manifested in a pattern
of consistent price differences between the sales on which NV is based
and comparison market sales at the LOT of the export transaction, we
make a LOT adjustment under section 773(a)(7)(A) of the Act. Finally,
for CEP sales, if the NV level is more remote from the factory than the
CEP level and there is no basis for determining whether the differences
in the LOTs between the NV and the CEP sales affects price
comparability, we adjust NV under section 773(A)(7)(B) of the Act (the
CEP offset provision). See Certain Cut-to-Length Carbon Steel Plate
from South Africa, 62 FR at 61731.
In the Preliminary Determination, the Department found that there
were no differences in LOT between POSCO's and the service centers'
home market sales and, therefore, did not make any LOT adjustment to
the normal value. See LOT Memo, dated July 19, 1999; Preliminary
Determination, 64 FR at 41226-27. In order to determine whether NV was
established at a different LOT than EP sales, we examined stages in the
marketing process and selling functions along the chains of
distribution between POSCO and its home market and U.S. customers.
Based on our analysis of the chains of distribution and selling
functions performed for EP sales in the U.S. market, we continue to
determine that POSCO and its subsidiaries POSCO Steel Sales and Service
Co., Ltd. (``POSTEEL''), the service centers, and POSAM (for EP sales)
provided a sufficiently similar degree of services on sales to all
channels of distribution, and that the sales made to the United States
constitute one LOT. See LOT Memo, dated July 19, 1999; Preliminary
Determination.
We find that the facts in this case are similar to those in Certain
Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products from
Korea, 64 Fed. Reg. 48767, 48773 (Sept. 8, 1999). While different types
of selling activities were performed by POSCO, POSTEEL, and the service
centers, in examining the selling functions associated with various
LOTs, the Department will compare the cumulative level of selling
activity rather than simply collating specific activities. See LOT
Memo, dated July 19, 1999; see generally, Certain Cut-to-Length Carbon
Steel Plate from South Africa, 62 FR at 61731. In comparing the
cumulative level of selling activity, we find that the differences in
selling functions between POSCO's two claimed home market LOTs are not
substantial. Accordingly, we find the U.S. sales and home market sales
to be at the same LOT, such that no LOT adjustment under section
773(a)(7)(A) of the Act is warranted.
Comment 2: Whether the Department should reclassify POSCO's U.S. sales
as CEP transactions
Petitioners contend that the Department should reclassify POSCO's
U.S. sales as CEP transactions, and assert that record evidence
demonstrates that POSAM sets prices in the United States and performs a
number of significant selling functions.
According to petitioners, POSAM was solely responsible for selling
POSCO's product and keeping contact with POSCO's customers. Petitioners
argue that U.S. customers initially contact POSAM, and POSCO has
admitted that during the POI it did not send any sales personnel or
senior managers to the United States. Petitioners also state that POSCO
reported that POSAM employs numerous individuals in the United States
responsible for various activities that are consistent with an active
selling operation in the United States, not an operation whose only
purpose is to process sales-related documentation. In addition,
petitioners state that POSAM's financial statements indicate that POSAM
extended credit for its customers' purchases of subject merchandise
from POSCO and POSTEEL. Thus, according to petitioners, POSAM is
undertaking the entire risk of these sales and, as such, is far more
than a mere processor of sales-related documentation.
POSCO argues that its sales through POSAM are properly treated as
EP sales. Respondent states that the Department closely examined this
issue at verification and found that POSAM merely functions as a
forwarder of requests to POSCO, and that only POSCO can approve the
price and terms of sale.
POSCO maintains that the Department found at verification that all
prices and terms of sale for U.S. sales are determined by POSCO or
POSTEEL and not POSAM, and that POSAM's role was limited to that of a
processor of sales-related documentation and providing a communication
link. See Sales Verification Report, dated November 10, 1999. POSCO
asserts that in no instance did POSAM have discretion to adjust prices
or negotiate with the customer. Furthermore, according to POSCO, POSAM
merely served as a communication link between POSCO and its U.S.
unaffiliated customers due to the time difference and communication
costs.
POSCO also argues that POSAM employs few employees and that it
would not be feasible for such a small number of employees to conduct
and operate an ``active selling operation.'' Next, POSCO states that
POSAM did not extend credit to POSCO's customers but merely received
payment which it then transferred to POSCO. Finally, POSCO argues that
the circumstances in the instant investigation are distinguishable from
other proceedings before the Department. In prior cases such as
Stainless Steel Wire Rod, Certain Cold-Rolled and Corrosion Resistant
Carbon Steel Flat Products, and Stainless Steel Plate in Coils from the
Republic of Korea, the circumstances were different and the factual
basis for the Department's decisions also differed. In each of the
above-mentioned cases, there was tangible evidence that POSAM did not
change or reject prices; POSAM is not the importer of record for the
overwhelming majority of sales; and POSAM did not provide any financing
to the U.S. customers. Based on these factors, POSCO argues that there
is nothing on the record to indicate that POSAM took steps beyond those
necessitated for EP classification. Accordingly, POSCO requests that
the Department continue to accord EP treatment to POSCO's U.S. sales
through POSAM.
Department's Position
We agree with POSCO that sales through POSAM are more appropriately
treated as EP transactions. The facts in this investigation are similar
to the facts in the Final Determination of Stainless Steel Wire Rod
from the Republic of Korea 63 FR 40461 (July 29, 1998) cited by POSCO,
and sufficient record evidence exists which leads the
[[Page 73212]]
Department to conclude that POSCO's U.S. sales through POSAM warrant
classification as EP sales.
The Department treats sales through an agent in the United States
as CEP sales, unless the activities of the agent are merely ancillary
to the sales process. Specifically, where sales are made prior to
importation through a U.S.-based affiliate to an unaffiliated customer
in the United States, the Department examines several factors to
determine whether these sales warrant classification as EP sales. These
factors are: (1) Whether the merchandise was shipped directly from the
manufacturer to the unaffiliated U.S. customer without being introduced
into the physical inventory of the affiliated selling agent; (2)
whether this is the customary commercial channel between the parties
involved; and (3) whether the function of the U.S. selling agent is
limited to that of a ``processor of sales-related documentation'' and a
``communication link'' with the unrelated U.S. buyer. Where the factors
indicate that the activities of the U.S. selling agent are ancillary to
the sale (e.g., arranging transportation or customs clearance), we
treat the transactions as EP sales. Where the U.S. selling agent is
substantially involved in the sales process (e.g., negotiating prices),
we treat the transactions as CEP sales. See Certain Cut-to-Length
Carbon Steel Plate from Germany: Final Results of Antidumping
Administrative Review, 62 FR 18389, 18391 (April 15, 1997); see also
Mitsubishi Heavy Industries v. United States, 15 F. Supp.2d 807, 811-12
(CIT 1998).
We note that neither party has disputed that POSCO's U.S. sales
through POSAM meet the first two criteria of the Department's standard.
Therefore, the determining factor in this case is the degree of
involvement by POSAM in the sales process. In the Preliminary
Determination, the Department based its EP classification of sales
through POSAM on POSCO's statement that POSTEEL or POSCO determined
price and terms of sale. See 64 FR at 41227-28. Based upon our findings
at verification, it is clear that POSTEEL and/or POSCO perform almost
all selling activities for U.S. sales through POSAM, including
undertaking business trips to meet with potential U.S. customers of the
subject merchandise. See Sales Verification Report at 11. The record
further supports POSCO's assertion that POSAM is merely a processor of
sales-related documentation. First, POSAM is only a point of contact
via whom the U.S. unaffiliated customer ultimately contacts POSCO or
POSTEEL. POSAM officials explained that because of the time zone
difference and the cost of long distance, it would be expensive and
inconvenient for the customer to contact POSTEEL directly. See Sales
Verification Report, dated November 10, 1999. POSAM acts as merely a
conduit between the unaffiliated U.S. customer and POSTEEL. See Sales
Verification Report, dated November 10, 1999. POSAM merely collects
payment from the customer and transfers this money to POSTEEL or POSCO.
See Sales Verification Report, dated November 10, 1999. The functions
performed by POSAM indicate that it is a mere facilitator and not a
seller of subject merchandise. This selling arrangement between POSAM
and POSTEEL is similar to the one between POSAM and Changwon, addressed
in Stainless Steel Wire Rod, where the U.S. customers remit payment to
POSAM, which subsequently transfers the payment to POSTEEL, which, in
turn, transfers it to Changwon. See Stainless Steel Wire Rod From
Canada, 64 FR at 40419. Furthermore, of the sales examined by the
Department during the POSAM verification, we found no evidence that
POSAM was given discretion in adjusting the price of the sale. See
Sales Verification Report at 30. Thus, the record evidence demonstrates
that POSAM has no sales negotiating authority with regard to U.S.
sales. Therefore, because of the lack of significant risk incurred by
POSAM, in addition to its lack of other selling activities, we find
that POSAM's activities are merely ancillary to the sales process and
have classified POSCO's U.S. sales through POSAM as EP transactions.
Comment 3: Whether the Department should disregard POSCO's model-
matching methodology
Petitioners state that due to significant discrepancies between the
model-matching reporting methodologies submitted by POSCO, the
Department should disregard POSCO's model-matching methodology.
Petitioners argue that for a U.S. specification, POSCO and Dongkuk
assigned different home market specifications in the most similar model
match chart. According to petitioners, this indicates that POSCO's and
Dongkuk's specification concordances for similar products are
unreliable. Petitioners argue that the Department should assign, as
facts available, the highest reported home market price to all sales of
non-identical home market specifications matching to U.S. sales.
POSCO claims that its model match methodology was verified and is
reliable. POSCO states that petitioners propose that the Department
assign the highest reported home market price to all sales of non-
identical specifications matching to U.S. sales because POSCO did not
report the same model matching hierarchy in the questionnaire
responses. POSCO claims that it is not aware of any requirement that
respondents report identical matching hierarchies. POSCO asserts that
the Department verified POSCO's approach to model matching and the
underlying information at verification. POSCO further argues that the
issue of model match hierarchy is moot due to the fact that, for the
specification at issue, the Department did not have to match to a
similar product for POSCO. POSCO claims that both companies sold a
sufficient quantity of the product above cost in the home market to
eliminate the necessity of selecting the next most similar product.
Department's Position
We disagree with petitioners that POSCO's reported model matching
hierarchies are flawed and must be rejected. The questionnaire in this
case instructed respondents to identify, for every specification sold
to the United States, the identical and four or five most similar
specifications sold in the home market. In the questionnaire,
respondents are requested to explain their identical and similar
selections. The Department normally relies on this information in
developing its model match concordance. See Original Questionnaire
Response: Section B, C and Appendix V (March 17, 1999). However, if we
disagree with any selection of similarity, or if any petitioners raise
any issues, we can and do rearrange this hierarchy in any way we deem
appropriate. Prior to raising this issue in their case brief,
petitioners did not dispute any of the hierarchies proposed by
respondents.
The Department verified the methodologies chosen by each of the
responding companies, and we noted no discrepancies between the
companies' records in the normal course of business and the
characteristics reported to us. We also note that each company sells a
different mix of specifications in the home market. Thus, the
similarity hierarchies can vary based on this fact. Therefore, we find
that the methodology used by POSCO to report physical characteristics
and matching hierarchies is accurate and reasonable under the
circumstances. In addition, in this case, the great majority of all of
the U.S. sales were matched to either identical, or functionally
identical, home market specifications. As a result, we have not
[[Page 73213]]
questioned the use of these hierarchies in supplemental questionnaires
or found specific faults with any of POSCO's selections. Thus, the
second and third choice for similar specifications are not relevant to
the margin calculations because these categories were not used in
matching.
Comment 4: Whether the Department should apply adverse facts available
for POSCO's reported downstream sales in the home market.
Petitioners claim that POSCO's reported sales and cost information
for affiliated service centers is significantly flawed and, as a
result, the Department should apply adverse facts available for POSCO's
reported downstream sales in the home market. Petitioners argue that
POSCO did not distinguish between prime and non-prime merchandise sold
by its affiliated service centers despite the Department's explicit
requests for that information. Petitioners state that the Department
discovered that POSCO's reporting of the PRIMEH Fields for sales made
by one service center was based entirely on the nature of the
merchandise purchased from POSCO, rather than on the nature of the
merchandise sold by the service center. Petitioners argue that while
the merchandise purchased from POSCO by one service center was reported
as prime material, that does not confirm the fact POSCO sold only prime
merchandise. Petitioners claim that the merchandise could have been
damaged during shipment or failed to meet customer-specified
characteristics that would warrant the production of non-prime
merchandise.
Petitioners further claim that POSCO failed to report affiliated
service centers' further processing costs for products produced by
POSCO. Petitioners argue that POSCO reported variable costs for the
affiliated service centers based solely on POSCO's own costs, as
opposed to the combined manufacturing costs of POSCO and its affiliated
service centers. Petitioners state that POSCO only provided cost
information for the unique products produced by the affiliated service
centers and did not provide the information requested by the Department
for the common products produced by both POSCO and the affiliated
service centers. Petitioners claim that POSCO withheld critically
important information and did not fully cooperate with the Department's
repeated requests and therefore, the Department should apply adverse
facts available.
POSCO argues that the Department verified the accuracy of its
reported downstream sales information. POSCO claims that the service
center's product code defines the merchandise that it is selling, not
the merchandise that it purchased. POSCO argues that the second and
third digits identify whether the merchandise was imported or purchased
domestically and the fourth and fifth digits of the code identifies the
specification of the merchandise being sold. Therefore, POSCO claims
that the service center is able to demonstrate that its sales of second
grade material were not from POSCO. POSCO states that it provided
complete and accurate answers to the Department's questions on
reporting the conditions of the merchandise.
POSCO states that it fully explained the basis for its methodology,
and the Department verified the accuracy of the reporting methodology.
POSCO claims that the Department verified that the additional cost has
a de minimis impact and is therefore, unnecessary for the service
centers to be included in the analysis.
Department's Position
We agree with POSCO. At verification, the Department conducted a
detailed examination of the reported downstream sales to determine the
accuracy of the reported characteristics and the methodology for
reporting any additional processing costs and expenses. See Sales
Verification Report, dated November 10, 1999, at 2. Therefore, we have
used the reported downstream sales in our analysis.
We agree with petitioners, in part, that POSCO failed to report the
reseller's further processing costs on the COP computer tape. At
verification, POSCO indicated that it did not include such costs in the
reported COPs because they would be negligible when included and
weight-averaged with POSCO's costs. See Cost Verification Report, dated
November 4, 1999, at 7. We tested this at verification and found that
POSCO's failure to include the resellers' further manufacturing costs
resulted in a minor understatement of COP. See Cost Verification
Report. We have increased the reported COP, based on our findings at
verification, to account for this understatement.
The Department normally requests responding companies to identify
whether sales are of prime or secondary merchandise in both the home
and U.S. markets to ensure that a proper comparison is made between
sales in both markets. See Original Questionnaire Response: Section B
and C (March 17, 1999). However, the Department will also consider the
burden on the responding company, whether the information is retained
in the normal course of business, and whether the requested information
is retrievable without undue burden. In the instant case, the
Department examined the records of the affiliated resellers which we
visited. We verified that one reseller does not maintain a product code
designation for non-prime or off-grade merchandise, thus rendering it
impossible for that reseller to identify possible sales of non-prime
merchandise. See Sales Verification Report, dated November 10, 1999 at
22. For the other reseller with which we conducted verification, we
noted no discrepancies in reviewing documentation to confirm its
assertion that it had no sales of non-prime merchandise purchased from
POSCO during the POI. See Sales Verification Report, dated November 10,
1999, at 25.
Based upon our examination of POSCO's records and its affiliated
resellers' records, the Department finds that POSCO's information was
properly reported to the Department as requested. Therefore, we have
continued to use all of POSCO's downstream sales in our analysis.
Comment 5: Facts Available for Certain Unique Product Costs
Petitioners argue that the Department should resort to adverse
facts available in adjusting POSCO's reported costs for certain
products. Petitioners claim that POSCO did not identify the unique
costs associated with producing products to various specified widths.
Petitioners state that POSCO indicated that it did not identify unique
costs for the width characteristic for cut-to-length plate although it
tracked the unique costs for hot-rolled plate and hot-rolled sheet
products. Petitioners claim that the Department confirmed that for
subject merchandise produced at the plate mill, POSCO's reported costs
did not reflect the differences in width. Petitioners argue that width
is an important physical characteristic in the Department's model match
hierarchy and that POSCO failed to cooperate to the best of its ability
to provide information requested by the Department.
POSCO claims that, as verified by the Department, the costs
associated with width are minor. POSCO states that width was not taken
into account in the product definition for plate products. POSCO argues
that the Department confirmed that any attempt to superimpose width as
a cost allocator raises serious risk that other costs would be
distorted in the process.
Department's Position: We agree with POSCO that the cost
differences associated with width are minor and that any attempt to
adjust for these differences could be distortive. As detailed in the
cost verification report,
[[Page 73214]]
we determined the minor cost differences associated with width (one of
several relevant physical characteristics) and found a way to isolate,
measure, and adjust for them. See Costs Verification Report, dated
November 4, 1999, at 5. However, POSCO's reported costs differ for
reasons unrelated solely to physical characteristics--POSCO's costs for
different products vary based on which plate mill will produce the
product as well as which blast furnace, steel making unit, and concast
unit will produce the slab. See POSCO Cost Verification Report, dated
November 10, 1999. Because each of these has different efficiencies and
standard costs, the same product (not to mention products whose only
difference is thickness) will have a different cost based on which mill
in which it was produced. As a consequence, cost differences are not
purely isolated to physical characteristics. Thus, applying an
adjustment factor based solely on physical characteristics to the
reported costs, which vary for reasons not associated with physical
characteristics, may not increase the accuracy of the reported costs.
We note that POSCO reported the actual costs it incurred to produce the
subject merchandise. For COP purposes, these costs are accurate and
reliable. However, for purposes of adjustments for physical differences
in merchandise, these costs are somewhat problematic in that POSCO
cannot always isolate cost differences purely associated with physical
differences (e.g., when identical products are produced at separate
facilities, production efficiencies become a factor in the calculation
of the cost of the product). In this case, the vast majority of price-
to-price comparisons are of identical merchandise. Therefore, any
adjustment would have a negligible effect.
Comment 6: Variable and Total Cost of Manufacture
Petitioners argue that POSCO misstates the burden of producing
complete and accurate data. They argue that the data provided to the
Department and petitioners was not readable due to the existence of
multiple VCOM values within a single CONNUM. Petitioners state that
POSCO's revised table of ``cost by CONNUMU,'' attached to the July 16,
1999 letter, is not an acceptable explanation of the previous
inadequate submission. In all cases, most of the sales represented by
the CONNUMU had been assigned one VCOM value, while other VCOM was
assigned to a much smaller number of sales. In POSCO's revised table,
the VCOM value which had previously been assigned to the smaller number
of sales for each CONNUMU is now identified as being the actual VCOM
value for all sales. Accordingly, petitioners feel that this is not a
logical explanation of POSCO's previous submission. In light of these
deficiencies in the database, petitioners recommend the Department
apply, as partial facts available, the highest calculated margin for
any CONNUM to each of these sales implicated by the deficiencies.
POSCO claims that its reported variable and total cost information
on the U.S. sales database is correct. POSCO asserts that an
inadvertent error in creating files caused different values in variable
costs for the same products in a previous submission. POSCO states that
the error has been corrected and subsequent databases have reported a
single variable cost and a single total cost of each unique CONNUM.
POSCO claims that the costs were fully and successfully verified by the
Department.
Department's Position
We agree with POSCO. Upon review of the record, we found that the
errors noted by petitioner made when POSCO filed its July 12, 1999,
response appear to be inadvertent. Subsequently, at the request of the
Department, POSCO corrected this error in its post-verification filing
on October 27, 1999. The Department has utilized the database filed on
October 27, 1999, with the unique variable cost of manufacturing and
total cost of manufacturing in its final determination.
Comment 7: Home Market Viability
Respondent claims that the issue regarding home market viability
raised by petitioners should be rejected by the Department. Respondent
argues that since petitioners did not raise that issue in their case
briefs, they have waived the right for consideration of the issue by
the Department.
Department's Position
The Department has not considered or substantially addressed this
issue in the instant final determination because petitioners
allegations were untimely. For a full discussion, see Particular Market
Situation, section, above.
Continuation of Suspension of Liquidation
In accordance with section 735(c)(1)(B) of the Act, we are
directing the Customs Service to continue to suspend liquidation of all
entries of subject merchandise from Korea that were entered, or
withdrawn from warehouse, for consumption on or after July 19, 1999
(the date of publication of the Department's preliminary determination)
for DSM, and those companies which received the ``all others'' rate.
POSCO's rate continues to be de minimis, as it was in the Preliminary
Determination; therefore the Department will not suspend liquidation of
these entries. The Customs Service shall continue to require a cash
deposit or posting of a bond equal to the estimated amount by which the
normal value exceeds the U.S. price as shown below. These suspension of
liquidation instructions will remain in effect until further notice.
The weighted-average dumping margins are as follows:
------------------------------------------------------------------------
Weighted-average margin
Exporter/Manufacturer percentage
------------------------------------------------------------------------
Pohang Iron & Steel Co., Ltd.............. 0.05 de minimis
Dongkuk Steel Mill Co., Ltd............... 2.98
All Others................................ 2.98
------------------------------------------------------------------------
ITC Notification
In accordance with section 735(d) of the Act, we have notified the
International Trade Commission (``ITC'') of our determination. Because
our final determination is affirmative, the ITC will, within 45 days,
determine whether these imports are materially injuring, or threatening
material injury to, the U.S. industry. If the ITC determines that
material injury, or threat of material injury does not exist, the
proceeding will be terminated and all securities posted will be
refunded or canceled. If the ITC determines that such injury does
exist, the Department will issue an antidumping duty order directing
Customs officials to assess antidumping duties on all imports of the
subject merchandise entered, or withdrawn from warehouse, for
consumption on or after the effective date of the suspension of
liquidation.
This determination is issued and published in accordance with
sections 735(d) and 777(i)(1) of the Act.
Dated: December 13, 1999.
Robert S. LaRussa,
Assistant Secretary for Import Administration.
[FR Doc. 99-33234 Filed 12-28-99; 8:45 am]
BILLING CODE 33510-DS-P
