[Federal Register Volume 62, Number 86 (Monday, May 5, 1997)]
[Notices]
[Pages 24394-24414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11384]
[[Page 24394]]
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DEPARTMENT OF COMMERCE
International Trade Administration
[A-588-840]
Notice of Final Determination of Sales at Less Than Fair Value:
Engineered Process Gas Turbo-Compressor Systems, Whether Assembled or
Unassembled, and Whether Complete or Incomplete, from Japan
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
EFFECTIVE DATE: May 5, 1997.
FOR FURTHER INFORMATION CONTACT: Louis Apple, Import Administration,
International Trade Administration, U.S. Department of Commerce, 14th
Street and Constitution Avenue, N.W., Washington, D.C. 20230;
telephone: (202) 482-1769, respectively.
THE APPLICABLE STATUTE: Unless otherwise indicated, all citations to
the Tariff Act of 1930, as amended (``the Act''), are references to the
provisions effective January 1, 1995, the effective date of the
amendments made to the Act by the Uruguay Round Agreements Act
(``URAA''). In addition, unless otherwise indicated, all citations to
the Department's regulations are to the current regulations, as amended
by the interim regulations, published in the Federal Register on May
11, 1995 (60 FR 25130).
FINAL DETERMINATION: We determine that engineered process gas turbo-
compressor systems (``EPGTS''), whether assembled or unassembled, and
whether complete or incomplete, from Japan are being, or are likely to
be, sold in the United States at less than fair value (``LTFV''), as
provided in section 735 of the Act.
Case History
Since the preliminary determination in this investigation (Notice
of Preliminary Determination and Postponement of Final Determination:
Engineered Process Gas Turbo-Compressor Systems, Whether Assembled or
Unassembled, and Whether Complete or Incomplete from Japan (61 FR
65013, December 10, 1996) (``Preliminary Determination'')), the
following events have occurred.
In January 1997, respondents Mitsubishi Heavy Industries, Ltd.
(``MHI'') and Mitsubishi Corporation (``MC'') submitted supplemental
questionnaire responses to the Department.
In February 1997, we verified the questionnaire responses of MHI
and MC in Tokyo and Hiroshima, Japan, and Houston, Texas. On March 10
and 11, 1997, the Department issued its reports on verification
findings.
On February 18, 1997, per the Department's instructions in the
preliminary determination, MHI, MC, and the petitioner, Dresser-Rand
Company, submitted comments on the issue of ``affiliation.'' On
February 21 and 24, 1997, MC and MHI, respectively, requested the
Department to strike certain portions of the petitioner's submission on
affiliation because it allegedly contained untimely new factual
information. After reviewing the petitioner's submission, the
Department determined on March 13, 1997, that certain information
presented therein constituted new factual information, untimely filed,
under section 353.31(a)(1)(i) of the Department's regulations, and
informed the petitioner that unless otherwise discussed in the
Department's verification reports, the information at issue would not
be considered for purposes of the final determination.
On February 28, 1997, per the Department's instructions in the
preliminary determination, the petitioner and MHI submitted comments on
the scope of the investigation, and suspension of liquidation
instructions.
The petitioner, MHI, and MC submitted case briefs on March 18,
1997, and rebuttal briefs on March 24, 1997. The Department held a
public hearing for this investigation on April 1, 1997.
Scope of Investigation
The products covered by this investigation are turbo-compressor
systems (i.e., one or more ``assemblies'' or ``trains'') which are
comprised of various configurations of process gas compressors, drivers
(i.e., steam turbines or motor-gear systems designed to drive such
compressors), and auxiliary control systems and lubrication systems for
use with such compressors and compressor drivers, whether assembled or
unassembled, and whether complete or incomplete. One or more of these
turbo-compressor assemblies or trains, may be combined. The systems
covered are only those used in the petrochemical and fertilizer
industries, in the production of ethylene, propylene, ammonia, urea,
methanol, refinery and other petrochemical products. This investigation
does not encompass turbo-compressor systems incorporating gas turbine
drivers, which are typically used in pipeline transmission, injection,
gas processing, and liquid natural gas service.
The scope of this investigation excludes spare parts that are sold
separately from a contract for an EPGTS. Parts or components imported
for the revamp or repair of an existing EPGTS, or otherwise not
included in the original contract of sale for the EPGTS of which they
are intended to be a part, are expressly excluded from the scope.
Compressors are machines used to increase the pressure of a gas or
vapor, or mixture of gases and vapors. Compressors are commonly
classified as reciprocating, rotary, jet, centrifugal, or axial
(classified by the mechanical means of compressing the fluid), or as
positive-displacement or dynamic-type (classified by the manner in
which the mechanical elements act on the fluid to be compressed).
Subject compressors include only centrifugal compressors engineered for
process gas compression, e.g., ammonia, urea, methanol, propylene, or
ethylene service.
Turbines are classified (1) As steam or gas; (2) by mechanical
arrangement as single-casing, multiple shaft, or tandem-compound (more
than one casing with a single shaft); (3) by flow direction (axial or
radial); (4) by steam cycle, whether condensing, non-condensing,
automatic extraction, or reheat; and (5) by number of exhaust flows of
a condensing unit. Steam and gas turbines are used in various
applications. Only steam turbines dedicated for a turbo-compressor
system are subject to this investigation.
A motor and gear box may be used as a compressor driver in lieu of
a steam turbine. A control system is used to monitor and control the
operation of a turbo-compressor system. A lubrication system is
engineered to support a subject compressor and steam turbine (or motor/
gear box).
A typical EPGTS consists of one or more compressors driven by a
turbine (or in some cases a motor drive). A compressor is usually
installed on a base plate and the drive is installed on a separate base
plate. The turbine (or motor drive) base plate will typically also
include any governing or safety systems, couplings, and a gearbox, if
any. The lube and oil seal systems for the turbine and compressor(s)
are usually mounted on a separate base plate.
The scope of this investigation covers both assembled and
unassembled EPGTS from Japan. Because of their large size, EPGTS and
their constituent parts are typically shipped partially assembled (or
unassembled) to their destination where they are assembled and/or
completed prior to their commissioning.
[[Page 24395]]
The scope of this investigation also covers ``complete and
incomplete'' EPGTS from Japan. A ``complete'' EPGTS covered by the
scope consists of all of the components of an EPGTS (i.e., process gas
compressor(s), driver(s), auxiliary control system(s) and lubrication
system(s)) and their constituent parts, which are imported from Japan
in assembled or unassembled form, individually or in combination,
pursuant to a contract for a complete EPGTS in the United States. An
``incomplete'' EPGTS covered by the scope of this investigation
consists of parts of an EPGTS imported from Japan pursuant to a
contract for a complete EPGTS in the United States, which taken
altogether, constitute at least 50 percent of the cost of manufacture
of the complete EPGTS of which they are a part. (See Comment 1 of the
``Interested Party Comments'' section of this notice for discussion on
the definition of ``incomplete EPGTS'' covered by the scope of this
investigation and the methodology the Department will use to calculate
the cost of manufacture.)
EPGTS imported from Japan as an assembly or train (i.e., including
turbines, compressors, motor and gear boxes, control systems and
lubrication systems, and auxiliary equipment) may be classified under
Harmonized Tariff Schedule of the United States (``HTSUS'') subheading
8414.80.2015, which provides for centrifugal and axial compressors. The
Customs Service may view the combination of turbine driver and
compressor as ``more than'' a compressor and, as a result, classify the
combination under HTSUS subheading 8419.60.5000.
Compressors for use in EPGTS, if imported separately, may also be
classified under HTSUS subheading 8414.80.2015. Parts for such
compressors, including rotors or impellers and housing, are classified
under HTSUS subheading 8414.90.4045 and 8414.90.4055.
Steam turbines for use in EPGTS, if imported separately, may be
classified under the following HTSUS subheadings: 8406.81.1020 (steam
turbines, other than marine turbines, stationary, condensing type, of
an output exceeding 40 MW); 8406.82.1010 (steam turbines, other than
marine turbines, stationary, condensing type, exceeding 7,460 Kw);
8406.82.1020 (steam turbines, other than marine turbines, stationary,
condensing type, exceeding 7,460 Kw, but not exceeding 40 MW);
8406.82.1050 (steam turbines, other than marine turbines, stationary,
other than condensing type, not exceeding 7,460 Kw); 8406.82.1070
(steam turbines, other than marine turbines, stationary, other than
condensing type, exceeding 7,460 Kw, but not exceeding 40 MW). Parts
for such turbines are classified under HTSUS subheading 8406.90.2000
through 8406.90.4580.
Control and other auxiliary systems may be classified under HTSUS
9032.89.6030 (``automatic regulating or controlling instruments and
apparatus: complete process control systems'').
Motor and gear box entries may be classified under HTSUS subheading
8501.53.4080, 8501.53.6000, 8501.53.8040, or 8501.53.8060. Gear speed
changers used to match the speed of an electric motor to the shaft
speed of a driven compressor, would be classified under HTSUS
subheading 8483.40.5010.
Lubrication systems may be classified under HTSUS subheading
8414.90.4075.
Although the HTSUS subheadings are provided for convenience and
customs purposes, our written description of the scope of this
investigation is dispositive.
Period of Investigation (``POI'')
The POI is April 1, 1995 through May 31, 1996.
Product Comparisons
Although the home market was viable, in accordance with section 773
of the Act, we based normal value (``NV'') on constructed value
(``CV'') because we determined that the merchandise sold in the home
market during the POI was not sufficiently similar to that sold in the
United States to permit proper price-to-price comparisons.
Fair Value Comparisons
To determine whether MHI's sales of EPGTS to the United States were
made at LTFV, we compared constructed export price (``CEP'') to NV, as
described in the ``Constructed Export Price'' and ``Normal Value''
sections of this notice.
Constructed Export Price
Pursuant to section 772 of the Act, the basis for the fair value
comparison is the price at which the merchandise is first sold to an
unaffiliated purchaser in the United States or for export to the United
States. MHI reported its sale to MC, a Japanese trading company, as an
export price (``EP'') sale on the grounds that MC is an unaffiliated
purchaser and, at the time of sale, MHI knew that the merchandise was
intended for export to the United States. However, based on our
examination of the sales documentation provided by MHI and MC and our
findings at verification, which demonstrate that MC and its U.S.
subsidiary, Mitsubishi International Corporation (``MIC''), acted as
MHI's selling agents in the U.S. transaction under investigation, we
have determined for purposes of this final determination that the
proper basis for the fair value comparison is the sale by MHI, through
MC/MIC, to the U.S. customer. Because MHI made this transaction through
agents acting on its behalf and thus subject to its control, we
determined that MHI and MC/MIC are affiliated within the meaning of
section 771(33) of the Act. Because the function of MC/MIC, as U.S.
sales agents, is beyond that of a ``processor of sales-related
documentation'' and a ``communications link'' with the unaffiliated
U.S. customer, we determined that the use of CEP is appropriate in the
final determination of this case (see Final Determination of Sales at
Less Than Fair Value: Large Newspaper Printing Presses and Components
Thereof, Whether Assembled or Unassembled, from Germany, 61 FR 38166,
38175-76 (July 23, 1996) (``LNPPs from Germany'')). (See Comment 2 in
the ``Interested Party Comments'' section of this notice for discussion
of principal-agency relationship between MHI and MC/MIC.)
In accordance with sections 772(b) and (c) of the Act, we
calculated CEP based on a packed, FOB Japanese port, duty paid price,
inclusive of spare parts, to an unaffiliated customer in the United
States through a Japanese trading company affiliated by virtue of an
agency relationship with the Japanese producer. We excluded from this
price any post-POI price amendments, in accordance with our standard
practice. (See LNPPs from Germany 61 FR at 38181-2). We made a
deduction from the starting price for MIC's cost of the non-subject
parts which were included in the U.S. sale. (See Comment 5 of the
``Interested Party Comments'' section of this notice.)
We also made further deductions from CEP pursuant to section 772(c)
and (d) of the Act based on the same methodology used in the
preliminary determination with the following exceptions:
1. We deducted the product liability expense which was reported in
the respondent's January 27, 1997, U.S. sales listing.
2. We deducted performance testing cost as a direct selling
expense. We reclassified the reported performance testing cost from a
manufacturing cost to a direct selling expense based on verification
findings which demonstrated that this type of test was optional and
only undertaken at the specific request of the customer in the
[[Page 24396]]
contract governing the sale. (See March 11, 1997, Report on the
Verification in Tokyo, Japan and Houston, Texas of Mitsubishi Heavy
Industries, Ltd. (``MHI'') and Mitsubishi Heavy Industries America
(``MHIA'') (``MHI Sales Verification Report'') at 31.)
3. We also deducted indirect selling expenses incurred by MHI that
related to economic activity in the United States, including certain
selling expenses incurred in Japan on the U.S. sale. (See Comment 6 in
the ``Interested Party Comments'' section of this notice.) (See also
April 24, 1997, Memorandum to the File Re: Office of Accounting
Constructed Value and Constructed Export Price Adjustments for Final
Determination)(``Calculation Memorandum'').)
4. We also deducted U.S. import duties as well as selling expenses
incurred by MC/MIC (see Comment 5 of the ``Interested Party Comment''
section of this notice).
Normal Value
For the reasons outlined in the ``Product Comparisons'' section of
this notice, we based NV on CV.
In accordance with section 773(e)(1) of the Act, we calculated CV
based on the sum of MHI's cost of materials, fabrication, selling,
general, and administrative expenses (``SG&A''), and profit, plus U.S.
packing costs.
We based CV on the same methodology used in the preliminary
determination with the following exceptions:
1. We increased cost of manufacture (``COM'') to include the
inventory loss related to the U.S. sale.
2. We recalculated the home market direct and indirect selling
expense rates based on only the home market sales made in the ordinary
course of trade. (See Comment 6 in the ``Interested Party Comments''
section of this notice.)
3. We recalculated CV profit based on only the home market sales
made in the ordinary course of trade.
4. We increased the COM of not only the U.S. sale, but also that of
the home market sales, to account for the excess of affiliated
suppliers' COP over the transfer price charged to MHI. (See Comment 16
in the ``Interested Party Comments'' section of this notice.)
Price to CV Comparisons
In comparing CEP to CV, we deducted from CV the weighted-average
home market direct selling expenses, including imputed credit and
installation-related expenses, pursuant to section 773(a)(8) of the
Act. (See Comment 10 in the ``Interested Party Comments'' section of
this notice.)
Currency Conversion
We made currency conversions into U.S. dollars based on the rate
applicable on the date of the U.S. sale due to a sustained movement in
the exchange rate, as calculated by the Department using the
methodology outlined in Policy Bulletin 96-1: Currency Conversions, 61
FR 9434 (March 8, 1996) (``Policy Bulletin 96-1'').
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 from the benchmark rate by 2.25 percent. The benchmark is
defined as the rolling average of rates for the past eight weeks. When
we determine a fluctuation existed, we substitute the benchmark for the
daily rate, in accordance with established practice. Further, section
773A(b) 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 methodology, see Policy
Bulletin 96-1.) Such an adjustment period is required only when a
foreign currency is appreciating against the U.S. dollar. The use of
such an adjustment period was warranted in this case because the
Japanese yen underwent a sustained movement. (See Comment 15 of the
``Interested Party Comments'' section of this notice.)
Verification
As provided in section 782(i) of the Act, we verified the
information submitted by MHI and MC for use in our final determination.
We used standard verification procedures, including examination of
relevant accounting and sales/production records and original source
documents provided by respondents.
Interested Party Comments
Comment 1: Scope of Investigation.
The scope of this investigation covers EPGTS used in the
petrochemical and fertilizer industries, whether assembled or
unassembled, and whether complete or incomplete. (See Initiation of
Antidumping Investigation of Sales at Less Than Fair Value: EPGTS,
Whether Assembled or Unassembled, and Whether Complete or Incomplete,
from Japan (61 FR 28164, June 4, 1996)(``Initiation'').)
Since the initiation of this investigation, the petitioner and MHI
have debated two scope-related issues: (1) The definition of
``incomplete'' EPGTS, and (2) the end uses of the EPGTS covered by the
scope. For purposes of the preliminary determination, we clarified the
scope of this investigation to include, among other things: (1) EPGTS
used in the production of refinery products, and (2) ``incomplete''
EPGTS if the EPGTS parts (otherwise referred to as ``components'' or
``subcomponents'') imported from Japan pursuant to a contract for a
complete EPGTS in the United States, taken altogether, constitute at
least 50 percent of the cost of manufacture of the complete EPGTS of
which they are a part. (See Preliminary Determination at 65015.) Both
of these issues, the parties' comments, and the Department's position
are summarized below. For a complete discussion and analysis of these
issues, see April 24, 1997, Memorandum to Jeffrey Bialos, Principal
Deputy Assistant Secretary for Import Administration, from The Team Re:
Scope Issues (``April 24, 1997, Scope Decision Memorandum'').
1. Definition of Incomplete EPGTS
The petitioner asserts that the intent of the petition was to cover
turbo-compressor ``systems'' engineered (custom made) for a particular
plant process, and typically sold as a single unit at a single
negotiated price, whether complete or incomplete. According to the
petitioner, the intent of the petition was to include incomplete EPGTS
and incomplete components if sold as part of a complete EPGTS. In order
to define a subject incomplete EPGTS for purposes of the final
determination, the petitioner argues that the Department should combine
a ``cost-based'' test with an ``essential components'' test.
Specifically, the petitioner maintains that the Department should amend
its preliminary scope language to indicate that imports of EPGTS
compressors, steam turbines, or any collection of components from Japan
accounting for at least 50 percent of the total cost of manufacture of
the EPGTS are subject merchandise. In the petitioner's opinion, this
two-pronged approach is simple to administer, avoids circumvention and
is consistent with the intent of the petition and the record throughout
this investigation.
The petitioner believes that many of the problems identified by the
Department in the final determination of LNPPs from Germany and Japan
which discouraged the Department from pursuing an ``essence'' test and
[[Page 24397]]
encouraged it to pursue a ``cost-based'' test (e.g., the difficulty in
identifying the ``essence'' of a LNPP, given the great number of parts
and subcomponents; the insignificant portion of total value of the LNPP
represented by many of the critical elements identified by the
petitioner) are not present in this case. According to the petitioner,
there are four major components (i.e., compressor, driver (steam
turbine or motor/gear), control system, and lubrication system);
however, the compressor and turbine are the heart of the turbo-
compressor system both in terms of both function and manufacturing
cost.1 The petitioner cites several cases where the
Department applied essence criteria to define the scope of the
investigation where, as here, the essential components were readily
identifiable and dedicated for use in the complete product.
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\1\ According to the petitioner, the compressor and turbine
together account for 80-90 percent of the total system cost.
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On the other hand, if the design and engineering of the turbo-
compressor system takes place in Japan, but the compressor is
subcontracted to another country, the petitioner maintains that it is
appropriate to invoke the 50 percent cost-based test to determine
whether the incomplete EPGTS should be covered by the scope of the
investigation. This would also address the situation where an
incomplete compressor is imported, to be assembled after importation
with other components, or where the foreign manufacturer produces and
supplies nearly an entire turbo-compressor system, but neither the
compressors nor the steam turbines are complete upon importation.
Because individual components do not constitute an incomplete EPGTS
unless they are used to fulfill an EPGTS contract, the petitioner notes
that if the Japanese producer is supplying only individual components
to be included in a system manufactured by a U.S. or third country
supplier, the system will not be of Japanese origin and the components
will not be covered.
According to the petitioner, the purpose for establishing a two-
part test is to avoid, whenever possible, the complexity of a cost-
based test and to remove any incentive for a foreign manufacturer to
circumvent the ``essence'' test by shipping its compressors or steam
turbines in incomplete form. The petitioner notes further that its
proposed two-prong approach places no undue burden on the importer to
determine whether the components imported from Japan are essential
components or account for 50 percent of the cost of manufacture of a
system, and prevents the suspension of liquidation of non-scope
merchandise unless the foreign producer and U.S. importer do not comply
in a timely manner with the Department's certification requirements.
The petitioner also requests that the Department further define the
calculation methodology to be applied in the performance of the cost-
based test, asserting that all design and engineering costs, overhead,
testing costs, installation costs, and other manufacturing expenses
incurred in Japan with respect to the complete EPGTS (including the
costs of any production assists provided by the Japanese manufacturer
to U.S. or third country subcontractors) should be included in the
Japan content portion of the cost-based test. Accordingly, the
petitioner requests that the certification provided to Customs in the
case of merchandise alleged to be outside the scope of any order in
this case be amended to include such costs explicitly.
Lastly, while the petitioner acknowledges that the Department's
industry support determination was based on the producers of complete
turbo-compressor systems, the petitioner asserts that the producers of
complete EPGTS also produce incomplete EPGTS, and there is no evidence
that there are producers of incomplete EPGTS, including compressors and
turbines, in the United States other than those that the Department
considered in its industry support determination. The petitioner also
claims that complete and incomplete systems constitute a single like
product, and hence, support of only producers of complete systems in
the Department's industry support analysis is adequate. The petitioner
further maintains that it is irrelevant whether supporters of the
petition produced incomplete EPGTS, so long as they accounted for an
adequate percentage of production of the domestic like product, which
includes both complete and incomplete systems.
MHI argues that only complete systems are covered by the scope of
this investigation because only complete systems were subject to the
Department's industry support determination made prior to initiation,
and that determination cannot be revisited. MHI asserts that the
Department identified the domestic like product to be a complete system
and based its determination of industry support on the conclusion that
the petition was filed on behalf of the domestic industry. To the
extent that the Department finds that its industry support
determination covered something other than complete systems, MHI argues
that, at a minimum, the Department should not define a subject
incomplete EPGTS in terms of individual components, as suggested by the
petitioner's proposed ``essential components'' test, because this would
unlawfully expand the scope of the proceeding to include merchandise
(i.e., compressors and steam turbines) for which the Department did not
make a determination of industry support.
Further, MHI objects to the Department's use of a cost-based
approach to define ``incomplete EPGTS'' for which liquidation would be
suspended and, instead, proposes the adoption of a ``merchandise-
based'' approach whereby an incomplete system would be defined as two
or more system components, at least one of which is a compressor and
all of which are made in Japan. In MHI's opinion, the use of a cost-
based approach is inappropriate and unworkable because: (1) It does not
ensure that the order will cover only the merchandise produced by a
domestic industry for which the Department made its determination of
industry support; (2) it fails to identify subject merchandise in terms
of facts known at the time of importation; (3) there is uncertainty
with respect to the final cost of manufacture and the types of expenses
that should be included when calculating the final cost of manufacture
of the complete system; and (4) it is unlikely that the Japanese
producer will have available at the time of importation enough
information about the final cost of the system to allow it to complete
the requisite certification, particularly if the Japanese producer is
providing only a portion of a system which will be assembled or
completed with non-subject equipment produced by unaffiliated non-
Japanese manufacturers. In addition, MHI contends that even though a
cash deposit would not be required for EPGTS entries accompanied by a
certification that they constitute less than 50 percent of the cost of
manufacture of the complete system, the Department unlawfully has
directed Customs to suspend liquidation of allegedly non-subject
merchandise pending its determination of the final cost of the system.
According to MHI, duties may be imposed only on subject merchandise,
and the Department does not avoid this issue by waiving the cash
deposit requirement for merchandise certified to be outside the scope
of the order.
[[Page 24398]]
For these reasons, MHI asserts that the Department must adopt the
above-described ``merchandise-based'' definition of a subject
incomplete EPGTS for which liquidation would be suspended. In MHI's
view, its approach is more consistent with the Department's methodology
in past cases where essence criteria were used to define incomplete
merchandise covered by the scope. Also, MHI maintains that a
merchandise-based definition eliminates the problems inherent in both
the Department's and the petitioner's suggested definition of an
``incomplete'' system. Under MHI's definition, single components would
fall outside the scope, eliminating the possibility that the scope
could violate the Department's industry support determination. Further,
it would allow foreign manufacturers, U.S. importers, the Department,
and the Customs Service to determine at the time of importation whether
an entry is subject to the order and, thus, remove unnecessary
administrative burdens on all parties.
In addition, MHI contends that the petitioner's concern about
circumvention (which, in MHI's opinion, is not a valid concern in this
case) does not justify the cost-based test which would unlawfully
expand the scope of the investigation. Citing various past cases, MHI
points out that the Department has consistently rejected scope
expansions based on speculative allegations of circumvention and relied
on the circumvention provisions of the antidumping law to provide
relief even for petitioners who have direct evidence of circumvention.
DOC Position
We disagree with both the petitioner and respondent. In our
Preliminary Determination, we explained that because of their large
physical size, EPGTS are typically imported into the United States in
either partially assembled or disassembled form, perhaps in multiple
shipments over an extended period of time, and may require the addition
and integration of non-subject parts prior to, or during, the
installation process in the United States. Consequently, we stated that
we were concerned that because of the great number of parts involved,
there is the potential that the Customs Service may inadvertently
liquidate entries of subject merchandise based on its lack of
completeness at the time of importation. Therefore, for suspension of
liquidation purposes, we preliminarily decided to use the cost-based
test described above to determine what constitutes a subject incomplete
EPGTS. We noted that this approach has been used in past cases with
similar fact patterns. (See, e.g., LNPPs from Germany and Japan, 61 FR
38166, 38139, July 23, 1996).
In order to determine whether the imported merchandise constitutes
a subject incomplete EPGTS through the performance of the cost-based
test, we stated in our preliminary determination that we would have to
wait until all of the parts comprising an EPGTS are imported and the
complete EPGTS is produced. Thus, we suspended liquidation of all
importations of EPGTS parts from Japan at the preliminary cash deposit/
bond rate unless a certification was provided by the foreign
manufacturer/exporter that the parts to be imported, when taken
altogether, constitute less than 50 percent of the cost of manufacture
of the complete EPGTS of which they are a part.
For entries accompanied by the appropriate certification, we
directed the Customs Service to suspend liquidation at a zero deposit/
bond rate. We also required parties to provide to the Department in
advance of the entry with a copy of this certification along with the
following information which would be subject to the Department's review
and verification at a later date, if necessary: (1) The number of the
sales contract pursuant to which the parts are imported, (2) a
description of the parts included in the entry, (3) the actual cost of
the imported parts, (4) the most recent cost estimate for the complete
EPGTS and historical variance between estimated and actual costs, (5) a
schedule of parts shipments to be made pursuant to the particular EPGTS
contract, if more than one shipment is relevant, and (6) a schedule of
EPGTS production completion in the United States. (See Preliminary
Determination, 61 FR at 65018; and January 23, 1997, Letter from Louis
Apple to James Cannon et al. re: Clarification of Preliminary
Suspension of Liquidation Instructions * * * (``January 23, 1997,
Suspension of Liquidation Instructions Clarification Letter.'')
The scope of this investigation unambiguously covers EPGTS, whether
assembled or unassembled, and whether complete or incomplete. As stated
above, because of their large physical size, EPGTS are typically
imported into the United States in either partially assembled or
disassembled form, perhaps in multiple shipments over an extended
period of time, and may require the addition and integration of non-
subject parts prior to, or during, the installation process in the
United States. Given this fact, the Department, in its pre-initiation
analysis, included ``incomplete'' EPGTS within the scope of the
investigation to avoid creating loopholes for enforcement (including
those arising from differing degrees of completeness of the imported
merchandise) should an order result from this investigation. (See
October 8, 1996, Memorandum to Jeffrey Bialos, Principal Deputy
Assistant Secretary from The Team Re: Scope.) We were, and still are,
concerned that because of the great number of parts involved, the
Customs Service may inadvertently liquidate entries of subject
merchandise based on a lack of completeness at the time of importation.
The inclusion of the term ``incomplete'' in the scope, however, raised
the issue of how to define the minimum level of incompleteness on which
the Customs Service should suspend liquidation in order to maintain the
effectiveness of any order that may be issued. For purposes of the
preliminary determination, we defined this minimum level to be 50
percent of the cost of manufacture of the complete EPGTS. This approach
has been used in past cases with similarly complex merchandise and
importation processes (see LNPPs from Germany and Japan).
Further, contrary to MHI's suggestions, we note that from the
Department's standpoint, it is not, and never has been, the individual
components or subcomponents of the system per se that are at issue, but
the combination of these components or subcomponents (i.e., the extent
of an ``incomplete system'') imported pursuant to a contract for a
complete EPGTS in the United States that would constitute covered
merchandise whether by cost, essence, or some other approach (i.e., the
sum of importations pursuant to a contract for a highly engineered and
integrated turbo-compressor system, not the individual importations of
the components or subcomponents, themselves.)
In formulating our decision for purposes of the final
determination, we made the following observations. First, the intent of
the petition was to include incomplete EPGTS. (See, e.g., petition at 6
* * * '' [T]his petition encompasses turbo-compressor systems, * * *
whether assembled or unassembled and whether complete or incomplete at
the time of entry'' (emphasis added).) In this regard, we note our
authority to clarify the scope of an investigation, in general, and in
a manner which reflects the intent of the petition, in particular.
(See, e.g., LNPPs from Germany 61 FR at 38169 (July 23, 1996); Minebea
Co., Ltd. v. United States, 782 F. Supp. 117, 120 (CIT 1992) (the
Department uses its ``broad discretion to define and clarify the scope
of an antidumping
[[Page 24399]]
investigation in a manner which reflects the intent of the
petition'').)
Second, incomplete EPGTS have been covered by the scope of this
investigation since our initiation. (See Initiation at 28165 * * *
''The scope of this investigation includes incomplete and unassembled
systems.''); and Preliminary Determination at 65013, 65015).)
Third, our industry support determination did not preclude us from
considering less than complete systems in the scope of the
investigation. Our industry support determination was based on the
domestic like product which was defined as complete systems, including
individual components/subcomponents and combinations of components/
subcomponents to the extent they are designed and dedicated to a
specific system typically designed to contract specifications. (See
Initiation, 61 FR at 28164.) This follows from the fact that specific
components per se are not covered by the scope of the investigation
unless they are included in the contract for the initial system
designed and dedicated for use in the complete system. Therefore, a
showing of industry support by U.S. manufacturers of components or
subcomponents who do not manufacture or sell complete systems was not
necessary. We note further that our definition of like product with
respect to our industry support determination is consistent with the
International Trade Commission's definition of like product in its
preliminary injury determination.2 (See USITC Publication
2976 (July 1996) at 8-10.)
---------------------------------------------------------------------------
\2\ The ITC found preliminarily that complete and incomplete
systems are part of the same domestic like product based on
application of its semi-finished products analysis. The ITC stated
that: (1) there is no independent use for an incomplete system other
than to be assembled into a specific and complete system and,
therefore, an incomplete system is dedicated for use in that EPGTS
system; (2) incomplete and complete systems share many of the same
characteristics and functions; and (3) there does not appear to be
an established price for incomplete systems because complete systems
are manufactured pursuant to a contract; thus, there are no
independent sales or markets). See USITC Publication 2976 (July
1996) at 8-10.
---------------------------------------------------------------------------
In order to determine the level of industry support for the
petition, the Department contacted five U.S. companies identified by
the petitioner as producers of EPGTS, including Dresser-Rand Company,
and requested that they provide production data on the number of
compressor casings, (i.e., compressor shells which, by definition, are
not complete systems), and the number and value of complete systems
produced. Based on the information we received from these producers and
that contained in the petition, we concluded that the producers who
supported the petition accounted for more than 50 percent of the total
production of the domestic like product. (See Initiation; May 28, 1996,
Memorandum from Mary Jenkins and Howard Smith to The File Re: Industry
Support; and May 28, 1997, Initiation Checklist.) We note that there is
no evidence on the record indicating that there were U.S. producers of
the like product other than the five producers contacted by the
Department that should have been considered in its pre-initiation
industry support analysis.
Fourth, while both the petitioner and MHI seem to agree that as a
practical matter, an incomplete EPGTS must include a compressor (as it
is the most critical component which typically accounts for over 50
percent of the manufacturing cost of a complete EPGTS) we do not
believe that this 50 percent threshold is reached in a situation where
only a compressor is imported pursuant to a contract for a multi-train
EPGTS system which includes multiple compressors, turbines, and other
components.
Further, there are other difficulties inherent in accepting either
the petitioner's or MHI's approach. Because of the large number of
parts involved, the disassembly inherent in the importation process,
and the potential for multiple shipments, an ``essence'' approach is
difficult to administer by Customs without a comprehensive list of
parts (identified at the most minimal level of disassembly
realistically possible) comprising the essential complete component(s),
which has not been provided by the petitioner or respondent. While the
petitioner defines certain parts of a compressor and turbine in its
attempt to define ``incomplete compressors and turbines'' covered by
the scope in the petition,3 the parts identified do not
represent such a comprehensive list. Also, respondent's approach does
not resolve the question of whether the critical component(s) would
constitute subject merchandise if it were incomplete in some minor way.
---------------------------------------------------------------------------
\3\ The petitioner defines incomplete compressors and turbines
for purposes of the petition as follows: ``An incomplete compressor
* * * consists of either half of the casing * * * or the casing and
end-caps * * * or * * * the rotor, whether or not mounted * * *.''
``An ``incomplete'' steam turbine * * * includes (1) either half of
the turbine casing, whether or not mounted on a platform; or (2) the
turbine rotor, whether or not mounted in the casing.'' See petition
at 7 and 9.
---------------------------------------------------------------------------
In addition, we note that MHI's definition of ``incomplete,'' which
must include at least a complete compressor, restricts the scope much
further than the petition, the Department's initiation, and preliminary
determination. It would also allow an exporter to circumvent any order
resulting from this investigation, simply by subcontracting the
manufacture of the system compressor to another country.
In sum, we believe that the approach pursued in the preliminary
determination is reasonable, predictable, administrable, and consistent
with our industry support determination. Under this approach, an
imported incomplete system is covered by the scope of this
investigation to the extent that its parts (imported pursuant to a
contract for an EPGTS) comprise a certain minimum percentage of the
cost of manufacture of the complete system. In response to MHI's
argument that we would not know at the time of importation whether the
imported incomplete merchandise was subject to duty, we acknowledge
that in order to perform the cost-based test, we will have to wait
until all of the parts/components comprising the system are imported
and the complete system is produced, and that we will suspend
liquidation on all imported EPGTS parts in the meantime. However, in
the case of multiple shipments of components and component parts, the
necessity for all shipments to be completed before the Department could
determine whether or not the imported merchandise was subject to any
order that may be issued in this case would also be relevant to the
essence approach, in that the identification of the critical
component(s) could only take place after all importations have been
made.
Further, by suspending liquidation at a zero cash deposit rate if
the Japanese producer/exporter provides the appropriate certification
and the requisite data substantiating the certification that the cost
of the imported parts satisfies the 50 percent test, we believe that
the importer would be relieved of the financial burden of posting cash
deposits which would otherwise be required and not reimbursed until
such time as the Department was able to make a determination as to
whether the imported parts constituted subject merchandise (i.e., after
the EPGTS is completed in the United States). At the same time, this
approach provides sufficient safeguards to protect U.S. firms from
potentially dumped subject merchandise.
With respect to the respondent's concern that the Japanese producer
may not know the final costs of the system so as to be able to certify
accurately that the cost of the parts comprising the incomplete system
is less than 50 percent of the cost of manufacture of the
[[Page 24400]]
complete system if he is providing only a portion of the complete
system, we note that if an affiliate is supplying the additional parts
to complete the system pursuant to a contract in the United States, we
would naturally require that the Japanese producer/exporter provide,
with the assistance of its affiliate, the actual final costs of the
complete system. If an unaffiliated party is involved in the completion
of the system in the United States, we would require that the Japanese
producer/exporter include in its cost calculation the estimated or
actual price for the parts supplied by the unaffiliated party. If the
Japanese producer were supplying only individual components outside of
a contract for a complete system (i.e., not ``pursuant to a contract
for a complete EPGTS''), then its merchandise would not be covered by
the scope of the investigation and the issue is moot.
Therefore, for purposes of the final determination, we continue to
define ``incomplete'' EPGTS covered by the scope as we did in our
preliminary determination. Further, we appreciate the parties' concerns
over the methodology to be used to calculate the cost of manufacture of
the incomplete system in order to administer the cost-based test.
Consequently, we have determined that it is appropriate to calculate
this cost of manufacture inclusive of all costs incurred by the
producer in Japan, including design and engineering, materials,
overhead, quality control testing, and other manufacturing costs such
as engineering assists provided to U.S. or third country
subcontractors. In addition, we intend to issue suspension of
liquidation instructions pursuant to the final determination similar to
those issued in connection with the preliminary determination with some
modification. Specifically, we will modify these instructions, as
follows: (1) To suspend liquidation of EPGTS parts at a zero cash
deposit/bond rate if the interested party (i.e., the Japanese producer/
exporter or U.S. importer) provides the requisite data substantiating
its claim that the cost of the imported EPGTS parts satisfies the 50
percent test within the context of a scope inquiry proceeding; (2) to
require that the requisite data substantiating the interested party's
claim, followed by an appropriate certification, be provided to the
Department instead of to the Customs Service; (3) to include the cost
calculation methodology described above; (4) to require the provision
of certain additional information; and (5) to require that if the
foreign producer/exporter finds that the costs reported to the
Department were understated and that the cost of manufacture of the
imported elements will be over 50 percent of the cost of manufacture of
the EPGTS of which they are a part, that the party inform the
Department immediately. See ``Suspension of Liquidation'' section of
this notice for details.
2. EPGTS Used in the Production of Refinery Products
MHI argues that the Department unlawfully expanded the scope of the
investigation after initiation to include EPGTS used in the production
of refinery and other petrochemical (downstream) products because this
expansion included products outside the Department's determination of
industry support which cannot be revisited after the initiation phase
of an investigation. MHI contends that the record strongly suggests
that the Department's industry support determination was made only with
respect to the production of EPGTS used in the production of five
specific chemicals listed in the petition: ethylene, propylene,
ammonia, urea or methanol.
The petitioner contends that the Department properly clarified the
scope of the investigation to include EPGTS for use in the production
of refinery and other petrochemical products. The petitioner asserts
that the petition was intended to cover all EPGTS, not only the five
end uses specified in the notice of initiation. The petitioner also
asserts that the Department's scope clarification does not conflict
with the Department's industry support determination because the
producers consulted by the Department in its industry support
determination constitute the universe of EPGTS suppliers, including
EPGTS used in the production of refinery and other petrochemical
products.
DOC Position
We disagree with MHI for the reasons already outlined in our
October 8, 1996, decision memorandum on this topic. In that memorandum,
we stated that the petition was intended to cover EPGTS used to produce
refinery products, as well as the other end uses already specified in
the notice of initiation. It was never the Department's intention to
revise the scope to exclude merchandise which the petition intended to
cover. Rather, in an attempt to draft a clear and concise scope
definition, the Department altered the original scope language in the
petition, inadvertently limiting the end uses of the subject
merchandise beyond what was intended by the petition. We noted that the
Department has the discretion to clarify the scope at any time during
the investigation in general, and in a manner which reflects the intent
of the petition, in particular. (See, e.g., LNPPs from Germany, 61 FR
at 38169; and Minebea Co., Ltd. v. United States.)
Accordingly, we clarified the scope to include EPGTS used in the
production of refinery products. We noted that this clarification did
not conflict with our industry support determination prior to the
initiation of this investigation. Our industry support determination
related to the production of EPGTS systems used generally in the
petrochemical and fertilizer industries, without distinction based on
the type of application within these industries (e.g., refinery,
ethylene, etc.). (See October 8, 1996 Memorandum to Jeffrey Bialos from
the Team Re: Scope.) Moreover, there is no evidence on the record to
indicate that there were U.S. producers of EPGTS used in the
manufacture of refinery products other than those contacted by the
Department in its industry support determination that should have been
considered in the Department's analysis. As stated in our May 28, 1996
Initiation Checklist, ``* * * we contacted all known producers and
asked them to provide production data * * *.'' (See also Initiation, 61
FR at 28164.)
Therefore, for purposes of the final determination, we find no
reason to depart from our original decision to clarify the scope of the
investigation to include EPGTS used in the production of refinery
products.
Comment 2: Agency vs. Reseller.
Throughout this investigation, the petitioner and MHI have argued
over whether EP or CEP methodology should be used to establish the
basis for the U.S. starting price. In this case, MHI sold subject
merchandise to MC (a Japanese trading company) which, in turn, sold
merchandise to the U.S. customer through MIC (MC's U.S. subsidiary).
MHI reported its sale to MC as an EP transaction on the grounds that MC
is allegedly an unaffiliated reseller and, at the time of sale, MHI
knew that the merchandise was intended for export to the United States
(i.e., the ``trading company'' rule). In our preliminary determination
in this investigation, we determined that MC and MIC were acting as
MHI's selling agents, not as independent resellers, in the transaction
under investigation. This determination was made based on our
preliminary examination of the sales documentation provided by MHI,
which showed that MHI played an integral role in the U.S. sale.
Accordingly, we determined preliminarily that the
[[Page 24401]]
proper basis for the fair value comparison was the sale by MHI, through
MC/MIC, to the U.S. customer. Because MHI made this transaction through
a U.S. agent which was acting on its behalf, we preliminarily
determined that the use of CEP, rather than EP, was appropriate. (See
Preliminary Determination, 61 FR at 65013.)
The petitioner, MHI, and MC submitted extensive comments in their
case and rebuttal briefs on this topic for purposes of the final
determination. These comments and the Department's position are
summarized below. For a complete discussion and analysis, see April 24,
1997, Memorandum to Jeffrey Bialos, Principal Deputy Assistant
Secretary for Import Administration, from The Team Re: Whether MC and
its U.S. Subsidiary, MIC, Acted as Agents of MHI or Independent
Resellers in the U.S. Sale Made to (the U.S. Customer), and the
Consequences of this Finding in Determining the Appropriate Basis for
U.S. Price (``April 24, 1997, Agency Decision Memorandum'').
The petitioner argues that the Department should continue to treat
the U.S. sale as a CEP sale in the final determination on the grounds
that MC/MIC and MHI are ``affiliated persons'' under section 771(33)(G)
of the Act because in the negotiation and sale of MHI's EPGTS to the
U.S. customer, MC and MIC acted as sales agents.4 The
petitioner states that the record evidence, augmented by verification
findings, establishes that MHI was integrally involved throughout the
sales negotiation process and that MC/MIC acted as agents for the
producer, not as independent purchasers/resellers. The petitioner
points to various facts on the record which reveal that MHI effectively
controlled the price and all other material terms of sale which were
ultimately agreed upon with the U.S. customer such as: (1) There were
both direct and indirect communications between MHI and the U.S.
customer throughout the transaction; (2) there were no significant
differences between MIC's bid proposals to the U.S. customer for the
subject merchandise which were ultimately accepted by the U.S. customer
and those prepared by MHI for MC/MIC; (3) inquiries from the U.S.
customer on the cost impact of proposed specification changes, both in
the pre-and post-sale period, were relayed by MIC directly to MHI and
MHI issued cost impact reports to the U.S. customer via MIC, except in
one case in which MHI dealt directly with the customer; and (4) MC and
MIC do not possess the necessary technical capacity or expertise
regarding cost, price, production/delivery schedules and post-sale
servicing to negotiate the U.S. sale.
---------------------------------------------------------------------------
\4\ The petitioner also argues that MHI and MC/MIC are otherwise
affiliated within the meaning of section 771(33)(F) of the Act. That
is, even assuming MC and MIC did not act as agents for MHI, the
petitioner maintains that the overall corporate relationship between
the companies, including equity ownership, common directors, and
numerous other ties establish that MC and MIC were, in effect,
controlled by MHI.
---------------------------------------------------------------------------
Further, the petitioner asserts that both under pre- and post-URAA
antidumping law and practice, MC and MIC would be considered affiliated
parties as MHI's agents, and thus their sales would warrant CEP
treatment. In addition, the petitioner notes that the ``trading
company'' rule does not apply to transactions between affiliated
parties or between agents and principals, such as the transaction at
issue in this case.
MHI argues that the Department's decision to treat MHI's U.S. sale
as a CEP sale in the preliminary determination based on its finding
that MC/MIC acted as MHI's U.S. selling agents, contradicts the
statute, Department practice, and the facts of this investigation. MHI
contends that the Department's preliminary analysis was flawed for
several reasons. First, MHI maintains that MHI's/MC's relationship
fails to meet the criteria for establishing an agency relationship and
the record establishes that MC was a purchaser of MHI's merchandise.
While MHI admits that some of the facts on the record may show that MHI
and MC acted cooperatively in making the U.S. sale, MHI asserts that
this cooperation does not diminish the fact that MHI and MC were still
independent companies, each seeking to maximize its own profit, and
does not provide a basis for determining that an agency relationship
existed. Citing Restatement (Second) of Agency section 12-14 (1957)
(``Restatement''), MHI asserts that a principal/agency relationship is
characterized by three criteria, all of which must be met in order for
an agency relationship to exist, but none of which are met in this
case: (1) The agent must have authority to alter the principal's legal
relationship to third parties; (2) the agent must have a fiduciary duty
to the principal or must act primarily for the benefit of the
principal; and (3) the principal must have the right to control the
conduct of the agent with respect to matters entrusted to him. Among
other things, MHI points out that the pre- and post-contract
correspondence reviewed by the Department confirms that, especially as
to commercial matters, the U.S. customer dealt almost exclusively with
MIC; no documents on the record establish that MC bound or was able to
bind MHI to the U.S. customer or to any other third party. MHI points
to other facts on the record to demonstrate that MHI and MC acted as
independent companies, each operating on its own behalf and not
controlling the other.
Further, MHI explains that if the factors enumerated in section 14J
of the Restatement (which assist in distinguishing an agent from a
reseller) are applied to the facts of this case, it reveals that MC was
a purchaser and reseller of MHI's merchandise. MHI points out: (1) The
sales documentation on the record demonstrates that only MIC had direct
communication with the customer on commercial matters prior to and
after sale, and MHI was involved in post-sale logistical and technical
negotiations with the U.S. customer; (2) the sales documentation
submitted by MHI established that title and risk of loss was
transferred from MHI to MC; (3) MC's scope of supply to the U.S.
customer differed from MHI's scope of supply to MC; (4) MC had the
right to retain the difference between what it paid to MHI and the
revenue it received from the U.S. customer; (5) MC had the right to
deal with the goods of persons other than MHI, as evidenced by examples
of head-to-head competition between the two companies in sales of
subject and non-subject merchandise during the POI; and (6) while MHI's
identity was disclosed to the U.S. customer because of the custom-built
nature of the goods and the fact that the manufacturers are specified
in the customer's request for quotation, MIC dealt directly with the
U.S. customer in its own name, and not on MHI's behalf.
Second, MHI contends that the rejection of prices between
unaffiliated parties for purposes of calculating CEP contradicts the
language and the logic of the Act. MHI asserts that the Department has
no legal authority to reject the sale price between two unaffiliated
parties and to resort to CEP methodology, even if it finds an agency
relationship based on cooperative marketing. MHI explains that under
pre-URAA law (section 771(13) of the Act), the Department was permitted
to collapse a principal and its agent for purposes of determining U.S.
price. According to MHI, the URAA (section 771(33) of the Act, as
explained in the Statement of Administrative Action (SAA) at 153)
repealed this provision and replaced it with the requirement that
prices may be rejected only between affiliated parties. MHI argues that
in order for the Department to make a determination of affiliation, it
must find that ``control,'' as defined under section 771(33) of the
Act, exists outside
[[Page 24402]]
and independent of the transaction under investigation. According to
MHI, ``control'' must be interpreted as the ability to force another
party to act against its own economic interests.
Third, MHI asserts that the Department's departure in its
preliminary determination from the ``trading company'' rule without
explanation was improper. MHI states that under normal practice, the
Department will treat a respondent's sale to a trading company as a
U.S. sale if the foreign manufacturer knows at the time of sale that
the merchandise is destined for the United States. While MHI reported
its U.S. sale in line with this settled practice, MHI asserts that the
Department rejected it without explanation.
Fourth, MHI argues that the U.S. sale meets the requirements of an
EP sale in accordance with section 772(a) of the Act and the
Department's proposed regulations (19 CFR 351.401). MHI contends that
its U.S. sale is an EP sale because: (1) MHI sold the merchandise to MC
prior to exportation; no inventorying was required or performed; and
(2) MHI's U.S. economic activity for this sale was de minimis and its
U.S. affiliate, MHIA, at most functioned as a communications link with
MHI's head office and Hiroshima plant on technical issues. Because
MHI's U.S. sale has none of the characteristics of a CEP sale, MHI
concludes that it should be treated as an EP sale.
Finally, MHI maintains that the existence of an agency relationship
does not convert a sale to CEP that would otherwise be classified as an
EP transaction. MHI argues that nothing in the Act or the Department's
proposed regulations support the conclusion that the involvement of an
unaffiliated party (even if characterized as an agent) itself, warrants
CEP methodology. MHI points out that considering a sale between a
principal and end user through an unaffiliated selling agent as a CEP
transaction ignores the purpose for distinguishing EP and CEP
transactions and results in distortive antidumping analysis. MHI
explains that the adjustments to CEP which are not relevant to EP exist
to eliminate distortions caused by selling functions and associated
profits accruing to the manufacturer by reason of sales activities in
the United States. In this case, however, MHI asserts that no U.S.
activities or profits accrue to the manufacturer where it does not
operate in the United States. Since the sale between the manufacturer
and the end user is an arm's-length border price, albeit negotiated
through the agent, no purpose is served by treating the transaction as
CEP merely based on the agent's involvement. Nothing in the nature of
the agency relationship suggests that the agent's commission from the
manufacturer would not be at arm's length. MHI states further that
under CEP analysis, the agent's commission would not be treated as a
circumstance of sale adjustment, but as affiliated party activity that
must be deducted, with profit, from CEP to ``construct'' an EP.
According to MHI, if the Department utilizes CEP methodology for
this sale, in effect, it would mandate that commissions per se cannot
be made at arm's length and would fail to recognize a fundamental
distinction between affiliation and agency, namely that agents may be
either affiliated or unaffiliated with their principals. According to
MHI, this distinction is reflected in the different definitions of
control that exist in common law with respect to agents and the
antidumping statute's treatment of affiliation. MHI explains that in
common law, a principal's ``control'' over an agent focuses on
manifestations of consent between the parties; thus, the agent remains
free to engage in arm's-length negotiations with the principal over its
compensation and other terms of the agency. MHI explains further that,
in contrast, the scope of ``control'' as it relates to affiliated
parties under the Act extends to the very terms of the parties'
relationship and whether or not the controlling party can induce the
controlled party to accept economic terms that the controlled party
would not otherwise accept. MHI points out that in this latter context
the Act requires the Department to disregard the price (or commission)
established between the parties because that price is assumed not to be
at arm's length. Where, however, the principal has no control over the
terms of agency the agent accepts, no reason exists for the Department
to disregard that commission. Thus, without other indicia of
affiliation, MHI contends that applying a CEP methodology to a
principal/agent relationship, thereby equating agency with affiliation,
violates the intent of the EP/CEP distinction and distorts the
antidumping analysis. Accordingly, MHI argues that a sale by a
principal through an unaffiliated selling agent to an unaffiliated U.S.
end user should be treated as an arm's-length EP transaction where the
commission accrued by the agent is accounted for as a circumstance of
sales adjustment.
Like MHI, MC contends that MC and MIC acted as resellers and not as
sales agents for MHI in the U.S. transaction at issue because: (1) The
required characteristics of an agency relationship are not fulfilled,
and (2) the parties' commercial behavior, sales documentation and
internal accounting records are consistent with a purchase/resale
relationship. According to MC, the price between MHI and MC is the
relevant U.S. price (pursuant to the ``trading company'' rule) because
MHI knew that the ultimate destination of the merchandise was the
United States and MHI and MC are unaffiliated parties.
Specifically, MC asserts that under U.S. law, an agency
relationship has several required characteristics which are not present
in the transaction under investigation. For example, it cannot exist
without an explicit agreement from the principal authorizing the agent
to act on his behalf in a specified context, and explicit consent by
the agent to act on the principal's behalf and only at the principal's
direction; and the agent does not act independently, pursuing his own
economic interests, but rather is acting exclusively to promote the
interests of the principal. According to MC, in a typical sales agent
relationship, the agent's job is to locate potential customers for the
principal. The principal makes all commercial decisions and takes
whatever profits accrued from the transaction. The agent is compensated
based on the principal/agent agreement. By contrast, resellers, while
they must cooperate with the seller to conduct business, they are
independent in their actions, take on more initiative and
responsibility, and bear more risk in the transaction than an agent
does. Specifically, resellers (1) Take title to the goods, (2) carry
the risk of loss, and (3) are compensated based on the spread or mark-
up that they can achieve independently on a resale. Based on the
behavior of the parties in the transaction and the documentation on the
record, MC maintains that MC and MIC acted as independent resellers in
the U.S. sale at issue. MC points out that if MC and MIC had been
acting as sales agents in the transaction at issue, MHI would have: (1)
Asked MIC or MC to solicit possible customers for MHI; (2) negotiated
all commercial terms and entered into the contract with the customer;
and (3) received the profit from the transaction, while MC/MIC would
have merely received a commission pursuant to the agency agreement.
According to MC, the record demonstrates that the sale at issue did not
occur in this manner.
Moreover, MC states that the legal documentation and internal
accounting records of the transaction at issue likewise confirm that
MC/MIC acted as
[[Page 24403]]
independent purchasers and resellers. MC asserts that the legal
documentation shows that MC and MIC each took title to the MHI turbo-
compressor equipment, bore the risk of loss and were fully responsible
for the further completion of the sale at issue. MC also asserts that
MC's and MIC's internal accounting records reflect purchase and sale
transactions, show that the price received from the resale customer is
higher than the price paid by MC/MIC to its supplier, and do not report
any commission.
Finally, like MHI, MC disagrees with the petitioner's argument that
the alleged agency relationship between MHI and MC is grounds for a
finding of affiliation. MC maintains that by its nature, a transaction-
specific agency relationship could not rise to the level of permanence,
significance, and control necessary to support a finding of affiliation
that is suggested by the Department's proposed regulations.
DOC Position
We agree with the petitioner. We determine that a principal and
agent in a sales transaction, even if unrelated in a broader corporate
sense, are ``affiliated'' within the meaning of section 771(33) of the
Act. For the purpose of determining U.S. price, the pre-URAA law
(section 771(13)) included an explicit reference to principal-agent
relationships in the definition of ``exporter'' and, in practice, sales
agents and their principals were deemed affiliated for the purpose of
calculating U.S. price. (See, e.g., Final Determination of Sales at
Less Than Fair Value: Furfuryl Alcohol from South Africa, 60 FR 22550
(May 8, 1995) (``Furfuryl Alcohol from South Africa''); Electrolytic
Manganese Dioxide from Japan: Final Results of Antidumping
Administrative Review, 58 FR 28551 (May 14, 1993) (``Electrolytic
Manganese Dioxide from Japan'').) In the URAA, Congress repealed this
provision and replaced it with the new definition of ``affiliated
persons'' in section 771(33) of the Act. While there is no explicit
reference to agents in new section 771(33), we nevertheless interpret
the new definition to include agents for several reasons. First, the
legislative history is clear that Congress intended to expand, not
limit, the definition of ``affiliated persons'' beyond that which
existed under the pre-URAA law. Second, the new law defines an
affiliated party to include ``any person who controls any other
person'' or ``any person which is legally or operationally in a
position to exercise restraint or direction over another person.''
Thus, this definition covers principal-agent relationships because, by
definition, a principal controls its agent. The agent may act only to
the extent its actions are consistent with the authority granted by the
principal. Thus, control of the principal over its agent is the
hallmark of an agency relationship. (See Restatement, section 14.)
While we agree that an agent may negotiate at arm's length the
terms of an agency agreement, we disagree with MHI that this leads to
the conclusion that there is no control within the meaning of section
771(33). With respect to activities undertaken pursuant to the agency
(e.g., the sale of merchandise), the principal unquestionably controls
the agent. Further, the very narrow definition of control proffered by
MHI (i.e., the ability to force another party to act against its own
economic interests) is inconsistent with the Act. The Act defines
control as the ability, legally or operationally, to direct or restrain
the acts of another. It is irrelevant whether that control is exercised
to the benefit or detriment of the controlled party.
In light of this interpretation, we believe that, contrary to the
respondents' assertions, the ``trading company'' rule does not apply in
cases where, as here, an agency relationship exists. This rule provides
that when a foreign producer sells subject merchandise to an
unaffiliated trading company in the home market with knowledge that the
merchandise will be sold for exportation to the United States, the
producer's price to the unaffiliated trading company (and thus EP) is
the appropriate basis for U.S. price. (See Forged Steel Crankshafts
from Japan, 52 FR 36984, October 2, 1987.) In a case where the trading
company acts as the foreign producer's selling agent, however, the
foreign producer and trading company would be considered affiliated by
virtue of their principal-agent relationship. The trading company rule
has been rejected in past cases with similar factual patterns where an
agency relationship exists between the producer and trading company.
(See Color Television Receivers, Except for Video Monitors, from
Taiwan, 53 FR 49706, 49711, December 9, 1988.)
Based on our analysis of the facts of record, we find that MC/MIC
were acting as agents on MHI's behalf in the U.S. sale at issue. The
analysis of whether a relationship constitutes an agency is case-
specific and can be quite complex; there is no bright line test. For
example, although agency relationships are frequently established by a
written contract, this is not essential. Under general principles of
agency, the focus of the analysis is whether it is agreed that the
agent is to act primarily for the benefit of the principal, not for
itself. (See Restatement, sections 1 cmt.b. and 26 cmt.a. See also
sections 14J and 14K.)
The Department has examined allegations of an agency relationship
in only a few cases and has focused on a range of criteria including:
(1) The foreign producer's role in negotiating price and other terms of
sale; (2) the extent of the foreign producer's interaction with the
U.S. customer; (3) whether the agent/reseller maintains inventory; (4)
whether the agent/reseller takes title to the merchandise and bears the
risk of loss; and (5) whether the agent/reseller further processes or
otherwise adds value to the merchandise. See, e.g., Furfuryl Alcohol
from South Africa, 60 FR 22550; Electrolytic Manganese Dioxide from
Japan, 58 FR 28551.
In this case, based on an examination of these and other pertinent
criteria outlined in the April 24, 1997, Agency Decision Memorandum, we
found that an agency relationship existed between MHI and MC/MIC in the
sales transaction at issue. In particular, we note that the record
evidence demonstrates that MHI effectively controlled the price, among
other terms of sale, in the transaction with the U.S. customer. The
evidence also shows that MHI conducted some marketing of its product to
the U.S. customer in the pre-sale period, and that its identity was
disclosed throughout the sales documentation governing the sale in a
manner indicative of a principal-agent relationship. In addition, MC/
MIC did not maintain inventory of, or further process, the subject
merchandise. Although MC/MIC took title to the merchandise and bore the
risk of loss, and that most of MHI's contact with the customer during
the pre-sale period was indirect and limited to technical matters, we
believe that based on the totality of the circumstances, that MC/MIC
was under MHI's control in the transaction at issue and, therefore, an
agency relationship existed.
Therefore, we determine that MHI and MC/MIC are ``affiliated''
within the meaning of section 771(33) of the Act by virtue of their
principal-agent relationship, not on the basis of the broader corporate
relationship between the parties. Having determined that the parties
are affiliated, we then considered whether the EP or CEP methodology
was appropriate. Based on the extensive role of MC/MIC in the U.S.
sales process, we have used CEP methodology in the final determination.
Comment 3: Corporate Affiliation under Sections 771(33)(F) and (G)
of the Act.
[[Page 24404]]
The petitioner contends that MHI and MC/MIC are affiliated within
the meaning of section 771(33)(F) of the Act. The petitioner contends
further that because of their interlocking corporate relationship, MHI
and MC are legally or operationally in a position to exercise restraint
or direction over the other, and that the record contains sufficient
evidence of common control between the two companies. The petitioner
urges the Department to evaluate the indicia of control (i.e.,
corporate grouping, joint venture agreement, debt financing, close-
supply relationship) described in the SAA cumulatively within the
context of control by a corporate group.
Further, the petitioner believes, contrary to respondents, that
``control'' within the meaning of section 771(33) of the Act, does not
require that one party has the power to coerce another to act against
its own interest and that this power extends beyond a particular
transaction. The petitioner states that no statutory principle embodies
this requirement. The petitioner believes that ``control'' within a
particular transaction is particularly important in cases, such as the
instant one, where there are few individual transactions and a producer
may have strong influence over the ultimate purchaser by virtue of
longstanding relationships.
MHI maintains that MHI and MC do not satisfy the requirements for
``control'' specified in sections 771(33)(F) and (G) of the Act and,
therefore, should not be treated as affiliated parties in the
Department's final antidumping analysis. MHI believes that to justify a
finding of control, the Department must: (1) Be able to identify the
controlling party and the controlled party; (2) examine MHI's and MC's
corporate relationship outside the confines of a specific transaction;
and (3) find evidence of the ability to exercise economic coercion
where one party can force the other party to act against its own
interest. MHI asserts that it is unlawful and illogical to conclude, as
the petitioner does, that affiliated parties exercise mutual control,
or that control can be diffused among a group of companies, the
membership of which is not defined legally. According to MHI, the
Department must determine that MHI controls MC, or MC controls MHI, or
some identifiable third party controls them both. Moreover, MHI states
further that this determination must be made in light of business and
economic reality, suggesting that the control relationship must be
significant and not easily replaced.
Further, MHI maintains that its analysis of the facts in this
investigation shows that MHI and MC did not have the ability to
exercise restraint or direction under the control indicia enumerated in
the SAA.
Like MHI, MC claims that MC and MHI do not qualify as
``affiliated'' persons under section 771(33) of the Act based on an
analysis of their relationship in terms of each of the control indicia
enumerated in the SAA. MC asserts that the affiliation issue was
already examined in the final determination of LNPPS from Japan (61 FR
38156-38157) where the Department ruled that the potential indicators
of control between MHI and MC taken individually were an insufficient
basis of finding control, and that the record facts with respect to
MC's/MHI's relationship and their relationship with third parties have
not changed so as to warrant a reversal of that decision.
MC also repeats many of the same arguments and similar facts stated
by MHI regarding the issue.
DOC Position
The Department invited comments on this issue in its preliminary
determination and evaluated the relevant facts in this case in the
context of the control standard set forth in section 771(33) of the Act
and the SAA. (See April 24, 1997, Memorandum to Jeffrey P. Bialos,
Principal Deputy Assistant Secretary for Import Administration, from
Louis Apple Re: Summary of Evidence on the Record of the Investigation
Regarding Potential Affiliation of MHI and MC.) In the facts and
circumstances of this case, however, we have determined that the
Department does not need to render a determination on this issue
because we have already found an agency relationship to exist and, on
that basis, have found the parties to be affiliated pursuant to section
771(33) of the Act. Accordingly, as noted in Comment 2 above, the
Department used CEP methodology for this sale and has deducted the U.S.
import duties and actual selling expenses incurred by MC/MIC pursuant
to our practice set forth in Furfuryl Alcohol from South Africa.
Comment 4: Level of Trade (``LOT'')/CEP Offset.
The petitioner contends that MHI should not receive either a LOT
adjustment or a CEP offset because it did not establish that its U.S.
transaction with MC/MIC is at a different LOT from its home market
sales. According to the petitioner, the record does not demonstrate
that there are any quantitative or qualitative differences between
MHI's home market and U.S. selling functions. The petitioner believes
that, given the technical complexity of the subject merchandise and the
importance of customer specifications to each sale, the same set of
selling functions (e.g., bid preparation, warranty, and installation
supervision) were performed by MHI for its EPGTS sales in both the home
market and the United States. In support of this argument, the
petitioner cites to the Notice of Proposed Rulemaking and Request for
Public Comment explaining section 351.412(c)(2) of the Department's
proposed regulations, which states: ``where the selling functions and
activities are substantially the same, however, sales normally will be
considered to have been made at the same level of trade.''
MHI contends that if the Department determines that CEP is the
appropriate basis for United States price, and collapses the activities
of MHI with those of MC/MIC, the Department should grant MHI a CEP
offset. MHI contends that it qualifies for a CEP offset because: (1)
Its CV is at a different LOT from its U.S. sale; (2) no data exist to
examine the price comparability between different home market LOTs; and
(3) the U.S. sale occurs at a less advanced stage of distribution than
its home market sales. In the alternative, MHI asks the Department to
base the calculation of SG&A and profit for CV upon the home market
sale to the trading company (i.e., MC), because that sale is allegedly
at a LOT that is comparable to its U.S. sale.
MHI asserts that its home market sales include certain selling
functions not found in its sale to MC/MIC (e.g., initial customer
contact, sales support operations, and delivery), and that its home
market sales occur at a more advanced stage of distribution than its
sale to MC/MIC. Citing Aramid Fiber Formed of Poly Para-Phenylene
Terephthalamide from the Netherlands, 61 FR 51406, 51409 (1996), among
other cases, MHI argues that because the adjustments to CEP under
section 772(d) of the Act will create a LOT that is at a less advanced
stage of distribution than MHI's LOT in the home market. Accordingly,
MHI maintains that the Department should calculate a LOT adjustment to
MHI's CV in the form of a CEP offset, if it does not base CV selling
expenses and profit exclusively on MHI's home market sale to a trading
company.
DOC Position
We agree with the petitioner. In accordance with section
773(a)(1)(B)(i) of the Act and the SAA accompanying the URAA, H.R. Doc.
No. 316, 103d Cong., 2d Sess. at 829-831 (1994), to the extent
practicable, the Department will calculate NV based on sales at the
same
[[Page 24405]]
LOT as the U.S. sale(s). When the Department is unable to find sale(s)
in the comparison market at the same LOT as the U.S. sale(s), the
Department may compare sales in the United States to foreign market
sales at a different LOT. Pasta from Italy, 61 FR at 30330-30331. The
LOT of NV is that of the starting-price sales in the home market. When
NV is based on CV, the LOT is that of the sales from which we derive
SG&A and profit.
For both EP and CEP, the relevant transaction for LOT is the sale
from the exporter to the importer. While the starting price for CEP is
that of a subsequent resale to an unaffiliated buyer, the construction
of the EP results in a price that would have been charged if the
importer had not been affiliated. We calculate the CEP by removing from
the first resale to an independent U.S. customer the expenses specified
in section 772(d) of the Act and the profit associated with these
expenses. These expenses represent activities undertaken by, or on
behalf of, the affiliated importer and, as such, they tend to occur
after the transaction between the exporter and importer for which we
construct CEP. Because the expenses deducted under section 772(d) of
the Act represent selling activities in the United States, the
deduction of these expenses normally yields a different LOT for the CEP
than for the later resale (which we use for the starting price).
Movement charges, duties, and taxes deducted under section 772(c) do
not represent activities of the affiliated importer, and we do not
remove them to obtain the CEP LOT.
In order to determine whether foreign market sales are at a
different LOT than U.S. sales, the Department examines whether the
foreign market sales have been made at different stages in the
marketing process, or the equivalent, than the U.S. sales. The
marketing process in both markets begins with goods being sold by the
producer and extends to the sale to the final user, regardless of
whether the final user is an individual consumer or an industrial user.
The chain of distribution between the producer and the final user may
have many or few links, and the respondent's sales occur somewhere
along this chain. In the United States this is generally to an
importer, whether independent or affiliated. We review and compare the
distribution systems in the foreign market and the United States,
including selling functions, class of customer, and the extent and
level of selling expenses for each claimed LOT. Customer categories or
descriptions (such as trading company or end-user) are useful in
identifying different LOTs, but are insufficient to establish that
there is a difference in the LOT without substantiation. An analysis of
the chain of distribution and of the selling functions substantiates or
invalidates claimed customer classification levels. If the claimed
customer levels are different, the selling functions performed in
selling to each level should also be different. Conversely, if customer
levels are nominally the same, the selling functions performed should
also be the same. Different stages of marketing necessarily involve
differences in selling functions, but differences in selling functions
(even substantial ones) are not alone sufficient to establish a
difference in the LOT. A different LOT is characterized by purchasers
at different places in the chain of distribution and sellers performing
qualitatively or quantitatively different functions in selling to them.
When sales in the U.S. and foreign market cannot be compared at the
same LOT, an adjustment to NV may be appropriate. Section 773(a)(7)(A)
provides that, after making all appropriate adjustments to EP or CEP
and NV, the Department will adjust NV to account for differences in
these prices that are demonstrated to be attributable to differences in
the LOT of the comparison sales in the foreign market.
With respect to the CEP offset, the statute also permits an
adjustment to NV if it is compared to U.S. sales at a different LOT,
provided the NV is more remote from the factory than the CEP sales, and
we are unable to determine whether the difference in LOT between CEP
and NV affects the comparability of their prices.
This latter situation can occur where there is no foreign market
LOT equivalent to the U.S. sales level, or where there is an equivalent
foreign market level, but the data are insufficient to support a
conclusion on price effect. Where different functions at different LOTs
are established under section 773(a)(7)(A)(i), but the data available
do not form an appropriate basis for determining a LOT adjustment under
section 773(a)(7)(A)(ii), the Department will make a CEP offset
adjustment under section 773(a)(7)(B), which is the lower of: (1) The
indirect selling expenses on the foreign market sale; or (2) indirect
selling expenses deducted from the CEP starting price under section
772(d)(1)(D).
In applying these principles to the facts in this case, we began by
removing from the CEP starting price the expenses specified in section
772(d) of the Act and the profit associated with these expenses. These
expenses represent activities undertaken by, or on behalf of, MC/MIC in
connection with the first sale to an unaffiliated customer in the
United States. In this regard, we identified: direct and indirect
selling expenses incurred by MIC for initial customer contacts, sales
negotiations, communications, and shipping logistics in the United
States to the unaffiliated customer; installation-related expenses
incurred by MHI in the United States following shipment of the subject
merchandise to the unaffiliated U.S. customer; and, indirect selling
expenses incurred by MHIA relating to U.S. office maintenance and
technical support.
Next, we sought to compare the distribution systems used by MHI for
its U.S. and home market sales, including selling functions, class of
customer, and the extent and level of selling expenses for each claimed
LOT. In reviewing the selling functions performed by MHI for both the
U.S. and home market sales transactions, we considered all types of
selling activities, both claimed and unclaimed, that had been
performed. As noted above, it is the Department's preference to examine
selling functions on both a qualitative and quantitative basis. While
MHI and MC provided information on the nature of the varying selling
functions performed for the sales transactions in both the U.S. and
home markets, respondents did not provide the Department with data
quantifying these selling activities. Further, at verification, such
information could not be derived from records and accounting systems
maintained by respondents in the ordinary course of business.
When we examined the CEP transaction between MHI and MC/MIC, we
identified the following selling functions performed by MHI: sales
negotiation and bid preparation; maintenance of sales office; technical
specification development and monitoring; parts procurement activities;
shipping arrangements; performance testing; and warranty extension.
When we reviewed MHI's home market sales during the POI, we did not
consider the one sale found to be outside the ordinary course of trade
(i.e., below the cost of production). Instead, we focused upon the two
remaining sales which were nominally made at different customer
levels--that is, trading company and end-user. However, when we
analyzed the selling functions at both levels, we found that they were
basically the same. Specifically, MHI performed the following selling
functions in connection with both home market sales: initial customer
contact; sales negotiation and bid preparation; maintenance of sales
offices; technical
[[Page 24406]]
specification development and monitoring; parts procurement activities;
shipping arrangements; and warranty extension. The only selling
function that might have been different between the two sales was
installation activity. However, we have treated the expense relating to
installation activity as a direct selling expense for which we have
made a circumstances of sale adjustment pursuant to section 353.56(a)
of our regulations. (See Memorandum to Case File, April 24, 1997.)
As a result of this analysis, we have determined that an
examination of MHI's selling functions in the home market does not
validate the claimed customer classification levels. Therefore, we have
determined that MHI's home market sales in the ordinary course of trade
are not made at different LOTs, and we have based our calculation of
SG&A and profit for CV upon these sales. (See ``Constructed Value''
section of this notice for more details.)
Finally, we compared the LOT of the CEP sale to the LOT of CV.
Here, again, we found no significant difference. Indeed, with only two
exceptions, MHI did perform the same selling functions on its home
market sales that it did on its CEP transaction with MC/MIC. These
functions, as noted above, included: sales negotiation and bid
preparation; maintenance of sales office; technical specification
development and monitoring; parts procurement activities; shipping
arrangements; and warranty extension. The only exceptions concern (1)
Initial customer contact and (2) performance testing. As explained
above, initial customer contact for the CEP sale was performed by, or
on behalf of, MC/MIC. Therefore, this expense (and the profit
associated with it) was deducted from the CEP starting price pursuant
to section 772(d) of the Act. In connection with its home market sales,
while MHI claimed to have performed initial customer contact functions,
the Department was unable to verify the accuracy of this claim.
With respect to performance testing conducted for the CEP
transaction, the expense relating to this selling function is
insignificant when compared to the total sales value of the CEP
transaction (see Memorandum to the Case File, dated April 24, 1997).
This difference in selling function between the U.S. and home markets
is, therefore, not significant for purposes of our LOT analysis.
In conclusion, our analysis of the record evidence regarding the
distribution systems in the foreign market and the United States
(including selling functions, class of customer, and the extent and
level of selling expenses for each claimed LOT) does not reveal
sufficient differences to justify either a LOT adjustment or a CEP
offset. Although there appear to be differences associated with
customer categories, these differences are not borne out by an analysis
of the selling functions for the home market and CEP sale, which are
largely the same. See Gray Portland Cement and Clinker from Mexico, 62
FR 17148, 17155-58 (1997).
Comment 5: MC's/MIC's Expenses and Value of Non-Subject Parts.
The petitioner argues that all actual expenses incurred by MC/MIC
in the U.S. transaction which were not deducted in the preliminary
determination should be deducted in the final determination in
accordance with section 772 (c) and (d) of the Act. These expenses
include U.S. Customs duties paid by MIC and selling expenses incurred
by MC/MIC which are associated with U.S. economic activity. In
addition, the petitioner maintains that the Department should continue
to deduct the value of non-subject parts from the CEP starting price
based on the amount ultimately charged to the U.S. customer, rather
than MIC's actual costs because there is no evidence that the former
amount was not at arm's length.
MHI argues that the petitioner's suggested adjustments to U.S.
price should be rejected because: (1) CEP methodology is not warranted
in this case for the reasons it explained in Comment 2 above; and (2)
by using the MHI-to-MC price as the basis for starting price and thus
applying EP methodology, the Department would substantively accommodate
the adjustments proposed by the petitioner. MHI points out that all of
MC's/MIC's expenses for the U.S. sale are included in the difference
between the MHI's price to MC and MIC's price to the U.S. customer.
DOC Position
We agree with the petitioner, in part. Based on our decision in
Comment 3 above, we have deducted from CEP all actual expenses incurred
by MC/MIC in the transaction, including U.S. import duties, selling
expenses associated with U.S. economic activity, and MIC's cost of non-
subject parts from the CEP starting price.
Comment 6: U.S. Indirect Selling Expenses Incurred in Country of
Manufacture.
The petitioner contends that certain items that were reported as
part of MHI's indirect selling expenses were actually directly related
with US sales activities and as such should be deducted from CEP. The
petitioner identifies those items as pre-bid meetings, travel, and
salesman visits. Because the nature of the subject merchandise in this
investigation requires technical design to the customer's
specifications, the petitioner asserts that the above-noted selling
expenses incurred by MHI were necessarily attributable to the
commercial activity in the United States and, therefore, should be
deducted accordingly. To support this assertion, the petitioner cites
Pasta from Italy, 61 FR at 30352. In the absence of information
sufficient to identify these expenses as direct expenses, the
petitioner argues that the Department should reduce CEP by MHI's
corporate indirect selling expense rate, or at a minimum, deduct all of
the Japanese indirect selling expenses reported by MHI.
In contrast, MHI asserts that, first, it is improper for the
petitioner to base its argument on the assumption that CEP methodology
is warranted in this case. Further, MHI asserts that it is the
Department's practice to deduct from CEP only those U.S. selling
expenses actually incurred in the United States. In support of this
assertion, MHI cites to the Department's decisions in Calcium Aluminate
Flux from France, 61 FR 40396, 40397 (August 2, 1996) (``Flux from
France''), and Certain Internal-Combustion Industrial Forklift Trucks
from Japan, 62 FR 5592 (February 6, 1997) (``Forklift Trucks from
Japan''). According to MHI, there is no evidence on the record in this
investigation which connects MHI's reported indirect selling expenses
with U.S. economic activity.
DOC Position
We agree with petitioner that certain of the indirect selling
expenses incurred by MHI for the U.S. sale are associated with economic
activity that occurred in the United States. Specifically, during
verification, we identified certain pre-bid expenses, including travel
expenses, that are appropriately included in our deduction of CEP
expenses. We have accounted for these expenses in our final CEP
calculations. (See Calculation Memorandum.)
Comment 7: Other Unclaimed Expenses.
The petitioner argues that certain other direct selling expenses
allegedly related to shipment logistics should be deducted on the
grounds that they are necessarily attributable to U.S. economic
activity.
MHI disagrees. It contends that the Department verified that the
expenses at issue either were not incurred or were
[[Page 24407]]
properly reported as part of cost of production for the U.S. sale.
Therefore, MHI asserts that no deduction to CEP for these expenses is
warranted.
DOC Position
We disagree with the petitioner. As MHI correctly points out, we
verified that the expenses at issue either were not incurred or were
properly reported as part of cost of production for the U.S. sale. (See
March 11, 1997 MHI Verification Report at 32.) Therefore, we have not
made any adjustments to CEP for the alleged direct selling expenses.
Comment 8: Mitsubishi Heavy Industries America (MHIA Houston)
Selling Expenses.
The petitioner asserts that MHI improperly allocated MHIA Houston's
reported selling expenses over both U.S. and non-U.S. sales, thereby
understating the selling expenses incurred by MHIA Houston for the U.S.
sale. The petitioner argues that MHIA Houston's selling expenses should
be allocated over total U.S. sales of turbo-machinery given that a
significant portion of MHIA expenses were allocated to such sales and
MHIA's small size effectively precludes it from servicing sales in non-
U.S. markets. Therefore, the petitioner requests that the Department
reject MHI's allocation formula and allocate MHIA Houston's selling
expenses over U.S. sales only.
MHI disagrees, arguing that the Department verified that MHIA
Houston was involved in sales to countries other than the United
States. According to MHI, while the market for turbo-machinery is
worldwide, Houston is a major center for turbo-compressor manufacturers
and plant contractors. Therefore, it is not unusual for meetings to
take place in Houston for sales of turbo-machinery to both U.S. and
non-U.S. markets. Based on these factors, MHI asserts that its
allocation methodology for MHIA Houston's selling expenses is
reasonable and accurate, and should be accepted for the final
determination.
DOC Position
We agree with MHI. At verification, we reviewed documentation
showing that MHIA was involved in technical support activities relevant
to both U.S. and non-U.S. sales. We also verified the accuracy and
completeness of the indirect selling amount reported by MHI. (See March
11, 1997 MHI Verification Report at 30.) Therefore, we have deducted
MHIA's indirect selling expenses.
Comment 9: U.S. Credit Expense.
A. General Calculation Methodology
The petitioner asserts that the Department should reject the
portion of MHI's claimed U.S. credit expense which reflects credit
income for payment received prior to shipment (i.e., progress payment)
and, for purposes of the final determination, calculate credit expense
equal to the corporate interest rate multiplied by the final payment
amounts times the number of days between shipment and payment, divided
by the number of days in the calendar year (i.e., 365). According to
the petitioner, the progress payments on which MHI's reported credit
income is based are improperly characterized by MHI as a negative
credit expense; rather, these payments are a form of working capital
financing. Further, citing Cellular Mobile Telephones and Subassemblies
from Japan, 50 FR 45,447, 45,455 (October 31, 1995), the petitioner
argues that the Department does not include progress payments received
in its calculation without evidence of interest revenue resulting from
these payments. The petitioner notes that only if the Department
considers the cost to MHI of financing EPGTS as work-in-process during
the period between the dates of sale and shipment should the Department
offset that cost with the interest income imputed for progress
payments.
MHI and MC request that the Department continue to calculate MHI's
credit expense for the U.S. sale inclusive of the pre-shipment credit
income at issue. According to MHI, the inclusion of imputed credit
benefit for payments received prior to shipment and imputed credit
expense for payments received after shipment reflect MHI's total cost
of extending credit to its U.S. customer. MHI asserts that if the
Department were to calculate credit as the petitioner suggests, it
would result in a credit expense adjustment that fails to fairly
measure MHI's opportunity cost of extending credit to the U.S. versus
home market customers. MHI explains that, in this instance, the payment
terms for the U.S. sale require the U.S. customer to make advance
payments (or progress payments) prior to the shipment of merchandise
while payment terms for home market sales do not require pre-shipment
or progress payments. According to MHI, failure to include both
payments received before and after shipment of merchandise would ignore
the payment terms specific to the U.S. sale. Additionally, MHI points
out that the petitioner fails to recognize that MHI's cost of financing
production is comparable for both its U.S. and home market sales.
Because MHI incurs its production costs for both U.S. and home market
sales in yen, MHI asserts that the imputed cost of financing these
sales would be comparable. Thus, MHI maintains that the calculation
methodology adopted by the Department in the preliminary determination,
but for the short-term interest rate used (see Comment 9(B) below),
correctly measures MHI's opportunity cost of extending credit on behalf
of its U.S. sale.
MC also disagrees with the petitioner, arguing that the Department
considers production costs in its credit expense analysis only when the
terms of sale call for the payment of significant capital outlays (up-
front) prior to production and shipment, which did not happen in the
case of the U.S. sale. Further, MC takes issue with the petitioner's
argument that a credit income adjustment is allowed only if interest
revenues on pre-shipment payments were obtained, maintaining that
imputed credit expense amounts are calculated regardless of the
presence or absence of actual borrowings.
DOC Position
We agree with respondents and have calculated U.S. imputed credit
expenses inclusive of the credit income at issue in the final
determination.
The intent of making a circumstances of sale adjustment for imputed
credit expenses incurred in the U.S. and comparison markets is to
adjust for differences in the payment terms extended to customers in
the two different markets. In this case, ignoring the imputed credit
income in the calculation of U.S. credit expense would result in a
credit expense adjustment which would fail to accurately measure MHI's
opportunity cost of extending credit to U.S. versus home market
customers. We note that the Department has calculated credit using both
pre- and post-shipment payments in past cases involving large,
customized equipment with relatively long production periods. (See
Mechanical Transfer Presses from Japan: Final Results of Administrative
Review, 61 FR 52,910, 52,914 (1996).) In certain other past cases such
as LNPPS from Japan, the Department has determined it to be appropriate
to offset production financing costs with progress payments, as
suggested by the petitioner, because there were multiple progress
payments relevant to sales in both the U.S. and comparison market and
an unusually long production period associated with the subject
merchandise. In this case, however, only one progress payment
[[Page 24408]]
was made for a relatively small portion of the total contract price,
the production period was not unusually long (i.e., approximately one
year), and no progress payments are applicable to MHI's home market
sales made during the POI.
Therefore, we have determined that there is no need to use an
alternative calculation methodology which would offset credit income
associated with progress payments with production financing costs or
one that would exclude credit income altogether from the calculation.
B. Short-term Interest Rate
MHI argues that in calculating imputed credit expenses for the U.S.
sale the Department should use the actual cost of the short-term
borrowing reported by MHI. MHI maintains that the Department's decision
in the preliminary determination to use a dollar-denominated short-term
interest rate appears to be an automatic application of matching the
currency of the interest rate used to the currency of the sale.
According to MHI, this approach does not conform with economic
rationale in this case where most of MHI's short-term debt was
denominated in yen. In support of recalculating U.S. credit expense
using the interest rate based on yen-denominated borrowings, MHI cites
to (1) LMI-La Metalli Industriale, S.p.A. v. United States, 912 F.2d.
455 (Fed. Cir. 1990) (LMI) in favor of using the interest rate for
imputed credit calculations that is in accordance with ``commercial''
reality, and (2) United Engineering & Forging v. United States, 779 F.
Supp. 1375 (Ct. Int'l Trade 1991), aff'd, 996 F.2d. 1236 (Fed. Cir.
1993) (United Engineering) in favor of using the lowest rate at which
the respondent has borrowed or to which respondent has access.
Therefore, MHI requests that the Department use the lowest interest
rate to which the respondent would have access, i.e., the reported yen-
denominated interest rate, in calculating the imputed U.S. credit
expense in the final determination.
Further, MHI takes issue with the Department's reliance on the
rationale outlined in LNPPs from Japan for using a dollar-denominated
short-term interest rate in the preliminary determination of this case.
MHI asserts that the Department's reasoning for the use of such a rate
captures the value of the credit to the customer, rather than the cost
to the seller of extending credit, which is contrary to the calculation
of the LTFV margin which is made from the seller's perspective.
Specifically, MHI states that if the Department is attempting to
measure the value of the theoretical loan from the seller to the buyer
during the period between shipment and payment from the buyer's
perspective, then the interest rate used should be the rate in which
the receivable is denominated. However, because the antidumping law
seeks to calculate a dumping margin based on the seller's expenses, MHI
maintains that the rate in which the receivable is denominated is
irrelevant. Instead, MHI argues that the Department must calculate the
cost of this theoretical loan from the seller's perspective. To do so,
MHI contends that the Department must examine MHI's actual cost of
capital, which in this case is denominated in yen.
The petitioner argues that the Department correctly applied a U.S.
dollar-denominated interest rate to compute MHI's imputed credit
expense on the U.S. sale. The petitioner asserts that the LMI decision
on which MHI relies was based on whether the chosen interest rate
comports with ``usual and reasonable commercial behavior.'' Therefore,
the petitioner argues that it is necessary to consider the
circumstances as a whole and not merely conclude that the lowest
interest rate should be used. According to the petitioner, the
circumstances in this investigation are as follows: (1) The foreign
producer has borrowings in U.S. dollars; (2) the U.S. sale is in U.S.
dollars; and (3) over one year elapses between the date of shipment and
the date of payment. Based on these conditions, the petitioner finds it
reasonable to use a U.S. dollar-denominated rate for purposes of
calculating U.S. credit expense. In support of its argument, the
petitioner cites LNPPs from Japan.
DOC Position
We agree with the petitioner and have calculated U.S. credit
expense based on the U.S. dollar-denominated interest rate in the final
determination. As noted in the final determination of LNPPs from Japan
(61 FR 38160), when sales are made in, and future payments are expected
in, a given currency, the measure of a company's extension of credit
should generally be based on an interest rate tied to the currency in
which its receivables are denominated, as the seller is effectively
lending to its purchaser in that currency. (See also Final
Determination of Sales at Less Than Fair Value: Oil Country Tubular
Goods from Austria, 60 FR 33551, 33555 (June 28, 1995).) Indeed, in the
present case, the Department verified that MHI had U.S.-denominated
short-term borrowings, the existence of which indicates the ability and
preparedness of MHI to support its EPGTS activities which result in
U.S. dollar-denominated revenues by borrowing in U.S. dollars.
Consequently, the Department's approach is consistent with LMI.
Further, contrary to respondent's suggestion, such an approach does not
capture the value of the credit extended to the customer instead of the
cost of extending credit to the seller. Rather, the cost calculated is
the cost to MHI, matching its dollar-denominated borrowing rate to its
dollar-denominated receivables. Whether or not this also reflects the
value to the buyer is irrelevant. Therefore, there is no basis to
depart from the Department's well-established practice.
Comment 10: Circumstances of Sale Adjustment for Home Market Credit
Expenses.
MHI argues that in the preliminary determination, the Department
failed to make a circumstances of sale adjustment for home market
imputed credit expenses. Specifically, MHI asserts that the Department
reduced the CEP by the amount of imputed credit expenses related to
MHI's U.S. sale, but did not make a corresponding adjustment for home
market credit expenses by subtracting the reported home market credit
expense from CV. MHI asserts that CV profit includes all items in the
home market price that are not otherwise included in CV. MHI reasons
that since imputed credit expense is included in the home market price,
it is included in the calculation of CV through a combination of
interest expense and home market profit. Therefore, MHI contends that
in order to ensure a fair value comparison, the home market credit
expense should be subtracted from CV as a circumstance of sale
adjustment. MHI cites LNPPS from Japan to support its contention.
The petitioner contends that no such circumstances of sale
adjustment is appropriate when NV is based on CV. Citing LNPPS from
Japan, the petitioner also argues that because imputed credit is, by
its nature, not an actual expense that would be included in the
calculation of CV in accordance with section 773(2)(A) of the Act,
there is no basis for an adjustment to CV for this imputed expense.
DOC Position
We agree with MHI. While we would not add an amount for imputed
credit expenses in the calculation of CV pursuant to section
773(e)(2)(A) of the Act, such expenses are reflected in the calculation
of CV profit and interest expense. Under the URAA, for CV, the statute
provides that SG&A be based on actual amounts incurred by the exporter
[[Page 24409]]
for production and sale of the foreign like product (see section 773(e)
of the Act). After calculating CV in accordance with the statute, we
have, in essence, a NV. Consistent with section 773(a)(8) of the Act,
adjustments to NV are appropriate when CV is the basis for NV.
The Department uses imputed credit expenses to measure the effect
of specific respondent selling practices in the United States and the
comparison market. Therefore, we have deducted from CV home market
imputed credit expenses as a circumstances-of-sale adjustment in the
calculation of NV. (See Antifriction Bearings (Other Than Tapered
Roller Bearings) from France et al.; Final Results of Antidumping Duty
Administrative Reviews, 62 FR 2081, 2119-2120 (January 15, 1997).)
Specifically, we deducted an amount for home market imputed credit
expense based on a ratio of imputed credit expenses incurred on home
market sales made in the ordinary course of trade to corresponding
sales revenue.
Comment 11: Currency Conversion.
The petitioner contends that the exchange rate used in the
preliminary margin calculation was erroneously a ``sustained movement
rate'' and not the official exchange rate in effect on the date of the
U.S. sale as stated in the Department's preliminary determination
notice. According to the petitioner, the Department should not
automatically apply the ``mechanical formula,'' as outlined in the
Department's Policy Bulletin 96-1: Currency Conversions (61 FR 9434,
March 8, 1996) (``Policy Bulletin 96-1''), which results in the
sustained movement rate in this case, because the sustained movement
rate is not suited for cases where sales are few and sporadic. Rather,
according to the petitioner, it is better suited for continuous sales
of commodities from a price list or based on periodic price
negotiations. In this investigation, the petitioner notes that the
subject merchandise is not sold continuously from a price list or
annual supply contracts; EPGTS are sold one at a time, and only few
sales are made in any given period. Under these circumstances, the
petitioner asserts that the parties involved in the transaction of such
merchandise are aware of the exchange rates, the currency used in the
transaction, and the prospect of hedging in order to reduce the risk of
changes in the exchange rate between the date of sale and date of
shipment. Therefore, the petitioner urges the Department to revise the
currency conversion formula accordingly to reflect the actual exchange
rate in effect on the date of the U.S. sale in the final determination.
MHI disagrees with the petitioner, arguing that the petitioner's
description of the Department's currency conversion methodology is
limited to the Department's method for identifying exchange rate
fluctuations. In the case of sustained movement, MHI states that the
Department allows at least 60 days for exporters to adjust their
prices. Further, MHI notes that neither the Act, the SAA, the
legislative history, nor Policy Bulletin 96-1, limits the sustained
movement rule to scenarios with high volume sales or numerous
transactions.
DOC Position
We agree with MHI, and made all currency conversions into U.S.
dollars using the sustained movement rate which resulted from the
methodology described in Policy Bulletin 96-1. As explained below, we
do not believe that the facts in this case warrant departure from this
methodology. We note that the sustained movement rate was also
appropriately used in the Department's preliminary calculations, but
the Department incorrectly described it as the official exchange rate
in effect on the date of the U.S. sale in its notice of preliminary
determination.
Section 773(A) of the Act provides that the Department will convert
foreign currencies on the date of the U.S. sale, subject to certain
exceptions. Those exceptions require the Department to ignore
``fluctuations'' in the exchange rate and to provide respondent(s) in
an investigation at least 60 days to adjust prices after a ``sustained
movement'' in the exchange rate. Because neither the Act, the
Antidumping Agreement (Agreement on Implementation of Article VI, GATT
1994) nor the Department's proposed regulations provide detail on
defining fluctuations or sustained movements, we designed the exchange
rate model described in Policy Bulletin 96-1 in order to: 1) Implement
the statutory requirements in a timely fashion; 2) ensure that all
exporters, when they set their U.S. prices and whether under order or
not, can know with certainty the daily exchange rate the Department
will use in a dumping analysis; and 3) capture the model in simple
computer code to reduce administrative burdens in monitoring exchange
rates. Having used this model for at least one year, it remains our
intention now to evaluate it based on our experience and public
comments that we have received. However, we will continue to use the
current model until our evaluation is complete.
The model classifies each daily rate as ``normal'' or
``fluctuating'' based on a ``benchmark'' rate. The benchmark is a
moving average of the actual daily exchange rates for the eight
consecutive weeks immediately prior to the date of the actual daily
exchange rate to be classified. Whenever the actual daily rate varies
from the benchmark rate by more than two-and-a-quarter percent, the
actual daily rate is classified as fluctuating. If within two-and-a-
quarter percent, the actual daily rate is classified as normal. Actual
daily rates classified as normal are the official exchange rate for
that day. However, when an actual daily rate is classified as
fluctuating, the benchmark rate is the official rate for that day.
Whenever the weekly average of actual daily rates exceeds the
weekly average of benchmark rates by more than five percent for eight
consecutive weeks (the recognition period), the model classifies the
exchange rate change as a sustained movement. During the eight week
recognition period, the model continues to classify each daily rate as
normal or fluctuating and to substitute the benchmark rate for the
actual daily rate when the daily rate is fluctuating.
When a sustained movement is identified in the Department's
exchange rate model, increasing the value of a foreign currency in
relation to the dollar, as in the instant case, respondents under an
investigation are given 60 calendar days to correct their prices in
order to mitigate against distortions to the Department's antidumping
analysis that may be caused by sustained movement in the exchange rate.
The 60-day grace period is meant to apply to all respondents in a
variety of industries, irrespective of the volume or number of their
transactions in any given period. This 60-day grace period begins on
the first day after the recognition period. During that period, the
official rate in effect on the last day of the recognition period will
be the official rate in investigations.
In this case, the actual date of the U.S. sale fell within the 60-
day adjustment period previously described. On April 26, 1995, all of
the Department's criteria for a sustained movement were met, and the
Department found that a sustained movement had occurred. As a result,
all official exchange rates between April 26, 1995, and June 26, 1995,
including the rate on the date of the U.S. sale, were held at the April
26, 1995, rate.
We have no basis on which to depart from our current methodology.
Further, the petitioner's suggestion that the model should
differentiate the exchange rate used based on a respondent's
[[Page 24410]]
volume or number of transactions necessarily implies that the
Department would be required to develop an exchange rate model on a
case-specific basis. We do not agree that this would be appropriate. In
addition, it would unnecessarily increase administrative burdens on the
Department and on parties interested in monitoring the exchange rates
used by the Department in its antidumping analysis.
Comment 12: Treatment of the Home Market Sale Made at a Below-Cost
Price.
MHI contends that section 773(b)(1) of the Act does not permit the
Department to conduct a sales-below-cost investigation solely to
recalculate CV profit. MHI asserts that such an investigation may be
pursued only as a mechanism to reject below-cost home or third country
market sales as the basis for a price comparison. MHI allows that while
the CV profit calculation may be considered to be part of the
``determination of NV,'' section 773(b)(1) of the Act requires the
rejection of below-cost sales before the Department can resort to CV.
Moreover, according to MHI, the discussion of NV at section 773(b)(1)
of the Act addresses only home and third country market sales, and not
CV. Because the Department based its antidumping analysis on CV and not
on HM prices, MHI maintains that it was inappropriate for the
Department to conduct a sales-below-cost investigation.
Petitioner urges the Department to follow the methodology that it
used in the preliminary determination of this case and exclude from the
CV profit computation all HM sales made by MHI at below-cost prices.
Petitioner asserts that nothing in the statute, SAA, or agency practice
suggests that the Department may use below-cost sales as the basis for
CV profit. According to petitioner, section 773(a)(4) of the Act
establishes CV as a type of NV. In computing CV, the statute directs
the Department to include an amount for profit based on the actual
amounts realized by the producer in connection with home market sales
of the foreign like product. Petitioner notes that where home market
sales were made at below-cost prices, section 773(b)(1) of the Act
provides that the Department exclude such sales from its determination
of NV. Thus, petitioner concludes that because CV is a type of NV and
the profit from home market sales is a factor in computing CV, the
exclusion of below-cost sales under section 773(b)(1) must apply to
home market sales used as the basis for CV profit in the Department's
antidumping analysis. Petitioner adds that, under MHI's interpretation
of the statute, the Department would be precluded from determining
whether home market sales (and the profits from such sales) were made
within the ordinary course of trade in all cases where such sales are
not sufficiently similar to U.S. sales to allow for a price-based NV.
DOC Position
We agree with the petitioner that the Department has the authority
to conduct a sales-below-cost investigation regardless of whether the
HM prices are used as the basis for a price-based NV or solely for the
CV profit calculation. At the beginning of this case, we determined
that each EPGTS sold in the home and U.S. markets during the POI was
manufactured to custom specifications for a unique application and,
thus, would be too dissimilar to permit a price-to-price comparison
between the subject merchandise sold in the United States and the
foreign like product sold in Japan. Therefore, we determined that the
NV should be based on CV in accordance with section 773(a)(4) of the
Act.
Section 773(e)(2)(A) of the Act directs the Department to include
in CV an amount for profits earned from sales of the foreign like
product in the ordinary course of trade and for consumption in the
foreign country. The Act also states, at section 771(15), that below-
cost sales made within an extended period of time and in substantial
quantities are considered outside the ordinary course of trade.
Therefore, in cases where the petitioner provides the Department with
reasonable grounds to believe or suspect that the foreign like product
forming the basis for CV profit was sold at below-cost prices, we will
conduct a cost investigation and will exclude those sales determined to
be outside the ordinary course of trade.
Comment 13: Reasonable grounds to believe or suspect that home
market sales were made at below-cost prices.
MHI argues that the Department lacked reasonable grounds to believe
or suspect that sales were made at prices below their cost of
production prior to initiating its sales below-cost investigation. MHI
contends that the Department was mistaken in its characterization of
MHI's post-cost allegation adjustments as new factual information. MHI
insists that its November 22, 1996 rebuttal simply proved that
petitioner's analysis was incorrect and that the data used by MHI in
the rebuttal was, or could be, supported by reference to its previously
submitted questionnaire responses. MHI asserts that it is incumbent
upon the Department to specifically and precisely identify the new
factual information in MHI's rebuttal. MHI claims that the Department's
position that MHI submitted new factual information regarding the
aggregate profitability of its HM sales is far to vague for a reviewing
court to determine whether the Department correctly applied its own
policy.
Petitioner claims that despite MHI's November 22, 1996 rebuttal of
petitioner's below-cost sales allegation, the Department had reasonable
grounds to suspect a below-cost sale had been made in the HM.
Petitioner states that in its rebuttal, MHI maintained that petitioner
had committed a ``simple methodological error'' in its sales-below-cost
allegation. Petitioner argues that MHI's rebuttal, rather than
establishing that petitioner committed a methodological error, reveals
that MHI reallocated production costs among the HM contracts in such a
manner that each HM sale was shown to have been made at a profit.
Further, petitioner asserts that MHI's subsequent January 1, 1997
reallocation of production costs and concession that the sale in
question was below cost, refutes any argument that the Department's
rejection of the below-cost sale was unreasonable.
DOC Position
We disagree with MHI. The information provided by petitioner in its
sales-below-cost allegation provided reasonable grounds for us to
believe or suspect that MHI had sold the foreign like product at a
price that was less than the company's cost of production. Moreover,
contrary to MHI's claims, the data provided in its November 22, 1996
rebuttal comments constituted new factual information which we do not
consider in making our determination to initiate a sales-below-cost
investigation. Although the aggregate profitability of all home market
sales (reported in the third column of figures of Attachment 1 of MHI's
November 22, 1996, rebuttal) had been submitted in MHI's November 12,
1996, submission, the revised aggregate profitability of only home
market sales 1 and 2 (reported in the third column of figures of
Attachment 1 of MHI's November 22, 1996, rebuttal) included cost
adjustments, resulting in revised profits. The data in this column
represents new information which was not previously on the record.
Import Administration Policy Bulletin 94.1 sets forth the
Department's practice with respect to new factual information submitted
by respondents subsequent to the filing of a cost allegation by
petitioners or other interested parties. The Bulletin states that the
Department disregards any new information regarding the actual costs of
production
[[Page 24411]]
where such information is used to rebut portions of an allegation. As
noted in the Policy Bulletin, the Department's purpose in reviewing the
sufficiency of an allegation is not to determine if sales were in fact
made at below-cost prices. Instead, the Department must decide whether,
based on the information available to the petitioner at the time of the
allegation, there is sufficient reason to believe that below-cost sales
exist.
Comment 14: Home market sales made outside the ordinary course of
trade.
Petitioner claims that the SAA is clear that below-cost sales are
outside the ordinary course of trade for purposes of calculating profit
for CV. Petitioner cites the SAA and Section 773(e)(2)(A) of the Act as
establishing that:
(1) CV profit is to be calculated based on sales in the ordinary
course of trade;
(2) The Department may ignore sales that it disregards as a basis
for NV, such as below-cost sales; and
(3) Unlike current practice, in most cases, the Department would
use profitable sales as the basis for calculating CV profit.
Petitioner argues that section 771(15) of the revised act defines
the ordinary course of trade to exclude below-cost HM sales disregarded
under section 773(b)(1) and therefore below-cost sales rejected under
section 773(b)(1) will also be rejected as a basis for profits.
Petitioner maintains that the statute places the burden on MHI to
establish that any below-cost sales are ordinary and should not be
rejected. Petitioner asserts that therefore, it is clear that the HM
below-cost sale in this case should be considered to be outside the
ordinary course of trade and excluded from the CV profit computation.
In the alternative, MHI argues that even if one of its HM sales was
properly found to be below cost, that does not mean this sale should be
``automatically'' excluded from the calculation of CV. Citing FAG U.K.
v. United States, 945 F. Supp. 260 (CIT 1996) and a series of other
cases, MHI argues that the burden is on petitioner to show that this
below-cost sale was ``outside the ordinary course of trade'' within the
meaning of section 771(15) of the Act. This burden, MHI asserts, has
not been met and, therefore, all HM sales should be included in the
calculation of CV.
MHI also relies upon the SAA. According to MHI, the SAA's reference
to profitable sales providing the basis ``in most cases'' for the
calculation of profit in CV ``implicitly recognizes that there are
situations in which unprofitable sales will also be included in the
calculation.''
DOC Position
For the most part, we disagree with MHI. As we state above in
response to comment 1, section 773(e)(2)(A) of the Act provides that
the calculation of profit in CV shall be based upon ``the actual
amounts incurred and realized by the specific exporter or producer * *
* in connection with the production and sale of a foreign like product,
in the ordinary course of trade, for consumption in the foreign
country'' (emphasis added). Section 771(15) of the Act further states
that sales made below their cost of production within the meaning of
section 773(b)(1) of the Act are not within the ``ordinary course of
trade.'' The cases cited by MHI, including FAG U.K. v. United States,
were decided under the pre-URAA version of the statute. That statutory
language, unlike the current language, did ``not limit the meaning of
`ordinary course of trade' to sales made above cost.'' 945 F. Supp at
269.
We also cannot agree with MHI's reading of the SAA. At page 169,
the SAA states, in part:
Commerce will base amounts for SG&A expenses and profit only on
amounts incurred and realized in connection with sales in the
ordinary course of trade of the particular merchandise in question
(foreign like product). Commerce may ignore sales that it disregards
as a basis for normal value, such as those disregarded because they
are made at below-cost prices (emphasis added).
It is clear from the record of this case that MHI made a sale in
the HM at a price that was below the cost of production, within an
extended period of time, and in substantial quantities (i.e., outside
the ordinary course of trade). Accordingly, we believe that section
773(e)(2)(A) of the Act supports our decision to exclude this sale from
the CV profit computation. Because section 773(e)(2)(A) and its
interpretation in the SAA indicate that CV profit should be calculated
based on sales in the ordinary course of trade and that in most cases
the Department should use profitable sales as the basis for calculating
CV profit, it is our opinion that the party claiming that below-cost
sales should not be considered outside the ordinary course of trade
should generally bear the burden of proving such an assertion.
Comment 15: Valuation of Inputs Purchased From Affiliated Parties.
Petitioner contends that the valuation of affiliated party
purchases should reflect arm's length values, including usual profits
earned on arm's length transactions. Petitioner asserts that the
Department has adjusted MHI's reported costs of inputs purchased from
affiliated parties under the ``transactions disregarded'' clause of
section 773(f)(2) of the revised act, rather than the ``major inputs''
clause of section 773(f)(3), which MHI assumes to be our basis for the
adjustment. Petitioner argues that because the ``transactions
disregarded'' clause of Section 773(f)(2) states that the reported
costs should ``fairly reflect the amount usually reflected'', the
Department should add a reasonable profit to the affiliated supplier's
total cost in order to reflect an arm's length price. Petitioner claims
that because MHI did not purchase comparable services from an
unaffiliated supplier, and the affiliated supplier did not sell
comparable services to an unaffiliated purchaser, the Department must
determine an appropriate amount ``based on the information available as
to what the amount would have been if the transaction was between
persons who are not affiliated'' per section 773(f)(2). Petitioner
asserts that the Department should apply the profit earned by the
affiliated party on its sales to MHI pertaining to MHI's third country
sales, as reported in an earlier section B submission.
MHI maintains that the Department should not add profit to the
inputs received from affiliated parties. MHI contends that although
under the ``transactions disregarded'' and ``major input'' rules, the
Department is authorized to adjust transfer prices to reflect market
price or COP, neither of the rules allow the Department to construct a
market price. MHI asserts that the Department's options are to
substitute other market prices or COP for the transfer prices.
MHI also claims that charging profit on its affiliated supplier
purchases would conflict with the purpose of the statute by unfairly
inflating MHI's costs. MHI argues that because the affiliated supplier
in question is a wholly owned subsidiary of MHI's, by adjusting these
inputs to reflect their COP, the Department effectively treats them as
if MHI had produced them internally. MHI maintains that petitioner's
argument that the Department should add to the affiliated party's COP,
the profit that would have been earned by an unaffiliated supplier had
it provided the services to MHI would be distortive. Further, MHI
claims that petitioner has failed to demonstrate that the profit rate
that the affiliated supplier earned, not on sales to an unaffiliated
party, but rather on other sales to MHI, fairly reflects the amount
usually reflected in sales of merchandise under consideration in the
market under consideration'', as required by section 773(f)(2).
[[Page 24412]]
DOC Position
Under the transactions disregarded rule of section 773(f)(2) of the
Act, we requested MHI to submit the transfer prices for a selected
sample of inputs that it purchased from affiliated suppliers for use in
manufacturing the subject merchandise. In addition, we asked MHI to
provide the arm's length prices charged by those affiliates to
unaffiliated purchasers for the identical input or the arm's length
prices charged by unaffiliated suppliers for sales of the identical
input to MHI. Because MHI claimed that there were no such arm's length
transactions between unaffiliated parties, the company submitted the
transfer prices for its purchases from affiliated suppliers and the
affiliated suppliers' corresponding COPs. For those inputs obtained
from affiliated suppliers, we compared the transfer price paid by MHI
to the affiliates' cost of producing the input. In one instance, we
found that the cost of the input was greater than the transfer price
between MHI and the affiliated supplier. For this transaction, because
there were no comparable transactions of similar inputs between
unaffiliated parties on which to base a value for inputs, we followed
our practice of using the affiliated supplier's cost of production for
that input as the information available as to what the amount would
have been if the transaction had occurred between unaffiliated parties
(See Antifriction Bearings (other than Tapered Roller Bearings) from
France et. al.; Final Results of Antidumping Duty Administrative
Reviews, 62 FR 2081, 2115 (January 15, 1997).) We disagree with
petitioner that the profit earned on the services provided by the
affiliate in connection with MHI's third country sales is
representative of the services furnished in connection with the U.S.
sale. Notwithstanding the fact that the transaction occurred between
the same parties (i.e., MHI and its affiliated supplier), in this case,
the input in question consists of services performed by an affiliate.
The nature of these services and the unique character of the EPGTS
products for which they were performed give us no reason to believe
that the services were in any way similar or comparable to one another.
Comment 16: Affiliated Party Input Adjustment.
MHI states that the Department erred by adjusting the transfer
prices of not only the major inputs purchased from affiliated
suppliers, but also the minor inputs. MHI claims that because the
Department has not established that these minor inputs were purchased
at below-cost prices, the transfer prices of the minor inputs should
not be adjusted.
MHI contends that if the Department chooses to adjust MHI's U.S.
sale for all affiliated party purchases (i.e., major and minor inputs),
it should make a corresponding adjustment for HM sales.
Petitioner claims that there is no statutory or rational basis for
a parallel affiliated party purchases adjustment to HM production costs
for purposes of calculating CV profit. Petitioner states that section
773(e)(2) of the revised act indicates that ``actual'' HM profit earned
in the ordinary course of trade should be included in the CV
calculation. Petitioner argues that actual HM profits should not be
reduced to the extent that the foreign producer's inputs were purchased
from affiliated parties at non-arm's-length transfer prices. Petitioner
also argues that although sections 773(f)(2) and (3) of the revised act
expressly provide for affiliated party cost adjustments for CV
calculations, section 773(b)(3), which pertains to COP for HM price
comparisons, contains no provision for such adjustments.
DOC Position
As noted above, we adjusted MHI's reported cost of inputs purchased
from affiliates under the transactions disregarded rule per section
773(f)(2) of the Act. This section relates to all inputs obtained from
affiliates, not just major inputs. Accordingly, we applied the
calculated affiliated party adjustment to all inputs obtained from
affiliates.
We agree with MHI that the affiliated party adjustment applied to
CV should also be applied to the submitted cost of producing the HM
sales. Section 773(f) of the Act identifies special rules for the
calculation of COP and CV, one of which is the transactions disregarded
rule. Since the statute does not direct the Department to treat
affiliated party transactions differently for COP and CV, we applied
the same affiliated party adjustment to both CV and COP.
Comment 17: Calculation of the G&A Rate.
Petitioner urges the Department to revise its preliminary
calculation of MHI's G&A expenses to include all of the G&A expenses
incurred by the company at each of its various corporate levels.
Petitioner believes that the G&A expense rate used by the Department to
compute COP and CV in its preliminary determination failed to include
the administrative expenses of MHI's Hiroshima Machinery Works
(``HMW''), the facility that produced the subject merchandise, as well
as allocable portions of G&A expenses associated with other
organizational levels within the company. As evidence of this problem,
petitioner points to MHI's internal financial statements which report
amounts for ``general'' and ``internal G&A'' that petitioner claims
were not allocated to the subject merchandise under MHI's normal
accounting system and, likewise, were excluded from COP and CV under
the company's submission methodology.
MHI argues that it fully accounted for all G&A expenses in the
submitted COP and CV figures and that petitioner simply fails to
understand the company's normal internal accounting system and its
financial reporting methods. MHI claims that adjusting the G&A expense
rate as petitioner proposes would result in double-counting both G&A
and selling expenses. MHI notes the fact that the Department verified
the company's G&A expense calculation and found that all such expenses
had been properly included in the MHI's reported COP and CV figures.
DOC Position
We agree with MHI that it properly accounted for all G&A expenses
in the reported COP and CV amounts. Under the company's normal
accounting system, both G&A and selling expenses are combined and
allocated to EPGTS job orders through a factory overhead burden rate.
The SG&A amounts to be allocated are reflected in the ``general'' and
``internal G&A'' figures in the company's internal financial
statements. Because the Department requires respondents to report
separately the selling expenses incurred for the merchandise, MHI
segregated these expenses for the HMW before allocating G&A expenses to
each EPGTS as manufacturing overhead following its normal accounting
methodology. Thus, as noted by MHI, basing the G&A expense rate on
amounts from the company's internal financial statements would result
in double-counting expenses already accounted for as part of either
selling expenses or manufacturing overhead. We reviewed MHI's G&A
expense calculation as part of our verification of the company's COP
and CV submission and found that the reported costs reflected an
appropriate amount of G&A expenses incurred by the company at each of
its organizational levels.
Continuation of Suspension of Liquidation
In accordance with section 735(c) of the Act, we are directing the
Customs Service to continue to suspend liquidation of all entries of
EPGTS from Japan, as defined in the ``Scope of Investigation'' section
of this notice, that are entered, or withdrawn from
[[Page 24413]]
warehouse for consumption, on or after December 10, 1996, the date of
publication of our preliminary determination in the Federal Register.
We are also directing the Customs Service to suspend liquidation of all
entries of parts of EPGTS imported pursuant to a contract for a
complete EPGTS in the United States that are entered, or withdrawn from
warehouse for consumption, on or after December 10, 1996. For these
entries, the Customs Service will require a cash deposit or posting of
a bond equal to the estimated amount by which the normal value exceeds
the constructed export price as shown below. The suspension of
liquidation with respect to EPGTS parts will remain in effect provided
that the sum of such entries represents at least 50 percent of the cost
of manufacture of the complete EPGTS of which they are part. This
determination will be made only after all entries of parts imported
pursuant to an EPGTS contract are made and the complete EPGTS pursuant
to that contract is produced, unless a request for a scope inquiry is
made by an interested party at least 75 calendar days prior to the
intended date of entry of the EPGTS parts in which the interested party
claims that the parts to be imported, when taken altogether, constitute
less than 50 percent of the cost of manufacture of the complete EPGTS
of which they are a part. Upon receiving such a request, the Department
will initiate a scope inquiry and instruct the Customs Service to
suspend liquidation at a zero cash deposit rate/bond rate (depending on
which rate, if any, is effective at that time) if the party can
establish to the Department's satisfaction, through the submission of
the requisite information specified below, that the sum of the EPGTS
parts to be imported pursuant to a particular EPGTS contract represents
less than 50 percent of the cost of manufacture of the complete EPGTS
of which they are a part.
In such a review, we will require that the foreign producer/
exporter submit to the Department, where applicable and available, the
following information and documentation substantiating its claim that
all of the parts to be imported into the United States from Japan
pursuant to a particular EPGTS contract constitute less than 50 percent
of the cost of manufacture of the complete EPGTS of which they are a
part and, thus, are not subject merchandise: (1) The EPGTS sales
contract (and any amendments) pursuant to which the parts are imported;
(2) a diagram of the complete EPGTS; (3) a description of the parts
included in the entry(ies); (4) the actual or estimated cost of the
imported parts (depending on what is available prior to the time of
importation of the parts into the United States); (5) the most recent
cost estimate of the complete EPGTS, and data on historical variances
between estimated and actual costs of production of the EPGTS; (6) a
financial statement for the business unit that produces EPGTS; (7) a
schedule of parts shipments to be made pursuant to a particular EPGTS
contract, if more than one shipment is relevant; and (8) a schedule of
EPGTS production completion in the United States. The foreign producer/
exporter will also be required to serve the submitted materials upon
counsel for the petitioner on the earlier of: (i) The same day they are
filed with the Department, if an applicable Administrative Protective
Order (``APO'') is outstanding, or (ii) within one day of the issuance
of an applicable APO. Public versions of such materials will be served
upon counsel for the petitioner in accordance with section 353.31 of
the Department's regulations. The petitioner will have 15 calendar days
from the date of receipt of such documents for review and the filing of
comments. If, after providing this information to the Department, the
foreign producer/exporter finds that the costs reported to the
Department were understated and that the cost of manufacture of the
imported parts will be over 50 percent of the cost of manufacture of
the EPGTS of which they are a part, we will require that the party
inform the Department immediately. After the expiration of the 15-day
comment period, the Department will conduct its review of the submitted
documentation and will, to the extent practicable, make an expedited
preliminary ruling as to whether the merchandise falls outside of the
scope. If the Department determines preliminarily that such merchandise
is outside of the scope, for all such entries made pursuant to the same
EPGTS contract, the Department will instruct the Customs Service to
suspend liquidation at a zero deposit/bond rate.
Pursuant to the Department's preliminary ruling, the U.S. importer
will be able to declare a zero rate for the imported merchandise at
issue. Upon entry of the merchandise into the U.S. Customs territory,
the U.S. importer and/or foreign manufacturer/exporter will be required
to submit an appropriate certification to the Department concerning the
contents of the entry. An appropriate certification should read as
follows:
I [Name and Title], hereby certify that the cost of the
engineered process gas turbo-compressor system parts from Japan
contained in entry summary number(s) ______ pursuant to contract
number ______, including the cost of design and engineering incurred
by, and any assists provided by, the manufacturer or producer with
respect to the engineered process gas turbo-compressor system,
constitutes less than 50 percent of the cost of manufacture of the
complete engineered process gas turbo-compressor system of which
they are a part.
The Department will make a final scope ruling within the context of
an administrative review, if requested by interested parties.
Verification of the submitted information will occur within the context
of such review, when appropriate. If the Department finds in its final
ruling that the imported merchandise falls below the 50 percent
threshold, then the Department will instruct the Customs Service to
liquidate the entries at issue without regard to antidumping duties.
Conversely, if the Department finds that the imported merchandise falls
within the scope (i.e., because the actual total cost of the parts
imported pursuant to a contract for a complete EPGTS is 50 percent or
more of the cost of manufacture of the complete EPGTS of which they are
a part), then the U.S. importer will be subject to the assessment of
antidumping duties on the imported parts, together with any applicable
interest from the date of entry of such parts, at the rate determined
in the administrative review.
With respect to entries of EPGTS spare and replacement/repair parts
from Japan, we will instruct the Customs Service not to suspend
liquidation of these entries if they are not included in the original
contract of sale for the EPGTS of which they are intended to be a part.
In addition, in order to ensure that our suspension of liquidation
instructions are not so broad as to cover merchandise imported for non-
subject uses, foreign producers/exporters shall be required to provide
certification that the imported merchandise would not be used to
fulfill an EPGTS contract. An appropriate certification should read as
follows:
I, [Name and Title], hereby certify that this entry/shipment
does not contain merchandise that is imported from Japan pursuant to
a contract for an engineered process gas turbo-compressor system and
is, therefore, not subject to antidumping duties.
We will also request that the interested parties register with the
Customs Service the EPGTS contract numbers pursuant to which subject
merchandise is imported. These suspension of liquidation instructions
will remain in effect until further notice.
[[Page 24414]]
The weighted-average dumping margins are as follows:
------------------------------------------------------------------------
Weighted-
average
Exporter/Manufacturer margin
percentage
------------------------------------------------------------------------
Mitsubishi Heavy Industries, Ltd. (MHI)..................... 41.72
All-Others.................................................. 41.72
------------------------------------------------------------------------
International Trade Commission (``ITC'') Notification
In accordance with section 735(d) of the Act, we have notified the
ITC of our determination. As our final determination is affirmative,
the ITC will determine, within 45 days, whether these imports are
causing material injury, or threat of material injury, to an industry
in the United States. 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 published pursuant to section 735(d) of the
Act.
Dated: April 24, 1997.
Robert S. LaRussa,
Acting Assistant Secretary for Import Administration.
[FR Doc. 97-11384 Filed 5-2-97; 8:45 am]
BILLING CODE 3510-DS-P