[Federal Register Volume 63, Number 54 (Friday, March 20, 1998)]
[Notices]
[Pages 13626-13636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7352]


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DEPARTMENT OF COMMERCE

[C-508-605]


Industrial Phosphoric Acid From Israel: Final Results of 
Countervailing Duty Administrative Review

AGENCY: Import Administration, International Trade Administration, 
Department of Commerce.

ACTION: Notice of final results of countervailing duty administrative 
review.

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SUMMARY: On September 10, 1997, the Department of Commerce published in 
the Federal Register its preliminary results of administrative review 
of the countervailing duty order on industrial phosphoric acid from 
Israel for the period January 1, 1995 through December 31, 1995 (62 FR 
47645). The Department of Commerce has now completed this 
administrative review in accordance with section 751(a) of the Tariff 
Act of 1930, as amended. For information on the net subsidy for each 
reviewed company, and for all non-reviewed companies, please see the 
Final Results of Review section of this notice. We will instruct the 
U.S. Customs Service to assess countervailing duties as detailed in the 
Final Results of Review section of this notice.

EFFECTIVE DATE: March 20, 1998.

FOR FURTHER INFORMATION CONTACT: Christopher Cassel or Lorenza Olivas, 
Office of CVD/AD Enforcement VI, Import Administration, International 
Trade Administration, U.S. International Trade Administration, U.S. 
Department of Commerce, 14th Street and Constitution Avenue, N.W., 
Washington, D.C. 20230; telephone: (202) 482-2786.

SUPPLEMENTARY INFORMATION:

Background

    Pursuant to 19 CFR 355.22(a), this review covers only those 
producers or exporters of the subject merchandise for which a review 
was specifically requested. Accordingly, this review covers Rotem-
Amfert Negev Ltd. (Rotem). This review also covers the period January 
1, 1995 through December 31, 1995.
    Since the publication of the preliminary results on September 10, 
1997, (Preliminary Results), the following events have occurred. 
Pursuant to section 751(a)(3) of the Tariff Act of 1930, as amended, we 
extended the final results to no later than March 9, 1998. See 
Industrial Phosphoric Acid From Israel; Extension of Time Limit for 
Countervailing Duty Administrative Review, 63 FR 1441 (January 9, 
1998). On October 10, 1997, a case brief was submitted by the 
Government of Israel (GOI) and Rotem, producer/exporter of industrial 
phosphoric acid (IPA) to the United States during the review period 
(respondents). On October 17, 1997, a rebuttal brief was submitted by 
counsel for the FMC Corporation and Albright & Wilson Americas Inc. 
(petitioners). On January 26, 1998, we provided petitioners and 
respondents the opportunity to address the grant calculation 
methodology followed in the Final Affirmative Countervailing Duty 
Determination: Steel Wire Rod from Venezuela, 62 FR 55014 (October 22, 
1997) (Wire Rod from Venezuela). That methodology has direct relevance 
in this proceeding and the final determination in that case was 
published after the preliminary results in this proceeding were 
completed. Accordingly, on February 3, 1998, comments were submitted by 
respondents and petitioners. On February 6, 1996, rebuttal comments 
were submitted by respondents and petitioners.

Applicable Statute

    Unless otherwise indicated, all citations to the statute are 
references to the provisions of the Tariff Act of 1930, as amended by 
the Uruguay Round Agreements Act (URAA) effective January 1, 1995 (the 
Act). The Department of Commerce (the Department) is conducting this 
administrative review in accordance with section 751(a) of the Act.

Scope of the Review

    Imports covered by this review are shipments of industrial 
phosphoric acid (IPA) from Israel. Such merchandise is classifiable 
under item number 2809.20.00 of the Harmonized Tariff

[[Page 13627]]

Schedule (HTS). The HTS item number is provided for convenience and 
U.S. Customs Service purposes. The written description of the scope 
remains dispositive.

Verification

    As provided in section 782(i) of the Act, we verified information 
submitted by the GOI and Rotem. We followed standard verification 
procedures, including meeting with government and company officials, 
and examining relevant accounting and financial records and other 
original source documents. Our verification results are outlined in the 
public versions of the verification reports, which are on file in the 
Central Records Unit (Room B-099 of the Main Commerce Building).

Subsidies Valuation Information

Period of Review

    The period for which we are measuring subsidies (the POR) is 
calendar year 1995.

Allocation Period

    In British Steel plc. v. United States, 879 F.Supp. 1254, 1289 
(February 9, 1995) (British Steel I), the U.S. Court of International 
Trade (the Court) ruled against the allocation methodology for non-
recurring subsidies that the Department had employed for the past 
decade, which was articulated in the General Issues Appendix, appended 
to the Final Countervailing Duty Determination; Certain Steel Products 
from Austria, 58 FR 37225 (July 9, 1993) (GIA). In accordance with the 
Court's remand order, the Department determined that the most 
reasonable method of deriving the allocation period for nonrecurring 
subsidies is a company-specific average useful life (AUL) of non-
renewable physical assets. This remand determination was affirmed by 
the Court on June 4, 1996. British Steel, 929 F.Supp 426, 439 (CIT 
1996) (British Steel II). Accordingly, the Department has applied this 
method to those non-recurring subsidies that have not yet been 
countervailed.
    For non-recurring subsidies received prior to the POR and which 
have already been countervailed based on an allocation period 
established in an earlier segment of the proceeding, it is not 
reasonable or practicable to reallocate those subsidies over a 
different period of time. Therefore, for purposes of these final 
results, the Department is using the original allocation period 
assigned to each nonrecurring subsidy received prior to the POR. This 
conforms with our approach in Certain Carbon Steel Products from 
Sweden; Final Results of Countervailing Duty Administrative Review, 62 
FR 16549 (April 7, 1997). For additional discussion of this issue, see 
Department's Position on ``Comment 6: Grants Previously Allocated 
According to the U.S. IRS Depreciation Schedules, Should be Allocated 
Over Rotem's Actual AUL'', below.
    For non-recurring subsidies received during the POR, Rotem 
submitted an AUL calculation based on depreciation and asset values of 
productive assets reported in its financial statements. Rotem's AUL was 
derived by adding depreciation charges for ten years, and dividing 
these charges by the sum of average gross book value of depreciable 
fixed assets for the related periods. We found this calculation to be 
reasonable and consistent with our company-specific AUL objective. 
Rotem's calculation resulted in an AUL of 24 years, and we have used 
this calculated figure for the allocation period for non-recurring 
subsidies which have not been previously allocated.

Privatization

(I) Background
    Israeli Chemicals Limited (ICL), the parent company which owns 100 
percent of Rotem's shares, was partially privatized in 1992, 1993 and 
1994. In this administrative review, the GOI and Rotem reported that 
additional shares of ICL were sold in 1995. We have previously 
determined that the partial privatization of ICL represents a partial 
privatization of each of the companies in which ICL holds an ownership 
interest. See Final Results of Countervailing Duty Administrative 
Reviews; Industrial Phosphoric Acid from Israel, 61 FR 53351, 53352 
(October 11, 1996) (1994 Final Results).
    In this review and prior reviews of this order, the Department has 
found that Rotem and/or its predecessor, Negev Phosphates Ltd., 
received non-recurring countervailable subsidies prior to these partial 
privatizations. Further, the Department has found that a portion of the 
price paid by a private party for all or part of a government-owned 
company represents partial repayment of prior subsidies. See GIA, 58 FR 
at 37262. Therefore, in the 1992 and 1993 reviews, we calculated the 
portion of the purchase price paid for ICL's shares that is 
attributable to repayment of prior subsidies. In the 1994 review, 
respondents reported that the GOI sold less than 0.5 percent of its 
shares in ICL. Because this percentage of shares privatized was so 
small, the percentage of subsidies potentially repaid through this 
privatization could have no measurable impact on Rotem's overall net 
subsidy rate. Therefore, we did not apply our repayment methodology to 
the 1994 partial privatization. See 1994 Final Results, 61 FR at 53352. 
However, we are applying this methodology to the 1995 partial 
privatization of ICL during the POR because 24.9 percent of ICL's 
shares were sold. This approach is consistent with our findings in the 
GIA and Department precedent under the URAA. See e.g., GIA, 58 FR at 
37259; Certain Hot-Rolled Lead and Bismuth Carbon Steel Products from 
the United Kingdom; Final Results of Countervailing Duty Administrative 
Review, 61 FR 58377 (November 14, 1996); and Final Affirmative 
Countervailing Duty Determination: Certain Pasta From Italy, 61 FR 
30288 (June 14, 1996).
(II) Modification of the Privatization Calculation Methodology
    As noted above, in the 1992 and 1993 administrative reviews of this 
order, we determined that the partial privatization of ICL, Rotem's 
parent company, represented partial privatization of Rotem. Therefore, 
in each of those reviews, we calculated the portion of the purchase 
price paid for ICL's shares that was attributable to the repayment of 
prior subsidies. Under this methodology, to determine the amount of 
subsidies that are extinguished due to privatization, we calculate the 
net present value (NPV) of the remaining allocable subsidies at the 
time of privatization. For example, if the privatization took place in 
1993, the NPV calculation for that transaction would be the remaining 
benefit from all unamortized subsidies in 1993. However, in past cases 
involving privatization or changes in ownership we recalculated the NPV 
in subsequent review periods by including only the remaining benefit 
from unamortized subsidies affecting that subsequent review period. For 
example, if we calculated the NPV for a privatization that took place 
in 1993, in the next administrative review, 1994, we would recalculate 
the NPV using only those subsidies still allocable to 1994, i.e., the 
remaining unamortized subsidies still benefitting the company in 1994.
    We revisited that methodology in the 1995 countervailing duty 
administrative review of lead and bismuth carbon steel products from 
the United Kingdom. See Certain Hot-Rolled Lead and Bismuth Carbon 
Steel Products from the United Kingdom; Final Results of Countervailing 
Duty Administrative Review, 62 FR 53306 (October 14, 1997). In that 
review, we determined that it is

[[Page 13628]]

not appropriate to modify the calculation of the NPV of the subsidies 
existing at the time of sale. The change in ownership of a company is a 
fixed event at a particular point in time. Thus, the percentage of 
subsidies that may be extinguished due to privatization or reallocated 
due to a change in ownership in a given year is also fixed at that same 
point in time and does not change. Therefore, the pass-through 
percentage will no longer be altered once it has initially been 
determined in an investigation or administrative review. We have 
modified the ICL privatization calculations in this administrative 
review to reflect the change outlined above.

Analysis of Programs

    Based upon the responses to our questionnaire, the results of 
verification, and written comments from the interested parties, we 
determine the following:

I. Programs Conferring Subsidies

A. Programs Previously Determined To Confer Subsidies
    1. Encouragement of Capital Investments Law (ECIL) Grants. In the 
preliminary results, we found that this program conferred 
countervailable subsidies on the subject merchandise. Our review of the 
record and our analysis of the comments submitted by the interested 
parties, summarized below, has led us to modify our findings from the 
preliminary results for this program. In particular, we followed the 
methodology set forth in Wire Rod from Venezuela to calculate the 
benefit from these non-recurring grants. Under this methodology, we 
converted the grant amount into U.S. dollars on the date of receipt of 
the grant. The benefit in the POR was then calculated using our 
standard grant allocation methodology. For a detailed discussion of the 
changes to the calculation methodology for this program, see the 
Department's Position on ``Comment 9: Inflation Adjustment for Non-
Recurring Grants,'' below; see also the Calculation Memorandum to the 
File, dated March 9, 1998 (public version on file in the Central 
Records Unit of the Department of Commerce) (``Calculation Memo''). 
Accordingly, the net subsidies for this program have changed and are as 
follows:

------------------------------------------------------------------------
                                                                 Rate   
                   Manufacturer/exporter                      (percent) 
------------------------------------------------------------------------
Rotem Amfert Negev.........................................         8.85
------------------------------------------------------------------------

    2. Long-term Industrial Development Loans. In the preliminary 
results, we found that this program conferred countervailable subsidies 
on the subject merchandise. We did not receive any comments on this 
program from the interested parties, and our review of the record has 
not led us to change any findings or calculations. Accordingly, the net 
subsidies for this program remain unchanged from the preliminary 
results and are as follows:

------------------------------------------------------------------------
                                                                 Rate   
                   Manufacturer/exporter                      (percent) 
------------------------------------------------------------------------
Rotem Amfert Negev.........................................       <0.005
------------------------------------------------------------------------

    3. Encouragement of Industrial Research and Development Grants 
(EIRD). In the preliminary results we found that this program conferred 
countervailable subsidies on the subject merchandise. We did not 
receive any comments on this program from the interested parties, and 
our review of the record has not led us to change any findings or 
calculations. Accordingly, the net subsidies for this program remain 
unchanged from the preliminary results and are as follows:

------------------------------------------------------------------------
                                                                 Rate   
                   Manufacturer/exporter                      (percent) 
------------------------------------------------------------------------
Rotem Amfert Negev.........................................         0.08
------------------------------------------------------------------------

II. Programs Found To Be Not Used

    In the preliminary results, we found that the producer/exporter of 
the subject merchandise did not apply for or receive benefits under the 
following programs:
    A. Reduced Tax Rates under ECIL;
    B. ECIL Section 24 loans;
    C. Dividends and Interest Tax Benefits under Section 46 of the 
ECIL; and
    D. ECIL Preferential Accelerated Depreciation.
    E. Exchange Rate Risk Insurance Scheme.
    We did not receive any comments on these programs from the 
interested parties, and our review of the record has not led us to 
change our findings from the preliminary results.

Analysis of Comments

Comment 1: Denominator for ECIL Grants Allocable to IPA, MKP and 
Fertilizers

    Respondents argue that the denominator used to calculate the ad 
valorem rate from ECIL grants allocable to IPA, monopotassium phosphate 
(MKP) and fertilizers is understated, because it does not include 
Rotem's direct sales of green acid, which is also a fertilizer. The 
correct denominator for these ECIL benefits should be taken from page 
two of Rotem's May 27, 1997, questionnaire response, and should include 
Rotem's sales of fertilizers, IPA, and MKP. The fertilizer sales amount 
includes direct sales of green acid.
    Petitioners contend that the Department used the correct 
denominator in the benefit calculations. According to petitioners, the 
Department's preliminary calculation reflects commercial realities 
because green acid is sold and accounted for as green acid and not as 
fertilizer.
    Department's Position. We agree with respondents. In the 
preliminary results, we incorrectly excluded direct sales of green acid 
from the ad valorem rate calculation for ECIL grants allocable to IPA, 
MKP and fertilizers. The funding for the grant projects in question, 
projects 9, 11, and 15, was for the expansion and debottlenecking of 
Rotem's green acid facilities. In the preliminary results, we 
determined that it was appropriate to attribute ECIL grants tied to a 
particular unit over the sales of the product produced by that unit 
plus the sales of all products into which that product may be 
incorporated. We also noted that green acid produced at plant 30 and 31 
can be incorporated into the production of all of the company's 
downstream products. Therefore, in these final results, we have 
included sales of fertilizers, including direct sales of green acid, as 
well as sales of IPA and MKP, in calculating the ad valorem rate from 
ECIL grants 9, 11, and 15 .

Comment 2: Attribution of ECIL Grants to Inputs Used in the Production 
of IPA

    Respondents contend that the Department should return to the 
attribution approach followed in the investigation of this case and in 
the five subsequent administrative reviews. According to respondents, 
departing from a long-standing methodology is unwarranted, in 
particular, as respondents claim here, when the earlier approach was 
more accurate. Under that earlier approach, ECIL grants to inputs, such 
as phosphate rock and green acid, were apportioned to IPA according to 
the consumption of each input product in IPA production. Respondents 
state that in the preliminary results, the Department incorrectly 
attributed these ECIL grants to the direct sales of the inputs and the 
sales of all downstream products that potentially incorporate the 
input.
    Respondents assert that it is the Department's practice not to 
disturb established methodologies in the absence of any new evidence or 
without new and compelling arguments. For example, respondents note 
that in the certain steel investigations, the Department rejected an 
argument made

[[Page 13629]]

by parties in that case to change the long-standing grant amortization 
methodology, stating that ``before a change is made in established 
policy there should be evidence to show that the change is warranted.'' 
GIA, 58 FR at 37229. Further, in a 1996 antidumping proceeding, the 
Department refused to alter the existing model match methodology 
``unless compelling reasons exist'' to do so. Polyethylene 
Terephthalate Film, Sheet, and Strip from the Republic of Korea; Final 
Results of Antidumping Duty Administrative Review, 61 FR 37177, 35181 
(July 5, 1996) (Strip from ROK). Respondents also state that the U.S. 
Court of International Trade (CIT) has found that changes to long-
standing methodologies, even if those changes result in greater 
accuracy, are not warranted because these methodologies become ``the 
law of these proceedings,'' and ``[p]rinciples of fairness prevent 
Commerce from changing its methodology.'' Shikoko Chemicals Corp. v. 
United States, 795 F. Supp. 417, 421-22 (CIT 1992) (Shikoko).
    Respondents acknowledge that the CIT has permitted the Department 
to depart from a verified methodology developed in an investigation if 
a ``different methodology permits a more accurate assessment of current 
margins.'' Hussey Copper, Ltd. v. United States, 834 F. Supp. 413, 425 
(CIT 1993) (Hussey). In this case, however, respondents contend that 
the Department acted contrary to law by opting for a methodology that 
provides a less accurate assessment than the one followed in all but 
the last two proceedings. For example, in British Steel II, 929 F. 
Supp. at 426, the CIT stated that ``Commerce is required to allocate 
subsidies over products that have benefitted from the subsidies * * * 
in a manner that reasonably reflects the extent to which the products 
have benefitted from the subsidies.'' Moreover, respondents note that 
the Hussey Court required the Department to implement ``the basic 
purpose of the statute--determining current margins as accurately as 
possible.'' Hussey, 834 F. Supp. at 425, citing Rhone Poulenc, Inc. v. 
United States, 899 F.2d 1185, 1191 (Fed. Cir. 1990).
    In light of this precedent, respondents argue that the Department 
should return to the original methodology, which allocates the grants 
as accurately as possible to the subject merchandise. Any other result 
is less accurate, contrary to law and punitive.
    Petitioners argue that the Department has reasonably determined 
that this new methodology more precisely allocates the subsidy 
benefits. The change in the methodology, petitioners state, was clearly 
within the Department's legal authority. According to petitioners, 
having made this determination, the Department should not return to the 
discarded methodology advocated by respondents.
    Department's Position. Contrary to respondents' assertions, the 
attribution approach for ECIL subsidies adopted in this administrative 
review, which departs from the approach followed until the final 
results in the 1993 administrative review of this case (61 FR 2884), 
accurately measures the benefit conferred from the countervailable ECIL 
grants and is consistent with the countervailing duty statute. 
Moreover, this approach is consistent with the Department's attribution 
principles concerning subsidies to inputs where the same corporate 
entity produces the inputs and the subject merchandise, as well as 
other downstream products.
    As a preliminary matter, we disagree with respondents' contention 
that the Department is irrevocably tied to long-standing methodologies 
merely because those methodologies have become accepted practice in a 
proceeding. Under respondents' logic, the Department could never change 
a methodology it had applied in the past. This conclusion is not 
supported by the countervailing duty statute, or administrative and 
legal precedent. Rather, administrative precedent is rarely binding 
because agencies must be given the opportunity to develop agency law on 
a case-by-case basis over time; otherwise they would be hindered in 
clarifying unsettled law and from adapting their practice to new 
interpretations and factual situations. Not being able to do so would 
force them to maintain positions that were no longer relevant. See NLRB 
v. J. Weingarten, Inc., 420 U.S. 251, 265-66 (1975) (``The use by an 
administrative agency of the evolutionary approach is particularly 
fitting.''). In fact, administrative agencies are given broad leeway to 
depart from prior administrative precedent, provided that such 
departure is adequately explained. See Ipsco, Inc. v. United States, 
678 F. Supp. 633, 639 (CIT 1988) (agency needn't explain its rationale 
at length, as long as the ``path of ITA's reasoning is discernible from 
the record'').
    Respondents' reliance on Shikoku for the proposition that changes 
in long-standing methodologies are not warranted is also not 
persuasive. Aside from having little precedential value, the facts in 
Shikoku are clearly distinguishable from those in this case. In 
Shikoku, the court found that the plaintiff, respondent Shikoku, had 
reasonably relied upon the Department's continued application of a 
case-specific antidumping calculation method applied in four previous 
reviews, and that by so doing, Shikoku was attempting to comply with 
U.S. antidumping law. However, the Department's departure from its past 
methodology resulted in a continuation of the antidumping order, which 
otherwise would have been revoked. This resulted in substantial harm to 
Shikoku. By contrast, in this case, Rotem has not demonstrated reliance 
upon the Department's prior methodology because such reliance could 
only be evidenced by refusing to accept subsidies.
    Respondents also incorrectly imply that the Department changed its 
methodology without considering whether that change was warranted on 
the basis of new information or changes in Department policy. In fact, 
in the 1994 administrative review of this case we conformed our 
attribution approach to the methodology articulated in the 
countervailing duty investigation of pasta from Italy. See Final 
Affirmative Countervailing Duty Determination: Certain Pasta From 
Italy, 61 FR 30288, 30304-305 (June 14, 1996) (Pasta From Italy). In 
Pasta From Italy, the Department reasoned that where subsidies for 
semolina production, a primary input into pasta, were provided to the 
same corporate entity that milled semolina and produced pasta, the 
production was sufficiently integrated that subsidies bestowed upon the 
production of semolina, which is an input into pasta, would necessarily 
flow down to the production of subject merchandise. In that 
circumstance, it was deemed unnecessary to conduct an upstream subsidy 
investigation to examine whether a competitive benefit had been 
bestowed on subject merchandise by the semolina subsidization. 
Therefore, the Department attributed subsidies provided to semolina to 
the company's total sales of pasta and semolina, including sales of the 
subject merchandise. The Department stated that ``for those companies 
where the mill is not incorporated separately from the producer of the 
subject merchandise, we have included subsidies for the milling 
operations in our calculation.'' Pasta From Italy, 62 FR at 30289.
    Respondents' complaint that the Department acted contrary to law by 
adopting a methodology that is not precise and accurate is also without 
merit. As a preliminary matter, the Department has broad discretion in

[[Page 13630]]

adopting specific methods to identify and value subsidies, the only 
requirement being that the method be reasonable and in accord with the 
law. See Inland Steel Industries, Inc. v. United States, Slip-Op. 97-71 
(CIT 1997) (``so long as Commerce's methodology is a reasonable means 
to carry out the statute, it needn't be the most precise method''); 
Chevron U.S.A. v. United States, 467 U.S. 837, 844 (1984).
    The attribution approach adopted in this review recognizes that the 
ECIL subsidies provided to the Arad, Zin and Oron mines, as well as to 
Rotem's green acid facilities, benefitted not only the inputs for which 
the subsidies were received, but also production of other downstream 
products, including IPA. Rotem officials confirmed this at 
verification, stating that ``every [phosphate] rock can be used in 
every product,'' and green acid from both green acid facilities could 
be used in all downstream products. See the August 22, 1997, Memorandum 
to Barbara E. Tillman, Verification of Rotem's Questionnaire Responses 
(public version on file in the Central Records Unit, Room B-099) (Rotem 
VR). Thus, by allocating the ECIL grants to inputs over sales of that 
input and sales of downstream products incorporating that input, the 
Department more accurately assessed the benefit attributable to IPA 
from the government's subsidization of inputs. The subsidized inputs 
(phosphate rock and green acid) benefit all of Rotem's downstream 
products. Moreover, as we established in prior reviews, phosphate rock 
inputs have in fact been incorporated into Rotem's downstream products, 
including IPA. Therefore, the Department appropriately attributed ECIL 
subsidies to inputs over Rotem's direct sales of these inputs and the 
sales of all downstream products, because those end products 
incorporate the inputs. Again, in order to make an apples-to-apples 
comparison, it is imperative that both the numerator (the 
countervailable benefit) and denominator (the universe of sales to 
which the benefit applies) used in the Department's calculation of a 
subsidy reflect the same universe of goods. Otherwise, the rate 
calculated will either over or understate the subsidy attributable to 
subject merchandise. The attribution method adopted in the preliminary 
results more accurately captures the apples-to-apples comparison 
outlined above. Accordingly, we have not altered that approach in these 
final results.

Comment 3: ECIL Grants to Projects that Did Not Provide Inputs to IPA 
During the POR

    According to respondents, the Department exceeded its statutory 
authority when it attributed to IPA subsidies under ECIL projects 1, 3, 
4, 7, and 15, because Department officials verified that inputs from 
the facilities that benefitted from these grants were not used in the 
production of IPA during the POR. Under such circumstances, respondents 
state, the Department's longstanding practice mandates that if a 
subsidy is not ``tied'' to the subject merchandise and the equipment or 
plant procured with the subsidy are not used to produce the subject 
merchandise, then the subsidy is not countervailable and cannot be 
attributable to the subject merchandise. Respondents state that the 
1997 proposed rules reaffirm this approach, stating that ``subsidies 
should be attributed, to the extent possible, to those products for 
which costs are reduced (or revenues increased),'' and that ``if a 
subsidy is tied to the production or sale of a particular product, the 
Secretary will attribute the subsidy only to that product.'' 1997 
Proposed Rules, 62 FR at 8845, 8855.
    According to respondents, the fact that the input products could 
``potentially'' be incorporated in all products produced by Rotem or 
that they ``may'' be incorporated into IPA, the Department's rationale 
for countervailing these grants, is not relevant. Respondents contend 
that the 1997 Proposed Rules do not speak of ``potential'' input 
products, only ``actual'' inputs and that an input that merely 
``could'' be an input does not fall within this provision. Similarly, 
respondents note that in British Steel II, the CIT observed that the 
Department must, after determining which products benefitted from 
countervailable subsidies, ``allocate countervailing duties over such 
products in a manner that reasonably reflects the extent to which the 
products have benefitted from the subsidies.'' 929 F. Supp. at 453. 
Thus, respondents state that the Department should find no benefit from 
these subsidies in 1995.
    According to petitioners, the Department acted correctly in 
calculating the benefit from ECIL projects to facilities that provided 
no inputs into the production of IPA during the POR (projects 1, 3, 4, 
7, and 15). Petitioners state that the issue with respect to these 
indirect benefits is not whether the particular inputs were used to 
produce IPA during a limited time period, such as the POR, but whether 
they could have been used, or in fact have been used in the past for 
that purpose. Petitioners further argue that by enhancing the 
facilities that produce inputs necessary for IPA production, these ECIL 
grants indirectly benefitted IPA, because to the extent that inputs are 
fungible, it is logical to consider enhanced production capability as 
an indirect benefit to IPA. Such a determination is, petitioners state, 
consistent with the Department's approach to subsidies to input 
products provided to a single corporate entity.
    Department's Position. Respondents' argument that ECIL subsidies 
under projects 1, 3, 4, 7, and 15 are ``tied'' to products other than 
the subject merchandise, and that these subsidies should therefore not 
be attributed to Rotem's sales of subject merchandise, is incorrect. In 
this review, we have correctly determined that, regardless of whether 
any of the inputs (phosphate rock and green acid) receiving subsidies 
were actually fed into IPA production during the POR, all of these 
products are inputs into IPA. We have thus departed from our past 
practice of attempting to determine the precise amount of inputs that 
were actually used in IPA production from each ECIL project during the 
relevant period and then apportioning the subsidies provided to those 
inputs accordingly. Consequently, we have fully brought our method of 
attributing ECIL grants into harmony with Pasta From Italy.
    The record in this case establishes that ECIL grants received by 
Rotem for Projects 1, 3, 4, and 7 were for Rotem's Arad, Zin and Oron 
mines, and grants received for Project 15 were for Rotem's new green 
acid facility. The mines and green acid facility are not separately 
incorporated entities. The Arad, Zin and Oron mines each produce 
phosphate rock, the main input of IPA and Rotem's other downstream 
products. Green acid is also an input into the production of IPA and 
other end products produced by Rotem. However, respondents attempt to 
argue that because inputs benefiting from Projects 1, 3, 4, 7, and 15 
have not been used in the production of IPA during the POR, these 
subsidies are `tied' to products other than the subject merchandise.
    Our position on the tying of benefits is that ``a subsidy is 
``tied'' when the intended use is known to the subsidy giver and so 
acknowledged prior to or concurrent with the bestowal of the subsidy.'' 
See Final Affirmative Countervailing Duty Determinations; Certain Steel 
Products from Belgium, 47

[[Page 13631]]

FR 39304 (September 7, 1982).1 When we determine that a 
benefit is ``tied'' to a product, there is an implicit assumption that 
the benefit is intended to affect only that product. See Industrial 
Nitrocellulose from France; Final Results of Countervailing Duty 
Administrative Review, 52 FR 833 (January 9, 1987). In this case, 
however, respondents have failed to provide any evidence on the record 
demonstrating that ECIL grants 1, 3, 4, 7, and 15 were intended to 
affect only the inputs that received the subsidy, and only the end 
products that incorporated these inputs only during the POR. Rather, 
ECIL subsidies are provided to inputs that are also incorporated into 
other downstream products produced by the same integrated company. 
Therefore, to the extent that ECIL grants are tied to phosphate rock 
and green acid, they are also tied to the sales of all other 
merchandise incorporating those inputs.
---------------------------------------------------------------------------

    \1\ This position is also reflected in the Department's 1989 
Proposed Rules, which define tied benefits as ``a benefit bestowed 
specifically to promote the production of a particular product.'' 
Countervailing Duties: Notice of Proposed Rulemaking and Request for 
Public Comments, 54 FR 23366, 23374 (May 31, 1989) (1989 Proposed 
Rules).
---------------------------------------------------------------------------

    It is also important to note that attribution is established at the 
point the subsidy is bestowed, not the point at which it is used. 
Otherwise, the subsidy is apportioned on a pro-rata basis in each 
administrative review. Such a pro-rata apportionment contravenes our 
policy of not examining the use of the subsidy to determine whether it 
is countervailable. As stated in the GIA, ``nothing in the statute 
directs the Department to consider the use to which subsidies are put 
or their effect on the recipient's subsequent performance * * * nothing 
in the statute conditions countervailability on the use or effect of a 
subsidy. Rather, the statute requires the Department to countervail an 
allocated share of the subsidies received by producers, regardless of 
their effect.'' 58 FR at 37260; see also British Steel v. United 
States, 879 F. Supp. 1254, 1298 (CIT 1995) (British Steel), appeals 
docketed, Nos. 96-1401 to -06 (Fed. Cir. June 21, 1996); British Steel 
Corp v. United States, 605 F. Supp. 286, 294-95 (1985) (``[I]t is 
unnecessary to trace the use'' of funds), citing Michelin Tire Corp. v. 
United States, 4 CIT 252, 255 (1982), vacated on agreed statement of 
facts, 9 CIT 38 (1985). Such an interpretation is also supported by the 
statute, as amended by the URAA. Specifically, Sec. 771(5)(C) of the 
Act states that the Department ``is not required to consider the effect 
of the subsidy in determining whether a subsidy exists.'' The SAA 
further elaborates, noting that the ``definition of subsidy does not 
require that Commerce consider or analyze the effect (including whether 
there is any effect at all) of a government action on the price or 
output of the class or kind of merchandise under investigation or 
review.'' SAA at 256; H.R. Rep. No. 826, 103d Cong., 2d Sess., vol. 1 
at 926 (1994) (SAA). As such, adoption of the attribution approach set 
out in Pasta From Italy was reasonable because Rotem is also an 
integrated producer, as are the pasta producers who own semolina 
production facilities. In such cases, subsidies to inputs will be 
attributed to the inputs and the downstream products that incorporate 
the inputs.
    Finally, we note that for subsidies ``tied'' to non-subject 
merchandise, i.e., products that could not be inputs into IPA, such as 
grants tied to fertilizers under Project 13, we did not include that 
ECIL grant in calculating the subsidy rate. For the reasons set forth 
above, for the purposes of these final results, the Department will 
continue to allocate ECIL grants from Projects 1, 3, 4 and 7, and 15 
over the sales of the inputs (phosphate rock and green acid) and the 
downstream products made by Rotem during the POR (IPA, MKP, and 
fertilizers).

Comment 4: ECIL Grants to Project 15

    According to respondents, the input product produced by the Rotem 
II facility, the plant that benefited from ECIL grant project 15, was 
never intended as an input into IPA. Respondents claim that the 
Department countervailed grants from project 15 on the basis of 
statements by Rotem officials at verification that green acid from the 
plant could chemically be used for IPA. According to respondents, 
however, the relevant fact is that it is not economical to use this 
green acid in the production of IPA. Therefore, respondents state, the 
Department should find that grants to project 15 did not benefit IPA 
during the POR.
    Respondents further note that because the plant that benefited from 
project 15 did not start operations until 1996, no benefit could 
possibly have accrued to IPA in 1995 from these grants. This is 
especially the case, since the grants to this facility were not 
intended to be used in IPA production. Rather, the inputs were to be 
directed to another product, not yet produced in 1995.
    According to petitioners, respondents' argument that project 15 
grants should not be countervailed because the facilities that 
benefited from the grants were not in operation in 1995 is irrelevant. 
Petitioners state that it is the potential use of the input that is 
important, and not its actual use.
    Department's Position. We disagree with respondents. Rotem II 
produces green acid, which is an input into IPA as well as other 
downstream products produced by Rotem. Respondents do not dispute that 
green acid from Rotem II can be used in the production of all 
downstream products, including the subject merchandise. In fact, 
respondents confirmed that green acid from Rotem II could be 
incorporated into IPA and Rotem's other end products. See Rotem VR. 
Therefore, as explained in detail under in the Department's Position on 
``Comment 3, ECIL Grants to Projects that Did Not Provide Inputs to IPA 
During the POR,'' above, consistent with our policy concerning 
corporate entities that produce both the inputs and the subject 
merchandise, we appropriately attributed the grants provided to Rotem 
II to the direct sales of green acid and all downstream products that 
can be produced from green acid. Such an attribution approach is 
consistent with the countervailing duty statute, and is in accordance 
with the attribution approach followed in Pasta From Italy.
    Respondents' argument that the Rotem II facility was not 
operational in 1995 is also without merit. In light of our policy 
concerning integrated producers, this fact is irrelevant. Under the 
countervailing duty statute, the Department will find a countervailable 
subsidy when a financial contribution has been provided and that 
financial contribution has conferred a benefit upon the recipient. 
While respondents may assert that green acid from Rotem II was directed 
to another product not yet produced, there is no information on the 
record of this proceeding indicating that green acid from Rotem II 
cannot be an input into the production of IPA, or that the ECIL grants 
to that facility are ``tied'' to the production of specific downstream 
products. Therefore, we have appropriately attributed these grants to 
Rotem's sales of green acid and to the sales of the company's 
downstream products that incorporate green acid.

Comment 5: Rate of Inflation and Interest Rate To Be Used for ECIL 
Grant Calculations for 1994 and 1995

    Respondents contend that the interest rate used by the Department 
to calculate the benefit during the POR from grants received in 1994 
and 1995 under ECIL project 15 was incorrect. The interest rate in 1995 
was calculated by adding the rate of inflation in 1994 to the real 
interest on CPI-indexed bonds in 1995. According to respondents, the 
rate of

[[Page 13632]]

inflation in 1995, not 1994 should have been added to that bond rate.
    Respondents further argue that the Department selected an incorrect 
inflation rate for 1995 from the Bank of Israel (BOI) Annual Report. 
The Department has consistently used the average change in the rate of 
inflation in its non-recurring grant benefit calculations. In 1995, 
this figure was 10.0 percent. According to respondents, this is not the 
actual rate of inflation during the year but the average change from 
the prior year. The actual change during the period, respondents state, 
was 8.1 percent, as noted in the BOI annual report.
    Petitioners contend that the Department has consistently used the 
average CPI change for the year in calculating the interest rate to be 
used in the ECIL benefit calculations. Therefore, the Department should 
not use a different CPI statistic in this administrative review, merely 
because the new rate would be helpful to Rotem. Petitioners point out 
that in 1994, the CPI change during the period was 14.5 percent, while 
the average change was 12.3 percent. In that review, respondents did 
not argue that the Department modify the CPI.
    Department's Position. As explained in the Department's Position on 
``Comment 9: Inflation Adjustment for Non-Recurring Grants,'' below, we 
have modified the calculation methodology for ECIL grants. The new 
approach does not require the use of NIS linked interest rates or the 
Israeli CPI index. Therefore, this issue is now moot.

Comment 6: Grants Previously Allocated According to the U.S. IRS 
Depreciation Schedules, Should Be Allocated Over Rotem's Actual AUL

    Respondents argue that the Department correctly allocated non-
recurring grants received by Rotem over the company's average useful 
life of assets (AUL) of 24 years. However, respondents note that the 
Department erred in not applying that allocation period to all of 
Rotem's non-recurring grants, including those received prior to the POR 
and which had been previously allocated according to the U.S. Internal 
Revenue Service depreciation schedules. According to respondents, the 
benefit from these earlier grants is, therefore, overstated, and will 
continue to be overstated if the allocation is not changed to reflect 
Rotem's AUL. Respondents state this correction can be achieved by 
taking the remaining balance in 1995 of previously allocated grants and 
reallocating that amount over the number of years left in a 24-year 
benefit stream that begins in the year the grant was received. This 
approach avoids the possibility of over-countervailing or under-
countervailing the subsidy, because the entire benefit will be 
countervailed over the 24 year period. Respondents further note that if 
the Department found it reasonable to revise the ECIL grant 
calculations prior to the POR with respect to the inflation adjustment, 
it should also be reasonable and practicable to do so for the AUL 
correction.
    Petitioners contend that the CIT's decision in British Steel does 
not require the Department to use a company-specific allocation period 
for all subsidies. Rather, petitioners state that the Department 
decided not to recalculate the AUL for subsidies received prior to the 
POR because such a change could distort the allocation of the actual 
benefits is fair and within the mandate of British Steel. Petitioners 
further argue that nothing in British Steel or in any other decision 
requires the Department to accept respondents' proposed method for 
recalculating the allocation period for earlier grants. In fact, 
petitioners note that the Department did not disturb previously 
established allocation periods in administrative reviews of other 
countervailing duty orders. See, e.g., Certain Carbon Cut-to-Length 
Carbon Steel Plate from Sweden; Final Results of Countervailing Duty 
Administrative Review, 62 FR 16551, 16552 (April 7, 1997), and Certain 
Carbon Steel Products from Sweden; Final Results of Countervailing Duty 
Administrative Review, 62 FR 16549, 16550 (April 7, 1997). Accordingly, 
petitioners argue that the Department's allocation of prior subsidies 
should remain unchanged.
    Department's Position. Petitioners correctly note that in prior 
cases we have not disturbed allocation periods established in prior 
proceedings. This approach is reasonable and, as noted by petitioners, 
is not in conflict with the CIT's decision in British Steel, which does 
not require the Department to allocate non-recurring subsidies over a 
company's AUL. Furthermore, maintaining established allocation periods 
is both fair and practical, and modifying the allocation stream for 
previously allocated subsidies can produce unfair results. For example, 
it is conceivable that a company-specific AUL would yield a shorter 
allocation period. In that case, it is possible that the subsidy may be 
under-countervailed, in particular for subsidies that have reached the 
point in the allocation stream beyond the total number of years in the 
company-specific AUL. For these reasons, Rotem's 24-year company-
specific AUL will only be adopted for ECIL grants that have not been 
previously allocated.

Comment 7: Grants Not Previously Considered in Subsidy Calculations 
Should Be Allocated Over Rotem's Actual AUL

    According to respondents, the Department has determined to 
countervail certain grants in this administrative review that have not 
been countervailed in prior reviews. Among these are grants received 
prior to the POR. For these grants, respondents argue that the 
Department should allocate these grants over Rotem's company-specific 
AUL of 24 years, because these grants have not already been allocated 
in past administrative reviews.
    Department's Position. Grants from ECIL project 15, received in 
1994, were not countervailed in the 1994 administrative review and 
therefore have not previously been allocated. Therefore, we concur with 
respondents that it is appropriate to allocate these grants over 
Rotem's company-specific 24-year allocation period. However, we 
disagree with respondents that there are ``numerous grants 
countervailed this time that have not been countervailed in the past.'' 
In the 1994 administrative review, the Department countervailed grants 
from projects that benefitted inputs that were not used in the 
production of IPA during 1994. Moreover, in past administrative 
reviews, ECIL grant projects to each of Rotem's phosphate rock and 
green acid facilities had been countervailed. This includes grants to 
the Arad and Zin mines, which Rotem claims in this review did not 
benefit production of IPA. Accordingly, the allocation period for these 
grants will not change in these final results.

Comment 8: The Denominator for Grants to Projects Not Tied Directly to 
IPA

    Respondents contend that the Department should not deviate from the 
practice followed in the 1994 review of attributing grants not tied to 
IPA over Rotem's total sales. This approach was modified in the 
preliminary results of this review so that grants to Rotem's green acid 
facilities were attributed to Rotem's total sales minus direct sales of 
phosphate rock. (Grants tied to Rotem's phosphate rock facilities were 
attributed to the company's total sales.) According to respondents, 
this change is not justified by the Department's regulations.
    Respondents state that the rationale for this change is found in 
the tying provision of the 1997 Proposed Rules.

[[Page 13633]]

However, respondents note that these rules, while they provide 
guidance, are not controlling in this review and are therefore not 
applicable. Respondents further argue that this provision should only 
be invoked for grants to an input that is essential to the production 
of the downstream product. This is not the case with green acid, which, 
while it has been an input into IPA, is not required for IPA 
production.
    Respondents further claim that under section 355.47 of the 1989 
Proposed Rules, the Department is directed to attribute subsidies 
either to total sales or to products to which the benefit is tied. 
Therefore, if a grant is tied to several products, the Department will 
allocate that grant over the sales of only those products. However, 
respondents contend that where the subsidy is given to an input into 
the subject merchandise, rather than directly to the subject 
merchandise or several products including the merchandise under 
investigation, the denominator should be the company's total sales. 
Therefore, respondents argue that in the final results, the Department 
should allocate all grants not tied directly to the subject merchandise 
over Rotem's total sales.
    Petitioners state that the Department is permitted to change its 
methodologies and that the approach followed in this review is a 
refinement of the methodology adopted in the 1994 proceeding. The 
Department has determined that the approach with respect to ECIL 
subsidies to Rotem's green acid facilities is a more precise 
measurement of the benefit bestowed. According to petitioners, the 
Department reasonably determined that because green acid is not an 
input into phosphate rock, sales of phosphate rock cannot benefit from 
a subsidy provided to Rotem's green acid facilities. Therefore, 
petitioners argue, the Department's modification is a logical and 
reasonable refinement of the new ``single-corporate-entity-input'' 
methodology.
    Department's Position. Our determination that ECIL subsidies 
provided to Rotem's green acid facilities are not attributable to 
direct sales of phosphate rock is, as petitioners note, a logical 
refinement of the attribution approach followed in the 1994 
administrative review. During the course of this proceeding, we learned 
that Rotem's total sales statistics include direct sales of phosphate 
rock and direct sales of green acid. These are the principal inputs for 
Rotem's end products. Under the approach first adopted in the 1994 
final results of this order, we determined that subsidies to inputs are 
appropriately attributable to the sales of the input and the sales of 
downstream products that can incorporate that input. Therefore, we 
excluded Rotem's direct sales of phosphate rock in calculating the 
subsidy rate from ECIL grants for the green acid facilities. This is 
logical given that phosphate rock is an input into green acid, but 
green acid is only a downstream product of phosphate rock, and, 
therefore, this approach accurately captures the universe of sales to 
which the benefit applies. Subsidies to green acid production cannot 
benefit the production of phosphate rock, and attributing such 
subsidies to phosphate rock will understate the subsidy to green acid 
and the end products that incorporate green acid.
    Respondents' contention that the provision with respect to inputs 
in the 1997 Proposed Rules should only be invoked for grants to an 
input that is ``essential to the production of the downstream product'' 
is incorrect. The plain language of the proposed rules states that ``a 
subsidy which is tied to the input product will be attributed to the 
input and downstream products produced by that corporation.'' See 1997 
Proposed Rules, Sec. 351.524(b)(5)(ii), 62 FR at 8855. Nothing in the 
1997 proposed rules speaks of inputs that are ``essential to the 
production of the downstream product.'' Nor do respondents provide any 
justification for the rationale that subsidies tied to inputs that are 
not ``essential to the production of the downstream product,'' be 
attributed to a company's total production, including upstream 
products. Rather, as the plain language of the proposed rules suggests, 
such subsidies can only be attributed to production of the input and 
the downstream products. Attributing such subsidies to upstream 
products would, as noted above, understate the subsidy and attribute 
the subsidy to products that did not benefit from the subsidy.
    Respondents' reliance on the 1989 Proposed Rules for the 
proposition that the Department is directed to attribute subsidies 
either by total sales or by products to which the benefit is tied is 
misguided. As a preliminary matter, we fail to see how this argument 
reconciles with respondents' earlier claim that subsidies to Rotem's 
green acid facilities provide competitive benefits only to green acid 
and to downstream products, but only according to the exact proportion 
that they were used to produce the downstream products. If this were 
the case, respondents have failed to explain how these same subsidies 
to green acid may also benefit a firm's total production, including 
upstream production. Thus, respondents are incorrect on both accounts. 
As outlined above, in order to make an apples-to-apples comparison, it 
is imperative that both the numerator (the countervailable benefit) and 
denominator (the universe of sales to which the benefit applies) used 
in the Department's calculation of a subsidy reflect the same universe 
of goods. Accordingly, this approach will remain unchanged in these 
final results.

Comment 9: Inflation Adjustment for Non-Recurring Grants

    Respondents argue that the inflation adjustment used by the 
Department in the preliminary results to calculate the benefit from 
non-recurring ECIL grants significantly overstates the benefit from 
these grants. According to respondents, the Department should 
``dollarize'' the grants, which would have the same effect as indexing 
the grants for inflation. This approach would comport with Rotem's 
actual business practices because most of the company's financing is in 
U.S. dollars, and the company's financial statements are expressed in 
U.S. dollars. Respondents further claim that converting the grant 
amount into dollars would be consistent with the approach followed in 
Wire Rod from Venezuela. Respondents suggest that the Department use 
Rotem's long-term cost of U.S. dollar-denominated borrowing in 1995 to 
calculate the benefit from the ECIL grants converted into dollars.
    Respondents state that if the Department chooses not to dollarize, 
then it should index the principal grant amounts and use a real 
interest rate in the benefit calculation. In the preliminary results, 
respondents argue, the Department incorrectly used a nominal interest 
rate. This approach double counts inflation, once by adjusting the 
principal by the inflation index, and again by accounting for inflation 
in the calculation of the interest component of the benefit. Short of 
making either of these adjustments, respondents contend the Department 
should return to the original methodology followed in the 1994 
administrative review.
    According to petitioners, the Department correctly followed the 
methodology adopted for the preliminary determination in Wire Rod from 
Venezuela. Petitioners also reject respondents' argument that because 
inflation was not as high as in Venezuela, the Department should return 
to its original methodology to account for inflation if it does not 
accept respondents' proposed methodology. Petitioners note that 
respondents' own analysis identifies Israel as a high

[[Page 13634]]

inflation country. Moreover, petitioners point out that Israeli 
companies have adjusted their financial statements throughout the 
allocation period.
    With respect to the methodology adopted in Wire Rod from Venezuela, 
petitioners state that dollarization can be used in this case if the 
Department applies exchange rates and interest rates that correctly 
account for inflation. Accordingly, petitioners argue that the 
Department should use a long-term, dollar-denominated interest rate as 
a discount rate in the grant calculations. In particular, if the 
Department is unable to locate a long-term fixed rate dollar-
denominated rate in Israel, petitioners contend that it is appropriate 
to use the average long-term variable rate in dollars available to ICL, 
Rotem's parent company, from private lenders during the POR. A long-
term rate, petitioners claim, reflects the economic benefit that Rotem 
received from the subsidies. Petitioners reject respondents' argument 
that the Department should use Rotem's long-term cost of borrowing 
during the POR, because at least some of those loans are financed by 
ICL and may, therefore, reflect below market interest rates.
    Department's Position. We have modified the calculation methodology 
for ECIL grants to conform with the approach followed in the final 
determination of Wire Rod from Venezuela. This approach aligns with 
respondents' proposed methodology to dollarize the grants at the time 
they were received.
    With respect to the discount rate to be applied to the grants, we 
agree with petitioners that an interest rate reflecting the long-term, 
U.S. dollar-denominated cost of borrowing to Israeli firms is most 
appropriate. However, we have been unable to find such rates. While 
Rotem's 1995 financial statements show the company's long-term cost of 
borrowing in U.S. dollars, we are unable to segregate long-term 
interest charged by Rotem's parent company, ICL, from the long-term 
interest rate charged by financial institutions. As such, we have 
turned to ICL's long-term cost of borrowing denominated in U.S. dollars 
in each year from 1985 through 1995 as the most appropriate discount 
rate. ICL's rates are shown in the notes to the company's financial 
statements, which are public documents that have been placed on the 
record of this proceeding. See ``Calculation Memorandum.'' For 1983 and 
1984, we used the interest rate on short-term euro-dollar financing 
because we were unable to locate an appropriate long-term dollar-
denominated interest rate for those years. See ``Calculation 
Memorandum.'' In converting the ECIL grants into dollars, we used the 
shekel/U.S. dollar exchange rates prevailing on the day the grants were 
received by Rotem. This information is available from the Bank of 
Israel. See the ``Calculation Memorandum'' for additional discussion of 
this issue.

Comment 10: Timing of Inflation Adjustments for Non-Recurring Subsidies

    According to respondents, in the preliminary results, the 
Department incorrectly adjusted the ECIL subsidies to take into account 
inflation for all grants dating back to 1986, the beginning of the 
relevant period. Respondents argue that it is ``not appropriate to 
adjust those grants that have already been adjusted by virtue of the 
inflated interest, since adjusting both interest and principal for 
inflation leads to a total subsidy greater than actually received.'' 
Therefore, respondents claim that the inflation adjustment should begin 
in 1995, as ``inflation has already been captured in the interest rate 
formula used for the grants prior to that year,'' and adjusting those 
grants now double counts the effects of inflation.
    Petitioners contend that dollarization should apply only to the 
period marked by high inflation in Israel, i.e., between 1983 and 1986, 
when inflation exceeded 30 percent. Petitioners state that this 
conforms with the approach taken in Wire Rod from Venezuela. Starting 
in 1987, petitioners argue, the remaining principal of the grants 
should be reconverted into shekels and interest on the remaining amount 
should be calculated using the rate of return on CPI-indexed commercial 
bonds. Petitioners reject respondents' argument that adjusting the 
principal of the grants received prior to 1995 would double count the 
effect of inflation. According to petitioners, in previous years the 
Department countervailed only the portion of the grants allocated to a 
particular POR, while no allocation has been made for the portion that 
will be countervailed in this review.
    Department's Position. Respondents' argument that inflation has 
already been captured for the grants in years prior to 1995 is 
incorrect. The purpose of adjusting non-recurring grants for inflation 
is to capture the impact of inflation on the nominal grant amounts. 
This merely accounts for the fact that, when inflation is consistently 
high, the value of non-monetary assets increases, and the value of the 
subsidy that benefits the non-monetary assets also increases. By 
converting the subsidy into dollars at the beginning of a high 
inflation period, we are taking into account the real value of the 
subsidy. To accurately capture that real value, we must adjust the 
nominal value from the time that inflation has a measurable impact. In 
this case, inflation was significant from the beginning of the 
allocation stream, with annual inflation at over 100 percent. If the 
adjustment is not made at the beginning of the allocation stream, in 
particular during the high inflation period of 1983 through 1986, the 
real value of the grant principal is eroded significantly. Therefore, 
it is essential that the ECIL grants are dollarized from the beginning 
of the allocation stream to preserve the real value of the grant and 
the real benefit from those grants to Rotem. Further, Rotem converts 
and maintains all of its financial records in U.S. dollars. Thus, 
dollarization conforms with Rotem's own business practices. It is also 
consistent with the approach followed in Wire Rod from Venezuela (62 FR 
at 55014).
    Respondents' claim that adjusting for inflation for years prior to 
1995 overstates the countervailable benefit because the adjustment has 
already been captured in prior reviews, is also without merit. As 
explained above, the real benefit in 1995 will be significantly 
understated if the adjustment is not made from the beginning of the 
allocation stream. Further, the inflation adjustment used in prior 
administrative reviews of this order added the rate of inflation to the 
discount rate. This approach treats inflation as a benefit in each 
year. However, as explained above, inflation increases the real value 
of non-monetary assets, such as machinery, over time, and is not a 
benefit in each year. Therefore, if anything, the impact of inflation 
was underestimated in prior reviews because inflation was only 
accounted for in the interest component of the benefit, while the 
principal amount remained in constant terms during the entire 
allocation period. Furthermore, petitioners correctly note that no 
allocation has yet been made for the portion that will be countervailed 
in this review, and therefore, the 1995 benefit has not yet been 
adjusted and is not overstated. For these reasons, we determine that 
dollarization is the most appropriate approach to capture the impact of 
inflation on ECIL grants received by Rotem. As noted above, we also 
determine that the grants should be dollarized throughout the entire 
allocation period.

Comment 11: Privatization of ICL

    Respondents allege that the Department's privatization methodology

[[Page 13635]]

is flawed. First, respondents state that each partial privatization of 
ICL between 1992 and 1995 was at fair value, and that the privatization 
process was highly competitive. Therefore, the stock price of ICL at 
the time of privatization reflected all publically available 
information about the company, including the fair value of the 
subsidies bestowed upon Rotem up to privatization. This means that 
investors who form expectations about ICL's projected cash flows would 
include the full benefits of the subsidies Rotem received. Accordingly, 
respondents argue that because the privatization price reflected the 
fair value of ICL, including the fair value of Rotem's subsidies, those 
subsidies are fully repaid to GOI with the sale of the company. 
Respondents further claim that while ICL was only partially privatized 
(51.48 percent of the company has been sold), the private party that 
purchased ICL has gained control over the company, including control 
over Rotem's business decisions. Thus, the effect on the pricing of 
Rotem's products is ``as if none of the subsidies awarded to Rotem 
prior to the privatization remain countervailable after the 
privatization.''
    Petitioners dispute respondents' claim that market forces have 
adjusted the selling price of ICL to reflect the full value of Rotem's 
subsidies. Even if this were the case, petitioners state that in 1995, 
only 24.9 percent of ICL's stock was sold, and therefore, only a 
portion of the subsidies could have been reflected in the sale price. 
Petitioners also dispute respondents' contention that the issue of 
control is a relevant factor in the privatization analysis. Again, even 
if control were germane, petitioners note that the GOI still enjoys 
``special rights'' to make business decisions, including (1) sales of 
company assets, (2) structural changes such as voluntary liquidation, 
reorganizations, or mergers that would impair the GOI's special rights, 
and (3) investments or holding in shares of subsidiaries. Moreover, the 
GOI retains over 48 percent ownership in the ICL.
    Department's Position. The issue of whether a fair market value 
privatization eliminates previous subsidies has already been addressed 
by the Department. Respondents in the certain steel investigations made 
similar arguments, stating that, since the fair market price of a 
government-owned company must include any remaining economic benefit 
from the subsidies, privatization extinguishes all remaining 
unamortized subsidies. At the time, we disputed this assertion because 
it rests on the assumption that subsidies must confer a demonstrated 
benefit on production in order to be countervailable. As we stated,

    [T]his is contrary to the CVD law, in which is embedded the 
irrebuttable presumption that nonrecurring subsidies benefit 
merchandise produced by the recipient over time. In sum, the 
countervailable subsidy (and the amount of the subsidy to be 
allocated over time) is fixed at the time the government provides 
the subsidy. The privatization of a government-owned company, per 
se, does not and cannot eliminate this countervailability.

GIA, 58 FR at 37263. This conclusion is also permitted under the change 
in ownership provision of the Act, as amended by the URAA. The SAA 
specifically states that the Department retains ``the discretion to 
determine whether, and to what extent, the privatization of a 
government-owned firm eliminates any previously conferred 
countervailable susidies.'' SAA at 258. This is the conclusion we 
reached in a recent countervailing duty proceeding, where we noted that 
the Act ``purposely leaves the Department with the discretion to 
determine the impact of a change in ownership on the countervailability 
of past subsidies.'' Certain Hot-Rolled Lead and Bismuth Carbon Steel 
Products from the United Kingdom, 61 FR 58377, 58379 (November 14, 
1996).
    We also disagree with respondents contention that, while ICL was 
only partially privatized, by virtue of the private party's control 
over the company, all of Rotem's prior subsidies are extinguished. As a 
preliminary matter, the Department has always applied it's 
privatization methodology to changes in ownership which resulted in the 
transfer of control from one party to another. See e.g., Final 
Affirmative Countervailing Duty Determination; Certain Steel Products 
From the United Kingdom, 58 FR 37393 (July 9, 1993) and Final 
Affirmative Countervailing Duty Determination: Steel Wire Rod From 
Trinidad and Tobago, 62 FR 55003 (October 22, 1997).
    Furthermore, respondents claim that the transfer of control has an 
effect on the pricing of Rotem's products, so that none of the 
subsidies awarded to Rotem prior to the privatization remain 
countervailable after the privatization, is also without merit. As we 
noted in the GIA, the Department does not, and is not permitted to 
undertake an analysis of the effect of subsidies. In particular, we 
stated `` the Department does not take account of subsequent 
developments that may reduce any initial cost savings or increase in 
output from a subsidy.'' GIA, 58 FR at 37261; see also, SAA at 256. 
Therefore, whether and to what extent the pricing of Rotem's products 
changes as a result of ICL's partial privatization is irrelevant for 
determining whether Rotem's previously bestowed subsidies remain 
countervailable. In any case, the Department's determination that 
previously bestowed subsidies may continue to benefit the privatized 
company during an arm's length transaction, has been upheld by the 
Court of Appeals of the Federal Circuit. See Saarstahl AG v. United 
States, 78 F.3d 1539, 1544 (Fed. Cir. 1996). For these reasons, our 
preliminary finding with respect to ICL's partial privatization will 
remain unchanged in these final results.

Comment 12: The Privatization Methodology

    According to respondents, the Department's gamma methodology is 
flawed. In particular, respondents state that the gamma is incorrectly 
based on the average ratio of annual subsidies to Rotem's net worth. 
Therefore, the Department is considering the annual flow of subsidies 
to Rotem. However, the net worth in a given year reflects the 
accumulated value of Rotem's equity. According to respondents, this 
results in an undervalued gamma ratio. Therefore, respondents contend 
the gamma calculation should consider the stock of countervailable 
subsidies at the time of the privatization. This would be done by 
dividing the total bestowed subsidies accumulated up to the 
privatization by Rotem's equity capital just prior to ICL's 
privatization.
    Respondents also contend that the Department's gamma percentage is 
understated because the denominators used in the gamma calculation are 
expressed in adjusted U.S. dollars while the numerators are nominal 
Shekel values. According to respondents, because the denominators (the 
net worth amounts) are expressed in adjusted U.S. dollars, they reflect 
inflation, while the grant amounts, the numerators, are expressed in 
nominal terms. Therefore, respondents suggest the Department use Rotem 
nominal net worth amounts submitted in the case brief. Alternatively, 
respondents assert that the Department should convert the ECIL grants 
into dollars at the exchange rate on the day of receipt of the grants.
    Petitioners argue that the Department's gamma calculation used 
Rotem's audited financial statements, which are an accurate tool for 
this calculation. Petitioners further state that Rotem should not be 
permitted to submit new net worth figures, after the Department has 
conducted verification.

[[Page 13636]]

    Department's Position. The gamma calculation attempts to derive a 
reasonable historic surrogate for the percent that subsidies constitute 
of the company's net worth in the year prior to privatization. 
Respondents' proposed modification of the gamma calculation is flawed 
because it incorrectly compares the value of Rotem's accumulated 
subsidies in the year before privatization to the company's net worth 
in that year. Such a comparison overstates the value of the subsidies 
in relationship to the company's net worth because it assumes that a 
company's net worth increases in direct proportion to the value of the 
subsidies received by that firm. However, this is not the case, as 
those values are depreciating from year to year. Simply stated, 
respondents comparison ignores the fact that the value of subsidies is 
eroding over time, i.e., a subsidy received in 1986 does not have the 
same relative value as a subsidy received in 1994. Therefore, 
respondents' approach overvalues the subsidies and thus grossly 
overstates the ratio of Rotem's subsidies to net worth in the year 
prior to privatization.
    Although we also disagree with respondents' argument that the gamma 
percentage is understated because the denominator is expressed in 
adjusted U.S. dollars and the numerator in nominal shekels, this issue 
is now moot because we have dollarized the ECIL grants.

Final Results of Review

    In accordance with 19 CFR 355.22(c)(4)(ii), we calculated an 
individual subsidy rate for each producer/exporter subject to this 
administrative review. For the period January 1, 1995 through December 
31, 1995, we determine the net subsidy for Rotem to be 8.93 percent ad 
valorem.
    We will instruct the U.S. Customs Service (``Customs'') to assess 
countervailing duties as indicated above. The Department will also 
instruct Customs to collect cash deposits of estimated countervailing 
duties in the percentages detailed above of the f.o.b. invoice price on 
all shipments of the subject merchandise from reviewed companies, 
entered, or withdrawn from warehouse, for consumption on or after the 
date of publication of the final results of this review.
    Because the URAA replaced the general rule in favor of a country-
wide rate with a general rule in favor of individual rates for 
investigated and reviewed companies, the procedures for establishing 
countervailing duty rates, including those for non-reviewed companies, 
are now essentially the same as those in antidumping cases, except as 
provided for in Sec. 777A(e)(2)(B) of the Act. The requested review 
will normally cover only those companies specifically named. See 19 CFR 
355.22(a). Pursuant to 19 CFR 355.22(g), for all companies for which a 
review was not requested, duties must be assessed at the cash deposit 
rate, and cash deposits must continue to be collected at the rate 
previously ordered. As such, the countervailing duty cash deposit rate 
applicable to a company can no longer change, except pursuant to a 
request for a review of that company. See Federal-Mogul Corporation and 
The Torrington Company v. United States, 822 F.Supp. 782 (CIT 1993) and 
Floral Trade Council v. United States, 822 F.Supp. 766 (CIT 1993) 
(interpreting 19 CFR 353.22(e), the antidumping regulation on automatic 
assessment, which is identical to 19 CFR 355.22(g)). Therefore, the 
cash deposit rates for all companies except those covered by this 
review will be unchanged by the results of this review.
    We will instruct Customs to continue to collect cash deposits for 
non-reviewed companies at the most recent company-specific or country-
wide rate applicable to the company. Accordingly, the cash deposit 
rates that will be applied to non-reviewed companies covered by this 
order are those established in the most recently completed 
administrative proceeding, conducted pursuant to the statutory 
provisions that were in effect prior to the URAA amendments. See 61 FR 
28841. These rates shall apply to all non-reviewed companies until a 
review of a company assigned these rates is requested. In addition, for 
the period January 1, 1995 through December 31, 1995, the assessment 
rates applicable to all non-reviewed companies covered by this order 
are the cash deposit rates in effect at the time of entry.
    This notice serves as a reminder to parties subject to 
administrative protective order (APO) of their responsibility 
concerning the disposition of proprietary information disclosed under 
APO in accordance with 19 CFR 355.34(d). Timely written notification of 
return/destruction of APO materials or conversion to judicial 
protective order is hereby requested. Failure to comply with the 
regulations and the terms of an APO is a sanctionable violation.
    This administrative review and notice are in accordance with 
section 751(a)(1) of the Act (19 U.S.C. 1675(a)(1)).

    Dated: March 9, 1998.
Robert S. LaRussa,
Assistant Secretary for Import Administration,
[FR Doc. 98-7352 Filed 3-19-98; 8:45 am]
BILLING CODE 3510-DS-P