RESPONSE TO COURT REMAND

Taiwan Semiconductor Manufacturing Company, Ltd., v. United States

Slip Op. 00-48

Consolidated Court No. 98-05-02184

SUMMARY

This remand determination, submitted in accordance with the Court's May 2, 2000, opinion involves challenges to the antidumping duty determination of the International Trade Administration, U.S. Department of Commerce, in Taiwan Semiconductor Manufacturing Company, Ltd., v. United States. In Slip Op. 00-48, the Department was ordered to: 1) clarify its reasoning with regard to why it selected the sale by the design house to be the "relevant sale" under the statute and its subcontractor practice; and 2) explain and clarify the producer status of Taiwan Semiconductor Manufacturing Company, Ltd. in the context of "direct" sales.

In accordance with the Court's instructions, we have clarified our reasons for selecting the sale by the design house as the relevant sale, and we have further clarified why we believe that Taiwan Semiconductor Manufacturing Company, Ltd.'s "direct" sales were not relevant sales.

BACKGROUND

On March 21, 1997, the Department of Commerce (the Department) initiated an antidumping duty investigation on SRAMs from Taiwan. See Initiations of Antidumping Duty Investigations: Static Random Access Memory From the Republic of Korea and Taiwan, 62 FR 13596 (Mar. 21, 1997). On April 16, 1997, we issued questionnaires to 22 companies believed to be producers and exporters of the subject merchandise to the United States. We received responses to these questionnaires in May 1997.

On May 21, 1997, we determined that the Department did not have the administrative resources to investigate all of the companies responding to the questionnaire. Accordingly, we limited the number of mandatory respondents to the five largest companies that exported static random access memory semiconductors (SRAMs) to the United States during the period of investigation (POI). See the May 21, 1997, memorandum from The Team to Louis Apple, Acting Director, Office 5, Import Administration, entitled "Antidumping Duty Investigation of Static Random Access Memory Semiconductors from Taiwan." Among the respondents selected was a company named Taiwan Semiconductor Manufacturing Company, Ltd. (TSMC). In the public version of our memorandum at page 2, we stated the following regarding TSMC's sales to the United States:

During the POI, TSMC produced and sold wafers to unaffiliated parties in the United States and Taiwan. For U.S. sales, TSMC reported direct sales (i.e., sales in which wafers where (sic) shipped directly to U.S. customers) and indirect sales (i.e., sales in which wafers where (sic) shipped directly to [[*******]] and processed into encapsulated SRAMS in Taiwan prior to shipment to the United States). TSMC reported these indirect wafer sales to [[******]] as U.S. sales and [[******]] reported the encapsulated SRAMs as U.S. sales. This has resulted in a double counting of [******] die in the total die reported.

For respondent selection purposes, we have been unable to determine which company should not have reported these double counted sales. Accordingly, we have taken the conservative approach and selected TSMC as a respondent. However, we recognize that a more detailed analysis of the U.S. indirect sales and the additional manufacturing process completed in Taiwan (i.e., a thorough analysis of respondents' response to Sections B, C, and D of the Department's questionnaire), is necessary before the Department can resolve this issue. Regardless of the resolution of this issue, TSMC will be considered by the Department to be a mandatory respondent throughout the course of this investigation.

Although TSMC submitted a response to our questionnaire, we subsequently did not use its information for purposes of our analysis because we found that TSMC operated solely as a subcontractor during the POI. Specifically, in our preliminary determination we stated:

the entity that controls and owns the SRAMs designs, i.e., the design house, controls the production, and ultimate sale, of the subject merchandise. Consequently, we have determined to disregard the foundry sales of ... TSMC for purposes of this investigation. Moreover, because all of TSMC's sales during the POI were foundry sales, we have determined that it should no longer be considered a respondent in this investigation.

See Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Static Random Access Memory Semiconductors from Taiwan, 62 FR 51442, 51444 (Sept. 23, 1997) (Preliminary Determination). See also the memorandum to Louis Apple from the Team, dated September 23, 1997, regarding Treatment of Foundry Sales and the Elimination of TSMC as a Respondent (the "Elimination Memo"). (1)

On February 13, 1998, we published in the Federal Register a notice of final determination of sales at less than fair value in this investigation. See Notice of Final Determination of Sales at Less Than Fair Value: Static Random Access Memory Semiconductors from Taiwan, 63 FR 8909 (Feb. 23, 1998) (Final Determination), as amended by Notice of Amended Final Determination and Antidumping Duty Order of Sales at Less Than Fair Value: Static Random Access Memory Semiconductors from Taiwan, 63 FR 18883 (Apr. 16, 1998). In this final determination, we found that it continued to be appropriate to exclude TSMC as a respondent. See Final Determination, 63 FR at 8918.

DISCUSSION

  • The "Relevant Sale"

The Department's policy concerning the treatment of subcontractors or tollers is set forth in 19 CFR 351.401(h), which states that the Department:

will not consider a toller or subcontractor to be a manufacturer where the toller or subcontractor does not acquire ownership, and does not control the relevant sale, of the subject merchandise or foreign like product.

This policy is further explained in the preamble to the regulations, which states:

Where a party owning the components of subject merchandise has a subcontractor manufacture or assemble that merchandise for a fee, the Department will consider the owner to be the manufacturer, because that party has ultimate control over how the merchandise is produced and the manner in which it is ultimately sold. The Department will not consider the subcontractor to be the manufacturer or producer regardless of the proportion of production attributable to the subcontracted operation or the location of the subcontractor or owner of the good.

See Notice of Proposed Rulemaking and Request for Public Comment: Antidumping Duties; Countervailing Duties, 61 FR 7308, 7330. While the new regulations were not applicable to this investigation, we note that these regulations codify past practice, as well as the Department's current policy regarding subcontractors. (2) Thus, the new regulations provided guidance on the treatment of TSMC in this investigation.

In our decision memorandum on this topic, we evaluated TSMC's role in the production of subject merchandise in the context of both our practice and the above-cited regulation. Specifically, we stated the following:

Regarding control over production in this case, after reviewing and analyzing the information submitted by respondents, including the contracts between the design houses and the foundries, we believe that the entity controlling the wafer design in effect controls production in the SRAMs industry. The design house performs all of the research and development for the SRAM that is to be produced. It produces, or arranges and pays for the production of, the design mask. At all stages of production, it retains ownership of the design and design mask. The design house then subcontracts the production of processed wafers with a foundry and provides the foundry with the design mask. It tells the foundry what and how much to make. The foundry agrees to dedicate a certain amount of its production capacity to the production of the processed wafers for the design house. The foundry has no right to sell those wafers to any party other than the design house unless the design house fails to pay for the wafers. Once the design house takes possession of the processed wafers, it arranges for the subsequent steps in the production process. The design of the processed wafer is not only an important part of the finished product, it is a substantial element of production and imparts the essential features of the product. The design defines the ultimate characteristics and performance of the subject merchandise and delineates the purposes for which it can be used. The foundries manufactured processed SRAMs wafers using the proprietary designs of the design houses during the POI. As such, they did not control the production of the wafers in question, but merely translated the design of other companies into actual products.

See Elimination Memo at page 9. Based on this analysis, we found that TSMC functioned as a subcontractor because it did not acquire ownership of the SRAM design or the design mask, nor did it control the subsequent sale of the wafers, which, in fact, was controlled by the design house.

In the Final Determination, we stated that, although we believed that the above statement contained certain factual errors, we continued to reach the central conclusion on which our decision was based. (3) Specifically, we found that it was appropriate to treat the design house as the manufacturer, rather than TSMC, in accordance with 19 CFR 351.401(h), because we concluded that the relevant sale was the sale between the design house and its customers. Because TSMC did not control the relevant sale, we found that TSMC was not the manufacturer for antidumping purposes. Because we also found that TSMC did not have any production for its own account (i.e., it functioned as a subcontractor with respect to 100 percent of the SRAMs fabricated by the company and thus had no relevant sales), we eliminated it as a respondent in the investigation.

The practice of determining producer status based upon who is in control of the production and relevant sale is consistent with sections 772(a) and (b) of the Tariff Act of 1930, as amended, which define "export price" and "constructed export price" as the price at which the subject merchandise is first sold (or agreed to be sold) by the producer or exporter of such merchandise to an unaffiliated purchaser in, or for exportation to, the United States. Because a subcontractor does not sell "subject merchandise," but rather only sells services and/or inputs, the export price (or constructed export price) cannot be derived from the subcontractor's "sales." This interpretation of sections 772(a) and (b) of the Act is explained more fully below.

Under the Department's practice, the "relevant sale" must be a sale by the company that owns the merchandise entirely, including all essential components, can dispose of the merchandise at its own discretion and, thus, controls the pricing of the merchandise and not merely the pricing of certain portions of production. (4) Thus , the "relevant sale" is the first sale in the distribution chain by the company that is in a position to set the price of the product, and by doing so, to sell at less than fair value in or to the U.S. market.

The company that is the first "price setter" for subject merchandise is also the company that is the producer of the merchandise. (5) This company is the entity that bears all essential costs from the inception of production through the time of the sale to the first customer. (6) Because its pricing represents all relevant elements of value, we find that this entity functions as the "price setter" or potential price discriminator, and, accordingly, we find that it makes the relevant sale. See, e.g., PVA from Taiwan, Carbon Steel Flat Products from Canada, Rebar from Turkey, and Orange Juice from Brazil.

In contrast, a subcontractor's or toller's price does not represent all elements of value. Rather, the subcontractor or toller merely performs one or more segments of the manufacturing process at the direction of another entity. (7) Thus, subcontracted production is distinguishable from other types of production because the subcontractor does not bear at least one element of cost which is essential to production of the subject merchandise. (8) For this reason, the toller cannot be considered the producer of the merchandise in question. Moreover, while the subcontractor may control the sale of its subcontracting services, it cannot control the sale of the merchandise itself.

The Department's practice and the regulation regarding subcontractors recognize that, although a subcontractor may deliver to the contractor a product which, based on its characteristics, is subject merchandise, the price paid to the subcontractor may not represent the entire value of the subject merchandise, but merely represents a portion of that value. In fact, in most subcontracting arrangements, the contractor already owns an essential portion of the product, and thus the price paid is only for the work performed by the subcontractor; that is, the sale by the subcontractor is only a sale of the service it performed (and any inputs provided). Under these circumstances, we find that it is not appropriate to equate the price of a subcontractor's services (and material inputs) with the price of subject merchandise in a dumping analysis. Indeed, we do not consider the "sale" between the subcontractor and such a contractor to be a sale of subject merchandise at all. Rather, it is a sale of certain inputs and subcontracting services. It is the contractor's subsequent sale which is the relevant sale because that party owns the merchandise in its entirety and thus its sales price represents the full value of the subject merchandise.

Typically, the subcontracting, or tolling, addressed by this practice involves a contractor who owns and provides to the subcontractor a material input and receives from the subcontractor a product that is identifiable as subject merchandise. Although in TSMC's case the contribution of the contractor (i.e., the design house) is not a physical input, but the product design and development phase of production of the subject merchandise, there is no substantive difference. The design house owns an essential element of the subject merchandise - the design - and has the same type of partial ownership claim that it would have had if instead it supplied the wafer material to TSMC. (9) Thus, TSMC's sale of its service to the design house is not the relevant sale as it only represents the value of certain inputs and the fabrication portion of the production process. In contrast, the design house's subsequent sale represents the value of design and fabrication (i.e., the full value of the subject merchandise). Therefore, this is the relevant sale for our dumping analysis.

In making the above distinction in this specific proceeding, we examined the role played by the foundries and design houses in the production of the subject SRAMs, as well as the nature of the product being produced. We found that, in the SRAM industry, the design was not only an important component of this product, but it defined its essence. As we stated in the Elimination Memo at page 9, "(t)he design of the processed wafer is not only an important part of the finished product, it is a substantial element of production and imparts the essential features of the product. The design defines the ultimate characteristics and performance of the subj ect merchandise and delineates the purposes for which it can be used." Because the design house not only developed the design, but also controlled how it was used in production by the foundry and the way that the products incorporating it were distributed in the marketplace, we found that the design house directed the production of the subject merchandise. (10)

We note that, while this distinction may hold true for many industries, it is a crucial distinction in an industry that is shaped by intellectual property considerations. In this type of industry, the design is one of the primary determinants of the value of individual products. Thus, although TSMC claims that it sold "subject merchandise" because it physically transferred the completed product for a price, the price from TSMC did not include an essential component of the product. Consequently, TSMC did not sell subject merchandise, but rather only sold inputs and fabrication services. Furthermore, while TSMC may have temporarily held title to the SRAM wafers in order to indemnify itself against the potential for loss, (11) it did not, and could not, control the sale of these finished wafers because it never owned the intellectual property which is embodied in them. (12)

  • TSMC's "Direct" Sales

As noted above, we find that TSMC functioned as a subcontractor during the POI with respect to 100 percent of the "sales" in question. (13) Although TSMC may have shipped product fabricated from other companies' designs to the United States by both direct and indirect channels (i.e., to the United States directly to U.S. design houses vs. to the United States through the Taiwan sales office of a U.S. design house), we find that none of these shipments constituted a relevant sale within the meaning of the Department's practice and proposed regulations. The only distinction between the "direct" and "indirect" sales was the location of the producer (i.e., the design house).

In order for a foundry to be a treated as a producer, we determined that the foundry must produce SRAMs using either its own designs or designs licensed from another company because we find that the design is the essential component of the SRAM. TSMC has offered nothing to demonstrate that it had any production ("direct" or "indirect") which differed from the type of subcontracting service discussed above. Thus, absent any evidence to the contrary, we find that TSMC did not function as a producer during the POI for any type of sale, direct or otherwise, nor did it control the relevant sale of any merchandise which it fabricated under foundry arrangements (i.e., the sale of the entire SRAM, including the design).

Troy H. Cribb

Acting Assistant Secretary

for Import Administration

(Date)

1. As we noted in the Elimination Memo at footnote 4, we believed at the respondent selection stage that TSMC had sales to the United States which were independent of any finding related to its foundry business. However, after an analysis of TSMC's responses, we discovered that TSMC did not have any non-foundry-related sales during the POI, and, thus, we were unable to continue to treat TSMC as a respondent.

2. Although the Court noted in its opinion, at page 29, that the Department changed its practice regarding subcontractors in conjunction with the Uruguay Round Agreements Act of 1994, we wish to clarify that the practice actually changed as early as 1993. Specifically, we found in the Final Determination of Stainless Steel Flanges from India, 58 FR 68853, 68855-56 (Dec. 29, 1993) (Flanges from India) that the company contracting for the tolling (i.e., the respondent Akai) was the manufacturer of the subcontracted flanges, rather than the toller, because this company was the entity that controlled the production of the subject merchandise. Thus, although a regulation codifying the Department's practice with respect to treatment of tollers was not promulgated until after the Uruguay Round Agreements Act was enacted, the Department had begun treating companies contracting for production, rather than fabricators, as respondents/producers prior to that time.

3. We agreed with TSMC that: 1) the foundry does conduct research and development related to process technology (but not product technology); and 2) production quantities and types are negotiated between the foundry and the design house. However, we found that neither of these facts was controlling to our analysis. See Final Determination, 63 FR at 8919.

4. The application of this principle can be seen in the Department's actions in a number of cases. Specifically, under the Department's current subcontractor practice, the Department finds that the manufacturer is the party contracting for, and controlling, the production, rather than the subcontractor itself. If this manufacturer who subcontracts certain production work is a respondent, the Department bases its analysis on the respondent's sales to its own unaffiliated customers, rather than on the transactions between the respondent and the subcontractor. Consequently, the Department has deemed the respondent's sales to be the "relevant sales" for purposes of the dumping analysis. See, e.g., Flanges from India, 58 FR at 68855, where the Department found that the respondent was the company that subcontracted certain work, rather than the subcontractor, and where the Department examined the respondent's sales of the complete merchandise, rather than the transactions between the respondent and the subcontractor for certain processing; Notice of Final Determination of Sales at Less Than Fair Value: Polyvinyl Alcohol From Taiwan, 61 FR 14064, 14070 (Mar. 29, 1996) (PVA from Taiwan), where the Department found that the party contracting for the tolling was the manufacturer (Because the contractor was not the respondent in the proceeding, the Department excluded these sales from its analysis); Certain Steel Concrete Reinforcing Bars from Turkey; Final Results of Antidumping Duty Administrative Review and New Shipper Review, 64 FR 49150, 49152 (Sept. 10, 1999) (Rebar from Turkey), where the Department found the respondent was the producer, rather than the subcontractor who rolled the rebar from billet, and where the Department reviewed the respondent's sales of that merchandise, rather than the price between the respondent and the subcontractor; Certain Corrosion-Resistant Carbon Steel Flat Products and Certain Cut-to-Length Carbon Steel Plate From Canada: Preliminary Results of Antidumping Duty Administrative Reviews, Intent To Revoke in Part, Intent Not to Revoke in Part, and Rescission of Review in Part, 64 FR 45228, 45231 (Aug. 19, 1999), affirmed by Certain Corrosion-Resistant Carbon Steel Flat Products and Certain Cut-to-Length Carbon Steel Plate From Canada: Final Results of Antidumping Duty Administrative Reviews, and Determination Not To Revoke in Part, 65 FR 9243 (Feb. 24, 2000) (Carbon Steel Flat Products from Canada), where the Department found that the respondent was the producer of certain merchandise galvanized by another party and based its analysis on the respondent's U.S. sales of this merchandise (rather than the transaction between the respondent and the galvanizer); and Frozen Concentrated Orange Juice from Brazil; Preliminary Results of Antidumping Duty Administrative Review, 65 FR 35892, 35894 (June 6, 2000) (Orange Juice from Brazil), where the Department treated a trading company as the producer of certain subject merchandise tolled by another party, and used the sales of this trading company in its analysis (rather than the transaction between the trading company and the toller).

5. We normally consider the producer to be the party that sets the price to the United States except in cases where the producer does not know that the subject merchandise is ultimately destined for the United States. In those cases, we find that a subsequent reseller controls the relevant sale, rather than the producer. See, e.g., Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Plate in Coils from Taiwan, 64 FR 15493, 15498 (Mar. 31, 1999).

6. Because cost is an important element in the establishment of value, the cost of the product is relevant to this question. See Flanges from India, 58 FR at 68855-56.

7. We note that, although a toller may take title to the product while it is physically in that company's production facility, it generally does so for purposes such as indemnification against the risk of loss (e.g., fire, theft, non-payment by the company for whom the production is subcontracted, etc.). Based upon the facts of this case, the Department determined that TSMC did not "own" the subject merchandise for purposes of the tolling regulation, because it did not own the design work and because it was restricted from selling the completed merchandise.

8. In this instance, TSMC did not bear the cost of the design or the design mask.

9. Like a toller who receives from the customer a material for processing, TSMC is not free to dispose of the subject merchandise at its discretion. It is the contractor which controls its disposition. Although TSMC controlled the sale of its service and the materials that it provided, it did not control the sale of the product which it fabricated. It did not produce SRAMs for its own account; indeed, it could not do so because it did not possess the requisite design technology. Consequently, it could not freely sell fabricated SRAMs at the direction of any customer of its choosing, but was bound to ship the SRAMs that it fabricated to the contractor that provided it with the design. This differs from a non-tolling situation where the producer has the ability to create a physical inventory of the product and sell it to any customer without restriction.

10. Although we recognized that the fabrication stage performed by TSMC is significant, we found that it did not capture all of the essential elements in the process. Thus, we found that the price for the SRAM itself after this production stage could not be set by TSMC. This finding is consistent with the language of the proposed regulation on tolling (i.e., 19 CFR 351.401(h)), which states that "[t]he Department will not consider the subcontractor to be the manufacturer or producer regardless of the proportion of production attributable to the subcontracted operation." (Emphasis added).

11. See the production agreements between TSMC and the design houses in Exhibit 6 of TSMC's August 6, 1997, supplemental response to sections A, B, and C of the Department's questionnaire.

12. See page 3 of the August 7, 1997, public version of TSMC's supplemental response to sections A, B, and C of the Department's questionnaire and Exhibit 6 of the business proprietary version of this questionnaire.

13. See page 3 of the August 7, 1997, public version of TSMC's supplemental response to sections A, B, and C of the Department's questionnaire, where TSMC states that there is "no difference between what foundry agreement customers and other customers provide to TSMC in terms of the elements of the design."