66 FR 49628, September 28, 2001 A-560-812 Investigation POI: 10/1/99 - 9/30/00 Public Document GIIO4:MJM MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Bernard T. Carreau Deputy Assistant Secretary Import Administration, Group II RE: Antidumping Duty Investigation of Certain Hot-Rolled Steel Flat Products from Indonesia SUBJECT: Issues Memorandum for the Final Determination Summary We have analyzed the comments of the interested parties in the antidumping duty investigation of certain hot-rolled steel flat products from Indonesia. As a result of our analysis of the comments received from interested parties, we recommend calculating an antidumping duty margin for the respondent, rather than relying upon total adverse facts available as was done in the preliminary determination. We also recommend that you approve the positions we have developed in the "Discussion of the Issues" section of this memorandum. Background The preliminary determination in this investigation was published on May 3, 2001. See Notice of Preliminary Determination of Sales at Less Than Fair Value: Certain Hot-Rolled Carbon Steel Flat Products From Indonesia, 66 FR 22163 (May 3, 2001) (Preliminary Determination). Since the preliminary determination, the following events have occurred. On May 11, 2001, we received a letter from PT Krakatau Steel Corporation (Krakatau), the respondent, that requested permission to submit a revised response to the Department's April 16, 2001 supplemental questionnaire. The Department granted this request on May 23, 2001 and received Krakatau's submission on May 29, 2001. We verified Krakatau's questionnaire responses from July 23 through July 27, 2001. On August 17, 2001, we released a calculation memorandum and computer programs to interested parties for the purpose of allowing parties to comment on the margin calculation methodology that would be used in the event the Department calculated a margin for the final determination in this case. The petitioners (1) and respondent filed case briefs on August 24 and August 27, 2001, respectively. Both parties filed rebuttal briefs on August 31, 2001. A public hearing was held on September 6, 2001. Although the deadline for this determination was originally September 17, 2001, in light of the events of September 11, 2001 and the subsequent closure of the Federal Government for reasons of security, the time frame for issuing this determination has been extended by four days. I. List of Issues Below is the complete list of the issues in this investigation for which we received comments from parties: 1. Application of Facts Available to U.S. Sales Database 2. Application of Facts Available to Short-Term Interest Rate Used to Calculate Credit Expense 3. General and Administrative Expense Ratio 4. Financial Expense Ratio 5. Depreciation Expense 6. Electricity and Natural Gas Valuation 7. Year End Audit Adjustments 8. Understated Direct Material Costs 9. Calculation of Total Variable Overhead Costs 10. Inclusion of Direct Selling Expenses in the Cost Test II. Changes in the Margin Calculations Since the Preliminary Determination On August 17, 2001, the Department released to the petitioners and Krakatau a calculation memorandum and computer programs demonstrating the methodology the Department would follow in the event we calculated a dumping margin for the final determination. The programs released at that time did not take into account our verification findings. As mentioned above, the parties had the opportunity to comment on the unadjusted programs and on the verification findings. Based upon our analysis of the comments received from the petitioners and Krakatau, we recommend making the following revisions to the unadjusted calculations released on August 17, 2001: A. Convert all reported U.S. prices from rupiahs to U.S. dollars using the Bank of Indonesia (BOI) exchange rates obtained from the U.S. market discrepancy chart (Verification Exhibit 4); B. Revise the exchange rate errors in the U.S. sales database, as listed on Verification Exhibit 4, with the correct data contained in that exhibit; C. Revise the invoice errors in the U.S. sales database, as listed on Verification Exhibit 4, with the correct data contained in that exhibit; D. Revise the exchange rate errors in the home market sales database, as listed on the home market discrepancy chart (Verification Exhibit 3), with the correct data contained in that exhibit; E. Revise the invoice errors in the home market sales database, as listed on Verification Exhibit 3, with the correct data contained in that exhibit; F. Remove home market sales of cut-to-length products with a reported thickness code #5 because such merchandise is non-foreign like product; G. Apply the largest transaction-specific U.S. credit expense (CREDITU) for any single U.S. sale to all of the respondent's U.S. sales, and apply the smallest transaction-specific home market credit expense (CREDITH) for any single home market sale to all of Krakatau's reported home market sales; H. Classify the reported home market and U.S. market advertising costs as indirect expenses and include these costs with Krakatau's reported indirect expenses; I. Classify the reported home market and U.S. market technical service costs as indirect expenses and include these costs with Krakatau's reported indirect expenses; J. Revise the reported home market and U.S. market packing costs to account for unreported packing labor and overhead; K. Revise Krakatau's general and administrative (G&A) expense ratio to account for our findings at verification; L. Calculate Krakatau's financial expense ratio based on the financial statements of its parent company, PT Bahana Pakarya Industri Strategies (Pakarya); M. Adjust the total cost of manufacture to include Krakatau's year-end accounting adjustments; N. Revise Krakatau's depreciation of fixed assets to account for inflation that occurred prior to the period of investigation (POI); O. Adjust the cost of electricity to reflect the market cost of electricity as quoted in certain newspaper articles; and P. Calculate an average market price for natural gas using prices quoted in certain newspaper articles, Krakatau's internal books and records, and Talisman Energy Inc.'s 2000 annual report. III. Discussion of Issues Comment 1: Application of Facts Available to U.S. Sales Database The petitioners argue that the Department should apply total facts available because necessary information is not available on the record and the respondent failed to provide the information by the deadline or in the form or manner requested as per section 776(a) of the Act. The petitioners contend that Krakatau failed to report its U.S. sales database in a timely manner, or in the form and manner requested. Specifically, the petitioners argue that the reported U.S. sales database has three fundamental flaws. First, the petitioners state that all of the respondent's U.S. sales were reported in rupiahs, though the U.S. sales were actually transacted in dollars. The petitioners note that all of the sales were converted from dollar to rupiah using a BOI exchange rate rather than the rate used by the Department. The petitioners state that even if the Department accepts the corrections contained in Krakatau's discrepancy chart, provided at verification, total facts available would still be warranted because a large percentage of U.S. sales would be stated in rupiah, with no means to convert them back to the original U.S. dollar-denominated prices. Secondly, the petitioners assert that Krakatau converted a considerable percentage of its U.S. sales using the incorrect BOI exchange rate. Third, the petitioners maintain that, with the exception of the first line-item, Krakatau incorrectly reported per-unit U.S. sales prices for all sales that were contained in multiple line-item invoices. The petitioners urge the Department to reject the corrections of the respondent's U.S. sales database contained in the respondent's sales discrepancy chart as untimely. The petitioners state that section 782(e) of the Act allows the Department to reject information which is not timely submitted. The petitioners assert that these untimely submissions are both significant and pervasive throughout the data. The petitioners also contend that it is the Department's practice to accept new information during verification only when the information makes minor corrections, corroborates, supports, or clarifies information already on the record. Furthermore, the petitioners argue that the Department's policy is to reject new information or revisions which would substantially alter previously submitted information. The petitioners further urge the Department to apply total adverse facts available because, according to the petitioners, the respondent has failed to cooperate to the best of its ability. The petitioners assert that the respondent failed to report its U.S. sales in U.S. dollars, though the Department requested the respondent to supply this information in the original and first supplemental questionnaires. The petitioners maintain that since Krakatau has possession of the dollar prices of its U.S. sales, Krakatau had the ability to report these sales in U.S. dollars, rather than rupiahs. According to petitioners, the only conclusion that can be drawn from Krakatau's choice of reporting U.S. sales in rupiahs is that reporting these sales in dollars would have been unfavorable. To counter the respondent's assertion of its inability to pay for counsel in this matter, the petitioners contend that the respondent in fact has retained counsel to prepare its responses and arguments in the corresponding case before the International Trade Commission. The petitioners cite the respondent's sales data to demonstrate that the respondent was profitable, and could afford counsel. In regard to the assistance from the Department requested by Krakatau under section 782(c) of the Act, the petitioners contend that the Department is only required to assist small companies, and that the respondent is not a small company in the meaning of the statute. Furthermore, the petitioners note that the respondent has three years of experience with antidumping investigations before the Department. The petitioners cite instances where the Department has assisted the respondent nonetheless, and that despite the Department's best efforts, the respondent's submissions were so fundamentally deficient as to be unusable. According to the petitioners, the deficiencies warrant the application by the Department of total adverse facts available. The respondent argues that the Department should not apply facts available in reaching the applicable determination for the following three reasons: (1) Krakatau submitted information which constitutes a complete record of this investigation, (2) Krakatau submitted information which was verified by the Department's officials, and (3) there is no reliable evidence that Krakatau has not been acting to the best of its ability in providing the information requested in the requested form, manner, and time. The respondent argues that the information submitted on the record, and verified by the Department, does not contain any significant deficiencies or omissions. According to Krakatau, the Department should calculate an antidumping margin in the final determination and include in those calculations the corrections provided at verification for the errors in the U.S. sales database. Krakatau asserts that these corrections are not significant or major because the errors resulted from human mistakes, such as the programming errors that caused incorrect per-unit prices to be assigned to certain line-items in multiple line-item invoices, rather than from problems in the source documents. Krakatau notes that none of the errors found at verification altered its reported sales quantity, which the Department reconciled to its accounting system. Furthermore, Krakatau argues that, as demonstrated by the Department's Calculation Memorandum dated August 17, 2001, the Department had no difficulty calculating Krakatau's dumping margin. The respondent also asserts that even though its U.S. sales were reported in Indonesian rupiahs, the Department used its own exchange rates in successfully calculating Krakatau's dumping margin. The respondent states that it timely submitted all of the information requested by the Department, in the form and manner required by the Department. The respondent asserts that the Department should not apply adverse facts available because the information it has submitted constitutes a complete record, and that this record was verified by the Department. The respondent further notes that at its verification of July 2001, the Department found no unreported sales, or any other significant deficiencies or discrepancies with the submitted data. The respondent argues that it has acted to the best of its ability to fulfill all of the Department's requests for information during this investigation. For this reason, the respondent concludes that the application of total adverse facts available is not warranted in this case. The respondent insists that it made every effort to submit information in the form, manner, and time requested by the Department. The respondent also argues that due to the 1998 devaluation of the Indonesian rupiah, it could not afford to hire legal counsel. Without experts in U.S. antidumping law to guide it, the respondent acknowledges that some difficulties were encountered. However, the respondent argues that section 782 (c) of the Act requires the Department to provide assistance to companies without legal counsel to avoid imposing an unreasonable burden in submitting the requested information. With the corrections provided at verification, the respondent argues that its response is not so deficient as to necessitate the application of adverse inferences. Department's Position: We determine that the application of partial adverse facts available with respect to the U.S. sales database is appropriate under the circumstances of this case. At the preliminary determination, we found that the evidence on the record established that the use of total facts available for Krakatau was warranted because Krakatau failed to provide complete sales and cost questionnaire responses within the meaning of section 776(a)(2)(B) of the Act. See Memorandum from Holly A. Kuga to Bernard T. Carreau, "The Use of Facts Available for PT Krakatau Steel and Corroboration of Secondary Information," dated April 23, 2001, at 16 (Preliminary Facts Available Memorandum). Because of the extent of these errors and the opportunities we provided Krakatau to correct the deficiencies, we also found that Krakatau failed to cooperate by not acting to the best of its ability within the meaning of 776(b) of the Act. See Preliminary Facts Available Memorandum, at 17. For these reasons, the Department based Krakatau's margin on total adverse facts available for purposes of the preliminary determination. As adverse facts available, we applied the margin for Indonesia published in the Department's notice of initiation, 59.25 percent, which was based on information in the petition. See Preliminary Facts Available Memorandum at 21. As mentioned in the Background section above, the Department granted Krakatau permission to submit a revised response to our April 16, 2001 supplemental questionnaire. We received this response on May 29, 2001 and our analysis indicated that Krakatau corrected enough of the sales and cost deficiencies to warrant verification. During verification, we confirmed that Krakatau's revised cost and sales responses were based on reasonable methodologies, and it corrected most of the errors on which we based our preliminary total adverse facts available determination. However, the petitioners are correct in that we found three errors concerning the U.S. sales database. During verification, Krakatau explained how these errors occurred and provided information to correct most of these errors. The petitioners argue that the problems found at verification affecting the value of U.S. market sales are major and significant and should therefore be rejected as information untimely filed at verification. We disagree with this characterization. The first problem cited by the petitioners is that Krakatau reported the gross unit prices of U.S. sales in rupiahs rather than in dollars as was requested in our supplemental questionnaire. While the Department always requests respondents to submit its U.S. sales in the currency in which the transaction occurred, and is hindered whenever a respondent fails to comply with this request, in this case we accepted information at verification that allowed the Department to convert the reported rupiah prices into the U.S. dollar invoice price. At verification, we found that Krakatau used monthly (3) BOI exchanges rates to convert the price of sales transacted in dollars to the reported rupiah price. See Verification Exhibits 3A and 3B. Because of errors made by Krakatau personnel in this conversion process, discussed below, Krakatau provided the Department at verification with a U.S. market discrepancy chart that lists the BOI exchange rates for a large percentage of the U.S. sales. By using the invoice number to link the sales listed on the discrepancy chart with the invoice date reported in the U.S. sales database for those sales, we were able to determine the month for which each BOI exchange rate applies. We then applied the monthly BOI exchange rates to the reported U.S. sales. In this manner, we were able to apply exchange rates from the discrepancy chart to 91.23 percent of the reported U.S. sales. For a more detailed discussion of this issue, see Memorandum from Mark Manning to the File, "Calculation Memorandum for the Final Determination in the Investigation of PT Krakatau Steel Corporation," dated September 21, 2001 (Final Calculation Memorandum). Since there is verified information on the record to correct this problem for the majority of U.S. sales, we used, where applicable, the BOI exchange rates obtained from the U.S. market discrepancy chart to convert the reported rupiah prices to the dollar invoice prices that Krakatau charged. For the remaining 8.77 percent of U.S. sales, we note that the BOI exchange rates for these transactions are not on the record of this investigation. Section 776(a)(2)(B) of the Act states that the Department shall use the facts otherwise available in reaching the applicable determination if an interested party "fails to provide such information by the deadlines for submission of the information or in the form and manner requested, subject to subsections (c)(1) and (e) of section 782." Pursuant to section 782(c)(1) of the Act, Krakatau provided the Department with an explanation for the alternative form in which it provided the requested information, and a method in which to correct the reported errors for greater than 90 percent of its U.S. sales. The Department considered and accepted that explanation and information. However, Krakatau failed to provide such explanation or alternative form for the remaining 8.77 percent of its U.S. sales. Accordingly, we have considered how to address the currency exchange rates for the remaining U.S. sales. We note that section 782(e) of the Act is not applicable to this exchange rate issue with respect to the remaining 8.77 percent of U.S. sales because Krakatau did not submit any information regarding the exchange rates applicable to these U.S. sales. Since the record demonstrates that exchange rates for U.S. sales normally are contained in Krakatau's general ledger, and the Department requested and Krakatau failed to report its U.S. sales in the currency in which they were transacted, we find that the use of partial facts otherwise available for the remaining 8.77 percent of the U.S. sales is warranted. As facts available, we chose for these transactions an exchange rate from among the various BOI exchange rates listed in the U.S. market discrepancy chart that Krakatau provided to the Department at verification to convert these transaction values back into U.S. dollars. As discussed above, we find the use of facts available is warranted for the 8.77 percentage of U.S. sales for which the relevant BOI exchange rates are not on the record of this investigation. Section 776(b) of the Act states that if the Department finds that "an interested party has failed to cooperate by not acting to the best of its ability to comply with a request for information from the administering authority...in reaching the applicable determination under this title, may use an inference that is adverse to the interest of that party in selecting from among the facts otherwise available." At verification, we found that the BOI exchange rates for sales transacted in U.S. dollars are readily accessible within Krakatau's general ledger. Moreover, we note that the Department requested Krakatau to report its U.S. sales in the currency in which they were transacted in our March 16, 2001 Section C supplemental questionnaire. Krakatau failed to comply with our request and, in its April 2, 2001 response, did not provide an explanation of why it could not report the dollar prices, or at least the exchange rates with which the Department could convert back to the dollar prices. For these reasons, we find that Krakatau did not cooperate to the best of its ability in responding to our request. Accordingly, we determine that an adverse inference is warranted. As partial adverse facts available, we are applying the largest BOI exchange rate listed on the U.S. market discrepancy chart to the U.S. sales in question. Section 776(c) of the Act provides that when the administering authority or the Commission relies on secondary information rather than on information obtained in the course of an investigation or review, the administering authority or the Commission, as the case may be, shall, to the extent practicable, corroborate that information from independent sources that are reasonably at their disposal. Because we are using as adverse facts available the largest BOI exchange rate listed on Krakatau's U.S. market discrepancy chart, which information is part of the record, we are not using secondary information. See 19 CFR 351.308(c)(2). Accordingly, the BOI rates used are not subject to the corroboration requirement. Concerning the second error noted by the petitioners, that Krakatau used incorrect BOI exchange rates when converting certain U.S. sales from the dollar invoice price to the reported rupiah price, we determine that this was an inadvertent error. At verification, we found that Krakatau personnel manually adjusted the rupiah prices obtained from the sales ledger (which are based on the tax authority exchange rates) to the rupiah prices contained in its general ledger (which are based on BOI exchange rates). See Memorandum to the File from Mark Manning, "Sales Verification Report for PT Krakatau Steel Corporation," dated August 10, 2001 (Sales Verification Report), at 12. Since the error resulted from Krakatau personnel manually adjusting exchange rates for the reported U.S. sales, and the errors were not in the underlying U.S. dollar price, we find that this is a minor error. For this reason, we have accepted the information correcting this error and are using it in our final calculations. Regarding the third error noted by the petitioners, that Krakatau reported incorrect gross unit prices for certain U.S. sales, we note that this also was an inadvertent error. Specifically, in preparing its U.S. and home market sales databases, Krakatau's computer programmers wrote two programs, one for each market, to access all of the relevant databases within Krakatau's accounting system and compile the information requested by the Department's questionnaire. See Sales Verification Report at 9. At verification we learned that Krakatau's programs failed to include a loop statement that would have assigned the correct per-unit price to each line- item in a multiple line-item invoice. Since the reporting error is minor and resulted from a programming error, we have accepted the information correcting this error and are using it in our final calculations. Comment 2: Application of Facts Available to Short-Term Interest Rate Used to Calculate Credit Expense The petitioners argue that the Department should apply adverse facts available to calculate the respondent's imputed credit expenses because the respondent failed to act to the best of its ability in calculating its borrowing rates. The petitioners assert that Krakatau did not act to the best of its ability by failing to comply with the Department's request to revise its short-term interest rate calculation on an actual basis. According to the petitioners, the respondent's failure occurred despite the Department's detailed example of one possible calculation methodology. Rather than follow the Department's instructions, petitioners contend, Krakatau continued to erroneously included the interest expense from both rupiah and U.S. dollar denominated loans and did not distinguish between the two for its home market and U.S. market short-term interest rate calculations. Also, the petitioners assert, the respondent failed to include in its calculations the principle for general purpose bank loans and loans provided by an affiliated company. The petitioners note that Krakatau had the information required for these calculations, but chose not to include it in their calculations. As adverse facts available, the petitioners recommend that the Department apply the largest credit expense for any single U.S. sale (CREDITU) to all of the respondent's U.S. sales, and apply the smallest credit expense for any single home market sale (CREDITH) to all of Krakatau's reported home market sales. The respondent contends that the Department should use the short-term interest rates submitted by Krakatau. The respondent explains that all its short-term interest rate expenses are recorded in a single account, regardless of whether the loan was a dollar denominated loan or a loan in rupiahs. Moreover, the respondent asserts that distinguishing between the two loans is extremely difficult because the it did not maintain separate sub-ledgers for the account. The respondent contends that the Department should not apply adverse facts available because Krakatau freely disclosed all information related to the short-term interest rate during the verification. Instead, the respondent urges that the Department use the reported credit expenses. Department's Position: We agree with the petitioners that use of adverse facts available is warranted. Section 776(a)(2)(B) of the Act states that the Department shall use the facts otherwise available in reaching the applicable determination if an interested party "fails to provide such information by the deadlines for submission of the information or in the form and manner requested, subject to subsections (c)(1) and (e) of section 782." At verification, we found that Krakatau maintains in its accounting system all of the data necessary to calculate its short-term home and U.S. market interest rates. The Department requested in its March 16, 2001 Sections B and C supplemental questionnaire that Krakatau revise its home market and U.S. market short-term interest rates, and even provided a detailed example of one possible calculation methodology, pursuant to section 782(c)(1) of the Act. In its supplemental response, Krakatau failed to calculate its short-term interest rate in the manner requested by the Department; nor did Krakatau provide an explanation as to why it could not comply with our request or offer an alternative method (other than to accept their single account). We note that section 782(e)(4) of the Act does not require us to consider Krakatau's single interest rate account because Krakatau has not demonstrated that it acted to the best of its ability in providing the information because it did not even attempt to follow our suggested calculation methodology; nor did it offer an alternative method. Since we could not obtain the data necessary to calculate the correct short-term home and U.S. market interest rates at verification, and this information is not elsewhere on the record, we find that the use of facts otherwise available is warranted for this issue. As facts available, we will choose from among short-term home and U.S. market interest rates for individual sales that are on the record. Section 776(b) of the Act states that if the Department finds that "an interested party has failed to cooperate by not acting to the best of its ability to comply with a request for information from the administering authority or the Commission, the administering authority or the Commission (as the case may be), in reaching the applicable determination under this title, may use an inference that is adverse to the interest of that party in selecting from among the facts otherwise available." We note that Krakatau never stated in its supplemental response that calculating a home market and U.S. market interest rate would have been burdensome; nor did it explain why it was unable to follow, or even attempt to follow, our suggested calculation methodology. Krakatau was repeatedly asked by the Department to calculate separate home and U.S. market short-term interest rates and failed to so do. Since verification demonstrated that the information needed to accomplish the calculations and provide the necessary information is in fact in Krakatau's possession, we find that it has not acted to the best of its ability in calculating its home market and U.S. market interest rates. Accordingly, adverse inferences are warranted for this issue. As adverse facts available, we applied the largest CREDITU for any single U.S. sale to all of the respondent's U.S. sales, and applied the smallest CREDITH for any single home market sale to all of Krakatau's reported home market sales. Section 776(c) of the Act provides that when the administering authority...relies on secondary information rather than on information obtained in the course of an investigation or review, the administering authority or the Commission, as the case may be, shall, to the extent practicable, corroborate that information from independent sources that are reasonably at their disposal. Because we are using as adverse facts available the largest CREDITU for any single U.S. sale and the smallest CREDITH for any single home market sale, which information is part of the record, we are not using secondary information. See 19 CFR 351.308(c)(2). Accordingly, the short-term interest rates used are not subject to the corroboration requirement. Comment 3: General and Administrative Expense Ratio The petitioners state that in the Department's verification report, the Department notes that Krakatau failed to deduct packing and royalty expenses from the cost of goods sold (COGS), per its financial statements, which is used as the denominator in the G&A expense ratio. Furthermore, the petitioners assert that these expenses must be deducted from COGS because the G&A ratio is applied to a total cost of manufacture (i.e., the TOTCOM variable) that is net of these expenses. The petitioners also contend that the respondent failed to include foreign exchange gains and losses related to accounts payable in the numerator of the G&A ratio. In accordance with the Department's practice, the petitioners maintain that these expenses should be included in the G&A ratio. The respondent asserts that it is not necessary to include foreign exchange gains and losses related to accounts payable in the numerator of the G&A ratio. The respondent states that, in its normal accounting practice, foreign exchange losses and gains are reported separately from G&A expenses because these gains and losses are not directly related to production, selling, or G&A activities. For this reason, the respondent argues that the Department's practice to include the foreign exchange gains and losses in G&A expenses is unreasonable. The respondent further argues that should the Department choose to include foreign exchange gains and losses in the numerator of the G&A ratio as per its policy, the Department should include all of the gains and losses that resulted from the short-term monetary items, both assets and liabilities, regardless of whether it comes from cash, receivable, payables, or debt. The respondent states that it is unfair to include only the foreign exchange gains and losses resulting from accounts payable in G&A expenses. Department's Position: We agree with the petitioners that Krakatau failed to deduct packing and royalty expenses from the COGS used as the denominator in the G&A expense ratio calculation. Petitioners are correct that these expenses must be deducted from COGS in order for the G&A expense ratio to be on the same basis as the TOTCOM to which it is applied. We have done so in our final calculations. We agree with the petitioners that the respondent failed to include foreign exchange gains and losses related to accounts payable in the numerator of the G&A ratio. Foreign exchange gains and losses related to accounts payable are included by the Department because they are associated with the purchase of the materials and services used by the company to manufacture its products. We have done so in our final calculations. We disagree with the respondent's argument that because its foreign exchange gains and losses do not directly relate to production, selling, or G&A activities they should not be included in the calculation of cost of production (COP). It is not a question of whether they are directly related to production. The issue is whether such gains and losses are related to business activities that support production, selling or general & administrative activities. Foreign exchange gains and losses are incurred on the purchase of goods, services and debt used to produce goods and maintain the business' operations, and as such, are a cost of doing business. As a result, we determined that such gains and losses are associated with the production of subject merchandise and have included them in COP. We disagree with the respondent that should the Department choose to include foreign exchange gains and losses in the numerator of the G&A ratio as per its policy, the Department should include all of the gains and losses that resulted from the short term monetary items - both assets and liabilities - regardless of whether it comes from foreign exchange cash, receivables, payables or debt. The Department does not include foreign exchange gains and losses related to accounts receivable in the product's cost because accounts receivable relate to the sales transaction. Furthermore, the Department typically includes the foreign exchange gains and losses on debt in the financial expense calculation. In this case, we have not included Krakatau's foreign exchange gains and losses on debt in its financial expense ratio because we are basing this ratio on Krakatau's parent company, Pakarya. Comment 4: Financial Expense Ratio The petitioners contend that the Department should apply adverse facts available in recalculating Krakatau's financial expense ratio because the respondent failed to act to the best of its ability by failing to supply its parent company's financial statements. The petitioners cite to Aramid Fiber to support their assertion that the Department relies upon the consolidated financial statements of a respondent's parent company in calculating a respondent's financial expense ratio. See Aramid Fiber Formed of Poly Para-Phenylene Terphthalamide from the Netherlands; Final Results of Antidumping Duty Administrative Review, 65 FR 67347 (November 9, 2000) and accompanying Decision Memo at Comment 1A. The petitioners note that the Department requested in its supplemental questionnaires that Krakatau provide the financial statements of Pakarya, its parent company. However, according to the petitioners, Krakatau failed to provide this information. Furthermore, the petitioners state that Krakatau's assertion that it is unable to obtain its parent company's information is absurd, in light of the fact that Pakarya's financial statements are publicly available and that the petitioners were able to place Pakarya's 1999 financial statements on the record. The petitioners ask the Department to use Pakarya's 1999 financial statements, asserting this is the best information available, in calculating the respondent's financial expense ratio. The petitioners state that there is no information on the record upon which an adverse inference can be based. The petitioners urge the Department to calculate this ratio as Pakarya's "interest and financial services" divided by its COGS. Finally, the petitioners assert that this ratio should be applied to the sum of the respondent's TOTCOM and packing expense because this ratio is calculated as a percent of a COGS that includes packing expense. The respondent argues that the Department should calculate its financial expense ratio based on Krakatau's financial report, rather than the financial statements of its parent company. The respondent states that Krakatau, not the parent company, is the producer and exporter of the subject merchandise. The respondent contends that pursuant to section 773(f)(1)(A) of the Act, which states that "costs shall normally be calculated based on the records of the exporter or producer of the merchandise," Krakatau's financial record is the proper source for calculating its financial expense ratio. Also, the respondent asserts that its own record, which has been verified by the Department, is more relevant and would increase the accuracy of the Department's calculation. Department's Position: We agree with petitioners that use of facts available is warranted with respect to this issue. Because money, from whatever source, can be used to fund various activities (i.e., money is fungible) at different levels in the broader corporate network, the Department uses the financial statements of the highest consolidation level to calculate financial expense, unless the respondent can demonstrate that its corporate parent does not direct its borrowing. The controlling management of the whole network of companies directs funding either actively or passively. Because the respondent failed to provide its current highest level consolidated financial statements, and failed to demonstrate that its corporate parent did not direct its borrowing, the Department, pursuant to section 776(a)(2)(B) of the Act, will use the information available on the record, which is the parent's 1999 financial statements. Pursuant to section 782(c)(1) of the Act, the Department requested in its supplemental questionnaires that Krakatau provide the financial statements of its parent company, Pakarya. However, Krakatau failed to provide this information. Further, we decline, pursuant to section 782(e) of the Act, to consider Krakatau's financial records for calculating financial expense ratio because their use cannot serve as a reliable basis for reaching the determination as they do not take into consideration Krakatau's parent company's financial control over Krakatau. Finally, we disagree that section 773(f)(1)(A) of the Act means that we must use Krakatau's records because they are in accordance with Indonesian GAAP. Section 773(f)(1)(A) of the Act states that the records of the company will be used only if such records "reasonably reflect the costs associated with the production and sale of the merchandise." In this case, the use of Krakatau's books and records is unreasonable because they do not reflect accurately Pakarya's financial control over Krakatau. Comment 5: Depreciation Expense The petitioners argue that the Department should adjust Krakatau's reported depreciation expense to account for inflation occurring between the dates Krakatau acquired its fixed assets and the beginning of the POI. The petitioners argue that because of pre-POI inflation, Krakatau's fixed asset values and related depreciation charges are understated. The petitioners note that, in the cost verification report, the Department adjusted for this inflation by restating Krakatau's depreciation at average 1998 price levels. The petitioners, however, assert that this methodology does not include the 18.9 percent inflation that occurred from 1998 through the second quarter of 1999. For this reason, the petitioners contend that the Department should revise its adjustment to depreciation to include the inflation that occurred from 1998 through the beginning of the POI. The respondent argues that the Department should accept its reported depreciation for the following four reasons. First, Krakatau states that pursuant to section 773(f)(1)(A) of the Act, the Department "shall consider all available evidence on the proper allocation of costs...if such allocations have been historically used by the exporter or producer...for establishing appropriate amortization and depreciation periods." According to the respondent, this section of the Act requires the Department to use Krakatau's reported depreciation of its fixed assets, without adjusting for inflation, because this depreciation is compliant with Indonesian GAAP. Second, the respondent argues that Indonesian companies, in their normal course of business, do not adjust depreciation for inflation, nor has this ever been recommended by Indonesian GAAP. Moreover, it is the respondent's belief that adjusting depreciation for inflation is not practiced in the United States either. Third, the respondent notes that inflation was significant in Indonesia only during 1998. Therefore, the respondent contends that using an inflation adjustment that includes time periods before or after 1998 is unreasonable. Finally, the respondent states that in the event the Department uses an inflation adjustment factor in determinating its depreciation costs, this factor should use 1998 as the base year and calculate the inflation adjustment only for the POI. Department's Position: We agree with petitioners that Krakatau's reported depreciation expense should be adjusted to account for inflation occurring between the dates Krakatau acquired its fixed assets and the beginning of the POI. Fixed assets are capitalized when purchased and then depreciated over time. However, if a company is operating in an inflationary environment, then the depreciation expense in the future years may not properly reflect an actual cost because it is stated in currency levels from prior years. See Fresh Cut Roses From Columbia: Final Determination of Sales at Less Than Fair Value, 60 FR 6980, 6993 (February 6, 1995) ("The exclusion of the inflation adjustment results in costs which are not reflective of current price levels and thus produces an improper matching of revenues and expenses"). We disagree with respondent that, because Indonesian GAAP does not adjust for inflation's impact on historical values, we should not make this adjustment. Section 773(f)(1)(A) of the Act states that the Department will follow the books and records of the respondent only if they reasonably reflect the cost to produce the merchandise under consideration. Ignoring the inflation in Indonesia between the dates Krakatau acquired its fixed assets and the beginning of the POI would be an inaccurate, and therefore unreasonable, reflection of the COP of subject merchandise. Moreover, Krakatau's argument that U.S. GAAP does not adjust for inflation is without merit. The United States has not experienced the significant levels of inflation that have occurred in Indonesia, so any comparison would be inapposite. Finally, Krakatau's argument that we should only adjust for specific years is also without merit. Even the levels of inflation that Indonesia experienced in more stable years add up to significant amounts when one considers the number of years a large fixed asset stays in service. The inclusion of these inflationary years in the overall calculation serves to make the adjustment more accurate. Comment 6: Electricity and Natural Gas Valuation The petitioners argue that Krakatau purchased natural gas and electricity from affiliated suppliers at below market value prices. The petitioners state that section 773(f)(2) of the Act allows the Department to disregard the transfer price for any input purchased from an affiliated supplier if the price is below the market price for the input. Furthermore, the petitioners cite to section 351.407(b) of the Department's regulations which states that the value of a major input purchased from an affiliated supplier will be based on the higher of: (1) The price paid by the exporter or producer to the affiliated person for the major input; (2) The amount usually reflected in sales of the major input in the market under consideration; or (3) The cost to the affiliated person of producing the major input. The petitioners assert that, regardless of whether the natural gas and electricity purchased by the respondent were "major inputs," because these inputs were purchased from affiliated suppliers at below market prices, as per section 773(f)(2) of the Act, the Department should disregard these prices. Natural Gas The petitioners contend that Krakatau has not substantiated that it purchased natural gas from an affiliated supplier at arm's-length, market value prices. The petitioners note that even the two newspaper articles provided by Krakatau during verification indicate that Krakatau obtained natural gas at below market value. Furthermore, the petitioners argue that the Indonesian market price for natural gas, as reported by the Canadian natural gas company Talisman Energy Inc. (Talisman), is much higher than the amount paid by Krakatau to its affiliated suppliers. The petitioners contend that the Department should rely solely on the price information from Talisman because it is superior evidence of the market price than the newspaper articles submitted by the respondent. First, the petitioners contend that the information from Talisman is more reliable because it contains prices reported in the audited financial statements of a widely held publicly-traded company. Second, the petitioners argue that the price information reported by Talisman is superior because it is the weighted- average price to all Indonesian customers for the full year 2000, unlike Krakatau's articles which only cover sales to a single customer for a discrete point in time. The respondent urges the Department not to adjust the natural gas price from its supplier, Pertamina. The respondent contends that although it is affiliated with Pertamina because the Government of Indonesia (GOI) owns both companies, in practice, the GOI does not exercise significant influence or control over Pertamina. According to the respondent, Pertamina is the only public supplier of natural gas in Indonesia and sets the prices for its customers based on its own criteria. The respondent asserts that the market price for natural gas should be the average of the prices set by Pertamina. Electricity The petitioners argue that Krakatau has not submitted any evidence to demonstrate that its reported transfer prices reflect the market price of electricity. However, the petitioners contend that an Indonesian news source reports that the price at which Perusahaan Listrik Negara (PLN), one of Krakatau's affiliated electricity suppliers, purchases power from an independent producer is much higher than the average transfer price paid by Krakatau. The respondent argues that the Department should continue to accept the reported price of electricity supplied by its affiliate PLN because it purchased electricity from this company at market based, arm's-length prices. The respondent contends that although it is affiliated with PLN, because the GOI owns both companies, in practice, the GOI does not exercise significant influence or control over PLN. The respondent also asserts that PLN is the only public supplier of electricity in Indonesia, and that its price list is applied to all companies and households within Indonesia. Thus, the respondent argues, the PLN price best reflects the Indonesian electricity market price. Department's Position: As discussed below, we have determined that natural gas is a major input and electricity is a minor input. Section 773(f)(3) of the Act allows the Department to test transactions between affiliated parties to determine whether the reported values of the major inputs are above the affiliated supplier's COP. In other words, if the value of an input would have a significant impact on the reported cost of the subject merchandise, the Department must be satisfied that the transfer price or market price is above cost. Further, we note that sections 351.407(a) and (b) of the Department's regulations sets forth certain rules that are common to the calculation of COP and constructed value (CV). This section states that for the purpose of section 773(f)(3) of the Act, the Department will determine the value of a major input purchased from an affiliated person based on the higher of: 1) the price paid by the exporter or producer to the affiliated person for the major input; 2) the amount usually reflected in sales of the major input in the market under consideration; or 3) the cost to the affiliated person of producing the major input. We have relied on this methodology in Final Determination of Sales at Less Than Fair Value: Stainless Steel Round Wire from Taiwan, 64 FR 17336, 17337 (April 9, 1999). In this case, the Department concluded that in the case of a transaction between affiliated persons involving a major input, we will use the highest of the transfer price between the affiliated party and the producer, the market price between unaffiliated persons involving the major input, or the affiliated supplier's cost of producing the input. This methodology has been upheld by the Court of International Trade (CIT) in Mannesmannrohren-Werke v. United States, Slip Op. 98-118, at 17 (CIT 1998). See also, Notice of Final Results of Antidumping Duty Administrative Reviews and Revocation in Part: Tapered Roller Bearings and Parts Thereof, Finished and Unfinished, from Japan, and Tapered Roller Bearings, Four Inches or Less in Outside Diameter, and Components Thereof, from Japan, 65 FR 11767 (March 6, 2000) and accompanying Decision Memorandum at Comment 2. We agree with the petitioners that the Department should value electricity and natural gas purchased from affiliated suppliers at the market price for those inputs. In establishing a fair market price, the Department normally looks to transactions between two unaffiliated parties. See, Notice of Final Results of Antidumping Duty Administrative Reviews: Antifriction Bearings (other than tapered roller bearings) and parts thereof from France, Germany, Italy, Japan, Romania, Singapore, Sweden, and the United Kingdom, 65 FR 49219 (August 4, 2000), and accompanying Decision Memorandum at Comment 61. As indicated by the prices quoted in the newspaper articles provide by Krakatau and the petitioners, Krakatau purchased natural gas from an affiliated supplier, Pertamina, at prices that were below market value of that input in Indonesia. Because of the percentage level natural gas represents as an input of the product under consideration, we determined that natural gas is a major input to Krakatau's production. Krakatau failed to provide its affiliated suppliers COP for natural gas and, therefore, only market prices and the transfer prices are on the record. We disagree with petitioners, however, that we should only use the prices supplied by them for the final determination. The prices supplied by petitioners and Krakatau both represent market prices in Indonesia and, therefore, we have averaged the figures. We disagree with Krakatau that the question is whether it controls Pertamina, not whether Pertamina and Krakatau are affiliated parties as defined by the statute. Section 771(33)(F) of the Act is the basis for our conclusion that Krakatau and Pertamina are affiliated because they are both under common control of the GOI. We further disagree with respondent that the Department should not test prices between Pertamina and Krakatau, simply because Pertamina is government controlled. Section 773(f)(2) of the Act allows the Department to test whether transactions between affiliated parties are at arm's length prices. The record demonstrates that natural gas prices between Pertamina and Krakatau are not at market levels. Krakatau obtains electricity from two affiliated parties. Electricity represents a smaller percentage of the cost to produce hot rolled steel, and therefore, we have determined that it is a minor input. However, Krakatau failed to provide its affiliates' (PLN and PT Krakatau Daya Listrik's (KDL)) market price of electricity in Indonesia. For the final determination, we have used as facts available, pursuant to section 776(a)(2)(B) of the Act, the information provided by the petitioners in their July 9, 2001 submission to the Department to establish a market price. The newspaper article in that submission states that "the state company buys electricity from independent power producers at an average of 6 U.S. cents (about Rp 680 at the current exchange rate)." We have adjusted the cost of electricity to reflect this market value. As we stated above, we disagree with Krakatau that the question is whether it controls KDL or PLN, not whether these companies and Krakatau are affiliated parties as defined by the statute. Section 771(33)(F) of the Act supports our conclusion that Krakatau, PLN and KDL are affiliated because they are under common control of the GOI (PLN) and Krakatau (KDL). The question is whether there might be manipulation of prices. We further disagree with respondent that the Department should not test prices between PLN and itself, simply because PLN is government controlled. Section 773(f)(2) of the Act allows the Department to test whether transactions between affiliated parties are at arm's length prices. The record shows that prices between PLN, KDL and Krakatau are not at market levels. Lastly, we disagree with Krakatau that the Department's decision in Notice of Final Determination of Sales at Less Than Fair Value; Certain Hot-Rolled Flat-Rolled Carbon-Quality Steel Products From Brazil, 64 FR 38756, 38786 (July 19, 1999) (HRS from Brazil) supports using the affiliated party's transfer price in this case. In HRS from Brazil the respondent paid the same government regulated price for electricity from all its affiliated suppliers, and the Department accepted those transfer prices. In this case, the record shows that Krakatau paid different prices to PLN and KDL, even though the GOI had set prices. Accordingly, the case upon which Krakatau relies is distinguishable. This distinction undermines respondent's argument that when electricity prices are set by regulation they are in fact used by all suppliers and customers. In this case, the actual prices varied from the regulatory price. Further, the articles submitted by petitioners indicate that other suppliers of electricity are charging yet a different set of prices. Therefore, for the final determination we adjusted the prices paid to its affiliated electricity suppliers to reflect the market price contained in the newspaper article submitted by the petitioners. Comment 8: Year End Audit Adjustments The petitioners argue that the Department should include Krakatau's year- end auditor's adjustments in the calculations of COP and CV. The petitioners argue that because Krakatau failed to meet its burden of establishing the amount and nature of its year-end adjustments, the Department must assume that they represented actual costs incurred during the POI and include these costs in the COP and CV calculation. The petitioners assert that the Department should include the weighted-average value of these two year-end adjustments in the calculation of TOTCOM. The respondent did not comment on this issue. Department's Position: We agree with petitioners that the difference between the reported costs and the financial records resulting from the year-end adjustments should be included in the reported COPs and CVs. We calculated the weighted- average percentage of COGS that the difference represented and applied it to TOTCOM. Comment 9: Understated Direct Material Costs The petitioners contend that Krakatau's direct material costs are understated because they reflect the transfer prices of certain raw materials which are below these material's actual costs of production. The petitioners note that Krakatau reconciled its reported costs to the COGS for its hot-strip mill (HSM) per the trial balance for 2000. That worksheet contained a reconciling item entitled "Adjustment to Krakatau's transfer cost methodology." The petitioners observe that in its most recent response, Krakatau omitted this adjustment without explanation. Moreover, the petitioners argue that the Cost Verification Report, at Exhibit 6, shows that Krakatau's reported costs are reconciled to the same COGS for its HSM, but without this adjustment. Petitioners contend that because reported costs now reconcile to statements that do not include this adjustment, those reported costs must understate the cost for these materials. The respondent requests that the Department disregard the costs associated with the materials from the divisions under question because the reported costs were prepared using a different methodology from the one used in Krakatau's normal accounting practices. Moreover, under the methodology used to report cost to the Department, the respondent states that all of the costs incurred in these divisions have been absorbed by the product. According to the respondent, including these costs would result in double counting. Department's Position: We agree with respondents. The adjustment to which petitioners refer represented an un-applied amount in an earlier submission made by the respondent. However, in later submissions Krakatau treated this item differently and the Department verified the final reconciliation. Moreover, as stated in the above comment, the Department has applied to the reported costs the remaining difference between the reported COPs, CVs and Krakatau's financial statements. Comment 10: Calculation of Total Variable Overhead Costs The petitioners argue that the Department failed to include the variable overhead costs incurred at Krakatau's direct reduction plant, reported in the field DVOH, in the calculation of total variable overhead (VOH). The petitioners suggest that the Department add the variable DVOH to the calculation of VOH in the Model Match and Margin programs. The respondent did not comment on this issue. Department's Position: We agree with the petitioners and have included the variable DVOH to our calculation of total variable overhead in the Model Match and Margin programs. Comment 11: Inclusion of Direct Selling Expenses in the Cost Test The petitioners argue that the Department should include direct selling expenses in the variable SELLCOP, which is used in the cost test. The petitioners note that the Department's Model Match program defines SELLCOP as the sum of direct and indirect selling expenses. The petitioners assert, however, that SELLCOP is defined to include only indirect selling expenses. The petitioners argue that because the Department has not deducted direct selling expenses from the variable NPRICOP, the net home market prices used in the cost test, the Department should revise SELLCOP to include direct selling expenses. The respondent did not comment on this issue. Department's Position: We agree with the petitioners and have included direct selling expenses in the variable SELLCOP, which is used in the cost test that is contained in the Model Match program. Recommendation Based on our analysis of the comments received, we recommend adopting the positions described above. If these recommendations are accepted, we will publish the final determination and the final weighted-average dumping margins in the Federal Register. Agree ____________ Disagree_______________ Let's Discuss___________ _______________________________ Faryar Shirzad Assistant Secretary for Import Administration Date _________________________________________________________________________ footnotes: 1. The petitioners in this investigation are Bethlehem Steel Corporation, Gallatin Steel Company, IPSCO Steel Inc., LTV Steel Company, Inc., National Steel Corporation, Nucor Corporation, Steel Dynamics, Inc., U.S. Steel Group (a unit of USX Corporation), Weirton Steel Corporation, Independent Steelworkers Union, and United Steelworkers of America (collectively the petitioners). (2) 2. Weirton Steel Corporation is not a petitioner in the investigation involving the Netherlands. 3. Although the BOI exchange rates used by Krakatau are in most instances monthly rates, we note that at certain times during the POI these rates were used by Krakatau for periods a little more and a little less than one month. See the Final Calculation Memorandum for a more detailed discussion.