KAJARIA IRON CASTINGS PVT. LTD., ET. AL. V. UNITED STATES
In accordance with the U.S. Court of International Trade's (CIT) order in Slip. op. 00 - 20 (February 18, 2000), Consol. Court No. 95-09-01240 (Kajaria Remand), the Department of Commerce (the Department), pursuant to the U.S. Court of Appeals for the Federal Circuit's (CAFC) opinion in Kajaria Iron Castings Pvt. Ltd. v United States, 156 F.3d 1163 (Fed. Cir. September 8, 1998) (Kajaria), has prepared these final results of redetermination on remand with respect to the final results of the 1991 countervailing duty administrative review of iron-metal castings from India. Certain Iron-metal Castings from India: Final Results of Countervailing Duty Administrative Review, 60 Fed. Reg. 44,843 (Aug. 29, 1995) (Final Results). Pursuant to the Court's remand instructions, the Department has recalculated the program rates for the subsidies conferred under section 80HHC of India's Income Tax Act (80HHC) and the company-specific total ad valorem rates. We have recalculated the rates, in conformity with the CAFC's September 8, 1998 opinion in Kajaria, using a methodology which ensures 1) that there is no "double-counting" of the subsidies that were provided in the form of Cash Compensatory Support (CCS) over-rebates and 2) that there is no countervailing of International Price Reimbursement Scheme (IPRS) rebates provided with respect to non-subject castings. Finally, we have recalculated the all-others rate and determined the company-specific total ad valorem rates pursuant to the CAFC's September 8, 1998 opinion.
In Kajaria, the CIT had previously affirmed the Department's original calculations of the subsidies provided to the Indian producers/exporters of iron-metal castings (the Producers). The CAFC then reversed, in part, and affirmed, in part, the CIT's decision. It held that the Department erred in its calculations of the amount of 80HHC subsidies provided by the Government of India (GOI) to the Producers, but affirmed the Department's methodology for calculating the all-others rate and determining the company-specific total ad valorem rates. Pursuant to the CIT's instructions in Kajaria Remand and in conformity with the CAFC's opinion, we have amended our calculations of the 80HHC program rates, the all-others rate, and the company-specific total ad valorem subsidy rates for the 1991 administrative review.
As instructed by the Court, we have recalculated the subsidy conferred by the 80HHC program by eliminating both the IPRS grants on non-subject merchandise and the double counting of CCS over-rebates.
There are three subsidy programs at issue in this remand: (1) the Cash Compensatory Support (CCS) program which rebates indirect taxes and import duties; (2) the International Price Reimbursement Scheme (IPRS) which reimburses Indian castings exporters for the difference in price between higher-priced domestic pig iron and imported pig iron; and (3) 80HHC of India's Income Tax Act (80HHC) which allows exporters to deduct profits derived from the export of goods and merchandise from taxable income. In the Final Results, we determined that the CCS and 80HHC were countervailable export subsidies. We also determined that the IPRS was not used with respect to exports of the subject merchandise to the United States.
The CAFC ruled that under the Indian tax system, the CCS rebates are considered taxable export income. They stated that the inclusion of the CCS rebates in export income raises export profits by an amount no greater than the amount of the CCS rebates. Therefore, the CAFC concluded that when the Department calculated the subsidy from the section HHC program, it double-counted the subsidy from the CCS program. On remand the CAFC instructed the Department to recalculate the subsidy provided by 80HHC in a manner eliminating the double-counting of the CCS over-rebates.
With respect to IPRS, the CAFC stated that because IPRS rebates are also considered export revenue, the castings respondents' export profits also increased by no more than the amount of the IPRS rebates. The CAFC noted that unlike the CCS over-rebates, the IPRS rebates were found not countervailable because the rebates were related to non-subject castings. The CAFC took exception with the Department's decision to treat the 80HHC income tax deduction as an untied subsidy. The CAFC stated that the portion of the 80HHC deduction based on the IPRS rebates was not an untied subsidy but was a subsidy tied to non-subject castings because the rebates were particular to non-subject castings. Thus, the CAFC instructed the Department to eliminate the IPRS rebates in calculating the subsidy received on subject castings through the 80HHC deduction.
The CAFC further stated that its decision does not mean that in every administrative review or investigation the Department must trace the tax treatment of subsidies to determine if two independent subsidies partially include the same benefit. However, when the party under investigation provides documentation that allows the Department to separate the tax deduction based on the fully countervailed subsidy from the otherwise countervailable portion of the tax deduction, the Department must adjust for the effect of the grant subsidy on the tax subsidy. In the Corrected Final Results of Redetermination on Remand Pursuant to Kajaria Iron Castings Pvt. Ltd., et. al. v. United States, Slip. Op. 99 - 6 (CIT, January 14, 1999)(Corrected Final Results of Redetermination), we attempted to comply with the CAFC's instructions and recalculated the subsidy for the 80HHC program by estimating the portion of the 80HHC deduction attributable to non-subject exports. However, the Producers argued that "the only way to eliminate the 'influence' of the IPRS on the subsidy calculations is to actually deduct the IPRS rebates from income and then calculate the total tax savings based on all exports." See Kajaria Remand at 6. This Court agreed with the Producers that "[i]n attempting to estimate the portion of the 80HHC deduction that is attributable to non-subject exports," our methodology failed to eliminate CCS and IPRS rebates from the calculated 80HHC program. Thus, the Court ordered the Department to recalculate the 80HHC subsidy in a manner not inconsistent the CAFC's opinion.
The CAFC stated that "when the party under investigation provides documentation that allows Commerce to separate the portion of the tax deductions based on rebates related to non-subject merchandise from the remainder of a countervailable tax deduction, Commerce should not countervail the portion of the tax deduction subsidy tied to non-subject merchandise." See 156 F.3d at 1176 (emphasis added). Therefore, based upon the instructions of the CAFC, we should only countervail that portion of the 80HHC tax deduction related to exports of subject merchandise. Thus, eliminating the IPRS rebates for non-subject merchandise from the calculation of the subsidy provided by 80HHC does not mean eliminating the subsidy conferred upon exports of subject merchandise under 80HHC.
The Producers have suggested that "all that needs to be done to eliminate the IPRS 'influence' from the calculation is to subtract the IPRS from the income used to calculate the 80HHC benefit. Unless all IPRS is deducted from income or profit first, the IPRS cannot be eliminated from the calculation as required by the CAFC." Kajaria Remand at 7. However, if this proposed methodology were followed, then the Department could be eliminating the subsidy conferred upon exports of subject merchandise by the 80HHC program.
The Department was instructed by the CAFC to eliminate the IPRS rebates from the calculation of the subsidy provided by the 80HHC deduction on subject merchandise. See 156 F.3d at 1176. The subsidy provided by 80HHC is the amount of taxes the producer would have paid absent the use of this export subsidy. Taxes are paid on the company's profit and, if the producer did not make a profit then there is no benefit from the 80HHC program because no taxes would otherwise be due. Therefore, the subsidy under 80HHC is derived from the producer's profit.
As noted above, the CAFC stated that Commerce should separate the portion of the tax deduction based on rebates related to non-subject merchandise from the remainder of the countervailable tax deduction. However, tying a corporate-wide profit amount to exports of non-subject and subject merchandise is not a simple calculation, and simply deducting IPRS grants from profit does more than eliminate the rebates tied to non-subject merchandise. This is due to the fact that the subsidy tied to non-subject merchandise (the IPRS rebates) may not even be in the profit used to calculate the benefit under the 80HHC program. As the Producers and the Court have observed, the IPRS grants could be used to offset losses, such as the losses incurred in purchasing the higher-priced domestic pig iron to produce exports of non-subject castings. Again, there is no information on the record delineating profit on a market- and product-specific basis. Therefore, the subsidy calculated under the 80HHC program attributable to subject and non-subject castings cannot easily be determined. Thus, in order to eliminate the IPRS rebates from the calculation of the 80HHC subsidy, the Department necessarily must estimate the effect of the IPRS rebates on the profit. The Department must do so because profit is the basis for the calculation of the 80HHC subsidy.
As stated above, the Producers proposed methodology of simply taking the 80HHC profit and first deducting IPRS and CCS rebates before recalculating the 80HHC subsidy is improper. Furthermore, it is at odds with the statute and the CAFC's instructions because the Producers' proposed methodology also may improperly eliminate the 80HHC subsidy related to subject merchandise. Because the CIT has rejected the calculations in the Corrected Final Results of Redetermination, we have recalculated the 80HHC subsidy by removing the IPRS and CCS rebates from the income which ultimately is the basis upon which the 80HHC tax deduction was derived.
Under this methodology, we have weighted all sources of income equally. We have not attempted to "trace" income or expenditures to specific sources, nor do we have information available to be able to attribute income, expenditures, or profit to specific sources. We have assumed that each rupee of income, regardless of the source of that income, played the same role in the determination of a company's profit, and thus played the same role in the calculation of the company's tax deduction under 80HHC. For example, we have assumed that both one rupee in duty drawback received by a company and one rupee in sales revenue received by the company had the identical effect on the determination of the company's profit. Thus, if a company's IPRS and CCS rebates equaled 20 percent of the company's income, then we assumed that 20 percent of the company's profit was derived from IPRS and CCS rebates. Therefore, 20 percent of the subsidy calculated for the 80HHC program in the original final results of administrative review should be "tied" to the IPRS and CCS programs. Thus, the recalculated 80HHC subsidy would be reduced by 20 percent. In compliance with the CAFC's instructions, where documentation was not provided by a company to allow the Department to make this adjustment to the 80HHC subsidy calculation, no adjustment was made.
Under the Department's long established policy, the benefits from income tax deductions are based upon the tax return filed during the period of investigation or review. Therefore, for the 1991 administrative review, the 80HHC subsidy was based upon the respondent's tax return filed during 1991. For the CCS program, we determined the benefit based upon the exports which were made during the period of review. The benefits from the IPRS program, if not tied to non-subject merchandise, would have been determined based upon the amount of IPRS rebates received during the period of review. Therefore, in order to make the necessary adjustments to the calculated 80HHC subsidy we had to match the tax return filed during the period of review to the financial statement which corresponded to the company's fiscal year covered in that tax return. Specifically, calculation of the 80HHC subsidy in the 1991 review period would be based upon the CCS and IPRS receipts reflected in the company's 1990 financial statement in instances where fiscal year 1990 was covered by the 1991 tax return.
For many respondents, the financial statement corresponding to the tax return filed during the period of review was not on the record. Therefore, we requested the respondents to place on the record of this proceeding the financial statement corresponding to the fiscal year covered by the companies' tax return filed during the period of review. The respondents submitted information on April 24, 2000. Based upon these financial statements, we made the necessary adjustments to the 80HHC calculation for CCS and IPRS rebates as mandated by the CAFC's instructions. Using the methodology described above, we have recalculated the 80HHC subsidy in compliance with the CAFC's instructions. The results of these recalculations for each of the respondents are shown in the "Remand Results" below. In addition the actual calculation worksheets for each of the respondents are attached.
We note, however, that we have not made an adjustment for the "double-counting" of the CCS rebates received for exports made prior to 1990. As noted above, the calculated subsidy for the 80HHC tax deduction is based upon the tax return filed during the period of review. Because CCS was not countervailed in the 1989 administrative review, CCS rebates listed in the respondent's financial statement for fiscal year 1989 - 1990, and included as part of the income subject to the 80HHC tax deduction in the company's tax return covering that period, have never been countervailed. Therefore, there is no double-counting to address with respect to these CCS receipts. We have, however, made an adjustment for exports made after 1989 (see Department's Position in response to Comment 5).
Per the instructions of the Court, we have recalculated the company-specific 80HHC program rates for the 1991 period using the methodology described above. In addition, we recalculated the all-others rate by taking the weighted-average of all of the companies' company-specific program rates. We then determined whether each company's individual company-specific rate was significantly different than the all-others rate. If so, the company was assigned its individually-calculated rate. If not, it was assigned the recalculated all-others rate. The rates in the first table below are the original and recalculated rates for the section 80HHC program. The rates set forth in the second table are the original and recalculated total ad valorem rates for each company.
The rates for Kejriwal have increased due to a clerical error. This error was corrected in the Corrected Results of Redetermination and is explained in the calculation sheet.
On April 28, 2000, we provided a draft of these final results to the interested parties and requested that comments on the draft results be provided by 1:00 p.m., on May 5, 2000. We received comments from the Producers and from the petitioners on May 5, 2000. The petitioners conceded to our draft results, while the Producers disagreed with our recalculation of the 80HHC subsidy rates. Because the Producers have disagreed with our remand results, we have addressed their comments objecting to our remand results in the "Comment Section," below.
The Producers assert that since the recalculation methodology results in virtually no reduction in the original subsidy rates found, the methodology does not eliminate from the 80HHC subsidy calculations the IPRS on non-subject castings or the double-counting of the CCS. They argue that a correct recalculation (i.e., to first subtract the IPRS from the income used to calculate the 80HHC benefit) will result in reductions of several percentage points. Therefore, although the Department's methodology reduces the original subsidy slightly, it in no way eliminates the double counting of the CCS or the influence of the IPRS on the 80HHC calculation.
The Department was not instructed to reduce the 80HHC subsidy by several percentage points. Rather, we have been instructed to eliminate the double counting of the CCS and the influence of the IPRS on the 80HHC calculation. Contrary to the Producers' allegations, we have eliminated the influence of IPRS and CCS rebates. Rather than removing them directly from taxable profit, however, we have eliminated these rebates from the income used to determine the Producers' profit. When these rebates are removed from the Producers' income, then the influence of these rebates on the Producers' taxable profit, which is the basis of the 80HHC calculation, is eliminated. This is basic accounting and the Producers have submitted nothing on the record which refutes this basic accounting principle that income is used to determine a company's profit.
Because the Producers have not submitted information to determine income and expenditures on a market- and product- specific basis, the Department has made the reasonable assumption that all income contributes equally to the Producers' profit. For example, if CCS and IPRS rebates accounted for 20 percent of a producer's total income, the Department reasonably assumed that CCS and IPRS rebates accounted for 20 percent of that producer's calculated profit. Therefore, to eliminate the influence of CCS and IPRS rebates on the 80HHC calculation, we reduced that company's profit by 20 percent thereby eliminating any double counting of CCS rebates and eliminating any IPRS rebates to non-subject merchandise. We then recalculated the 80HHC subsidy, which effectively reduced it by 20 percent.
This approach does not, as incorrectly suggested by the Producers, simply pro-rate profit between subject and non-subject merchandise. Rather, our recalculation methodology completely eliminates the entire amount of CCS and IPRS rebates from the producers' income and profit.
As we demonstrate in the following example, the Producers' proposed methodology goes far beyond eliminating the influence of IPRS rebates on the calculation of the 80HHC subsidy and is, therefore, improper. The following table reflects the income, expenses, and profits we use in our example.
Although as noted above, there is no market- or product-specific information on the record, to simplify our example we have assumed that sales revenue for both subject and non-subject merchandise is equal. The sales revenue for the subject merchandise is 1,000 rupees and the costs for producing and selling the subject merchandise is 900 rupees. Therefore, without any other deductions, the taxable profit earned on subject merchandise is 100 rupees. The sales revenue for non-subject merchandise is also 1,000 rupees. However, because the company uses higher-priced domestic pig iron to produce non-subject merchandise, its costs for producing and selling the non-subject merchandise is 1,100 rupees. As acknowledged by the Producers, the company receives IPRS rebates from the government of India to offset the higher-priced domestic pig iron. We thus assume the company received 200 rupees in IPRS rebates on exports of non-subject merchandise to offset the higher costs associated with using domestic pig iron. Therefore, the taxable profit on non-subject merchandise, like the taxable profit on subject merchandise, is 100 rupees. The profit on non-subject castings would be the same regardless of whether the IPRS rebates are treated as a reduction in cost (1,100 rupees in cost minus the 200 rupees in IPRS rebates = 900 rupees in cost and 1,000 rupees in income minus 900 rupees in cost = 100 rupees in profit) or as income (1200 rupees in income minus 1100 rupees in cost = 100 rupees in profit).
If we were to deduct the 200 rupees directly from profit, as suggested by the Producers, the result would be that the subject merchandise would not have received any subsidy benefits from the 80HHC income tax deduction (200 rupees in profit minus 200 rupees in IPRS rebates). However, as we see, this approach has the erroneous effect of eliminating the 80HHC subsidy to subject merchandise, because 100 rupees of the 200 rupees in company taxable profit was derived from sales of subject merchandise.
While the appellate court directed us to eliminate IPRS rebates in calculating the 80HHC subsidy on subject castings, Kajaria, 156 F.3d at 1176, it did not instruct the Department also to eliminate the subsidy conferred upon exports of the subject merchandise by the 80HHC program. Consequently, IPRS can not simply be deducted from profit.
As we noted previously, there is no information on the record delineating profit on a market- and/or product-specific basis. The only information on the record which can be used to recalculate the 80HHC subsidy is that information provided in the producers' tax returns and financial statements. Therefore, our methodology, based on the principal that all sources of income contribute equally to profit, is a reasonable attempt to eliminate the influence of IPRS rebates and the double-counting of CCS rebates.
In an effort to demonstrate that the Department's recalculation methodology does not eliminate the double counting of the CCS or the influence of the IPRS, the Producers offer the following example. A company with 1,000,000 rupees of income and 1,000,000 rupees of expenses would have no profit and, consequently, owe no taxes and receive no benefit from the 80HHC deduction/subsidy. However, if that same company received 200,000 rupees IPRS on non-subject castings, under the Department's recalculation methodology, the company would have 200,000 rupees in taxable profit. The Producers therefore argue that using the Department's recalculation methodology merely reduces any previous subsidy; it does not eliminate the subsidy and thus, cannot be viewed as eliminating the influence of the IPRS.
While the example presented by the Producers would make it appear as though our recalculation methodology does not eliminate the IPRS influence, we believe our example, in Comment 1, more accurately reflects reality and is, therefore, more reasonable. There are a number of problems with assumptions relied upon in the example used by the Producers.
Their position that IPRS rebates contribute directly to profit contradicts prior statements made by them regarding the IPRS program and cannot be supported by their own tax and financial statements, which are on the record of this proceeding. In earlier administrative reviews, the Producers argued that the IPRS program refunds to the Producers the difference between the price they must pay for pig iron purchased from government-owned companies and the lower price they would have otherwise paid on the world market. They stated that castings exporters can either import pig iron or purchase domestic pig iron at the relatively high price set by the Indian government and receive IPRS rebates; the net effect of these two alternatives is the same.(1)
These statements are consistent with the tax and financial statements on the record of this proceeding, which show that some of the Producers record IPRS rebates as "other income." Other producers, however record IPRS rebates as a reduction to expenses (see e.g., Kejriwal Iron & Steel Works financial statement as at 31st March 1989, in which Kejriwal reports pig iron & scrap net of IPRS reimbursement and R.B.Argawalla & Company financial statement, as at 31st March 1989, in which Argawalla reports purchases less IPRS received).
What is clear from the record of this proceeding is that none of the Producers record IPRS or CCS rebates directly as profit or taxable profit. Further, taxable profit is not merely income minus expenses as the Producers' example implies. Rather, as can be seen, for example, in the statements provided by RSI Limited, profit for the purpose of determining the 80HHC deduction is the sum of profit from the profit and loss statement plus "inadmissible items" less "admissible items."
The CAFC noted that IPRS and CCS increased profits by "no more than" the amount of the grants, thereby implicitly recognizing that IPRS and CCS rebates are not direct profit, but rather, that IPRS and CCS rebates contribute to profit. Therefore, the assumption made by the Producers that every rupee of IPRS contributes directly to profit, is not as reasonable as the assumption made by the Department that every rupee of income contributes equally to profit.
The Producers argue that if the Department insists on using a ratio approach, then the denominator used in the ratio must be profit, not total income. They assert that the CIT has already rejected the rational set for in Kajaria Remand (at pages 8 and 9) for using total revenue as the ratio's denominator rather than profit.
We do not agree that it is appropriate to use profit as a denominator for the purpose of determining the contribution of the rebates (IPRS and CCS) to taxable profit. Nor do we agree that the CIT has rejected the use of total revenue as the denominator. Rather, we note that in Kajaria Remand, the CIT set aside the Department's estimate of profit on non-subject merchandise. In our recalculation methodology, in order to separate the portion of the tax deduction based on rebates (IPRS and CCS) from the remainder of the countervailable tax deduction, we have determined the contribution to profit made by the rebates by first weighting all sources of income equally. Because we are determining the contribution to profit made by the rebates, as compared to other sources of income, the appropriate denominator is total income.
Arguing that the financial statement submitted in the exporters' April 24, 2000, submission shows the information necessary to make an adjustment for IPRS rebates, the Producers object to the fact that no adjustment was made for Commex Corporation.
As stated above, we have relied on the tax returns filed during the period of review for our recalculations. The tax return filed by Commex Corporation during 1991, covered Commex's fiscal year 1989 - 1990 (ending March 31). The information provided by Commex on April 24, 2000, however, related to its fiscal year ending March 31, 1991. Therefore, we did not have the information necessary to make an adjustment.
The Producers disagree with the Department's methodology of not adjusting for CCS income where the tax return filed during the 1991 period of review applied to fiscal year 1989 - 1990 (ending March 31). They argue that some of the CCS included in a 1989 fiscal-year tax return filed in 1991 was received in the first quarter of 1990 and that this CCS was countervailed for the 1990 calendar-year period of review. They argue that the Department's calculations fail to take into account the fact first quarter 1990 CCS receipts would be reflected on a 1990 tax return filed in 1991. Therefore, for the final results, this should be corrected.
We disagree that we failed to take into account that a year tax return covering fiscal year 1989 - 1990 (ending March 31) applies to the first quarter of 1990. Rather, we determined that any CCS benefits attributable to the tax return covering such a period and filed during 1991 were not countervailed by the Department. Specifically, in the administrative review covering calendar year 1990, the Department countervailed the benefit from the CCS program based upon the "date of export." Consistent with longstanding practice, the Department determined that the CCS benefits were conferred at the time of export because the exporters knew at the time of export that they would receive the full amount of CCS rebate if they submitted their applications within six months of the date of export. See Certain Iron-metal Castings from India: Final Results of Countervailing Duty Administrative Review, 60 Fed. Reg. 44849 (August 29, 1995). Thus, the amount of CCS benefits countervailed for the 1990 administrative review was derived based on exports made during calendar year 1990.
In their financial statements, however, the exporters reported as income the actual amount of CCS rebates they received during the fiscal year. During verification for the 1990 administrative review, GOI officials and castings exporters explained that there was a three- to six-month lag between the date of export and the time a CCS rebate is processed by the GOI and received by the company.(2) Therefore, based on this lag-time, we made the reasonable assumption that all CCS benefits received and reported as income during fiscal year 1989 - 1990 (and more specifically, January 1990 - March 1990) are attributable to exports made prior to January 1990; the beginning of the period of review during which we first countervailed benefits from the CCS program.
The Department did not countervail the CCS program in the administrative review covering calendar year 1989. Because the CCS program was not countervailed with respect to exports made prior to 1990, and there is a lag of at least three-months for receipt of CCS benefits, there is no possible double counting of CCS benefits reported as income prior to April 1990.
The Producers argue that the Department should make an adjustment for Commex regarding its receipts of CCS income for fiscal year 1989 - 1990 regardless of whether actual values are available. They contend that because, in originally calculating the subsidy from the CCS, the Department used 4.24 percent for all companies and did not use actual CCS receipts, the Department should adjust Commex's 80HHC program rate using the 4.24 percent figure. They claim that subtracting 4.24 percentage points from Commex's 80HHC subsidy rate would be valid because the percentage calculation for both of the subsidies is based on the same denominator.
The tax return Commex filed during 1991 applied to the 1989 - 1990 fiscal year. As explained above, CCS income received during fiscal year 1989 - 1990 applies to exports made prior to 1990. Because the Department did not countervail the CCS program with respect to exports made prior to 1990, there is no double counting of CCS with respect to the tax return filed during 1991, so no adjustment of any kind is necessary.
The Department has recalculated the subsidy rates of the 80HHC program pursuant to the instructions of the CIT and in conformance with the opinion of the CAFC. The calculation sheets for these final remand results are attached.
Troy H. Cribb
1. See e.g., Certain Iron-Metal Castings From India; Final Results of Countervailing Duty Administrative Review, 55 FR 50747, 50747-50748 (December 10, 1990)
2. See "GOI Verification Report" at page 3 (December 13, 1993), "Kajaria Verfication Report" at page 4 (February 25, 1994), "UMA Verification Report" at page 3 (February 25, 1994), and "Carnation Verification Report" at page 2 (December 13, 1993).