FINAL RESULTS OF REDETERMINATION PURSUANT TO COURT REMAND

Delverde, SrL v. United States,

Consol. Ct. No. 96-08-01997, Slip Op. 97-163 (CIT Dec. 2, 1997)



I. Introduction

The Department of Commerce (the "Department") has prepared these final remand results pursuant to the Opinion of the U.S. Court of International Trade (the "Court") in Delverde, SrL v. United States, Consol. Ct. No. 96-08-01997, Slip Op. 97-163 (CIT Dec. 2, 1997).

In its Opinion, the Court remanded the case to the Department and instructed the Department to further consider two issues. It set a deadline of March 2, 1998 for the Department to file its remand determination with the Court.

Subsequently, the Department filed a motion with the Court seeking an extension of time until April 2, 1998. The Department then circulated a draft remand determination to the interested parties on March 9, 1998 and set a deadline of March 17, 1998 for comments. Only respondent Delverde, SrL ("Delverde") filed comments.

The first of the two issues, which was remanded at the Department's request, concerns the net subsidy calculation for Law 64 industrial development grants. The Court noted that the Department's "determination was not explained in a way which would provide opportunity for challenge." Slip Op. 97-163 at 2-3.

On this issue, the Department has determined that its calculation of the net countervailable subsidy amount in its final determination incorrectly included an offset for withholding of income taxes on subsidy payments to respondent Delverde. The Department has revised its calculation accordingly.

The second and more substantial issue concerns the Department's determination regarding a change of ownership transaction in which respondent Delverde, a private company, had purchased a pasta factory and certain other assets from another private company. Here, the Department had followed the methodology found in the Restructuring section of the General Issues Appendix of Final Affirmative Countervailing Duty Determination; Certain Steel Products from Austria, 58 FR 37217, 37269 (July 9, 1993), where it addresses the treatment of spin-offs. This methodology for dealing with spin-offs is based on the Department's methodology for handling privatizations. Applying the spin-off methodology, the Department determined that a portion of the non-recurring subsidies received by the seller prior to the change of ownership transaction passed through to respondent Delverde, with the remainder of those subsidies being allocated to the seller. On this issue, the Court made two rulings in response to arguments from respondent Delverde that all of the prior subsidies were extinguished because this transaction had been made at arm's length and for fair market value.

First, the Court explained that Section 771(5)(F) of the countervailing duty statute, 19 U.S.C. 1677(5)(F), which had been added by the Uruguay Round Agreements Act, Pub. L. No. 103-465, 108 Stat. 4809 (1994) ("URAA"), governed the Department's analysis of this issue. Section 771(5)(F) provides:

A change in ownership of all or part of a foreign enterprise or the productive assets of a foreign enterprise does not by itself require a determination by the administering authority that a past countervailable subsidy received by the enterprise no longer continues to be countervailable, even if the change in ownership is accomplished through an arm's length transaction.

19 U.S.C. 1677(5)(F).

According to the Court, Section 771(5)(F) directs the Department to consider carefully the facts of each case before making a determination regarding the appropriate treatment of the prior subsidies. Slip Op.97-163 at 32. The Court then held that the Department had not done so. According to the Court, the Department had presumed that subsidies always pass through in an arm's length transaction and had "reject[ed] . . . Delverde's evidence of the nature and circumstances of its particular arm's length transaction." Id. at 28, 29, 30.

The Court explained the conflict between the Department's methodology and Section 771(5)(F) as follows:

It is clear under the URAA that Commerce does have the authority to determine that subsidies have passed through despite an arm's length transaction. 19 U.S.C. 1677(5)(F). It is just as clear that Commerce does not have the authority to presume that they always pass through in an arm's length transaction. Id.

Slip Op. 97-163 at 30 (emphasis in original). Then, after acknowledging that "the legislative history [of Section 771(5)(F)] fails to specify what constitutes careful consideration," the Court stated its first holding:

[T]he statute's implicit restriction against the establishment of a legal presumption indicates that such careful consideration would include, at the very least, an examination as to how subsidies may pass through in some cases, but not others. The willingness of Commerce to ignore the possibility that certain arm's length transactions may be a sufficient basis for a finding that subsidies did not pass through to the new owner therefore reflects a failure to take seriously the requirement that the facts of each case be considered carefully before making a determination.

Id. at 34.

Second, after holding that the Department had violated the requirement of Section 771(5)(F) that it carefully consider the facts of the Delverde change of ownership transaction, the Court then addressed whether Section 771(5)(F) was even applicable to this transaction in the first place, given that it was a purely private transaction rather than a privatization. On this issue, the Department had referenced Section 771(5)(F) in support of its determination that the private nature of this transaction did not distinguish it in any material way from a privatization.

The Court decided that the statutory language of Section 771(5)(F) allows differing interpretations and that the legislative history is vague. Id. at 35-36. Consequently, to resolve this issue, the Court proceeded to examine whether the Department's interpretation of Section 771(5)(F) -- that this provision did apply to purely private changes of ownership -- was consistent with other provisions added by the URAA. The Court also examined what it considered to be "the impact [that] the differences between private transactions and government privatizations have on Commerce's interpretation." Id. at 39. The Court's examination of these two matters raised questions about the applicability of Section 771(5)(F) to purely private transactions. In particular, the Court suggested that Section 771(5)(B), 19 U.S.C. 1677(5)(B), which was added by the URAA, may have made a change in the statutory law by creating the requirement that a subsidy confer a benefit upon the recipient. Slip Op. 97-163 at 40-41, 43. The Court also found that there were "significant differences between privatizations and purely private transactions." Id. at 44.

Nevertheless, in the end, the Court did not seem to make an express finding as to whether Section 771(5)(F) applies to purely private transactions. Instead, the Court faulted the Department for not explaining more fully the basis for its determination on this issue. In particular, the Court stated,

Commerce has not explained [1] how, in an arm's length transaction between two private actors where assets are bought at market value, the costs of the subsidies received by the former owner would not be reflected in the market value paid by the new owner, and [2] how the new owner could receive a "benefit" as required by statute.

Id. at 43 (emphasis in original). The Court concluded:

[W]hether Commerce has or has not engaged in any of the complex decision making required by the statute, such deliberation is not reflected in this record, or in the arguments of the parties. Further reflection on the record is required. To date, Commerce has offered no rationale for its implicit determination that Delverde received a benefit from the subsidies reaped by the previous owner of the pasta production facility at issue.

Id. at 47. The Court also cautioned that it is not reasonable for the Department to "automatic[ally] appl[y]" its privatization methodology to a purely private transaction like the Delverde change of ownership. Id. at 45-46. Rather, the Court continued, "Commerce is required to establish standards applicable to private transactions which will lead to rational determinations as to when, if ever, an arm's length sale of assets at market value will lead to pass-through of subsidies." Id. at 46.

As discussed below, the Department has followed the Court's instructions and explained more fully the rationale underlying its methodology for handling the possible pass-through of subsidies in a purely private change of ownership transaction. As part of this explanation, the Department also has addressed the Court's concerns regarding the meaning of Section 771(5)(F), the significance of an arm's length transaction at fair market value, the benefit requirement found in the URAA, and the differences between privatizations and purely private changes of ownership. The Department, in addition, has explained generally how it takes into consideration the facts of each case when applying its methodology and specifically how it took into consideration the facts of this case.

II. Discussion

A.Law 64 Industrial Development Grants

In its final determination, the Department countervailed benefits from non-recurring industrial development grants received by respondent Delverde pursuant to Law 64 of 1986. For certain of these grants, the Department allowed a reduction in the amount of the benefit by the amount of corporate income taxes withheld.

The Law 64 grants from which an amount was withheld related to a project for Tamma Industrie Alimentari Di Capitanata, SrL ("Tamma") and to a publicity grant received by MI.BA. A review of the documentation on the record of the case relating to these grants indicates that the amount withheld was for the corporate income tax referred to as IRPEG. Evidence that this amount is withheld for IRPEG is included in the September 22, 1995 questionnaire response of Delverde at Exhibit 2, where the translated text of this exhibit refers to "withholding of IRPEG, for an amount of 4%, according to the last paragraph of art. 28 of DPR n. 600 of 1973." This same provision concerning withholding in the amount of four percent also is cited in the approval documentation for the above-referenced grants. See Tamma Questionnaire Response, dated September 22, 1995, at Exhibit 10; Tamma Verification Report, dated February 29, 1996, at 9; Delverde Verification Report, dated March 7, 1996, at 12 and Exhibit 22.

We have determined that the amount withheld represents a financial contribution, just as do the funds disbursed directly to Delverde. The amount withheld is a transfer, at the time of the disbursement, to the recipient's taxpayer account and represents a benefit to the recipient. The amount withheld essentially is a payment by the Italian government of taxes on behalf of Delverde, although the portion of the amount withheld that actually will be used to pay taxes on the funds disbursed directly to Delverde may not be known until the end of the tax year.

Meanwhile, turning to the portion of the amount withheld which, at the end of the tax year, actually goes to the payment of taxes on the funds disbursed directly to Delverde, the Department's past practice is clear that no reduction in the grant amount is to be made because of this tax payment. Here, the tax payment is not different from the tax payments which the Department has addressed in other contexts and found to be secondary tax consequences not included in the exhaustive listing of permissible offsets provided under Section 771(6). See, e.g., Final Affirmative Countervailing Duty Determinations: Certain Steel Products from Belgium, 58 FR 37273, 37289 (July, 9, 1993); Final Affirmative Countervailing Duty Determination: Certain Fresh Atlantic Ground Fish from Canada, 51 FR 10041, 10066 (March 24, 1986).

Accordingly, we have determined that respondent Delverde benefitted from the entire amount of the grant, which includes not only the amount directly disbursed to it but also the amount that was withheld and credited to Delverde's taxpayer account at the time of that disbursement.

The Department has now recalculated the benefit from Law 64 grants paid to Delverde, the only investigated company for which taxes were withheld on grant payments. This recalculation changes the subsidy rate for Delverde's Law 64 grants from 2.21 percent ad valorem to 2.22 percent ad valorem. Delverde's overall countervailing duty rate, in turn, changes from 5.90 percent ad valorem to 5.91 percent ad valorem.

B.Change of Ownership

1.The Department's Final Determination

The facts in this case are not materially in dispute. However, the Department sets them forth below in some detail, given the Court's concern regarding the Department's failure to set forth its consideration of the change of ownership issue fully on the record.

According to respondent Delverde's questionnaire responses, which were confirmed at verification, a company called "Sangralimenti" formed a company called "Nuova Delverde" and purchased a pasta factory from an unrelated company called "Delverde," along with the Delverde name and trademark, in March of 1991. The original Delverde company remained in business, producing pasta, olive oil and other products, and changed its name to "MI.BA." Nuova Delverde subsequently changed its name to Delverde, and it is one of the respondents in this case.

Respondent Delverde maintained in its questionnaire responses that this transaction had taken place at arm's length and at fair market value. It explained that the transaction was between unrelated companies and was based upon an independent asset valuation. Specifically, the purchase price for this transaction was determined by reference to an asset appraisal conducted by an independent appraiser, who had been appointed by an Italian court and had applied Italian laws relating to the capitalization of assets and the valuation of assets upon their sale. The purchase price equalled the total of the values which the appraiser had calculated.

Nuova Delverde (before changing its name to Delverde) paid the purchase price, in exchange for the pasta factory, by providing the original Delverde company's successor, MI.BA, with shares in Nuova Delverde at a value equalling the amount of the purchase price. On the day after this transaction, MI.BA agreed to the sale of its Nuova Delverde shares, at the same price, to Sangralimenti. This sale was completed over a period of four years.

The pasta factory which respondent Delverde purchased at this time -- March of 1991 -- previously had benefitted from certain non-recurring subsidies provided by the Italian government, namely, Law 64 industrial development grants. Specifically, the original Delverde company had applied for and received approval for grants supporting five projects (Projects 45887, 58081, 64117, 38020, and 41769) relating to the expansion and modernization of the pasta factory. Part of the grant monies for each project were paid to the original Delverde company periodically over time, as work on the project progressed. By March 1991, the original Delverde company had only received all of the grant monies approved for three of the five projects, namely, Projects 45887, 38020, and 41769.

The Italian government disbursed the remaining grant monies for Projects 58081 and 64117 to Delverde after Delverde's March 1991 acquisition. It received these grant payments in 1993 and 1995.

In the final determination, the Department applied the spin-off methodology found in the Restructuring section of the General Issues Appendix, which is essentially the same as the Department's privatization methodology, to resolve the issue of how to treat the non-recurring subsidies received by the original Delverde company. Application of this methodology allocated a portion of the prior subsidies to the seller and a portion to the buyer, respondent Delverde. The Department calculated these portions pursuant to a percentage figure, known as "gamma," which estimates what portion of the purchase price in the change of ownership transaction reasonably can be attributed to the seller of a subsidized entity.

Notably, it was in the General Issues Appendix, two years prior to the final determination in this case, that the Department first had indicated that it would apply the same methodology to both partial privatizations and purely private transactions. At that time, the Department stated plainly that "[c]orporate restructurings may . . . be accomplished through mergers, spin-offs, and acquisitions" and identified two types of situations in which such restructuring transactions occur, namely, (1) "between a state-owned enterprise and a privately-owned enterprise, and [(2)] between privately-owned enterprises." General Issues Appendix, 58 FR at 37268 (emphasis added). It was to this universe of corporate restructurings which, the Department indicated, the methodology in the Restructuring section applied.

One of the two principal arguments raised by respondent Delverde was that an arm's length transaction at fair market value, as in this case, extinguishes any previously bestowed subsidies because no benefit from those subsidies could be realized by the purchasing company. The Department responded that, in Saarstahl AG v. United States, 78 F.3d 1539 (Fed. Cir. 1996) ("Saarstahl II"), rev'g Saarstahl AG v. United States, 858 F. Supp. 187 (CIT 1994) (Carman, J.) ("Saarstahl I"), the Federal Circuit had "specifically stated that the Department does not need to demonstrate competitive benefit." 61 FR at 30298. Consequently, citing both Saarstahl II and Section 771(5)(F), the Department explained that "[t]hese subsidies do not necessarily lose their countervailable nature by simple virtue of an arm's length transaction . . . ." Id.

The Department also addressed respondent Delverde's other principal argument. Here, respondent Delverde had argued that, "in addition to an arm's length transaction at fair market value," the transacting parties "are privately held entities and there was no government ownership" or other involvement. Id. Without providing more explanation, respondent Delverde then concluded that the private nature of this transaction "means that the previous owners retain the benefit from the subsidies." Id. Respondent Delverde did not explain why the identity of the parties to the change of ownership transaction in this case meant anything one way or another. The Department refuted respondent Delverde's argument by referencing Section 771(5)(F) and explaining that it applies to all types of changes of ownership, not merely to a change of ownership involving the privatization of a government-owned company, and therefore it applies to this case.

2.The Department's Methodology

As explained above, the Department used its spin-off methodology to determine how to treat the subsidies received by the original Delverde company. In the General Issues Appendix, the Department explains in some detail the rationale for this methodology, which the Department applies both to the sale of a "productive unit" of a government-owned company, and to the sale of a private company's "productive unit."

The starting premise of this methodology, which is based on the Department's privatization methodology, is that while subsidies are considered to be "distortions in the market process for allocating an economy's resources," General Issues Appendix, 58 FR at 37260, it is neither required nor feasible for the Department to show how those distortions may have occurred in any particular instance of subsidization. As the Department explained in the General Issues Appendix, which construed the countervailing duty statute as it existed prior to the URAA,

[n]othing in the statute directs the Department to consider the use to which subsidies are put or their effect on the recipient's subsequent performance. See 19 U.S.C. [] 1677(6). Nothing in the statute conditions countervailability on the use or effect of a subsidy. Rather, the statute requires the Department to countervail an allocated share of the subsidies received by producers, regardless of their effect.

General Issues Appendix, 58 FR at 37260. See id. (discussing legislative history and judicial opinions construing pre-URAA countervailing duty statute).

Building on this principle, which is equally applicable to the privatization methodology and the spin-off methodology, the Department concluded:

[W]hether subsidies confer a demonstrable competitive benefit upon their recipients, in the year of receipt or any subsequent year, is irrelevant -- the statute embodies the irrebuttable presumption that subsidies confer a countervailable benefit upon goods produced by their recipients.

General Issues Appendix, 58 FR at 37260. The Department added that this "statutory presumption . . . must, in order to have the intended effect, be applied over a reasonable period of time," just as the Department "allocates non-recurring subsidies over time in recognition of the fact that the statutory goal of providing a remedy against subsidies would be defeated by allocating the subsidies to a single moment or year." Id. at 37261.

In other words, the countervailable subsidy amount is fixed at the time that the government bestows the subsidy. The sale of a company, per se, does not and cannot eliminate this potential countervailability because the countervailing duty statute "does not permit the amount of the subsidy, including the allocated subsidy stream, to be reevaluated based upon subsequent events in the marketplace." Id. at 37263.

The Department gave two examples to help explain this conclusion. First, it stated that

if a government were to provide a specific producer with a smokestack scrubber in order to reduce air pollution, the Department would countervail the amount that the company would have had to pay for the scrubber on the market, notwithstanding that the scrubber may actually reduce the company's output or raise its cost of production.

Id. at 37261. The Department further stated:

Similarly, the Department does not take account of subsequent developments that may reduce any initial cost savings or increase in output from a subsidy. For instance, if a government provides a piece of capital equipment to a company, the Department continues to countervail the value of that equipment as received, regardless of whether it subsequently becomes obsolete or is taken out of production.

Id. (citation omitted).

Proceeding to the argument that the sale of a company automatically extinguishes prior subsidies because "the fair market price must include any remaining economic benefit from the subsidies," id. at 37263, the Department expressly rejected it. The Department noted that this argument "rests on the assumption that subsidies must confer a demonstrated benefit on production in order to be countervailable." Id. This assumption was contrary to the countervailing duty statute, according to the Department, because the countervailing duty statute contained "the irrebuttable presumption that nonrecurring subsidies benefit merchandise produced by the recipient over time," without requiring any re-evaluation of those subsidies based on subsequent events in the marketplace or the use or effect of those subsidies. Id.

On the basis of these principles, the Department affirmatively adopted the approach

of treating nonrecurring subsidies previously bestowed on the seller as potentially passing through to the purchaser in a privatization or other change of ownership transaction. At the same time, however, the Department needed to resolve the issue of whether, or under what circumstances, to allocate the prior subsidies to the seller, to the purchaser, or to both the seller and the purchaser.

The Department addressed this allocation issue, in the first instance, in the privatization context, when it considered specifically whether some portion of the prior subsidies should be allocated to the seller (i.e., the government) and considered to be full or partial "repayment" of the prior subsidies. This particular inquiry was prompted by the fact that it has been the Department's longstanding practice generally that subsidies can be "extinguished" by being "repaid" to the government. See General Issues Appendix, 58 FR at 37261.

On this issue, as the General Issues Appendix reflects, some parties had argued that "privatization at fair market value necessarily constitutes repayment of the residual value of any remaining benefit." Id. The Department rejected this argument, as it again was premised on a reassessment of the value of the prior subsidies as of the time of the privatization transaction.

Other parties had argued that "privatization per se does not entail repayment of prior subsidies" based on a theory that draws a distinction between the owners of the privatized company and the privatized company itself. The Department addressed this argument in some detail and ultimately rejected it for reasons that are not relevant to this remand proceeding. See id. at 37621-63.

Still other parties had argued that "if the Department were to determine that privatization at fair market value does not, by definition, eliminate the countervailability of subsidies bestowed previous to privatization, the Department should still determine that some portion of the remaining value of those subsidies would be offset by the purchase price paid by the new owners." Id. at 37261. The Department accepted this argument in light of its past practice. The Department explained:

As part of our administration of the law, we have determined that there must be an allowance for the repayment of prior subsidies. . . . In the context of privatization, we have concluded that a payback to the government by the new company or its owners (which we regard essentially as one and the same in these circumstances), regardless of how it is patterned, can indeed repay at least some amount of the subsidies remaining . . . .



Id. at 37264 (citation omitted).

The problem that the Department faced at this point was how to calculate the portion of the purchase price attributable to the repayment of prior subsidies. The most reasonable starting point in this analysis was to determine the percentage of the company's value attributable to prior subsidies. Unfortunately, there is no economic analysis available -- short of, possibly, an extensive econometric analysis which would be, at best, administratively infeasible in a countervailing duty proceeding and, at worst, an expensive, resource-intensive exercise that would still be subjective and not necessarily any more accurate -- that can identify the percentage of a company's value attributable to prior subsidies. Certainly, however, given that the purchaser was paying for the entire company, at least some portion of the company's value, however large or small, realistically could be attributable to prior subsidies.

Absent guidance in the countervailing duty statute, legislative history or case law, the Department resolved this problem by developing a formula which yields a reasonable estimate of the percentage of the company's value attributable to prior subsidies. In the context of a privatization, this formula essentially divides the amount of non-recurring subsidies (i.e., those subsidies allocable over time) received by the company prior to privatization by the company's net worth over time in order to obtain the percentage of the company's value reasonably attributable to prior subsidies. The Department then multiplies this percentage by the purchase price to obtain the amount of the purchase price representing the portion of prior subsidies attributable to the seller. Because the seller is the government, this amount is considered to be "repaid" to the government and, therefore, "extinguished." The remainder of the prior subsidies, meanwhile, are attributable to the purchaser and remain subject to countervailability.

It bears noting that the universe of subsidy funds that can be allocated between the seller and the purchaser under this methodology is not in any way based on a re-valuation of the prior subsidies as of the time of the privatization. Rather, it simply equals the amount of the prior subsidies originally attributable to the POI under the Department's normal methodology for allocating nonrecurring subsidies over time.

When the Department first adopted this repayment approach, which was in the context of a privatization, it explained:

The estimate so obtained of the proportion of prior subsidies repaid through privatization is the most reasonable that we have been able to devise. Although the "all-or-nothing" alternatives proposed by respondents and petitioners avoid difficult allocation problems inherent in the Department's approach, they are dependent on assumptions which we believe are incorrect.



Id. at 37263.

Of course, the methodology developed by the Department can result in the full pass through of benefits from prior subsidies, or absolutely no pass through of benefits, or anything in between, depending on the facts of a particular case. This aspect of the Department's methodology was noted and endorsed by the Court of Appeals when it stated: "Commerce's methodology correctly recognizes that a number of scenarios are possible: the purchase price paid by the new private company might reflect partial repayment of the subsidies, or it might not." Saarstahl II, 78 F.3d at 1544.

When this approach is applied to a spin-off, there is no "extinguishment" of prior subsidies. Rather, the full amount of the prior subsidies allocated between seller and purchaser remains subject to countervailability, although what actually will be countervailed in a particular case depends on whether the seller or the purchaser, or both, are under investigation. For example, if the Department investigates subsidies benefitting a government-owned company -- the seller -- which has spun off a productive unit, the Department will countervail, inter alia, the portion of the subsidies which has been allocated to the seller pursuant to the formula which it has developed. See General Issues Appendix, 58 FR at 37269 (in Swedish and U.K. steel investigations, Final Affirmative Countervailing Duty Determinations; Certain Steel Products from Sweden, 58 FR 37385 (July 9, 1993), and Final Affirmative Countervailing Duty Determination; Certain Steel Products from the United Kingdom, 58 FR 37393 (July 9, 1993), where the respondent was a government-owned company that had spun off a productive unit, the Department allocated a portion of the prior subsidies to the spun-off productive unit and the remainder to the government-owned company and, then, countervailed the portion allocated to the government-owned company, the company that happened to be under investigation). Similarly, in the final determination in this case, the Department allocated the prior subsidies in part to the seller and in part to the purchaser, respondent Delverde. Because the purchaser was one of the companies under investigation, moreover, the Department countervailed the amount allocated to it.

Lastly, it bears noting that the Department's methodology does not change depending on the amount of the purchase price. The allocation of subsidies between seller and buyer is affected by the amount of the purchase price, but the methodological approach which the Department applies remains constant. Consequently, it is not relevant, from a methodological standpoint, whether the purchase price is at fair market value or above or below fair market value. As the Department explained in the General Issues Appendix:

Given the Department's methodology, petitioners' and respondents' concerns regarding whether or not the sale . . . was at a fair market price are irrelevant. To the extent that the purchase price may have been lower than the offer made by a different bidder, correspondingly less of any pre-existing subsidies were repaid.



Id. at 37264.

To date, the Federal Circuit has expressly upheld the Department's methodology, both in the context of privatization, where repayment to the government took place, see British Steel plc v. United States, Nos. 96-1401, -1402, -1404, -1405, -1406, slip op. (Fed. Cir. Oct. 24, 1997) ("British Steel"); Saarstahl II, and in the context of spin-offs, where the Department allocated subsidy amounts to the seller and the purchaser, without any repayment to the government, see Inland Steel Bar Co. v. United States, 86 F.3d 1174 (Fed. Cir. 1996) (per curiam) (citing Saarstahl II rationale). The only issue which the Federal Circuit (or this Court) has not squarely addressed is the reasonableness of the specific formula which the Department has adopted to estimate the subsidy amounts which should be allocated between seller and purchaser. No party in this case, however, has directly challenged this formula.

In any event, in Saarstahl II, the Federal Circuit reviewed Saarstahl I, where this Court had held that "the arm's length sale of a [government-owned] company extinguished any remaining 'competitive benefit' from the prior subsidies, because the price presumably included the market value of any continuing competitive benefit." Saarstahl II, 78 F.3d at 1541 (citing Saarstahl I, 858 F. Supp. at 193). In reversing this holding, the Federal Circuit explained that the Court had adopted a faulty premise, namely, that "subsidies may not be countervailed unless they confer a demonstrable competitive benefit upon the merchandise exported to the United States." Id. at 1543. The Federal Circuit forcefully rejected any notion that it was proper for the Department to re-value subsidy benefits based on the use or effect of the subsidies. The Federal Circuit clearly stated that

the statute makes clear that Congress did not require Commerce to determine the effect of the subsidy once bestowed. Indeed, Congress has expressed the contrary view that "an 'effects' test for subsidies has never been mandated by the law and is inconsistent with effective enforcement." North American Free Trade Agreement Implementation Act, S. Rep. No. 189, 103d Cong., 1st Sess. 42 (1993). It would be "burdensome and unproductive for the Department of Commerce to attempt to trace the use and effect of a subsidy demonstrated to have been provided to producers of the subject merchandise." Id. at 42-43.



Saarstahl II, 78 F.3d at 1543. Consequently, according to the Federal Circuit, an arm's length transaction, at fair market value, does not automatically extinguish previously bestowed subsidies because the countervailing duty statute is not concerned with "whether the subsidy actually confers any competitive advantage on the merchandise exported to the United States." Id.

The Federal Circuit then stated what was necessary in order to impose countervailing duties on a company after it had been privatized. It held that the Department is authorized to impose duties simply on the showing that two statutory requirements are satisfied: "(1) a subsidy is provided with respect to the manufacture, production, or sale of a class or kind of merchandise; and (2) a domestic industry is injured by reason of imports into the United States of that class or kind of merchandise." Id. (citing 19 U.S.C. 1671(a)). In other words, with regard to the "subsidy" requirement, it is sufficient merely to establish that a subsidy was bestowed on the government-owned company prior to privatization. It is not necessary to determine whether or to what extent that company may be benefitting from the subsidy after privatization.

In the Department's view, even though Saarstahl II and later British Steel both construed the pre-URAA countervailing duty statute, those decisions continue to support the Department's approach to privatization under the post-URAA statute. None of the provisions added to the statute by the URAA alters the principles on which the Department's methodology is based, as explained below in Part II.B.3.c.

Furthermore, the rationale of the Saarstahl II and British Steel decisions extends not only to privatizations, but also to purely private changes of ownership. As explained above, the same fundamental principles underlie both methodologies.

3.The Court's Questions

The Court's questions can be broken down as follows: How does the Department carefully consider the facts of each case when applying its spin-off methodology? Does section 771(5)(F) apply to purely private changes of ownership? How does the purchaser in a change of ownership transaction receive a "benefit" as required by section 771(5)(B)? Why does an arm's length transaction at fair market value not extinguish the subsidies bestowed on the seller prior to the change of ownership? How does the Department's methodology account for the "significant differences" between privatizations and purely private changes of ownership?

The Department answers each of these questions, in turn, below.



a.How Does the Department Carefully Consider the Facts of Each Case When Applying its Spin-off Methodology?



In the first part of its Opinion, the Court finds Section 771(5)(F) plainly applicable to the Department's analysis of the purely private change of ownership at issue in this case and, in particular, the nonrecurring subsidies previously bestowed on the original Delverde company. The Court explains, citing to the SAA, that the Department therefore is required to consider carefully the facts of each case before making a determination regarding the appropriate treatment of the prior subsidies. Lacking a detailed explanation of the Department's methodology for handling purely private changes of ownership and how the Department applied it in this case, the Court then finds an apparent conflict between the Department's methodology and Section 771(5)(F). The Court states that the Department's methodology uses a "legal presumption" that subsidies "always" pass through in an arm's length transaction, without any consideration being given to the circumstances surrounding a particular arm's length transaction. In addition, in the Court's view, the Department used this presumption in this case to "reject[ ] [respondent] Delverde's evidence of the nature and circumstances of its particular arm's length transaction." Slip Op. 97-177 at 29 (emphasis added).

The Department acknowledges that it did not adequately address, on the record, the specific issues raised here by the Court when it reached its final determination. Below, the Department now provides its views in detail in order to rectify this situation.

The Department agrees with the Court that Section 771(5)(F) applies to the Department's analysis of the purely private change of ownership at issue in this case. The Department addresses this issue more fully below in Part II.B.3.b. where it responds to statements made by the Court in another part of its Opinion suggesting that Section 771(5)(F) actually may not apply to a purely private change of ownership.

The Department also agrees with the Court that Section 771(5)(F) requires the Department to consider carefully the facts of each case. Although Section 771(5)(F) itself does not state this requirement, the SAA and the House and Senate Reports uniformly do. See SAA at 258; H.R. Rep. No. 826, 103d Cong., 2d Sess., vol. 1 at 928 (1994); S. Rep. No. 412, 103d Cong., 2d Sess. 92 (1994).

The Department disagrees with the Court's suggestion, however, that the Department's methodology does not allow it to consider the facts of each case. The methodology does allow the Department to consider the facts of each case, and the Department has done so in every case in which it has addressed a change of ownership. See, e.g., Final Results of Countervailing Duty Administrative Review; Certain Hot-rolled Lead and Bismuth Carbon Steel Products from the United Kingdom, 61 FR 58377, 58379 (Nov. 14, 1996).

Through its methodology, the Department does not automatically treat all previously bestowed subsidies as passing through to the purchaser in a change of ownership transaction, nor does it automatically treat all of them as remaining with the seller or as being extinguished. Rather, "we have recognized that privatization has some impact on previously bestowed subsidies and have employed a repayment formula to determine the extent to which those subsidies pass through to the privatized firm." Notice of Proposed Rulemaking and Request for Public Comments (Countervailing Duties), 62 FR 8818, 8821 (Feb. 26, 1997)

The Department's methodology requires the Department to consider and rely on several facts particular to whatever change of ownership might be at issue. As can be seen from this case, these facts include the nature of the previously bestowed subsidies, the amounts of those subsidies, the time when those subsidies were bestowed, the appropriate period for allocating the subsidies, the net worth over time of the company sold, the amount of the purchase price and, in the context of a spin-off, the value of the assets. It is on the basis of these facts that the Department determines the ultimate allocation of the prior subsidies between the seller and the purchaser.

The Court suggests that the Department is not considering the facts of each case, as required by Section 771(5)(F), if it uses a methodology that "ignore[s] the possibility that certain arm's length transactions may be a sufficient basis for a finding that subsidies did not pass through to the new owner." Slip Op. 97-163 at 34. On this point, the Department interprets Section 771(5)(F) differently. The Department views it as a congressional effort to preserve the Department's discretion in dealing with changes of ownership. The Court in Saarstahl I had overruled the Department and held that an arm's length transaction automatically precludes the pass-through of prior subsidies to the purchaser. Section 771(5)(F) makes clear that the Department may not find that an arm's length transaction, in and of itself, automatically precludes the pass-through of prior subsidies to the new owner. Section 771(5)(F) does leave open the possibility of finding that a particular arm's length transaction precludes pass-through, given the circumstances of that particular transaction. Even so, the fundamental point is that Section 771(5)(F) does not dictate any particular approach that the Department must follow. Thus, the Department need not adopt a methodology that focuses on the arm's length nature of a transaction and inquires into what circumstances might be attendant to that arm's length transaction that might warrant a finding of no pass-through of subsidies. Section 771(5)(F) instead leaves the choice of methodology to the Department's discretion.

Turning to the facts which the Department considered in this case independent of those relevant to the repayment calculation, the Department would first like to respond to the Court's statement that the Department rejected respondent Delverde's evidence of the nature and circumstances of the arm's length transaction in this case. The Department did accept and consider all of the evidence presented by respondent Delverde, although it did not rely on all of it in the manner urged by respondent Delverde.

Respondent Delverde's evidence was intended to show that the change of ownership transaction was conducted at arm's length. The evidence also included certain facts which went beyond the existence of an arm's length transaction, namely, that the purchase price was equal to the fair market value of the assets being purchased from the original Delverde company, that the parties to the transaction both were private companies, and that there was no indication of any government involvement in the transaction.

The Department did not make any finding in response to Delverde's argument that its evidence showed a transaction at arm's length and for fair market value. Under the Department's methodology, which is based on one permissible reading of the countervailing duty statute, the arm's length, fair market value nature of a transaction does not affect the determination regarding the pass-through of prior subsidies. What the Department did do was rely on Delverde's evidence to the extent that it showed the amount of the purchase price. In this regard, under the Department's methodology, the Department uses the purchase price in its repayment calculation regardless of whether that price was reached at arm's length or could be characterized as at, above or below fair market value. The amount of the purchase price only affects how the prior subsidies are allocated between the seller and the purchaser. A higher purchase price will result in more of the prior subsidies being attributed to the seller and less of them being attributed to the purchaser, while a lower purchase price will result in less of the prior subsidies being attributed to the seller and more of them being attributed to the purchaser.

The evidence regarding the purely private nature of the transaction, meanwhile, had no relevance to the amount of prior subsidies passing through to respondent Delverde, the purchaser. It only meant that the amount of prior subsidies allocated to the seller was not considered as repayment to the government.

In sum, the Department considered all of the factual evidence presented by respondent Delverde, and then properly followed its existing methodology. There was nothing about the nature and circumstances of the transaction at issue which gave the Department any reason to change that methodology.

Finally, as can be seen, it is not correct to characterize the Department's methodology as one that "presume[s]" that prior subsidies "always" pass through in an arm's length transaction, as the Court has done. It is true that the Department's methodology rejects the notion that an arm's length transaction, per se, extinguishes or otherwise prevents the pass-through of prior subsidies to the purchaser. However, as explained above, that does not mean that the Department instead treats all of the prior subsidies as passing through in an arm's length transaction. To the contrary, the Department allocates the prior subsidies between the seller and the purchaser. Depending on the facts of the particular case, the Department may find that most or almost all of the subsidies pass through to the purchaser, as in Final Affirmative Countervailing Duty Determinations; Certain Steel Products from Brazil, 58 FR 37295 (July 9, 1993), or that much fewer subsidies pass through to the purchaser, as in Final Affirmative Countervailing Duty Determination; Certain Steel Products from the United Kingdom, 58 FR 37393 (July 9, 1993). Indeed, it is possible that, in a given case, the purchase price may be high enough in relation to the prior subsidies that all of the prior subsidies will be allocated to the seller, with the result that no prior subsidies would be treated as passing through to the purchaser.

b.Does Section 771(5)(F) Apply to Purely Private Changes of Ownership?



The Court, in its Opinion, addresses the question whether Section 771(5)(F) applies to purely private changes of ownership. Although the Court does not seem to have reached a definitive conclusion on this issue, it does seem to favor an interpretation which would have Section 771(5)(F) applicable to privatizations, but not to purely private changes of ownership. In the final determination, meanwhile, the Department had only stated conclusorily that Section 771(5)(F) did apply to purely private changes of ownership

. Below, the Department explains in detail why it has interpreted this section as applying not just to privatizations, but also to purely private changes of ownership. The Department also states its position regarding what it would mean, in terms of the Department's exercise of discretion, if Section 771(5)(F) did not apply to purely private changes of ownership.

The starting point in any analysis of a statutory provision is the language itself. Here, Section 771(5)(F) provides in its entirety:

A change in ownership of all or part of a foreign enterprise or the productive assets of a foreign enterprise does not by itself require a determination by the administering authority that a past countervailable subsidy received by the enterprise no longer continues to be countervailable, even if the change of ownership is accomplished through an arm's length transaction.



19 U.S.C. 1677(5)(F).

As can be seen from its plain language, Section 771(5)(F) speaks only generally of a "change of ownership" involving a "foreign enterprise." It makes no specific reference to a "privatization" or a "government-owned enterprise," nor does any other language suggest even in the remotest way that this section is addressing only the one type of change of ownership, i.e., a privatization, rather than all types of changes of ownership. Thus, the plain language of the statute is unambiguous. By its terms, it applies to any change of ownership involving a foreign enterprise. Because the statutory language is unambiguous, there would seem to be no need to consult the SAA or congressional reports to interpret this section.

Nevertheless, the Court seems to view this language as ambiguous. It states that the statutory language "does not mention any characteristics to identify the seller or buyer in a given transaction." Slip Op. 97-177 at 35. In other words, according to the Court, the statutory language does not specify whether the seller or the buyer in a particular transaction would be a government-owned company or a private company.

In the Department's view, this silence does not detract from the clarity of the statutory language. Indeed, if anything, it reinforces it. If, as the Department reads the statutory language, Section 771(5)(F) refers to all types of changes of ownership, then there simply is no need for it to identify the seller or the buyer. Depending on the particular type of transaction at issue, it is possible to have any combination of identities for the seller and the buyer.

More fundamentally, it is difficult for the Department to see what it is about Section 771(5)(F)'s use of the general terms "change of ownership" and "foreign enterprise" which even suggests in the first place that Congress may have been intending only to address privatizations and not all changes of ownership. These terms, in themselves, have no ambiguity, and there certainly is nothing absurd that results from giving them their plain meaning when interpreting Section 771(5)(F).

In any event, the possible ambiguity identified by the Court would seem to be overcome by an examination of the SAA and the relevant congressional reports. Each of these documents confirms, in multiple ways, that Section 771(5)(F) is addressing all types of changes of ownership.

Turning first to the SAA, its discussion of Section 771(5)(F) reads in its entirety as follows:

Section 771(5)(F) [19 U.S.C. 1677(5)(F)] provides that a change in the ownership of "all or part of a foreign enterprise" (i.e., a firm or a division of a firm) or the productive assets of a firm, even if accomplished through an arm's-length transaction, does not by itself require Commerce to find that past countervailable subsidies received by the firm no longer continue to be countervailable. For purposes of section 771(5)(F), the term "arm's-length transaction" means a transaction negotiated between unrelated parties, each acting in its own interest, or between related parties such that the terms of the transaction are those that would exist if the transaction had been negotiated between unrelated parties.



Section 771(5)(F) is being added to clarify that the sale of a firm at arm's-length does not automatically, and in all cases, extinguish any prior subsidies conferred. Absent this clarification, some might argue that all that would be required to eliminate any countervailing duty liability would be to sell subsidized productive assets to an unrelated party. Consequently, it is imperative that the implementing bill correct and prevent such an extreme interpretation.



The issue of the privatization of a state-owned firm can be extremely complex and multifaceted. While it is the Administration's intent that Commerce retain the discretion to determine whether, and to what extent, the privatization of a government-owned firm eliminates any previously conferred countervailable subsidies, Commerce must exercise this discretion carefully through its consideration of the facts of each case and its determination of the appropriate methodology to be applied.



SAA at 258.

In the Department's view, the SAA, like the relevant congressional reports, correctly reflects the fact that privatization was an important issue with which both the Administration and Congress were concerned. However, it does not indicate that privatization was the only issue.

Focusing on the specific language used, what is most immediately apparent is that the SAA demonstrates an awareness of the distinction between changes of ownership generally and privatizations. It uses both terms, and it also uses the more specific term "privatization" only when its statements would not be equally applicable to both privatizations and purely private changes of ownership. In fact, the structure of the SAA's write-up indicates that privatizations are intended to be a subset of the broader category of changes of ownership.

Thus, looking at the first two paragraphs, it is clear that the SAA is addressing changes of ownership generally and not merely those involving a government-owned company. This is evident from an examination of the terms used by the SAA. In the first two paragraphs, the SAA refers only to a "change in the ownership" of a foreign enterprise, not to a "privatization." Moreover, the SAA expressly defines a change in the ownership of "a foreign enterprise" as a change in the ownership of "a firm." It does not use the term "government-owned firm" in this definition.

It is only in the third and last paragraph that the SAA specifically addresses privatizations rather than all types of changes of ownership. Here, it cautions that "privatization[s]," in particular, "can be extremely complex and multifaceted." This characterization of privatizations, as contrasted with purely private changes of ownership, hardly would seem to be controversial. Rather, it simply underscores the fact that, in the preceding two paragraphs, the SAA -- like Section 771(5)(F) -- is addressing all types of changes of ownership.

The Court considered this aspect of the SAA in its Opinion. The Court suggests that the terms "foreign enterprise" and "firm" could "easily have been assumed by Congressional representatives to be synonymous with 'government-owned firms,' because until that point in time, the only change of ownership of relevance for countervailing duty purposes to either the Department of Commerce or Congress had involved governments." Slip Op. 97-177 at 37 (emphasis in original).

It is true that, prior to this case, the Department had not addressed a wholly private change of ownership. However, in the General Issues Appendix, the Department did deal with a spin-off where the seller was owned 50 percent by two private parties and 50 percent by the government and the purchaser was a private party. See General Issues Appendix, 58 FR at 37269 (addressing the Certain Steel Products from Sweden case). Moreover, when the Department announced its spin-off methodology, the Department indicated that it intended to apply essentially the same methodology to private transactions, as is discussed above in Part II.B.2. The Department issued the General Issues Appendix well before the enactment of the URAA and Section 771(5)(F).

Turning to the congressional reports, it can be seen that the House Report uses language which is essentially identical to that used in the SAA. See H.R. Report No. 316, supra, vol. 1 at 928. The Senate Report uses different language. However, in doing so, it provides additional support for the Department's position that Congress intended Section 771(5)(F) to apply to all changes of ownership, including private-to-private transactions. Specifically, after describing the subject of Section 771(5)(F) as a change in the ownership of a firm, the Senate Report adds:

The Committee believes that this provision serves the important purpose of making clear that the sale of a firm at "arm's length" does not automatically extinguish any previously-conferred subsidies. New section 771(5)(F) stands in contrast to such an interpretation, which would result in an end to the countervailability of prior subsidies otherwise allocable to the merchandise. The sale of subsidized goods or assets to an unrelated party should not in and of itself permit the avoidance of duties. The Commerce Department should continue to have the discretion to determine whether, and to what extent (if any), actions such as the "privatization" of a government-owned company actually serve to eliminate such subsidies. It is the Committee's expectation that Commerce will exercise this discretion carefully and make its determination based on the facts of each case, developing a methodology consistent with the principles of the countervailing duty statute.



S. Rep. No. 412, supra, at 92 (emphasis added). By using the phrase "such as," the Senate Report clearly implies that the privatization of a government-owned company is just one example of a change of ownership addressed by Section 771(5)(F), not the only type of change of ownership addressed by this section.

According to the Court, "the Senate could have meant 'privatization' of a government owned company as opposed to some other action undertaken by a government company, such as the sale of an asset or a portion of capital stock." Slip Op. 97-177 at 38 (emphasis in original). The Court then cites to a distinction made in the General Issues Appendix between the "privatization" of an entire government-owned company and the "sale" of a productive unit of a government-owned company.

While the Court offers what may be one permissible reading of the Senate Report language, the Department maintains that its reading is more sound and, at a minimum, equally permissible. The initial subject of the paragraph at issue is "the sale of a firm." The paragraph then addresses "[t]he sale of subsidized goods or assets to an unrelated party." It is only after these two subjects are addressed that the paragraph references actions "such as the 'privatization' of a government-owned company." These two subjects are not limited to the actions of a government-owned firm. Rather, they apply to firms generally. When the Senate immediately thereafter uses the phrase "such as the 'privatization' of a government-owned company," it would seem logical to view this phrase as an example of those subjects, or in other words an example of the sale of a firm or subsidized goods or assets. It is difficult to view the Senate's use of this phrase as an effort, in effect, to limit the two prior subjects in the paragraph to the sale of a government-owned firm or its subsidized goods or assets, which is the possibility raised by the Court.

As further support for this position, the Department would point to the definition of "arm's-length transaction" in the SAA and both congressional reports. It is defined as follows:

For purposes of section 771(5)(F), the term "arm's-length transaction" means a transaction negotiated between unrelated parties, each acting in its own interest, or between related parties such that the terms of the transaction are those that would exist if the transaction had been negotiated between unrelated parties.



SAA at 258. Accord, H.R. Report No. 316, supra, vol. 1 at 928; S. Rep. No. 412, supra, at 92.

This definition is not confined to transactions between a government-owned company and a private company, i.e., privatizations. Rather, by contemplating transactions between related parties, it can readily be inferred that the SAA and the congressional reports -- and therefore Congress -- had in mind purely private changes of ownership and not, at this point, privatizations. In this regard, a privatization, by definition, cannot involve related parties. Both parties have to be unrelated, as the seller is the government and the purchaser is a private company. In contrast, a purely private change of ownership has no such inherent restrictions, as both the seller and the purchaser are private companies and can be either related or unrelated to each other.

Finally, it is of overriding importance to note that even if it were proper to conclude that Section 771(5)(F) does not apply to purely private changes of ownership, this would not mean that the Department was then precluded from exercising its discretion and applying its existing spin-off methodology to handle purely private changes of ownership. Rather, Section 771(5)(F) simply would cease to have any direct bearing on the Department's handling of purely private changes of ownership.

In this regard, Section 771(5)(F) is not the source of the Department's authority for the spin-off methodology or, for that matter, the privatization methodology. Rather, as was true under pre-URAA countervailing duty law, the Department's authority derives from its inherent power to implement the countervailing duty statute. Section 771(5)(F) only acts to preserve the ability of the Department to exercise its discretion, and it accomplishes this goal by overturning the approach ordered in Saarstahl I, which had mandated that the Department find that an arm's length transaction, in and of itself, precludes any pass-through to the purchaser.

With Section 771(5)(F) deemed inapplicable to purely private changes of ownership, there would be no effect on how the Department could handle purely private, arm's length transactions. The only effect would be the removal of an explicit, statutory limitation on judicial review of the Department's methodology. The Department itself would continue to be free to exercise its discretion and adopt a reasonable methodology, and it is theoretically possible that the methodology adopted by the Department could provide for full pass-through, partial pass-through, or even no pass-through of prior subsidies, as was true prior to the enactment of Section 771(5)(F).

Nevertheless, and perhaps more fundamentally, the Department would not change its methodology under these circumstances. Well before the enactment of Section 771(5)(F), the Department itself already had rejected the notion that an arm's length sale prevents the pass-through of prior subsidies to the purchaser. The presence or absence of Section 771(5)(F) is not relevant to the Department's position.

Thus, whether Section 771(5)(F) is interpreted as applying or as not applying to purely private changes of ownership, the Department's discretion is preserved. The Department is free to exercise that discretion, moreover, to use the spin-off methodology that it used in this case.

c.How Does the Purchaser in a Change of Ownership Transaction Receive a "Benefit" as Required by Section 771(5)(B)?



In its Opinion, the Court suggests that new Section 771(5)(B), which requires that a subsidy confer a benefit upon the recipient, represents a change in the statutory law. The Court then suggests that the purchaser of a subsidized company does not receive a "benefit" within the meaning of this section, as long as it has paid market value for, inter alia, the previously bestowed subsidies. The Court also states that the Department "has offered no rationale for its implicit determination that Delverde received a benefit from the subsidies reaped by the previous owner of the pasta production facility at issue." Id. at 47.

We interpret the Court's statements to mean that Section 771(5)(B) requires a showing that a benefit accrues directly to the purchaser at the time of the change of ownership transaction. Such an interpretation would appear to be similar to the "competitive benefit" test enunciated by this Court, construing pre-URAA countervailing duty law, in Saarstahl I.

There are three parts to the Department's response to the Court's statements, each of which is discussed more fully below. First, the benefit requirement set forth in Section 771(5)(B), although new to the countervailing duty statute, is not new to the Department's practice. It merely codifies what had been the Department's longstanding, court-approved practice. Second, the "benefit" requirement means only that a benefit to the recipient be found at the time of the subsidy bestowal; subsequent uses or effects are irrelevant to this determination. Third, it is only necessary, in the context of a change of ownership, to establish that the company or productive unit being sold was the original recipient of a subsidy benefit. It is not necessary to establish in what way, or to what degree, the subsidy may have provided an actual, direct, competitive benefit to the purchaser at the time of the change of ownership.

Turning to the first point, it should be clear that the requirement that a subsidy confer a "benefit" upon the recipient in order to be countervailable is not new. Although it had not been set forth in the statute prior to the enactment of the URAA, it has long been established as a fundamental principle of U.S. countervailing duty law that there must be a benefit, and the Department has applied this principle in every countervailing duty proceeding that it has ever conducted.

Specifically, since the Department began implementing the U.S. countervailing duty statute, a subsidy has been defined as (a) an act or practice of a foreign government, normally referred to as a "program," (b) which confers a "benefit" on the recipient. A subsidy becomes a countervailable subsidy if it is also "specific" to an enterprise or industry or a group of enterprises or industries, a concept which is referred to as "selective treatment."

This definition is set forth in the Department's first set of proposed substantive regulations in the countervailing duty area, issued in 1989. There, Section 355.42, which attempted to re-state the Department's practice up to that point, provided as follows:

A countervailable subsidy exists when the Secretary determines that:

(a) A program provides selective treatment to a product or firm; and



(b) A program provides a countervailable benefit with respect to the merchandise.



Notice of Proposed Rulemaking and Request for Public Comments (Countervailing Duties), 54 FR 23366 (May 31, 1989) ("1989 Proposed Regulations") (emphasis added).

The key term "benefit" in paragraph (b) is defined elsewhere in the 1989 Proposed Regulations. Specifically, Section 355.44 defines it, although it does so by way of example rather than through a generic statement. Thus, this section describes grants, below-market rate loans, equity infusions made on terms inconsistent with commercial considerations, the provision of goods or services at preferential rates, and the like. See 1989 Proposed Regulations, 54 FR at 23380-83.

Since the issuance of the 1989 Proposed Regulations, the Department has continued to follow the requirement that a subsidy confer a benefit on the recipient, in cases decided under the countervailing duty statute as it existed both before and after the enactment of the URAA. Thus, pre-URAA law cases include, for example, Final Results of Countervailing Duty Administrative Review; Porcelain-on-Steel Cookingware from Mexico, 60 FR 53165, 53166 (Oct. 12, 1995) ("With the broad definition of a subsidy contained in 19 U.S.C. [] 1677(5), Congress specifically included government action which results in the provision of capital and loans on 'terms inconsistent with commercial considerations,' and the like, to a specific group of beneficiaries. See 19 U.S.C. [] 1677(5)(A)(ii). . . . The Department determines the countervailability of subsidies by measuring benefit to the recipient . . . . Where, as here, loans are given below commercial market rates, a benefit is conferred."); Final Results of Countervailing Duty Administrative Review; Certain Iron-Metal Castings from India, 61 FR 64676, 64685 (Dec. 6, 1996) ("The benefit from that program is the difference between the amount of interest the respondents actually pay and the amount of interest they would have to pay on the market. The interest expense enters the accounts as an expense or cost, just like hundreds of other expenses. There is no way to determine what effect a reduced interest expense has on a company's profits because there are so many variables . . . that enter into, and affect, a company's costs. . . . [W]e do not, and are not required to, consider the effects of subsidies on a company's profits or financial performance."); Final Results of Countervailing Duty Administrative Review; Extruded Rubber Thread from Malaysia, 60 FR 17515, 17517 (Apr. 6, 1995) ("The Department has a longstanding practice of valuing the benefit to the recipient . . . for the purpose of calculating countervailing duty rates.") The courts similarly have recognized the "benefit" requirement under pre-URAA law, as can be seen, for example, in Inland Steel Industries, Inc. v. United States, 967 F. Supp. 1338, 1347 n.9 (CIT 1997) ("In order to be countervailable, Commerce must determine a loan satisfies the following three criteria: (1) the existence of government action caused the issuance of the loan; (2) a benefit was conferred on the recipient firm by the loan; and (3) the loan was specific."). Meanwhile, although no court (other than this Court) has addressed the issue, the Department has expressly found the "benefit" requirement to have remained unchanged under post-URAA law. See, e.g., Final Results of Countervailing Duty Administrative Review; Extruded Rubber Thread from Malaysia, 62 FR 48985, 48987 (Sept. 18, 1997) ("As explained in the previous reviews, the Department has a longstanding practice of valuing the benefit to the recipient . . . for the purpose of calculating countervailing duty rates. This practice is now reflected in section 771(5)(E) of the Act, which states that the subsidy benefit 'shall normally be treated as conferred where there is a benefit to the recipient.'"); Final Results of Countervailing Duty Administrative Review; Extruded Rubber Thread from Malaysia, 61 FR 55272, 55275 (Oct. 25, 1996) (same); Final Results of Countervailing Duty Administrative Review; Certain Iron-Metal Castings from India, 62 FR 32297, 32299 (June 13, 1997) ("In examining whether a short-term export loan [under the PSCFC program] confers countervailable benefits, the Department must determine whether 'there is a difference between the amount the recipient of the loan pays on the loan and the amount the recipient would pay on a comparable commercial loan that the recipient could actually obtain on the market.").

The SAA, meanwhile, eliminates any possible doubt on this issue. It states:

In general, the Administration intends that the definition of 'subsidy' will have the same meaning that administrative practice and courts have ascribed to the term . . . 'subsidy' under prior versions of the statute, unless that practice or interpretation is inconsistent with the definition contained in the bill. Absent such inconsistency, . . . practices countervailable under the current law will be countervailable under the revised statute.



SAA at 255 (emphasis added). In its subsequent analysis of the elements of a "subsidy," the SAA identifies a few instances in which prior U.S. practice is inconsistent with the requirement that the government make some sort of a financial contribution. See id. at 257, 258. However, the SAA does not identify any inconsistencies with regard to the "benefit" requirement. It simply says that the statute "reflects the 'benefit-to-the-recipient' standard which long has been a fundamental basis for identifying . . . subsidies under U.S. CVD practice." Id. at 257.

This conclusion is confirmed by a look at the post-URAA countervailing duty statute itself. As can be seen, the statute mirrors the 1989 Proposed Regulations. It first states, in Section 771(5)(A), that a "subsidy" is countervailable if it is "specific" in nature. In Section 771(5)(B), the statute then explains that a "subsidy" is a financial contribution or an income or price support provided directly or indirectly by a government, which confers a "benefit" on the recipient. Section 771(5)(E) goes on to identify particular examples of when a "benefit" is conferred.

Notably, the language used by the new statute to identify the "benefit" requirement reveals no intent to change the Department's longstanding, court-approved practice, as it existed prior to the URAA. The statute uses precisely the language that the Department has used over the years. It states the "benefit-to-the-recipient" standard, which, as discussed above, " long has been a fundamental basis for identifying . . . subsidies under U.S. CVD practice." Id.

Meanwhile, it is true that the impetus for the addition of Section 771(5)(B) to the countervailing duty statute was a similarly new provision in the WTO Agreement on Subsidies and Countervailing Duty Measures ("Subsidies Agreement"), which went into effect on January 1, 1995. That provision, Article 1 of the Subsidies Agreement, represented the first time that the GATT or its successor, the WTO, had included the "benefit" requirement in its rules. More specifically, it was the first time that this body had defined the term "subsidy," of which the "benefit" requirement is one element. The only prior agreement in the subsidies area, the 1979 GATT Subsidies Code, like the pre-URAA U.S. countervailing duty statute, had not defined the term "subsidy."

Nevertheless, these developments have no real significance for the issue in this case. While the addition of the "benefit" requirement was a substantive change for the WTO, it was not a substantive change for U.S. countervailing duty law. Rather, as the SAA confirms, it merely codified the Department's longstanding, court-approved practice.

In the Uruguay Round, the United States had two principal goals in the subsidies area which are relevant here. First, the United States wanted to change the 1979 GATT Subsidies Code, which was relatively summary in nature, to set out the applicable rules in much more detail. As part of this effort, the United States sought to include a definition of the term "subsidy." On this point, the U.S. countervailing duty law had long been settled by the Department's practice, with court approval, even though it was not set forth in the governing statute. The practice of the Contracting Parties under the GATT Subsidies Code, however, could hardly be characterized as settled. Second, there had been a related dispute under the 1979 GATT Subsidies Code as to whether, in applying countervailing duty measures, the investigating authorities should identify and measure subsidies according to their cost to the government (the EU approach) or their benefit to the recipient (the U.S. approach).

The Uruguay Round resulted in substantial victories for the United States on both points. The Subsidies Agreement, in Article 1, permits the U.S. definition of a countervailable subsidy, including the requirement that a "benefit" must be conferred. In addition, in Article 14, the Subsidies Agreement reflects U.S. practice regarding the identification and measurement of a "benefit." It provides guidelines for identifying whether a "benefit" exists and for measuring the resulting "benefit," and these guidelines are consistent with U.S. practice, as they are based on the benefit-to-the-recipient approach.

The SAA explains these developments as they relate to U.S. countervailing duty law as follows:

Section 771(5)(E) [of the countervailing duty statute] provides the standard for determining the existence and amount of a benefit conferred through the provision of a subsidy. . . . Thus, [Section 771(5)(E)] reflects the 'benefit-to-the-recipient' standard which long has been a fundamental basis for identifying and measuring subsidies under U.S. CVD practice, and which is expressly endorsed by Article 14 of the Subsidies Agreement.



SAA at 257.

Turning to the next part of the Department's response, it is the Department's view that Section 771(5)(B), as a codification of the Department's prior practice, only requires that a benefit to the recipient be found at the time of the subsidy bestowal. It does not require the Department to consider subsequent events in the marketplace or the use or effect of a subsidy when determining whether a benefit exists, as the Court seems to imply.

The Court's apparent interpretation of Section 771(5)(B) is contrary to the Department's longstanding, court-approved practice, which is explained at length in Part II.B.2. above. Additionally, it is inconsistent with, inter alia, one other provision added by the URAA, i.e., the change of ownership provision, Section 771(5)(F).

Here, it is instructive to ask, what would be the effect on Section 771(5)(F) if it were correct to interpret Section 771(5)(B) as representing a new requirement under the U.S. countervailing duty law and as meaning that, as the Court suggests, it is necessary to show a direct benefit to the purchaser -- essentially, the "competitive benefit" test in Saarstahl I -- at the time of the change of ownership? This would mean that Section 771(5)(F) was a dead letter from the outset, even though Congress intended Section 771(5)(F) to overrule Saarstahl I and its use of essentially the same "competitive benefit" test. Plainly, this or any other conflicting construction of the URAA must be disfavored. Congress could not have meant Section 771(5)(F) to be an empty gesture. Rather, if at all possible, these two provisions -- Section 771(5)(B) and Section 771(5)(F) -- should be read so as to make the URAA internally consistent. The way to do that is to adopt the Department's interpretation of Section 771(5)(B).

All of this discussion, meanwhile, leads to one final perspective, which should be controlling. If Congress had intended Section 771(5)(B) to effect a change in the countervailing duty law and now require a showing of "competitive benefit," this change obviously would have been of major significance. It would have overturned one of the bedrock principles of the countervailing duty law, which is that the Department is not required to consider the use or the effect of a subsidy in order to countervail it. In this type of situation, certainly it would be reasonable to expect that Congress somewhere -- either in the statute itself or at least in the legislative history -- would state expressly that it was making that major change. However, no statement to that effect can be found anywhere. The reasonable conclusion, therefore, is that Congress did not intend to make the major change suggested by the Court.

The last part of the Department's response focuses on how the "benefit" requirement works in the context of a change of ownership. Specifically, under the countervailing duty statute, both before and after the URAA, it is only necessary, in the change of ownership context, to establish that the company or productive unit being sold was the original recipient of the subsidy benefit. It is not necessary to establish in what way, or in what degree, the subsidy may have provided an actual, direct competitive benefit to the purchaser at the time of the change of ownership.

As has been upheld by the Federal Circuit in Saarstahl II and British Steel, nothing in the countervailing duty statute conditions countervailability on the use or effect of a subsidy or on the demonstration of a "competitive benefit." Rather, to impose countervailing duties, only two requirements need to be satisfied. These two requirements are the existence of a "subsidy" provided with respect to the manufacture, production, or sale of a class or kind of merchandise and "injury" to a domestic industry by reason of imports into the United States of that class or kind of merchandise. See Part II.B.2. above.

In establishing the existence of a "subsidy," one element is some sort of financial contribution by the government, and the other element is that a "benefit" be conferred upon the recipient. The "benefit" element is satisfied, in the context of a change of ownership, through the government's original financial contribution to the seller on some sort of preferential terms.

Consequently, it is not necessary for the Department to show an actual competitive advantage accruing to the purchaser. The countervailing duty law simply does not require any showing regarding subsequent events in the marketplace or how the subsidy in fact may be benefitting production of the merchandise over time in order for the Department to be able to impose countervailing duties.

Meanwhile, it is the Department's opinion that it is not relevant that the purchaser did not actually "receive" the subsidy in the first place, nor is it relevant whether or not the record evidence shows that the purchaser, as of the time of the change of ownership, obtained a demonstrable competitive benefit or otherwise realized some "economic effect" from the subsidy. Indeed, these perspectives were expressly discussed and rejected by the Federal Circuit in Saarstahl II. See 78 F.3d at 1542-43.

The fundamental point here is that the Department has devised a reasonable, feasible system of allocation designed to implement the statute's broad requirement that the Department countervail subsidies provided "with respect to the manufacture, production, or sale of a class or kind of merchandise." Once the Department finds that a "subsidy" has been provided, it measures the amount of the subsidy, attributes the subsidy to the appropriate production, determines the period of time over which the subsidy will be allocated and then allocates the subsidy over time. The Department performs this allocation once, as of the time of the subsidy bestowal, based on the value of the subsidy at that time. The Department does not look at how the value of the subsidy may have changed over time due to the company's usage of the subsidy funds or market events. Generally speaking, the practical result of this system of allocation is to link liability for, as an example, pasta subsidies to pasta production, not to the original recipient of those subsidies. Thus, when a company or productive unit that has been subsidized is sold, as in this case, it is reasonable for the Department to continue to allocate some of those subsidies to that production.

The Federal Circuit's decisions in Saarstahl II and British Steel support this system even under the post-URAA countervailing duty statute. The URAA did not make any changes to U.S. countervailing duty law which are material to the Department's methodology. In particular, as explained above, the URAA's addition of Section 771(5)(B) and its "benefit" requirement did not effect any change in U.S. countervailing duty law, and that was the sole basis on which the Court had posited the inapplicability of Saarstahl II under the post-URAA statute.

d.Why Does an Arm's Length Transaction at Fair Market Value Not Extinguish the Subsidies Bestowed on the Seller Prior to the Change of Ownership?



The Court asks, why does an arm's length transaction at fair market value not extinguish the subsidies bestowed on the seller prior to the change of ownership? The Court cautions that, particularly in the context of a purely private change of ownership, the Department's standards should "lead to rational determinations as to when, if ever, an arm's length sale of assets at market value will lead to pass-through of subsidies." Slip Op. 97-177 at 46.

The Court's interpretation of the "benefit" requirement, discussed above in Part II.B.3.c., seems to have influenced the Court's analysis of what Congress meant in Section 771(5)(F), the change of ownership provision added by the URAA. The Court plainly takes a very restrictive approach to the pass-through of subsidies, as it suggests that subsidies rarely, if ever, should pass through to the purchaser.

In any event, the plain language of Section 771(5)(F) would seem to contradict the Court's view. To the Department, Section 771(5)(F) means that the Department may not find that an arm's length transaction, in and of itself, automatically precludes the pass-through of prior subsidies to the new owner. As discussed above in Part II.B.3.a., Section 771(5)(F) does leave open the possibility of finding that a particular arm's length transaction precludes pass-through, given the circumstances of that particular transaction. At the same time, however, Section 771(5)(F) does not dictate that the Department adopt a methodology that focuses on the arm's length nature of a transaction and inquires into what circumstances might be attendant to that arm's length transaction that might warrant a finding of no pass-through of subsidies. Rather, it plainly leaves the choice of methodology to the Department's discretion.

The Department's interpretation, of course, is not just supported by the plain language of Section 771(5)(F). It also is supported, dispositively, by the legislative history. The Senate Report, in particular, is very clear on this point. It provides:

The Commerce Department should continue to have the discretion to determine whether, and to what extent (if any), actions such as the "privatization" of a government-owned company actually serve to eliminate such subsidies.



S. Rep. No. 412, supra, at 92. Accord, SAA at 258.

The Court, on the other hand, endorses the "negative pregnant" analysis of Section 771(5)(F)'s language urged by the dissent in Saarstahl II. There, the dissent stated:

[Section 771(5)(F)] contains a negative pregnant: since it is not required to find that the subsidy was extinguished, it must be permissible to find that the subsidy does not continue in appropriate cases. The question then is what are the appropriate cases. . . . I believe that Congress' purposes in the countervailing duty legislation dictates the approach that, absent a convincing reason in a given case to find otherwise, an arm's-length privatization means that no countervailable duties may be ascribed to the enterprise's later production undertaken in a fully competitive market environment.



Saarstahl II, 78 F.3d at 1548 (Plager, J., dissenting).

In addition to being inconsistent with the plain meaning of Section 771(5)(F) and with the clear statement quoted above from the Senate Report, this interpretation also obviously runs afoul of the majority's view in Saarstahl II, which rejected the dissent's (and now this Court's) interpretation of Section 771(5)(F). Citing to Section 771(5)(F), the majority expressly stated, in dicta, that "the current statutory scheme is fundamentally at odds with the Court of International Trade's decision in this case," i.e., that an arm's length transaction in and of itself extinguishes prior subsidies. Id. at 1543.

Furthermore, it is critical to note that, as the SAA (at 258) explains, the purpose of Section 771(5)(F) was to "correct and prevent" Judge Carman's "extreme interpretation" in Saarstahl I, namely, that "the arm's length sale of a [government-owned] company extinguished any remaining 'competitive benefit' from the prior subsidies, because the price presumably included the market value of any continuing competitive benefit." Saarstahl II, 78 F.3d at 1541 (citing Saarstahl I, 858 F. Supp. at 193). It was this "extreme interpretation" which was precluding the Department from applying the same methodology which Saarstahl II later upheld and which is the basis for the Department's privatization methodology. Section 771(5)(F) removed this impediment by, in effect, overruling Judge Carman. Notably, however, Section 771(5)(F) did not go on and dictate the methodology that the Department must follow when handling changes of ownership. Rather, the section is written instead to preserve the Department's discretion in this area.

The Department agrees with the Court to the extent that it views Section 771(5)(F) as preserving the Department's discretion in handling changes of ownership. See Slip Op. 97-177 at 31. However, the Department strongly disagrees when the Court's effort to read Section 771(5)(F) as requiring the approach which the Court outlines or, indeed, any particular approach. The fundamental point, made above in Part II.B.3.b.ii., is that Section 771(5)(F) is not the source of the Department's authority for the privatization and spin-off methodologies. As was true under U.S. countervailing duty law as it existed prior to the URAA, the Department's authority derives from its inherent power to implement the countervailing duty statute. Section 771(5)(F), meanwhile, does not attempt to dictate to the Department what approach it should take. It merely operates to prevent the imposition of one particular approach on the Department.

What this all means, in the end, is that the Federal Circuit's pre-URAA law holdings in Saarstahl II and British Steel -- that an arm's length, fair market value change of ownership does not automatically extinguish prior subsidies, and that the Department's methodology for handling changes of ownership is reasonable -- continue to be controlling, even, as in this case, under the post-URAA countervailing duty statute. This result obtains because the source of the Department's authority in this area, both before and after the enactment of the URAA, is its inherent power to implement the countervailing duty statute, and that statute has not changed in any relevant way since the Federal Circuit construed it in Saarstahl II and British Steel. As shown above in Part II.B.3.c., the URAA made no relevant changes to U.S. countervailing duty law, and it did not make any change, in the Department's view, through the one provision which this Court posits as the reason for Saarstahl II's current inapplicability, namely, the "benefit" requirement found in Section 771(5)(B).

Equally important for this case, not only do the Saarstahl II and British Steel decisions remain authoritative under post-URAA law, but also the rationale of those decisions extends to purely private changes of ownership even though the changes of ownership which those decisions addressed were privatizations. As explained above in Parts II.B.2. and II.B.3.a., the same fundamental principles underlie the methodologies applicable to both types of changes of ownership.

e.How Does the Department's Methodology Account for the "Significant Differences" Between Privatizations and Purely Private Changes of Ownership?



In the investigation below, respondent Delverde did argue that there were significant differences between privatizations and purely private changes of ownership. However, it only pointed out that, in a privatization, the government was selling a government-owned company, while, in a purely private change of ownership, the parties on both sides of the transaction were private companies and the government had no involvement. Then, in attempting to explain the significance of this difference, respondent Delverde only asserted that the Department's privatization methodology could not be extended to cover a purely private change of ownership because there was no possibility of "repayment" to the government. In the final determination, the Department explained basically why the identity of the parties to the change of ownership transaction was not relevant. In addition, in Parts II.B.2. and II.B.3.a. above, the Department has explained its reasoning in more detail.

In its Opinion, the Court goes beyond the matter that respondent Delverde had raised and identifies what it sees to be "significant differences" between privatizations and purely private changes of ownership. In the Court's view, moreover, these differences justify different rules for privatizations and purely private changes of ownership.

The Court explains that its view "is based primarily on the ability of the government and state-owned firms to take actions or absorb losses which may not be reflected in market value." Slip Op. 97-177 at 44. The Court then gives the following example:

[W]hen a private firm purchases a company with outstanding debt, the government seller could guarantee the debt to private banks, or the government could assume the debt before the sale. Neither the guarantee nor the assumption of debt would necessarily be reflected in the purchase price so that, in effect, the purchaser would be receiving a benefit from the government despite the nominal "arm's length transaction."



Id. at 44-45. The Court adds that private firms cannot and do not operate this way.

Essentially, the Court seems to be describing two possible scenarios. One scenario is where the government provides a subsidy to the government-owned company in anticipation of its privatization. The other scenario is where the government provides a subsidy to the purchaser as part of the privatization transaction itself.

Turning to the first scenario, the Department has encountered cases where a government has provided a subsidy to a government-owned company in anticipation of its privatization. See, e.g., Final Affirmative Countervailing Duty Determination: Steel Wire Rod from Trinidad and Tobago, 62 FR 55003, 55006 (Oct. 22, 1997); Final Affirmative Countervailing Duty Determinations: Certain Steel Products from Germany, 58 FR 37315, 37320 (July 9, 1993). In those cases, there has been no need for the Department to change its methodology. The subsidies have been considered to be additional subsidies bestowed on the government-owned company prior to privatization, and the benefits have been included in the formula which allocates the prior subsidies between the seller and the purchaser as appropriate.

Turning to the second scenario, the Department has not squarely confronted a privatization where the government provides a subsidy to the purchaser as part of the privatization transaction itself. In all of the cases addressed by the Department, the privatization transaction has been made at arm's length, and there has been no clear evidence of any subsidization of the purchaser as part of the privatization transaction itself, other than on account of the pass-through of subsidies that have been bestowed on the government-owned company. It is not clear how the Department would handle this scenario. One possibility is that the Department might attempt to treat the subsidy as a subsidy to the purchaser, distinct from the prior subsidies being passed-through to the purchaser in the privatization transaction, and countervail it as it would any other subsidy of that nature.

More generally, the Court goes on to add that an arm's length privatization transaction "may or may not reflect true market value" because "the government is not bound by business motives of profit maximization." Id. at 45. In contrast, according to the Court, "[a] sales transaction between two private firms reflects the convergence of each firm's willingness (guided by profit considerations) to buy or sell within a given range of prices, with the final sales price reflecting the market value of the asset sold." Id.

Under the Department's methodology, whether in the context of a privatization or a purely private change of ownership, it is not relevant whether the purchase price is at fair market value or above or below fair market value. Rather, as explained above in Parts II.B.2. and II.B.3.a., from a methodological standpoint, the amount of the purchase price simply affects how the prior subsidies are allocated between the seller and the purchaser. It does not in any way change the Department's methodology. Thus, a higher purchase price means that more of the prior subsidies will be treated as repaid and correspondingly less of those subsidies will be treated as passing through. Meanwhile, with a lower purchase price, less of the prior subsidies will be treated as repaid and correspondingly more of those subsidies will be treated as passing through.

In making its comments, the Court obviously views the presence or absence of a fair market value purchase price as something that should affect the Department's methodology. This view, again, derives from the notion that previously bestowed subsidies should be re-valued as of the time of the change of ownership. As explained above in Parts II.B.2. and II.B.3.c., however, in applying the countervailing duty law, the Department does not look at subsequent events in the marketplace or how the subsidy recipient may have used a particular subsidy, nor does the statute require it to do so.

In any event, the more fundamental point here is that when a privatization transaction is at arm's length, and there are no surrounding circumstances like those described by the Court in the second scenario, there are no material differences between the privatization transaction and a purely private change of ownership transaction as in this case. Consequently, there is no basis for requiring the use of different methodologies.

Meanwhile, the differences raised by the Court, even if accepted and considered significant, would not warrant any change in the methodology applicable to a purely private change of ownership. The only change that conceivably could be warranted would be in the methodology applicable to privatizations. More precisely, while the methodology currently applicable to privatizations remains reasonable when applied -- as it has been to date -- to an arm's length privatization without any of the surrounding circumstances described by the Court in the second scenario, it may be appropriate for the Department to develop and apply a different methodology to handle privatizations which are accompanied by those surrounding circumstances. The Department, of course, has not yet had the occasion to address this issue because it has never been presented with a privatization with any of those surrounding circumstances.

In Saarstahl II, meanwhile, the Federal Circuit reviewed and upheld the Department's privatization methodology, as applied to a privatization that was not accompanied by any of the surrounding circumstances described by the Court in the second scenario. Consequently, there are no material differences between that privatization and a purely private change of ownership like the one in this case. The potential "significant differences" identified by the Court therefore are not directly relevant, and there is no basis left for finding Saarstahl II inapplicable to this case.

Thus, the differences raised by the Court, even if accepted, have no impact on this case. They do not call into question the methodology that the Department used. Rather, if anything, they only raise questions about cases which have not yet been before the Department.

III. Comments

A.Law 64 Industrial Development Grants

Comment 1

Respondent Delverde states that the draft redetermination does not cite evidence in the administrative record showing that the taxes in question are, in fact, corporate income taxes.

Department's Position

Although the calculation worksheets distributed to parties with the draft redetermination included references to supporting documents in the administrative record, we have supplemented our narrative discussion in the body of the final remand determination to include references to the administrative record which indicate that the taxes withheld were the IRPEG corporate income taxes.

Comment 2

Respondent Delverde argues that in its draft remand determination the Department failed to explain why the withholding of taxes from the disbursement of a grant is not an allowable offset of a type permitted by Section 771(6) of the Act.

Department's Position

Section 771(6) includes a listing of allowable offsets when calculating the net countervailable subsidy. This listing includes such items as any application fee, deposit, or similar payment paid in order to qualify for, or to receive, the benefit of the countervailable subsidy. This provision allows the Department to adjust the gross amount of a subsidy for those listed, allowable offsets to ensure that the full amount of the benefit received is countervailed. Neither the four percent withholding of IRPEG nor the amount of this withholding that actually goes to the payment of taxes on the funds disbursed directly to Delverde fall within this definition.

Comment 3

Respondent Delverde next argues that, rather than comprising an offset of the subsidy or a secondary tax effect, the withholding tax defines the limit of the "financial contribution" provided by the Government of Italy. Respondent Delverde claims that the amount of the disbursement received by Delverde is not a subsidy net of a tax, but is the full amount of the subsidy.

Department's Position

We disagree with Delverde. Under the circumstances, as we have explained earlier in this remand determination, we consider the financial contribution from the Government of Italy to have been provided in two parts, i.e., the amount disbursed directly to Delverde and the amount withheld and placed in Delverde's taxpayer account.

B.Change of Ownership

Comment 1

Respondent Delverde asserts that the Court found that "Commerce's categorical application of the privatization methodology in a purely private transaction is unreasonable." Slip Op. 97-163 at 34. Respondent Delverde then argues that the Department ignored the Court's subsequent order to "establish standards applicable to private transactions which will lead to rational determinations as to when, if ever, an arm's length sale of assets at market value will lead to pass-through of subsidies." See id. at 46. Instead, according to respondent Delverde, the Department merely presented a series of arguments "that fly in the face of the Court's decision" and amount to no more than "a lengthy effort to rebut . . . the Court's decision." Delverde Comments at 10, 11.

Department's Position

We disagree with respondent Delverde. In the Department's view, the Court's ultimate holding was that the Department did not adequately explain either its methodology or how it applied that methodology to the facts of the Delverde change of ownership. As the Court pointed out, the record did not show how the Department had addressed several specific issues when reaching its final determination. The Court itself went on to discuss these issues and to provide its own tentative views as a means of highlighting where its concerns lie, so that the Department would be certain to address them in its remand determination. Implicit in the Court's Opinion is a recognition that the Department, as the agency charged with applying and enforcing the countervailing duty statute, should be provided the opportunity, in the first instance, to set forth its views before the Court rules definitively. The Court, accordingly, did not order the Department to adopt one view or another on these issues.

Specifically on the necessity of establishing standards for purely private changes of ownership, as the Court's Opinion reflects, the Department's final determination had not made clear what standards applied to purely private changes of ownership. The Court, therefore, ordered the Department to explain the standards that it uses in this type of situation, and the Department has done so. See Part II.B.2. above.

It is true that the Court also proceeded to express its views that there rarely should be any pass-through of subsidies in an arm's length, fair market value transaction and that the Department should have different standards for privatizations versus purely private changes of ownership. On these maters, the Court did not order the Department to follow the Court's tentative views, although it did want the Department to address them. Again, the Department has done so. See Parts II.B.3.d. and II.B.3.e. above.

Finally, it bears noting that the Department does not view its remand determination as a rebuttal of the Court's Opinion, contrary to respondent Delverde's suggestion. Rather, as should be clear, this remand determination addresses a difficult area of the countervailing duty law, and there is not always only one reasonable approach that can be taken on a given issue. The Court, meanwhile, had several legitimate concerns with the Department's final determination, which were fueled by the failure of the final determination to explain the Department's analysis in the appropriate detail. Because of the Court's detailed discussion of these issues, the Department has been better able to understand and address the Court's concerns and to articulate its own views.

Comment 2

According to respondent Delverde, the Court found that "Commerce's presumption that subsidies always pass through in an arm's length transaction is inconsistent with the Change in Ownership provision." Delverde Comments at 8 (citing Slip Op. 97-163 at 28). Respondent Delverde states that the Court then ordered the Department to conduct a factual analysis of the particular nature and circumstances of the arm's length transaction at issue here. Respondent Delverde argues, however, that the Department simply refused to conduct that analysis. It adds that the Department "simply dismisses most of the pertinent facts as 'irrelevant.'" Delverde Comments at 7.

Department's Position

We disagree with respondent Delverde. The Department did analyze the facts of the Delverde change of ownership in its remand determination, and its analysis was thorough. As explained above in Part II.B.3.a., the Department accepted and considered all of the evidence presented by respondent Delverde, although the Department did not rely on this evidence in the manner urged by respondent Delverde, given the nature of the Department's methodology. Furthermore, as is also explained above, the nature of the Department's factual analysis shows that the Department does not presume that prior subsidies always pass through in an arm's length transaction. Although it is true that the Department's methodology rejects the notion that an arm's length transaction, per se, extinguishes or otherwise prevents the pass-through of prior subsidies to the purchaser, that does not mean that the Department instead treats all of the prior subsidies as passing through in an arm's length transaction. To the contrary, the Department allocates the prior subsidies between the seller and the purchaser, and it is even possible that in certain factual situations no prior subsidies would be treated as passing through to the purchaser.



______________________

Joseph A. Spetrini
Acting Assistant Secretary
for Import Administration


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Date