A-122-822
NAFTA Remand 1994 -1995
Public Document
IA/III/IX: NGZ

Final Remand Determination:
North American Free Trade Agreement ("NAFTA")
Article 1904 Binational Panel Review
USA-97-1904-3

SUMMARY

This remand determination is submitted in accordance with the June 4, 1998, decision of the NAFTA Binational Panel ("Panel Decision") regarding the second administrative review of the antidumping order on Certain Corrosion-Resistant Carbon Steel Flat Products from Canada. The case was remanded to the United States Department of Commerce (the "Department") to consider three issues related to the antidumping duty margin for Stelco Inc. ("Stelco"): 1) the valuation for cost of production purposes of the inputs supplied to Stelco by its affiliated supplier, Baycoat (both to reconsider the calculation of transfer price and to consider Stelco's argument that the transfer price of the Baycoat inputs should be recalculated to take into account Stelco's actual costs with regard to these inputs); 2) the computation of the net interest expense factor (to include certain payments to governments other than income tax, i.e., worker's compensation, unemployment insurance, pension plan expenses and property tax, as part of Stelco's cost of sales); and 3) a ministerial error made in the computation of certain inland freight expenses for Stelco's further manufactured sales. This last issue was not contested by any party to this case. In accordance with the instructions in the Panel Decision, the Department has considered each of these issues.

The Department issued a Draft Remand Determination to the parties on August 4, 1998. Both Stelco and Petitioners submitted comments on the Draft Remand Determination. As explained further below, we continue to find that the results in the Draft Remand Determination are appropriate.

BACKGROUND

On April 15, 1997, the Department published its final results of the second administrative review of the antidumping duty order on certain corrosion-resistant carbon steel products from Canada. See Certain Corrosion-Resistant Carbon Steel Flat Products and Certain Cut-to-Length Carbon Steel Plate from Canada: Final Results of Antidumping Duty Administrative Reviews, 62 FR 18448, 18464 (April 15, 1997) ("Final Results"). In its discussion of the cost of production of Stelco's subject merchandise, the Department explained that, in accordance with its standard practice for valuing major inputs supplied by affiliated companies, it had valued painting services supplied by Baycoat at the highest of three valuations: the transfer price between the affiliated parties; the market price between unaffiliated parties (which in the case of the Stelco-Baycoat arrangement was inapplicable, as there were no unaffiliated transactions to indicate market price); and the affiliated supplier's cost of producing the input.

The questionnaire responses supplied by Stelco did not contain all of the information necessary to calculate individual transfer prices for the Baycoat inputs; Stelco merely supplied average transfer prices. However, at verification, the Department obtained information that enabled it to calculate transfer prices for these inputs. These transfer prices were above the affiliated supplier's cost. For the final results of review, the Department used these transfer prices as the cost of production of the inputs. Id.

In addition, the Department disagreed with Stelco's assertion that the consolidated cost of sales used as the denominator in the financing expense ratio should include payments to governments other than income tax. The Department determined that these expenses are properly classified as general and administrative expense items which should be excluded from the cost of sales. The Department also stated that the financial expense ratio should be calculated on a basis consistent with the cost of manufacturing ("COM") figures to which it is applied. As it was the Department's view that the reported COMs did not include any general and administrative expenses, the financing expense ratio was recalculated so as to exclude payments to governments other than income taxes from the denominator. Id. at 18465.

REMAND ISSUES

1. That the Department reconsider and explain the calculation of transfer price for Baycoat's inputs and consider Stelco's argument that the transfer prices of Baycoat's inputs should be recalculated to take account of Stelco's actual costs with regard to these inputs.

The first issue in this remand is whether transfer price should be adjusted downward to take into account the remission of profits from Baycoat to Stelco. We agree with the Panel's observation that the return of profit in this case is independent of the number or value of sales of painting services to Stelco and is, therefore, not a sale by sale rebate; rather, it arises from Stelco's ownership interest. Panel Decision at 10. Moreover, because the profits are remitted in a manner independent of the number of transactions of subject merchandise receiving the painting service, a profit adjustment cannot reasonably be applied on a transaction-specific basis. Therefore, for purposes of this remand, we find that no adjustment to transfer price is appropriate.

Turning to the more fundamental issue, the issue of whether to value the inputs at transfer price or the affiliated supplier's costs, the Panel has stated that the Department has discretion in applying section 773(f)(1)(A) of the Act to the valuation of inputs supplied by an affiliated party. In past cases under the current statute where the input supplier is affiliated with the producer, and where the input is a "major input," the Department has exercised this discretion by interpreting section 773(f)(1)(A) together with sections 773(f)(2) and 773(f)(3) of the Act. In other words, in such cases, the Department has chosen the supplier's cost of production only where it is higher than the transfer price and the market price. See Final Results of Antidumping Administrative Review; Antifriction Bearings (Other Than Tapered Roller Bearings) and Parts Thereof from France, Germany, Italy, Japan, Singapore, and the United Kingdom, 62 Fed. Reg. 2081, 2115 (January 15, 1997).

Under the Department's current regulations, the three provisions of the Act are interpreted to require, normally, that Commerce value inputs supplied by affiliated persons at the transfer price between the entities provided that such a price reflects the price commonly charged in the market and, for major inputs, is not below the cost of producing the input. 19 C.F.R. 351.407(b). While this provision of the regulations does not apply directly to this remand, because the new regulations were not in effect at the time the final results of review were published, the Panel has found the flexibility of this provision to be conducive to a fair application of the law and has urged the Department to follow it. Panel Decision at 10. Thus, for purposes of this remand, we will follow the regulation.

Three considerations support using the transfer price of the Baycoat inputs, as calculated in the final results of this review, as an element of Stelco's costs. First, it is uncontested that Baycoat is an affiliated party of Stelco and that the painting services provided by Baycoat to Stelco are a major input in the production of corrosion-resistant steel. (On the latter point, see, e.g., the Department's model match criteria, which consider painting as the most important determinant in the comparison of models.(1)) Second, the Department's transfer price calculations in the final results of review were based upon Stelco's own cost records, which were kept in accordance with Canadian GAAP;(2) we note that while there is conflicting evidence on the record as to the cost basis chosen by Stelco for its financial statements, it is clear that Stelco's books and records reflect unadjusted transfer price.(3) Finally, the transfer price calculated by the Department is higher than Baycoat's cost of production, and there is no market price to which the transfer price can be compared.

Thus, the question before this Agency is whether an exception should be found to the general rule that, for major inputs purchased from affiliated parties, the Department will use a bona fide transfer price where it is higher than the affiliated party's cost and where there is no available market price. In this regard, we note that Stelco and Baycoat are separate legal entities, and that Stelco does not have a majority interest in Baycoat, or a dominant minority interest. Baycoat is not an operating division of Stelco, nor has Stelco presented any evidence that Baycoat operates in such a manner. Moreover, we note that Baycoat maintains its own cost accounting system independent of Stelco's cost accounting system. Based on the facts presented by this record, the Department concludes that the actual cost of the painting services to Stelco is in fact the price paid by Stelco, and that there is no reason, based upon the affiliated supplier's costs or any other measure of value, to conclude that the actual cost is distorted or should be replaced. In other words, as the goal under section 773(f)(1)(A) of the Act is to "calculate costs based on the records of the exporter or producer of the merchandise," as Stelco is the producer or exporter in question, and as the evidence of record indicates that Baycoat is a separate entity from Stelco, we see no reason to depart from the normal application of 19 C.F.R. 351.407(b). The normal application of this provision dictates that transfer price is the appropriate basis for Stelco's cost of production with respect to the Baycoat inputs.

2. That the Department recompute the interest expense factor to include certain payments to governments other than income tax, i.e., worker's compensation, unemployment insurance, pension plan expenses and property tax, as part of Stelco's cost of sales.

We agree with the Panel that there is an inconsistency between our cost of manufacturing ("COM") calculation and our cost of sales ("COS") calculations; specifically, certain "payments to governments other than income taxes"were included in COM but not in COS. Because we have found that these expenses represent SG&A, they should not be included in either COM or COS (see Final Results of Review  at 18465). Thus, it is the Department's view that the inconsistency is properly corrected by deducting these expenses from COM. However, because the Panel has instructed the Department to do so, we have recalculated the net interest rate expense factor to include these payments, which consist of worker's compensation, unemployment insurance, pension plan expenses and property tax, in the COS calculation. See Calculation Memorandum, dated August 3, 1998 for the recalculated net interest rate and related computations.

3. That the Department correct the clerical error with respect to double counting certain inland freight expenses for Stelco's further manufactured sales.

Page 7 of the Department's Final Results Analysis Memorandum(4) and the computer program used by the Department indicate that Stelco's inland freight expenses, which are reflected in the fields "INLFTC1U" and "INLFTC2U," are also reflected in the calculation of "MOVE" and "FURMANU." Accordingly, Stelco's inland freight expenses were improperly deducted twice in the calculation of the net constructed export price. Because INLFTC1U and INLFTC2U consist of movement expenses from Stelco Inc. to Stelco USA's (SUSA's) processor, such expenses should be included in the calculation of FURMANU and deducted from the calculation of MOVE.

For this remand, we have made the appropriate changes to the Department's margin calculation program to ensure that movement expenses from Stelco Inc. to SUSA's processor have been included in the calculation of further manufacturing expenses and have been deducted from the calculation of movement expenses.

COMMENTS

The parties made the following arguments:

Comment 1: Petitioners state that they support the Department's conclusions in the draft remand in all respects. Petitioners claim that (a) the Department properly calculated Stelco's cost for painting services using that company's own cost records and internal accounting methods, (b) that sections 773(f)(2) and (3) (i.e. the transactions disregarded rule and the major input rule) apply to the facts of this case and provide that Baycoat's painting services should be valued at the transfer price, (i.e. the invoice price) because it is higher than Baycoat's cost of production, (c) there is no basis to depart from the statute's normal application in this case, and (d) that the transfer price between Baycoat and Stelco should not be adjusted downward to account for the year-end remission of profits from Baycoat to Stelco. Petitioners further argue that Stelco acknowledged that it uses invoice price, unadjusted for profit, to value the cost of painting services at the factory level, and that the unadjusted invoice price is also the cost used by Stelco for financial statement purposes. In regard to Stelco's financial statement methods, petitioners point out that the profit from Baycoat is considered to be "equity income," and is included in revenue; Stelco thus does not use this profit to reduce the cost of goods sold (i.e. the cost of manufacture) in its normal books and records, contrary to what Stelco seeks in this appeal. Petitioners conclude that both of these factors further support the Department's conclusion that the invoice price is the appropriate valuation and that no adjustment for year-end profit should be made.

Respondent offers three arguments against these claims. First, respondent argues that petitioners' claim regarding Baycoat's profits in Stelco's financial statements is incorrect. Respondent holds that, while it is correct that Stelco's 1994 financial statements treated joint venture profits as equity income, this is only because Stelco used the "equity" method of consolidation, under which costs of joint ventures are taken into account only according to their net income or loss. However, for the 1995 fiscal year, Stelco was required by Canadian GAAP to use a "proportional" consolidation methodology to determine its costs of goods sold. Under this consolidation methodology, argues Stelco, a joint venture's profits directly reduce the owner's cost of goods sold. Thus, for the 1995 portion of the 1994-1995 review, Stelco's financial statements used the return of profits from Baycoat to reduce its cost of goods sold. Stelco reasons that whether the return of Baycoat's profits is called "equity income" under the equity methodology, or whether it is taken directly to reduce costs of goods sold as under Stelco's line-by-line consolidation system, the return of Baycoat's profits reduces Stelco's actual cost of Baycoat's painting services. Stelco concludes that to portray the 1994 financial statements as "evidence" that Stelco's financial system does not consider the Baycoat profits as a cost reduction is factually incorrect.

Respondent next maintains that its treatment of Baycoat costs at the factory is irrelevant. In respondent's view, how it treats costs at the works level is not determinative of whether a particular cost is a cost of manufacture.

Finally, Stelco maintains that the Department cannot reasonably conclude that Stelco uses the face value of Baycoat invoices to calculate its cost of painting, particularly in light of the Panel's finding that "the input was transferred at a price that is artificially high." Stelco concludes that petitioners have failed to provide any basis to disregard the Panel's determination that the face value of Baycoat invoices do not represent the true cost of painting to Stelco.

Department's position:

With regard to the question of whether the Department should make an adjustment to transfer price for profits remitted at the end of the year, we continue to find that such profit remission is not properly treated as an adjustment to price. This finding flows from the nature of the remission, not the manner in which the remission is recorded in Stelco's financial statements or at the factory level.

Similarly, for purposes of determining which of the two available prices we should use as the basis of Stelco's cost of production, while we note that it is not clear from the record which of the two prices is normally used by Stelco in its financial statements, we find that the methods reflected in Stelco's financial statements are not dispositive. In this case, we have on the record unconsolidated books and records that reflect a price charged the producer by an affiliated party for a major input. We therefore started our analysis with this cost, and then determined whether it exceeds the cost to the supplier or any available market price. Since it does, we then considered whether there was any other reason on the record of this case to reject this transfer price. We found that there was no such reason.

Comment 2: Respondent states that the Department's draft remand completely ignores the Binational Panel's ruling regarding the valuation of Stelco's painting costs. Respondent argues that the Panel made clear that the Department must, in calculating costs of production, be mindful of "the requirement of 1677b(f)(1)(A)," that the amounts used to value an input may not exceed "the costs associated with the production and sale of the merchandise." Respondent continues that where there is a conflict between the requirement that inputs must be valued at cost, and the major input rule, the Panel made clear that the cost requirement takes precedence. Respondent argues that the Department makes no factual inquiry as to whether or to what extent the transfer price exceeds the cost to Stelco of Baycoat painting. Instead, maintains respondent, the Department merely states ipse dixit, that the actual cost to Stelco is in fact the price Stelco paid, and therefore "we see no reason to depart from the normal application of sections 773(f)(2) and (f)(3) of the Act." Respondent argues that the Panel's ruling finds that subsections (f)(2) and (f)(3) do not apply, because in this case they result in costs higher than Stelco's actual cost of production; the Department does not acknowledge the Panel's finding that the transfer price was "artificially high." Respondent maintains that in essence, the Department has misunderstood its task on remand. In respondent's view, although the Panel did allow the Department to "reconsider" the issue of the appropriate value of Baycoat's inputs, the clear direction from the Panel was for the Department to revise its results in light of the Panel's decision. Respondent concludes that the Panel rejected the Department's original determination to use Baycoat's unadjusted invoice price as the value of Stelco's cost of painting.

Petitioners argue that the draft remand complies with the Panel's decision and the remand instructions. Petitioners maintain that the Panel made three determinations: (1) the Department had the discretion to use the invoice price (i.e. the transaction price or transfer price) as the valuation of Stelco's cost of purchasing painting services from its affiliate, Baycoat, rather than using Baycoat's costs; (2) the Panel endorsed the Department's recently-promulgated regulations which differed from the strict standard set forth in Antifriction Bearings from France by providing that the Department "will normally" follow the "standard required the Department to choose the highest of the transfer price, market value, and cost of production;" and (3) the Panel decided to leave the question to the Department of whether it must adjust the transfer price by the amount of the profit remitted from Baycoat to Stelco at year-end. Petitioners continue that an adjustment to the invoice price would render the statute meaningless, nullifying the provisions in 1677b(f)(2) and (f)(3).

Department's position: We agree with petitioners. The Panel did not direct the Department to use Baycoat's cost of production as the basis of Stelco's input cost. Rather, the Panel directed the Department to determine the "actual" cost of these inputs, noting that the Department has the discretion to base the "actual" cost of these inputs on either transfer price or Baycoat's cost of production. The Panel held that, in exercising this discretion, the Department should not apply the "strict standard" set forth in Antifriction Bearings from France, i.e., the Department should not mechanically choose the highest valuation for the cost of the inputs. Finally, the Panel left open the question of whether the Department should adjust the transfer price by the amount of profit remitted from Baycoat to Stelco. The Panel found that, contrary to Stelco's arguments on appeal, the remission of profit was not in the nature of a rebate; rather, it was independent of the number and value of painting services Stelco purchased.

Thus, the Department must give a reasoned explanation of its choice of valuations for the Baycoat inputs (which were major inputs supplied by an affiliated party). As we stated above, the Department's "starting point" was the Baycoat invoice price, consistent with section 773(f)(1)(A), which directs the Department to base cost of production on the books and records of the "producer of the merchandise." The producer in this case is Stelco, not any consolidated entity. We determined not to adjust this amount for year-end profit remissions, because these remissions were not in the nature of a price adjustment. Moreover, we determined that this amount was higher than Baycoat's cost of production and would therefore normally form the basis of Stelco's input costs. However, we also considered whether there were any facts of record that would undermine the use of transfer price as the basis of Stelco's input costs. We determined that there were no such facts of record.

Stelco's position appears to be that Stelco determines what is its "actual" cost of inputs, and the Department must simply mimic whatever treatment the company chooses to employ in its financial statements. This position is not dictated by the statute, is not required by the Panel decision, and is contrary to the logic of sound administration of the antidumping laws. Moreover, as pointed out by petitioners, Stelco, at least in its 1994 financial statement, used unadjusted transfer price as the cost basis for these inputs.(5)

Comment 3: Respondent states that the Department has misstated the legal issue before it. Respondent maintains that the Department states that the "fundamental issue" before it is "whether to value the inputs at transfer price or the affiliated supplier's costs..." Respondent argues that this is not the issue before the Department, and that the only question before the Department is whether the producer's costs are addressed by the major input rule. Respondent states that in the particular facts of this case, valuing Stelco's painting costs at the invoice-face value of Baycoat inputs overstates Stelco's costs of production. Respondent states that the Panel agreed with this point when it said that "the input was transferred at a price that is artificially high." Respondent states that the Department, however has entered into an inquiry as to whether it can value the inputs at Baycoat's cost, and has thus ignored the Panel's injunction to "exercise its discretion to make some adjustment to the transfer price" so that the input value will reflect Stelco's true cost of production. Respondent concludes that the Department must make a determination as to whether the face value of invoices from Baycoat adequately reflect Stelco's cost of production..

Department's position: We disagree. The Panel, at page 10, stated that the current Commerce regulations "offer a more flexible approach because they state that the Department will 'normally' follow the hierarchy. 19 C.F.R. 351.407(b). The Panel finds this flexibility to be conducive to a fair application of the law and urges the Department to follow it." In this remand determination, the Department has done precisely what the Panel urged it to do: it has applied the hierarchy in the new regulations in a flexible manner. As developed above, flexibility means applying the hierarchy with an eye to any special circumstances presented by a case. Flexibility does not mean that the hierarchy should be abandoned, nor does it mean that the Department's discretion in valuing inputs should be ceded to respondents.

Comment 4: Respondents argue that the factual premises underlying the Department's remand determination are wrong. Thus, in respondent's view, the only basis that the Department could advance for using Baycoat's transfer price is that, on re-examination, it has looked at the record and determined that Baycoat's unadjusted invoice price is, in fact, Stelco's actual cost of production. Respondent maintains that the Department cites no factual evidence for disregarding the "economic and commercial realities" the Panel found to govern the case, and that the Department's statement that the "actual cost of painting services to Stelco is in fact the price paid by Stelco" is unsupported on the record. However, continues respondent, the Panel's decision shows key facts: (a) Baycoat has only two owners, Stelco and Dofasco, (2) Baycoat's sole purpose is to provide painting services to its owners exclusively, and (3) each year, Baycoat returns all of the profits it earns on its "sales" of painting services to its owners. Given these facts, argues respondent, the actual cost of painting to these owners is clearly not the invoice price, but it must be, at least to some extent, the invoice price less the returned profits. Respondent concludes that the facts on the record do not support the Department's conclusion that the invoice price from Baycoat to Stelco represents Stelco's cost of painting the subject merchandise.

Petitioners argue that the record fully supports the Department's factual findings and that Stelco's claim that they lack backing on the record is simply incorrect.

Department's position: We agree with petitioners. As explained above, the key starting point for the analysis is how the producer records the costs in its normal books and records. Stelco stated in its questionnaire response that its normal practice "is to record the invoiced price as its cost of painting services." Less significant is what is reflected in the respondent's financial statements. Nevertheless, we note that Stelco's financial statement covering part of the review period (1994) shows that the profit from Baycoat is considered by Stelco to be equity income; such profit is included in Stelco's revenue, and is not used to reduce Stelco's cost of goods sold.

Comment 5: Respondent states that the Department's draft remand determination on the two other issues properly reflects the Panel's ruling and that no changes should be made to the Department's remand determination with respect to these issues. These two issues consist of (a) recalculating the net interest expense factor in order to remove the inconsistency between the Department's cost of manufacturing calculation and the Department's cost of sales calculation and (b) the correction of the clerical error with respect to double counting inland freight for Stelco's further manufactured sales.

Petitioners did not comment on this issue.

Department's position: We agree with respondent and have not changed our opinion since the draft remand determination.

Accordingly, we have re-calculated the weighted average margins for Stelco as indicated below:

Stelco: 0.53 percent ad valorem

If the Panel approves these results of redetermination, the Department will instruct the Customs Service to assess appropriate antidumping duties on entries of subject merchandise made by Stelco during the period August 1, 1994 through July 31, 1995. The Department will issue appraisement instructions directly to the Customs Service.

____________________________

Joseph A. Spetrini
Acting Assistant Secretary for
Import Administration

____________________________
Date

1. See Department's Request for Information, dated September 14, 1995.

2. See Cost Verification Report at 15, and Stelco's Section D questionnaire response at D-10.

3. Stelco stated that its normal practice "is to reflect in product cost at the Works level the invoice price of {Baycoat's painting} service." See Stelco's Section D questionnaire response at D-53.

4. See Memorandum to the file, dated April 3, 1997.

5. See Stelco's Response to Section A of the Department's Antidumping Questionnaire in the Second Administrative Review (October 17, 1995) at Tab 8.