A-122-822
NAFTA Remand
08/01/95-07/31/96
Public Document
IA/DASIII/7/EB

Final Remand Determination:
North American Free Trade Agreement ("NAFTA")
Article 1904 Panel Review
USA-CDA-98-1904-01

SUMMARY

This final remand determination is submitted in accordance with the March 20, 2001 decision of the NAFTA Panel (Panel Decision) regarding the third administrative review

(August 1, 1995 through July 31, 1996) of the antidumping duty order on certain corrosion-resistant carbon steel flat products from Canada (58 FR 44162). The Panel remanded the case to the United States Department of Commerce (the Department), with instructions to: (1) recalculate Stelco Inc.'s (Stelco) costs of production, taking account of the year-end return of profits by Baycoat Partnership (Baycoat) and Z-Line Company (Z-Line) to Stelco; (1) provide the Panel with the method by which the Department recalculates that cost of production (COP) in light of such return of profits; and explain the Department's methodology in light of the statutory requirements and attendant legislation as interpreted by this Panel; (2) to reevaluate the application of 19 U.S.C. 1677(b)(f)(3) in light of the requirement that the Department adjust the transfer price in accordance with the recalculation set out under (1) immediately above; and (3) to correct any errors on the imputed credit expense and payment date issues, in light of Stelco's complaint. (See Panel Decision, at 31.) In accordance with the Panel's instructions, the Department is issuing these final results of redetermination.

BACKGROUND

The Administrative Review

On March 16, 1998, the Department published its final results of the third 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, 63 FR 12725 (March 16, 1998) (Final Results). In discussing Stelco's cost of producing the subject merchandise, the Department explained that, in accordance with its standard practice for valuing major inputs supplied by affiliated companies, it had valued coating services and painting services supplied by Z-Line and Baycoat, respectively, pursuant to the major input rule and the transactions disregarded rule, at the highest of three valuations: the transfer price between the affiliated parties; the market price between unaffiliated parties (which, in this case, was inapplicable, as there were no unaffiliated transactions to indicate market price); and the affiliated supplier's cost of producing the input. See Final Results, at 63 FR 18464.

In responding to the Department's questionnaire, Stelco only supplied Z-Line's "actual cost of the operation in a manner consistent with other Hilton Works operating units," and Baycoat's transfer price adjusted for profit remitted to Stelco. (See Supplemental Response of November 4, 1996, at CORR-D-57 and CORR-D-53, respectively). In the Final Results, the Department increased the reported cost of coating and painting by the weighted average difference between invoice (i.e. transfer price) values from the sample invoices of the respective services to Stelco, obtained at verification, and the values reported by Stelco. (See Memorandum for the file through Rick Johnson from Gerard Zapiain: Analysis for Stelco, Inc.: Final Results of the Third Administrative Review of Certain Corrosion-Resistant Products from Canada for the period 8/1/95 - 7/31/96, dated March 10, 1998, at 10 & 11, (Final Analysis Memo)). The Department determined that these transfer prices were above the affiliated supplier's cost of producing these inputs. Therefore, for the final results of review, the Department used the transfer prices to value such inputs when calculating Stelco's COP and constructed value (CV).

In addition, the Department's Import Administration Policy Bulletin 98.2 of February 23, 1998 states, in part, that, for the purposes of calculating imputed credit expenses, we will use a short-term interest rate tied to the currency in which sales are denominated. We will base this interest rate on the respondent's weighted-average short-term borrowing experience in the currency of the transaction. In cases where a respondent has no short-term borrowings in the currency of the transaction, we will use publicly-available information to establish a short-term interest rate applicable to the currency of transaction. For dollar transactions, we will generally use the average short-term lending rates calculated by the Federal Reserve to impute credit expenses. Specifically, the Department uses the Federal Reserve's average data for commercial and industrial loans maturing between one month and one year from the time the loan is made. Because Stelco had no U.S. dollar borrowings during the period of review (POR), the Department applied the Federal Reserve rate in its calculations of Stelco's imputed credit expense in the United States for each transaction during the POR. Furthermore, to calculate imputed credit expenses for sales for which payment was not received by the time Stelco submitted its response to the agency, the Department applied the date of its final results as the surrogate payment date.

Pursuant to the Department's receipt of the Court's remand instructions, the Department issued a supplemental questionnaire to Stelco. On June 25, 2001, Stelco submitted its response to the Department's supplemental questionnaire (Supplemental Response). On July 6, 2001, the Department issued its draft remand results and requested comments from interested parties. (See Draft Results of Redetermination: North American Free Trade Agreement ("NAFTA"), Article 1904 Panel Review, USA-CDA-98-1904-01 (July 6, 2001) (Draft Remand Results).) On July 11, 2001, respondent filed comments on the Draft Remand Results. No party filed rebuttal comments, which were due by noon on July 13, 2001.

REMAND ISSUES

On the issue of the application of the major input rule and the transactions disregarded rule, under subsections 1677b(f)(2) and (f)(3) of the statute, the Panel has ordered the Department as follows:

(1) That the Department recalculate Stelco's costs of production, taking into account the year-end return of profits by Baycoat and Z-Line to Stelco; provide the Panel with the method by which the Department recalculates that COP in light of such return of profits; and explain the Department's methodology in light of the statutory requirements and attendant legislation as interpreted by the Panel.

As explained in the Draft Remand Results, the Department recalculated Stelco's COP, taking into account year-end return of profits to Stelco from Baycoat and Z-Line, as reported in Stelco's Supplemental Response to the Department's supplemental questionnaire. The methodology used to account for such return of profits is as follows:

Baycoat

Since profits remitted cannot be tied to any individual invoices, adjustments to transfer price cannot be made by profits remitted on individual sales. Baycoat profits, as recorded in Stelco's financial statements, may include profits on sales to Stelco's joint venture partner and other parties. For those reasons, the Department decided to make an adjustment to the transfer price based on an allocated amount of the profits earned by Baycoat. Because Stelco's utilization of painting services during the period of review (POR) was not identical to that of the other joint venture partner, we reallocated total per- unit profit by class of painting services (Stelco's per-unit profit, as derived by Stelco, multiplied by two to account for the full amount of profit remitted by Baycoat to both joint venture partners), by multiplying it by the ratio of the total value charged to Stelco by Baycoat (as it appears in Baycoat's records) to the total value produced by Baycoat, as stated on pages 4 and 5 of the Supplemental Response. We subtracted the profit from the cost per net ton by class of painting services.

We allocated Interest and General and Administrative Expenses ("G&A") by class by multiplying the Interest and G&A per net ton times two, and then multiplying the product by the ratio of the total value charged to Stelco to the total value produced by Baycoat. We subtracted allocated Interest and G&A expenses from the cost per net ton, since Baycoat's Interest and G&A were already included and accounted for in Stelco's overall Interest and G&A expense calculation.

Z-Line

For sales of inputs by Z-Line, we found that Z-Line does not invoice Stelco by product costs. Stelco obtains an invoice of Z-Line's monthly operating costs, for which Stelco will reimburse Z-Line. (Id. at 7.) Because Z-Line does not differentiate between subject and non-subject merchandise, it cannot assign profits for Stelco to subject and non-subject merchandise. Stelco uses Z-Line profit, as recorded in Stelco's books and records, to reduce transfer price reported by Z-Line. (Id. at 9-10.) Further, in its Supplemental Response, at 6, Stelco states that Z-Line did not perform any coating for any other joint venture partner or third party, and that it coated subject and non-subject merchandise for Stelco during the POR. (See Supplemental Response, at 6.) For the reasons discussed above under the Baycoat section, we made an adjustment to the transfer price by subtracting an amount for profit, interest, and G&A expenses from the cost per net ton.

The Department adopted these methodologies in light of the Panel's interpretation of the relevant statutory provisions and their legislative history. The Panel held that subsection 1677b(f)(2) is a limited exception to the general rule governing COP set forth in subsection 1677b(f)(1). The Panel interpreted the legislative history of the provision and found that the purpose of subsection (f)(2) is to ensure that affiliated parties do not manipulate prices. Further, the Panel found that there is no reasonable evidence on the record of this case to indicate that the return of profits in this case was intended to manipulate Stelco's cost of producing the subject merchandise. (See Panel Decision, at 22.) Second, the Panel found that the statute did not mandate that the Department disregard the return of profits to Stelco. Under the Panel's interpretation, the plain language of subsection (f)(2) does not require that the Department apply the highest of transfer price, market price, or COP. The Panel held that the language of (f)(2) provides the Department with the discretion to disregard a transaction (i.e., adjusted transfer prices), but only if "...the amount representing that element does not fairly reflect the amount usually reflected in sales of merchandise under consideration..." The Panel found that the Department failed to reasonably comply with the requirement to establish that the amount, which in the instant case is Stelco's invoice prices less profits returned from Baycoat, "did not fairly reflect" the amount usually reflected in sales. (See Panel Decision, at 23.) Finally, the Panel found that even if the Department were entitled to rely on Stelco's invoice prices, rather than the invoice price adjusted for profit remittances, the Department has not established that it has taken due account of all material factors in arriving at a reasonable calculation of costs. (Id., at 23.)

In light of the Panel's interpretation of subsection (f)(2), the Department has limited the application of subsection (f)(2) in this case to instances in which there is evidence that the parties intended to manipulate the COP. In this case, the Panel found there is no reasonable evidence on the record to indicate the parties intended to manipulate the COP. Therefore, the Department should not have applied subsection (f)(2) in this case. Consequently, to determine a reasonable calculation of Stelco's COP, absent any application of subsection (f)(2), we have taken into account the return of profits from Baycoat and Z-Line to Stelco as it pertains to the subject merchandise at issue in this case, as described above.

The Panel also ordered the Department to:

(2) reevaluate the application of 19 U.S.C. 1677(b)(f)(3) in light of the requirement that the Department adjust the transfer price in accordance with the recalculation set out under (1) immediately above.

The Panel has interpreted the legislative history of subsection 1677b(f)(3), the major input rule, and found it to be an exception to the general rule on determining the producer's COP under subsection 1677b(f)(1). The Panel stated that this exception only applies when the Department has reasonable grounds to believe or suspect that both the transfer price and the arm's length price would be less than the affiliated party's COP. ( Panel Decision, at 28.) The Panel then found there were no reasonable grounds to so believe or suspect in this case. Id. On the other hand, the Panel has remanded the case for the Department "to compare Baycoat's transfer price without profits to Stelco's cost of production." Panel Decision, at 28. The Panel has also ordered the Department to reevaluate the application of the major input rule in light of the requirement that the Department adjust the transfer price.

As an initial matter, we note that the issue of whether the Department has reasonable grounds to believe or suspect that sales of inputs from affiliated parties are below the cost of producing such inputs is separate and distinct from the issue of whether the Department has a basis to conclude that such sales are in fact below cost, and therefore should be disregarded. The "reasonable grounds" requirement of the statute establishes the standard for initiating a cost investigation on a major input. In this case, the Department initiated a cost investigation on major inputs based upon its finding that there were reasonable grounds to believe or suspect that Stelco was selling the merchandise (foreign like product) in Canada at prices below the COP under section 1677b(b)(1). See Certain Corrosion Resistant Carbon Steel Flat Products and Certain Cut-to-Length Carbon Steel Plate From Canada: Preliminary Results of Antidumping Duty Administrative Reviews, 62 FR 47429, 47432 (Sept. 9, 1997). No party in this case disputes that the Department had reasonable grounds to believe or suspect such sales of foreign like product were made at below-cost prices.

Based upon the above, and in light of the Panel's statement that it has remanded the case for the Department to compare Baycoat's transfer price without profits to the COP, we have interpreted the Panel's ruling to mean that, pursuant to the major input rule, the Department is to ensure that the value of the major inputs used to calculate Stelco's COP are not below the cost of producing such inputs. As the Panel specifically noted, it does not conclude that the Department "should have reduced Stelco's costs of production to the full extent of profits returned by Baycoat." (Panel Decision, at 24.) Accordingly, the adjustment for profits remitted to Stelco from Baycoat and Z-Line should not exceed the profit that pertains to the sales of those inputs which are used in the production and sale of subject merchandise. To the extent that the adjustment is greater than the profits pertaining to such sales, the Department would be using input values that are below the cost of producing such inputs. For purposes of the Draft Remand Results, we recalculated Stelco's COP for the subject merchandise based upon the transfer price of the inputs at issue, as adjusted for the return of profit from Baycoat and Z-Line to Stelco. Where the Department found that the value of the inputs, as adjusted for profit, was less than Baycoat and Z-Line's respective costs of producing such inputs, the Department used the COP for such inputs, pursuant to the major input rule.

Pursuant to the Department's request, the Panel granted the agency a remand to address the following issues:

(3) That the Department properly determine the interest rate to be applied in calculating Stelco's imputed credit expense in the United States, and reevaluate the appropriate surrogate payment date in situations in which payment is not remitted at the time of the submission.

To determine transaction-specific credit expenses for the purpose of calculating dumping margins, the Department measures the time period in which credit is extended to the customer by calculating the time between shipment of the merchandise to the customer and payment by the customer for such merchandise. The outstanding amount owed by the customer is then multiplied by the interest rate for the time period between the date of shipment and date of payment. In the Final Results, the Department used the Federal Reserve Rate to calculate Stelco's imputed credit expenses because the company had no short-term borrowings. Stelco, however, argued that the Department is not required to use the Federal Reserve Rate where no U.S. dollar borrowing has occurred, and that instead the Department should have used the rate in which Stelco negotiated with respect to its open line of credit. The Department requested the Panel to remand the issue, so it could determine the proper interest rate to be applied in calculating Stelco's imputed credit expense in the United States. Further, the Department used the date of the final results of review as the surrogate payment date where payment was not remitted from the customer at the time Stelco filed its response to the Department. The Department requested the Panel to remand the issue for further consideration.

In the Draft Remand Results, the Department reconsidered the calculation of Stelco's imputed credit expense in the United States during the POR and its choice of surrogate payment dates where payment was not remitted at the time of submission. Since it is the Department's practice to calculate the U.S. credit expense using a short-term interest rate tied to the currency in which the sales are denominated, and the interest rate should be based on the respondent's weighted-average short-term borrowing experience in the currency of the transaction, we applied the interest rate available to Stelco based on its loan agreement, as provided in the Supplemental Response, at 12 and Attachment 2. See Also Certain Corrosion Resistant Carbon Steel Flat Products and Certain Cut-to-Length Carbon Steel Plate From Canada: Final Results of Antidumping Duty Administrative Reviews, and Determination Not To Revoke in Part, 65 FR 9243, 9248 (Feb. 24, 2000). In the Draft Remand Results, we revised our calculation of Stelco's imputed credit expense in the United States during the POR, based on Stelco's short-term lending agreement, which is the U.S. dollar LIBOR rate plus bank fees for the POR, and which is the rate at which Stelco would have been able to borrow U.S. dollars during the POR.

With respect to the issue of missing payment dates, the Department's practice is to base the payment period for such sales on the length of time between shipment and the last day of verification. See, e.g., Stainless Steel Wire Rod from Italy, 62 FR 40422, 40428 (July 29, 1998); Extruded Rubber Thread from Malaysia, 63 FR 12752, 12757 (March 16, 1998); SRAMs from Taiwan, 63 FR 8909 (February 23, 1998); and Brass Sheet and Strip from Sweden, 60 FR 3617, 3620 (January 18, 1995). Based upon the record for this review, the last day of verification is the last day that we can determine with any certainty that these sales were still unpaid and that Stelco was still extending credit to this customer. Therefore, in its Draft Remand Results, the Department used the last day of verification as the surrogate payment date for sales where payment had not been received at the time of Stelco's submission of its complete questionnaire response to the Department.

COMMENTS

Respondent made the following comments:

Comment 1: Stelco argues that the Department made a clerical error in its draft results by inflating Baycoat's value reported for custom slitting by three digits in its derivation of Baycoat's total value of production. Stelco indicates that the Department should recalculate its allocation ratio, which is the total amount charged to Stelco, as recorded in Baycoat's financial statements, to Baycoat's total revised value of production. Stelco further indicates that the Department should then recalculate the allocation of profit by class of painting services performed by Baycoat, based on the revised allocation ratio.

Department's Position: We agree with respondent concerning the value reported for custom slitting services performed by Baycoat. We inadvertently misread the value reported in the Supplemental Response, at 4, to be "in thousands," when it did not apply to this particular instance. We also agree with Stelco that the Department should recalculate its allocation ratio based on Baycoat's revised total value of production. For these final results, we therefore have recalculated Stelco's profit allocation, based on the revised ratio, and deducted the resulting amount of profit per class of painting services performed from the cost per net ton.

As a result of our recalculation of COP, we have revised the weighted average margin for Stelco for the POR. The new margin is 0.00 percent.

If the Panel affirms these final results of redetermination, the Department will instruct the U.S. Customs Service (Customs) to assess the appropriate antidumping duties on entries of subject merchandise made by Stelco during the period August 1, 1995 through July 31, 1996. The Department will issue appraisement instructions directly to Customs.

________________________________

Joseph A. Spetrini
Acting Assistant Secretary     for Import Administration

July 20, 2001      
Date


footnote:

1. We note that the Panel did not include Z-Line in its instruction to the Department on page 31 of its Panel Decision; however, the Panel includes Z-Line in its detailed discussions in the remainder of the Panel Decision. Therefore, the Department interprets this instruction from the Panel to also include Z-Line.