65 FR 37520, June 15, 2000 A-122-601 ARP: 1/1/1998 - 12/31/1998 Public Document GIIOIV: PRR MEMORANDUM TO: Troy H. Cribb Acting Assistant Secretary for Import Administration FROM: Holly A. Kuga Acting Deputy Assistant Secretary for Import Administration SUBJECT: Issues and Decision Memorandum for the Administrative Review of Brass Sheet and Strip from Canada - 1/1/1998 through 12/31/1998; Final Results Summary We have analyzed the comments and rebuttals of interested parties in the 1998 administrative review of the antidumping duty order covering Brass Sheet and Strip from Canada. As a result of our analysis, we have made changes from our preliminary results. We recommend that you approve the positions we have developed in the Discussion of the Issues section of this memorandum. Below is the complete list of the issues in this administrative review for which we received comments and rebuttals by parties: 1. General and Administrative Expenses, Interest Expenses Packing and Movement Expenses Parent Company General and Administrative Expenses Interest Expense Foreign Exchange Gains 2. Circumstance of Sale Adjustments A. Warranty Expenses 3. Model-Match Methodology Product Width Comparison Background On February 8, 2000, the Department of Commerce ("the Department") published the Preliminary Results of Administrative Review of the Antidumping Duty Order on Brass Sheet and Strip from Canada, 65 FR 6134 ("Preliminary Results"). The period of review ("POR") is January 1, 1998, through December 31, 1998. This review covers one manufacturer/exporter, Wolverine Tube (Canada) Inc. ("Wolverine"). We invited parties to comment on our preliminary results of review. We received comments on March 9, 2000, from Wolverine and from Hussey Copper Ltd., The Miller Company, Olin Corporation, Outokumpu American Brass, Revere Copper Products, Inc., International Association of Machinists and Aerospace Workers, International Union, Allied Industrial Workers of America ("AFL-CIO"), Mechanics Educational Society of America ("Local 56"), and the United Steel Workers of America ("AFL-CIO/CLC") (collectively "petitioners"). On March 14, 2000, we received a rebuttal brief from petitioners. On March 15, 2000, we received a rebuttal brief from Wolverine. The Department has conducted this administrative review in accordance with section 751 of the Act. Changes Since the Preliminary Results Since the preliminary results we have made the following change in our calculation. We recalculated the total cost of manufacture that we used to calculate general and administrative ("G&A") and interest expense to include packing expenses (see Comment 1). See also Analysis Memorandum ("Analysis Memo") dated June 7, 2000, on file in the Central Records Unit (CRU), located in Room B-099 of the main Commerce Department Building. In addition, Wolverine, in response to a post-preliminary results supplemental questionnaire, presented two revisions to its reported information. We have accepted and used the following revisions: 1) recalculated G&A expenses which add corporate airplane and corporate development to Wolverine's reported corporate G&A expense. See Analysis Memo; and 2) recalculated warranty costs on a sale-specific basis. See Analysis Memo. Discussion of the Issues General and Administrative Expenses, Interest Expenses A. Packing and Movement Expenses Comment 1: Packing Expenses Petitioners argue that the Department should apply the G&A and interest expense ratios to the sum of total cost of manufacture and packing expenses in order to determine Wolverine's G&A expenses. According to petitioners, Wolverine's reported cost of manufacture data exclude packing costs. In addition, petitioners claim that the cost of sales data, submitted by Wolverine, do not show any deductions for packing costs. Thus, petitioners state that packing costs were included in Wolverine's cost of sales but were not included in its cost of manufacture. According to petitioners, the inclusion of packing expenses in the G&A and interest ratio calculations, and the exclusion of the same expenses from the cost of manufacture, would yield understated product-specific G&A and interest expenses. Wolverine agrees with petitioners. Department's Position: The Department agrees with petitioners and has corrected the calculations of the G&A and interest expenses by including packing costs in the total cost of manufacture for these final results. See Analysis Memo. B. Parent Company General and Administrative Expenses Comment 2: General and Administrative Expenses Petitioners argue that the Department should recalculate Wolverine's G&A expense ratio using Wolverine's total G&A expenses. Petitioners claim that Wolverine did not include a sufficient amount of the G&A expense of its parent company, Wolverine Tube Inc., ("Wolverine Tube"), in Wolverine's reported G&A expenses. According to petitioners, Wolverine excluded a large percentage of these expenses from its G&A expense calculations. Petitioners state that Wolverine claims that all of the general expenses that were excluded from Wolverine's G&A expense calculations were expenses that related solely to the U.S. operations of the company. Petitioners argue that Wolverine has failed to provide evidence that the excluded general expenses at Wolverine Tube were incurred solely for U.S. operations. Additionally, petitioners state that the Department does not require that G&A expenses be incurred to produce the subject merchandise to be included in the G&A expense ratio. Petitioners further argue that the Department should revise Wolverine's corporate G&A expenses to include Wolverine's research and development ("R&D") expenses. Petitioners claim that it is the Department's stated practice to calculate G&A expenses by using the operations of the company as a whole, even if the expenses relate to non-subject merchandise. Petitioners state that Wolverine justified not including any of its R&D expenses in its reported G&A expenses because they related solely to Wolverine Tube's tube production, and did not relate to the production of brass sheet and strip. Petitioners state that Wolverine did not submit any evidence to support its claim that Wolverine Tube's R&D expenses relate solely to tube production. Petitioners point to Wolverine Tube's 1998 financial statements which seem to indicate that at least a portion of the R&D expenses incurred correspond to general expenses, because they related to the development of new products and processes. Petitioners argue that Wolverine's reported G&A expenses should be revised to include general R&D expenses. Wolverine argues that it reported the net G&A expenses incurred at its subsidiary which produces the subject merchandise. In addition, Wolverine claims that it added a proportionate amount of G&A expenses incurred by its corporate parent that were not otherwise reflected in the subsidiary's expenses. Wolverine states that it would be both duplicative and erroneous to also include in Wolverine's submitted G&A expense both G&A expenses incurred at the subsidiary level plus a proportionate share of the full corporate consolidated G&A expense. Wolverine argues that it has isolated the U.S. parent company's administrative expenses that relate to the consolidated company as a whole, divided those expenses by the consolidated cost of sales, and added that percentage to the ratio derived by dividing Wolverine's expenses by Wolverine's cost of sales. Wolverine also argues that it properly excluded Wolverine Tube's R&D expenses from its G&A calculation. Wolverine claims that the R&D expenses incurred by Wolverine Tube were for its tube production, not for its production of brass sheet and strip. According to Wolverine, tubes and brass sheet and strip are two distinct products and there is no overlap between the R&D for tube production and sheet production. Wolverine further argues that it has certified the accuracy of statements made in its questionnaire response concerning its claim that the R&D expenses are not related to brass sheet and strip production. Therefore, Wolverine urges the Department to base its G&A expense ratio on the revised data that Wolverine submitted in its supplemental questionnaire responses. Department's Position: We agree with Wolverine that it accurately reported its G&A expenses. Contrary to petitioners' assertion, Wolverine allocated an appropriate portion of its corporate parent's G&A expenses to the production of subject merchandise. The allocation methodology Wolverine describes above is typical of the kind we accept in antidumping cases where the corporate parent incurs certain G&A expenses on behalf of its subsidiaries. It is Department practice to allocate a portion of G&A expenses incurred by the parent company to the respondent under the theory that the parent's G&A expenses are incurred on behalf of its subsidiaries. See, e.g., Final Determination of Sales at Less Than Fair Value: Dynamic Random Access Memory Semiconductors of One Megabit and Above From Taiwan, 64 FR 56308, 56320 (October 19, 1999). In the instant review, there is no evidence to demonstrate that all of the parent company's G&A expenses are allocable to Wolverine. As such, the methodology employed by Wolverine to allocate a portion of Wolverine Tube's total corporate G&A to the production of brass sheet and strip using consolidated cost of sales is reasonable and representative. In addition, we agree with Wolverine that Wolverine Tube's R&D expenses related to tube production are not related to Wolverine's brass sheet and strip production. Wolverine submitted evidence on the record and adequately demonstrated that Wolverine Tube's R&D expenses were soley related to tube production. As such, there is no basis to allocate a portion of these expenses to subject merchandise. In the instant case, the Department accepts Wolverine's G&A expenses as reported. C. Interest Expense Comment 3: Reported Interest Expense Petitioners argue that, based on an analysis of the financial breakdown submitted on November 12, 1999, the Department should revise Wolverine's reported interest expense ratio to exclude interest income that Wolverine used as an offset to its interest expense. Petitioners claim that Wolverine used the net interest expense reported in Wolverine's 1998 consolidated financial statements to calculate its reported interest expense ratio and claimed all of its interest income as an offset to its interest expenses. According to petitioners, Wolverine failed to demonstrate that any portion of its consolidated interest income was from short-term investment of working capital and failed to document or substantiate its claimed offset for interest income. Wolverine argues that it has reported interest expense net of short-term interest income. Wolverine states that its calculation of the reported interest expense is accurate and is in line with the Department's practice and was verified in prior reviews. Department's Position: We agree with Wolverine that, based on an analysis of the financial breakdown submitted on November 12, 1999, the interest income it reported as an offset to interest expense is short-term income. The Department's practice is to calculate the financial expense offset with only short-term interest income. The Court of International Trade ("CIT") has upheld this approach stating that in order to qualify for an offset, interest income must be related to the "ordinary operations of the company." See Gulf States Tube Division of Quanex Corp. v. United States, 905 F. Supp. 1083, 1097 (CIT 1995) and Timken Company v. United States, 673 F. Supp. 495, 513 (CIT 1987). Wolverine's list of assets on its balance sheet statement supports the Department's conclusion that the only account on the balance sheet that earns interest income is the Cash and Equivalents Account, which, by nature, earns only short-term interest income. Because the "Cash and Equivalents Account" constitutes short-term interest income, and is related to the "ordinary operations of the company," Wolverine has demonstrated that it is entitled to a short-term interest income offset in the financial expense calculation. Accordingly, the Department is using Wolverine's reported interest expense in calculating the final results of this review. D. Foreign Exchange Gains Comment 4: Foreign Exchange Gains Petitioners argue that the Department should revise Wolverine's interest expense ratio to exclude foreign exchange gains. Petitioners claim that Wolverine failed to follow the Department's instructions to revise its reported financial expenses to exclude these foreign exchange gains and also failed to demonstrate that the foreign exchange gains or losses resulted from the acquisition of raw materials used to produce the merchandise under review. Petitioners request that the Department calculate a revised financial expense ratio that excludes Wolverine's foreign exchange gains. Wolverine states that petitioners' argument is based upon a typographical error made by Wolverine in its November 12, 1999, Supplemental Response. Wolverine claims that it mistakenly stated that foreign exchange gains are "not" related to raw material purchases. According to Wolverine, the statement should indicate that foreign exchange gains are now related to raw material purchases and should be included in the calculation the COP. Wolverine requests that the Department reject the petitioners' argument and accept the data as reported by Wolverine. Department's Position: We agree with Wolverine. Although Wolverine was unable to present the data regarding foreign exchange gains and losses in the analytical format requested, it nevertheless did its best to comply with our request. Furthermore, upon review of the information on the record, the Department agrees with Wolverine that it was Wolverine's intention to report that foreign exchange gains are now related to raw material purchases. (See Exhibits 17, 29, and 30 of the November 12, 1999, questionnaire response.) In accordance with Department practice, Wolverine distinguished between exchange gains and losses realized or incurred in connection with sales transactions and those associated with purchase transactions. Additionally, our normal practice is to include a portion of these foreign exchange gains and losses in the calculation of COP and constructed value ("CV"), when they are associated with raw material purchases. See, e.g., Notice of Final Determination of Sales at Less Than Fair Value: Steel Wire Rod from Trinidad and Tobago, 63 FR 9177, 9181 (February 24, 1998). Therefore, because Wolverine was able to demonstrate that a portion of its reported foreign exchange gains is related to raw material purchases and because it included only those foreign exchange gains in both the COP and CV, the Department included these gains in the calculation of COP and CV. Circumstance of Sale Adjustments A. Warranty Expense Comment 5: Warranty Expenses Petitioners argue that the Department should not allow Wolverine's claimed adjustment for home market warranty expenses. Petitioners claim that Wolverine failed to demonstrate that its claimed home market warranty expenses were related to the sales of brass sheet and strip subject to review. According to petitioners, the Department specifically requested the submission of credit notes/memos to indicate that the invoices included in Wolverine's claimed home market warranty expenses were for sales of brass sheet and strip, and Wolverine chose not to submit this information. Additionally, petitioners state that Wolverine did not report return freight costs for all of its warranty expense claims despite the fact that Wolverine claimed that all of its warranty claims involved the return of defective merchandise. Furthermore, reiterating their letter submitted on July 29, 1999, petitioners claimed that the following additional problems exist with respect to Wolverine's submitted warranty expenses: (1) Wolverine failed to provide the product-specific warranty expenses requested by the Department's questionnaire; (2) it was unclear whether Wolverine's claimed warranty expenses were related to sales of subject merchandise made during the period of review, because Wolverine failed to identify the home market sales that were involved with its claimed home market warranty expenses; (3) Wolverine failed to describe the basis for the amounts shown in the "direct cost" column of its warranty expense table; (4) Wolverine failed to state whether it resold any of the returned merchandise; and (5) the basis that Wolverine used to calculate its claimed average warranty expenses did not match either the total quantity that Wolverine sold during the POR, or the total quantity of sales during the POR plus the contemporaneity window periods. Wolverine argues it has provided adequate warranty information pertaining to the sales of subject merchandise, as requested by the Department. Wolverine states that in its supplemental questionnaire response dated November 12, 1999, it linked each warranty-related credit note to a specific POR invoice. Wolverine claims that petitioner's argument is wrong as a factual matter. Accordingly, Wolverine requests that the Department use its warranty information as reported in the final results of review. Department's Position: We agree with Wolverine. The Department requested that Wolverine supplement its response to support its claimed warranty expenses. We find that Wolverine adequately responded and has demonstrated that it is entitled to this adjustment. With respect to the credit notes/memos, Wolverine, in response to the Department's request, provided a chart that links each warranty-related credit note to a specific POR invoice (see Exhibit 14 of the November 12, 1999, questionnaire response). Although Wolverine has not provided actual copies of the above-referenced credit memos, the Department has determined that the chart, as well as the evidence discussed below, provides sufficient support for the Department's analysis. Furthermore, in this same exhibit, Wolverine reported all of the return freight costs that it incurred in transporting the defective merchandise from the customers' premises back to Wolverine's facility. As reported in Exhibit 14, Wolverine incurred return freight costs on only a small number of returns of defective merchandise. With respect to the "additional problems" cited by petitioners, Wolverine provided the following documentary evidence. First, in Wolverine's supplemental questionnaire response dated February 14, 2000, Wolverine provided sales-specific warranty expenses, as requested in the Department's original questionnaire. Second, in Exhibit 14 of Wolverine's supplemental questionnaire response dated November 12, 1999, Wolverine identified its home market sales that incurred warranty expenses. Third, in Exhibit 14 of Wolverine's supplemental questionnaire response dated November 12, 1999, Wolverine adequately described the basis for the amounts shown in the "direct cost" column of its warranty expense table. Fourth, on page 20 of Wolverine's supplemental questionnaire response dated November 12, 1999, Wolverine stated that none of the merchandise incurring the claimed warranty expenses was resold at a reduced price or as scrap. Fifth, Wolverine submitted its warranty expenses on a sale-specific basis in its February 14, 2000, supplemental questionnaire response. The Department, after considering the information on the record of this review, has determined that there is sufficient evidence to warrant granting the adjustment. Therefore, as stated above, the Department has continued to adjust home market sales prices for the claimed warranty expenses. Model-Match Methodology A. Product Width Comparison Comment 6: Product Width Comparison Wolverine argues that the Department should recalculate the dumping margin based on the full widths of subject merchandise sold in the United States. For the preliminary results, the Department compared the actual widths (after slitting) of merchandise sold in the home market, to the actual widths (after slitting) of merchandise sold in the United States. Wolverine claims that by reclassifying U.S. sales according to specific finished widths, the Department is improperly disregarding the commercially relevant physical characteristics of the products, which results in a skewed dumping margin analysis. Wolverine argues that it sells the product at the same price per pound regardless of whether the customer ordered an uncut 24-inch wide coil, two 12-inch wide strips, three 8-inch wide strips, or any combination of three or fewer strips whose combined width equals 24 inches. In addition, Wolverine argues that the product characteristics do not change regardless of whether the customer ordered a full unslit coil of 24-inch width, or slit coils of multiple width variations equaling 24 inches, which is why Wolverine reported its U.S. sales as having a width of 24 inches. Petitioners argue that the Department should continue to make its product comparisons based on physical characteristics and exact physical matches wherever possible. Petitioners claim that the Department is under a statutory obligation to compare a respondent's merchandise sold in the United States with that respondent's merchandise that is sold in the home market which is identical in terms of physical characteristics with the U.S. sale. Therefore, petitioners claim that product comparisons should be based on tangible physical characteristics, not discretionary "commercial realities." According to petitioners, Wolverine's decision to price its 8-inch products at a lower price in the United States than in Canada amounted to dumping. Department's Position: In both the U.S. and home markets, Wolverine sold 24-inch coils to be slit into smaller widths prior to delivery, as directed by the customer. In the instant review, Wolverine reported the widths of the merchandise before slitting for all U.S. sales. For sales made in the home market, on the other hand, Wolverine reported the widths of the merchandise after slitting. Because the Department prefers to compare respondent's merchandise sold to the United States with that respondent's merchandise sold in the home market which is identical or most similar in physical characteristics, inconsistencies in the manner in which U.S. and home market sales are reported with respect to physical characteristics necessarily affect our comparisons. See Section 771 (16)(A) of the Act. In the current administrative review, after analyzing the data on the record before the preliminary results, we instructed Wolverine to resubmit its U.S. sales list using the actual widths of the merchandise after slitting, as reported in the home market. Wolverine provided this data on January 11, 2000. The Department's statute and regulations dictate that comparisons be based on sales of merchandise in the home market that are identical or most similar to the merchandise sold in the United States with which they are being compared. In light of the above, Wolverine has not provided sufficient information to substantiate its claim that a comparison of slit merchandise in the home market to pre-slit merchandise in the U.S. market would result in an appropriate dumping calculation. Therefore, the Department will continue to compare Wolverine's U.S. sales to home market sales on an "as-slit" basis, in these final results, using the data Wolverine submitted on January 11, 2000. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions and adjusting all related margin calculations accordingly. If these recommendations are accepted, we will publish the final results of review and the final weighted-average dumping margins for all reviewed firms in the Federal Register. AGREE ___________________ DISAGREE ________________ ______________________ Troy H. Cribb Acting Assistant Secretary For Import Administration (Date)