66 FR 3543, January 16, 2001 A-122-822/823 ARP: 8/1/98 - 7/31/99 Public Document G3O7: MEH/EB MEMORANDUM TO: Troy H. Cribb Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary AD/CVD Enforcement Group III SUBJECT: Issues and Decision Memo for the Final Results of the Antidumping Duty Administrative Reviews and the Determination not to Revoke in Part of Certain Corrosion- Resistant Carbon Steel Flat Products and Cut- to-Length Carbon Steel Plate from Canada - 8/01/98 through 7/31/99 Summary We have analyzed the comments and rebuttals of interested parties in the 1998- 1999 administrative review of the antidumping duty orders covering certain corrosion-resistant carbon steel flat products (CORE) and cut-to-length carbon steel plate (CTL) from Canada. As a result of our analysis, we have made changes, including corrections of certain inadvertent programming and clerical errors, in the margin calculations. 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 these administrative reviews for which we received comments and rebuttals by parties: for Continuous Colour Coat, Ltd. (CCC): 1. Clerical Errors for Clayson Steel Co. (Clayson): 1. Model Match 2. General and Administrative Expenses 3. Quantity Adjustments 4. Hourly Production Rates 5. Overhead Exclusions 6. Clerical Errors for Dofasco Inc. and Sorevco Inc. (collectively, Dofasco): No Issues for Gerdau MRM Steel Co. (MRM): 1. Revocation Background On September 8, 2000, the Department of Commerce (the Department) published the preliminary results of administrative reviews of the antidumping duty orders on CORE and CTL from Canada (65 FR 54481). The merchandise covered by these orders consists of CORE and CTL as described in the "Scope of Reviews" section of the Federal Register notice. The period of review (POR) is August 1, 1998 through July 31, 1999. We invited parties to comment on our preliminary results of review and received the following comments. Discussion of the Issues CCC 1. Clerical Errors Comment 1: Petitioners argue that the Department's Preliminary Results Memorandum rightly indicates that fixed overhead costs should be included in the calculation of total cost of manufacture in the model match program, but that in the process of the model match programming, the Department failed to include that variable in its calculations. Respondent did not file any comments. Department's Position: We agree with petitioners that fixed overhead is a component of the total cost of manufacture, and therefore should be included in its calculations of the total cost of manufacture. We also agree with petitioners that we erroneously omitted fixed overhead costs in our calculations of the total cost of manufacture. For these final results, we have included fixed overhead in our calculations of total cost of manufacture in the model match program. Comment 2: Respondent notes that direct selling expenses in the home market (DIRSELH), in this case, the credit cost incurred by the manufacturer on its home-market sales (CREDITH), were not deducted in the computer program. Respondent submits that this error should be corrected by setting DIRSELH equal to CREDITH in the computer program. Further, respondent states that the corrected home market interest rate, which the Department determined at verification, rather than the originally reported value, should be used to calculate credit expenses. Finally, respondent requests that the Department adjust the direct selling expense calculation in the model match program using the correct credit expense rate. Department's Position: We agree with respondent that the Department erroneously omitted credit expenses from the direct selling expenses in the home market. We also agree with CCC that the verified interest rate is the appropriate rate to use in this calculation. (See Memorandum To File From Jacqueline Arrowsmith Through Maureen Flannery: Sales Verification for the Sixth Administrative Review of Corrosion-Resistant Carbon Steel Flat Products from Canada, August 30, 2000, at 8.) Therefore, we have included the revised credit expense factor in the direct selling expenses of the Department's model match program for these final results. Comment 3: Respondent points out that the Department incorrectly recalculated CCC's U.S. credit expenses by misapplying the decimal for the rate applied in the calculations of the Department's model match program. CCC further states that the Department clearly indicated the correct U.S. interest rate, but in the actual programming, misapplied the rate to the credit calculation, thereby increasing it by a factor of ten. Department's Position: We agree with respondent that the Department misapplied the rate in the credit calculations for CCC's U.S. sales. We have therefore adjusted the credit rate to the proper decimal in the margin calculation program. Comment 4: Respondent clarifies that its reported scrap (TOTSCRAP) can have either a positive or negative value. However, the Department deducts TOTSCRAP in its calculation of total cost of manufacture (TOTCOM), resulting in the deduction of values that should have been added, and the addition of values that should have been deducted. Department's Position: We agree that respondent has reported the scrap as either a negative or a positive value in its cost data base, and that therefore scrap should be added to the total cost of manufacture. We have corrected this error in our calculation of the total cost of manufacture in the Department's model match program. Clayson 1. Model Match Criteria Comment 1: Clayson argues that the Department used incorrect model matches when comparing Clayson's home market sales to its U.S. sales by not adequately refining the width and thickness criteria used in the comparison. Clayson asserts that out of the eight characteristics the Department used in its model match, width and thickness illustrate the differences between Clayson's products and those sold in the United States, and points out that some merchandise sold in the home market was incorrectly grouped with other merchandise sold in the United States. By failing to divide width and thickness into subcategories, Clayson asserts the Department could not compare identical or most similar products, thereby leading to the determination of inaccurate dumping margins. Clayson states that the criteria used by the Department does not reflect the true price and cost differences that are needed to determine correct dumping margins, adding that the Department is statutorily mandated to calculate dumping margins as accurately as possible, and cites the following cases in its support: Bethlehem Steel Corporation, et. al. v. United States, Slip Op. 2000-63, 10 (CIT 2000)(Bethlehem Steel Corp. v. United States); Rhone Poulenc, Inc. v. United States, 899 F.2d 1185, 1191 (Fed. Cir. 1990)(Rhone Poulenc, Inc. v. United States) and Lasko Metals Prods. Inc. v. United States, 43 F.3d 1442, 1443, 1446 (Fed. Cir. 1994)(Lasko Metals Prods. Inc. v. United States)). Furthermore, Clayson recommends the Department use the length of each dock leveler platform as an additional model match criteria, and denotes that different physical characteristics affect price and cost. For example, Clayson points out that in Extruded Rubber Thread from Malaysia: Final Results of Antidumping Duty Administrative Review, 62 FR 62547 (November 24, 1997) (Extruded Rubber Thread from Malaysia; Final Results-1997), the Department determined that color was a suitable criterion for matching due to its effect on cost. Clayson states that this illustrates that the use of length as an additional characteristic is appropriate, because of its effect on price. Clayson points out that it produces and sells its merchandise in a niche market, manufacturing products and components to very specific sizes. Clayson states that it prices its merchandise according to quantity ordered and size, and notes that size is dictated by the width, thickness, and length of each individual unit. Clayson states that the Department should accept its modifications to the model match criteria. It relies on Certain Corrosion Resistant Carbon Steel Flat Products and Certain Cut to Length Carbon Steel Plate From Canada: Final Results of Antidumping Duty Administrative Reviews, 61 FR 13815 (March 28, 1996)(Steel From Canada; Final Results-1996), at 21, in which the Department accepted a modified matching hierarchy for a respondent. Clayson further cites Notice of Final Results and Partial Recission of Antidumping Duty Administrative Review: Roller Chain, Other than Bicycle, From Japan, 62 FR 60472, 60475 (November 10, 1997) (Roller Chain From Japan; Final Results-1997) as a prior example where the Department used additional product characteristics for its final results in order to prevent grouping of physically diverse chain as identical or similar merchandise. Clayson adds that in Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Bar From Spain, 59 FR 66931 (December 28, 1994)(Stainless Steel Bar From Spain; Final Results- 1994), the Department altered the criteria of Appendix V of the Questionnaire in order to account for certain grades of steel which the respondent sold during the period of review, but which were not taken into account. Clayson also argues that since there are no U.S. sales that are precisely identical in all dimensions to those products sold in the home market, a difference in merchandise adjustment (DIFMER) for length be made to account for these differences in size, and submits that the adjustment be made on a per pound basis. Clayson points to Rautaruukki Oy v. United States, 22 CIT, Slip Op. 98-112, 9 (August 4, 1998)(Rautaruukki Oy v. United States), and notes that the Department has the authority to amend its matching criteria throughout the course of a proceeding. Petitioners counter Clayson's argument by stating that the Department's model match hierarchy was developed through interested party comments and the Department's own investigation, and further note that the criteria are based on the Department's determination of meaningful commercial differences between products rather than subjective choices of individual respondents. Petitioners point out that, as expressed by the Court of International Trade in The Timken Co. v. United States, 10 CIT 86, 98; 630 F. Supp. 1327 (Feb. 20, 1986)(Timken), it is the Department and not the respondent who selects proper matching criteria. Petitioners disagree with Clayson's claim that the Department should substitute new width and thickness groupings for those used in the established hierarchy, stating that this claim is untimely and should have been raised by Clayson in its questionnaire responses. They cite Certain Cut-To-Length Carbon Steel Plate From Finland: Final Results of Antidumping Duty Administrative Review, 61 FR 2792, 2795 (January 29, 1996) (Carbon Steel Plate From Finland; Final Results-1996) in support of this position. Petitioners maintain that permitting modifications where the claim has not been considered from the initial stage, deprives the Department and Petitioners of the opportunity to assess and develop all relevant facts. Petitioners recommend the Department deny Clayson's request for new width and thickness sub-groupings, and state that the Department properly analyzed the subject merchandise. They claim the subject merchandise is sold by Clayson by deck and not on a per pound basis. Therefore, petitioners assert, the Department accurately applied the established model match criteria to the subject merchandise because the Department calculated the margin on a per piece basis, which is the unit in which respondent sells subject merchandise. Department's Position: We agree with petitioners that the Department has established model match criteria in this proceeding based upon the Department's determination of meaningful commercial differences between products. In order to maintain consistency among companies, and between reviews, the Department does not reconsider its matching criteria ab initio in each review. Rather, it retains the hierarchy from review to review unless a respondent can establish that there are meaningful commercial differences not captured by the hierarchy. In the present case, no party provided early comments on the Department's model match hierarchy to be used in this review. Rather, without explanation, Clayson simply adopted its own matching methodology based upon criteria Clayson deemed significant. Clayson put its arguments on the record that its preferred matching criteria represented meaningful commercial differences for the first time in its case brief. It is well established that it is the Department, rather than respondents, which has the authority to determine proper matching criteria. See Timken. Moreover, as the Department has explained, the purpose of the deadline for comments on model matching methodology is to let parties know the date by which they must respond in order to ensure that their comments are considered in formulating initial questionnaires. See Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Stainless Steel Sheet and Strip in Coils From France, 64 FR 130, 131 (Jan. 4, 1999) (SSSS France). The Department further noted in SSSS France that parties must present their arguments about model matching early in the case in order "to avoid situations in which parties point out relevant matching criteria too late for the Department to gather necessary data." Additionally, in Carbon Steel Plate from Finland: Final Results-1996, at 2795, the Department rejected changes to the model matching criteria not presented in the comments solicited by the Department. See also Roller Chain From Japan; Final Results- 1997, at 60474. In this case, Clayson presented its arguments for altering the matching hierarchy in its case brief, at a time when it is too late for the Department to gather data necessary to determine the merits of Clayson's arguments. Thus, the record contains only Clayson's arguments about its matching criteria, and does not contain factual evidence to establish that products which differ with respect to one of Clayson's criteria should not be considered like products within the meaning of section 771(16) of the Act. In reviewing this issue, we have also determined that, in our preliminary results, we mistakenly deviated from our standard methodology, as established in Steel from Canada; Final Determination-1993, and as applied in every subsequent administrative review under this order, by calculating respondent's margin on a per piece unit basis. In reporting the gross unit price, respondents have chosen to report the price per unit piece of steel plate instead of reporting the price per unit weight. Nonetheless, the Department has determined that it is preferable for the agency to formulate respondent's price per unit weight. The usage of weight provides the Department with results which are both consistent and predictable in formulating the margin analysis. The Department has traditionally used weight as a standard unit measure in determining gross unit price because a large number of steel products are most commonly priced using weight as the standard measurement. Because weight is so commonly used in this manner, many companies track costs based on a weight unit measure for determining selling expenses, inputs and other information. Thus, the Department is able to make comparisons between steel products on a consistent unit basis by using a weight-based standard, which assists the agency in achieving the most accurate result possible, which is specifically the case here. Therefore, for purposes of consistency and predictability, the Department has chosen to use unit weight in calculating the dumping margins rather than price per unit piece of steel plate. Therefore, for these final results, we have returned to our standard model match methodology, and have calculated respondent's weighted average margin on a per weight basis. 2. General and Administrative Expenses Comment 2: Clayson disagrees with the Department's calculation of selling, general and administrative expenses (SG&A), and argues that the Department failed to take into account its varied production operations. Clayson asserts that shearing, roll forming, forming, and cutting to length should be taken into account in determining general and administrative expenses; however, laser cutting should not be used because it is not utilized with respect to the subject merchandise and is not relevant to the current review. Laser cutting, Clayson notes, is a highly sophisticated, high-technology production technique, and is much more costly than the other types of operation. Clayson points out that, during verification, the Department witnessed that the laser operation operates 24 hours a day, 7 days a week, whereas the shearing operation only operates 16 hours a day, 5 days a week. Clayson argues that the Department failed to utilize the methodology used by Clayson, and instead employed a recalculated ratio based solely on Clayson's generally accepted accounting principles (GAAP) audited income statement of 2000, which included all general and administrative expenses, whether related to the subject merchandise or not. Clayson requests the Department make a proration on the audited data to reflect the amount of unrelated expenses used in its laser cutting operations, and use Clayson's methodology in its final determination. Clayson asserts that the Department is required to use the company's own calculations if satisfied with the accuracy of the cost representations they render, citing Floral Trade Council v. United States, 99 C.I.T. 10, 54 (1999)(Floral Trade Council v. United States), and Borden, Inc. v. United States, 4 F. Supp. 2d 1221, 1234 (1998)(Borden, Inc. v. United States) in its support. Clayson also argues that, as established by the Court of International Trade in Bethlehem Steel Corporation, et. al. v. United States, Slip Op. 2000- 63, 10 (CIT 2000), there is no requirement that a particular methodology be followed when determining COP. Petitioners disagree with Clayson's comments concerning SG&A. Furthermore, they were concerned about the Department's implementation of overhead costs. See Comment 5. Petitioners counter Clayson's argument relating to SG&A that the Department properly calculated the ratio of Clayson's total SG&A over the total cost of goods sold as reported in Clayson's audited 2000 Financial Statement. Petitioners note that Clayson's request for the Department to use an alternative methodology to calculate SG&A is a departure from the Department's past practice, and maintain that such a methodology depends on an unsupported estimate of the costs associated with Clayson's laser operations. Petitioners point out that it is the Department's practice to calculate SG&A on a company- wide basis, citing Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Sheet and Strip in Coils From Japan, 64 FR 30574, 30590 (June 8, 1999) (Steel From Japan; Final Results-1999), and that such a calculation is appropriate even if certain elements of a company's SG&A are closely related to the production of non-subject merchandise. Petitioners further note that Clayson admits that it did not track SG&A on a product- specific basis, but rather used an assumption to calculate the percentage of SG&A expenses for its laser operations. They also note that unsupported estimates cannot form the basis for the Department to abandon its normal practice of calculating SG&A using the operations of the company as a whole. Department's Position: We disagree with respondent. Respondent is asking the Department to apply product-specific SG&A, although the company does not maintain these records on such a basis in its own accounting system. It is the Department's practice to use company-wide SG&A expenses when calculating cost of production and constructed value based on the company's annual financial statements, because SG&A and other non-operating income and expenses are considered fungible in nature and relate to the operations of the company as a whole. See Notice of Final Determination of Sales at Not Less Than Fair Value: Expandable Polystyrene Resins from the Republic of Korea, 65 FR 69284 (November 16, 2000); Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Sheet and Strip in Coils from Japan, 64 FR 30574 (June 8, 1999), at 30590; Circular Welded Non-Alloy Steel Pipe and Tube From Mexico: Final Results of Antidumping Duty Administrative Review, 63 FR 33041 (June 17, 1998), at 3349; Brass Sheet and Strip from Canada: Final Results of Antidumping Duty Administrative Review, 61 FR 46618-01 (September 4, 1996), at 46619. Accordingly, we have made no adjustments to our preliminary calculations of SG&A. 3. Quantity Adjustments Comment 3: Clayson affirms that its products are dictated by the needs of each customer, and because they are made to order, as order sizes increase, costs related to the products decrease. Clayson states that it sells its product in the United States based on a full truckload with the average price being correspondingly less than in the home market where its products are sold, on average, in smaller quantities. To account for this difference in quantity, and its effect on price, Clayson requests that a quantity adjustment be made, thus differentiating between the home market and the U.S. market. Clayson cites Foam Extruded PVC and Polystyrene Framing Stock from the United Kingdom, 61 FR 51411 (October 2, 1996)(Framing Stock from the United Kingdom), as a previous example where the Department allowed the respondent to make a quantity adjustment for the price differences based on order sizes. Clayson explains that it is a specialty processor whose products are custom made for each client, based on an exact size and quantity, and that order price for deck leveler platforms is determined by the size (i.e., width, length, and thickness) and the quantity ordered. Thus, cost decreases as order sizes increase. As an alternative to a quantity adjustment, Clayson recommends that the Department disregard sales of quantities of 3 units and under when comparing identical or most similar products in U.S. sales and home market sales, because there are no comparable sales of these quantities between the U.S. market and the home market. Petitioners argue that Clayson offers no support for the assertion that its production costs decrease as a sale's quantity increases, and points out that a respondent bears the burden to establish the appropriateness of any adjustment to price or cost. Petitioners assert that the Court of International Trade has upheld the Department's requirement that a company demonstrate the correlation between price differences and quantities sold or costs incurred, citing Sandvik AB v. United States, 13 C.I.T. 738, 758; 721 F. Supp. 1322 (September 14, 1989)(Sandvik AB v. United States) in support of their argument. Petitioners further note that Clayson's request for a quantity adjustment is similar to that made by the respondent in Stainless Steel Round Wire From Canada, 64 FR 17324 (April 9, 1999)(Stainless Steel Round Wire From Canada), a request that was denied by the Department. Petitioners further recommend that the Department deny Clayson's request for the Department to ignore all home market sales with a quantity less than three, noting that the Department has removed from its regulations any requirement to use sales of comparable quantities. Department's Position: We agree with petitioners that respondent does not offer any support to qualify for a quantity adjustment. Section 773(a)(6)(C)(i) of the trade Act provides that normal value (NV) may be adjusted to reflect the differences in quantities sold in the home market and in the U.S. market, and 19 CFR 351.409 lists the requirements normally needed to be satisfied to qualify for a quantity adjustment. Accordingly, the producer or exporter must either have granted discounts of at least the same magnitude on 20 percent or more of the sales of subject merchandise in the home market or third country during the period examined, or must have demonstrated that the discounts reflect savings specifically attributable to the production of the different quantities, for NV to be based on sales with quantity discounts. Also see Final Determination of Sales at Less Than Fair Value: Brass Sheet and Strip From the Netherlands, 53 FR 23431-01 (June 22, 1988), at 23433. On pages 9 and 25 of the section B and C responses of the Department's questionnaire of January 21, 2000, respondent states that it did not grant any quantity discounts in the home market or the United States. Further, there is no information on the record demonstrating that respondent granted discounts of at least the same magnitude on 20 percent or more of its sales of subject merchandise in the home market during the POR, as respondent claims, were granted on its sales to the United States. Respondent also failed to establish a correlation between the price differences and the quantities sold, and the savings specifically attributable to the production of different quantities. In Notice of Final Determination of Sales at Less Than Fair Value - Stainless Steel Round Wire from Canada, 64 FR 17324-01 (April 9, 1999), at 17328 and 17329, the Department did not grant a quantity discount because respondent could not establish the correlation of quantities and price. As in this instant case, the respondent did not grant any quantity discounts, effectively imposing a surcharge on smaller orders. Further, in Notice of Final Determination of Sales at Less Than Fair Value: Foam Extruded PVC and Polystyrene Framing Stock From the United Kingdom, 61 FR 51411-01 (October 2, 1996)(Framing Stock from the U.K.), at 51413 and 51420, as cited by respondent, respondent demonstrated "that the prices between the different quantity bands were sufficiently varied to warrant comparisons at comparable quantity bands." In this case, respondent did not provide the Department with this information. Therefore, the Department is not required to grant respondent such a quantity adjustment. See Timken Co. V. United States, 11 C.I.T. 786, 804; 673 F. Supp. 495, 513 (1987). Furthermore, in Framing Stock from the U.K. the Department only granted a quantity adjustment for sales where the "[i]nformation on the record demonstrates that the prices between the different quantity bands were sufficiently varied to warrant comparisons at comparable quantity bands,..." However, the record did not support a quantity adjustment for a sale for which a sale of a comparable quantity was not available for comparison. 4. Hourly Production Rates Comment 4: Petitioners argue the Department should reject Clayson's product- specific labor costs because Clayson's books and records do not track labor costs related to individual products. Petitioners assert that Clayson's hourly production rates are not based on production times, engineering records, or other documentation maintained by Clayson, but rather on unsupported estimates, and are therefore unreliable. Petitioners cite Porcelain-on-Steel Cooking Ware From the People's Republic of China, 62 FR 32757 (June 17, 1997)(Cooking Ware From China), as an example where the Department rejected the respondent's unsupported production rates, and note that production rate tables for this review are based on Clayson's production staff's subjective estimates. Petitioners further note that since no documentation has ever been produced to substantiate these estimated hourly production rates, these estimates are not verifiable. Petitioners further assert that Clayson's hourly production rates, which Clayson reports as varying with the size of each plate, are inaccurate. Petitioners note that for any given thickness and width, the hourly production rate will decrease as the length of the plate increases. They also point out that Clayson's production rates are not consistent with this principle. Furthermore, petitioners illustrate that because hourly production rates are based on unsupported estimates and are also demonstrably inaccurate, they cannot be used in allocating Clayson's direct labor costs. Therefore, petitioners argue that the Department must use Clayson's financial statements to calculate the company-wide average direct labor cost per pound shipped. Clayson counters that the Department correctly used Clayson's methodology in calculating direct labor costs and hourly production rates given Clayson's accounting system, and asserts that Clayson's reported labor costs are not based on subjective opinions of Clayson's personnel, as petitioners argue, but rather on its experience in supplying parts to the dock leveler industry for over 14 years. Clayson points out that its parts are used for the decks in dock levelers and do not change in size since they must meet specific size parameters. Clayson affirms its engineers are qualified to determine the hourly output for subject merchandise because Clayson has been manufacturing its parts on a daily basis over extended periods of time, and asserts that the Department had the opportunity to observe first hand the production process of subject merchandise during its verification. Clayson adds that during verification it offered to perform hourly production runs for the Department, but the Department felt that this was not necessary. Clayson cites Bethlehem Steel Corp. v. United States, Slip. Op. 2000-63, at 12 (June 2, 2000), as a previous case where the respondent was unable to provide product specific costs, but instead provided the Department with a "relatively accurate calculation." Clayson adds that in Bethlehem Steel Corp. v. United States the Department verified the "soundness and reasonableness" of the respondent's methodology, and asks the Department to do the same in this case since Clayson is unable to provide exact data for hourly production rates from its accounting system. Clayson also cites U.S. Steel Group v. United States, Slip Op. 2000-99, 8 (August 15, 2000) (U.S. Steel Group v. United States), noting that petitioners in that case challenged the Department's acceptance of the respondent's reported estimated weighted average rolling costs and requested that the Department apply adverse facts available to the respondent based on the argument the respondent had failed to provide cost information to the Department. Clayson notes that the Department disagreed with petitioners' argument and accepted the respondent's method of determining rolling costs, and asks the Department to do the same in this present review. Clayson further notes that petitioners rely on Cooking Ware From China to argue that the Department must reject Clayson's production rates, and as a case where the Department was unable to verify the calculations of actual labor hours provided by the respondent. The respondent in Cooking Ware From China, Clayson argues, relied on piece rate tables based on estimates which were 30 years old. Clayson also points to Synthetic Indigo From the People's Republic of China; Notice of Final Determination of Sales at Less Than Fair Value, 65 FR 25706 (May 3, 2000) (Synthetic Indigo From China)as a prior example where the Department accepted the respondent's best estimates because the respondent's methodology resulted in the actual hours worked by their employees. Department's Position: We agree with petitioners that we were unable to verify the hourly production rates, and therefore we cannot use them for our calculation of the labor rates. We found at verification that Clayson does not maintain either a cost accounting system or a formal production control system. In fact, they do not maintain any production records. As a result, in order to respond to the Department's requests for information, the company had to derive product data from existing records. In doing so, Clayson took steps to segregate cost between subject and non-subject products. The subject merchandise is produced only at two of Clayson's three plants. However, when verifying Clayson, we were unable to confirm the production times of the specific products, as presented to us at that time by company officials, other than by interviewing company employees involved in the production of subject merchandise. Respondent was unable to produce any records or engineering reports maintained in the ordinary course of business or prepared from existing records for verification. (See Memorandum To File Through Maureen Flannery From Elfi Blum: Sales and Cost Verification Report for Clayson Steel Inc., in the Antidumping Administrative Review of Certain Cut-to-Lenght Carbon Steel Plate (CTL Plate) from Canada,of August 30, 2000, at 13-14.) We agree with petitioners that the table of production rates provided at verification was not verifiable and therefore can not be accepted for the calculation of labor costs. In Notice of Final Determination of Sales at Less Than Fair Value: Certain Preserved Mushrooms from India, 63 FR 72246 (December 31, 1998), Comment 9 (Mushrooms from India), the Department rejected respondent's approach to allocate cost "based on certain estimated product yield factors,...because the method relies purely on estimates of the mushroom yield factors..." See also Cooking Ware from China, at 32760 (where the Department rejected the reported labor factor of production because it was not supported by source documents at verification). Further, we disagree with respondent concerning U.S. Steel Group v. United States, since the circumstances in that case were very different than Clayson's. First, respondent in that case had a cost accounting system that the Department was able to verify, and the average cost assigned was based on the company's books and records. In addition, it involved only one of many segments in a complex production process. Finally, the company further maintained engineering records, on which production costs could be measured and then allocated. Thus, the Department was able to verify the information and data submitted in the responses and provided at verification, based on those existing records which the company maintained. Therefore, although the Department accepted a cost estimate in the absence of actual cost figures for one element of COP, it only did so after determining that the estimate was based on verifiable data and was otherwise reasonable. As explained above, respondent maintains neither a cost accounting system nor any engineering or production records. Accordingly, we were not able to verify any of the product-specific production rates presented to us at verification. However, since respondent's books and records indicate total labor costs, including benefits and incentives, and tons shipped during the POR, we calculated the dumping margin using the average labor rate for plants 1 and 2 for the POR divided by the tons shipped, excluding laser tons, as provided by respondent. See Memorandum To File Through Sally Gannon From Elfi Blum: Analysis for Clayson Steel, Inc. for the final results of the sixth administrative review of corrosion-resistant carbon steel flat products from Canada for the period August 1, 1998 to July 31, 1999, of January 5, 2001, (Analysis Memorandum Final Results) on file in Room B-092, Department of Commerce. We excluded plant 3 (Laser Plant)labor costs and tons shipped, since those were clearly identified in respondent's books and records as a separate expense item, and were not involved in the production of subject merchandise. Finally, we disagree with respondent that any parallels can be drawn between Synthetic Indigo From China, and the facts of this case. In Synthetic Indigo From China, Comment 12, the Department was conducting a non-market economy analysis which relied on the hours worked for purposes of its factor calculation, and the Department was able to use the results of its verification to make that determination. The instant case deals with a market economy analysis, and thus does not rely solely on the hours worked to calculate the labor rate. Rather, we are using the actual data of a company's books and records, as verified, to conduct our analysis. Clayson purchases hot-rolled coils and plates and cuts them to length; therefore, the processing that it performs is relatively small compared to the total cost of manufacturing. In other words, material costs make up the significant portion of a product's cost. Moreover, the only significant physical difference between specific subject products is the dimensions characteristic. Therefore, the difference in the cost of manufacturing between products is relatively small. In Clayson's case, the Department was not able to verify the production or yield rate which is needed to calculate an accurate labor rate. 5. Overhead Exclusions Comment 5: Petitioners argue that Clayson failed to substantiate its exclusions from plant overhead that it claimed were attributable to its laser operations. Petitioners assert that in order to remove those costs allegedly associated with laser operations, Clayson applied certain percentages to various company-wide overhead expenses, reduced the majority of its overhead costs, and also reduced light, heat, power and depreciation costs. Petitioners further maintain that Clayson failed to produce reliable evidence substantiating these reductions, and did not rely on documentation but rather on "assumptions based on its knowledge of its business and review of data." Petitioners note that the methodology used by Clayson is similar to that used by the respondent in Elemental Sulphur From Canada, 62 FR 37958 (July 15, 1997)(Sulphur From Canada), which was rejected by the Department, and state that Clayson created estimates, without documentary support, to exclude certain overhead costs associated with its laser operations. Petitioners also argue that Clayson failed to demonstrate that hours of operation bear any relation to the allocation of plant costs, and that Clayson did not provide any documentary evidence supporting its work force breakout. Petitioners recommend the Department reject Clayson's unsupported exclusions relating to laser operations in calculating variable and fixed overhead expenses. Further, petitioners state that Clayson calculated the labor rate including benefits and incentives paid during the POR. Accordingly, the Department should recalculate overhead expenses to properly account for benefits and incentives to indirect labor. Clayson counters that it has provided the Department with a conservative calculation in its adjustments for its laser operations, and notes that during verification the Department confirmed the accuracy of the conservative adjustments in accounting for laser cutting operations. Clayson notes that the Department's way of calculating overhead and general and administrative expenses is a methodological issue specific to each case, citing Manganese Metal From the People's Republic of China; Final Results of Antidumping Duty Administrative Review, 65 FR 30067 (May 10, 2000) (Manganese From China; Final Results-2000) in its support. Clayson cites Bethlehem Steel Corp. v. United States, asserting that Clayson's proposed methodology for determining overhead and general and administrative costs allows the Department to more accurately calculate overhead costs associated with the production of subject merchandise with little data manipulation. Clayson argues it has provided the Department with a number of documents supporting the cost burden related to the laser plants and other elements of business, and adds that the Department observed first-hand the laser operation, and claims it has met its burden of proof of establishing the accuracy of the laser cutting operation adjustments to its overhead and general and administrative expenses. Clayson further argues that the Department accurately included benefits when calculating total hourly wages and maintains that petitioners' recommendation to add benefits to indirect costs would lead to a "double count" and is clearly incorrect. Department's Position: We disagree with petitioners that respondent's methodology for allocating fixed and variable overhead is unsubstantiated and therefore unuseable. Section 773(f)(1)(A) of the Act states that "[c]osts shall normally be calculated based on the records of the exporter or producer of the merchandise, if such records are kept in accordance with the generally accepted accounting principles of the exporting country (or the producing country, where appropriate) and reasonably reflect the costs associated with the production and sale of the merchandise. The administering authority shall consider all available evidence on the proper allocation of costs, including that which is made available by the exporter or producer on a timely basis,..." However, as noted in Comment 4, in this case, the respondent company does not maintain a cost accounting system or production control system. In instances like this, it is the Department's practice to have respondent derive per-unit cost from existing records if that information more accurately reflects the true cost of production. See Section 782(e) of the Act. In order to provide the Department with per-unit overhead costs, respondent divided the individual cost categories within the fixed and variable groupings into subject costs and non-subject costs. Respondent then allocated cost items for fixed and variable overhead based on these derived percentages. The amounts used to calculate the percentages were taken directly from respondent's financial statements and from its computer system maintained in the normal course of business. At verification, we tested some of the allocation ratios, such as maintenance and repairs, and found that in some instances the ratios used by Clayson were conservative. See Memorandum To File Through Maureen Flannery From Abdelali Elouaradia and Elfi Blum: Sales and Cost Verification Report for Clayson Steel Inc. in the Antidumping Duty Administrative Review of Certain Cut-to-Length Steel from Canada, at 19. Therefore, we disagree with petitioners' alternative of using one average cost, including subject and non- subject merchandise, since that would not lead to the most accurate results. Further, in Sulphur From Canada the Department disagreed with respondent on the allocation methodology it used to further refine product specific costs, and which the Department was unable to verify, whereas in this case we were able to test the reasonableness of those allocations. It is the Department's practice to base its analysis on the representative samples taken at verification. The Court of International Trade has supported this approach: Verification is like an audit, the purpose of which is to test information provided by a party for accuracy and completeness. Normally an audit entails selective examination rather than testing of an entire universe. Hence, evasion is a common possibility, but only when audits uncover facts indicating the actuality thereof are auditors compelled to search further . . . Commerce has the discretion in choosing which items it will verify, and so long as Commerce has not uncovered facts in the process of verification that point to an improper accounting . . . Commerce is not compelled to search further. See PMC Specialities Group, Inc. v. United States, 20 CIT 1130, 1134-35 (1996). Therefore, for these final results we have accepted respondent's calculations of fixed and variable overhead with the following adjustments. To reflect company-wide expenses, we have included the expense ratio for benefits and incentive pay in the appropriate wage and salary categories for fixed and variable overhead. For more detailed information, see Analysis Memorandum Final Results. 6. Clerical Errors Comment 6: Petitioners request the Department correct certain ministerial errors in its calculation of Clayson's scrap costs, and also suggest the Department adjust Clayson's overhead costs to appropriately account for benefits and incentives related to indirect labor costs. Department's Position: We addressed the issues pertaining to the inclusion of benefits and incentives in overhead above. We agree with petitioners that the costs resulting from scrap loss during production should be added to the total cost of manufacture to arrive at total cost instead of subtracting it. For the final results we have corrected this error and have added the scrap cost to the total cost of manufacture. MRM 1. Revocation Comment 1: MRM argues that the Department had no basis for rejecting its request for revocation in the preliminary results of review. It argues that the Department's decision was not based on any evidence on the record, but only on the fact that MRM is a respondent in an ongoing anticircumvention investigation, which MRM characterizes as irrelevant and based on unsubstantiated allegations. In fact, argues MRM, all relevant and substantiated evidence on the record supports its revocation request. It asserts that it meets all three of the prongs of the Department's three-prong revocation test in effect for this review period. More specifically, MRM argues that its history of three consecutive review periods of zero antidumping margins should be decisive in deciding whether to grant revocation. It cites the Department's Amended Regulation Concerning the Revocation of Antidumping and Countervailing Duty Orders 64 FR 51236 (Sept. 22, 1999), in which the Department explained the reasoning behind its new revocation regulations, which went into effect after the initiation of this review. MRM cites the following passage: "If the only evidence on record is a respondent's ability to sell subject merchandise at not less than normal value for three consecutive years, the record would not support a decision to maintain the order in light of the requirement in Article 11.2 . . . that there be positive evidence reflecting the continued necessity of the order." Id. at 51238. It also claims that current Department practice is to create a presumption in favor of revocation after three periods of zero or de minimis margins, citing Preliminary Results of Antidumping Duty Administrative Review; Pure Magnesium from Canada, 63 FR 26148, 26149 (May 12, 1998) for this proposition: respondent's lack of dumping over the course of three years is "generally predictive of future behavior." To support this argument, MRM claims that Hyundai Electronics Co. v. United States, 53 F. Supp. 2d 1334 (May 19, 1999) (Hyundai) is not relevant to the facts of this case. Hyundai stated that the Department may revoke an order if its three-prong test is satisfied, but did not have to do so. MRM argues that Hyundai is inapplicable here, because, in that case, the Department was concerned with below-cost sales masking past dumping, and not with an anticircumvention investigation. In any case, argues MRM, Hyundai did not give the Department permission to depart from a three-prong test without justifying its decision on the basis of substantial evidence on the record. MRM argues that, even if the anticircumvention investigation were relevant to the revocation decision, there is no evidence on record supporting a finding that MRM made, sold, or dumped alloy steel plate covered by the circumvention inquiry, and, therefore, the Department could still not point to substantial evidence on the record in justifying the denial of revocation. It furthermore emphasizes its belief that the Department verified the fact that it does not add boron to its sales of steel to the United States in an attempt to circumvent the cut-to-length order. Petitioners respond by asserting that the Department has been given broad discretion, by statute, regulations, and court decision, in deciding when to revoke an order. In particular, they argue that the existence of the anticircumvention investigation is substantial evidence on which the Department can base its decision, and that the relevance of such an investigation to a revocation decision has been recognized by the Court of International Trade in Samsung Electronics Co. v. United States, 20 CIT 1306 (1996) ("both anticircumvention and changed circumstances reviews . . . address whether the antidumping duty order should be revoked . . . ."). Finally, they argue that the Department did not verify information relating to the anticircumvention investigation. Department's Position: We agree with petitioners. While the anticircumvention investigation is a separate segment under the cut-to-length order, with a separate time table, both the anticircumvention investigation and the administrative review attempt to determine whether merchandise falling within the scope of the cut-to-length order is being sold in the United States at less than normal value. Thus, until the anticircumvention investigation has been completed, it is not possible for the Department to determine that MRM will not sell merchandise to the United States at less than normal value in the future. Moreover, if the Department determines that MRM has been circumventing the order, the Department might reasonably conclude that MRM's successive periods of zero margins are not truly indicative of its behavior towards the U.S. market. Therefore, until the Department can be satisfied either that MRM has not circumvented the order(1) or that, if it did, its sales of circumventing merchandise are not dumped, we cannot determine whether MRM has satisfied the first two prongs of our three- prong revocation test in effect for this review: 1) the subject producer has not dumped for at least three consecutive years, and 2) it is not likely the producer will dump in the future. Furthermore, as the CIT confirmed in Hyundai, the relevant regulation, 19 CFR § 351.222(b)(2), permits the Department to revoke the order in part if the test is satisfied, but it does not mandate revocation. See Hyundai at 1340 (quoting Matsushita Electric Industrial Co. v. United States, 12 CIT 455 (1988) in part ("'Commerce is not compelled to grant revocation' even where plaintiffs satisfy the requirements.")). Additionally, petitioners are correct in their assertion that the Department did not conduct a verification pertaining to the anticircumvention investigation. The verification referred to by MRM in its case brief, e.g. on page 8, was conducted to verify MRM's responses submitted as part of the administrative review. Thus, the verification outline issued to MRM, which the Department also placed on the record, states that it is in regard to the "administrative review," and refers to the dates of the administrative review period: The caption of the verification report indicates "ARP: 8/1/98 - 7/31/99", i.e., "administrative review period" for the period of the administrative review. Furthermore, there is nothing in any document pertaining to the verification which even mentions the anticircumvention investigation. Although the report does discuss grades of steel and their chemical content, that discussion involved the Department's verification that MRM had reported all sales relevant to the administrative review--a standard component of any administrative review verification. Thus, we asked MRM to explain why it had excluded from its responses various products on the basis of their steel grades being outside the scope of the review. While we discovered no instances of MRM selling high carbon boron steel during this verification,(2) it was not our purpose to try and do so. 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 Assistant Secretary for Import Administration _________________________ (Date) ____________________________________________________________________________ footnotes: 1. 1 The Department published Preliminary Determination of Circumvention of Antidumping Order: Cut-to-Length Carbon Steel Plate from Canada on October 31, 2000 (65 FR 64926), preliminarily determining that MRM circumvented the order. 2. 2 The verification report does refer to the Department's discovery of MRM's exclusion of sales of high carbon boron steel. This is a mistake. As can be seen by the report's description of the chemical content of the products sold, these excluded sales were of low carbon boron steel. Even at this point in the report, however, the Department was not commenting on, and did not even mention, the anticircumvention investigation. (See Memorandum to the File from Mark Hoadley through Sally Gannon: Correction to Verification Report, December 21, 2000.)