(65 FR 13366, March 13, 2000) A-570-815 AR 8/01/97-7/31/99 Public Document MEMORANDUM TO: Robert S. LaRussa Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary for Enforcement SUBJECT: Issues and Decision Memo for the Administrative Review of Sulfanilic Acid from the People’s Republic of China (PRC) from August 1, 1997 through July 31, 1998; Final Results Summary We have analyzed the comments and rebuttals of interested parties in the 1997/98 administrative review of the antidumping duty order covering sulfanilic acid from the PRC. As a result of our analysis, we have made changes, including corrections of certain inadvertent programming and clerical errors, in the margin calculations for these final results of review. 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. Facts Available 2. Non-Market Economies Factor Valuation 3. Affiliation Control Collapsing 4. EP/CEP Movement Expenses 5. Circumstances-of-Sale Adjustments Indirect Selling Expenses 6. Packing and Movement Expenses Inventory Carrying Costs 7. Miscellaneous Issues 8. Programming and Clerical Errors Background On September 8, 1999, the Department of Commerce published the preliminary results of administrative review of the antidumping order on sulfanilic acid from the People’s Republic of China (the PRC). See Notice of Preliminary Results of Antidumping Duty Administrative Review: Sulfanilic Acid from the People’s Republic of China, 64 FR 48788 (September 8, 1999). The merchandise covered by this order is all grades of sulfanilic acid, which include technical (or crude) sulfanilic acid, refined (or purified) sulfanilic acid and sodium salt of sulfanilic acid. The period of review (POR) is August 1, 1997 through July 31, 1998. We invited parties to comment on our preliminary results of review. No timely requests were made for a public hearing. Discussion of the Issues 1. Facts Available Only two firms, Yude/Xinyu (Yude) and Zhenxing/Mancheng (Zhenxing), responded to the Department’s questionnaire and demonstrated that they are entitled to a separate rate. Eleven other companies, for which a review was requested, did not respond to the Department’s questionnaire. All firms that have not demonstrated that they qualify for a separate rate, including the 11 that did not respond, are deemed to be part of a single enterprise under the common control of the government (the PRC enterprise). Therefore, all such entities receive a single margin, the "PRC rate." We preliminarily determined, in accordance with sections 776(a) and (b) of the Act, that resorting to adverse facts available is appropriate in arriving at the country-wide rate because companies deemed to be part of the PRC enterprise for which a review was requested did not respond to the Department’s antidumping questionnaire. Thus, the Department preliminarily found that the PRC enterprise failed to cooperate by not acting to the best of its ability to comply with a request for information. When making adverse inferences, the Statement of Administrative Action (SAA), H.R. Doc., 103- 316 (1994) authorizes the Department to consider the extent to which a party may benefit from its own lack of cooperation (SAA at 870). Because the "PRC rate" applicable during the POR and to current imports is 85.20 percent, the Department believes that assigning a rate of 85.20 percent will prevent non-responding firms from benefitting from their failure to respond to the Department's requests for information. Anything less than the current cash deposit rate would effectively reward non-responding firms for not cooperating to the best of their ability. The 85.20 percent rate is based on the less than fair value (LTFV) final determination which, in turn was based on information in the petition. Section 776(b) of the Act authorizes the Department to use as adverse facts available information derived from, among other places, the petition or the final determination from the LTFV investigation. This type of information is considered secondary information. See SAA at 870; 19 CFR 351.308(c)(1). In accordance with section 776(c) of the Act, the Department, to the extent practicable, will examine the reliability and relevance of any secondary information used as facts available. However, in an administrative review the Department will not engage in updating the petition to reflect the prices and costs that are found during the current review. Rather, corroboration consists of determining that the significant elements used to derive a margin in a petition are reliable for the conditions upon which the petition was based. With respect to the relevance aspect of corroboration, the Department will consider the information reasonably at its disposal as to whether there are circumstances that would render a margin not relevant. To corroborate the LTFV rate of 85.20 percent, we examined the basis of the rates contained in the petition of October 8, 1991. The U.S. price in the petition was based on actual prices from customer purchase orders, invoices and price quotations for refined sulfanilic acid from the PRC. This U.S. price covers delivery to the customer’s point of usage. We were able to corroborate the average unit values listed in the petition by comparing those values to publicly available information compiled by the U.S. Census Bureau and made available by the International Trade Commission (ITC). The ITC reports quantity and value by HTS numbers. Using the same HTS numbers as listed in the petition (HTS 2921.42.24, 2921.42.79, and 2921.42.79), we divided the total quantity by the total value for the period referenced in the petition and noted the average unit values were very similar to those reported in the original petition. The petition also states that due to the non-market economy status of the PRC, the foreign market value was calculated using a factors of production methodology. Based on the production experience of the petitioners, the petition identified actual factors of production for subject merchandise. Such factors include: labor, raw material, energy, overhead, and general selling and administrative expenses. To value these factors of production, the petition used published costs in India for the above-mentioned factors as surrogate values for those in the PRC. See Antidumping Petition on Sulfanilic Acid from the People’s Republic of China dated October 2, 1991, and found in the Department’s Central Records Unit (CRU). Because petitioners used published, publicly available data for valuing the major inputs, we consider this data to be probative and relevant. The SAA at 870 specifically states that where "corroboration may not be practicable in a given circumstance,'' the Department may nevertheless apply an adverse inference. The SAA at 869 emphasizes that the Department need not prove that the facts available are the best alternative information. Therefore, based on our efforts described above to corroborate information contained in the petition, and mindful of the legislative history discussing facts available and corroboration, we consider the petition margin we are assigning to non-responding firms in this review as adverse facts available to be corroborated to the extent practicable. Finally, we note that where circumstances indicate that the selected margin is not appropriate as adverse facts available, the Department will disregard the margin and determine an appropriate margin. See, e.g., Fresh Cut Flowers from Mexico; Final Results of Antidumping Duty Administrative Review, 61 FR 40604, 40606 (August 5, 1996). In this review, there is no evidence on the record that would indicate that the margin from the petition is not appropriate. Nothing on the record of this administrative review supports a determination that the highest margin rate from the petition in the underlying investigation does not represent reliable and relevant information for purposes of adverse facts available. This rate has been used as the PRC-wide, all others rate in all administrative reviews of this order conducted since the Department’s Final Determination of Sales at Less Than Fair Value: Sulfanilic Acid from the People’s Republic of China, 57 FR 29705 (July 6, 1992). Comment 1: Petitioner contends that the Department should apply the country-wide rate of 85.20 percent as the facts available to Zhenxing and Yude because respondents submitted incomplete information. Petitioner states that respondents failed to disclose in their original questionnaire response that Yude/Xinyu (Yude) was bankrupt and under state control. Petitioner also claims that Zhenxing/Mancheng (Zhenxing) did not disclose the full scope of its operations, and the fact that it engages in businesses other than sulfanilic acid (cystine and garment processing) as described in a corporate brochure. Finally, petitioner alleges that Zhenxing did not report its U.S. sales through export channels other than PHT. Respondents state that use of facts available is unwarranted, and that they have fully cooperated in this and prior reviews. Respondents argue that only the domestic part of Yude’s business was under state control and that Mr. Zhu, the owner, continued to run the factory and negotiate sulfanilic acid prices with PHT. During this period, respondents claim that Yude was monitored by a bank in a manner similar to a reorganization under U.S. bankruptcy laws, and note that during the Department’s January 1998 verification of Yude, a bank employee was observed monitoring the situation. Respondents state that they have disclosed the exact scope of Zhenxing’s business operations (sulfanilic acid and sodium sulfanilate). Respondents note that its operations have been verified in two previous administrative reviews, and as recently as 1998. Furthermore, they claim that all of Zhenxing’s and Yude’s U.S. sales were reported to the Department, and that their joint venture agreement with PHT precludes any exporting to the United States through other channels. Respondents claim that Zhenxing had no knowledge of domestic sales being destined to the U.S. market, and contend that even if it did, the Department would not consider them U.S. sales because the transaction occurred within China between two Chinese entities. See Notice of Final Determination of Sales at Less Than Fair Value: Creatine from the People’s Republic of China, 64 FR 71104 (December 20, 1999). Lastly, respondents note that PHT investigated and found fraudulent use of Zhenxing invoices by other Chinese exporters to ship sulfanilic acid to the United States. Department’s Position: The Department agrees with respondents that they cooperated and disclosed information regarding Yude’s bankruptcy, the scope of Zhenxing’s operations, and the reported U.S. sales by Yude and Zhenxing. Respondents’ July 23, 1999 response to the Department’s second supplemental questionnaire clarified that only the domestic part of Yude’s business was under the control of the bank, and that the sulfanilic acid under PHT’s joint ownership was not affected by the bank’s intervention. Furthermore, the Department’s March 18, 1998, verification report of Yude, submitted by respondents as part of this record on August 31, 1999, refers to a meeting with a bank representative who was monitoring the situation, and indicates the Department’s awareness of Yude’s financial situation. The Department therefore, concludes that respondents supplied sufficient information on the financial condition of Yude, and that the use of total adverse facts available is unwarranted. Petitioner’s claim that Zhenxing failed to fully disclose the scope of its business operations is based on a corporate brochure, presumably from Zhenxing, that identifies products other than sulfanilic acid, such as cystine, tissue, and "garment processing." Due to the unknown source and age of the publication, its poor legibility, and the limited information it provides about these products and whether they are sold domestically or exported, the Department determines that this brochure lacks the substance and credibility to establish petitioner’s claim. Finally, the Department determines that respondents properly identified all their U.S. sales. The issue of whether respondents had knowledge of the final destination of their domestic sales is moot because the Department is only concerned with the first market- based sale in the chain of distribution for export to the United States. Transactions between two companies located in an NME country are not considered appropriate to use as U.S. sales. See Notice of Final Results of Antidumping Duty Administrative Review and Partial Termination of Administrative Review: Fresh Garlic from the People’s Republic of China, 62 FR 23759 (May 1, 1997). Comment 2: Petitioner contends that the Department should apply the country-wide rate of 85.20 percent as adverse facts available to Zhenxing and Yude because respondents submitted contradictory information. Petitioner alleges that the information on the record concerning the legal status of the Chinese producers is misleading because respondents used different names to identify PHT’s joint venture partners in their submissions. Petitioner also contends that respondents made misleading claims of private ownership that directly contradict later descriptions of the PRC factories as collective enterprises, an essential ownership distinction that effects the Department’s separate rate analysis. Respondents note that they have provided a number of documents for the record, including the joint venture agreements and business licenses themselves, that correctly identify the parties to the joint ventures. They also state that the two joint ventures were twice verified by the Department, as recently as 1998 as part of the prior review. Respondents argue that Zhenxing and Yude are collective enterprises in name only and that each is privately owned by one person. Respondents claim that in China one person is allowed to be a "collective ownership," and that this is normally done to receive favorable tax benefits. Furthermore, respondents state that the Department’s de jure and de facto criteria for assigning separate rates recognizes the important legal and factual distinction with regard to ownership in China. See Notice of Final Determination of Sales at Less Than Fair Value: Silicon Carbide from the People’s Republic of China, 59 FR 22585 (May 2, 1994). Lastly, respondents assert that one of the Department’s criteria for determining a "market-oriented industry" is whether the industry itself is characterized by private or collective ownership. See Preliminary Determination of Sales at Less Than Fair Value: Sulfanilic Acid from the People’s Republic of China, 57 FR 9409, 9411 (March 18, 1992). Department’s Position: The Department agrees with respondents that they have submitted ample evidence, including the joint venture agreements, business licenses, and responses to all four of the Department’s supplemental questionnaires, to sufficiently clarify and explain the identity and legal status of the joint venture partners. For purposes of these final results, the Department has not received any additional information from petitioner to indicate that Xinyu and Mancheng are not affiliated with Yude and Zhenxing. Specifically, the Department has not received any comments from petitioner to dispute the information on ownership and shared facilities that established the basis of the Department’s determination of affiliation, and which would justify the use of adverse facts available. The Department disagrees with petitioner that the discrepancy in the information concerning collective and private ownership would alter the Department’s finding on separate rates. Although the petitioner has identified differences in respondents’ classification of the joint ventures as privately-owned companies and in the classification used in their business licenses as collective ownerships, this distinction is in name only, and does not alter the manner in which we apply our de facto criteria in determining an absence of governmental control with respect to exports. The four factors for evaluating de facto governmental control are; (1) whether the export prices are set by or subject to the approval of a government authority; (2) whether each exporter retains the proceeds from its sales and makes independent decisions regarding the disposition of profits and financing of losses; (3) whether each exporter has autonomy in making decisions regarding the selection of management; and (4) whether each exporter has the authority to sign contracts and other agreements. These criteria look beyond the legal distinctions of ownership, and has in the past been accorded greater weight than the de jure factors for determining whether a company should be assigned a separate rate. See Coalition for the Preservation of American Brake Drum and Rotor Manufacturers v. United States, 44 F. Supp. 2d 29 (CIT 1999). Finally, respondents addressed this issue in their response to the Department’s fourth supplemental questionnaire, dated December 22, 1999, stating that one person is allowed to be a "collective ownership" in China, and that this is normally done in order to receive more favorable tax benefits. Therefore, the Department determines that this ownership discrepancy does not affect the outcome of its separate rates determination, that respondents have provided adequate clarification that was not disputed by petitioner, and that the use of adverse facts available is unwarranted. 2. Non-Market Economies Factor Valuation Comment 3: Petitioner claims that the Indian domestic price is the most appropriate surrogate value for aniline for the following reasons: (1) the perceived distortions in the Indian domestic price once created by an 85 percent tariff rate on aniline has been eliminated due to its significant reduction to 30 percent, thereby making the rate neither abnormally high relative to other countries nor to other chemical products imported into India; (2) in the Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Synthetic Indigo from the People’s Republic of China, 64 FR 69723, 69728 (December 14, 1999) (Synthetic Indigo), the Department determined that the distortions in the domestic price of aniline are disappearing as the Indian import tariff on aniline has been reduced to the same level as that of other chemicals, and the pricing of domestic aniline is now comparable to its import price; (3) because of the dramatic increase in India’s domestic production over the last four years, India is now a net exporter of aniline, rather than a net importer of aniline products, unlike the situation found in prior reviews, and therefore, Indian sulfanilic acid producers are no longer disproportionally using imported aniline; (4) the domestic price for aniline has fallen significantly due to the reduction in import tariffs and improved efficiencies of larger scale production, and is now comparable to the export price; and (5) the Department has a clear preference for using the domestic price when both the domestic and import prices are available on a tax and duty exclusive basis. See Notice of Final Results of Antidumping Duty New Shipper Administrative Review: Pure Magesium from the People’s Republic of China, 63 FR 3085, 3087 (January 1, 1998); Notice of Final Determination of Sales at Less Than Fair Value: Certain Cut-to-Length Carbon Steel Plate from the People’s Republic of China, 62 FR 61964, 61966 (November 20, 1997); and Notice of Final Determination of Sales at Less Than Fair Value: Brake Drums and Brake Rotors from the People’s Republic of China, 62 FR 9160, 9163 (February 28, 1997). Petitioner contends that the import price is no longer the best estimate of the price of aniline in a theoretical market-economy PRC. Petitioner cites the Government of India’s September 1999, initiation of an antidumping investigation of imports of aniline from Japan and the United States, indicating that a reasonable basis exists to believe or suspect that aniline is being dumped in the Indian domestic market. Petitioner states that Congress specifically mandated that "Commerce shall avoid using any prices which it has reason to believe or suspect may be dumped or subsidized," thus, the import price no longer constitutes the best available information for determining the surrogate value of aniline. See H.R. Rep. No. 100- 576 at 590 (1988). Furthermore, petitioner submitted additional information indicating that Japan and the United States dumped aniline in India during the POR. Petitioner also claims that the import price is distorted and should not be used as a surrogate value because the price is based on transfers of bulk quantities of aniline from large foreign producers to their Indian affiliates. Petitioner contends that reliance on import statistics incorrectly assumes that Indian sulfanilic acid producers can purchase aniline in bulk quantities at lower per-unit prices. By contrast, Indian sulfanilic acid producers are relatively small operations which do not purchase aniline in bulk, and which would necessarily pay a higher per-unit cost than the transfer prices occurring between foreign affiliates. Furthermore, petitioner states that the observed price difference between imported and domestic aniline can be attributed to the volume differences and higher cost of drumming smaller quantities of aniline. Respondents contend that petitioner’s data supporting its argument for using the domestic price to value aniline is unreliable. Respondents claim that petitioner’s argument relies on two reports from a consulting firm that contain unsubstantiated and non-public trade statistics. Therefore, respondents contend that there is neither reliable public information supporting petitioner’s assertions of a price disparity based on volume differences between imports and exports, nor adequate evidence to attribute the price difference to the small scale of the Indian sulfanilic acid industry. Furthermore, respondents argue that this data does not provide adequate documentation to support petitioner’s "estimate"of domestic Indian aniline demand and its assertion that India is now self- sufficient in aniline. Respondents also argue that the Directory of World Chemical Producers (1996 edition) (Directory) fails to provide a comprehensive list of India’s sulfanilic acid producers, or to support petitioner’s claim that aniline is not being imported directly by Indian sulfanilic acid producers. Respondents note that, using the internet, they found sulfanilic acid producers in India that were not listed in the Directory. Respondents state that the Department should continue to use the Indian import prices as the surrogate value for aniline because the Department, the Court of International Trade (CIT) and Court of Appeals for the Federal Circuit (CAFC) have rejected petitioner’s argument for the use of Indian domestic prices. See Notice of Final Determination of Sales at Less Than Fair Value: Sulfanilic Acid from the People’s Republic of China, 57 FR 29705 (July 6, 1992); 61 FR 53702, 53711 (October 15, 1996); Nation Ford Chem. Co. v. United States, 985 F. Supp. 133, 137 (CIT 1997), aff’d,166 3d F. 1373 (CAFC 1999) (Nation Ford). Respondents claim that information they placed on the record indicates that Indian sulfanilic acid producers continue to use imported aniline. Specifically, respondents state that a letter from an Indian exporter of sulfanilic acid demonstrates how it imports aniline and works with an Indian producer to toll produce sulfanilic acid for export. Respondents comment that this Indian producer uses, but does not import, the aniline. Furthermore, respondents add that a letter from an Indian law firm demonstrates that the Indian Advance License scheme for aniline/sulfanilic acid is being used by Indian sulfanilic acid producers to import aniline duty-free due to the high price of domestic aniline. Respondents reject petitioner’s allegations that imported aniline is being dumped in India, noting that an initiation of an investigation is not a determination of dumping, that the investigation was initiated in September 1999, outside the POR, and that the initiation does not cover all the countries that export aniline to India. In addition, respondents claim that petitioner’s use of selective public data to draw its own conclusions of dumping in India by Japan and the United States is purely speculative. Finally, respondents assert that the issue raised by petitioner in Synthetic Indigo with respect to price distortions in the domestic value of aniline, is not pertinent in this case. Respondents contend that the real issue is whether the domestic price should be used when evidence on the record shows that Indian producers who make and export sulfanilic acid continue to use imported aniline. Respondents claim that Indian manufacturers can produce sulfanilic acid for export only by using imported aniline through the Indian Advance License/duty exemption program because of the high price of domestic aniline. Department’s Position: In determining the choice of an appropriate surrogate value for aniline, the Department considered several factors. First, the tariff on aniline has fallen significantly from its "abnormally high" rate of 85 percent to 30 percent, and now equals the rate applicable to two other inputs for which we have used domestic prices as surrogate values (sulfuric acid and sodium bicarbonate). The new 30 percent duty rate on aniline was in effect prior to and throughout the POR. Thus, we determine that the reduction of the rate effectively removed the distortions in the domestic price that we previously attributed to this "abnormally high" rate, and which distortions the CIT and CAFC recognized. Second, the dramatic growth in aniline exports prior to and during the POR as evidenced by the Monthly Statistics of the Foreign Trade of India (MSFTI), suggests that Indian manufacturers and exporters are no longer reliant on imported aniline to produce sulfanilic acid. Third, it is reasonable to conclude that domestically-produced aniline is being used in the manufacture and export of sulfanilic acid due to the consistent downward trend in the price of domestic aniline over several years to a level comparable to the published export price. Finally, the Department has information on the record to adjust the domestic price of aniline, as it has with sulfuric acid and sodium bicarbonate in this and prior reviews, to account for excise and local taxes. Therefore, the Department considers the average Indian domestic price, as published in Chemical Business and adjusted for these taxes, to be the best surrogate value for determining the cost of aniline used by Indian producers of sulfanilic acid for the export market. Comment 4: In the event that the Department uses the import price for valuing aniline, petitioner argues that the Department should adjust the import price data to include an importers’ mark-up to better approximate the true cost of imported aniline. Petitioner contends that based on the absence of evidence on the record that Indian sulfanilic acid producers purchased imported aniline directly and not through importers, the Department should conclude that Indian importers/middlemen affiliated with large foreign producers import bulk quantities of aniline for resale to sulfanilic acid producers with a mark-up added. Petitioner provides an appropriate mark-up range between 28.44 and 32 percent of the CIF value based upon information provided by petitioner which allegedly establishes profit rates for two Indian import trading companies and the mark-up for chemical distributors. Respondents contend that the CIT determined that the Department was justified in not adding an importer mark-up to import prices. See Nation Ford. Respondents argue that the Court affirmed the Department’s refusal to add markups on imported aniline in the absence of proof that Indian producers paid markups on imported aniline. Finally, respondents state that evidence they have provided shows that Indian importers toll produce sulfanilic acid for export. Department’s Position: Since the Department has determined that the Indian domestic price is the best choice of a surrogate value for aniline, petitioner’s argument for the use of an importers’ mark-up has not been considered. Comment 5: Petitioner states that the Department should use the Indian import prices to value activated carbon because this data is more contemporaneous and is based on publicly-available published information. Petitioner argues that the Indian domestic price quote used by the Department in the preliminary results was neither public information nor contemporaneous with the period of review. Finally, petitioner contends that there is no evidence on this record that imported and exported carbon are of different quality, or that Indian sulfanilic acid producers are more likely to purchase activated carbon at prices comparable to the export price rather than the import price. Respondents argue that the Department can use either the Indian domestic or export price to value activated carbon. Respondents note that in the Notice of Final Results of Antidumping Duty Administrative Review: Sulfanilic Acid from the People’s Republic of China, 62 FR 48597, 48600 (September 16, 1997) (1996 Sulfanilic Acid), the Department determined that the Indian import prices did not appear to correspond to the type of activated carbon used by Chinese manufacturers, and therefore, used the public price quotes supported by the published export price to account for this specific type of "powder" activated carbon being used in China. Respondents also state that the Department correctly adjusted this price using the wholesale price indices for India published by the International Monetary Fund in order to make this price contemporaneous to the POR. Department’s Position: The Department agrees with respondents that the Indian import prices do not appear to correspond to the type of activated carbon used by Chinese manufacturers. Petitioner submitted no information on the record to dispute the Department’s previous determination of the existence of different types and grades of activated carbon. Furthermore, in 1996 Sulfanilic Acid, the Department consulted with a chemical products specialist at the International Trade Commission who confirmed the distinction between liquid and gas phase activated carbon, which led to the Department’s determination that the disparity between the import and export prices suggested different grades of activated carbon. Therefore, the Department will continue to use the public price quotes adjusted for inflation, supported by publicly available published information (i.e., the export price), that are specific to the type and grade of activated carbon used by Chinese sulfanilic acid producers. Comment 6: Petitioner argues that the surrogate value for water can be broken out and valued separately in cases where the power, fuel, and water item is not included in factory overhead expenses, citing to Synthetic Indigo Preliminary Determination Valuation Memorandum of December 6, 1999 (Synthetic Indigo Valuation Memo). Respondents contend that the Department should continue to follow its practice of including water in factory overhead as it has in prior reviews and other cases. Department’s Position: The Department agrees with respondents and will continue to include the surrogate value of water in factory overhead. The scenario presented by petitioner notes an exception to this practice in cases where "power, fuel, and water" are a distinct line item that can be separated from factory overhead expenses. In this review, we valued factory overhead using information from the Reserve Bank of India Bulletin for chemical manufacturers in India that included a separate line item only for "power and fuel." Therefore, the Department cannot segregate the water cost from other factory overhead expenses because there is no distinct line item that can identify this cost. Comment 7: Petitioner contends that the Department should not use polyethylene bags to value packing materials because these types of bags are extruded thin films more commonly used for trash or garbage applications. Instead, petitioner recommends using the surrogate value for woven polypropylene bags, alleging that these are the types of bags used by respondents. Department’s Position: The Department did not consider and will not use the value of woven polypropylene bags as proposed by petitioner to value packing materials because, in accordance with section 351.301(c)(3)(ii) of the Department’s regulations, this information was submitted after the Department’s deadline for accepting publicly available information on factors of production. See section 782(g) of the Act. Comment 8: Petitioner argues that the Department should use the most contemporaneous prices available for the surrogate values for coal and electricity. Petitioner states that in the Department’s preliminary determination in Synthetic Indigo, the average electricity rates from three Indian companies’ financial statements covering the period April 1998 to March 1999 were used as the surrogate value for electricity. Petitioner states that the Department used steam coal costs from Indian Import Statistics covering the period April 1996 to February 1997 as the surrogate value for coal. See Notice of Preliminary Determination of Sales at Less Than Fair Value: Sebacic Acid from the People’s Republic of China, 64 FR 42916 (August 6, 1999). Petitioner claims that this information to value coal and electricity is more contemporaneous than the information from the International Energy Agency Statistics covering 1997 and 1996, respectively. Department’s Position: As in Comment 5, this information was submitted after the Department’s deadline for accepting publicly available information on factors of production, in accordance with section 351.301(c)(3)(ii) of the Department’s regulations. Therefore, the Department did not consider and will not use the electricity rates and coal costs as proposed by petitioner in its case brief to value these energy costs. See section 782(g) of the Act. 3. Affiliation Control Comment 9: Petitioner claims that Yude and Zhenxing are not affiliated, and that the Department should therefore base U.S. price on the transaction price between the PRC factories and PHT, the U.S. importer. Petitioner contends that the mere existence of a joint venture between two companies does not automatically establish that those two entities are affiliated, and that the evidence must demonstrate that both parent corporations can exercise operational control over a third entity. See Mitsubishi Heavy Industries, LTD v. United States, 54 F. Supp. 2d 1183, 1192 (CIT 1999). Petitioner argues that the joint ventures were formed to obtain export licenses rather than to consolidate operations, and that the true extent of this consolidation is not enough to create an affiliation with PHT. Petitioner contends that the initial investment made by PHT was effectively an advance on future payments, rather than a capital contribution Respondents contend that PHT is affiliated with Yude and Zhenxing. Respondents claim that they have submitted numerous official documents such as joint venture agreements, business and export licenses, and tax returns that demonstrate that the joint ventures are more than paper companies. Respondents state that the Department has twice verified the legal status of Zhenxing and Yude, including in the previous review, and found them to be affiliated. Respondents argue that section 771 (33)(E) of the Act, 19 U.S.C. 1677(33)(E), does not require a finding of control in order for entities to be affiliated parties, but instead defines an affiliated person as one "directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization and such organization." Respondents state that since PHT has more than a five percent interest in Yude and Zhenxing, PHT is affiliated with them. Department’s Position: The Department continues to find PHT to be affiliated with Yude and Zhenxning, and the Yude/Xinyu and Zhenxing/Mancheng producer pairs to be affiliated parties within the meeting of section 771 (33)(E) of the Act. The Department disagrees with petitioner’s argument that the extent of operational control and consolidation of the joint ventures is not enough to create an affiliation with PHT. The Department found sufficient evidence of "operational" control to support its determination of affiliation based on PHT’s sole authority to market and sell the subject merchandise in the United States. Furthermore, the joint venture agreements specifically provide PHT with an ownership interest in excess of five percent of each producer in the two joint ventures. See the Department’s August 31, 1999, "Collapsing" memorandum (Collapsing Memo), a public version of which is on file in the CRU. Collapsing Comment 10: Petitioner states that Xinyu and Mancheng, and not Yude and Zhenxing, are the true parties of the joint ventures with PHT. Petitioner states that by definition, the third entity or joint venture itself could not exist without the survival of the original two parties forming the agreement, and that therefore, Xinyu and Mancheng continue to exist as independent entities. Petitioner also points to Yude’s and Zhenxing’s business licenses which identify two corporate entities as the parties to the joint venture. Petitioner states that none of the parties to the joint venture undertake joint production or marketing activities. Petitioner contends that there is no evidence on the record of a preexisting formula for allocating profits between the joint venture partners, or sufficient evidence to conclude that the joint ventures even maintained independent bank accounts. Finally, petitioner claims that the only financial statements submitted were those of the factories and not those of the joint ventures, that PHT’s financial statements did not reflect its investments in the joint ventures, and, that there is no evidence on the record of board meetings between the joint venture partners. Respondents claim that Xinyu and Mancheng, the factories that entered into the joint venture agreement, became new legal entities with new names, Yude and Zhenxing. Respondents contend that because the Chinese government only named the two joint venture companies on the export licenses, only Yude and Zhenxing have the right to export sulfanilic acid from China. Furthermore, respondents state that Xinyu and Mancheng cannot export sulfanilic acid to the United States because they are merely the factories, and not the licensed exporters. Respondents argue that Yude and Zhenxing should not be collapsed with PHT simply because PHT has common ownership in both. Respondents contend that the Department cannot collapse producers only on the basis of an interlocking directorate and financial investment. See Nihon Cement Co. v. United States, 17 CIT 1400, 15 ITRD 1558 (1993). Respondents claim that in Nihon Cement, the CIT correctly recognized that the Department relies upon a broad analysis of the facts of the case, and that its determination to collapse related companies is not "based solely on the extent of the financial relationship." See Notice of Final Results of Antidumping Duty Administrative Review: Cellular Mobile Telephones and Subassemblies from Japan, 54 FR 48011, 48015 (November 20, 1989). Respondents state that there is no relationship between Yude and Zhenxing other than PHT’s minority interest in both and their one common board member. Respondents contend that PHT has no control over the production or management of the two factories, that it negotiates prices with each factory independently, and that it can only buy and sell for them in foreign markets. Therefore, respondents argue that PHT’s common interest in Yude and Zhenxing is not enough to constitute the "relatively unusual situations, where the type and degree of relationship is so significant that we find there is a strong possibility of price manipulation." See Notice of Final Determination of Sales at Less Than Fair Value: Antifriction Bearings (Other than Tapered Bearings) and Parts Thereof from the Federal Republic of Germany, 54 FR 18992, 19089 (May 3, 1989). Department’s Position: The Department rejects respondents’ claim that PHT should not be collapsed because it has no control over the production and management of the two factories/joint ventures. To the contrary, the Department found evidence on the record that the two factories/joint ventures share production facilities, and that PHT is significantly involved in their production and pricing decisions. In their July 26, 1999 response to the Department’s second supplemental questionnaire, respondents state that both Xinyu and Yude, and Mancheng and Zhenxing, respectively, do not maintain separate facilities, that none of these Chinese entities participate in price or sales negotiations with U.S. customers, and that PHT consults with them in forecasting annual production and assisting in the purchase of raw materials. These facts satisfy the test for determining that these companies should be treated as a single entity as prescribed in section 351.401(f) of the Department’s regulations which calls for collapsing entities "where those producers have production facilities for similar or identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities, and the Secretary concludes that there is a significant potential for the manipulation of price or production." 4. EP/CEP Movement Expenses Comment 11: Petitioner contends that the Department failed to deduct "commissions" paid by PHT to Baoding and the China National Chemical Construction Corp. (CNCCC) for services directly related to the export of sulfanilic acid to the United States. Petitioner cites respondents’ May 19, 1999, submission which states that PHT "paid CNCCC and Boading 1.5-2% of the sales price as interest for the money advanced to the [sic] Zhenxing and Yude. PHT also paid CNCC and Baoding a 1.5 percent handling fee for processing the paperwork." Petitioner argues that the Department should adjust the U.S. price by deducting these alleged commissions at a rate of 3.5 percent of PHT’s reported gross unit price. Department’s Position: We agree with petitioner that the 1.5 percent paid by PHT to CNCCC and Baoding for processing paperwork on each sale is directly related to the sale. Therefore, the Department will deduct 1.5 percent of the gross unit price from the U.S. price in order to calculate CEP. This is consistent with the determination made for the identical service provided by CNCCC in the 1994-95 administrative review of Sulfanilic Acid. The Department also finds that the fee paid by PHT to CNCCC and Baoding for advances made to Zhenxing and Yude constitutes an additional cost directly related to the sale of sulfanilic acid in the United States. Thus, it is appropriate to deduct an additional 1.5 percent of the gross unit price from the U.S. price to reflect this expense. Therefore, a total of 3 percent of the gross unit price will be deducted from the U.S. price to reflect these "administrative" expenses associated with exporting sulfanilic acid to the United States. 5. Circumstance-of-Sale Adjustments Indirect Selling Expenses Comment 12: Petitioner contends that PHT understated its indirect selling expense attributable to sulfanilic acid by excluding its September 1998 salary expense from its calculation. Petitioner argues that this expense was disproportionately high in September, and must represent a year-end accounting adjustment. Therefore, in accordance with Department practice, this alleged year-end expense should be attributed to the POR even though it was recorded after the POR. See Notice of Final Results of Antidumping Duty Administrative Review: Extruded Rubber Thread from Malaysia, 64 FR 12967, 12976 (March 16, 1999). Respondents state that it has correctly calculated PHT’s indirect selling expense according to the method prescribed by Department verifiers in the previous review. According to respondents, this method divides total operating expenses not associated with a specific sale by total sales occurring over the POR. Respondents contend that the salary expense for September 1998 belongs in the 1998-99 administrative review and not the present review. Respondent claims that the September 1998 salary expense is larger than each of the preceding months due to year-end bonuses. Furthermore, respondents note that the September 1997 salary expense is similarly large as a result of these bonuses, and was included in the indirect selling expense calculation for the POR. Department’s Position: The Department reviewed PHT’s financial statements for September 1996 and September 1997 and found a similar pattern of disproportionally high salary expenses for this month. Although the Department cannot determine whether the specific timing of this increase represents year-end bonuses, we are capturing its effect on the indirect selling expenses calculation by incorporating each September salary expense that falls within the POR. Therefore, the Department does not consider this increase to be a year-end accounting adjustment, and will not include the September 1998 salary expense in our calculation of indirect selling expenses because it is outside the POR. 6. Packing and Movement Expenses Inventory Carrying Costs Comment 13: Petitioner states that the Department failed to deduct from CEP the inventory carrying costs incurred by PHT from the time of export to delivery to the first unaffiliated customer in the United States. Petitioner contends that section 351.402(b) of the Department’s regulations requires the Department to make a determination as to whether these costs are related to the unaffiliated customer or the sale to the affiliated importer. Department’s Position: The Department addressed this issue in the Notice of Final Results of Antidumping Duty Administrative Review: Sulfanilic Acid from the People’s Republic of China, 63 FR 63834, 63840 (November 17, 1998) and determined not to deduct the inventory carrying costs between Zhenxing and PHT from CEP because those expenses are not associated with economic activity between unaffiliated U.S. parties. The same rationale applies in this review. However, the Department has correctly adjusted the U.S. price for inventory carrying costs incurred by PHT prior to its sale and delivery to unaffiliated U.S. customers. 7. Miscellaneous Issues Comment 14: Respondents contend that the Department’s prior decisions not to give importer specific assessments rates have encouraged other Chinese importers to use fraudulent Zhenxing invoices to obtain its low dumping margin. Respondents request the Department to follow its normal practice of calculating the assessment rate on an importer-specific basis in accordance with section 351.212(b)(1) of the Department’s regulations to prevent any fraud by importers other than PHT who seek to avoid liquidation at the "all others rate." Department’s Position: We agree with respondents. The Department has calculated an importer- specific rate for PHT. 8. Programming and Clerical Errors In reviewing our calculations for this review, the Department found two ministerial errors that we are correcting for these final results. The first error involved the use of a surrogate value for foreign brokerage and handling when no such expenses were reported by respondents. We will therefore, delete this column and deduction from our calculation of CEP. The second error involved our use of an inflator to adjust the surrogate values that are outside our POR. In cases where there is overlap between the POR and the period that surrogate values are obtained, the Department’s practice is to not inflate these prices. Therefore, the Department will not use an inflator in our calculations of the surrogate values for polyethylene bags and electricity rates where such an overlap occurs. Comment 15: Petitioner states that the Department incorrectly adjusted the surrogate values for sulfuric acid and sodium bicarbonate by the import duty rate rather than the domestic excise tax rate. Petitioner contends that the Department should use the most recent excise tax rate of 18 percent to adjust the Chemical Weekly price for sulfuric acid and sodium bicarbonate, citing to the Synthetic Indigo Valuation Memo. Department’s Position: The Department agrees with petitioner that it mistakenly used import duty rates instead of the correct excise and local tax rates to adjust the surrogate values for sulfuric acid and sodium bicarbonate, and will correctly adjust the Indian domestic prices by the 18 percent excise tax in effect during the POR as published in the Central Excise Tariiff of India 1997-98. The Department will also continue adjust these values by an additional four percent to account for the Maharastra local sales tax. We have made these same adjustments to the domestic price of aniline. Comment 16: Respondents state that the Department omitted Indian imports from Chinese Taipei (Taiwan) in calculating the average import values of aniline and polyethylene bags. Respondents also argue that the Department should exclude imports from Hong Kong in calculating the average import value of polyethylene bags because it is a major transshipment point for goods produced in the PRC. Department’s Position: Since the Department has determined that the Indian domestic price is the best choice of a surrogate value for aniline, respondents’ argument to include imports of aniline from Taiwan has not been considered. With regard to imports of polyethylene bags from Taiwan, we agree with respondents’ claim to include these imports in our calculation of the average import value of polyethylene bags. However, the Department has found no evidence on the record of this review to substantiate the claim of transshipment, and we will therefore, continue to include imports from Hong Kong in our calculation of the surrogate value of polyethylene bags. Comment 17: Respondents claim that the Department, in calculating the surrogate value for activated carbon, should first average the domestic price quotes from Brilex, and add this average to the four other domestic price quotes obtained from another source, VVD & Sons, instead of using the simple average of all six price quotes. The average of these five numbers would then be used to determine the surrogate value for activated carbon. Respondents contend that the Brilex prices should be averaged because they are identical grades of activated carbon that are only packaged differently. Department’s Position: The Department will continue to use the simple average of all six price quotes to calculate the surrogate value for activated carbon due to the limited number of price quotes, and to capture the universe of price differentials that are not only restricted to the grade of activated carbon. Comment 18: Respondents contend that the Department’s calculation of ocean freight for Yude’s observations two and three should be revised to account for the fact that these two sales were consolidated into one shipment in the same container. To accurately calculate the ocean freight deductions for these observations, respondents state that the Department should divide the per-container charge by the sum of the quantities of these two sales. Department’s Position: We reviewed respondents’ November 25, 1998 response to sections C and D of the Department’s questionnaire to determine how they number and interpret their sales invoices. We found that when respondent’s invoice number is followed by an "a," "b," or "c," this "denotes that the shipment according to the purchase order was divided into two or more releases to the customer." Therefore, the Department agrees with respondents that these two observations were shipped in a single container, and we will adjust the ocean freight deductions by consolidating the quantities, and allocating half of the per-unit costs to each observation. Comment 19: Respondents argue that the foreign inland freight deduction should have been divided by the kilogram-to-pound conversion factor instead of multiplied by it. Respondents also state that the Department did not use the full value of this conversion factor (2.204 instead of 2.204623) in its calculation of normal value. Finally, the respondents claim that the Department truncated the U.S. price to four digits, thus understating the U.S. value and overstating the weighted average margin, and should correct this error by using a non-truncated figure for U.S. price. Department’s Position: We agree with respondents that we erroneously multiplied instead of divided the kilogram-to-pound conversion factor for foreign inland freight, and have corrected this calculation accordingly. However, we disagree with respondents that we did not use this full conversion factor for normal value. We reviewed our calculation of normal value in dollars and pounds, and found that we used the full conversion factor for kilogram-to-pounds. We also disagree with respondents that we truncated the U.S. price in our calculation of U.S. value. Although this column only shows four digits, the result of this CEP calculation is properly carried beyond four digits, and has no effect on U.S. value whether we extend the number of "visible" decimal places or not. 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 ______ ______________________ Robert S. LaRussa Assistant Secretary for Import Administration ______________________ Date