66 FR 58115, November 20, 2001 A-570-866 Investigation Public Document G1O3:TES MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Richard W. Moreland Deputy Assistant Secretary AD/CVD Enforcement Group I SUBJECT: Issues and Decision Memorandum for the Less Than Fair Value Investigation of Certain Folding Gift Boxes from the People's Republic of China (PRC): June 1, 2000, through December 31, 2000 SUMMARY: We have analyzed the briefs and rebuttal briefs of interested parties in the less-than-fair-value (LTFV) investigation of certain folding gift boxes from the People's Republic of China. As a result of our analysis, we have made changes from the Notice of Preliminary Determination of Sales at Less Than Fair Value: Certain Folding Gift Boxes From the People's Republic of China, 66 FR 40937 (August 6, 2001) (Preliminary Determination). The specific calculation changes can be found in the Max Fortune Industrial Ltd. (Max Fortune) final analysis memorandum dated November 13, 2001, and the Red Point Paper Products Co., Ltd. (Red Point) final analysis memorandum dated November 13, 2001. We recommend that you approve the positions we have developed in the "Discussion of the Issues" section of this Issues and Decision Memorandum. Below is the complete list of the issues in this investigation: Comment 1: Use of Facts Available for Max Fortune Comment 2: Use of Facts Available for Red Point Comment 3: Red Point Paperboard Prices Comment 4: Red Point and Lindy Bowman Affiliation Comment 5: Red Point Selling, General, and Administrative Expenses and Profit Comment 6: Red Point Electricity Valuation DISCUSSION OF THE ISSUES: I. Changes from the Preliminary Determination Based on the results of verification and the comments we received from interested parties, we have made revisions to the data used for the final determination. For further details, please see the final analysis memoranda for Max Fortune and for Red Point dated November 13, 2001,which is on file in B-099 of the Central Records Room at the Department of Commerce. These revisions are: Red Point 1. We used the U.S. sales database that Red Point presented at the start of verification which incorporates its pre-verification corrections. 2. We deducted the declaration fees that Red Point incurred on U.S. sales. 3. We used the FOP database that Red Point presented at the start of verification which incorporates its pre-verification corrections. Because Red Point did not include the usage for plastic tabs for certain models in its database, we included the usages we verified for these models. 4. We recalculated Red Point's glue usage to account for beginning inventory in Red Point's calculation of usage of glue. 5. We recalculated Red Point's shrink-wrap usage to account for beginning inventory in Red Point's calculation of usage of shrink wrap. 6. We revised Red Point's per-piece shrink-wrap weights to accord with the weights we verified. 7. We revised Red Point's reported carton usage to accord with the usage we verified. 8. We converted Red Point's reported tape usage from a per-meter to a per- kilogram basis using a conversion factor based on information in the Red Point verification report dated September 13, 2001, at page 12. 9. We revised Red Point's reported market-economy input costs to accord with the costs we verified. 10. We revised Red Point's electricity usage calculation to include the electricity for the foil-stamping or pre-cutting processes. 11. We revised Red Point's labor usage calculation to accord with the labor hours we verified. 12. We have recalculated the surrogate value for electricity for Red Point. Max Fortune 1. We used the U.S. sales database that Max Fortune submitted August 8, 2001. 2. We included an unreported billing adjustment for one invoice that we found at verification. 3. We found at verification that Max Fortune reported out-of-scope boxes, all of which are printed with the retailer's name. We have removed all sales of such boxes from Max Fortune's U.S. sales database. 4. We found at verification that Max Fortune allocated its movement expenses by dividing the expense by the standard weight and multiplying this number by the actual weight reported in the response for each observation. We corrected this by dividing the reported movement expenses by the reported actual weight and multiplying it by the standard weight for the model. 5. We found at verification that the sum of per-unit weight and per-unit scrap for each model of boxes incorporating duplex board exceeded the per- unit usage of those models. We corrected this by reallocating the scrap offset to take into account the relative scrap generated by each model. 6. We found at verification that Max Fortune incorrectly reported that it did not incur freight expenses for inputs of glue. We included this freight expense when valuing the glue inputs. 7. We revised the value of Max Fortune's market-economy inputs pursuant to the corrections Max Fortune provided at the start of verification. II. Company-Specific Issues: Comment 1: Use of Facts Available for Max Fortune Harvard Folding Box Company and Field Container Company, LP (the petitioners), argue that the Department should calculate Max Fortune's margin on the basis of facts available because, at verification, the Department found numerous inconsistencies between Max Fortune's records and its response. The petitioners observe that the Department found at verification that: 1) Max Fortune reported nonsubject merchandise in its U.S. sales database, 2) there were inconsistencies in the usage of paperboard and scrap Max Fortune reported, 3) Max Fortune did not report freight expenses for glue inputs, and 4) Max Fortune did not report bank charges. The petitioners contend that these inconsistencies call into question Max Fortune's entire response. Max Fortune argues that there are no grounds for the application of facts available in calculating its margin. Max Fortune also contends that it has been fully cooperative throughout the investigation, that the errors the Department found during the verification were ministerial and can be corrected, and that the petitioner's allegations are not true. Department's Position: While it is true that we found several discrepancies during our verification of Max Fortune, these discrepancies do not warrant discarding Max Fortune's response in its entirety. The discrepancies we found were: 1) Max Fortune did not report a billing adjustment for one invoice, 2) Max Fortune reported out-of-scope boxes, all of which are printed with the retailer's name, 3) Max Fortune allocated its movement expenses by dividing the expense by the standard weight and multiplying this number by the actual weight reported in the response for each observation, 4) the sum of per-unit weight and per-unit scrap for each model of boxes that Max Fortune reported incorporating duplex board exceeded the per-unit usage of those models, and 5) Max Fortune reported it did not incur freight expenses for inputs of glue. See Max Fortune verification report dated September 19, 2001. We collected data at verification with which we can correct Max Fortune's response. Moreover, we verified all of Max Fortune's reported sales, factors-of- production, and market-economy input data and found no other discrepancies beyond those noted in the verification report. See Max Fortune verification report dated September 13, 2001, for further details. We verified that, with the exception of these limited issues, Max Fortune's response was an accurate reflection of its actual experience. Moreover, the data needed to correct the response is in the verification exhibits and we were able to correct the response without undue difficulty. Therefore, for this final determination, we have corrected the discrepancies we noted in our verification report and have otherwise used the data reported by Max Fortune. Comment 2: Use of Facts Available for Red Point The petitioners argue that the Department should calculate Red Point's margin on the basis of facts available because, at verification, the Department found numerous inconsistencies between Red Point's records and its response. The petitioners observe that the Department found at verification that: 1) Red Point did not report declaration fees, 2) the Department could not tie the per-piece shrink-wrap weights from the response to Red Point's internal records, 3) the Department could not tie carton weights from the packing lists to Red Point's carton-usage worksheet, 4) the Department could not tie the quantities and values of the market-economy inputs that Red Point reported to its internal records, 5) Red Point did not include the electricity it used in its foil-stamping or pre-cutting processes, and 6) the Department could not tie labor hours reported by Red Point to payroll records. The petitioners contend that these inconsistencies call into question Red Point's entire response. Red Point argues that there are no grounds for the application of facts available in calculating its margin. Red Point contends that it has been fully cooperative throughout the investigation and that the Department was able to verify the majority of the information it submitted. Red Point also contends that the errors the Department found were small and that the Department has the information it needs to make any changes necessary to Red Point's information. Department's Position: While it is true that we found several discrepancies during our verification of Red Point, these discrepancies do not warrant discarding Red Point's response in its entirety. The discrepancies we found were: 1) Red Point did not report the declaration fees it incurred on U.S. sales, 2) Red Point did not account for beginning inventory in its calculation of usage of glue, 3) Red Point did not account for beginning inventory in its calculation of usage of shrink wrap, 4) we were unable to recreate the per-piece shrink-wrap weights Red Point reported in its July 18, 2001, submission, 5) we were unable to tie the carton weights from the packing lists to Red Point's carton-usage worksheet, 6) we were unable to tie the quantities and values of the market-economy inputs that Red Point reported in its revised market- economy inputs summary to its internal records, 7) Red Point did not include the electricity for the foil-stamping or pre-cutting processes, and 8) we were unable to reconcile the labor hours Red Point reported to payroll records at the factory. See Red Point verification report dated September 13, 2001. We collected data at verification which we used to correct Red Point's response. Moreover, we verified all of Red Point's reported sales, factors-of-production, and market-economy input data and found no other discrepancies beyond those noted in the report. See Red Point verification report dated September 13, 2001, for further details. In other words, we found that, with the exception of these limited issues, Red Point's response was an accurate reflection of its actual experience. Moreover, the data we need to correct the response is in the verification exhibits and we were able to correct the response without undue difficulty. Therefore, for this final determination, we have corrected the discrepancies we noted in our verification report and have otherwise used the data reported by Red Point. Comment 3: Red Point Paperboard Prices Red Point argues that the Department should adjust its paperboard prices to exclude a certain expense that was actually incurred outside of the period of investigation (POI). Red Point claims that the Department verified the nature of this expense and, citing Less Than Fair Value Investigation of Stainless Steel Butt-Weld Pipe Fittings from Malaysia, 65 FR 81825 (December 7, 2000) and the accompanying Issues and Decision memorandum at Comment 19, contends that the Department normally excludes "out-of-period" costs. The petitioners argue that the Department should not lower the paperboard price for this expense because it would understate the true cost of paperboard to the respondent. Because of the proprietary nature of this comment, the rebuttal, and our position, see Red Point's final determination calculation memorandum dated November 13, 2001, for a complete discussion of this issue. Department's Position: We have not reduced Red Point's reported paperboard costs for this expense and have, instead, relied on the prices Red Point actually paid its suppliers. Because of the proprietary nature of our position, see Red Point's final determination calculation memorandum dated November 13, 2001, for a complete discussion of this issue. Comment 4: Red Point and Lindy Bowman Affiliation Red Point argues that the Department should find that Red Point and The Lindy Bowman Company (Lindy Bowman) are affiliated within the meaning of section 771(33)(G) of the Tariff Act of 1930, as amended (the Act), which defines affiliated persons as including "any person who controls any other person." Red Point further argues that the Statement of Administrative Action (SAA) states that such control includes "close supplier relationships in which the supplier or buyer becomes reliant upon the other." SAA accompanying the URAA, H.R. Doc. No. 103-316, vol. 1 at 838 (1994). According to Red Point, the Department saw substantial evidence of this close relationship at verification. Red Point contends that the Department found at verification that Red Point and Lindy Bowman: 1) operate as a single company, 2) share sales and cost information freely, 3) present themselves as one company in a single exhibit in Hong Kong trade shows, 4) meet periodically to discuss marketing strategies together, 5) are sufficiently close that contracts are unnecessary. Red Point further argues that all merchandise produced by Red Point is labeled with the Lindy Bowman logo. Red Point also contends that Lindy Bowman does all of the design work for the merchandise produced by Red Point and that Lindy Bowman has performed other forms of assistance, such as technical service, for Red Point. Citing Steel Concrete Reinforcing Bars from Latvia, 66 FR 33530 (June 22, 2001) (Rebar) and the accompanying Issues and Decision Memorandum at Comment 1, Red Point argues that the Department has found two entities affiliated under section 771(33)(G) of the Act by virtue of a close buyer/supplier relationship. Red Point claims that, in Rebar, the Department found that the two entities were affiliated because: 1) the two entities made joint sales visits to U.S. customers, 2) the trading company had an exclusive distribution contract for U.S. sales of the respondent's product (which Red Point also alleges apparently was breached), and 3) the trading company provided financing to the producer. See Rebar and the accompanying Issues and Decision Memorandum at Comment 1. Red Point contends that its relationship with Lindy Bowman is even closer than the one that existed in Rebar because Red Point sells the subject merchandise exclusively to Lindy Bowman, Lindy Bowman sells only subject merchandise produced by Red Point, and Lindy Bowman provides the designs Red Point uses in manufacturing the subject merchandise. Based on these facts, Red Point argues that the Department should find that it is affiliated with Lindy Bowman and use the verified Lindy Bowman sales to unaffiliated companies in the margin calculation for Red Point. The petitioners argue that the Department should not find that Red Point and Lindy Bowman are affiliated. According to the petitioners, Red Point has failed to establish either that one party is reliant upon the other or that either party is in a position to exercise control over the other. The petitioners contend that the facts that led the Department to preliminarily find that the two firms are not affiliated remain unchanged. The petitioners contend that the facts of this case provide less support for a claim of reliance than did the facts in Notice of Preliminary Determination of Sales at Less Than Fair Value: Solid Fertilizer Grade Ammonium Nitrate From the Russian Federation, 65 FR 1139, 1143 (January 7, 2000) (Ammonium Nitrate), where the Department determined that a respondent and an importer were not affiliated because: 1) there were numerous producers and numerous importers of the subject merchandise, 2) comparative sales of both companies did not establish reliance, and 3) the length and terms of a contract between the companies did not establish reliance. With regard to the first and third points, as they relate to the instant case, the petitioners contend that there are numerous producers and numerous importers of the subject merchandise in this investigation and there are no contracts between Red Point and Lindy Bowman. With regard to the second point, the petitioners cite a Court of International Trade (CIT) decision in AK Steel Corporation v. United States, 34 F. Supp. 2d 756 (CIT 1998) (AK Steel), where the CIT upheld the Department's finding there was no affiliation between two parties even though one of the parties purchased the majority of its product from the other party. In AK Steel, the petitioners claim, the CIT relied on an earlier Department ruling in Notice of Preliminary Determination of Sales at Less than Fair Value and Postponement of Final Determination: Melamine Institutional Dinnerware Products from Indonesia, 61 FR 43333, 43335 (August 22, 1996) (Dinnerware), stating that the Department "has declined to find affiliation where a producer supplied 100 percent of its U.S. sales through a single, unrelated U.S. importer but where the parties are free to seek other business partners." AK Steel, 34 F. Supp. 2d at 769. The petitioners further argue that neither Red Point nor Lindy Bowman are in a position to exercise control over the other. The petitioners contend that the Department's verification report did not state that it found that Red Point and Lindy Bowman operate as a single company. The petitioners allege that the fact that the two companies share information, make joint presentations at trade shows and discuss marketing strategies does not demonstrate that either party is in a position to control the other. Further, the petitioners argue that there is no evidence that either company could take legal acts for the other, that there is no evidence that either company had unlimited access to proprietary business records of the other company, and that there is no evidence of shared office personnel. Department's Position: Section 771(33)(G) of the Act defines affiliated persons as including "any person who controls any other person." (1) Section 771(33) of the Act further states that "[f]or purposes of this paragraph, a person shall be considered to control another person if the person is legally or operationally in a position to exercise restraint or direction over the other person." The Department has stated that merely identifying "the presence of one or more of the other indicia of control [as per section 771(33) of the Act] does not end [the Department's] task." See Antidumping Duties; Countervailing Duties: Notice of Proposed Rulemaking and Request for Public Comments, 61 FR 7308, 7310 (February 27, 1996). The Department is compelled to examine all indicia, in light of business and economic reality, to determine whether they constitute evidence of control. In determining whether control over another person exists within the meaning of section 771(33) of the Act, the Department will consider the following factors, among others: corporate or family groupings; franchise or joint venture agreements; debt financing; and close supplier relationships. However, the Department will not find affiliation on the basis of these factors unless the relationship has the potential to affect decisions concerning the production, pricing, or cost of the subject merchandise or foreign like product. See 19 CFR 351.102(b). We do not find the existence of an affiliation, as defined by the statute, between Red Point and Lindy Bowman. First, Lindy Bowman and Red Point have no stock ownership in each other, they do not share managers, and there is no common familial ownership. See Red Point's July 13, 2001, supplemental response at 6. Furthermore, we do not find that Red Point's relationship with Lindy Bowman constitutes a "close supplier relationship" which would indicate control by either party over the other. The SAA defines a close supplier relationship as one where "the supplier or buyer becomes reliant upon the other." SAA accompanying the URAA, H.R. Doc. No. 103-316, vol. 1 at 838 (1994); see also, Certain Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products From Korea: Final Results of Antidumping Duty Administrative Reviews, 62 FR 18404, 18417 (April 15, 1997) (Korean Steel). To establish a close supplier relationship, the party must demonstrate that the "relationship is so significant that it could not be replaced." See Korean Steel, 62 FR at 18417. In Korean Steel, the Department provided additional guidance regarding close supplier relationships. Specifically, the Department established a threshold requirement that, in order to find a close supplier relationship, actual reliance between the companies must be found: "Only if we make such a finding [of reliance] can we address the issue of whether one of the parties is in a position to exercise restraint or direction over the other. When the Preamble to our Proposed Regulations * * * states that "business and economic reality suggest that these relationships must be significant and not easily replaced," it suggests that we must find significant indicia of control." Korean Steel, 62 FR at 18417. With respect to whether reliance exists in this case, the Department has examined relevant information on the record of this investigation. As discussed in the Red Point Preliminary Determination Analysis Memorandum dated July 30, 2001, at page 3, we found that there are alternative sources of supply of the subject merchandise and there is no information on the record indicating that Lindy Bowman is precluded from purchasing folding gift boxes from other suppliers. In addition, we found that there are alternative sources of distribution of the subject merchandise, there is no information on the record that suggest that Red Point is precluded from selling to any of the other known U.S. importers of PRC-origin folding gift boxes, and there is no information on the record that demonstrates that Lindy Bowman holds a dominant position in the U.S. marketplace such that Red Point would effectively be precluded from selling to other U.S. importers. Id. Furthermore, there are no formal contracts between the two companies that would provide evidence of reliance. See Red Point verification report dated September 13, 2001, at page 4. There has been no information or argument submitted since the Preliminary Determination that causes us to reconsider these findings. Based on the above factors, we do not find that reliance exists with respect to the business relationship between Red Point and Lindy Bowman. With regard to Red Point's contentions that the Department found at verification that Red Point and Lindy Bowman operate as a single company, we did not make any such finding. Rather, we noted at verification that "Mr. Bowman told us ... that he and Red Point operate as a single company." See Red Point verification report dated September 13, 2001, at page 3. Furthermore, the fact that Red Point and Lindy Bowman share sales and cost information, present themselves as one company in a single exhibit in Hong Kong trade shows, and plan marketing strategies together does demonstrate that the two companies cooperate closely but does not demonstrate either reliance of one upon the other or control of one exercised by the other. Nor does the fact that all merchandise produced by Red Point is labeled with the Lindy Bowman logo demonstrate affiliation, as that appears merely to be a physical characteristic demanded by the customer (i.e., Lindy Bowman). The fact that Lindy Bowman does all of the design work for the merchandise produced by Red Point does not establish control or reliance of one upon the other. As is the case with the logo, the designs provided by Lindy Bowman are presumably a physical characteristic demanded by the customer (i.e., Lindy Bowman). Furthermore, there is no evidence on the record that Red Point could not create its own designs if it was necessary for it to do so. We find that this is no different than, for example, an original equipment manufacturer that needs custom-designed bearings and that works closely with and provides designs to a bearing manufacturer. It may be an example of close cooperation, but it does not establish reliance or control. With regard to the other forms of assistance that Lindy Bowman provided for Red Point, we discussed why we determined that this did not establish affiliation in the Red Point Preliminary Determination Analysis Memorandum dated July 30, 2001, at page 3. Finally, Red Point's citation to Rebar is inapposite. In that case, among the factors the Department cited in finding that an affiliation existed between a respondent (LM) and a U.S. trading company were the facts that the trading company had "an exclusive distribution contract for U.S. sales of the respondent's product;" there were "negotiations between the respondent, the trading company, and the trading company's parent bank to finance a major overhaul of the respondent's production facilities, requiring that LM share sensitive financial information and business plans," a "provision of a large line of credit to finance the production of rebar for sale to the United States through the trading company," and "numerous visits of top managers of the trading company to LM, in the company of U.S. customers, suggesting the sharing of customer information (and, similarly, visits of top managers of LM to the United States, in the company of top managers of the trading company, for purposes of meeting with U.S. customers)." Rebar, and accompanying Issues and Decision Memorandum at Comment 1. The only factor in this investigation that parallels any of the factors in Rebar is the fact that Lindy Bowman and Red Point present themselves as one company in a single exhibit in Hong Kong trade shows. None of the other factors we used to find an affiliation in Rebar has a genuine parallel in this case. Most importantly, as noted above, there are no formal contracts between Lindy Bowman and Red Point. Thus, although the proportions of sales between Red Point and Lindy Bowman suggest that there may be reliance, there are no contracts or other legal authority preventing Lindy Bowman from using other PRC suppliers or preventing Red Point from selling to other U.S. customers. Thus, in the absence of any evidence of contractual or legal control, these facts are not a sufficient basis for finding that reliance exists. We also do not find that other evidence combined with this supply relationship suffices to establish any type of control that would lead to a finding of affiliation. Accordingly, we determine that Red Point and Lindy Bowman are not affiliated as defined by the statute. Consequently, we calculated the margin for Red Point based on its sales to Lindy Bowman in the United States. Comment 5: Red Point Selling, General, and Administrative Expenses and Profit Red Point argues that the Department should use Red Point's actual selling, general, and administrative expense (SG&A) and profit experience rather than rely on the Indian surrogate value which the Department used in the Preliminary Determination. Red Point contends that it is the Department's long-standing practice to value inputs incurred in market- economy currencies in the currency in which the expense was incurred. Red Point contends that all of its SG&A was incurred in market-economy currencies. Red Point argues that there is nothing in the Department's regulations to limit this practice to direct materials. Red Point argues that the use of its actual expenses would be fairer and more accurate than the use of the Indian surrogate values. Finally, Red Point contends that neither the Indian nor the Indonesian financial statements on the record provide an adequate surrogate for Red Point because both the Indian and Indonesian producers are large conglomerates that make different products than Red Point. Red Point concludes that the best methodology would be for the Department to use Red Point's financial statements to calculate SG&A and profit for Red Point. Red Point also contends that its depreciation expenses, which account for the majority of its factory overhead, were also incurred in market-economy currencies and argues that the Department should value its factory overhead on the basis of its financial statements. The petitioners argue that the Department should not adopt Red Point's suggestion and observe that Red Point did not cite any instance where the Department has determined not to use a surrogate-country for the valuation of SG&A and profit in cases involving non-market economies. The petitioners contend that profit is a function of the entire financial operation of a company, including production costs. Thus, the production costs, which include non-market economy inputs such as labor and energy, have a bearing on the profit recorded in Red Point's accounting records. In addition, the petitioners contend that Red Point's proposed methodology would not account correctly for factory overhead. The petitioners further contend that Red Point would have the Department base SG&A on expenses which are partially incurred in Hong Kong and partially incurred in the PRC. The petitioners argue that, if the Department were to adopt this methodology, parties could argue over every SG&A expense as to whether it was a market-economy expense. The petitioners allege that the result of SG&A expenses being treated as market-economy expenses and others as non-market-economy expenses would cause great administrative difficulties. Finally, the petitioners argue that the Department is not limited to selecting financial statements from companies that only produce the subject merchandise but can use financial data from companies that produce comparable merchandise. The petitioners contend that the Indian producer the Department used in its preliminary analysis is a manufacturer of folding boxes. Thus, the petitioners conclude, the Department should continue to use the Indian producer's data for its final determination. Department's Position: We have not used the SG&A or profit from Red Point's financial statements for our final determination. As the petitioners observe, Red Point obtained some of its production inputs, including labor, energy, and some material inputs, from non-market-economy sources. We do not value these production inputs at the price Red Point paid to its non-market-economy suppliers because the presence of government controls on various aspects of the economy renders price comparisons and the calculation of production costs invalid under our normal methodologies. See, generally, sections 771(18) and 773(c) of the Act. Thus, because Red Point's profit is calculated by subtracting its costs, including these production costs, from its revenues, any profit figure we calculated would be equally invalid. With regard to SG&A expenses, contrary to Red Point's contention, it is clear from Red Point's financial statements that many of these expenses were incurred in the PRC in renminbi. See the Red Point verification report dated September 13, 2001 at Exhibit 2, wherein many of the general and administrative expenses recorded on Red Point's financial statements have a "C-" prefix, and at page 8, which states that "'C-transportation' and 'C-declaration' are freight expenses incurred in renminbi." Thus, while the expenses are recorded in Red Point's financial statements in Hong Kong dollars, the expenses were incurred in renminbi. (2) Red Point simply converted the expenses using an exchange rate between renminbi and Hong Kong dollars. In order to adopt Red Point's suggestion that we calculate SG&A on the basis of its financial statements, we would have to calculate SG&A incurred in Hong Kong dollars on the basis of its financial statements and then calculate a surrogate for the SG&A incurred in renminbi. However, many expenses are incurred in both Hong Kong dollars and renminbi. See Red Point verification report dated September 13, 2001 at Exhibit 2. Thus, we would have to attempt to value a portion of Red Point's expenses using its financial statements and value the other portion using a surrogate. It is unclear whether this is possible to do in a meaningful manner given the inherent unreliability of the expenses incurred in renminbi. As a result, we conclude that it is impossible to calculate a meaningful SG&A figure based on Red Point's financial statements. Therefore, we have calculated SG&A for Red Point based on the Indian surrogate. With regard to factory overhead expenses, it is not clear from the record that the methodology Red Point suggests would capture all appropriate factory overhead expenses. While it may be the case that the machinery Red Point used was purchased from market-economy suppliers, it is not clear that using this depreciation would account for substantially all overhead costs, including the cost of either factory-building depreciation or leasing the factory building. Nor can we segregate machinery depreciation from other depreciation in the surrogate overhead data so as to use surrogate costs only for other overhead costs. In addition, even if it were the case that Red Point incurred all of its SG&A and factory overhead expenses in market-economy countries and paid these expenses in market-economy currencies, it would still be inappropriate to allocate these expenses based on Red Point's financial statements. In order to use data from Red Point's financial statements, we would have to calculate ratios of Red Point's total SG&A and total factory overhead expenses divided by Red Point's total production costs, then apply such ratios to per-unit production costs based in large part on surrogate values. As we described above, Red Point obtained some of its production inputs, including labor, energy, and some material inputs, from non-market-economy sources. We do not value these production inputs at the price Red Point paid to its non-market-economy suppliers because the prices are not based on market principles, rendering the calculation of production costs unreliable and invalid under our normal methodologies. See, generally, sections 771(18) and 773(c) of the Act. Thus, any expense ratio that we calculated on the basis of these production costs would be equally unreliable and invalid. Further, it would not be appropriate to apply such a ratio to a cost based on surrogate values. We agree, in principle, with Red Point that it would be preferable to use, as a surrogate, the financial data of a company that only produces merchandise identical to the subject merchandise instead of the data of a company that produces other merchandise. In addition, we agree, in principle, that it would be preferable to use actual expenses rather than surrogate expenses when the use of actual expenses is practicable. In this investigation, however, Red Point's financial data does not permit us to calculate meaningful figures for the reasons described above. Because the Indian producer we used as a surrogate in the Preliminary Determination produces merchandise comparable to the subject merchandise, it is reasonable to use that producers's financial data. Therefore, for this final determination, we have continued to rely on the financial data of the Indian producer to calculate factory overhead, SG&A, and profit for Red Point. Comment 6: Red Point Electricity Valuation Red Point argues that the Department should use a different surrogate value for electricity for Red Point than it used in the Preliminary Determination. Red Point observes that the Department's surrogate values for electricity vary depending on the size of the company and argues that it is more accurately characterized as a different-size company than the size the Department assumed for the Preliminary Determination. Department's Position: We agree with Red Point in part. We found at verification that Red Point's electricity usage falls between the usage of a company the size that Red Point claims it should be characterized as and a company the size that we characterized Red Point as for the Preliminary Determination. See Red Point verification report dated September 13, 2001, at page 14 and Factor Valuation Memorandum dated July 30, 2001, at Exhibit 6. Because Red Point's electricity usage is significantly higher than the size of company that Red Point claims to be, we find it would be inappropriate to use the electricity rate Red Point suggests we use. Conversely, because Red Point's electricity usage is significantly lower than that of the size of company that we characterized Red Point for the Preliminary Determination, we find it would be inappropriate to use the rate we used in the Preliminary Determination. Therefore, for this final determination, we have calculated the simple average of the rates that Red Point suggests we use and the rate that we used in the Preliminary Determination and used the resulting average rate to value Red Point's electricity use. See the Red Point final analysis memorandum dated November 13, 2001, for proprietary details. RECOMMENDATION: Based on our analysis of the comments received, we recommend adopting all of the above changes and positions, and adjusting the margin calculation programs accordingly. If accepted, we will publish the final results of the investigation and the final weighted-average dumping margins in the Federal Register. AGREE___________ DISAGREE___________ __________________________________________ Faryar Shirzad Assistant Secretary for Import Administration __________________________________________ Date __________________________________________________________________________ footnotes: 1. Red Point does not argue that there is a basis for affiliation with respect to the statutory definitions under section 771(33), subsections (A) through (F). 2. See also Red Point's October 2, 2001, case brief, footnote 16, at page 19.