66 FR 15837, March 21, 2001 A-570-815 AR 8/01/98 - 7/31/99 Public Document MEMORANDUM TO: Bernard T. Carreau, fulfilling the duties of Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary AD/CVD Enforcement Group III SUBJECT: Issues and Decision Memorandum for the Administrative Review of Sulfanilic Acid from the People's Republic of China (PRC) from August 1, 1998 through July 31, 1999; Final Results Summary We have analyzed the comments and rebuttals of interested parties provided in the 1998/99 administrative review of the antidumping duty order covering sulfanilic acid from the PRC. As a result of our analysis, we have not made changes in the margin 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 by interested parties in the following submissions: case briefs, responses to the Department's Collapsing Memorandum, dated January 9, 2001, and responses to the U.S. Customs Service's (Customs) documents placed on the record of this administrative review by the Department on February 2, 2001: 1. Facts Available 2. Use of Factual Information from the U.S. Customs Service 3. Verification Outline and Procedure 4. Verification Report/ Alleged Untrue Statements 5. Verification Report/ Use of the Term "Unreported" Sales 6. Verification Report/ Inability to Reconcile Sales 7. Verification Report/ Issuing of Verification Report 8. Verification Comments are Untimely Factual Information 9. Knowledge Test 10. Collapsing 11. Surrogate Values Due to the proprietary nature of the comments on the Customs documents and of certain comments on the verification report received from interested parties, we have addressed these comments more fully in the Memorandum on the Department's Findings on Certain Customs Documents (Customs Findings), dated March 13, 2001, and in the Department's Memorandum on Respondents' Comments on the Verification and Verification Report (Memorandum on Verification Comments), dated March 13, 2001, respectively. Public versions of these memoranda are on file in the Central Records Unit (CRU), room B-099 of the Main Commerce Building. Background On September 14, 2000, the Department published the preliminary results of the administrative review of the antidumping duty order on sulfanilic acid. See Sulfanilic Acid from the People's Republic of China; Preliminary Results of Antidumping Duty Administrative Review, 65 FR 55508 (September 14, 2000). On September 18, 2000, the Department issued the verification report as a result of our on-site inspection of relevant sales and financial records. Zhenxing, Yude, and PHT International (hereafter, respondents) submitted comments on the verification report on September 28, 2000, and all interested parties filed case briefs with the Department on October 16, 2000. In a letter to respondents dated November 7, 2000, the Department determined that the respondents' comments on the verification report and their case brief contained certain untimely filed new factual information and argument based upon that information, and requested that they correct and re-file these submissions. On November 9, 2000, respondents filed a request to the Department to consider retaining some of the information contained in the aforementioned submissions because they concerned events that transpired at verification that they claimed disputed certain statements made in the verification report. The Department granted this request, and on November 15, 2000, issued a revised corrections list to respondents and a schedule for submission of respondents' corrected case briefs and rebuttal briefs from all interested parties. Respondents submitted their corrected comments on the verification report and their revised case brief on November 20, 2000, in accordance with the Department's decision in this matter. All interested parties submitted rebuttal briefs to the Department on November 27, 2000. Respondents submitted publicly available information to value factors of production on October 4, 2000. In addition, they filed a timely request for a hearing on October 17, 2000, and a hearing was held at the Department on December 13, 2000. The hearing was attended by both respondents and petitioner. Respondents also requested in a letter to the Department dated November 1, 2000, the right to revise their case brief in order to address the impact of the new law, H.R. 4461. The Department addressed this request in its aforementioned November 15, 2000, letter to respondents. On January 4, 2001, the Department published a notice to extend the time limit for the final results of review from January 12, 2001 to March 13, 2001. See Sulfanilic Acid from the People's Republic of China: Extension of Time Limit for Final Results of Antidumping Duty, 66 FR 1952 (January 10, 2001). The Department issued a preliminary determination to treat Zhenxing and Yude as a single producer for the 1998/1999 administrative review on January 9, 2001, and requested comments from interested parties. See Department's Collapsing Memorandum dated January 9, 2001. On January 22, 2001, respondents timely filed comments to this memorandum. On December 22, 2000, the Department requested the U.S. Customs Service (Customs) to release to us certain documents that it had in its possession concerning possible sales of sulfanilic acid from Zhenxing to unaffiliated U.S. importers. In response to this request, Customs released to the Department on January 26, 2001, information relating to the possible sales. On February 2, 2001, the Department placed this information on the record of this review via a letter to interested parties requesting comments on the documents obtained by Customs. Respondents requested an extension of the deadline for the filing of comments on these Customs documents in a February 14, 2001, letter submitted to the Department. On February 15, 2001, the Department denied this extension in a letter issued to respondents. All interested parties filed their comments and rebuttals to this Customs information on February 16, 2001 and February 21, 2001, respectively. On February 20, 2001, petitioner (Nation Ford Chemical Company) submitted a letter to the Department claiming that respondents' comments to this Customs information erroneously included new factual information. The Department addressed this issue in a memorandum to the file dated February 22, 2001, by clarifying that the Department is accepting respondents' new factual information, and by granting petitioner 10 days from the date of its submission to rebut this information with any factual information of its own. Accordingly, petitioner submitted rebuttal factual information on February 26, 2001. Discussion of the Issues 1. Facts Available Comment 1: Petitioner first argues in its rebuttal brief that the Department correctly used adverse facts available in its preliminary determination because respondents provided incomplete and inaccurate information in spite of the Department's repeated attempts to obtain complete and comprehensive answers for all of respondents' sales of subject merchandise to the United States during the POR. Petitioner contends that the Department was rebuffed by respondents on at least four occasions when it sought further information on possible sales to U.S. importers other than PHT. According to petitioner, respondents reported to the Department that they neither had such sales nor knew anything about such sales. See Petitioner's Rebuttal Brief, dated November 28, 2000, at 5. Therefore, in accordance with 19 U.S.C. §1677e(a), the Department should use an adverse inference in selecting from the facts otherwise available when it "finds that an interested party failed to cooperate by not acting to the best of its ability to comply with a request for information from the administering authority {...}." Specifically, petitioner argues that respondents misled the Department about purported "domestic sales" of sulfanilic acid, when, in fact, these sales were actually Zhenxing's export sales to the United States. According to petitioner, respondents exported unreported sales of sulfanilic acid through one of their agents, Company B, to circumvent the antidumping order while maintaining a low dumping margin by only reporting preselected sales through PHT. To support their assertion that respondents had knowledge of these sales, petitioner claims that Customs, in the process of conducting its own inquiry into the source of certain sulfanilic acid imports into the United States, obtained documents that indicate Zhenxing's involvement in selling sulfanilic acid to a U.S. customer other than PHT. Id. at 10. Furthermore, petitioner argues that information contained in the verification report clearly indicates that PHT knew of these sales and attempted to hide them. Id. at Attachment 1. Respondents argue that the Department should not use adverse facts available based on Zhenxing's failure to report sales made to Company B. According to respondents, Zhenxing sold sulfanilic acid to Company B without any knowledge of the customer, price, or final destination. Department's Position: For the reasons discussed in our preliminary results, the Department continues to find that application of adverse facts available is appropriate. This finding is further supported by our analyses as contained in the Customs Findings and Memorandum on Verification Comments. The information obtained from Customs after the publication of the preliminary results, indicates Zhenxing's knowledge of, and involvement in, negotiating unreported sales of sulfanilic acid to an unaffiliated U.S. importer. This information directly contradicts Zhenxing's assertion that it had no knowledge of the U.S. customer and did not participate in setting the price of these unreported sales. Moreover, as indicated in the preliminary results, it was not until the Department had already discovered evidence of these "unreported" sales in Zhenxing's agent's records (Company B), and Company B's subsequent refusal to provide the customer's name and final foreign destination of these sales, that Zhenxing provided us, unsolicited, a number of value-added (VAT) invoices related to these unreported sales through Company B. See Preliminary Results of Anitidumping Duty Administrative Review: Sulfanilic Acid from the People's Republic of China, 65 FR 55510 (September 14, 2000). Therefore, the Department continues to find that Zhenxing did not act to the best of its ability in reporting all of its POR sales to the United States, as the Department had requested. 2. Use of Factual Information from the U.S. Customs Service Comment 2: Petitioner argued that the Department should place on the record of this review information contained in a Customs investigation that provides evidence of respondents shipping sulfanilic acid to the United States through channels other than PHT. Petitioner contended that the statute clearly permits the Department to obtain information on its own initiative, rather than simply to rely on submitted information. See 19 U.S.C. §1516a(b)(2)(A) and §1677m(g) (1994); also Freeport Minerals Co. v. United States, 776 F.2d 1029, 1034 (1985). In using such information, the Department must release to all interested parties the essential facts under consideration before making a final determination, and give parties the opportunity to comment. See Bethlehem Steel Corp. v. United States, 27 F.Supp2d 201, 207-208 (1998); also 19 U.S.C. §1677m(g) (1994) and 782(g) of the Tariff Act; also Wieland-Werke AG v. United States, 4 F.Supp2d 1207 (1998). Furthermore, in accordance with section 351.301(c)(1) of the Department's regulations, petitioner stated that the Department must document any ex parte communications with Customs on the record of this administrative review in order to allow parties the opportunity to comment on the information. Petitioner claimed that the Customs information in question should be placed on the record of this review because it directly rebuts respondents' claim that Zhenxing was unaware of the terms, price or ultimate customer of certain subject merchandise exports to the United States to a customer other than PHT. According to petitioner, this information clarifies certain factual disputes in the instant review concerning: (1) the existence of sulfanilic acid exports through channels other than PHT; and (2) the foreign producer's direct knowledge of, and involvement in, such exports. Respondents agreed with petitioner that, if any information has been provided by Customs which has played any role in the Department's preliminary determination for this review, then that evidence should be placed on the record of this proceeding. Furthermore, respondents argued they have a right to comment directly on any such evidence or "new" factual information. Department's Position: As indicated above, the Department requested and placed on the record of this review certain Customs documents that relate to alleged unreported sales of subject merchandise from Zhenxing to an unaffiliated U.S. importer. This request to Customs was made in response to allegations by both petitioner and respondents concerning the validity of these alleged unreported sales made by Zhenxing. See Department's Letter to the U.S. Customs Service Headquarters, dated December 22, 2000. Furthermore, both parties were given the opportunity to comment on the documents provided by Customs and placed on the record of this review. See also a further discussion of these alleged unreported sales in relation to the Department's Customs Findings in Comments 4-6 and 9, as well as in the business proprietary memorandum on Customs Findings, a public version of which is available in the CRU. 3. Verification Outline and Procedure Comment 3: Respondents commented on several issues regarding the verification outline and the conduct of the verification that contest the procedures and techniques used by investigators to verify the relevant data on the record. Respondents assert that the verification outline provided no guidance to Zhenxing's two "export agents" as to how they should prepare for the verification, and was not in accordance with the ruling cited in Rubberflex SDN BHD v. United States (Rubberflex), 59 F. Supp. 2d 1338, 1346, 1347 (CIT 1999). Respondents contend that the Department did not follow the verification outline and only covered certain points that the senior investigator considered important, resulting in an incomplete reconciliation of Zhenxing's sales. Furthermore, respondents state that the investigators were unwilling to accept any suggestions during verification on how certain topics in the outline could be clarified, and provided no warning to respondents concerning the investigators' inability to reconcile sales at Zhenxing. Respondents characterize the verification as being 'prosecutorial' in style and equivalent to an 'interrogation' of company officials. As evidence of this, respondents cite to certain last minute adjustments made to the starting time of verification and the verification agenda itself. Finally, respondents conclude that the senior investigator's decision not to allow respondents' trade consultant to participate in the verification at Zhenxing tainted the verification results and denied respondents' right to due process. Department's Position: The Department believes that the conduct of this verification was in accordance with the guidelines set forth in the Department's Antidumping Manual (see Import Administration website address at http:enforcement.trade.gov/admanual). Furthermore, respondents' arguments concerning the style of the investigators and the procedural issues of this verification do not demonstrate that the Department acted outside the parameters set forth in the Antidumping Manual and, as such, should not undermine the findings of the actual verification itself. The Department has prepared a Memorandum on Verification Comments which specifically addresses these procedural issues as well as those arguments which contest the credibility of the investigators (See Memorandum on Verification Comments, a public version of which is available in the CRU). 4. Verification Report/ Alleged Untrue Statements Comment 4: Respondents contend that the Department misstated the fact that Zhenxing's other agent, also an import/export corporation (hereafter referred to as Company A), was owned by a third party. Instead, respondents clarify that this third party is Company A's competitor and not its owner. According to respondents, the Department was inaccurate in its conclusions in the preliminary results that the VAT invoices identified an unaffiliated U.S. importer. Respondents argue that it is not the VAT invoices that reveal the name of this U.S. importer, but rather, one commercial invoice related to these unreported sales that was issued by Company B and identifies the unaffiliated importer. Counsel for respondents first claims in his affidavit that at the time he disclosed these sales to the Department, he had no knowledge of Company B's unaffiliated U.S. customer. Second, it was not until later in the day when Company B faxed this commercial invoice to investigators that he learned this U.S. company's name. Third, this invoice, according to respondents, was issued by Company B by fraudulently using Zhenxing's name and stamp as the exporter in violation of its agency agreement with PHT. Therefore, respondents contend that Zhenxing could not have reported these sales when it did not know the U.S. customer and did not set the price. Department's Position: The Department does not agree with respondents that we made incorrect statements in the verification report concerning the ownership of Company A. Respondents contend that the Department reported that Company A was owned by a third party when, in fact, that third party is actually a competitor. In our verification report, we specifically state that Company A is state-owned and "controlled," not "owned" by this third party. See Verification Report at 5. This was the information that was presented to investigators by Company A officials during verification, and properly recorded in the verification report. We do agree with respondents, in part, that the Department was inaccurate in stating in the preliminary results that the VAT invoices identify the names of the unaffiliated U.S. importer. However, this was not the result of any distorted facts contained in the verification report, but rather the Department inaccurately presenting in the preliminary results the correct fact found in the verification report. Even respondents themselves rely upon findings contained in the verification report to clarify that the VAT invoices only identify Zhenxing as the seller and Company B as the buyer. See Respondents Case Brief at 22. Further, respondents are correct in that only one commercial invoice relating to these unreported sales was obtained at verification which reveals the name of the U.S. customer and importer. However, the Department was accurate in stating in the verification report that the U.S. customer was disclosed at the time the Department obtained the VAT invoices related to these unreported sales through Company B. In addition, the information obtained by Customs and addressed in the Department's Customs Findings, provides a clear indication that Zhenxing, in fact, knew this U.S. customer and was directly involved in negotiating the price of several unreported sales to this unaffiliated U.S. importer. 5. Verification Report/ Use of the Term "Unreported" Sales Comment 5: Respondents state that the verification report included a number of incorrect statements and provided legal conclusions instead of the facts. Specifically, respondents point to the Department's use of the term "unreported" sales in the verification report as leading the Department to its preliminary determination to use adverse facts available. Counsel for respondents claims that he never stated that he "wished to submit information regarding 'unreported' sales of Zhenxing to the United States." See Respondents Case Brief, dated November 20, 2000, at 24. Furthermore, he states that he told investigators that he would be arguing that these Zhenxing sales to its agent, an import/export corporation (Company B), "were not export sales but domestic sales in renimbi (RMB) and, therefore, not Zhenxing's export sales and not 'unreported' sales," citing Final Determination of Sales at Less Than Fair Value: Creatine Monohydrate from the People's Republic of China, 64 FR 71104,71109 (December 20, 1999) (Creatine). Finally, counsel states that he would not have made that statement because Zhenxing did not know the U.S. customer and, therefore, was not involved in setting the price. Department's Position: The Department disagrees with respondents' argument that the Department did not properly characterize the "unreported" sales made by Company B and falsely attributed them to Zhenxing. As is quoted in respondents' case brief itself, the Department's first reference to these unreported sales clearly states that Company B "directly sold {...} metric tons of sulfanilic acid during the POR from Zhenxing to {...}, a U.S. importer." See Respondents' Case Brief at 23. From this context, it is readily apparent that Company B was involved in selling material that originated from Zhenxing. The Department characterized these sales as "unreported" as a descriptive term to report a finding of fact at verification that additional sales existed outside of those reported by Zhenxing through its agent, Company B, to its affiliated importer, PHT. Therefore, the Department was correct in initially identifying them as sales involving Company B without necessarily making a determination as to whom these sales should eventually be attributed based on Company B's role as either an agent or a reseller. Counsel's assertion that the Department falsely attributed a statement that he made at verification concerning his willingness to disclose the facts of these "unreported" sales is misplaced. In the verification report, the Department noted the following with regard to this point: "{he} stated their desire to have full disclosure of the facts of these unreported sales on the record." See the Department's Verification Report of Sulfanilic Acid from the PRC (Verification Report), dated September 18, 2000, at 12. There is no mention, as counsel claims in his affidavit, that the Department quoted him as saying that he wished to submit information regarding "unreported sales of Zhenxing" to the United States. As mentioned above, our use of the terms "these unreported sales" in the verification report was used in reference to the aforementioned statement in the report indicating Company B's involvement in selling subject merchandise that originated from Zhenxing. The legal arguments that were made by respondents' counsel as to why he would not have claimed that these unreported sales belonged to Zhenxing were, in fact, presented to the investigators during the verification. However, the Department did not incorporate his legal arguments concerning Creatine in its report because the role of the investigators is to report the facts and not legal conclusions as counsel himself attests in his case brief. Finally, counsel's statement that he would not have made such claims since Zhenxing did not know the U.S. customer and was not involved in setting the sales price does not alter the likelihood that Zhenxing did, in fact, have knowledge of these sales in light of the information obtained by Customs and addressed in the Department's Customs Findings. 6. Verification Report/ Inability to reconcile sales Comment 6: Respondents contest the findings in the verification report that indicate that the investigators were unable to confirm the quantity and value of sales of subject merchandise from Zhenxing to the United States as a result of evidence of unreported sales and incomplete accounting records. See Verification Report at 1. Furthermore, respondents dispute our finding that we could not reconcile the total quantity of sulfanilic acid sold and recorded by Zhenxing during the POR to the amounts it allocated toward international and domestic sales. Id. at 2. According to respondents, they were never warned of the fact that investigators could not reconcile Zhenxing's domestic and international sales. Respondents contend that the verification report does not reflect any attempts to reconcile the sales data in the books and records of Zhenxing. Moreover, respondents state that the verification report shows that international sales to PHT and domestic sales to Company B are recorded in Zhenxing's books. Respondents argue that Zhenxing would not have sales recorded in its accounting records to the unaffiliated U.S. customer for sales made by its agent, Company B. However, as indicated in the verification report, Zhenxing was able to show in its records and by VAT invoice the transaction between Zhenxing and Company B that represented one of the unreported sales allegedly made by Company B to an unaffiliated U.S. importer. In addition, respondents claim that they could have reconciled all the sales made to Company B which were related to these unreported sales. Finally, respondents illustrate the point that the Department did not do a sales reconciliation of Zhenxing by claiming that the Department failed to examine Zhenxing's bank account. According to respondents, had we checked this bank account, we would have been able to verify that Zhenxing received no payments in foreign currency. Respondents state that the reason for this is because Zhenxing does not have a foreign exchange account and, therefore, can only make sales to the United States via its relationship to PHT. Department's Position: We disagree with respondents that the Department did not attempt to reconcile Zhenxing's total quantity of sales through a review of its accounting records. As the verification report notes, the Department did review Zhenxing's "finished product" subledger for sulfanilic acid to account for Zhenxing's total sales of sulfanilic acid during the POR. See Verification Report at 14. Using a worksheet provided by Zhenxing, the investigators reviewed the allocation of Zhenxing's domestic and international sales of sulfanilic acid during the POR in an attempt to reconcile these amounts with the total amount recorded in Zhenxing's subledger. As properly noted in the verification report, the total amount of sulfanilic acid recorded in Zhenxing's allocation worksheet did not match the total amount recorded in its subledger. Furthermore, this allocation worksheet identifies only [three] companies that Zhenxing made domestic sales to and, notably, does not include the name of Company B. In fact, this worksheet actually indicates that Company B was only involved in Zhenxing's international sales to PHT. Id., Zhenxing exhibit Z-9. The Department's identification of such inconsistencies in the verification report provides evidence of its attempts to reconcile Zhenxing's sales. We agree, in part, with respondents' argument that Zhenxing's transactions with its agent, Company B (which include the unreported sales) are recorded in some fashion in Zhenxing's accounting records. It is important to note, however, how these transactions actually appear in Zhenxing's accounting records. According to the verification report, Zhenxing maintains its accounts receivable subledger under the customer's account name. Id. at 14. In the case of Company B, Zhenxing maintains a separate accounts receivable subledger organized under the name of Company B for all of its transactions with Company B. As Zhenxing itself stated at verification, "{...} the only sales it knows with certainty are international sales are the ones to PHT which are recorded in its books under PHT's purchase order number." Id. at 14. Essentially, Zhenxing claims that it can only identify certain Company B sales as being international sales by writing a number next to Company B's name in the sales entry which presumably represents PHT's purchase order. We find this noteworthy for two reasons. First, there is no separate account receivable subledger under the name of PHT in Zhenxing's accounting books. This could be explained by the fact that Company B, as Zhenxing's agent, pays for all of its merchandise from Zhenxing in advance. See Zhenxing's Response to the Department's First Supplemental Questionnaire (Zhenxing First Supplemental), dated April 24, 2000, at 4. Second, our review of Zhenxing's sales income subledger for the one sale to Company B in which we obtained a commercial invoice identifying an unaffiliated U.S. customer (one of the unreported sales), identifies a sale under voucher no.11 to Company B with a number entered beside it. Id. at 15. Absent any other information, the Department could reasonably conclude that, based on the explanation above which was provided to us at verification, this number represents a purchase order number involving either a sale to PHT to a country other than the U.S., or quite possibly, a U.S. sale to an unknown customer. In either circumstance, it is readily apparent that Zhenxing's accounting records do not give straightforward answers as to how to distinguish between its domestic and international sales. Respondents contend that, had the Department checked Zhenxing's bank account, we would have been able to verify that Zhenxing received no payments in foreign currencies. The Department found no need to verify Zhenxing's bank account because we had earlier established at the verification of PHT's Beijing Sales Office that Company B makes advance payments to Zhenxing in the local currency and is later reimbursed by PHT through wire transfer when the subject merchandise arrives in the United States. Id. at 4. In addition, it was apparent from the VAT invoices disclosed by Zhenxing relating to the unreported sales to Company B, that the transactions between Zhenxing and Company B were denominated in local currencies just as were the sales to PHT. Furthermore, the sales trace packet relating to one of these unreported sales indicated that the documentation sent by Company B to the unaffiliated U.S. customer was identical to the documentation sent to PHT, the affiliated U.S. importer. Given these facts, it was quite likely that the sales process for these unreported sales was identical to the one used for the reported sales and thereby, did not require Zhenxing to receive payments in foreign currencies. Finally, respondents make a point of noting that neither Zhenxing nor its counsel were warned by investigators that they could not reconcile Zhenxing's domestic and international sales. As the Department notes in its Memo on Verification Comments, the Department's Antidumping Manual specifically states that, in cases where major discrepancies occur, "the analyst should not discuss the possibility of using facts available for the missing data in making a final determination." See Antidumping Manual, Chapter 13, section IV (E). 7. Verification Report/ Issuing of Verification Report Comment 7: Respondents state that the verification report was issued in an untimely manner and denied them the opportunity to make comments on the inaccuracies in the report prior to the preliminary determination. Department's Position: Although we agree with respondents that the verification report was not issued until after the preliminary results, the respondents were not denied any right to respond to, and make legal arguments with respect to, the information presented in the report. 8. Verification Comments are Untimely Factual Information Comment 8: Petitioner argues that the Department should refuse to accept untimely filed factual information contained in respondents' comments on the verification report. According to petitioner, this factual information was submitted more than eight months past the deadline established pursuant to section 351.301(b)(2) of the Department's regulations, and accordingly, should be rejected as untimely. Respondents state that the Department allowed certain affidavits involving statements of facts on events that took place at verification in front of the verifiers, to be retained in respondents' comments on the verification report. Department's Position: We agree with petitioner, in part, that certain affidavits contained in respondents' comments on the verification report represented untimely filed factual information. In our letter of November 15, 2000, we clarified what we considered to be untimely filed new information, and requested that revised case briefs be filed to exclude the information that the Department found to be new factual information. However, as also stated in this letter, we allowed certain affidavits to remain in respondents' comments on the verification report and case brief since they could reasonably be viewed as argumentation by parties who were present at verification, concerning what transpired during the course of verification. 9. Knowledge Test Comment 9: As previously mentioned, Zhenxing states that Company B violated its agency agreement and fraudulently used Zhenxing's stamp and name to export sulfanilic acid to the United States without Zhenxing's knowledge of the customer or its involvement in setting the price. In addition, Zhenxing contends that it was not involved with Company B's sales because it cannot accept payments in U.S. dollars. Furthermore, Zhenxing argues that, if it was able to convert foreign currencies on its own, it would not have needed an import/export company such as Company B to process the payments from PHT and convert them from dollars to RMB. Therefore, according to Zhenxing, it is impossible for it to know for certain where its products were going when it sold "domestically" to Company B or any other Chinese export company since all of Zhenxing's sales are in RMB. Zhenxing states that the only exception to this case is when its uses its two import/export companies (Company A and Company B) as agents to sell to PHT, its joint venture partner. Zhenxing claims that Company B had no incentive to reveal these sales to Zhenxing. According to Zhenxing, had it known the high price that Company B was charging for these sales to the United States, Zhenxing would have demanded more money from Company B for its subject merchandise. Moreover, if Zhenxing knew for certain which sale was going to the United States and PHT learned about it, the agency agreement with PHT would be ended. Zhenxing states that the VAT invoices obtained during verification do not indicate the name of the unaffiliated U.S. importer that Company B sold to and, therefore, the Department has no documentation that indicates Zhenxing's knowledge of this U.S. customer. Furthermore, Zhenxing contends that the Department does not rely on simple statements absent any documentation to prove whether a party had knowledge of the final destination for sales of subject merchandise. See Final Determination of Sales at Less Than Fair Value: Polyvinyl Alcohol from the People's Republic of China, 61 FR 14057 (March 29, 1996) (Polyvinyl Alcohol). Zhenxing contends that even if there were documents showing that Zhenxing knew that Company B was selling subject merchandise to the United States, the knowledge test would not apply to Zhenxing in this case because the sales transactions would have been between two companies in a non-market economy (NME) using a nonconvertible currency. See Creatine at 71109; also Final Determination of Sales at Less Than Fair Value: Synthetic Indigo from the People's Republic of China, 65 FR 25706 (May 3, 2000) (Indigo). Furthermore, respondents state that the Department has never considered sales in RMB between two companies in China to be "market-based" transactions. See Final Results of Antidumping Duty Administrative Review and Termination of Antidumping Review: Fresh Garlic from the People's Republic of China (Garlic), 62 FR 23578 (May 1, 1997). In attempting to distinguish between Zhenxing's "domestic" sales to Company B as compared to its "international" sales to PHT through Company B, Zhenxing makes two arguments. First, Zhenxing's alleged domestic sales to Company B cannot be considered Zhenxing's export sales to the United States because Zhenxing did not know the customer and did not set the U.S. price. Second, in contrast to these alleged domestic sales, Zhenxing sets the price for its export sales to PHT, its related U.S. importer, and it is because of their relationship that these export sales should be considered Zhenxing's sales. Respondents add that, when PHT and Zhenxing "sold" the subject merchandise to Company A and Company B (the two import/export companies that are Zhenxing's agents) in China as part of the process of exporting it to the United States, "they were merely using this procedure to get the sulfanilic acid out of China to the United States." See Respondents' Case Brief at 52. Respondents cite to the Department's Issues and Decision Memorandum for the Investigation of Sales at Less Than Fair Value of Synthetic Indigo from the People's Republic of China (Indigo Decision Memo) (May 3, 2000) as support for their conclusion that Zhenxing's two import/export companies functioned as intermediate trading companies that were used for "facilitating the export of merchandise from the PRC and {... for} arranging the shipment of the subject merchandise from the PRC {...}." See Indigo Decision Memo at 12. Furthermore, "because the intermediate trading companies are in a NME, {...} the NME transaction between the producer and the intermediate trading company cannot be used as the basis for export price." Id. at 13. Petitioner argues that the Department should apply its "knew or should have known" standard contrary to respondents claim that there is no "knowledge test" in China. According to petitioner, the CIT has held that "if the producer knew or had reason to know the goods were for sale to an unrelated buyer,... the producer's sales price will be used as 'purchase price'." See Petitioner's Rebuttal Brief at 12. Petitioner contends that the statute is clear in using the transaction between the producers and the reseller as the basis for export price. Furthermore, according to petitioner, this standard has consistently been applied in prior determinations and upheld by both the Court of International Trade and the Federal Circuit Court of Appeal. See Termination of New Shipper Antidumping Administrative Review: Certain Pasta from Italy, 62 FR 66602 (December 19, 1997); also Yue Pak, Ltd. v. United States, 20 CIT 495 (1996), aff'd 1997 WL 130319 (1997). Department's Position: The information obtained from Customs and addressed in the Department's Customs Findings indicates that Zhenxing was actively involved in directly negotiating and setting the price of these unreported sales from Company B to an unaffiliated U.S. importer. Therefore, the Department reasonably concludes that these unreported sales were handled in the same manner as the reported sales to PHT, with Company B acting as Zhenxing's agent. Specifically, these unreported sales transactions involved the same sales process of Zhenxing obtaining advance payments for the subject merchandise from Company B in RMB, and Company B being reimbursed by the U.S. importer once the shipments arrived in the United States. Therefore, Zhenxing essentially can use this existing channel of trade to make any international sale without ever having to convert foreign currencies as long as Company B is willing to continue to make advance payments for the subject merchandise. The Department finds Zhenxing's claim that Company B had no incentive to reveal to Zhenxing these unreported sales to the United States to be irrelevant. As noted above, the substantial evidence obtained from Customs indicates that Zhenxing was actively involved in directly negotiating these sales to the unaffiliated U.S. importer. Zhenxing's argument that the Department obtained no documentation at verification which indicates Zhenxing's knowledge of these unreported sales does not consider the fact that we would not expect Zhenxing to have such export documents in its possession given that its export agents perform all the paperwork processing for Zhenxing's exports even for sales to its affiliated U.S. customer, PHT. As indicated in the verification report, we reviewed numerous documents prepared by Company B as part of its duties to handle the paperwork processing for Zhenxing's reported sales to PHT. Therefore, if we were to find any documentation relating to these unreported sales, we would most likely have found it at Company B, not at Zhenxing. Such an effort was undertaken by investigators to obtain copies of the export documents relating to the unreported sales after the initial discovery of their existence at Company B, but Company B failed to provide any copies of these documents. See Verification Report at 10-11. Finally, the Department has acquired several documents, included in the Customs information and addressed in the Customs Findings that demonstrate Zhenxing's knowledge of and role in making these sales to the United States. It is noteworthy that respondents cite to Polyvinyl Alcohol to make the point that the Department does not rely on simple statements absent any documentation to prove whether a party has knowledge of a sale. Yet, respondents use only statements and affidavits to argue that Company B fraudulently used Zhenxing's name and stamp for the unreported sales made to the United States. An examination of the export documents obtained at verification and the information provided by Customs shows no reference to Company B's name on any of the export documents relating to these unreported sales. Essentially, respondents provide no documentary evidence to support their assertion that Company B acted independently in fraudulently using Zhenxing's documents (by their ability to control the paperwork process for Zhenxing's exports) and making these unreported U.S. sales appear as if Zhenxing was the true exporter. We accept respondents' proposition that the import/export companies are being used as agents by Zhenxing as a means to "facilitate" the export of the subject merchandise out of China. However, we have considered the following in determining that Zhenxing's alleged domestic sales to its agent, Company B (involving unreported sales made to the United States), are, in fact, Zhenxing's export sales being made with Company B acting as the export agent: First, the evidence provided by Customs indicates that Zhenxing knew the unaffiliated U.S. importer and negotiated directly with it; second, the record supports the fact that Zhenxing's overall sales process involving the use of its agents is identical whether or not Zhenxing sells to affiliated or unaffiliated U.S. customers (see Customs Findings for a complete analysis of the documentation and payment processes associated with the unreported export sales made by Zhenxing); and third, Zhenxing's own description of the transaction taking place between itself and its agents for purposes of making international sales, casts doubt as to the validity of any actual sale occurring. As mentioned above, respondents characterize the exact same process with their agent (Company B) as "merely using this procedure to get the sulfanilic acid out of China" when they are describing sales to PHT, and as a "domestic sale" to Company B for all other transactions with Company B. Therefore, we do not find the issue, of whether or not a knowledge test is applicable to the facts in the instant review, to be relevant, since the Department does not consider any transaction made between Zhenxing and its agents as constituting a valid sale in China. Throughout respondents' case brief, they claim that the Department's preliminary determination raised a simple question: "{...} how could Zhenxing have sold sulfanilic acid through the Chinese import/export company to a U.S. customer and reported these sales to the Department when it did not know the U.S. customer and did not set the price {?}." See Respondents' Case Brief at 22-23. Given the evidence provided in the Customs Findings, the Department reasonably concludes that Zhenxing did, in fact, know the name of this U.S. customer and was directly involved in negotiating these unreported sales. Therefore, Zhenxing should have reported these sales to the Department as a result of its knowledge of these sales. 10. Collapsing Comment 10: Respondents contend that Yude and Zhenxing should not be collapsed with PHT simply because PHT has common ownership in both. Respondents cite to an article published in The Commerce Department Speaks on International Trade and Investment entitled "Affiliated Persons Under the URAA," that explains the distinction between affiliated persons and collapsed persons, and argue that ownership is not the decisive factor in determining whether to collapse companies. See Respondent's Response to the Department's Collapsing Memorandum dated January 22, 2001, at 2. According to respondents, Zhenxing and Yude are separate and independent companies that are competitors who engage in intense, independent price negotiations with PHT. Therefore, PHT does not have the ability to manipulate prices or production. Respondents argue 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) (Nihon Cement). 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 argue that both Yude and Zhenxing sell their products in other foreign markets and do not rely solely on the U.S. market to endure, thereby limiting PHT's power to negotiate prices. In addition, respondents state that no business transactions took place between Zhenxing and Yude during the POR, and that both companies operate independently under different management styles and with different production facilities. Moreover, Yude is smaller than Zhenxing and has substantially older equipment. In addition, since the Yude factory was closed during the POR, PHT could not have been able to manipulate production or prices between the Yude and Zhenxing facilities. Department's Position: Although the Department analyzed the issue of whether to collapse Yude and Zhenxing, this ceased to be an issue when the Department determined that Yude and Zhenxing should each receive the PRC-wide rate as AFA. The reasons for assigning AFA are fully explained in the preliminary results and in Comments 1-2, 4-6, and 9. Therefore, the Department need not reach the issue of whether to collapse the two companies in this final determination. 11. Surrogate Values Comment 11: Respondents argue that the Department should use the Indian import statistics as published in the Monthly Statistics of Foreign Trade of India to value aniline for the final results. According to respondents, this value was used in previous administrative reviews and should be used because it was upheld in subsequent appeals by both the Court of International Trade (CIT) and the United States Court of Appeals for the Federal Circuit (CAFC). Respondents cite to a ruling by the Department shortly after the 1998 Final Results that states that when the import price and domestic price are equal in terms of specificity, contemporaneity, and representativeness, the import price should be used over the domestic price because the "{...} the former is reported on a duty-exclusive, tax- exclusive basis, while the latter almost always is not." See Issues and Decision Memorandum for the Administrative Review of Heavy Forged Hand Tools from the People's Republic of China (Indigo Decision Memo) (July 13, 2000), at Comment 6. Respondents argue that there is little benefit for small-scale producers of sulfanilic acid to use imported aniline because of the high level of investment needed to handle larger orders of imported aniline. Therefore, according to respondents, it would be appropriate for the Department to use the import price for aniline since Zhenxing is not a small-scale factory. In addition, respondents argue that Indian sulfanilic acid producers/exporters would not use the Indian domestic price for aniline because it is at least 38.5 percent higher than imported aniline prices due to the Indian customs duties. According to respondents, the Indian import price is the most appropriate surrogate value for aniline which best accounts for Zhenxing's size and is most representative of the cost of aniline in China if that price were set by market forces. Finally, respondents contend that the Indian Duty Entitlement Passbook (DEPB) scheme could be considered a subsidy that lowers the domestic price of Indian aniline and, therefore, the Department should exclude using the Indian domestic price as the surrogate value for aniline. According to respondents, the Department should not separately value water as a surrogate value for this administrative review because, in past Chinese antidumping investigations, the Department has not included water as a direct cost but as an overhead item. Therefore, the Department should continue to use the same overhead, SG&A and profit numbers from the Reserve Bank of India which includes water in the overhead item. Petitioner argues that the Department should use the domestic value of aniline in India as the appropriate surrogate value for the following reasons: (1) the Indian domestic price is not distorted; (2) the Indian tariff rates on aniline have significantly been reduced, and are now comparable to Indian tariff rates on other chemicals and tariff rates on aniline in other countries; (3) India's domestic production of aniline has significantly increased and India has become a net exporter of aniline products; (4) the domestic price of aniline has fallen significantly; (5) a reasonable basis exists to believe or suspect that imported aniline has been dumped in India thereby, precluding the use of the import price; (6) the imported value of aniline is distorted because it is based on a transfer price between affiliated companies and sold in quantities in excess of the volumes consumed by sulfanilic acid producers in India; (7) the current domestic price of aniline is consistent with the volume of aniline consumed by sulfanilic acid producers in India; and (8) the Department's policy is to use a domestic price as a surrogate value when the domestic price and the imported price are both available on a tax/duty exclusive basis. Finally, petitioner contends that the Department should value water consumption independently as it has in other investigations where it has obtained financial statements that contain line items for "power, fuel, and water." Department's Position: Based upon on our determination in these final results to use facts otherwise available, we have not considered respondents' or petitioner's arguments concerning the most appropriate surrogate value to use to value aniline and water. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions. If these recommendations are accepted, we will publish the final results of review and the final antidumping duty margin for these reviewed producers/exporters of the subject merchandise in the Federal Register. AGREE ______ DISAGREE ______ _____________________________________ Bernard T. Carreau, fulfilling the duties of Assistant Secretary for Import Administration _____________________________________ Date