66 FR 10988, February 21, 2001 A-469-807 Administrative Review POR 03/05/98-08/31/99 Public Document IA: L. Armstrong MEMORANDUM TO: Bernard T. Carreau fulfilling the duties of Assistant Secretary for Import Administration FROM: Holly A. Kuga Acting Deputy Assistant Secretary, Group II Import Administration SUBJECT: Issues and Decision Memorandum for the Antidumping Duty Administrative Review on Stainless Steel Wire Rod from Spain - March 05, 1998 through August 31, 1999 Summary We have analyzed the comments of the interested parties in the 1998-1999 administrative review of the antidumping duty order covering stainless steel wire rod from Spain. As a result of our analysis of the comments received from interested parties, we recommend making changes in the margin calculations for the respondent, as discussed in the "Margin Calculations" section of this memorandum. We also 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 from parties: 1. Ministerial Errors 2. Allocation Methodology Used to Calculate U.S. Indirect Selling Expenses Background On October 13, 2000, the Department of Commerce (the Department) published in the Federal Register the preliminary results of the administrative review of the antidumping duty order on stainless steel wire rod (SSWR) from Spain. See Notice of Preliminary Results of Antidumping Duty Administrative Review: Stainless Steel Wire Rod From Spain, 65 FR 60905 (October 13, 2000). The period of review (POR) is March 05, 1998 through August 31, 1999. We invited parties to comment on our preliminary results of review. In response to this invitation, respondent, Roldan, S.A. (Roldan) and petitioners (i.e., Empire Specialty Steel Inc. (formerly AL Tech Specialty Steel Corp.,) Carpenter Technology Corp., Republic Engineered Steels, and the United Steel Workers of America (AFL-CIO/CLC) filed case briefs on November 13, 2000. Roldan submitted a rebuttal brief on November 20, 2000. Margin Calculations Based upon our analysis of the comments received from interested parties, we recommend making the following revisions to the calculations used in the preliminary results: •Recalculate the difference in merchandise (DIFMER) value using updated variable manufacturing costs for products sold in the home market (VCOMH). See Comment 1. •Recalculate U.S. indirect selling expenses. See Comment 2 Discussion of the Issues Comment 1: Ministerial Errors Roldan claims that there are two ministerial errors in the Department's calculations. First, Roldan contends that the Department should not have considered the difference in merchandise percentage (identified as the COSTDIFF variable in the margin program) in selecting the best home market sales matches for U.S. sales. Roldan notes that the Department identified the most appropriate home market sales for matching purposes by selecting sales with the following characteristics (listed in order of importance): 1) sales of SSWR with physical characteristics identical, or most similar, to the physical characteristics of the SSWR sold in the United States; 2) sales of SSWR with the smallest COSTDIFF and; 3) sales contemporaneous with the U.S. sale (90-60 day rule). According to Roldan, use of the COSTDIFF variable for matching purposes fails to follow the Department's practice of considering equally similar matches where the best match consists of home market sales of two different SSWR products that are equally similar to the SSWR sold in the United States. Specifically, Roldan notes that as long as matches are within the 20 percent DIFMER test, the Department's practice is to use all equally similar matches and weight average the net prices and DIFMERS of all equally similar matches. Moreover, Roldan notes that incorrect matches resulted from using the COSTDIFF variable. Roldan cites specific instances where U.S. sales were not matched to contemporaneous home market sales of SSWR identical to that sold in the United States. Thus, Roldan claims that not only does the Department's program select the incorrect home market sales for matching purposes but it does not account for equally similar matches. Second, Roldan notes that the Department's DIFMER calculation is not based on updated variable manufacturing costs for products sold in the home market (VCOMH). The petitioners did not comment on this issue. Department's Position We agree with Roldan, in part. The Department's model match program resulted in incorrect matches. This occurred because the Department calculated DIFMER using incorrect values for VCOMH. However, we disagree with Roldan's position regarding COSTDIFF. The Department's current practice is to include the COSTDIFF variable in its model match program. (1) If two home market models are equally similar to a U.S. model, based on physical characteristics, the Department considers the home market model with the smallest COSTDIFF to be the model most similar to the U.S. sale. Therefore, the COSTDIFF variable must be included in the Department's model match program in order to properly match models sold in the U.S. and home market. Thus, for the final results the Department has used the updated VCOMH in its calculation but has continued to consider COSTDIFF for matching purposes. Comment 2: Allocation Methodology Used to Calculate U.S. Indirect Selling Expenses Roldan employed a four-step allocation methodology in order to calculate U.S. indirect selling expenses for SSWR. First, Roldan divided the estimated number of hours that personnel at its U.S. sales affiliate, Acerinox USA (AUSA), spent selling SSWR during 1998 by total hours worked during 1998 by all AUSA employees. Second, Roldan multiplied the ratio described in step one by AUSA's total operating expenses for 1998 (total operating expenses were used because AUSA is a distributor and sales agent). The resulting product is the total amount of expenses AUSA incurred to sell SSWR during 1998. Third, Roldan divided the figure obtained in step 2 by the value of U.S. sales of SSWR during 1998. This is the indirect selling expense ratio. Fourth, Roldan calculated the U.S. indirect selling expenses reported for individual sales by multiplying the indirect selling expense ratio by the sales price. Petitioners urge the Department to reject the allocation methodology Roldan used to calculate U.S. indirect selling expenses because the methodology: 1) is based on estimates that can not be verified; 2) results in significant distortions; 3) is not consistent with the Department's normal practice for allocating indirect selling expenses; and 4) contains errors which cannot be corrected from information on the record. According to petitioners, the Department should follow its normal practice and calculate revised U.S. indirect selling expenses based on the ratio of total operating costs to total net sales value. Each of petitioners' arguments is discussed in detail below. First, petitioners claim that Roldan's allocation formula rests entirely on an unsupported and unverified estimate of the number of hours AUSA employees spent selling SSWR in the United States during 1998. Moreover, petitioners note that the individual who made the estimate is no longer employed by AUSA and was not present at verification. See memorandum Verification of the Sales Response of Roldan S.A. in the Antidumping Duty Administrative Review of Stainless Steel Wire Rod From Spain (September 29, 2000) (Verification Report) at 35. Second, petitioners contend that Roldan's allocation methodology is distortive because it allocates significantly more selling expenses to out- of-scope merchandise than to SSWR. In support, petitioners cite the preamble to the Department's regulations as evidence that an allocation method that includes out-of-scope merchandise is distortive where the expenses likely are incurred or granted disproportionately on the out-of- scope or the in-scope merchandise. See Antidumping Duties; Countervailing Duties, 62 FR 27296, 27348 (May 19, 1997). Further, petitioners contend that Roldan's allocation is distortive and, thus, unreasonable because the ratio of SSWR sales to total company sales is much greater than the ratio of allocated SSWR selling expenses to total selling expenses. Moreover, petitioners claim that Roldan's attempts to explain its distortive methodology are inconsistent and contradicted by other information on the record. Specifically, petitioners maintain that Roldan's selling function table contains information which contradicts Roldan's claim that AUSA incurred fewer expenses to sell SSWR than other non-subject products because it performed fewer selling functions to make SSWR sales. Finally, petitioners assert that Roldan's allocation methodology is not supported by data on the record concerning sales and employee hours. Third, petitioners assert that Roldan's allocation methodology is inconsistent with the Department's practice of using a value-based allocation methodology. See Notice of Final Determination of Sales at Less Than Fair Value-Stainless Steel Round Wire from Canada, 64 FR 17324, 17329, 17330 (April 9, 1999). Further, petitioners claim that Roldan's allocation methodology should be rejected because it is a quantity-based allocation methodology (i.e., based on the estimated number of hours incurred to sell SSWR). Fourth, petitioners argue that Roldan's allocation methodology contains obvious errors that cannot be corrected using information on the record. Petitioners question the allocation methodology from a conceptual stand point asserting that the numerator and denominator of the ratio are not on the same basis (i.e., hours selling compared to hours worked). Next, petitioners argue that the methodology Roldan used to calculate the denominator results in an overstatement of the denominator (2) and understates the amount of indirect selling expenses allocated to SSWR. Finally, petitioners claim Roldan excluded certain selling expenses from its calculation of U.S. indirect selling expenses without providing any support for the exclusion. Petitioners note that AUSA is a sales agent and distributor, and thus all of its operating expenses should have been reported as indirect selling expenses. For the foregoing reasons, petitioners urge the Department to use the total operating expenses and net sales revenue in AUSA's 1998 audited financial statements to calculate a revised U.S. indirect selling expense ratio for the final results. In rebuttal, Roldan asserts that: 1) its allocation methodology accurately captures the indirect selling expenses; 2) its methodology is permissible under the Department's regulations; and 3) the Department has accepted the allocation methodology in a prior segment. First, Roldan urges the Department to accept its allocation methodology, alleging that it accurately reflects the differences between AUSA's selling experience for SSWR and non-subject merchandise. Contrary to petitioners' claims, Roldan asserts that AUSA's selling experience indicates that sales of non-subject merchandise involve a significantly greater number of indirect selling expenses, and, as documented at verification, more complexities than sales of SSWR. Second, Roldan notes that, contrary to petitioners' assertion, the preamble to the Department's regulations clearly contemplates a disproportionate allocation of expenses between subject and non-subject merchandise where differences between the merchandise warrant such an allocation. See Antidumping Duties; Countervailing Duties, 62 FR 27296, 27348 (May 19, 1997). Third, Roldan argues that the Department has recognized that the allocation methodology used by Roldan was necessary in order to properly report U.S. indirect selling expenses. In fact, Roldan notes that its allocation methodology dates back to the original investigation of SSWR from Spain where, during verification, the Department revised the methodology offered by Roldan and AUSA into its present form. See Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Wire Rod from Spain, 63 FR 40391, 40396 (July 29, 1998)(SSWR From Spain) (where the Department states "we adjusted Roldan's CEP sales by Acerinox USA's actual selling expenses, revised based on verification findings"). Further, Roldan notes that throughout this administrative review, the Department has examined Roldan's indirect selling expense methodology and calculation and has not requested that Roldan revise the calculation. In response to petitioners' allegations, Roldan argues that petitioners' claims regarding inconsistencies and distortions are without merit. First, Roldan asserts that petitioners' analysis comparing the sales ratio (SSWR sales divided by total company sales) to the selling expense ratio (selling expenses allocated to SSWR divided by total selling expenses) is invalid because petitioners' failed to include revenue from back-to-back sales in the denominator of the sales ratio. (3) According to Roldan, petitioner's failure to include back-to-back sales revenue exaggerates the alleged disproportionality between the two ratios. Second, Roldan contends that its selling functions table shows that AUSA only engaged in the highest degree of selling activity for Channel 2 and Channel 3 sales, which constitute a minority of total reported U.S. sales. For the remainder of U.S. sales, Roldan claims that AUSA played either no role or a limited role in many of the selling functions. Fourth, Roldan contends that its statements that AUSA performed more functions to sell stainless steel flat products than SSWR, and expended more time and effort to sell stainless steel concrete reinforcing bars than SSWR, are not inconsistent as both products require greater selling effort than SSWR. Also, contrary to petitioners' claim, Roldan notes that it provided documentation illustrating the complexities of selling non-subject merchandise as opposed to selling SSWR. Furthermore, Roldan rejects petitioners' claims regarding inaccuracies and distortions in the indirect selling expense calculation. Contrary to petitioners' assertion, Roldan maintains that its calculation of the allocation ratio denominator is correct because AUSA has considered all of its operating expenses to be selling expenses. Roldan notes that petitioners' approach of using total hours selling all products as the denominator is valid only if the expenses being allocated are limited solely to expenses incurred by salespersons. Also, Roldan refutes petitioners' claim that certain expenses should not have been excluded from the indirect selling expense calculation by noting that the expenses in question do not relate to SSWR and that the Department verified the expenses used in the calculation and did not find any discrepancies. In addition, Roldan maintains that petitioners have wrongly concluded that its allocation methodology is quantity-based because it used estimated hours spent selling SSWR to determine the numerator of the indirect selling expense ratio. Roldan maintains that its has reported indirect selling expenses using the ratio of indirect selling expenses incurred for SSWR to total SSWR sales revenue and thus, its methodology is in fact value-based. Finally, Roldan contends that the allocation methodology proposed by petitioners' would significantly overstate indirect selling expenses because it fails to account for back-to-back sales. Because AUSA plays a role in making back-to-back sales, Roldan maintains that these sales, which are not recorded in the company's books, must be included in the denominator of the ratio. Thus, Roldan urges the Department to reject the allocation methodology proposed by petitioners. Department's Position We agree with petitioners, in part. When transaction-specific reporting is not feasible, the Department's practice is to consider allocated expenses, provided we are satisfied that the allocation methodology used does not cause inaccuracies or distortions. See 19 CFR 351.401(g)(1). Indirect selling expenses, by definition, cannot be identified with specific transactions and thus, must be allocated to reported sales. Typically, the Department allocates indirect selling expenses by multiplying the price of each sale by the ratio of total indirect selling expenses to total sales revenue (the indirect selling expense ratio). See Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Plate in Coils ("SSPC") from the Republic of Korea, 64 FR 15444, 15455 (March 31, 1999). Nevertheless, the Department may accept other allocation methodologies provided they do not result in inaccuracies or distortions and are based on data which can be verified. See Micron Technology, Inc. v. United States, Court No. 96-06-01529, Slip Op. 99-12 (CIT January 28, 1999). Roldan's allocation methodology, which was used in the investigation of SSWR from Spain (see SSWR From Spain, 63 FR at 40396) and the preliminary results of this review, differs from that typically used by the Department. While the Department accepted this methodology in a prior segment of this antidumping proceeding, for the following reasons we have determined that it would be inappropriate to continue to accept this methodology. First, at verification, Roldan could not support the number of hours AUSA spent selling SSWR, which is at the heart of its allocation methodology. See Verification Report at 35. As noted in the preamble to the Department's regulations, "allocation methods, like any other type of factual information, are subject to verification." See Antidumping Duties; Countervailing Duties, 62 FR 27296, 27347 (May 19, 1997). Contrary to Roldan's contentions, the Department's acceptance of the allocation in this review was premised upon the Department verifying the data used in the allocation. Thus, Roldan is incorrect when it claims the Department accepted this methodology in this review. Moreover, the Verification Report makes clear that the number of hours spent selling SSWR is an estimate. Generally, the Department does not rely on estimates because they are subject to manipulation. Second, Roldan failed to adequately demonstrate that its allocation methodology does not cause distortions. Specifically, the Department finds insufficient information on the record demonstrating that Roldan's allocation methodology properly quantifies the differences in selling SSWR compared to other products. Although Roldan provided explanations and documentation to support its contention that it is less expensive to sell SSWR than other products, the indirect selling expense ratio, which in effect quantifies the extent of selling differences between SSWR and other products, could not be verified. In light of this verification failure, the Department finds Roldan's explanations as to why its methodology is not distortive to be inadequate. In the instant review, satisfactory explanations to questions regarding possible distortions are particularly important given that Roldan's methodology allocates indirect selling expenses disproportionately between SSWR and non-subject merchandise (with significantly fewer expenses allocated to SSWR). See Antidumping Duties; Countervailing Duties, 62 FR 27296, 27348 (May 19, 1997) ("in the case of these types of allocations {allocations involving "out-of-scope merchandise} it will be particularly important that a party claiming an adjustment provide {an} explanation ... as to why the allocation method used is not inaccurate or distortive."). Furthermore, the reasonableness of Roldan's methodology is called into question when it is compared to the methodology typically used by the Department. Specifically, the Department notes that Roldan's methodology results in an indirect selling expense ratio that is approximately 89 percent less than the indirect selling expense ratio calculated using the Department's normal allocation methodology. (4) An understatement of the indirect selling expense ratio results in an overstatement of the U.S. price and a decrease in the dumping margin. Thus, the record evidence raises concerns that the allocation methodology used in the preliminary results contains distortions which are advantageous to Roldan. When an allocation methodology cannot be supported at verification and record evidence does not sufficiently allay the Department's concerns that the methodology may result in distortions, the Department's practice is to reallocate indirect selling expenses using an alternative methodology. See Notice of Final Determination of Sales at Less Than Fair Value: Emulsion Styrene-Butadiene Rubber From Mexico, 64 FR 14872, 14880 (March 29, 1999). Therefore, for the final results, the Department has reallocated AUSA's indirect selling expenses to U.S. sales by multiplying net U.S. sales prices by the ratio of AUSA's total operating expenses to total sales revenue. The Department included revenue from back-to-back sales in the total sales revenue. We agree with Roldan that the allocation methodology proposed by petitioners overstates the indirect selling expense ratio because it fails to take into account back-to-back sales. AUSA plays a role in making back-to-back sales and, thus, these sales must be included in the denominator of the ratio. However, the amount of revenue earned from back-to-back sales is not on the record. Thus, in accordance with section 776 (a)(1) of the Act, we have used facts available in order to determine this figure. See the memorandum Adjustments Made to the Margin Calculations for Roldan S.A. (Roldan) (February 12, 2001). Because we rejected Roldan's allocation methodology and adopted a methodology that is consistent with that advocated by petitioners, we need not address petitioners' allegations that Roldan's methodology is quantity- based and contains inaccuracies. Moreover, although petitioners did not raise this issue with respect to home market indirect selling expenses, we note that in the instant review, Roldan also uses estimates to calculate home market indirect selling expenses. However, as in the SSWR investigation, the Department finds that "the overall results of verification and the insignificant amount of the reported home market indirect selling expense adjustment suggest that Roldan did not overstate the adjustment. Therefore, it is reasonable to presume that Roldan made these estimates in good faith and that they may be relied upon." See SSWR From Spain. Recommendation Based upon 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 weighted-average dumping margin for the reviewed firm in the Federal Register. Agree____ Disagree___ Bernard T. Carreau, fulfilling the duties of Assistant Secretary for Import Administration (Date) _____________________________________________________________________ footnotes: 1. In the past, the Department has used the matching methodology described by Roldan in this case (i.e., using equally similar matches and weight averaging the net prices and DIFMERS of all equally similar matches), but it is not the Department's current practice. 2. Petitioners claim the denominator should be total hours spent selling all products. 3. AUSA is paid a commission for making back-to-back sales for its affiliates. Revenue from back-to-back sales is recorded on the affiliates' books. 4. The Department included AUSA's back-to-back sales revenue in its calculation of the indirect selling expense ratio.