66 FR 52587, October 16, 2001 A-583-828 Administrative Review Public Document GII/O4: AGA/KG/CB/CMC MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Bernard T. Carreau Deputy Assistant Secretary for Import Administration Group II DATE: October 10, 2001 SUBJECT: Issues and Decision Memorandum for the Final Results of the Antidumping Duty Administrative Review of Stainless Steel Wire Rod from Taiwan. Summary We have analyzed the comments in the case and rebuttal briefs submitted by interested parties in the antidumping duty administrative review of stainless steel wire rod (SSWR) from Taiwan. Below is a complete list of issues in this investigation for which we received comments from the parties. As a result of our analysis, we have not made changes in the preliminary margin calculations. We recommend that you approve the positions we have developed in the Discussion of Issues section of this memorandum. In Section I, we identify the issues in this review for which we received comments from the interested parties. Section II sets out the scope, or product coverage, of this review. Section III analyzes the comments of the interested parties. Finally, we recommend approval of the Department's positions developed for each of the issues. Background On June 12, 2001, the Department of Commerce (the Department) published its preliminary determination in the antidumping duty administrative review of SSWR from Taiwan. See 66 FR 31613. The period of review (POR) is September 1, 1999 through August 31, 2000. The respondent in this review is Walsin Lihwa Corporation (Walsin). We invited all parties to comment on the preliminary determination. Walsin submitted a case brief on July 17, 2001 and the petitioners (i.e., Carpenter Technology Corp., Empire Specialty Steel, and the United Steel Workers of America, AFL-CIO/CLC), submitted a rebuttal brief on July 24, 2001. I. List of issues 1. Interest Expense Calculation: Use of Consolidated Financial Statement 2. Interest Expense Calculation: Inclusion of Interest Expense Related to Investments 3. Interest Expense Calculation: Offsetting Total Interest Expenses with Capital Gains II. Scope For purposes of this review, SSWR comprises products that are hot-rolled or hot-rolled annealed and/or pickled and/or descaled rounds, squares, octagons, hexagons or other shapes, in coils, that may also be coated with a lubricant containing copper, lime or oxalate. SSWR is made of alloy steels containing, by weight, 1.2 percent or less of carbon and 10.5 percent or more of chromium, with or without other elements. These products are manufactured only by hot-rolling or hot-rolling annealing, and/or pickling and/or descaling, are normally sold in coiled form, and are of solid cross-section. The majority of SSWR sold in the United States is round in cross-sectional shape, annealed and pickled, and later cold- finished into stainless steel wire or small-diameter bar. The most common size for such products is 5.5 millimeters or 0.217 inches in diameter, which represents the smallest size that normally is produced on a rolling mill and is the size that most wire-drawing machines are set up to draw. The range of SSWR sizes normally sold in the United States is between 0.20 inches and 1.312 inches in diameter. Two stainless steel grades are excluded from the scope of the review. SF20T and K-M35FL are excluded. The chemical makeup for the excluded grades is as follows: SF20T ----- Carbon 0.05 max Chromium 19.00/21.00 Manganese 2.00 max Molybdenum 1.50/2.50 Phosphorous 0.05 max Lead-added (0.10/0.30) Sulfur 0.15 max Tellurium-added (0.03 min) Silicon 1.00 max K-M35FL ------- Carbon 0.015 max Nickel 0.30 max Silicon 0.70/1.00 Chromium 12.50/14.00 Manganese 0.40 max Lead 0.10/0.30 Phosphorous 0.04 max Aluminum 0.20/0.35 Sulfur 0.03 max The products subject to this review are currently classifiable under subheadings 7221.00.0005, 7221.00.0015, 7221.00.0030, 7221.00.0045, and 7221.00.0075 of the Harmonized Tariff Schedule of the United States (HTSUS). Although the HTSUS subheadings are provided for convenience and customs purposes, the written description of the scope of this review is dispositive. III. Analysis of Comments Comment 1: Interest Expense Calculation: Use of Consolidated Financial Statement Walsin objects to the Department's calculation of its interest expense used to calculate the cost of production in the preliminary results. According to the respondent, the Department must calculate dumping margins as precisely as possible. The Department must do so using the respondent company's data where records are maintained pursuant to its country's Generally Accepted Accounting Principles (GAAP) and "reasonably reflect costs associated with the production and sale of merchandise." See Section 773(f)(1)(A) of the Act. Walsin also contends that the Department is required to use "the actual amounts incurred and realized by the specific exporter for selling, general and administrative expenses." See Section 773(e)(2)(A) of the Act. In the present case, Walsin asserts that the Department erred by using the consolidated financial statement, without adjustment. According to Walsin, the Department included as part of the company's interest expenses an amount which related solely to interest expenses incurred by a non- Taiwanese subsidiary. Walsin cites Taiwan's Company Law and Taiwan's "Guidelines for Preparation of Financial Reports by Securities Issuers," which require that any loans between related parties must be disclosed. Walsin points out that its financial statement does not include such loans. However, by using the consolidated financial statement, financial expenses of related companies in other countries and in other product areas not associated with the production and sales of the subject merchandise were included in calculating interest expense, and distorted the calculation of interest expense. Moreover, Walsin argues that its position is supported by the case of AIMCOR v. U.S., 69 F.Supp. 2d 1345 (Court of International Trade (CIT) 1999) (AIMCOR). According to Walsin, in AIMCOR, the court ruled that the phrase "specific exporter or producer" in section 773(e)(2)(A) of the Act was ambiguous, and that Commerce's choice of which consolidated financial statement to use in this case was not reasonable nor supported by the evidence in the case. Walsin contends that, similarly, in the instant case, only if the interest expenses from the offshore subsidiary are excluded will the Department, pursuant to AIMCOR, determine the 'true costs of the specific exporter.' In rebuttal, the petitioners state that the use of Walsin's consolidated financial statement to calculate interest expenses is consistent with the Department's long-standing policy and court precedent. The petitioners state that Walsin completely disregards the Department's long-standing policy of calculating the financial expense ratio based on the financial expenses of the consolidated entity. See, e.g., Notice of Final Determinations of Sales at Less than Fair Value: Steel Wire Rope From India and the People's Republic of China; Notice of Final Determination of Sales at Not Less Than Fair Value: Steel Wire Rope From Malaysia, 66 FR 12759 (February 28, 2001) (Wire Rope from India, et. al.) and accompanying Decision Memo regarding India at Comment 3. The petitioners also point out that the Department's practice takes into consideration two important facts: "(1) the fungible nature of money within a consolidated group of companies; and (2) that the controlling entity within a consolidated group has the power to determine the capital structure (i.e., the debt and equity) of each member company within its group." See Final Results of Antidumping Duty Administrative Review and Determination Not to Revoke in Part: Silicon Metal From Brazil, 66 FR 11256 (February 23, 2001) (Silicon Metal 2001) and accompanying Decision Memo at Comment 6, and Final Results of Antidumping Duty Administrative Review: Silicon Metal From Brazil, 65 FR 7497, 7500 (February 15, 2000). In support of its position, the petitioners further cite Notice of Final Results of Antidumping Duty Administrative Review: Fresh Atlantic Salmon From Chile, 65 FR 78472 (December 15, 2000) (Salmon from Chile) and accompanying Decision Memo at Comment 7, in which the Department stated that "the corporate control on the financing operations of individual group member companies may exist even in the apparent absence of specific inter-company financing transactions." The petitioners point out that the Department's use of consolidated financial statements has also been upheld by the Courts. For example, in Camargo Correa Metais, S.A. v. United States (17 CIT 897, 902 (1993)) (Camargo), the CIT held that the Department's practice of allocating financial expenses on a consolidated basis was reasonable due to the fungible nature of debt and equity. Moreover, the petitioners cite Camargo, 17 CIT at 902, where the Court stated, "The Department recognizes the fungible nature of a corporation's invested capital resources, including both debt and equity, and does not allocate corporate finance expenses to individual divisions of a corporation... Instead, [Commerce] allocated the interest expense related to the debt portion of the capitalization of the corporation, as appropriate, to the total operations of the consolidated corporation." In addition, the petitioners assert that Walsin's reliance on AIMCOR v. United States is entirely misplaced as the facts in that case differ significantly from those in the instant case. In AIMCOR, a respondent company was owned by another company, which was in turn still owned by another conglomerate. Thus, the CIT in this case held that the Department's use of the consolidated financial statement of the conglomerate, two tiers up from the respondent, to calculate interest expenses was inappropriate. In the instant case, the petitioners state that, unlike in AIMCOR, the consolidated financial statement used by the Department was of the respondent itself and not of a remote parent company. Thus, there is no ambiguity as to whom the "specific exporter or producer" is in this case, or any lack of indicia that the cost of financing is not related to the consolidated entity. The petitioners point out that Walsin itself is a major producer and exporter of the subject merchandise in Taiwan. Moreover, Walsin's December 18, 2000, Section A questionnaire response indicates that Walsin's Financial Investment Business Department handles the financing arrangements for all of Walsin's sales in the home market, third-country market, and in the United States. Because Walsin is itself the parent company and it maintains corporate control over the finances of all its subsidiaries, and because of the fungibility of financing between subsidiaries, the petitioners argue that it is proper for the Department to use data from the consolidated financial statement to calculate the company's interest expenses. The Department's Position: We agree with the petitioners that the Department's long-standing practice is to calculate the financial expense ratio based on the financing expenses at the consolidated level. As the petitioners note, the Department's policy recognizes the fungible nature of money within a consolidated group of companies and that the controlling entity within a consolidated group has the power to determine the capital structure of each member within the group. Corporate control of the financing operations of individual group member companies may exist even in the apparent absence of specific inter-company financing transactions. See, e.g., Salmon from Chile, Decision Memo at Comment 7. The CIT, recognizing the fungibility of financing funds, has sustained the Department's use of a consolidated financial expense. See, e.g., Camargo, 17 CIT at 902. In the present case, Walsin, the parent company, owns at least 50 percent of its consolidated subsidiaries, and therefore clearly is in position to control the finances of these subsidiaries. Even though Walsin may not have loans with the subsidiary at issue, because Walsin is in a position to control its subsidiary's finances (and determine that the subsidiary, and not Walsin itself, should hold debt from third parties), and money is fungible, this subsidiary's financial expense is properly included as part of Walsin's consolidated expense. If the Department were to ignore the fungibility of money, and that Walsin, the consolidated entity, determines the capital structure of its subsidiaries and affiliates, we would calculate costs that did not reasonably reflect the costs associated with the production and sale of the merchandise. See, e.g., Wire Rope from India, et. al., Decision Memo regarding India at Comment 3. We also agree with the petitioners that the facts in AIMCOR differ from the present case. The issue before the Court in AIMCOR was whether it was appropriate to calculate the financial expense ratio of a respondent based on the consolidated financial statement of the parent company of the respondent's parent company. Here, Walsin itself is the respondent. Since Walsin clearly is the "specific exporter" under section 773(e)(2)(A) of the Act, consistent with the Department's practice, we have used Walsin's consolidated financial statement to calculate its financial expense ratio. Comment 2: Interest Expense Calculation: Separation of Interest Expense Related to Investments Walsin contends that the Department should separate interest expense related to investments. Walsin argues that, because money is fungible, loans should be spread over its entire assets. In order to determine the portion of investment expense derived from investment activities, Walsin proposes allocating interest expense based on assets. Thus, interest expense related to investment may be imputed and the related investment expense can be excluded from the calculation of the cost of production. Walsin contends that the Department used essentially this same methodology in Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Sheet and Strip from France, 64 FR 30820, 30837 (June 8, 1999) (Stainless from France). In that instance, the Department did not accept a respondent's calculation of imputed short-term income because the financial statement in question did not report any breakdown of short-term vs. long-term investments or investment income. Thus, there was no basis on which to impute short-term investment income. However, Walsin does offer a breakdown, as noted above, of short-term and long-term investments on the asset side of the ledger. Thus, Walsin states that, in Walsin's case, the Department can impute the necessary information. Alternatively, Walsin says that the Department should classify Walsin's investment activity as a separate line of business that should bear a portion of the interest expense incurred. In Final Determination of Sales at Less Than Fair Value: Sweaters Whole or in Chief Weight of Man-Made Fiber from the Republic of Korea, 55 FR 32659, 32667 (August 10, 1990) (Sweaters from Korea), Walsin states that the Department agreed that investment activity was a separate line of business and that interest expenses should be allocated to this activity, thereby reducing the amount of expense allocated to the merchandise under investigation. The petitioners rebut Walsin's position regarding the treatment of investment activity as a separate business. In particular, the petitioners argue that Walsin erroneously states that in Sweaters From Korea, the Department "agreed that investment activity was a separate line of business." In Sweaters From Korea, the petitioners contend that the Department only agreed that interest expense, including investment activity, was "related to all lines of business in which the company is involved," not that "investment activity was a separate line of business." Id. Further, the petitioners point out that the Department "did not use the company's asset structure as reported on the balance sheet as a basis for interest allocation to the different lines of business because of the different methods used in valuing assets, e.g., manufacturing assets are depreciated and investment assets remain on a historic cost basis." Id. Department Position: The respondent made basically the same argument prior to the Preliminary Results, and we continue to find that its argument is not compelling. As we stated in the Preliminary Results: [I]t is the Department's practice to derive net financing costs based on the borrowing experience of the entire consolidated company, including investment arms of the consolidated company. See Final Determination of Sales at Less Than Fair Value: New Minivans From Japan, 57 FR 21937, 21945 (May 26, 1992) (Minivans From Japan). See Preliminary Results, 66 FR at 31615. In Minivans from Japan, in an argument similar to Walsin's argument, the respondent requested that the Department exclude interest income and expenses related to an investment arm from the financial expense calculation because those expenses were not related to the respondent's manufacturing operations. If the Department did include the expenses at issue, the respondent in Minivans from Japan requested that the Department include all of the associated interest income. See Minivans from Japan, 57 FR at 21945. In response, the Department stated that the investment arm's "interest income and expenses are as much a part of the group's overall borrowing experience as any other member company." See id. See also Salmon from Chile, Decision Memo at Comment 7. In a similar manner, Walsin's interest income and expenses from investments are as much a part of Walsin's overall borrowing experience as those interest expenses and income from any other source. Furthermore, because money is fungible, and a corporation can use the proceeds from loans for a variety of corporate purposes, we do not generally investigate the use of the loan proceeds, and therefore do not associate interest expense with specific activities, such as investment. (1) We therefore believe it is appropriate, and consistent with the Department's practice, to include the total amount of Walsin's consolidated interest expense, unadjusted for interest expense related to investments, in our calculations. Moreover, consistent with Minivans from Japan, 57 FR at 21945, we also believe it is appropriate to offset Walsin's consolidated interest expense only with the part of its interest income related to the current operations of the company. See Department position to Comment 3, below. Comment 3: Interest Expense Calculation: Use of Consolidated Financial Statement Offsetting Total Interest Expenses with Capital Gains If the Department does insist upon using the full amount of consolidated interest expenses, Walsin proposes using capital gains on the sale of securities (i.e., "gains on sale of investment") to offset its interest expense. At the very least, Walsin wants the Department to deduct that portion of the sale of investments that corresponds to the ratio of short- term and long-term investments on the asset side of the financial statement. Walsin states that it is "patently unfair" to assume that 100 percent of investment income is long-term income, especially since "virtually all borrowings are eventually used for working capital," which cannot generally be put into long-term investments at once. Walsin concludes that logically, one would assume that the vast majority of the investment income is short-term. In response, the petitioners hold that the Department should deny Walsin's request to use its capital gains as an offset to its total interest expenses. The petitioners cite the Department's long-standing policy to allow a respondent to offset interest expenses with short-term interest income earned from the general operations of the company. See Silicon Metal 2001, Decision Memo at Comment 8. The petitioners add that the Department "does not, however, allow a company to offset its financial expense with income earned from investing activities (e.g., long-term interest income, capital gains, dividend income) because such activities are not related to the current operations of the company." See id. The petitioners point out that this practice has been upheld by the CIT. See, e.g., Gulf States Tube Division of Quanex Corp. v. United States, 981 F. Supp. 630 (CIT 1997) (Gulf States Tube). The petitioners emphasize that investment income like capital gains are not interest income, and not related to the general operations of the company. The petitioners also point out that, even if it were appropriate to use short-term capital gains as an offset, Walsin has not demonstrated the actual amount of short- term capital gains. Department Position: We agree with the petitioners. In calculating a company's cost of financing, we recognize that, in order to maintain its operations and business activities, a company must maintain a working capital reserve to meet its daily cash requirements (e.g., payroll, suppliers, etc.). The Department further recognizes that companies normally maintain this working capital reserve in interest-bearing accounts. The Department, therefore, allows a company to offset its financial expense with the short-term interest income earned on these working capital accounts. As the petitioners note, the Department does not, however, allow a company to offset its financial expense with income earned from investing activities (including capital gains) because such activities are not related to the current operations of the company. See Silicon Metal 2001, Decision Memo at Comment 8. Moreover, as the petitioners also note, the CIT has upheld the Department's approach to calculating the financial expense offset with only short-term interest income. See Gulf States Tube. In the present case, Walsin has not provided any evidence that its capital gains are anything but capital gains from investment, which are not related to the current operations of the company. The burden of proof to substantiate and document this adjustment is on the respondent making a claim for an offset. See Timken Company v. United States, 673 F. Supp. 495, 513 (CIT 1987); and Gray Portland Cement and Clinker from Japan; Final Results of Antidumping Duty Administrative Review 60 FR 43761, 43767 (August 23, 1995). Since the record evidence indicates that Walsin's capital gains are not related to Walsin's current operations, we have continued to disallow this offset to Walsin's financial expense. 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____ _________________________________ Faryar Shirzad Assistant Secretary for Import Administration _________________________________ (Date) ________________________________________________________________________ footnote: 1. We note that Stainless from France involved imputing short- and long- term interest income, and not imputing interest expense associated with different activities.