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FINAL RESULTS OF REDETERMINATION PURSUANT TO COURT REMAND FUJIAN MACHINERY AND EQUIPMENT IMPORT & EXPORT CORPORATION, and SHANDONG MACHINERY IMPORT & EXPORT CORPORATION V. UNITED STATES and O. AMES COMPANY SUMMARY
The Department of Commerce ("the Department") has prepared these final results of redetermination pursuant to the remand order of the U.S. Court of International Trade ("Court") in Fujian Machinery and Equipment Import & Export Corporation, and Shandong Machinery Import & Export Corporation v. United States and O. Ames Company, Court No. 99-08-00532, Slip Op. 01-120 (September 28, 2001) ("Fujian Machinery"). This remand pertains to the Department's application of adverse facts available ("AFA") to Fujian Machinery and Equipment Import & Export Corporation ("FMEC") and Shandong Machinery Import & Export Corporation ("SMC") as a result of their failure to provide information required for the Department's antidumping analysis. See Heavy Forged Hand Tools, Finished or Unfinished, With or Without Handles, From the People's Republic of China; Final Results and Partial Recision of Antidumping Duty Admin. Reviews, 64 FR 43659 (August 11, 1999) ("Final Results") On January 23, 2002, the Department issued draft Redetermination Results ("Draft Results") pursuant to the Court's remand order. On February 7, 2002, FMEC and SMC ("Respondents") submitted comments on the Draft Results ("Respondents' Comments") which the Department addresses below. Upon consideration of Respondents' comments and re-examination of the facts associated with this proceeding segment, the Department has determined that FMEC failed verification with respect to all four classes of subject merchandise. Regarding facts available ("FA"), the Department has determined that FMEC and SMC had the ability to comply with the agency's information requests, but that FMEC and SMC failed in all four classes of merchandise to provide the information that was required to conduct an antidumping analysis and did not cooperate to the best of their ability within the meaning of section 776(b) of the Tariff Act of 1930 ("the Act"). In addition, the Department has found with respect to SMC and FMEC that there were data reconciliation problems with their supplier factories that also result in the factories' verification failure. Therefore, the Department determines on remand that it is proper to use an adverse inference in assigning dumping margins to FMEC and SMC. BACKGROUND During the underlying investigation, the Department was required to rely entirely upon FA, because FMEC and SMC submitted untimely and incomplete information. See Final Results 64 FR at 43661-43665. Also, factors of production ("FOPs") data from their supplier factories [ * * * ] ("Factory A") and [ * * * ] ("Factory B") could not be verified. See Final Results at 64 FR at 43665-43667. Based on the inadequacy, incompleteness and untimeliness of FMEC's and SMC's information, their failure to provide the necessary data, and their failure to reconcile the information they did submit to their books and records at verification, the Department determined that (1) FMEC and SMC failed verification; and (2) FMEC and SMC failed to act to the best of their ability to comply with the agency's information requests. See Final Results at 64 FR at 43661-43666, 43667-43668. Therefore, citing section 776(b) of the Act, the Department applied an adverse inference in selecting from among the facts otherwise available to establish FMEC's and SMC's margins.
In its September 28, 2001 opinion, the Court ruled as follows: 1. The Court affirmed the Department's determination that SMC failed verification, but remanded for reconsideration the Department's decision to apply AFA to subject merchandise for purposes of determining dumping margins. See Fujian Machinery at 42, 64. 2. The Court agreed with the Department that FMEC failed verification with respect to bars and wedges. Id. at 36. The Court remanded the Department's determination that FMEC failed verification with respect to the remaining three classes of subject merchandise. The Court also held that The Department "must now afford FMEC the opportunity to submit those documents that it would have provided at verification or immediately afterwards." Id. at 31. In the event the Department continues to find that these three categories of merchandise failed verification, the Court directed the Department to explain for each product category the basis for its decision to apply AFA. Id. at 64. 3. The Court also found that the Department "failed to provide a reasoned explanation for its change in methodology" when it refused to accept caps for raw material inputs for Factory A. Similarly, the Court found that a reasoned explanation was lacking for the Department's finding that Factory A lacked records tying its purchases of steel to its consumption of steel. Id. at 46-47. Therefore, the Court remanded so the Department could reconsider whether Factory A failed verification. 4. The Court found that the Department had failed to "provide a reasoned explanation for its change in methodology," namely the Department's characterization as unreported FOPs three items, salt, acetylene and oxygen, (1) that had not been considered production factors previously for Factory B. Id. at 47-49. Therefore, the Court remanded so the Department could reconsider whether Factory B failed verification. 5. Finally the Court ordered the Department to calculate separate rates for FMEC and SMC. Id. at 55. The Department issued its Draft Results on January 23, 2002 pursuant to the Court's remand order. On February 7, 2002, Respondents submitted comments. As explained below in the Interested Party Comments section of this remand, the Department was not persuaded by Respondent's comments to change the results of its analysis in the Draft Results. The following, with some minor corrections and clarifications, is the analysis the Department issued in its Draft Results. ANALYSIS A. Statutory Framework for Facts Available Section 776(a)(2) of the Tariff Act of 1930 ("the Act") provides that the Department may use FA in reaching the applicable determination, if, subject to section 782(d), an interested party (A) withholds information that has been requested by the Department; (B) fails to provide such information in a timely manner or in the form requested; (C) significantly impedes a proceeding under the antidumping statute; or (D) provides such information but the information cannot be verified as provided for under section 782(i). Section 776(b) states that if the Department finds that an interested party has failed to cooperate by not acting to the best of its ability to comply with a request for information, the Department may use an inference that is adverse to the party in selecting FA. Section 782(c)(1) of the Act places an affirmative duty on an interested party to notify the Department if it cannot submit the information in the requested form and manner, "together with a full explanation and suggested alternative forms" for responding. Id. Section 782(d) of the Act provides certain conditions that must be satisfied before the Department may disregard all or part of the information submitted by a respondent. First, this section states that, if the Department determines that a response to a request for information does not comply with the request, it shall promptly inform the person submitting the response of the nature of the deficiency and shall, to the extent practicable, provide that person with an opportunity to remedy or explain the deficiency in light of the time limits established for the completion of the review. Section 782(d) continues by providing that, if the party submits further information in response to the deficiency notice and the Department finds that the response is still deficient or submitted after the applicable time limits, the Department may disregard all or part of the original and subsequent responses. B. Application of AFA to SMC With respect to SMC, the Court found that taken together, the errors and omissions at verification constitute substantial evidence that SMC failed verification and that FA was necessary in constructing SMC's dumping margins. However, the Court also noted that once the Department has determined that it may resort to FA, it must make additional findings prior to drawing an adverse inference. The Court remanded with respect to SMC for the Department to reconsider its decision to apply AFA to SMC and make those additional findings, if appropriate.
In order to use AFA under 776(b) of the Act, the Department must make a finding, supported by substantial evidence, that the "respondent . . . failed to cooperate by not acting to the best of its ability to comply with a request for information." See Fujian Machinery at 56. According to the Statement of Administrative Action, A party is uncooperative if it has not acted to the best of its ability to comply with requests for necessary information. Where a party has not cooperated, Commerce . . . may employ adverse inferences about the missing information to ensure that the party does not obtain a more favorable result by failing to cooperate than if it had cooperated fully. In employing adverse inferences, one factor the agencies will consider is the extent to which a party may benefit from its own lack of cooperation. See Uruguay Round Agreements Act, Statement of Administrative Action, H.R. Doc No. 103-316, vol. 1, at 656, 892 (1994)("SAA"). (2) The Department recognizes that, in order to satisfy its statutory obligation, it must be explicit in its reasons for applying an adverse inference as a consequence of SMC's verification failure. We also note that to employ an adverse inference, the Court has indicated that, "at a minimum, Commerce must find that a respondent could comply, or would have had the capability of complying if it knowingly did not place itself in a condition where it could not comply." See Fujian Machinery at 60. As set forth below, the Department finds that SMC failed to cooperate to the best of its ability after establishing that SMC could have provided the information requested but did not do so because it chose not to prepare for the Department's verification visit. The Department is therefore justified in the use of adverse inferences. The Department interprets the law to require the respondent to notify the Department and explain why it is incapable of providing requested information in a timely manner. See section 782(c)(1) of the Act. Without a specific, compelling explanation, the Department generally has no means of discerning if a respondent is truly incapable of complying. In this case, SMC failed to demonstrate that it was incapable of complying with the Department's request, especially since the information that SMC failed to provide was within its own control. The determination of whether a company has acted to the best of its ability must be decided on a fact-specific and case-specific basis. The determination must be applied in light of the circumstances surrounding the company at issue. Moreover, this standard must be applied with due regard to the fact that, by its very nature, a dumping proceeding is a demanding process, but also one in which a respondent's cooperation is the only means that the Department has of obtaining the information it needs to meet its statutory obligations. For this reason, the statute requires a respondent to cooperate "to the best of its ability," rather than merely requiring that it make what it views as sufficient effort to cooperate. See section 776(b) of the Act. In employing adverse inferences, one factor the Department considers is whether SMC may benefit from its lack of cooperation. The errors and omissions uncovered at SMC's verification had potentially significant implications for SMC's dumping margins. Failure to report a number of its sales to the Department could affect the size of its dumping margins. Moreover, by not providing any invoices or sales documentation covering transactions purported to be of non-subject merchandise or to markets other than the United States, SMC prevented the Department from verifying the completeness of its response and could have further hid other possible sales of subject merchandise. Also, SMC's failure to provide the Department with a quantity and value worksheet could serve to help SMC obscure its misreported figures. Finally, by failing to report the existence of several departments, including the [ * * * ] , SMC could conceal possible unreported U.S. sales of subject merchandise and benefit with lower dumping margins. 1. Based on the administrative record, SMC had the ability to comply with the Department's information requests.
As it customarily does for every respondent subject to verification, the Department sent a verification outline to SMC prior to the verification visit. See Antidumping Manual, Chapter 13, at 23. This outline contained specific requests which were not complied with, though SMC had the ability to do so. In its verification outline, the Department requested reconciliation worksheets that tie the reported sales totals in SMC's questionnaire response to the total sales reported in SMC's financial statements, beginning with the quantity and value totals in the latest U.S. sales listing that had been submitted. The Department also requested copies of the source documents which tied these numbers into the financial reporting system. See SMC Verification Agenda at 4. However, SMC did not prepare or make available any of the quantity and value worksheets requested by the Department in the outline nor did SMC explain why the requested worksheets were not completed. See SMC Verification Report at 7. SMC clearly had the ability to comply with the Department's request for a quantity and value worksheet, which is to say, produce the working basis for generating its response to the Department. SMC told verifiers that, in compiling its response, it was able to derive the quantity and value of its U.S. sales by conducting a computer search (i.e. an accounting report) of invoices during the period of review ("POR") by product name, and then manually check each invoice identified, to determine whether the sale was a sale to the United States. See SMC Verification Report at 7. SMC did not keep or replicate these reports, nor did it make the appropriate invoices (U.S. sales and sales to all other countries) available to the Department verifiers. While this is not precisely the quantity and value worksheet that the Department requested in the verification outline, the purpose of requesting such a worksheet would have been served, to a limited extent. (3) SMC admitted that it was also fully capable of determining the quantity and value of subject merchandise sold to the United States during the POR by the two departments that handled these exports and to reconcile this figure to the departments' financial statements. (4) Id. at 7-8. (stating that the company officials "explained that it was possible to do so, but . . . they may not have been able to complete this task during verification."). Finally, SMC advised the Department at verification that it was also capable of reconciling the financial statements for the two departments with the company-wide financial statement. Id. at 9 (stating that the department's financial statements were reconciled with the company's financial statements three months after the department's financial statements are issued.) The problem at the heart of SMC's verification failure was that SMC prepared very little for the verification. The instance where SMC's compliance with Department requests was most lacking was in regard to its Agricultural Tools Department, where no supporting documentation whatsoever was offered. Id. at 9. With respect to these failures, SMC notably made no affirmative claim at the time of verification that it did not have the ability to comply. See section 782(c)(1) of the Act. The Department attempted to reconcile the SMC sales invoice records for December 1997 from the two departments that sell subject merchandise, with December 1997 financial statements for the two departments, and the SMC financial statement. Tying the reported U.S. sales to the total sales invoice record of the two departments and ultimately SMC's financial statement would have been a key step in the verification process. Without continuous threads through these accounting records, the Department cannot be certain that all U.S. sales of subject merchandise were reported. SMC could not reconcile any of its departments' financial statements to its company financial statements for the year 1997. The explanation offered was that the company financial statement is typically recalculated three months after department financial statements are issued, and the three month period had not elapsed at the time of verification. Id. at 9. SMC claimed that the continuous threads would have been in place if verification had occurred after the three month period when department and companywide financial statements are reconciled. Nonetheless, the result was that this verification task could not be completed. SMC's claim also highlights the fact that it did have the ability to reconcile the department and company financial statements for the Department's verification. This is notable in light of the fact that the Department's request for SMC to reconcile its 1997 financial statements came during the last quarter of 1998. As a result of this failure, the verifiers were forced to improvise and make less demanding requests for worksheets that could be completed during the scheduled verification. See SMC Verification Report at 8. SMC also failed to provide the underlying invoices and other sales documentation for transactions involving non-subject merchandise or sales to markets other than the United States, thereby thwarting the Department's attempt to perform a completeness test. These invoices were, in fact, part of the approach that SMC claimed that it had employed in preparing its questionnaire response. However, at verification, SMC did not provide any invoices or sales documentation, except for the invoices of the reported U.S. sales of the subject merchandise. See SMC Verification Report at 10. Moreover, SMC failed to provide a sufficient reason for its failure to provide this information. SMC clearly had the ability to comply with the Department's request, as SMC possessed the documents which the Department needed to perform the completeness test. Company officials stated though that the salesmen with the sales documentation had left the office for the day. Id. This explanation is insufficient in that SMC had notice that the Department would be seeking this information to verify the completeness of its reported sales. See SMC Verification Agenda at 2 (requesting the company make available "appropriate personnel who are knowledgeable about the data in the response and the underlying accounting systems."). In its verification outline, the Department asked for documentation, including the sales invoices which account for all issued invoices during the POR. See SMC Verification Agenda at 5. Considering that SMC had knowledge that the Department would require source documents to substantiate the sales SMC claimed were not covered by the review, coupled with SMC's admitted possession of these documents, SMC's failure to provide this information or propose another way to confirm completeness is unacceptable. At a minimum, SMC had the ability to make certain that an employee with access to all necessary records was available at all times during the verification.
Finally, SMC failed to report the existence of several departments, which may or may not have sold subject merchandise during the POR, even though SMC had information about all of its departments readily available. As discussed above, the Department clearly requested the full disclosure of all of SMC's departments. See Department's Questionnaire at A-5. However, while reviewing SMC's 1997 financial statement during verification, the Department discovered the existence of [ * * * ] companies, [ * * * ] of which were established in 1997. See SMC Verification Report, at 5. Furthermore, while reviewing the 1997 financial statement of the No. 2 Hand Tools Department, the Department discovered the existence of several departments, one of which was named the [ * * * ] . Id. At 9. SMC had information about all of its departments. However, although SMC had the ability to comply with the Department's request that SMC provide information on all its departments, SMC did not comply with this request, and did not provide any compelling reason for this failure.
To summarize the conclusions of the verifiers: (1) department sales could not be matched up with total SMC sales, which was the result of a lack preparation by SMC; (2) SMC did not provide commercial invoices to establish its total sales of subject and non-subject merchandise for the Department, because it did not have the necessary personnel available during verification to make these records available to the Department upon request; and (3) there were other departments for which the verifiers could not determine whether they sold subject merchandise, and information about these departments was in SMC's control and not provided. Therefore, the verifiers could not be certain that all sales of subject merchandise were reported. As all of the records necessary to verify that all U.S. sales of subject merchandise were reported did exist, but were not produced at verification, then SMC had the ability to provide the requested documentation, but failed to do so. 2. Based on the administrative record, SMC failed to comply to the best of its ability with the Department's information requests. The precise basis for the Department's finding that SMC failed to act to the best of its ability is that SMC indicated that the records necessary to pass verification existed, but for one reason or another, they were never presented to the Department verifiers for review. These records covered all four classes of subject merchandise. Since SMC failed to provide these records for the Department to review, SMC committed an act that first caused the failure of the verification of its reported sales. Second, because SMC possessed and controlled these records, it can not be said that SMC complied to the best of its ability. SMC possessed the specific documents necessary for verification and it was fully capable of providing these documents to the Department. The Department is applying AFA to all of SMC's classes of merchandise chiefly on this basis. The fact that company officials admitted that it was possible to comply with the Department's requests demonstrates that SMC was capable of complying with the Department's requests. See SMC Verification Report at 8. Moreover, SMC did not provide a compelling explanation for its failure. SMC's officials stated that its computer accounting records did not distinguish sales by market, and that they may not have been able to complete this task during verification. Id. SMC officials never provided any explanation for why SMC did not complete the specified tasks which the Department clearly set forth in SMC's verification outline, prior to verification. The verification outline was received by respondent's counsel on September 24, 1998, and the verification took place on October 7th and 8th. SMC had thirteen days to tie its total U.S. sales of each subject merchandise product with department and company financial statements. Significantly, company officials stated that they may not have been able to complete the quantity and value reconciliation in the allotted two days for verification, indicating that they thought it indeed might have been possible to satisfy the Department's requests, had the necessary effort been applied. See SMC Verification Report at 8. The implication is that SMC was fully capable of compliance if it had acted to the best of its ability. Also, merely stating that SMC usually reconciles its company-wide financial statement with its department financial statements three months after the department's financial statements are issued does not offer sufficient excuse for SMC's inability to comply. This is particularly true since the Department's request to reconcile its 1997 financial statements came during the last quarter of 1998. SMC admitted that this reconciliation task is typically completed as part of normal company procedure, but was not completed at the Department's request. Furthermore, it was not a company that was inexperienced in antidumping matters, as SMC was participating in its seventh review. While a completely errorless investigation is not a reasonable expectation, this is a case where SMC exercised minimal effort in responding to the Department's questionnaire and prepared very little for verification. SMC's failure to comply cannot be excused as mere inadvertence, but shows a pattern of non-responsiveness to the Department's requests and failure to heed the requests made in the verification outline provided prior to verification. SMC consequently failed to do its best, and it failed to provide a sufficient reason for its failure. Based on the above, SMC did not cooperate to the best of its ability and should be subject to AFA. C. FMEC 1. FMEC's Verification Failure The Department interprets section 351.301(b)(2) of its regulations as allowing the Department to request that a respondent submit specific documents after verification, at the Department's discretion. If a company were allowed to submit post verification submissions at will, the Department would no longer control the verification process and, in fact, may be unable to conduct a verification if a respondent chose to withhold documents until after verification. Moreover, a respondent that chooses this path could put itself seriously at risk. The Court recognizes this when it says, "In practice, a respondent should be fully prepared for verification and try to satisfy all requests for factual information immediately, not only because much evidentiary documentation feasibly can only be inspected on-site, but also to reduce the risk that the verifying officials will find the information to be deficient." See Fujian Machinery at 27-28, footnote 19. Under the Department's interpretation, this generally is avoided as this regulatory provision is used to permit filings in instances where the Department has determined that post-verification submission of data is appropriate. The Department's interpretation corresponds to the goal of verification: to confirm the accuracy and completeness of the data provided in a company's questionnaire responses. To verify the accuracy of U.S. sales responses, Department officials review on site the worksheets that companies prepare and use as bridges between their accounting records and the sales databases they submit to the Department. They also examine the source documentation supporting the worksheets and the sales transactions that have been reported. The verification process includes spot checking source documentation, probing the company's responses from different directions, and asking additional questions as they emerge and the need for clarification or additional corroborating information develops. The ability to review this information at verification, to ensure that clear translations of the data are provided, to question various company personnel about the specifics of a particular issue or the operations of the firm, to obtain "unrehearsed" answers to the Department's questions, and to maintain some level of spontaneity in the data confirmation process are critical to a thorough and successful verification. See Antidumping Manual, Chapter 13. In this case, the Court has ordered the Department to afford FMEC the opportunity to submit those documents the Department requested during verification that FMEC did not supply at verification but could have submitted immediately thereafter. See Fujian at 31. The Department has accepted and reviewed the FMEC documents for purposes of this remand. With respect to the additional documentation that FMEC provided pursuant to the remand, the Department found after its review that this data did not change the outcome of verification. Since dumping is a measure of price discrimination, and prices are reflected in sales documentation, a complete record of sales is indispensable for an accurate measure of dumping. In the case of FMEC, the Department could not ensure that all U.S. sales were properly reported for any product category, with the result that the Department could not verify the quantity and value of the merchandise that FMEC sold to the United States during the POR. More specifically, company officials claimed that they had two separate financial statements for the hand tool production unit for 1997, one for the period of January 1997 through April 1997, when it was called the "Hand Tools Department," and another for the period of May 1997 through December 1997, when it was under new management and called the "General Machinery & Tools Department." See Fujian Machinery & Equipment Import and Export Corporation: Report on the Verification of Sales Information Submitted in the Administrative Review Covering February 1, 1997 through January 31, 1998 ("FMEC Verification Report") at 8. Although the second financial statement's reported sales income was reconciled with FMEC's monthly financial statements and general account book, no monthly sales income statement or account book information was available to support the first financial statement. The department manager, Mr. Zheng, initially claimed that he had no access to accounting records from the period preceding his management. Later he claimed that the records were in a locked cabinet, the accountant with the key to the cabinet had left for the day, and he was unsuccessful in his attempts to contact this individual. Id. These records were among the records ("FMEC Submission") submitted to the Department on November 27, 2001 as a result of the Court's order. See FMEC Submission, at 10-20. However, even with these recent submissions, FMEC's quantities and values for all four classes of subject merchandise in this POR can not be verified. For the period January 1997 through April 1997, the financial statement reported sales income of [ * * * ] . See FMEC Verification Report at 8. The monthly "income statements" submitted on November 27, 2001, indicate total sales of [ * * * ] . (5) The large and unexplained discrepancy between these figures is sufficient to raise doubts that FMEC has reported all sales properly because based on this data recently submitted, it appears that FMEC either under-reported sales totaling at least [ * * * ] (6) or over-reported sales totaling [ * * * ] (7).
In preparation for on-site verification, the Department sent a verification outline to FMEC ten days in advance requesting, among other things, the worksheets the company prepared to identify and report the quantity and value of subject merchandise sold to the United States. The outline was similar to verification outlines used in the past. The quantity and value worksheets are important because they serve as a baseline or bridge to the company's accounting ledgers and other records that are used to prepare and verify the questionnaire responses that have been submitted to the Department. For this reason, the outline issued to FMEC requested that FMEC submit a quantity and value reconciliation on the record prior to the start of verification. FMEC failed to provide these worksheets before or during verification, and it has not provided them to date. During verification, it was clear to Department verifiers that FMEC was not prepared, and that its lack of preparation was aggravated by the absence of key personnel during critical moments in the verification, which affected the timing and flow of the verification. The relevant FMEC accountant was not available the first day of verification, and FMEC officials were therefore unable to carry out any verification procedures, including quantity and value reconciliations, involving accounting records until the second day of verification. See FMEC Verification Report at 5-6. Moreover, the accountant left on the second day before company officials could retrieve from the accountant's locked files the documents the Department had been repeatedly requesting. The Department verifiers put in extra hours and tried to adjust and find alternative ways to substantiate the data in FMEC's questionnaire response, but could not overcome FMEC's lack of preparedness and non-responsiveness to the Department's requests during verification. Moreover a review of source documentation during verification raised questions regarding the accuracy and completeness of FMEC's sales reporting. According to FMEC, sales vouchers indicate the amount of income actually received by FMEC on its sales transactions. Producing these vouchers for a given month would help confirm that the sums paid for merchandise sold in the United States had been accurately reported to the Department. During verification, FMEC did not produce the vouchers for February 1997 requested by the Department. See FMEC Verification Report at 9. Moreover, although the Court has afforded FMEC an opportunity to remedy this failure, FMEC again failed to submit the requested vouchers and invoices in its November 27, 2001 submission. Although FMEC reported three U.S. sales by the Hand Tools Department during February of 1997, FMEC only provided invoices for two of those sales and a voucher for one. FMEC submitted a document entitled, "FMEC evidence for keeping account," indicating [ * * * ] of total sales for February 1997, which converts to [ * * * ] , using FMEC's exchange rate of US$0.1207729 to RMB 1.00. See FMEC Submission at 4. Only one sale of subject merchandise of US$ [ * * * ] on 2/15/97 was covered by one voucher. There are no vouchers for the 2/20/97 sale of US$ [ * * * ] and the 2/24/97 sale of US$ [ * * * ] of subject merchandise. The Department must therefore conclude that [ * * * ] (8) in sales of subject and non-subject merchandise for February 1997 are not supported by sales voucher records. Even if the Department were to assume that FMEC provided all the necessary source documentation for its three U.S. sales, the Department has no way of verifying that FMEC has reported all of its U.S. sales of subject merchandise because there are no vouchers or invoices for transactions involving non-subject merchandise or markets other than the United States. The Department has considered the possibility that the remainder of FMEC's reported February 1997 sales of subject merchandise, which is to say, the sales dated February 20, 1997 and February 24, 1997, have supporting vouchers which were not issued until March 1997. However, after consideration of the record, we do not believe that this is the case. FMEC's voucher record for the one February 1997 sale has three documents with the questionable date of "February 30, 1997," and one dated February 15, 1997. See FMEC Submission at 2-5. The Department in this instance does not consider that the questionable date completely undermines the evidentiary value of the record. However, the Department will consider that the record does reflect a clear intent by the respondent to record vouchers for all February sales within the month of February in order to simplify its accounting records. Therefore, the Department concludes that the February 20, 1997 and February 24, 1997 sales should be supported by a February voucher record, and that these voucher records have not been produced for verification. Since the voucher records do not reflect FMEC's reported sales, the quantity and value of these sales cannot be confirmed.
As previously stated in the Final Results and referenced above, the verifiers made deliberate efforts to work within the constraints of FMEC's limited accounting system and were still unable to confirm the completeness and accuracy of FMEC's responses. For instance, when the verifiers discovered that FMEC's accounting system did not distinguish sales by markets, the verifiers lowered the bar in attempting to verify FMEC's reported quantity and value of U.S. sales. The verifiers changed their approach by attempting to verify if FMEC could reconcile its company-wide financial statements with its departmental financial statements and then narrowing the time frame to determine if the reported U.S. sales for one month was accurately reported. The verifiers' attempt at reconciling FMEC's own books and records failed, as FMEC could not reconcile the hand tool producing department's sales from monthly and yearly financial statements with sales shown in the audited company-wide financial statement. See FMEC Verification Report at 7-8. Essentially, the verifiers changed their approach and took into account the nature of the company's accounting records and its level of preparedness and continued to search for a way of grounding FMEC's reported sales in FMEC's accounting record. The fact that the verifiers attempted to perform standard verification procedures despite the difficulties presented is clearly reflected in the Department's verification report. Id. The verifiers also were forced to improvise when they realized that FMEC did not prepare any of the requested worksheets, that the accountant was not available on the first day, and that there was no access to key documents for the Hand Tools Department. Id. at 5, 6, 10. However, despite rearranging the verification agenda, limiting requests to departmental levels within FMEC, and confining the reconciliation to a smaller time period, FMEC failed to provide sufficient data from its books and records to confirm the accuracy of its response. In particular, FMEC presented the Department with financial statements that did not include accounts from two branches. Although FMEC has now provided financial records relating to these two branches in [ * * * ] , and long-term and short-term investment records, the discrepancy between the income and financial statements and the inadequacy of the provided sales vouchers result in another completeness test failure. See AFA Memo at 4. The Court has ruled that the category of bars/wedges failed verification as a result of a confirmed unreported sale of bars/wedges, amounting to a 100 percent lack of reported sales with respect to that class of merchandise. See Fujian Machinery at 36. However, the verification failures which were key to the Department's decision to resort to FA in the Final Results pertain to all classes of FMEC's subject merchandise. The discovered failure to report a bar/wedge sale may have added to the Department's doubts about reliability of FMEC's data, but this failure was not absolutely essential to the Department's decisions with respect to the other classes of subject merchandise. The Department has determined that FMEC failed verification with respect to all four classes of subject merchandise because FMEC failed to substantiate the accuracy of its U.S. sales data, nor could FMEC establish the completeness of its reported sales, especially since there were unreported departments and branches, any of which could have sold unreported subject merchandise. See FMEC Verification Report at 8-9. While FMEC has submitted additional documents highlighting its investments in three branches and three subsidiaries, these documents do not corroborate any FMEC claim that these branches and subsidiaries did not sell subject merchandise to the United States during the POR. See FMEC Submission at 18-26. FMEC apparently was not attempting to make this claim with its submission, but rather only establish its relationship with its branches and other holdings. At verification, FMEC did not provide the Department with the necessary documentation upon which to verify its submitted data, and as a result, the Department had no confidence that the data were correct. The material submitted pursuant to the Court order has not helped to complete verification. FMEC did not provide source documents to demonstrate the accuracy and completeness of the reported sales made by the Hand Tools Department, thereby undermining the Department's confidence in the reported quantity and value of U.S. sales. In addition, although FMEC reported three U.S. sales by the Hand Tools Department during February of 1997, FMEC only provided invoices for two of those sales and a voucher for one. See FMEC Submission, Exhibit 1. Finally, the reported amount for the sales income of February 1997 is reflected in neither the recently submitted voucher documents nor the February "income statement," and neither of these documents reconcile with each other. Thus, the Department could not confirm that all appropriate sales transactions had been reported or that the reported sales had been portrayed accurately for any product category. The conclusion of the Department is that these verification failures undermine the reliability of FMEC's submitted sales data. Therefore, the Department finds that all product categories failed verification. The Court directed the Department in the event it continued to find that all product categories failed verification to explain for each product category the basis for its decision to apply AFA. As noted above, in order to use AFA under section 776(b) of the Act, the Department must make a finding, supported by substantial evidence, that the "respondent . . . failed to cooperate by not acting to the best of its ability to comply with a request for information." See Fujian Machinery at 56.
2. Based on the administrative record, FMEC had the ability to comply with the Department's information requests. In its opinion, the Court found that FMEC would have submitted certain verification records which the verifiers requested at the October 1998 verification "immediately after verification had the verifying officials not implied that to do so was unnecessary." See Fujian Machinery at 30. The Court ordered the Department to afford an opportunity for FMEC to submit these records. Id. at 31. As the Court has ruled that FMEC could have submitted these documents at verification or shortly thereafter, the Department need not establish here that FMEC had the ability to cooperate with the Department by preparing for and furnishing these records at the October 1998 verification. In regard to the balance of FMEC's submitted record, the Department's position that FMEC had the ability to comply with Department's requests is unchanged. FMEC did not provide quantity and value worksheets and a complete sales listing for any product category. In FMEC's Verification Outline, the Department requested that FMEC "should have on hand all company records and worksheets used in responding to the questionnaire and supplemental requests." See FMEC Verification Outline, at 1. FMEC provided quantities and values in its response to the Department's questionnaire, and with this request the Department was merely seeking the worksheet (i.e., the working basis) that FMEC used to derive the reported quantities and values. The Department, in its final determination, rejected FMEC's contention that it did not have enough time to prepare the documents for verification. See Final Results 64 FR at 43659, 43662-3. FMEC company officials admitted that requested documents were in its possession in a locked cabinet. It is the Department's view that many of the necessary documents must have been compiled, and satisfactory worksheets completed by FMEC, in order to generate its questionnaire responses, in particular the sales listing. Moreover, FMEC had the source documentation necessary for verification within its control and was fully capable of providing it to the Department. Therefore, these materials should have been produced for verification, but were not. 3. Based on the administrative record, FMEC failed to comply to the best of its ability with the Department's information requests It is the position of the Department that FMEC had the ability to produce the records necessary for verification but for various reasons did not. These records must have existed at the time of verification and if FMEC had acted to the best of its ability, these records would have been produced immediately. FMEC asserts that the Department did not request quantity and value worksheets until late in the second day of the verification; however, these worksheets along with voucher books and income statements were requested in the original verification outline. See FMEC Verification Outline at 1-2. Moreover, FMEC's accountant was not present on the first day of verification, and FMEC's counsel was not present on the second day. See Memorandum To The File, FMEC Request to Submit Supplemental Verification Information, (February 26, 1999) at 2; (FMEC Request Memo). The result of this lack of attendance on both days of the verification was that FMEC greatly limited the Department's opportunity to conduct verification, and that FMEC limited its own ability to respond to the Department's requests. See FMEC Verification Report at 6, 8, 10. Contrary to FMEC's claims, the verifiers repeatedly made it clear to company officials that the quantity and value worksheets and voucher books were necessary. See FMEC Request Memo at 2; See AFA Memo at 2. If FMEC's counsel had been present on the second day of verification, perhaps the Department's verification goals may have been met by other routes. The assertion by FMEC that counsel for FMEC left with the verifiers' assent, and with the understanding that verification was complete, is not substantiated by the record. See Petitioner's Rebuttal Brief. The Department does not participate in these decisions because this is a judgment made solely between respondent and its counsel. The verification ended with the acknowledgment of all concerned that the Department's requests were not satisfied, with particular reference to its failure to make contact with the employee with access to monthly financial statements and voucher books. See FMEC Verification Report at 8, 10. If there were any questions by FMEC's counsel that Department verifiers chose not to answer, they were questions which pertained to the eventual Department judgment concerning the outcome of the FMEC verification. Furthermore, FMEC's assertion that the employee was eventually contacted is not substantiated by the record, and neither is its assertion that the verifiers told company officials that it was too late at such point; the Department refuted these claims when they were originally made on the record on February 9, 1999. See FMEC Request Memo at 1. Moreover, the verifiers left the FMEC verification after working until 10:00 PM on the second day of the verification, and the requested documents were never produced. See FMEC Request Memo at 2.
On October 30, 2001, FMEC submitted documents which it claims were the documents which would have been produced within seven days of the verification, pursuant to the Court's ruling. However, all the documents submitted were in Chinese, and none of the documents had English translations as required by 19 CFR 351.303(e) and the instructions regarding translations in the verification outline the Department provided to FMEC. After a consent agreement on November 21, 2001, for an extension of the ordered sixty days for filing these remand results, counsel for FMEC resubmitted the documents, some with translations, others with a translation "key" in lieu of a page-by-page translation. After reviewing the new FMEC Submission, despite the additional opportunity FMEC has been given, the Department has found that the submitted voucher record and the monthly financial statements are inadequate for verifying FMEC's reported sales.
At the original October 1998 verification, FMEC demonstrated a pattern of unresponsiveness when it did not comply with the Department's repeated requests for documents. See FMEC Verification Report at 5, 8 ("Despite repeated requests, FMEC did not provide [ * * * ] ."); (" [ * * * ] e were not able to reconcile the sales income figure in the Hand Tools Department 1997 annual financial statement to the department's financial records because, despite repeated requests, company officials did not provide us with the Hand Tools Department's monthly financial statements for January 1997 through April, 1997."). The Department did not consider adequate FMEC's excuse that Mr. Zheng was responsible for the Tools Department only since May 1997. The verification outline clearly stated that these financial statements and records had to be provided at verification. See Verification Outline at 2, 4. As stated in the FMEC Verification Report, the documents requested by the Department, namely the financial statements for January through April 1997 and the February 1997 vouchers for the Hand Tools Department, were not provided because the documents were in a locked cabinet, and the accountant who had the key for that cabinet had left for the day. See FMEC Verification Report at 8, 10. FMEC clearly had the ability to comply with the Department's request, since the documents were located in a locked cabinet. However, FMEC failed to act to the best of its ability by failing to ensure that key personnel be available to unlock the cabinet, or at least ensure that the keys to the cabinet were available during the verification. FMEC is without an excuse because the Department's verification outline had clearly requested that FMEC provide supporting documentation for all sales, including non-subject merchandise or sales to markets other than the United States, for the POR. Moreover, having been given another opportunity in this remand, it still has not provided proper documentation to support its questionnaire response. In light of the above listed failures, FMEC's failure to comply cannot be excused as mere inadvertence, but shows a pattern of non-responsiveness to the Department's requests and failure to heed the requests made in the verification outline provided prior to verification. In deciding to employ adverse inferences for FMEC, the Department has considered whether FMEC could have benefited from its lack of cooperation. See SAA, H.R. Rep. No. 103-826, at 870 (1994). The errors and omissions uncovered at FMEC's verification had potentially significant implications for FMEC's dumping margins. In light of the fact that the Hand Tools Department's recently submitted January to April 1997 monthly income statements could not be reconciled with the 1997 Hand Tools Department financial statement, FMEC may have withheld significant volumes of U.S. sales from the Department. FMEC's failure to provide a quantity and value worksheet could serve to further obscure any reconciliation of its sales reporting to its accounting system. Moreover, FMEC could benefit from withholding voucher books of subject and non-subject merchandise for February 1997, if there were unreported U.S. sales which FMEC failed to disclose to the Department. FMEC's failure to disclose the [ * * * ] in FMEC's financial statement could also serve to hide unreported U.S. sales during the POR. Finally, with respect to FMEC's acknowledged failure to report at least one shipment of bars/wedges to the United States, FMEC could benefit (as it could in all product categories) from this lack of disclosure if it is selective about sales that it reports to the Department for its margin calculation. All these failures lead to the same conclusion - potentially incomplete and inaccurate sales responses in all product categories. The ability to benefit stems from this and the possible result is lower dumping margins in all product categories. As a result of the above, FMEC should be subject to AFA for all product categories. C. Alleged Changes of Verification Methodology for Supplier Factories A and B The Court has ordered the Department to explain or to provide substantial evidence explaining the Department's decision to require supporting accounting records for raw material input "caps," and to identify salt, acetylene gas, and oxygen as FOPs for the calculation of surrogate values (rather than attribute them to factory overhead). We note that the verification difficulties experienced at the factories add to the evidence supporting the use of FA. However, because SMC and FMEC failed verification due to substantial deficiencies in their sales verifications, the Department would be assigning FA to these companies regardless of our findings at the factory level. Nevertheless, verification failure of the factories further support our FA determination for the following classes and kinds of subject merchandise: Factory A supplied hammers/sledges to both FMEC and SMC, and Factory B supplied picks/mattocks to both FMEC and SMC. 1. Factory A FOPs
The respondents claimed to have reported actual consumption quantities for steel due to the overwhelming significance of steel costs in relation to all other input costs in hand tool production. See SMC Seventh Administrative Review Questionnaire Response ("SMC Questionnaire Response) at D-5; FMEC Seventh Administrative Review Questionnaire Response ("FMEC Questionnaire Response") at D-21. FMEC and SMC were, in effect, reporting on behalf of Factory A and other factories that supplied subject merchandise to both FMEC and SMC. FMEC reported to the Department that Factory A in particular kept such actual costs even where it relies on "caps." In FMEC's supplemental questionnaire response to the Department's inquiry into how their caps were determined, FMEC claimed that the Factory A calculates "(s)tandard costs . . . based on the last several years actual cost data. The factory compares the actual cost of a specific product in the year end with the 'caps' of that year and reaches a performance evaluation for the year. The product-specific variances were then determined based on the standard costs as reflected by the caps." See FMEC Response to Department's August 10, 1998 Supplemental Questionnaire (September 8, 1998) at 16. SMC made the same claim with respect to Factory A in its supplemental questionnaire response to the same question, with identical language. See SMC Supplemental Response to Department's August 7, 1998 Supplemental Questionnaire (September 14, 1998) at 5. At verification, however, the Department found that Factory A did not have the accurate cost data that FMEC and SMC claimed it had; the Department could not actually tie inventory ledgers to the reported steel consumption. See [ * * * ] : Report on Verification of Factors of Production Information Submitted in the Administrative Review Covering February 1, 1997 through January 31, 1998 ("Factory A Verification Report") at 5. Using alternative verification methodology, the Department found that the reported steel inputs appeared reasonable after weighing the steel input materials, though noting that the accounting records did not substantiate the reported figures. See Final Results at 43665. Nonetheless, the Department determined that since Factory A had claimed to obtain its actual steel consumption from its books and records, it was reasonable for the Department to require Factory A to tie its reported quantity of actual steel consumption to its books and records. This does not represent a change in the Department's verification procedures, rather, where actual consumption quantities are involved, it is a standard verification procedure to require a respondent to tie such quantities into its books and records. With respect to caps, the Department finds that Factory A failed to demonstrate that its reported caps reasonably reflect actual consumption quantities. When the Department verifiers attempted to verify the reasonableness of coal and electricity caps, figures that cannot be confirmed through weighing, using the factory's accounting records, specifically, we calculated the ratios of coal and electricity consumed per pound of steel consumed in the factory and found that coal appeared to have been over-reported, and electricity under-reported. See Factory A Verification Report at 9. Moreover, during verification, the Department found that Factory A company officials were not prepared to support their reported caps through their general accounting ledger, as had been requested in the verification outline. See Factory A Verification Report at 3. "Company officials stated that they could not tie any of these expected factor consumption figures per product to its financial records because their company produced other products than hammers, and their records did not record costs for individual products or types of products." Id. The Department finds that Factory A should be capable of comparing its reported "caps" with actual usage in order to demonstrate the reasonableness of the caps, since in FMEC's supplemental questionnaire response, FMEC claimed that Factory A's caps are standard costs and noted that "(S)tandard costs are based on the last several years actual cost data. The factory compares the actual cost of a specific product in the year end with the 'caps' of that year and reaches a performance evaluation for the year. The product-specific variances were then determined based on the standard costs as reflected by the caps." See FMEC Response to Department's August 10, 1998 Supplemental Questionnaire at 16. The Department rules similarly for SMC, which made the same claim. See SMC Supplemental Response to Department's August 7, 1998 Supplemental Questionnaire (September 14, 1998) at 5. With these statements, the respondents state unequivocally that Factory A's reported caps can be compared on a product specific basis with actual results. This suggests to the Department that the respondents had the ability to substantiate the caps by comparing them to actual consumption recorded in accounting records, and this is the usual test the Department employs to verify respondents' data. Therefore, for the Department to proceed with verification by checking the reported factors against accounting records is not unreasonable.
The Department has relied upon caps in the past only when they were found to be reasonable, and has rejected them when found to be otherwise, as in Natural Bristle Paintbrushes and Brush Heads from the People's Republic of China; Final Review Results of Antidumping Review, 64 FR 27506 (May 20, 1999) ("Natural Bristle Paintbrushes"), cited in the Final Results in this case. See Final Results 64 FR at 43666. In Natural Bristle Paintbrushes, the respondent attempted to duplicate reported cap figures, but did not succeed. See Natural Bristle Paintbrushes at 27514. The respondent asserted that the figures derived from a standard cost system, but this system was not explained to the verifiers. The Department finally rejected the caps. In contrast, the Department found in previous reviews of the hand tool orders that the reported caps were reasonable. See Heavy Forged Hand Tools, Finished or Unfinished, With or Without Handles, From the People's Republic of China; Final Results of Antidumping Duty Administrative Reviews, 63 FR 16758, 16761 (April 6, 1998). In the case of coal, for example, the Department made this determination after the verifiers had calculated an average consumption rate for coal using the factory's books and records and determined that there was no significant difference between its calculations and the reported caps. The verifiers did the very same thing in the review at hand, but found significant differences. Consequently, in this POR, the caps were found to be unreasonable. There were discrepancies between the reported caps and the figures obtained at verification, which called into question the reasonableness of the caps. For May and September of 1997, the verifiers calculated unit-of-coal to unit-of-steel ratios of [ * * * ] and [ * * * ] respectively, based upon the coal delivery record, the detail record for production coal consumption, and the steel consumption ledger. When these ratios were applied to reported steel inputs for each product, the reported coal consumption figures for each product appeared over-reported. See Factory A Verification Report at 8-9. Ratios of kilowatt hour of electricity consumed (from electric company bills and monthly meter records) per pound of steel consumed (from the steel consumption ledger) were calculated at [ * * * ] and [ * * * ] for May and September 1997, and when these ratios were applied to reported steel inputs, electricity appeared under-reported. Id. Where caps have been accepted previously, such discrepancies were not present. In sum, the same verification methodology used in prior reviews was applied, and the precedent from prior reviews was followed. The only difference is the final result. Factory A's officials were unable to provide variances between caps and actual consumption figures in order to demonstrate that the caps are reasonable. Furthermore, while company officials claimed that the verifiers' coal and electricity consumption figures per-unit of steel were not accurate, they did not discuss any necessary adjustments which might reconcile the verifiers' figures with the figures reported to the Department. Therefore, the Department has a reasonable basis for rejecting Factory A's reported caps for electricity and coal, because we found they do not reflect actual usage. The Department was able to use Factory A's billing and consumption records. Similarly, Factory A could have reported figures for coal and electricity consumption using accounting records to allocate coal and electricity consumption quantities to specific products. See Factory A Verification Report at 7. The documents which the Department used to measure the reasonableness of Factory A's reported consumption figures could have been used to generate consumption figures directly, without reliance on the caps methodology. Because the verifiers calculated an average consumption rate for these production factors but found a significant difference between their calculations and the reported caps, the Department concludes that this cap data is flawed. For instance, for coal, which was the third most important factor of production after steel and unskilled labor, Factory A's caps were over-reported by as much as 180 percent. Because respondents were not able to demonstrate that the reported consumption quantities reasonably reflected actual consumption quantities, the reported values cannot be used to reliably represent production factors for these inputs. Thus, Factory A claimed to have obtained it reported quantity of actual steel consumption from its books and records. However, Factory A could not demonstrate this at verification. In addition, Factory A failed to demonstrate that its reported caps reasonably reflect actual consumption quantities. Because Factory could not demonstrate the reasonableness of its FOPs, the Department considers Factory A to have failed verification. 2. Factory B FOPs The Court has cited the Department's treatment of pellets and detergent in a previous review of this antidumping order as precedent which requires that three inputs, salt, acetylene gas and oxygen, should be included in factory overhead, rather than valued separately as FOPs. See Fujian Machinery at 47. The principle which the Court invokes is that materials not directly incorporated into subject merchandise should be included in factory overhead. The principle is outlined in the Compendium of Statements and Standards published by the Institute of Chartered Accountants of India, which the Department has relied upon in the past to maintain consistency between the valuation of FOPs and Indian surrogate values. See Notice of Final Determinations of Sales at Less Than Fair Value: Brake Drums and Brake Rotors From the People's Republic of China, 62 FR 9160, 9169 (February 28, 1997). However, it is not always simple to discern which material inputs are appropriately included in factory overhead in accordance with the Compendium of Statements and Standards standard. The exact citation for the standard in question identifies materials which "assist in the manufacturing process, but * * * (do) not enter physically into the composition of the finished product" as overhead. Id at 9169. Applying this standard, the Department has ruled that materials which are consumed as flux, for example, are considered a direct material even though they are not present in the finished product. Id. Acetylene gas and oxygen are similarly burned during a welding process, and like flux, they are not present in the finished product, however indispensable they are for production. In this instance though, the Department considers acetylene and oxygen as energy inputs in the production process, and treats them as direct inputs, consistent with section 773(c)(3)(C) of the Act. The statute specifically designates "amounts of energy and other utilities consumed" as production factors. Id. It is important to note that the verifiers confirmed the use of acetylene gas and oxygen as an energy input used by cutting torches [ * * * ] during a tour of Factory B's plant and production process. See Factory B Verification Report at 5. Furthermore, just as electricity and coal are considered FOPs that are separately valued, there is no reason to exclude from the factors the acetylene gas and oxygen that fuels the torches that cut direct material inputs into uniform pieces. The Department found it reasonable to consider salt a factor of production in the Final Results. Salt is used during the quenching process in a manner comparable to flux material used to fuse material during soldering, brazing, and welding. Flux is not present in a product after the process is completed, but it affects the molecular structure of the material that is being worked, while it is being worked. Salt similarly affects the molecular composition of steel by hardening reheated steel during the production process. Molten salt and brine quenching has the effect of making reheated steel harder than does quenching in water, because it is a faster quench. See Modern Application News: The Metalworking Idea Magazine, "Proper Quenching Option Yields Better Heating-Treating Results" by Larry Olson, June 2001. However, in the Notice of Final Determination of Sales at Less Than Fair Value: Saccharin from the People's Republic of China, 59 FR 58818, 58824 (November 15, 1994)(Saccharin from PRC), certain materials used to "cool the reactors" were attributed to overhead. The Department stated in that case that "(t)he types of inputs in question here, trace chemicals and chemicals used to cool the reactors, are infrequently used in the production process and typically are small in value relative to the total cost of manufacturing the product and, hence would be included in overhead." Id. While salt is used with more frequency than the materials at issue in Saccharin from PRC, we suspect the similarity in terms of relative cost makes the application of this precedent more compelling than Brake Drums in this instance. The Department has found that where materials which are used infrequently and in small quantities in production have a relative cost that is a significant portion of the cost of the finished product, companies may choose to trace the cost of the materials to the finished product, rather than allocating them over total production. See Issues and Decision Memorandum for the Antidumping Administrative Review of Silicomanganese from the People's Republic of China - December 1, 1997 through November 30, 1998, at 25-26 ("Silicomaganese"). In contrast to Silicomaganese, the Department finds that the relative cost of salt to the finished hand tools product is likely not so significant that its cost must be extracted from overhead to ensure its inclusion in normal value.
If there has been a failure by the Department to separate accounts for acetylene and oxygen, it was as a result of oversight which occurred specifically because the respondent had never identified those production factors previously. Even disregarding these factors, however, the Department has ample basis for continuing to find that Factory B failed verification. The Department's determination that Factory B failed verification is based not only on Factory B's failure to report acetylene gas and oxygen as FOPs, but also upon Factory B's inadequate documentation of its FOP data, including the most important factor, steel. See Final Results at 43666. The Department weighed steel inputs and outputs, and compared them to Factory B's response, and did not find sufficient correlation with respect to 2.5 pound hammers. See Factory B Verification Report at 8. Moreover, the Department failed Factory B because it had insufficient records to support the consumption figures that it had reported for coal and electricity (meter readings and coal delivery announcements, respectively). See Final Results at 43666, Factory B Verification Report at 10-11. Finally, Factory B also had the capacity to reconcile "caps" to the actual usage since it has stated on the record, "Standard costs are based on the last several years actual cost data. The factory compares the actual cost of a specific product in the year end with the 'caps' of that year and reaches a performance evaluation for the year. The product-specific variances were then determined based on the standard costs as reflected by the caps." See FMEC Response to Department's August 10, 1998 Supplemental Questionnaire at 17. As discussed above, the Department is not obligated to accept caps that are not verified and found to be reasonable. See infra at 16-17. As a result, the Department remains unconvinced that Factory B accurately reported its factor inputs. See Zenith Electronics Corp. v. U.S., 988 F.2d 1573, 1583 (Fed. Cir. 1993) ("The burden of production should belong to the party in possession of the necessary information" in the antidumping context.) In light of the above, the Department considers Factory B to have failed verification. D. Interested Party Comments: Comment 1: FMEC asserts that the Department has not shown that it failed verification. At the Court's direction, the Department allowed FMEC to submit verification documents the Department refused to accept during the administrative review. FMEC claims that it is not clear how the Department confirmed its finding that FMEC failed verification after receipt of these documents since such documents fulfilled their function of demonstrating that income statement sales amounts could be reconciled to financial statements for the same time period. FMEC maintains that any claim by the Department to the contrary is based on a misunderstanding of FMEC's accounting procedures. As these documents demonstrate that FMEC did not under report its sales, FMEC contends the Department is wrong in its assertion that these documents did not provide the necessary verification. DOC Position: The Department maintains that FMEC has failed to reconcile its reported sales revenue with its financial statements. FMEC's Hand Tools Department reported sales revenue for January 1997 through April 1997 of [ * * * ] . See FMEC's Verification Report at 8. However, the January 1997 to April 1997 sales figure reported by FMEC's Hand Tools Department in its "income statement" submitted on November 27, 2001 (as a result of the Court's order) is [ * * * ] . (9) Even if we were to assume that the amount reflected in the "income statement" for April reflects total sales for January through April of 1997 totaling sales of [ * * * ] as FMEC has asserted, this does not explain the large discrepancy between the sales figures FMEC provided to the Department and the sales amount contained in FMEC's income statement. This reconciliation problem affects the verification of U.S. sales of all product categories. We note that, as discussed above, there were other important verification deficiencies affecting FMEC, a number of which raised significant additional questions about the completeness of FMEC's response. However, the nature and size of this reconciliation discrepancy alone makes it impossible for the Department to determine whether FMEC fully and accurately reported its U.S. sales. As a complete U.S. sales record is fundamental to an accurate measurement of dumping, we consider this and other FMEC verification deficiencies to be substantial enough to justify the Department determining that FMEC failed verification. Comment 2: FMEC contends that the Department has not justified its decision to assign FMEC total FA with respect to all four classes of subject merchandise. FMEC claims that the Department has abandoned its original rationale and come up with new reasons to justify the dumping margins based on FA. FMEC notes that this case was remanded so that the Department may determine how and why data with respect to one type of merchandise affects the Department's treatment of the other types of merchandise. The Court also stated that the Department must address whether such errors may be remedied through the application of FA to bars and wedges, or whether such errors instead corrupt the entire universe of sales data and thus necessitate the use of total FA for all four categories of subject merchandise. According to FMEC, despite the Court's instructions, the Department has not shown why FMEC's failure to report sales of bars and wedges justifies the use of total FA for the other types of subject merchandise. DOC Position: The Court agreed that FMEC failed verification with respect to bars and wedges, but remanded the Department's determination that FMEC failed verification with respect to the remaining three classes of subject merchandise. See Fujian Machinery at 36. As explained above, the Department has determined that FMEC failed verification with respect to all four classes of subject merchandise because, among other things, it failed for each product category to substantiate the accuracy and completeness of its U.S. sales and a complete U.S. sales listing is fundamental to the Department's ability to conduct its antidumping analysis. Where a company fails verification, the Department resorts to total FA for the company's dumping margin. We note that, while discussing another respondent in this review segment, the Court observed that a failure to fully report sales, such as took place at FMEC, not only provides substantial evidence of a verification failure, but also supports the use of total FA. See Fujian Machinery at 42. Comment 3: FMEC contends that the Department cannot use the fact that FMEC did not provide documentation during verification as the justification for FMEC's verification failure. FMEC states that the Court has already established that the Department is not justified in using this fact to impose punitive dumping margins. It further points out that the Court has ruled that FMEC officials and FMEC's counsel could reasonably have interpreted the Department's actions as an indication that FMEC had satisfied the verifiers' information requests. Additionally, FMEC notes that for the first time, the Department contends that "{t}he assertion by FMEC that counsel for FMEC left with the verifiers' assent, and with the understanding that verification was complete, is not substantiated by the record." The respondent argues that the Department cannot challenge this finding now by merely asserting that it is not supported by the record. According to the respondent, the Court has already observed that the Department did not contest FMEC's version of these events, and therefore is assuming it to be substantially true. In summary, the respondent claims that its belief that the sales data had been adequately verified was reasonable, and does not demonstrate a lack of cooperation by the company. DOC Position: Although we have given FMEC another opportunity to provide the Department the documents requested at verification, as instructed by the Court, FMEC has failed to do so in its November 2001 submissions. The Department's requested documents at verification included, among other documents, February 1997 voucher books and attached invoices. As explained above, FMEC reported three U.S. sales during the month of February, but has only submitted one voucher and two invoices. Further, the submitted documents fail to reconcile its reported sales to its financial statements. Thus, FMEC has failed to comply with the Department's request even after it was given another opportunity to do so. We also disagree that it was reasonable for FMEC to assume that its sales data had been adequately verified. As the Department pointed out in the Draft Results, and in the FMEC verification report, the Department made repeated requests of FMEC officials for the documents at issue, but FMEC officials failed to provide the information. See FMEC Verification Report at 8-10. Late in the second day of verification, and subsequent to the verifiers' repeated requests for the subject documents, FMEC officials informed the verifiers that the accountant with the key for the locked cabinet where the documents were located had left for the day and they were unable to reach this party by phone. (10) See id. FMEC officials, after receiving repeated requests for the documents at issue, and making futile attempts to contact the one employee who had access to this information, were clearly aware that they had not satisfied the verifiers' information requests. These officials may have been satisfied themselves that they were successful in offering the Department one final excuse for not providing the documents, (11) but they were clearly aware that they had not fulfilled the verifiers' information requests. Furthermore, as we also pointed out in the Draft Results, the assertion that FMEC's counsel left a day early with the verifier's assent is not substantiated by the record. In fact, the Department does not participate in these decisions, as this is a judgment made solely between respondent and its counsel. Moreover, if FMEC's counsel had comments or substantive questions subsequent to the FMEC verification pertaining to the eventual Department judgment over the outcome of the FMEC verification, he could have raised them by submitting them formally for the record pursuant to Department regulations. As respondent's assertions may have been understood by the Court to have been fact, we note that FMEC fails to point to any record evidence supporting its characterization of the verification events. The Court, in its decision, may have assumed that FMEC's version of certain events were "substantially" true because the details of FMEC's version of events were not specifically contested by the Department. (12) However, the record evidence, which served as the basis of all of the Department's findings and briefs before the Court, on its face contradicts the respondents' version of many of the events. (13) Moreover, we further note that the SAA states that the Department does not need to address every argument in a case, but those that are material or relevant to the underlying substantive issue. Recognizing that antidumping proceedings are "investigatory in nature and . . . do not allow an extensive period of time in which to write determinations," the SAA states that the Department "must specifically reference in [ * * * ] determinations factors and arguments that are material and relevant, or must provide a discussion or explanation in the determination that renders evident the agency's treatment of a factor or argument." The Department addressed what it considered was material and relevant to the issues in this proceeding segment; its silence regarding FMEC's assertions does not mean that FMEC's version of events is true. Comment 4: FMEC maintains that the Department has not justified its decision to apply AFA to FMEC. According to FMEC, the Court ruled that to assign AFA, "Commerce needs to articulate why it concluded that a party failed to act to the best of its ability, and explain why the absence of this information is of significance to the progress on its investigation." (14) Even if the Department is able to demonstrate that a respondent had the ability to comply, the Court notes that if the respondent pleads that "it did not do so because of simple inadvertence, {Commerce} must show more." Factors the Court suggests the Department might consider include "multiple erroneous business submissions, non-responsive answers to multiple inquiries, and other evidence of a 'pattern of unresponsiveness' or that strongly indicat{es} a specific intent on the part of the respondent to evade {Commerce's} requests for information. However, the respondents stress the Court's observation that a "completely errorless investigation is simply not a reasonable expectation. Even the most diligent respondents will make mistakes, and Commerce must devise a non-arbitrary way of distinguishing among errors." DOC Position: Contrary to respondent's assertion, the Department is not required to establish a respondent's intent before using AFA. The statute requires a respondent to cooperate "to the best of its ability," rather than merely requiring that it make what it views as sufficient efforts to cooperate. As described above, the Department found that FMEC's verification failures cannot be excused as mere inadvertencies, but reflect a failure to heed the verification outline the Department provided prior to verification, a lack of preparation for the verification, and a pattern of non-responsiveness to the Department's requests at verification. FMEC had the source documentation necessary for verification within its control and was fully capable of providing it to the Department, but did not. As FMEC could have provided the information requested, but chose not to supply it, the department is justified in the use of adverse inferences. Comment 5: SMC maintains that as discussed above with respect to FMEC, the Department has not justified its decision to apply AFA to SMC. Additionally, SMC argues that the new reasons cited in the Draft Results no more justify the use of AFA than do the reasons cited in the Department's original determination. SMC claims that the Department declined to take into account the Court's view that there is "abundant record evidence tending to show that most of the problems associated with verification . . . were inadvertent and directly attributable to the inadequate accounting and computing resources of the plaintiffs and their suppliers' factories."
SMC also maintains that the Department's finding is based upon a mischaracterization of the record. SMC officials did not indicate that they could have satisfied the Department's requests for a quantity and value reconciliation "had the necessary effort been applied." On the contrary, they stated that they were unable to provide the information within the two days allowed for verification because its accounting records do not distinguish sales by market. Moreover, SMC claims that the Department ignored its explanation that while it would have been possible to reconcile these figures at the end of the accounting period, it was not possible, given the limitations of the computer accounts, to do so at the time of verification. Furthermore, SMC criticizes the Department for noting that it reported transportation distances incorrectly and for observing that SMC is an experienced respondent participating in its seventh review of the hand tool orders. According to SMC, the Court held that the Department could not rely on SMC's past experience to justify AFA unless the Department could show that prior reviews had served to give SMC notice of its deficiencies in its cooperation, or if the Department could demonstrate specific actions by SMC in prior reviews that would prove that SMC had the ability to cooperate in the present review. SMC contends that the Department has not shown or demonstrated any of these items. Moreover, because of the wealth of other sales data that it provided, SMC maintains that the record does not demonstrate the type of willful withholding of evidence that warrants the application of AFA. DOC Position: We disagree. SMC's assertion that the Department cannot apply AFA except in cases where the respondent deliberately withholds information overstates the actual requirement. A respondent need only fail to act to the best of its ability in order to receive AFA. Where a respondent is undisputedly capable of providing requested data and the respondent also had its attention drawn to the need for the information, it cannot be said that the respondent has acted to the best of its ability when it fails to provide this data. SMC states that it reconciles its department financial statements to its company-wide financial statement every year, and the Department asked SMC to do exactly that at verification. However, according to SMC, the Department's verification occurred prior to the time that this task is typically completed. Consequently, SMC characterizes this as a case of the Department making demands which are beyond its accounting limitations. We disagree, especially given the fact that the Department's request for SMC to reconcile its 1997 financial statements came during the last quarter of 1998. The Department acknowledges that SMC's transportation distances misstatement did not benefit the respondent and has modified the remand accordingly; however, the Department merely cited this as evidence that SMC exercised minimal effort in responding to the Department's questionnaire and prepared very little for verification. Reporting proper distances can in no way be considered difficult and the errors can not be attributed to a rudimentary or problematic accounting system. As described above, the Department found that SMC's verification deficiencies cannot be excused as mere inadvertencies, but reflect a 'pattern of unresponsiveness' through SMC's failure to adequately prepare for verification and to provide many key documents requested by the Department at verification. SMC cannot attribute many of its failures to an inadequate accounting or computer system. Specifically, the following failures did not depend on SMC's accounting system: (1) providing documents related to the agricultural tools department (2) providing key personnel, and (3) reporting the existence of several departments. As this is not the first review for SMC and not its first verification, the company has the ability to comply and to provide source documentation would be needed to confirm its questionnaire responses. SMC had the source documentation necessary for verification within its control and was fully capable of providing it to the Department, but did not. Therefore, pursuant to section 776(b) of the Act, the Department has determined that it is appropriate to use an adverse inference in selecting from the facts otherwise available when determining a margin for SMC. Comment 6: Respondents take issue with the Department's statement that "because SMC and FMEC failed verification, there ultimately is no need to value production factors in this review segment." In respondents' judgment, this statement improperly assumes that the verification problems at FMEC and SMC alone warrant the use of adverse inferences. Respondents argue that it is necessary for the Department to consider the factor data because as the Court pointed out, verification problems in this case do not of themselves warrant wholesale rejection of respondents' data. Citing the Final Results, respondents maintain that the Department originally rejected caps because they could not be traced to the factories' accounting records, a ruling that respondents assert constituted a departure from the Department's acceptance of caps in prior segments of this proceeding. In the Draft Results, respondents claim the Department now contends that the caps were not reasonable because the Department's verifiers, based on their own calculations, found errors in the reported consumption rates for coal and electricity. On the other hand, the Department conceded that Factory A's reported steel consumption was reasonable even though SMC did substantiate the reported figures with the accounting records. Considering the percentage that steel alone accounts for with respect to Factory A's total production costs, and the fact that overstating coal consumption inflates Factory A's costs, respondents argue that it can hardly be said that Factory A's factor errors warrant the use of AFA. DOC Position: The Court remanded the Department's determination with respect to Factory A so that the Department could reconsider whether Factory A failed verification. As explained above, the Department determined that FMEC and SMC failed verification because, among other things, they could not substantiate the accuracy and completeness of their U.S. sales and these sales are essential to an antidumping analysis. This had been the thrust of the Department's analysis. Where a company fails verification, the Department uses total FA for the company's dumping margin. It was only in this context that we noted in the Draft Results that FMEC and SMC's verification failures do not hinge on the verification failure of the factories, and the verification failures of the factories merely lend greater support to our determination to use total FA. However, total FA could result from the verification failures of the factories as well. The Department realizes that the caps themselves may not be recorded in the company's accounting records or be used to calculate the consumption amounts reported therein. Thus, the caps may not be able to be "traced" to accounting records. However, in keeping with our past practice, in the 97-98 review the Department used the factory's accounting records to test the reasonableness of the caps, essentially testing the variance between the caps or standard consumption amounts reported and actual consumption amounts. With respect to coal and electricity, two of the more significant inputs for which caps were reported (the factory reported the actual consumption of steel, not caps), the Department found the caps to vary substantially from the consumption figures derived from the factory's accounting records. While the Department understands that caps are estimates of consumption amounts and will vary from actual consumption figures, in this case the caps for coal and electricity varied significantly from the consumption figures derived from the factory's accounting records. Testing the reasonableness of reported caps using the factory's accounting records does not constitute a departure from the manner in which caps have been tested in the past. However, in this case the test indicated that the caps for coal and electricity were unreliable. Moreover, the factory failed to provide any other support for the reported usage. Verification requires a respondent to substantiate its reported information and Factory A failed to do so with respect to the usage rates reported for coal and electricity. With respect to the results of verification at Factory A, the Department determined, as described above, that Factory A failed verification. Factory A claimed to have obtained its reported actual steel consumption from its books and records. However, Factory A could not demonstrate this at verification. In addition, Factory A failed to demonstrate that its reported caps reasonably reflect actual consumption quantities. Because Factory A could not demonstrate the reasonableness of its FOPs, the Department considers Factory A to have failed verification. Furthermore, at verification, the respondent's records could not be used to substantiate any of the actual consumption figures reported for steel. Although the Department was able to weigh randomly selected steel inputs for two types of hammers, and found the consumption figures reported for these hammers to be reasonable, the Department believes that weighing inputs, which has been used to test caps in the past, does not in this case adequately support the actual consumption quantities reported for steel when the respondent claimed that it had "sufficient record keeping ability to record the amount of steel used to produce the subject merchandise", and even reported a model-specific consumption quantity of steel for one model of hammer but then, at verification, was not prepared to support and could not support the consumption figures reported for steel using any of its accounting records. Comment 7: Respondents argue that pursuant to the Court's instructions, "unless Commerce can demonstrate that it has changed its methodology (and post hoc rationalizations will not suffice for this purpose) or can adduce substantial evidence showing that Factory B failed to prove that the items (i.e., the materials at issue) were not physically incorporated, it must find that Factory B did not fail to report any factors of production." While the Department concedes that salt is properly included in factory overhead and that acetylene gas and oxygen are "not present in the finished product," respondents assert that the Department nonetheless engages in post hoc rationalization to come up with a new basis for including acetylene gas and oxygen in the factors of production on the theory that they constitute energy inputs. Furthermore, respondents argue that in the process, the Department attempts to shift the blame for this change to respondents by stating that the Factory had never identified those production factors previously. Respondents explain that Factory B never reported these costs as FOPs because they were not treated as FOPs in prior reviews and the Department never told respondent that it should report its FOPs any differently in this review. The respondents also contend that the Department's other purported reasons for finding that Factory B failed verification are unsubstantiated as well and do not merit the application of AFA. Respondents dispute the Department's claim that it weighed steel inputs and outputs for 2.5 pound hammers and did not find sufficient correlation with Factory B's questionnaire response. Respondents claim that the report merely states the output weights of 2.5 pound hammers and states no conclusions regarding the correlation between inputs and outputs. DOC Position: The Court remanded the Department's determination with respect to Factory B so the Department could provide a reasoned explanation for its change with respect to FOPs and to reconsider whether Factory B failed verification. At issue here is a provision of law, section 773 (c)(3)(C) of the Act, which requires that all energy inputs be reported as FOPs. Respondent apparently neglected to separately report two such inputs for several reviews, and this went unnoticed by the Department. The fact that the Department did not request the information in past reviews does not mean that Factory B did not need to report the information for this review. The fact that the Department addressed these energy factors in this POR is not a change in methodology on the Department's part, but the result of information the Department collected during verification which permitted it to identify FOPs that should have been reported, but were not. Moreover, as explained above, Factory B failed to demonstrate the reasonableness of its input data despite stating in its questionnaire response that it could. With respect to hammers, the Department notes that verification reports do not state conclusions; their purpose is to report facts. Conclusions are always left for the Department's determinations. The problem with respect to 2.5 pound hammers was just a statement of fact by the verifiers; the problem was self-evident from the Department's findings. Taking all its findings together, the Department determined that Factory B failed verification. E. Separate Rates for SMC and FMEC The Court ordered the Department to issue separate rates for FMEC and SMC. Accordingly, the applicable dumping margins are: SMC hammers/sledges 27.71% bars/wedges 47.88% picks and mattocks 98.77% axes/adzes 18.72% FMEC hammers/sledges 27.71% bars/wedges 47.88% picks and mattocks 98.77% axes/adzes 18.72% RESULTS OF REDETERMINATION For the foregoing reasons, the Department determines, on remand, that FMEC failed verification with respect to all subject merchandise. With regard to FA, FMEC and SMC failed to cooperate to the best of their ability to comply with the Department's information requests. Therefore, pursuant to section 776(b) of the Act, the Department determines that it is proper to use an adverse inference in selecting from the facts otherwise available for determining dumping margins for FMEC and SMC. ______________________ Faryar Shirzad Assistant Secretary for Import Administration ______________________ Date 1. After reviewing the record, the Department notes that in the [***]: Report on Verification of Factors Information Submitted in the Administrative Review Covering February 1, 1997 through January 31, 1998 ("Factory B Verification Report"), "acetylene," "salt" and "oxygen" were treated as business proprietary information ("BPI"). On April 21, 1999, counsel for FMEC and SMC notified the Department that it had not designated "acetylene," "oxygen" or "salt" to be BPI. Letter from Robert T. Hume, April 21, 1999. Therefore, the information will not be treated as BPI, and the Department corrects any over-bracketing that may have occurred. 2. Congress directs the judiciary to consider the SAA to be Congress's authoritative expression of intent. 19 U.S.C. § 3512(d) (2000). 3. SMC had the ability to print out an accounting report of all sales during the POR, and other accounting reports of sales of each article of subject merchandise that it produces. SMC Verification Report at 7. SMC also had the ability, for example, to pull the invoices on the reports, and mark the export destination of each line item on the print out after reference to the invoices, highlighting those line items which it found to be U.S. sales, and separate the invoices into two stacks (U.S. sales and sales to all other countries). Id. 4. SMC claimed that only two of its departments handled subject merchandise exported to the United States, the No. 2 Hardware & Tools Department and the Agriculture Tool Department. SMC Verification Report at 3. 5. The documents submitted by FMEC also show a total of [***] sales by the Hand Tools Department for the year on the April monthly income statement. It is unclear whether this reflects the income from January to April, or only March and April. The source of this ambiguity is the March "income statement" which has identical numbers in two columns, the total monthly sales income column and the year-to-date sales column. Thus, it is unclear whether March reflects the income from January to March or only reflects the sales income for the month of March. It is also unclear whether the year-to-date figure for April reflects the income from January to April, or only reflects the sales income for March and April. 6. This is the difference between the [***] amount reported in the verification report, and [***], the sum of the year-to-date amounts reflected in the February and April "income statements" (assuming that the year-to-date amounts in these income statements each reflect two months of income). 7. This is the difference between the [***] amount reported in the verification report, and [***], the year-to-date amount reflected in the April "income statement" (assuming that the year-to-date amount in April reflects the income from January through April). 8. This figure is derived by taking the total reported sales for February 1997 of subject and non-subject merchandise of [***] and deducting the one US sale substantiated by a voucher of [***]. 9. We note that the Department's request to FMEC was for monthly income statements. If the March statement was cumulative for the year, as FMEC has asserted, then it is not a monthly statement, as requested by the Department. Rather it is a quarterly statement, which is incidentally labeled as a monthly statement for March. The submissions by FMEC were at best confusing and misleading. 10. As noted in the Draft Results, FMEC's assertion that the accountant was eventually contacted is directly contradicted by the record evidence. 11. Earlier in the verification, the manager of the department covering the subject merchandise, Zheng Yi Feng, had told the verifiers that he did not have access to that department's records prior to May 1997 (when he became manager of this department), and would have to ask his manager's permission to provide the requested documents. See FMEC verification report at 8-10. FMEC officials also never explained why they subsequently would be able to provide the documents at issue through the accountant (discussed above), when Mr. Zheng never had asked or received his manager's permission to provide the requested documents. 12. The respondent, in its comment, implies that the Court assumed that FMEC's version of all of the verification events were all substantially true. However, the Court's assumption appears to be limited to the events noted on page 29 of its decision, and does not include the supposed assent by the Department to "allow" FMEC's counsel to leave verification (which is summarized by the Court on page 23 of its decision). 13. See the Draft Results at 14-15. 14. Slip Op. at 60 (citing Nippon Steel Corp. v. United States, 146 F. Supp. 2d 835, 841 n.10 (CIT 2001)(Nippon Steel). The Department notes that Nippon Steel is not a final and conclusive court decision. Nevertheless, pursuant to the Court's order, in the instant case, the Department has applied the standard set forth in Fujian Machinery in making its determination to apply AFA to the respondents. |