The Department of Commerce (the Department) submits these final results of redetermination (Final Results) pursuant to the remand order of the U.S. Court of International Trade (the Court) in U.S. Steel Group, A Unit of USX Corporation, USS/Kobe Steel Co., and Koppel Steel Corp. v. United States, Slip Op. 97-95 (CIT July 14, 1997) (U.S. Steel Group). This remand pertains to the calculation of the cost of production (COP) of one company, Siderca S.A.I.C., and its affiliate, Siderca Corporation (together Siderca), the sole respondent in the Department's less-than-fair- value (LTFV) investigation of oil country tubular goods (OCTG) from Argentina.
In calculating Siderca's COP, the Department's calculation of general and administrative (G&A) expenses included an offset for "miscellaneous income" comprised of revenues from: (1) sales of intermediate products; (2) sales of tubes purchased from other countries and resold in other countries; and (3) sales of technical assistance to other steel companies. See Final Determination of Sales at Less Than Fair Value: Oil Country Tubular Goods From Argentina, 60 FR 33539 (June 28, 1995) (Final Determination).
With respect to the G&A offset, the Court stated that the Department's factual determination must be supported by substantial record evidence, and found that the Department failed to cite evidence in the Final Determination to support the notion that Siderca's miscellaneous expenses were related to the production operations of the subject merchandise. The Court also stated that the legal standard articulated in the Department's April 15, 1996 Memorandum to the Court(1) was not the same as that set out in the Final Determination. Therefore, the court remanded this issue to the Department with instructions to clearly articulate the Department's practice in allowing such an offset, and cite to record evidence to support the notion that Siderca's miscellaneous sales were related to the production operations of the subject merchandise.
Additionally, the Department requested a remand to explain why, in calculating COP, it had reduced Siderca's manufacturing costs for the full amount of the reintegro tax rebate received by Siderca. Id. With respect to this second issue, the Court found insufficient the Department's explanation for its adjustment to Siderca's COP to account for the entire amount of indirect taxes rebated to Siderca on sales to the People's Republic of China (PRC), the third-country market used to determine foreign market value. The Court found that it was not reasonable for the Department to assume that the entire amount of the rebate on Siderca's sales to the PRC was attributable to material inputs, and noted that Siderca acknowledged that the rebate was for taxes paid on various elements other than material inputs. Pursuant to the Department's request, the Court remanded the Department's Final Determination with respect to the rebate to give the Department the opportunity to correct its erroneous statement that all of the indirect taxes are attributable to material inputs, and to more plainly articulate its rationale for adjusting Siderca's COP for the full amount of the rebate received by Siderca.
On August 21, 1997, we released our Draft Results of Redetermination Pursuant to Court Remand (August 21, 1997) (Draft Results) for comment. On August 28, 1997, we received comments on the Draft Results from U.S. Steel Group. On September 3, 1997, we received rebuttal comments from Siderca. Upon consideration of the comments, and rebuttal, our Final Results remain unchanged from our Draft Results.
Issue 1: Income Offset to General and Administrative Expenses
In its July 14, 1997 opinion in this case, the Court stated that the antidumping statute does not define COP, nor does it include discussion of the treatment of an income offset to cost. U.S.Steel Group, Slip Op. 97-95 at 25. Citing Daewoo Elec. Co., Ltd. v. Int'l. Union of Electronic Elec., Technical, Salaried and Mach. Workers, 6 F.3d 1511, 1516 (Fed. Cir. 1993), cert. denied 512 U.S. 1204, 114 S.Ct. 2672 (1994). The Court then stated that, in the face of statutory silence or ambiguity, the Court must defer to the Department's reasonable interpretation. Id. However, the Court expressed concern that we were unclear in our articulation of the applicable standard for allowing the offset to G&A expenses. Further, the Court directed us to cite record evidence supporting the notion that Siderca's miscellaneous sales revenue in question is "related to production operations of the subject merchandise." U.S. Steel Group, Slip Op. 97-95 at 25. As explained below, this language in the Final Determination is an inaccurate reflection of the Department's general practice.
To clearly explain the Department's approach to calculating G&A expenses, we must start with a conceptual framework for calculating the cost of producing merchandise. In accordance with 19 CFR 353.51(c), COP is calculated based on the cost of materials, fabrication, and general expenses. Materials and fabrication (i.e., labor and factory overhead) costs, together, comprise the cost of manufacturing (COM), i.e., costs that are directly related to a production process. In a financial accounting context, such costs represent assets (i.e., inventory) of the company until the products manufactured are sold, at which time they become an expense (i.e., cost of goods sold (COGS)) on the company's income statement.
General expenses, on the other hand, consist of amounts incurred for activities that do not bear as direct a relationship to production of merchandise as do the amounts in COM. These expenses, though typically diverse in nature, are classified as selling expenses, interest or financing expenses, and general and administrative expenses (G&A).(2) General expenses may support the main manufacturing operations of the company, as in the case of expenses related to selling manufactured products or amounts paid for officers' salaries and bonuses. They may also result as a consequence of those manufacturing operations, such as in the case of legal and auditing fees. In other instances, expenses (or income) may be accounted for as general expenses because they are immaterial in amount and, thus, any attempt to account for such expenses in a more accurate fashion would provide little or no benefit to the company. No matter the underlying nature of each general expense, they all share a common characteristic in that they are accounted for as period expenses, that is, they are recognized immediately in the company's income statement as expenses of the period in which they are incurred. Although, manufacturing costs, i.e., inventory costs, and period expenses are both included in COP, period costs are classified as G&A expense and would not be a component of COM.
Unlike COM, G&A expenses, including miscellaneous items of income and expense, are not considered to be directly related to the acquisition or production of merchandise. In fact, in most cases, G&A expenses are so indirectly related to a particular production process that the most reasonable allocation basis is the company's total cost of manufacturing.
Our normal method for allocating G&A expenses to individual products is to calculate a "G&A rate" by dividing the company's G&A expenses by the total COGS of that company during a given financial statement period. This rate is then multiplied by the per-unit COM of a product in order to derive the portion of total G&A that is allocated to that product. This method recognizes that G&A is a cost that relates to the company's overall operations, not specifically to a single line of products.
Within this conceptual framework the standard described in the Final Determination of this case, i.e., that the miscellaneous income items at issue be related to production of the subject merchandise, does not accurately reflect the appropriate criteria for analyzing whether such items should be included in our calculation of G&A for Siderca. As explained above, where these or other items of expense or income bear a close relationship to production of the subject merchandise, they may be more accurately accounted for as part of the COM of that merchandise. On the other hand, where, as in the instant case, items of income and expense are most closely related to the general operations of the company (all general activities associated with the company's core business), it is appropriate to treat those items as part of G&A to be allocated across all products manufactured by the company. This methodology is in accord with our established practice, and was the basis for including Siderca's income offsets in G&A.
In the Draft Results, we cited to a number of cases as reflective of our practice. These include: Notice of Final Determination of Sales at Less Than Fair Value: Certain Pasta From Italy, 61 FR 30326, 30363 (June 14, 1996); Certain Corrosion-Resistant Carbon Steel Flat Products From Korea: Final Results of Antidumping Duty Administrative Review, 61 FR 18547, 18549 (April 26, 1996); Final Determination of Sales at Less Than Fair Value: Circular Welded Non-Alloy Steel Pipe from Korea, 57 FR 42942, 42952 (September 17, 1992) (3); Final Determination of Sales at Less Than Fair Value: Fresh Cut Roses from Colombia, 60 FR 6980, 7014 (February 6, 1995); and Final Determination of Sales at Not Less Than Fair Value: Saccharine from Korea, 59 FR 58826, 52828 (November 15, 1994). The use of inconsistent terminology in these prior determinations has caused some confusion. Therefore, in response to U.S. Steel Group's comments on the Draft Results, we have clarified the methodology used in prior proceedings in Comment 1, below.
As we demonstrated in our Memorandum (at 70), Siderca's miscellaneous income consists of sales of items for which the production cost is included in Siderca's G&A costs. Therefore, it is appropriate to allow offsets to the G&A for the revenue derived from the sales of these same miscellaneous items.
As discussed above, costs which are specifically identified to the production of any particular product or product line are charged directly to that product as part of COM, and are not allocated across all production as part of the Department's G&A allocation. In the instant case, miscellaneous income items under consideration are not directly related to the production of the subject merchandise, but rather to the general production operations of the company and, therefore, were properly included in the G&A calculation consistent with the Department's normal practice. In accordance with this standard, we are able to cite record evidence supporting the nexus between these items and Siderca's general production operations.
In the Final Determination, we relied upon our discussions and observations at verification as documented in the cost verification report, our verification exhibits from that report, and the information provided in the questionnaire responses submitted by Siderca. Specifically, cost verification Exhibit 20 shows the 12 categories included in G&A and our tracing of these sub-categories into Siderca's records.(4) The category "Other Income and Expense," which represents an insignificant percentage of the company's total G&A expense is, in turn, comprised of five sub-accounts. During verification, Siderca provided as part of Exhibit 20 the detail worksheets showing the items in the caption "Other Income and Expense." One of these five sub-accounts, the "Ventas Diversas" (Miscellaneous Sales) is comprised of eight further sub-sub-accounts. These eight sub-sub-accounts contain the items in question.(5) The total of the Ventas Diversas account represents a negligible percent of Siderca's cost of sales.(6)
Each of the items in question relates to Siderca's general production operations and as such, each is an item which would typically be included in G&A. The product brochure submitted at Exhibit 18 of Siderca's September 23, 1994 Section A questionnaire response shows Siderca's production process. The production process illustration shows that subject and non-subject merchandise share many of the same production lines.(7) It further illustrates that sponge iron, bar, and other miscellaneous products are generated during the steel production stage, a process common to both subject and non-subject merchandise.(8)
Similarly, although it is a service, miscellaneous technical assistance provided to other companies relates to Siderca's general production activities. That is, the primary function of the personnel performing these miscellaneous services is to provide technical product assistance on behalf of Siderca. The benefits and social taxes paid for these personnel were included in Siderca's overhead and administrative expenses.(9) It is therefore reasonable to offset these personnel costs, which were included in the reported overhead and G&A expenses, with the revenue earned as a result of their technical service assignments.
We also concluded from the record evidence that revenues earned from the sale of purchased tubes were also properly treated as part of our G&A calculation. Although the description of the account titled "purchased tubes" has evolved(10) since the verification, we note that the record evidence simply describes the account as purchased tubes, which does not indicate the type of tubes nor their origin. At the cost verification these tubes were described as miscellaneous tubes that Siderca disposed of during the period. Because a pipe manufacturer may use tubes for maintenance on its facilities or as a raw material in making the subject merchandise, we concluded that the disposal of such items was a normal G&A activity for a pipe manufacturer.
At no time prior to the submission of case briefs during the LTFV investigation were these tubes described as OCTG products, nor was their origin discussed. In fact, their treatment as a miscellaneous income and expense item for accounting purposes indicates that they are nothing more than as described at verification, that is, miscellaneous tubes disposed of by a pipe manufacturer. Under generally accepted accounting principles (GAAP), the sales revenue and cost of sales for all OCTG -- casing, drill pipe and line pipe -- sold by Siderca is accounted for in the main revenue and cost of sales accounts in Siderca's income statement. Under GAAP, no distinction is made between purchased OCTG and OCTG manufactured internally -- both would be recorded in the same inventory, revenue, and cost of sales accounts. Likewise, the same inventory, revenue, and cost of sales accounts are used regardless of the country of origin or destination. Moreover, this account is not referenced as a reconciling item in the sales verification report in which we described our volume and value testing of Siderca's sales, indicating that this account contained nothing more than miscellaneous tubes.
Finally, the insignificant values of the eight sub-accounts in the "Ventas Diversas" (miscellaneous sales) sub-account were a factor in leading us to conclude that these items should properly be included in G&A. The Department is simply not required to test all of respondent's accounts at verification. We test those accounts deemed to be important in the subject proceeding. In fact, it would be impossible for us, given time and other resource constraints, to test every account. Moreover, the Court itself stated, "[t]he statute [19 U.S.C. 1677(e)] does not specify how verification is to be accomplished." U.S. Steel Group, Slip Op. 97-95 at 21. See also, Bomont Indus. v. United States, 733 F. Supp. 1507, 1508 (CIT 1990) (upholding our verification procedures).
Moreover, the verification process would be subverted if petitioners or respondents were allowed to claim after verification that, because an account was not tested in detail, that account should not be treated in a particular manner. Also, the small value in this account in itself demonstrates that it is neither a major line of business for Siderca nor a significant financial transaction affecting Siderca's profitability. Because we capture many different types of miscellaneous expense items in G&A, it is reasonable to also include associated items of miscellaneous income as an offset to those expenses in order to more accurately derive Siderca's actual cost of production.(11)
Issue 2: Deduction of the Full Amount of the Indirect Tax Rebate from Siderca's COP.
At the Department's request, the Court's remand directed us to correct language in the Final Determination in which we erroneously stated that the entire amount of the indirect tax rebate on sales to the PRC, the third-country market used to determine foreign market value, was attributable to material inputs.
Our reexamination of the record evidence confirms that this statement was in error. Cost verification Exhibit 18 contains the tax incidence study calculations prepared by Siderca.(12) The first page contains a summary of the study's results. The second column from the right clearly shows the percentage of Siderca's COP that is attributable to taxes levied on it directly or indirectly through the prices it pays suppliers for goods and services.(13) The last four tax items shown in the worksheet are taxes paid directly by Siderca. Therefore, we can deduce the percentage of the taxes imbedded in the COP that are from indirect taxes, i.e., taxes paid by Siderca's suppliers and passed on to Siderca in the price to Siderca for goods and services. The last column on the right shows the amount Siderca claimed as being physically incorporated under the countervailing duty rules. This amount includes the indirect taxes imbedded in certain materials and the direct taxes that Siderca pays. Our statement in the Final Determination that the entire rebate is attributable only to material inputs is therefore incorrect. The amount of taxes rebated on sales to third countries is attributable to a wide range of taxes imbedded in each element of Siderca's COP (i.e., materials, labor, factory overhead, and G&A expenses). In the Final Determination we decided that a circumstance-of-sale adjustment was warranted in order to make a fair comparison between third country prices, which were lower due to the reduction in cost afforded by the full rebate received by Siderca on those sales, and U.S. prices, which were reduced to a lesser extent due to only a partial rebate.(14)
In the Final Determination we stated that "[b]ased on the fact that the Department has previously determined that Siderca was entitled to a rebate without incurring countervailing duties and because it currently accepts a lower rebate, it is reasonable to assume that the entire reintegro is attributable only to material inputs." Final Determination, 60 FR at 33546. This statement is factually incorrect and, further, unnecessary to our decision. Consequently, we requested, and were granted, the opportunity to articulate more plainly our standard for adjusting Siderca's COP for the full amount of the rebate received.
To begin, we require that respondents include in their reported COP data all operating and non-operating costs incurred during the reporting period. Siderca complied with this requirement and reported COP data that included all of the taxes it paid directly or indirectly to the government. Indirect taxes are those levied on Siderca's suppliers and passed on to Siderca in the price that Siderca pays for materials, labor and other services. The tax incidence study shows that the taxes on materials and other production costs are imbedded in Siderca's COP. In the Final Determination (at 33539), we correctly stated that taxes paid to the Argentine government are included in Siderca's manufacturing costs of OCTG. We stated further:
For the cost test, the Department noted that the cost of production is the
cost of the product sold in the third country. This cost is being compared
to a third country price. Since Siderca receives the entire rebate on sales
to the third country, the cost of the third country product should be
lowered by the entire amount of the rebate received upon exportation.
Id. When refunding the taxes, the Argentine government does not distinguish between taxes on materials, labor, or overhead activities. It simply determines the portion that it is willing to refund of all taxes that are imbedded in the cost in a given period.
The relevant provision of the statute (19 U.S.C. 1677(b)) does not address the issue of how to treat rebated indirect taxes for COP when, as here, foreign market value is based on sales to a third country. Nor do our regulations address this issue. In this case, we found that, on its sales to the PRC, Siderca received back a portion of the total direct and indirect taxes that are included in its reported COPs. Therefore, a fair comparison requires that, when performing the cost test on these sales, all of the refunded taxes be deducted from the COP, as the absence of these taxes lowered the costs of goods sold to PRC customers.
Therefore, the basis for adjusting Siderca's COP for the full amount of the rebate received is that Siderca's actual costs for sales to the PRC were reduced by the full amount of the rebate Siderca received. Therefore, we reduced Siderca's costs by that same amount. This enabled us to calculate an accurate COP that reflected Siderca's actual costs related to its sales to the PRC. Accordingly, we maintain that both the methodology used in the Final Determination, and the results obtained with respect to this issue, were correct.(15)
Interested Party Comments
I. Offsets to G&A
Comment 1 Legal Standard
U.S. Steel Group argues that the Department's clarified legal standard (i.e., allowing an offset to G&A expenses for miscellaneous income which relates to the general production operations of the company) is not consistent with the Department's longstanding practice of allowing such an offset only when the miscellaneous income relates directly to the production of the subject merchandise. U.S. Steel Group states that the Department's actual practice is to analyze whether the activity giving rise to the income for which the offset is made is related (generally or specifically) to the production of subject merchandise and, where the activity is not specifically related, the Department disallows the offset.
U.S. Steel Group also contends that the cases cited by the Department in its Draft Results support the "production of the subject merchandise" standard and do not support the general production operations standard. As examples demonstrating that where the miscellaneous activity is distinct from the production of subject merchandise the offset will be disallowed, U.S. Steel Group cites Certain Corrosion-Resistant Carbon Steel Flat Products from Korea, 61 FR 18547, 18549 (April 26, 1997) (where, according to U.S. Steel Group, the Department disallowed certain "non-production-related income offsets to respondents'" G&A because the revenue items "were related to investments, and not to the production of subject merchandise") and Circular Welded Non-Alloy Steel Pipe from Korea, 57 FR 42942, 42952 (September 17, 1992) (where the Department disallowed both dividend income and commission income as an offset to G&A, stating the investment activity and the "various activities" giving rise to the commissions were "unrelated to the production of the subject merchandise").
Siderca responds that the Department correctly stated in the Draft Results that it inadvertently used the "subject merchandise" phrase in the underlying Final Determination. Siderca argues that the Department properly clarifies its standard in the Draft Results, and that cases cited by the Department in the Draft Results reflect what has been the Department's actual practice and the focus of verifications for well over a decade.
Siderca argues that, contrary to U.S. Steel Group's argument, the three cases cited by the Department support the clarified legal standard. Siderca notes that while referencing the case from Brazil (Final Determination of Sales at Less Than Fair Value: Circular Welded Non-Alloy Steel Pipe from Brazil, 57 FR 42940, 42952 (September 17, 1992)), the Department's specific page citation and the quotation show that the Department was actually referring to Non-Alloy Steel Pipe from the Republic of Korea. Siderca notes that in the passage cited, the Department decided to allow an offset to G&A for the sale of scrap, stating that it "verified that this income was derived from general operations of the factory."
Siderca argues that the second case cited in the Draft Results, Final Determination of Sales at Less Than Fair Value: Roses from Colombia, 60 FR 6980 (Feb. 6, 1995) (Roses from Colombia) also supports the clarified legal standard. Siderca quotes the Department's determination that "[t]he unreported general income and expense items related to the general activities of the respondent as a whole. Therefore, we considered it reasonable to include the financial statement general income and expense items in the G&A calculation." Roses from Colombia, 60 FR at 7014.
Finally, Siderca argues that the third case cited by the Department, Final Determination of Sales at not Less Than Fair Value: Saccharin from Korea, 59 FR 58826, 58828 (Nov. 15, 1994) (Saccharin from Korea), also supports the clarified legal standard, and states that U.S. Steel Group is not describing the case correctly. Siderca argues that in Saccharin from Korea one group of expenses, commission and dividend income, was rejected as an offset to G&A, but that another group of expenses not cited by petitioner, i.e., miscellaneous income, was accepted by the Department as an offset. Siderca quotes the Department's determination in Saccharin from Korea (at 58828) that "[w]e agree with respondent that miscellaneous income should be permitted as an offset to G&A because this income is related to JMC's production operations" as supportive of the Department's clarified legal standard in the Draft Results.
In past determinations we have not used consistent terminology when describing our practice with respect to allowing income offsets to the G&A expense. Although we correctly stated in Roses from Colombia (at 7014) that income giving rise to the offset must "relate to the general activities of respondent as a whole," in other determinations we have used the terms "production of the subject merchandise" and "production operations" indiscriminately.(16) Thus, while we agree with U.S. Steel Group that the language in the cases cited in the Draft Results do not uniformly support the more precise articulation of our practice in this area, we disagree that these cases in fact support the opposite conclusion, i.e., that miscellaneous revenues earned by respondents must, in all cases, pertain directly to production of the subject merchandise before such revenues may be used to offset indirect costs such as G&A.
Despite inconsistency in the terms used to describe the standard employed, our practice, both in general and in the determination at issue, has in fact been to require that such income be tied to general production operations. First, as discussed in the main text of these Final Results, and as discussed further below, the use of the more restrictive "production of the subject merchandise" standard is inconsistent with the basic accounting allocation concepts surrounding G&A expenses. Second, the record evidence in the underlying proceeding demonstrates that, as Siderca argues, we in fact used the correct standard in determining that it was appropriate to include the income offsets at issue in calculating the company's G&A expenses. We address each of these items in turn below.
As stated in the main text of these Final Results, items which we determine are directly related to the production of the subject merchandise are treated as cost of manufacturing (COM) and are attributed entirely to those products. Thus, it would be improper to include in G&A items of cost or revenue which relate directly to production of the subject merchandise and to allocate those items over the cost of all goods and services produced by the respondent. In fact, wherever we identify expenses recorded as G&A which directly relate to the production of the subject merchandise, we ensure that such expenses are accounted for solely as a component of the cost of the subject merchandise. This is achieved by removing the expense from the G&A calculation and reclassifying it as part of the product's COM.(17) Notwithstanding the Department's use of inexact language in some past Federal Register notices, the Department's practice has in fact been to analyze G&A information to determine if such revenues and expenses were, in fact, attributable to the general production operations of the respondent.
In addition, G&A expenses, by definition, are period costs that relate to the company as a whole. Accordingly, the G&A category includes a diverse range of items, among which we include items of miscellaneous income and expenses. As in this case, miscellaneous income and expenses are typically immaterial in amount and, thus, any attempt to account for such expenses in a more accurate fashion would provide little or no benefit to the company. In determining the appropriateness of a particular item's inclusion or exclusion from the G&A calculation, we review the nature of the activity generating the income or expense and the relationship between the activity and the principal operations of the company. Where the income (or expense) relates to the general production operations of the company, the Department includes this item in the calculation of the G&A expense. Accordingly, we disagree with U.S. Steel Group's characterization of our practice as requiring that income offsets to G&A be tied to the production of subject merchandise.
Not only is the "general production operations" standard the proper standard with respect to income offsets to G&A, but it is the standard that was in fact used to determine whether to allow the three income offsets at issue in this case. In this regard, the standard as cited in our Memorandum to the Court is an accurate reflection of our analysis of miscellaneous income and expense items in the calculation of G&A expenses.
In the underlying determination, the petitioners argued that "the Department's longstanding policy is to deduct from G&A only the portion of miscellaneous income related to the production of subject merchandise." Final Determination, 60 FR at 33550 (emphasis added). Siderca responded that "the petitioners' focus on 'production of the subject merchandise' is misleading" and argued instead that "there does not have to be a direct link to OCTG, only to the production facilities where the merchandise was produced." Id. Thus, the parties' positions with respect to the appropriate standard to be used in determining whether to allow the income offsets were clear: petitioners argued that such offsets must be tied to the subject merchandise and respondent argued that they must only be tied to general production operations.
In our response to these comments in the Final Determination, we agreed with Siderca and allowed the offset. Although we incorrectly used the phrase "production operations of the subject merchandise" in describing our standard, given the clarity of the parties' positions on this issue, along with the fact that we agreed with Siderca on this point and allowed the offset, it is evident that we did not in fact employ the standard advocated by petitioners. It is simply untenable to maintain that we could disagree with petitioners and allow the offset, while maintaining that the standard advocated by petitioners was correct. We did not determine that the income offsets at issue were related to the production of subject merchandise. Rather, as in other cases (cited above), we inadvertently used this phrase interchangeably with the correct standard, that of "general production operations."
Comment 2 Record Evidence
U.S. Steel Group argues that the record evidence fails to support the Draft Results. According to U.S. Steel Group it is Siderca's burden to prove entitlement to each offset. Further, U.S. Steel Group asserts that Siderca's financial statements show separate accounts for G&A expense and miscellaneous activities and, therefore, each of the activities in question, technical service, purchased tubes, and intermediate products, are not viewed by the company as G&A, but are distinct lines of business. Finally, citing Elemental Sulphur from Canada; Final Results of Administrative Review, 61 FR 8239, 8245 (March 4, 1996), U.S. Steel Group states that the issue is not whether other income and other expense are included in G&A, but whether net income (i.e., profit) is included in the G&A calculation.
Siderca responds that U.S. Steel Group offers no support for its characterization of this activity as a "separate line of business activity." Siderca argues that U.S. Steel Group cannot arbitrarily describe activities as separate lines of business and then simply assert that, by definition, a separate and distinct business activity does not constitute an item that relates to the general production operations of the company as a whole.
Siderca contends that the Department must reject U.S. Steel Group's argument that separate classifications of G&A and other income and expense on a company's financial statement prohibits the Department from using income items as an offset to G&A. According to Siderca, the proper focus of analysis is: (1) the nature of the activity generating the income or expense, and (2) the relationship between these activities and the principal operations of the company. Citing U.S. Steel Group's comments on the Draft Results (at 12), Siderca notes that U.S. Steel Group itself states that "[i]t is the nature of the activity that controls."
In the underlying proceeding, the Department requested and analyzed extensive cost and sales information provided by Siderca. The Department performed separate on-site verifications of Siderca's sales, cost, and further manufacturing data. We found that Siderca complied with our requests for information both prior to and during verification. Based on the analysis and testing performed at these verifications, we determined that the information provided by Siderca was substantially accurate and, therefore, after certain modifications, could be relied upon in reaching our Final Determination. Accordingly, U.S. Steel Group's assertion that Siderca failed to substantiate its claimed offsets is without merit. As discussed above, we are not required to test the activity recorded in every account. Rather, by employing the normal spot check method of verification, and having determined that Siderca's reporting passed verification (i.e., was determined to be accurate and complete), we attribute this accuracy to Siderca's reporting generally, including items not specifically examined at verification.
U.S. Steel Group's assertion that each of the items constitutes a separate line of business is unsupported and contrary to record evidence. This characterization by U.S. Steel Group is contradicted by Siderca's accounting records. The extreme immateriality of each of these items is evidenced by the fact that they are aggregated with dozens of other such items and the total reported in the company's financial statements as "other income and expense." (We again note that the total of all of such items represents an extremely small amount relative to the actual cost of manufacturing OCTG or to other items of G&A expense named by Siderca. See Memorandum at 66). If any of these items represented a "separate line of business" which was at all material to the company's operations, such activity would have to be disclosed in the financial statements.
Finally, we disagree with U.S. Steel Group that if the revenue generated from a miscellaneous G&A activity is greater than the associated cost, the Department must exclude the profit amount in the offset. Such a rule would not only be arbitrary and illogical, but also unfair to respondents because it would find only losses appropriate for inclusion. The proper focus of the analysis is the activity's relationship to the general production operations. Therefore, it matters not whether a gain or a loss occurs. We note that, because the category at issue consists of miscellaneous items, any profit resulting from such activity will be minor. Furthermore, U.S. Steel Group misrepresents our decision in Elemental Sulphur, which is irrelevant to the issue of G&A expenses, miscellaneous expenses, or other income and expense. At issue in Elemental Sulphur was whether to allow the respondent to offset the COM of the subject merchandise with income generated through a separate subcontracting operation managed by the company. The revenues and cost in question were from a major line of business (i.e., significant sales volumes and revenues). In essence, we declared that, because the respondent in Elemental Sulphur was also able to engage in a separate and profitable subcontractor operation did not mean that it cost the company less to produce the subject merchandise.
Comment 3 Technical Assistance
U.S. Steel Group argues that, by definition, a service cannot relate to general production activities. U.S. Steel Group further claims that the record does not support the Department's reasoning that the same personnel who provided the technical support internally were the same individuals who provided the service to outside parties. U.S. Steel Group argues that the Department's stated position implies that any service done on behalf of or for the benefit of the company as a whole would qualify as an offset, and adds that such a proposition is untenable and would allow every item of miscellaneous income to offset G&A expenses. Finally, U.S. Steel Group argues that the fact that the costs related to such services were reported in both overhead and G&A is not dispositive.
Siderca responds that U.S. Steel Group's assertion that, by definition, services cannot be related to the general production operations of a company is incorrect. Siderca notes that there
are many types of services rendered in any given production process, and they are no less related to the general production operations of a company than is a tangible item.
As discussed above, it is reasonable to conclude that miscellaneous technical assistance provided to other companies relates to Siderca's general production activities. That is, the primary function of the personnel performing these miscellaneous services is to provide technical product assistance on behalf of Siderca relating to the products it produces and sells. Accordingly, we disagree with U.S. Steel Group's assertion that such services cannot relate to general production operations.
In fact, a company's G&A expense calculation is typically replete with examples of service expenses. For example, the expenses incurred to obtain janitorial services, accounting and tax services, and computer services, to name just a few, would all be included in a calculation of a company's G&A expenses. Further, should a respondent company have its own such service departments which, in addition to supporting its production operations, also happen to generate some miscellaneous income, this too could be included in the calculation of the company's G&A expenses.
We disagree with U.S. Steel Group's assertion that the Department believes "that any service done on behalf of or to benefit the company as a whole would qualify as an offset." This is not an accurate reflection of our position; in fact we stated clearly in the Draft Results, and in these Final Results, that the proper focus is the relationship of the activity giving rise to the income or expense to the general production operations.
Comment 4 Purchased Tubes
U.S. Steel Group argues that there is no record evidence to indicate whether Siderca used these tubes for maintenance on its facilities or, as the Department suggested, as a raw material in the production of subject merchandise. U.S. Steel Group claims that the record indicates that these items were purchased in third countries, stored, and subsequently resold to third countries.
Siderca acknowledges that the record does not contain a significant amount of information regarding the nature of this activity. However, Siderca argues that a company, such as itself, that exports a significant quantity of its production, can be expected to have a sales department actively supporting the main manufacturing operations by aggressively participating in bids around the world. If, at times, it is necessary for the company's sales force to act in a brokering capacity, this brokering activity can be considered to be related to the general production operations of the company because the activity supports production planning, and because the expenses relating to this activity are captured in G&A.
Consistent with Siderca's position, we continue to believe that it is reasonable to allow the minor amount of revenue generated from the sale of miscellaneous pipe in the G&A expense calculation. U.S. Steel Group's concern about the origin of the tubes in question is misplaced. The source of a material, service, or finished good is not, in the context of the G&A expenses, germane to our analysis. Our focus is on the nature of the activity generating the income or expense and the relationship between the activity and the principal operations of the company. As noted above, subsequent to our verification in the underlying determination, the description of
these items has been embellished in the case briefs. However, the record shows only that these tubes were bought and resold in third countries.
Comment 5 Intermediate Products
U.S. Steel Group does not dispute that the intermediate products relate to Siderca's general production operations, but argues that revenue from sales of sponge iron, bar and other intermediate products should not be an offset to G&A but, rather, should be applied to the COM of the subject merchandise. U.S. Steel Group argues that the Department incorrectly stated that production costs for intermediate products are included in Siderca's G&A costs. U.S. Steel Group claims that the costs associated with the sale of intermediate products are included in COM and, therefore, the COGS denominator used in calculating the G&A allocation factor should be corrected to remove this offset.
Siderca responds that the Department's statement in the Final Determination that certain costs are accounted for in the overall variance is consistent with its statement in the Draft Results that other costs would be included in Siderca's G&A. Siderca argues that if these items are consumed in the production process, the associated costs would be accounted for in cost of sales. However, if these items are disposed of, the associated costs would be accounted for in the other income and expense account along with the revenue from the sales.
Siderca argues further that, although U.S. Steel Group cites to cases in which the Department applied scrap revenue and thereby reduced COM (i.e., did not treat scrap revenue as a G&A expense), it fails to note that the Department followed the same practice in the instant case. Siderca argues, however, that the Department drew a distinction between the scrap/secondary pipe revenue and the income from sponge iron, bar and other intermediate products because all of the costs of producing these items were not included in COM (i.e., cost of goods sold) but, rather, that the costs associated with these items are reflected in the other income and expense account.
Record evidence indicates that the costs associated with these miscellaneous sales are not included in the COGS account, but are recorded in the other income and expense account. (See "General & Administration," Cost Verification Exhibit 20 at pages 24 and 25, Fiche 129, Frame 48; line 5 of the "Ventas Diversas" section which reads "Costo Vtas. Diversas.") We note further that this exhibit indicates that Siderca's revenues from these miscellaneous sales are only marginally above the costs associated with those same sales.
With regard to U.S. Steel Group's suggestion that these revenues should be removed from the G&A expense calculation and reflected in the denominator of the ratio, (i.e., COGS), we note that this would require reclassifying the costs (that U.S. Steel Group incorrectly asserts are in the COM) out of G&A and into the cost of manufacturing. Such an adjustment would offset itself, by reducing the reported per-unit COMs to which the G&A rate is applied and by increasing the G&A rate. Accordingly, we believe that it was appropriate to allow the revenue as an offset to G&A.
II. Deduction of Tax Rebates from Siderca's Costs
U.S. Steel Group maintains that the Draft Results contain the following errors: (1) the Department failed to articulate plainly the appropriate legal standard for including an amount for rebated taxes as an offset to COP; and (2) to the extent that the Department did articulate a standard regarding this issue, pursuant to which it allowed the full amount of the reintegro rebate that Siderca received on third country sales as an offset to COP, that standard is incorrect. U.S. Steel Group contends that the Department must provide a clearer explanation of the appropriate legal standard, and should determine that the appropriate standard is one that limits the inclusion of such tax rebates in COP to that portion that is attributable to material inputs.
With respect to the adequacy of the Department's articulation of the appropriate legal standard regarding tax rebates in the Draft Results, U.S. Steel Group alleges the following deficiencies: (a) the draft erroneously claims that the issue of whether the rebate was attributable to material inputs is "superfluous to our decision"; (b) the draft ignores the specific statutory provision governing the treatment of tax rebates contained in section 773(e) of the Tariff Act of 1930, as amended (the Act) and fails to state whether this provision applies to COP; and (c) the draft is unclear with respect to the relevance of the countervailing duty (CVD) rules to the present issue.(18)
U.S. Steel Group contends that, once the Department includes the above items in its analysis of the appropriate legal standard for allowance of rebated tax amounts in the COP, it must determine that the appropriate standard is in fact one that limits the inclusion of such rebates to that portion specifically attributable to materials inputs. In particular, U.S. Steel Group cites to the statutory provision contained at section 773 (e) (1) (A) of the Act, which states that in the calculation of costs for constructed value (CV) purposes the cost of materials is "(exclusive of any internal tax applicable in the country of exportation directly to such materials or their disposition, but remitted or refunded upon the exportation of the article in the production of which such materials are used) and of fabrication or other processing of any kind . . . ." 19 U.S.C. 1677b(e)(1)(A).
Regarding this provision, U.S. Steel Group first argues that the fact that the language regarding tax rebates is positioned behind the reference to materials but before other elements of cost makes clear that the deduction of tax rebates applies only to materials. U.S. Steel Group claims that the Department has in fact recognized this in the CV context by limiting the amount of any rebate received to that portion specifically attributable to material inputs. In support of its position, U.S. Steel Group cites Notice of Final Results of Antidumping Duty Administrative Review: Silicon Metal from Argentina, 62 FR 5613, 5617 (February 6, 1997) (Silicon Metal), where the Department held that the Argentine company Andina did not substantiate its claim to lower CV by the amount of the reembolso tax rebate (which subsequently became the reintegro tax rebate), because Andina was unable to link the reembolso tax rebate to material inputs that were physically incorporated into the subject merchandise. U.S. Steel notes that Silicon Metal in turn cites to the challenged OCTG Final Determination.
U.S. Steel Group then argues that this provision applies to COP as well, as evidenced by the Department's questionnaire issued in the underlying proceeding, which reads, "If third country sales are used as a surrogate for home market sales, exclude internal taxes that are applied directly to materials, but that are not collected or are collected and refunded upon exportation of the merchandise produced." U.S. Steel Group adds that Congress has specifically recognized in the Uruguay Round Agreements Act (URAA) H.R. 5110, 103d Cong., 2d Sess.§ 224 and 19 U.S.C. §1677b(b)(3)(1994) that the same standard applies to CV and third country COP.
U.S. Steel Group concludes by noting that the record in this case contains sufficient information, as detailed by Siderca, to allow the Department to identify and limit the amount of the rebate that is attributable to Siderca's material inputs.
Siderca agrees with the Department's inclusion of the full tax rebate in its COP calculations based on the "actual cost" principle. Siderca cites several cases where the Department has outlined and used the "actual cost principle," including Fresh and Chilled Atlantic Salmon from Norway; Final Results of Antidumping Duty Administrative Review, 58 FR 37912, 37915 (July 14, 1993) and Final Determination of Sales at Less Than Fair Value; Furfuryl Alcohol from Thailand, 60 FR 22557, 22561 (May 8, 1995). Siderca claims that the common factor in the relevant agency determinations is the emphasis that COP must reflect actual costs and, therefore, include grant offsets, payments, etc. Siderca maintains that the Department could not follow the actual cost principle and simultaneously agree to limit -- either to taxes on materials or to an average rebate -- the deduction for production expenses that the company recovers through a rebate.
We disagree with U.S. Steel Group that the appropriate standard is to limit the amount of the reintegro rebate to that portion specifically attributable to material inputs. Instead, we continue to find that it is appropriate to include the entire amount of the rebate that Siderca received on its exports to the third country market in calculating the company's COP for the reasons provided in the main text of this remand and as discussed more fully below.
Despite U.S. Steel Group's multi-pronged critique of the adequacy of the explanation provided in the Draft Results, its argument for limiting the rebated amount to that attributable to material inputs rests exclusively on its interpretation of a phrase contained at section 773(e)(1)(A) in the CV portion of the Act and repeated in the COP section of the questionnaire issued in the underlying proceeding. This phrase allows for the exclusion of "any internal tax applicable in the country of exportation directly to materials or their disposition, but remitted or refunded upon the exportation of the article in the production of which such materials are used."(19) Contrary to U.S. Steel Group's assertions, the existence of this phrase, explicitly providing for the exclusion of one group of commonly-incurred internal taxes (taxes on material inputs that are rebated upon export), does not prohibit us from recognizing instances where other internal taxes are rebated and, thus, are not an actual cost to the respondent. There is simply nothing in the statute, or its legislative history, to suggest that this provision contains an exhaustive list (indeed, a list comprised of one item) of the types of taxes for which rebate amounts will be excluded. With respect to U.S. Steel Group's references to the URAA in support of its position, we note that the URAA does not govern the challenged determination. Further, the legislative history to the URAA itself is replete with language in favor of the actual cost principle. See, e.g., Statement of Administrative Action (SAA), H. Doc. 316, 103d Cong., 2nd Sess. at 834, discussing calculation of costs in general (the Department accepts a respondent's reporting if it "reasonably reflects the costs associated with the production and sale of the merchandise" and "In determining whether a company's records reasonably reflect costs . . ." ). With respect to the statute that does govern the challenged determination (the pre-URAA statute), all parties agree that there is no provision in the statute or its implementing regulations that addresses the factual
situation presented in this case: the treatment of tax rebates for purposes of calculating COP for third-country sales.
Any inference of a statutory prohibition regarding the exclusion of rebated taxes other than those directly levied on material inputs would be unreasonable given our longstanding practice of calculating a respondent's COP based on the actual costs of producing merchandise sold in the foreign market, as noted in the main text of this redetermination. See also Final Determination of Sales at Less Than Fair Value: Certain All-Terrain Vehicles From Japan, 54 FR 4864, 4867 (January 31, 1989) ("When we calculate COP pursuant to section 773(b) of the Act, we are only interested in determining the actual costs incurred to produce the merchandise under investigation."); Final Results of Antidumping Duty Administrative Review: Television Receivers, Monochrome and Color, From Japan, 56 FR 37078, 37078 (August 2, 1991) ("We avoid imputing expenses or costs when a company quantifies or documents its actual expenses, and when the company's quantification accurately reflects the expense to the seller.").
The application of this principle to the instant proceeding indicates that Siderca did not incur the cost of any of the taxes that were refunded, including both taxes attributable to material inputs and those attributable to other aspects of the production process. It would be distortive and unreasonable to assign such non-existent costs to the company in determining its COP. Accordingly, we have used our discretion, given the statutory and regulatory silence regarding the treatment of rebated taxes on non-material inputs, in a reasonable manner. See Daewoo Elec. Co. Ltd. V. Int'l. Union of Electronic Elec., Technical, Salaried and Mach. Workers, 6 F.3d at 1516 (Fed. Cir. 1993).
Our determination regarding the reembolso tax rebate in Silicon Metal does not require a different result. Rather, the language in that proceeding was adopted from the underlying OCTG Final Determination, which itself is erroneous. As discussed above, we mistakenly concluded in the OCTG Final Determination that the entire reintegro tax rebate was attributable to material inputs. We have explained in the body of this redetermination why this finding was both factually incorrect and irrelevant. The fact that we perpetuated this erroneous standard in a subsequent case does not make the standard itself appropriate. Accordingly, for the reasons presented above, we continue to include the entire amount of the reintegro tax rebate received by Siderca in determining COP for the Chinese market.
This redetermination is in accordance with the order of the Court in U.S. Steel Group, Slip Op. 97-95 (July 14, 1997).
Robert S. LaRussa
for Import Administration
1. 1 Defendant's Memorandum in Opposition to the Motion of Siderca S.A.I.C. and Siderca Corp. And in Partial Opposition to the Motion of U.S. Steel Group, a unit of USX Corp., et al. For Judgement on the Agency Record, dated April 15, 1996 (Memorandum).
2. Accounting standards throughout the world vary as to the types of income and expense items that, for financial statement purposes, are accounted for as miscellaneous (or "other") income and expenses. Because of this inconsistency, we may consider miscellaneous items reported on financial statements as part of G&A for purposes of calculating COP and constructed value.
3. Incorrectly cited as Circular Welded Non-Alloy Steel Pipe from Brazil, 57 FR 42940.
4. See "General & Administration," Cost Verification Exhibit 20, Fiche 129, Frame __. The titles of the sub-accounts shown in this exhibit which comprise Ventas Diversas are as follows: Tubos Comprados (purchased tubes), Barras (bars), Hierro esponja (sponge iron), Vtas Diversas (misc. sales), Costo Vtas Diversas (cost of misc. sales), Asistencia Tecnica (technical assistance), Costo Asistencia Tecnica (cost of technical assistance), and Otros (other).
5. The detail of the Ventas Diversas accounts was provided in cost verification Exhibit 20 as a supporting document for the Other Income and Expense account.
6. Calculated as Siderca's net "other income" divided by Siderca's cost of sales.
7. Exhibit 18 of Siderca's September 23, 1994 Section A questionnaire response, Fiche 70-78, Frame 1. Siderca makes various pipe products: OCTG, casing tubes, drill pipes, and line pipes. Of these four categories only line pipes are non-subject merchandise.
8. The brochure explicitly shows sponge iron and bar being generated by Siderca's integrated process. Numerous other miscellaneous products are also generated during steel production. These miscellaneous products would include slag, gas, various scrap, etc.
9. The revenue earned from these miscellaneous technical services was offset with the costs (i.e., labor) associated with these revenues. We also note that since they have been classified under different accounting codes these technical services are not the same as those included in the selling adjustments. See verification exhibit 20 at pages 24 and 25, Fiche 129. U.S. Steel Group's brief at page 40, footnote 103, dated March 5, 1997.
10. In the February 24, 1995 supplemental questionnaire response at page 35 (fiche 105-107) Siderca described the account as sales of semi-finished products, raw materials, and net results of buying and reselling tubes in third countries. In respondent's May 17, 1995 at case brief at page 59 (fiche 119) the description changed to sales of OCTG products purchased from other countries, stocked in Siderca's yard, and then exported to other countries.
11. We further discuss the evidence supporting the inclusion of Siderca's income offsets in G&A in our response to Comments 2 - 5, below.
12. See "Reintegro Study," Cost Verification Exhibit 18, Fiche 128, Frame 1.
13. The Argentine government does not rebate all of the taxes imbedded in the COP. The Argentine government determines the extent to which it is willing to rebate taxes and sets the rate for the period. During the investigation the rate was approximately 15 percent.
14. Final Determination, 60 FR at 33546, "Because rebates are directly related to the sales of the merchandise in the two markets, it is necessary to make a circumstance-of-sale adjustment to FMV." The Court, in its July 14, 1997 opinion, upheld the Department's decision in this regard.
15. We further discuss the reasons for including the entire amount received by Siderca of the rebated tax in the COP calculation in our response to Comment 6, below.
16. See Saccharin from Korea, 59 FR at 58828 (stating that the income at issue must be "related to [respondent's] production of the subject merchandise" and elsewhere stating that it must be "related to [respondent's] production operations."); see also Non-Alloy Steel Pipe from Korea, 57 FR at 42952 (stating that the income must be related to "the production of the subject merchandise" and, elsewhere, that it must be "derived from the general operations of the factory.")
17. See, e.g., High Information Content Flat Panel Displays and Display Glass Therefor from Japan; Final Determination 56 FR 32376 (July 16, 1991) (Comment 2 "Factory overhead expenses of LCD division which Sharp had included in its G&A calculation were reclassified and included in the cost of manufacture;" and Comment 4 "R&D expenses related specifically to the EL FPD class or kind of merchandise were allocated over sales of EL FPD class or kind of merchandise.") and Final Determination of Sales at Less Than Fair Value: Certain Small Business Telephones Systems and Subassemblies Thereof From Taiwan, 54 FR 42543 (October 17, 1989) (the Department included a portion of the R&D expense incurred by Vidar-SMS as general R&D in the general and administrative section of the constructed value calculation. Those R&D expenses determined to be product specific were reclassified from general expenses to cost of manufacturing.)
18. In this regard, U.S. Steel Group notes that, in the Final Determination, the Department relied upon a prior CVD determination in finding that it was "reasonable to assume that the entire reintegro is attributable only to material inputs," citing Final Determination, 60 FR at 33546.
19. We note that the phrasing in the COP portion of the questionnaire (at D-9 - D10) differs slightly from that quoted above (taken directly from section 773(e)(1)(A) of the Act); these differences are immaterial.