66 FR 14887, March 14, 2001 A-475-811 ARP 1998-1999 Group III/Office 8: HMK public document MEMORANDUM TO: Bernard T. Carreau, fulfilling the duties of Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary Enforcement Group III SUBJECT: Issues and Decision Memorandum for the Final Results in the Antidumping Duty Administrative Review of Grain-Oriented Electrical Steel from Italy Summary We have analyzed the comments and rebuttal comments of interested parties in the antidumping duty administrative review of grain-oriented electrical steel ("GOES") from Italy. As a result of our analysis, we have made changes in the margin calculation. We recommend that you approve the positions we have developed in the Discussion of the Issues section of this memorandum. Below is the complete list of the issues in this investigation for which we received comments and rebuttal comments from parties: 1. In-Bond Transactions 2. Level of Trade 3. CEP Offset 4. Rebates 5. Technical Service Expenses 6. Warranty Expenses 7. Unreported U.S. Sales Background On September 7, 2000, the Department of Commerce ("the Department") published the preliminary results in the antidumping duty administrative review of GOES from Italy. See Grain-Oriented Electrical Steel From Italy: Notice of Preliminary Results of Antidumping Duty Administrative Review, 65 FR 54215 ("Preliminary Results"). The period of administrative review ("POR") is August 1, 1998, through July 31, 1999. We invited parties to comment on our preliminary results. On November 15 and 16, 2000, we received case briefs from Acciai Speciali Terni S.p.A. and Acciai Speciali Terni USA, Inc. (collectively, "AST"), the sole respondent in this case, and from Allegheny Ludlum Corp., AK Steel, the Butler Armco Independent Union, the United Steelworkers of America, and the Zanesville Armco Independent Union (hereinafter the "petitioners"). Both parties filed rebuttal briefs on November 27, 2000. At AST's request, a public hearing was held on January 29, 2001. Scope of Administrative Review The product covered by this review is grain-oriented silicon electrical steel, which is a flat-rolled alloy steel product containing by weight at least 0.6 percent of silicon, not more than 0.08 percent of carbon, not more than 1.0 percent of aluminum, and no other element in an amount that would give the steel the characteristics of another alloy steel, of a thickness of no more than 0.560 millimeters, in coils of any width, or in straight lengths which are of a width measuring at least 10 times the thickness, as currently classifiable in the Harmonized Tariff Schedule of the United States (HTS) under item numbers 7225.30.7000, 7225.40.7000, 7225.50.8085, 7225.99.0090, 7226.11.1000, 7226.11.9030, 7226.11.9060, 7226.91.7000, 7226.91.8000, 7226.92.5000, 7226.92.7050, 7226.92.8050, 7226.99.0000, 7228.30.8050, and 7229.90.1000. Although the HTS subheadings are provided for convenience and customs purposes, our written descriptions of the scope of these proceedings are dispositive. Discussion of the Issues In-Bond Transactions Comment 1: Petitioners argue that the Department should continue to include AST's temporary importation bond ("TIB") sales destined for Mexico in its margin calculation because those sales allegedly do not meet the U.S. Customs criteria for treatment as TIB entries. Petitioners contend that AST's U.S. customer admitted that those entries were not repaired, altered or further processed in the United States, as required under Heading 9813.00.05 of the Harmonized Tariff Schedule of the United States. See AST's Supplemental Response (October 4, 2000) at Exhibit 1. Petitioners also contend that these products do not qualify for TIB treatment because they were imported for sale, as allegedly demonstrated by AST USA's sales contracts with unaffiliated U.S. customers. Petitioners further argue that according to the criteria enunciated in AK Steel Corp. v. United States, 226 F.3d 1361 (Fed. Cir. 2000) ("AK Steel"), the TIB sales by AST USA to an unaffiliated U.S. company should be considered CEP sales. Petitioners cite as a precedent the Department's inclusion of TIB transactions in its margin calculation in Dynamic Random Access Memory Semiconductors of One Megabit or Above from the Republic of Korea: Final Results of Antidumping Duty Administrative Review and Determination Not to Revoke the Order in Part, 64 FR 69694 (December 14, 1999) ("DRAMS from Korea"). In addition, petitioners urge the Department to include the TIB sales in its margin calculation for future deposit rates on the grounds that effective January 1, 2001, TIB exports to Mexico are allegedly subject to duty deposit requirements under NAFTA Article 303(3), as implemented in 19 U.S.C. sections 81c and 3333 (the duty drawback provision). AST counters that products which transited the United States under U.S. Customs bond procedures for ultimate delivery and consumption in Mexico should be excluded from the final margin calculation. AST claims that the record establishes that these products were re-exported to Mexico within the time limits established by the bonds, did not enter the customs territory of the United States, and were not sold for consumption, or further processed, in the United States. AST argues that the NAFTA provision does not support a change in the Department's practice of excluding in-bond transactions from the calculation or assessment of antidumping duties, and that in any event, NAFTA Article 303 does not apply because it became effective with respect to Mexico after the POR. Furthermore, AST claims that the transactions in question do not qualify as "goods subject to NAFTA drawback" because the merchandise was not further processed in the United States prior to re-export. AST disputes petitioners' interpretation of its customer's certification letter, claiming that the letter does not indicate that the in-bond transactions were entered under HTSUS Heading 9813.00.05. AST cites the Department's long-standing position that antidumping duties may be assessed and collected only on imported merchandise that is entered, or withdrawn from warehouse, for consumption in the customs territory of the United States. See, e.g., Oil Country Tubular Goods from Japan: Preliminary Results and Rescission in Part of Antidumping Duty Administrative Review, 64 FR 48589, 48590 (September 7, 1999) ("OCTG Japan"); Final Determination of Sales At Less Than Fair Value: Uranium from the Republic of Kazakhstan, 64 FR 31179, 31185 (June 10, 1999) ("Uranium from Kazakhstan"); Oil Country Tubular Goods from Argentina: Rescission of Antidumping Duty Administrative Review, 63 FR 49089, 49090 (September 14, 1998) ("OCTG Argentina"); Tapered Roller Bearings, Four Inches or Less in Outside Diameter and Certain Components Thereof, from Japan: Final Results of Antidumping Duty Administrative Review, 56 FR 65228 (December 16, 1991); Tapered Roller Bearings, Finished and Unfinished, and Parts Thereof from Japan: Final Results of Antidumping Duty Administrative Review, 56 FR 41508, 41517 (August 21, 1991); Antifriction Bearings from the Federal Republic of Germany: Final Results of Antidumping Duty Administrative Review, 56 FR 31692, 31704 (July 11, 1991). AST cites decisions by the Court of International Trade (CIT) confirming the Department's interpretation of the statutory limitation. See Helmerich & Payne, Inc. v. United States, 22 CIT __, 24 F. Supp. 2d 304,314 (1998); Torrington Co. v. United States, 19 CIT 403, 881 F. Supp. 622, 646 (1995); Timken Co. v. United States, 18 CIT 942, 865 F. Supp. 881, 888 (1994); Timken Co. v. United States, 18 CIT 897, 865 F. Supp. 850, 856 (1994); Timken Co. v. United States, 18 CIT 839, 862 F. Supp. 413, 420 (1994); Timken Co. v. United States, 18 CIT 619, 858 F. Supp. 206, 214 (1994); Timken Co. v. United States, 18 CIT 486, 852 F. Supp. 1122, 1132 (1994); Torrington Co. v. United States, 17 CIT 545, 826 F. Supp. 492, 494 (1993); Torrington Co. v. United States, 17 CIT 541, 823 F. Supp. 945, 948 (1993); Torrington Co. v. United States, 17 CIT 1999, 818 F. Supp. 1563, 1573 (1993). AST also cites Titanium Metals Corp. v. United States, 19 CIT 1143, 901 F. Supp. 362, 366-67 (1995) as upholding the Department's position that antidumping duties do not apply to merchandise transiting the United States under in-bond procedures. AST disputes petitioners' claim that the in-bond sales were CEP sales, citing its unaffiliated U.S. customer's certification that it was the importer of record and did not import the in-bond products for sale, or sale on approval, in the United States. See AST's Supplemental Response (October 4, 2000) at Exhibit 1. AST cites the Department's U.S. Sales Verification Report as establishing that the sales terms for the in-bond transactions called for the products to be delivered to, and consumed in, Mexico. AST argues that to be a CEP sale, a transaction must first meet the requirements of a U.S. sale for the purpose of calculating antidumping duties, including the requirement that it involve merchandise entered, or withdrawn from warehouse, for consumption in the United States. AST notes that petitioners have cited no case in which the courts or the Department determined that sales involving merchandise that was not entered, or withdrawn from warehouse, for consumption in the United States are CEP sales subject to review. AST argues that petitioners' claim that 19 C.F.R. section 351.213(e)(1), which calls for the review of "entries, exports, or sales of the subject merchandise during the 12 months immediately preceding the most recent anniversary month," supports classifying the in-bond transactions as CEP sales is misplaced. AST explains that the cited regulation addresses the Department's ability to review sales involving products that, while sold during a POR, were entered for consumption before or after the POR. AST argues that this regulation must be read together with the enabling statutory provision, section 751(a)(2)(A), which provides that in an administrative review, the Department must determine NV, EP, CEP and a dumping margin for each entry of subject merchandise. AST notes that the regulation does not expand the statutory requirement of a consumption entry. Department's Position: We agree with AST that the in-bond transactions imported by its unaffiliated customer for re-export and consumption in Mexico should not be included in the Department's margin calculation. Once an antidumping order is in place, section 751(a)(2)(A) of the Act directs the Department to conduct a review, upon request, in order to determine "(i) the normal value and export price (or constructed export price) of each entry of the subject merchandise, and (ii) the dumping margin for each such entry." (Emphasis added.) The Department has consistently interpreted the language of section 751(a)(2)(A) to mean entries for consumption into U.S. customs territory. See OCTG Japan, 64 FR at 48590; Uranium from Kazakhstan, 64 FR at 31185; OCTG Argentina, 63 FR at 49090. The Court of International Trade (CIT) has upheld this interpretation. See Titanium Metals, 19 CIT 1143, 901 F.Supp. at 367; Torrington, 17 CIT 199, 818 F.Supp. at 1573 ("there is no reason to believe that the use of the term entry in the antidumping statute refers to anything other than formal entry of merchandise into the U.S. Customs territory"). In answer to a supplemental questionnaire seeking clarification of the in-bond transactions, AST submitted a response dated October 4, 2000.(1) AST stated that the in-bond sales were made with the intention that the merchandise was being sold for consumption in Mexico. These sales were made by AST USA to an unaffiliated customer in the United States, and transshipped through the United States to Mexico. For these sales, AST USA's customer acted as the importer of record, handling the necessary customs paperwork and arranging for the re- export to Mexico. The products were neither sold by the unaffiliated U.S. customer, nor further processed by anyone in the United States. As an exhibit to this response, AST submitted a letter from one of its customers confirming this information. See AST's Supplemental Response (October 4, 2000) at Exhibit 1. Because these transactions were not entered for consumption in the U.S. customs territory, the Department has not considered them to be CEP sales nor, as suggested by petitioners, has the Department included them in the margin calculation for the purpose of setting cash deposit rates, even if duties are never actually assessed. For the final results of this review, the Department has included in its margin calculation only U.S. entries for consumption during the POR. We find the petitioners' claim that AST's in-bond sales were in contravention of the requirements of the TIB category and therefore, under the DRAMS from Korea precedent, must be included as U.S. sales in this review to be without merit. First, the circumstances in the DRAMS from Korea review which led the Department to include in-bond transactions in the margin calculation were substantially different from the facts in this case. In DRAMS from Korea, the Department found evidence of the diversion of in-bond merchandise ostensibly destined for sale in Mexico to the U.S. market for sale. 64 FR at 69713. The Department found the record evidence to support the conclusion that the respondent knew or should have known that the merchandise was destined for consumption in the United States. That is not the case here. Second, U.S. customs law provides for a host of in-bond transactions other than the TIB category. In the Department's view, whether a transaction qualified for in-bond treatment is an enforcement matter for the U.S. Customs Service. There is no indication on the record that Customs found any irregularity with respect to the in-bond transactions. The Department's concern is whether there have been entries for consumption into the customs territory of the United States. See section 751(a)(2)(A) of the Act. To clarify the issue raised by the petitioners regarding the type of bond used in these transactions, the Department issued a supplemental questionnaire to AST on February 13, 2001, requesting information on the types of bonds used and the parties that took out the bonds. AST's response on February 20, 2001, states that its customers' customs brokers or shipping company took out immediate transportation or immediate export bonds in the names of the various trucking companies used. For a small number of transactions, AST indicates that it was responsible for moving the merchandise under bond from the port of entry to the customer's warehouse. Petitioners filed comments on AST's response on February 22, 2001, alleging that AST's submission provided new information that is inconsistent with the Department's findings at verification, and that the record is incomplete and unreliable as regards AST's in-bond sales. The petitioners urge the Department to find that AST has been uncooperative and to apply adverse facts available by including the in-bond sales in the margin calculation. In a response to the petitioners' comments, dated February 26, 2001, AST admitted that there have been inconsistencies in its answers concerning in-bond transactions. Indeed, AST had initially denied having any sales associated with any special Customs programs that do not involve a consumption entry. See AST's Questionnaire Response (November 2, 1999) at A-3. Nonetheless, AST has repeatedly stated that to the best of its knowledge all in-bond transactions were destined for Mexico, and none of the merchandise was entered for consumption into the United States. See AST Supplemental Response (June 1, 2000) at S-II-5/16-1 and S-II-5/26-2. In addition, AST provided evidence of its knowledge that the merchandise was destined for Mexico. See AST Supplemental Response (May 17, 2000), Exhibit C-2. The Department verified AST's understanding that the merchandise was destined for Mexico. See U.S. Sales Verification Report (August 30, 2000) at 10-12. There is no indication in the instant review that GOES imported under bond for transit to Mexico was entered for consumption in the United States. Rather, import statistics submitted by AST corroborate that the only entries for consumption during the POR were the CEP sales reported by AST. See AST's Supplemental Response (October 4, 2000) at Exhibit 2. Because these in-bond transactions are not U.S. entries for consumption, the Department has not included them in the margin calculations. We also find that the petitioners' reliance on the AK Steel case as support for their argument that the in-bond sales were CEP sales is misplaced, because the cited case involved only entries for consumption, and the Court did not address the issue of in-bond transactions. Furthermore, the Department determines that the petitioners' claim that NAFTA provisions effective on January 1, 2001, justify including the in-bond transactions in the margin calculation for this review is without basis in law. Congress provided a clear expression of its intent that this provision of NAFTA would not apply to exports to Mexico until this date. See Pub. L. 103-182, section 213(c)(2)(A), 107 stat. 2100 (1993) (19 U.S.C. section 3331 note); H.R. Rep. No. 103-361 Part I, at 39 (1993). See also NAFTA Annex 303.7. Accordingly, because the merchandise subject to this review was exported to Mexico prior to the date in question, the NAFTA provisions cannot be applied retroactively. See American Permac, Inc. v. United States, 191 F.3d 1380, 1381-82 (1999). The Department, therefore, declines to address the applicability of these NAFTA provisions other than determining that the transactions in question here took place prior to the effective date. Level of Trade Comment 2: AST claims that its home market sales of the subject merchandise are at two different levels of trade (LOT), factory-direct sales made by AST, and downstream sales by value-added resellers, and that only one of these two types of sales is similar to the U.S. LOT, which is the LOT of the factory- direct sales from AST to AST USA. As evidence of the different roles that AST and the value-added resellers play in the chain of distribution, AST cites the long lead times for production to order, larger minimum volume and lack of stamping and cutting services for direct sales to end-users, whereas resellers distribute exclusively from inventory for immediate delivery, sell in smaller volumes and provide stamping and cutting services. As differences in selling activities, AST points to the acceptance by the resellers of small orders, and the resellers' provision of inventory and cutting and stamping services. AST concludes by arguing that the Department should limit its calculation of normal value to AST's factory-direct sales and exclude downstream sales from comparison to U.S. factory-direct sales. Petitioners argue that AST has not demonstrated that there are price differences associated with sales to different customer classes or different channels of distribution, as is required for a LOT adjustment or CEP offset and that AST's claims regarding differences in quantities sold and operational structures are legally irrelevant to a LOT inquiry. Petitioners cite AST's statement in its Section A response that GOES was sold exclusively to end-users in the U.S. and home markets, and AST's statement in its May 17, 2000, supplemental response that there is a single LOT in the home market and that all home market sales are made directly to end-users. Petitioners argue that the existence of the same customers and the same types of customers for both AST and its affiliated resellers supports the Department's preliminary finding of a single LOT in the home market. In support of their argument that differences in quantities cannot justify a LOT distinction, petitioners cite the Statement of Administrative Action Accompanying the Uruguay Round Agreements (SAA) at 830 and Final Determination of Sales at Less Than Fair Value and Final Negative Critical Circumstances Determination: Disposable Pocket Lighters from Thailand, 60 FR 14263, 14264 (March 16, 1995), in which the Department rejected a claimed difference in LOT based on differences in quantities purchased. Petitioners point out that the statute requires differences in LOT to arise from differences in selling functions performed, and that the level and structure of production operations do not provide evidence of different selling functions. See section 773(a)(7)(A) of the Act. Petitioners argue that cutting and stamping services are further processing activities undertaken by the resellers, and are not selling functions. Moreover, petitioners point out that the cut and stamped products are transformed into a separate product that is outside the scope of this review. Therefore, petitioners conclude, cutting and stamping services cannot differentiate LOTs for the product under review. Petitioners conclude that AST is left with only one selling function difference, inventory services, which is insufficient to distinguish LOTs in the home market. Furthermore, petitioners point out, AST argued in its case brief that its direct sales and its warehouse sales are at the same LOT despite the difference in one selling function-inventory services. AST Brief at 36-37. Department's Position: We agree with petitioners that AST did not meet its burden of proof to establish that its home market sales are at two different LOTs. We determine that sales are made at different LOTs if they are made at different marketing stages (or their equivalent). Substantial differences in selling activities are a necessary, but not sufficient, condition for determining that there is a difference in the stages of marketing. See 19 C.F.R. 351.412(c)(2). The differences cited by AST in its case brief between its direct factory sales and downstream sales by its affiliated resellers are related to differences in quantities sold and production operations, rather than selling functions, as required by the statute and the Department's regulations. See section 773(a)(7)(A) of the Act; 19 C.F.R. 351.412(c)(2). In the Preliminary Results, the Department found that the sales process of the affiliated resellers (Nuova Eletrofer and Electroterni) is similar to that of AST, and that there is some overlapping of customers. The single major difference is that the resellers sell from inventory, whereas most of AST's direct factory sales are produced to order. See Preliminary Results at 54217. This difference is insufficient to establish that home market sales were made at two different LOTs. There is no dispute that all the U.S. sales are at one LOT. Therefore we determine that there is only one LOT in each of the U.S. and home markets. CEP Offset Comment 3: AST claims that the LOT of the CEP sales is considerably less advanced and involves fewer selling functions than AST sales in the home market. AST points out that the statute and the Department's practice require a comparison of LOT after deductions relating to the selling activities performed in the United States have been made to the starting price, as provided for in section 772(d) of the statute. Thus, according to AST, the analysis of the marketing stages and selling functions must focus on the selling functions performed by AST S.p.A. for the intermediate transaction with its affiliated importer, AST USA. AST claims that the "Selling Activities Chart" provided as Exhibit 7 to its February 18, 2000, supplemental response shows that it performs considerably fewer selling functions and activities in connection with the CEP transaction with AST USA than are involved in home market sales to the unaffiliated customer. According to AST, in the U.S. market virtually all of the selling functions directed to the end-user are performed by AST USA. AST cites freight and delivery and the provision of credit as the only significant selling functions AST S.p.A. performs in connection with the CEP transactions. AST claims that both these functions are performed at a low level. In contrast, AST argues, AST S.p.A. is responsible for performing all selling functions associated with home market sales to end-users. In addition, AST argues that the LOT associated with sales through its affiliated resellers is even more remote than AST's direct factory sales because the resellers provide additional services to its customers. AST concludes that because both the claimed home market LOTs are more advanced than the LOT of the CEP sales, a CEP offset is required under 19 C.F.R. section 351.412(f). Petitioners claim that AST's LOT arguments are inconsistent. Petitioners argue that AST's assertion that the Department should compare U.S. sales with the factory-direct home market sales because the U.S. sales are also factory-direct is an implicit acknowledgment that the U.S. and home market factory-direct sales are at the same LOT. Petitioners point out that no CEP offset may be granted where the LOTs of the U.S. and the home market sales are the same. Petitioners argue that the additional services performed in the home market for technical advice and warranties are minimal, and do not provide a basis for distinguishing home market and U.S. LOTs. Moreover, petitioners argue, information AST has submitted demonstrates that any difference in the prices between the sales at issue has nothing to do with differences in LOT, citing business proprietary information in AST's section A response at A-14. Petitioners state that a fundamental prerequisite to the granting of a LOT adjustment or a CEP offset is an indication that there are different LOTs that reflect different pricing practices, citing 19 U.S.C. section 773(a)(7). Petitioners note: Although the statute authorizes the granting of a CEP offset where respondent is unable to calculate a level of trade adjustment if the other requirements showing level of trade differences are met, the CEP offset is not authorized where the agency has been presented with affirmative evidence that there are no price differences associated with sales to different customer categories or different channels of distribution in the two markets. See petitioners' rebuttal brief at 30. Petitioners urge the Department to affirm its preliminary determination that there is a single LOT in both markets, that the LOT in the home market and in the United States is the same, and that a CEP offset should be denied. Department's Position: We agree with petitioners that a CEP offset is not warranted in this case and that any differences in price are not related to differences in LOT. Section 773(a)(7)(A) of the Act provides that differences in LOTs for which adjustments may be made involve the performance of different selling activities and a demonstrated effect on price comparability. Under special circumstances as described in the Department's regulations at 19 CFR 351.412(f), the Department may make a CEP offset using indirect selling expenses in the home market. The offset can only be applied where the respondent has succeeded in establishing that there is a difference in LOT between the CEP sales and the home market sales, and NV is determined at a more advanced LOT than the CEP LOT, but, although the respondent has cooperated to the best of its ability, the available data do not permit a determination on whether the difference affects price comparability. AST has argued that it performs considerably more selling functions in the home market than it does in connection with its sales to AST USA. AST states that these functions include: (1) soliciting sales and acting as a point of contact with unaffiliated customers; (2) receiving, analyzing, processing, and confirming customer orders; (3) conducting pricing analyses; (4) approving customer credit; (5) issuing sales invoices; (6) making collections on sales; (7) providing technical advice to customers and arranging for testing; (8) performing claims investigations; (9) making freight arrangements to the final destination; (10) invoicing customers; (11) carrying inventory (in the case of warehouse sales). See AST rebuttal brief at 38. We agree with petitioners that the functions listed as numbers (1), (2), (3) and (6) are merely subpart of the overall sales process and therefore do not constitute separate selling functions. Additionally, the functions listed as numbers (5) and (10) duplicate each other. In essence, then, AST's selling functions in the home market consist of providing technical advice, freight and delivery services, and credit and warranty services. For sales in the United States, AST S.p.A. provides AST USA with freight and delivery services and some aid in extending credit. See Preliminary Results at 54217. AST reported that there were no U.S. warranty claims during the POR. The issue of whether the CEP sales, then, are at a less advanced LOT than the home market sales turns on the importance of technical and warranty services AST S.p.A. provides for home market sales. These are the only areas of differences in selling functions between the U.S. market and home market. AST claimed that it provided both pre-sale and post-sale technical advice to customers in both the U.S. and home markets, but it did not provide any substantiating information on the extent of services rendered in either market. AST reported these expenses as indirect selling expenses. Information AST provided on home market warranty expenses was limited to credit memos issued to customers for defective merchandise. See discussion under comment 6 below. Warranty claims were paid for both prime and secondary merchandise, but not all home market customers had such claims. Moreover, U.S. sales were covered by warranties, even though no claims of defective merchandise were made during the POR. Therefore, differences in the provision of technical service and warranties are either unsubstantiated or insufficient to support a finding of different LOTs. Consequently, we affirm our preliminary determination that there is not a substantial difference in the LOTs between the U.S. market and the home market, and that a CEP offset is not warranted. See Preliminary Results at 54217. 4. Rebates Comment 4: Petitioners argue that the Department should deny an adjustment to normal value for claimed rebates in the home market because there is no evidence on the record that AST actually paid these rebates to its customers. AST counters that it is the Department's practice to accept a respondent's claim of accrued but unpaid rebates if the respondent demonstrates that either (1) there is a contractual obligation to pay such rebates; or (2) there is an historical record of such rebates having been paid in the past. As evidence of the Department's practice, AST cites Certain Corrosion-Resistant Carbon Steel Flat Products and Certain Cut-to-Length Carbon Steel Plate from Canada, 63 FR 12725, 12740-41 (March 16, 1998) ("Steel Plate from Canada"); Gray Portland Cement and Clinker from Japan, 56 FR 12156, 12168 (March 22, 1991) ("Cement from Japan"); and Antifriction Bearings (Other than Tapered Roller Bearings) and Parts Thereof from Japan, 54 FR 18992, 19056 (May 3, 1989) ("AFBs from Japan"). AST claims it met both of the requirements for a rebate adjustment, citing the Department's verification report, which states that AST sent a letter to those customers who qualified for a rebate stating the amount of the rebate, and that the rebate for 1998 was paid in February 2000. See Sales Verification Report (SVR) at 36-37. Department's Position: We agree with AST that the claimed rebates are allowable. The Department has accepted accrued but unpaid rebates after requiring the respondent to demonstrate that there is evidence of a contractual obligation to pay such rebates, or an historical record of such rebates having been paid in the past. See Steel Plate from Canada, 63 FR at 12740-41; Cement from Japan, 56 FR at 12168; AFBs from Japan, 54 FR at 19056. The rebate agreements in Exhibit SA-10 and the customer-specific rebate summary in Exhibit SA-11 of AST's Supplemental Section A Response (February 18, 2000), demonstrate that AST meets both conditions. Because substantial record evidence indicates that AST's customers were aware of the rebate prior to the time of sale, and the claimed rebates are customer-specific, we have continued to adjust normal value to account for rebates for these final results of review. 5. Technical Service Expenses Comment 5: Petitioners argue that the Department improperly treated AST's technical service expenses as direct selling expenses in the home market and that these should be treated as production costs rather than as direct or indirect selling expenses. Petitioners allege that the technical service expenses claimed by AST were costs incurred for testing and issuing mill certificates, and that these should be included in production costs. Petitioners also argue that AST failed to reduce its claimed technical service expenses for reimbursements or payments received from customers for these services, as instructed by the Department's questionnaire. Petitioners cite the home market sales verification report, which states that AST is often reimbursed for technical advice provided to outside parties. See SVR at 26. Petitioners further argue that laboratory analysis and preparation of mill certificates apply to all sales and there is therefore no basis for adjusting normal value to account for differences in cost between U.S. and home market sales. Petitioners point out that AST reported all its technical service expenses as indirect selling expenses, and that these should not be treated as direct. AST counters that the Department treats technical services as a selling expense, and that AST's technical service activities should be treated as a selling expense in the final results of review. Department's Position: We agree, in part, with petitioners that the Department incorrectly treated AST's technical service expenses as direct selling expenses in the Preliminary Results. AST reported these expenses as indirect. See Supplemental Sections B and C Response (March 22, 2000) at SB-15. However, in arguing that these expenses should be treated as production costs, petitioners appear to have misinterpreted the Department's SVR in characterizing the reported expenses as comprised solely of testing and certification costs. Sales Verification Exhibit 11 includes the accounting details for the expense items included under metallurgical and laboratory testing, and it is clear that these comprise activities associated with quality control and technical service. As AST did not segregate the variable from the fixed costs of these cost centers, it incorrectly reported them in the field for technical service expenses, which are direct expenses, instead of including them in indirect selling expenses reported in the field INDIRSH. We have made this correction for the final results of this review. 6. Warranty Expenses Comment 6: Petitioners argue that the Department should not allow AST's claimed home market warranty expenses because AST did not report these expenses on a model or product-specific basis. Petitioners cite the Department's questionnaire instructions calling for basing warranty cost on experience by model, or on the most product specific basis possible. Petitioners point out that AST reported these expenses on a customer-specific basis instead, although the Department twice requested this information on a model or product-specific basis. Petitioners argue that the credit notes obtained by the Department during verification demonstrate that AST could have reported these expenses on a model or product-specific basis. Petitioners conclude that this information was available to AST, and that AST failed to cooperate to the best of its ability. Petitioners also point out that AST's claim that it gave warranties only on prime merchandise is contradicted by the evidence in Sales Verification Exhibit 41, which includes credit memos paid for claims on second choice merchandise. Petitioners argue that AST should have allocated warranty claims on non-prime merchandise only to non-prime merchandise, and that because it is unclear how much of the warranty expenses for AST's other customers related to sales of non- prime GOES, the Department should not allow any of AST's claimed home market warranty expenses. At a minimum, petitioners argue, the Department should not allow any warranty expenses on sales of prime quality GOES to those customers to whom credit notes were issued exclusively for non-prime merchandise. See Verification Exhibit 41. Petitioners also point out that AST incorrectly calculated the warranty expense ratios for two customers. In addition, petitioners argue that warranty claims for high-permeability GOES should have been allocated only to this type of product. Because it is unclear how much of these expenses related to sales to this product, petitioners urge the Department to deny an adjustment. Petitioners also argue that the warranty claims should be disallowed because many of the credit notes were issued after the end of the POR, but AST allocated the amounts on these credit notes based on sales to each customer during the POR. Petitioners allege that this allocation methodology overstated the amount of AST's warranty expense because it was based on a formula that used different periods for the numerator and the denominator used to calculate the customer-specific percentages for warranty expenses. Petitioners also argue that this methodology will result in double-counting of warranty expenses in each administrative review. At a minimum, petitioners urge the Department to exclude credit notes issued after the end of the POR. Petitioners also argue that the Department should deny AST's claimed warranty expenses on the grounds that AST failed to provide any evidence that it reworked the merchandise prior to resale, citing Brass Sheet and Strip from Canada: Final Results of Antidumping Duty Administrative Review and Notice of Intent Not to Revoke Order in Part, 64 FR 46344, 46345-46347 (August 25, 1999) ("Brass S&S"). Petitioners claim that direct warranty expenses should be based on the actual costs that a respondent incurs to return defective merchandise to the factory and the variable costs incurred to rework the defective merchandise for resale. Petitioners cite information in the record that if the product was returned because it did not meet electrical standards, the returned merchandise was resold without being reworked. AST counters that it issues credit notes for customer claims concerning defective or non-conforming merchandise, which are expenses arising directly from the sales of the subject merchandise and relating to specific sales. AST cites section 351.410 of the Department's regulations as supporting its claim that these warranty expenses are a direct selling expense. Department's Position: We agree, in part, with AST that it has established its claim for treating warranty expenses as a direct expense and have made an adjustment to normal value for the final results of review. Section 351.410(c) of the Department's regulations defines direct selling expenses as expenses that result from, and bear a direct relationship to, the particular sale in question. Thus, there is no requirement to rework the merchandise, but only to show that expenses were incurred directly relating to the sales of subject merchandise. Contrary to the petitioners' position, Brass S&S has no applicability to this case. In Brass S&S, the Department did not make a generally applicable finding that in all cases direct warranty expenses consisted of only the freight cost associated with returning defective merchandise and the manufacturing costs associated with reworking the merchandise in order to make it resalable. Rather, the Department found, in that particular case, that these items were included in the total amount of the warranty expense. 64 FR at 46346. Further, as the Department explained in Brass S&S (Comment 4): Where feasible, the Department normally considers actual or historical warranty data on a model-by-model basis. ... Because certain warranty expenses are direct selling expenses, the Department asks respondents to associate these expenses with the individual sales which gave rise to them, to the extent that the company's record-keeping system permits them to do so. In some instances, the company's record-keeping system does not track direct expenses such as warranties to individual sales; in such cases, the Department normally will accept an allocation of these expenses on as specific a basis as possible, including a customer-specific basis. 64 FR at 46347. Thus, where the respondent does not record warranty expenses on a model-specific basis in the normal course of business, the Department allows these expenses to be reported on a customer-specific basis. Although AST's credit memos indicate the model of the rejected merchandise and whether it was sold as prime or non-prime quality, this information is not recorded in the accounting system and would have to be retrieved manually by examination of each credit memo. As petitioners themselves noted in their discussion of the claimed CEP offset, these expenses were relatively minor. The Department has to weigh whether the relative importance of the expense to its antidumping duty calculation warrants the imposition of this additional burden on the respondent. However, we agree with petitioners that payments made after the end of the POR should not be included in the adjustment. Accordingly, we have subtracted these payments and recalculated the customer-specific warranty expense ratios on the basis of information AST provided in its Section B and C response, Exhibit B-8 (November 24, 1999), allocating the reported warranty expenses during the POR to sales during that period. See Circular Welded Non-Alloy Steel Pipe and Tube from Mexico: Final Results of Antidumping Administrative Review, 65 FR 37518 (June 15, 2000); Issues and Decision Memorandum, Hylsa Comment 8. In addition, we agree with petitioners that AST incorrectly calculated the warranty expense ratios for two customers, and have corrected the allocation of these expenses to those customers. 7. Unreported U.S. Sales Comment 7: Petitioners claim that AST had a series of U.S. sales that were re- exported to a third country that should have been subject to the payment of antidumping duties, citing proprietary information in the Department's U.S. sales verification report at 6-7, 10. Petitioners urge the Department to apply adverse facts available for these sales. AST rejoins that the Department's questionnaire directed AST to report each U.S. sale entered for consumption during the POR, and that petitioners fundamentally mischaracterize the contents of the U.S. sales verification report, which confirms that the unreported sales were shipped directly to Canada without transiting the United States. AST explains that in certain instances, "USA" was mistakenly printed in the "ship to" field on AST's invoice, although the address in that field was clearly in Canada, and the bills of lading demonstrated that the products had in fact been shipped directly to Canada. Department's Position: We agree with AST that petitioners appear to have misconstrued the U.S. sales verification report. The Department verified that the merchandise was shipped directly from Italy to Canadian ports. Therefore, there was no reason for AST to report them as in-bond sales. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions and adjusting all related margin calculations accordingly. If these recommendations are accepted, we will publish the final determination and the final weighted-average dumping margin for AST in the Federal Register. AGREE ____________ DISAGREE _________ ______________________________ Bernard T. Carreau, fulfilling the duties of Assistant Secretary for Import Administration ________________ (Date) ________________________________________________________________________ footnote: 1. Commerce has the authority to accept post-verification information clarifying original questionnaire responses. See Monsanto Co. v. United States, 12 CIT 937, 698 F.Supp. 275, 281 (1988). Commerce verified the value of AST's in-bond transactions at verification of AST USA. See U.S. Verification Memorandum (August 30, 2000), pp. 5-6. Commerce, therefore, sought clarification of the in-bond transactions after verification.