67 FR 1715, January 14, 2002 A-475-824 ARP:1/4/99-6/30/00 Public Document IA/III/OIX: CB MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary AD/CVD Enforcement Group III SUBJECT: Issues and Decision Memorandum for the Final Results of Antidumping Administrative Review of Stainless Steel Sheet and Strip in Coils from Italy: January 4, 1999 through June 30, 2000 -------------------------------------------------------------------------- SUMMARY: The Department of Commerce ("the Department") published its notice of preliminary results of antidumping administrative review of stainless steel sheet and strip in coils from Italy on August 8, 2001. See Stainless Steel Sheet and Strip in Coils From Italy: Preliminary Results of Antidumping Duty Administrative Review ("Preliminary Results"), 66 FR 41517 (August 8, 2001). We have analyzed the case briefs and rebuttal briefs of interested parties in this review. As a result of our analysis, we have made changes from the preliminary results. The specific calculation changes for Acciai Speciali Terni S.p.A. and Acciai Speciali Terni USA, Inc. (collectively "AST") can be found in Analysis for the Final Results in the Administrative Review of the Antidumping Duty Order on Stainless Steel Sheet and Strip in Coils from Italy - Acciai Speciali Terni ("AST") ("Final Analysis Memorandum") (January 7, 2002). We recommend that you approve the positions we have developed in the "Discussion of the Issues" section of this Issues and Decision Memorandum. Below is the complete list of the issues in this review: Issues Comment 1: Classification of U.S. Sales Comment 2: CEP Offset Comment 3: Major Inputs from Affiliated Suppliers Comment 4: Home Market Short-Term Interest Rate Comment 5: U.S. Insurance Revenue DISCUSSION OF THE ISSUES: Comment 1: Classification of U.S. Sales AST argues that its back-to-back sales (1) to its U.S. customers are properly considered export price ("EP") sales. AST maintains that in preliminarily determining to reclassify AST's back-to-back sales transactions (i.e., Channel 1 sales) as constructed export price ("CEP") transactions, the Department misconstrued the nature of the sales transaction between AST S.p.A. and the unaffiliated U.S. customer and the principles for EP classification established in AK Steel Corp. v. United States, 226 F.3d 1361, 1374 (Fed. Cir. 2000) ("AK Steel"). AST claims that under the statute, EP classification is appropriate where the merchandise is sold before importation outside of the United States by the foreign producer or exporter to an unaffiliated purchaser in the United States (see section 772(a) of the Tariff Act of 1930, as amended ("the Act") (19 U.S.C. § 1677a(a))), and CEP classification is appropriate if the merchandise is sold before or after importation, in the United Sates by or on behalf of the foreign producer or exporter (see section 772(b) of the Act (19 U.S.C. § 1677a(b))). AST argues that for Channel 1 sales, AST S.p.A., not AST USA, makes the sale to the unaffiliated U.S. customer from Italy. Although AST acknowledges that AST USA serves as the primary contact point for the U.S. customer and plays a role in the collaborative effort by which AST and the U.S. customer establish the price and terms of a particular sale, AST holds that the actual sales transaction is between AST S.p.A. and the U.S. customer. Citing its questionnaire responses, AST states that AST USA must obtain special approval from a senior sales manager if an order is placed that is outside the pricing guidelines established by AST S.p.A. AST also notes that AST S.p.A. is responsible for reviewing the details of an order and then accepting the order. Arguing that Department mis-characterizes the order confirmation issued by AST USA as a contract within the meaning of AK Steel, AST maintains that the order confirmation issued by AST USA to the customer is a communication of the fact that AST S.p.A. has agreed to sell the merchandise to the unaffiliated U.S. customer. AST also asserts that the Department verified other evidence which confirms that Channel 1 sales are between AST S.p.A. and the unaffiliated U.S. customer. Specifically, citing its questionnaire responses, AST explains that AST S.p.A. arranges the logistics of delivery to the final customer and ships the merchandise directly from the Italian factory to the U.S. customer or to the U.S. customer via an unaffiliated further processor. AST adds that the merchandise never enters the inventory of AST USA. AST argues that it is further evident that its back-to-back sales are properly classified as EP sales when a comparison is made to those U.S. sales made from AST's inventory (or from the inventory of AST's other U.S. affiliates). AST maintains that in contrast to its back-to-back sales for which it claims AST S.p.A. is directly and centrally involved in the sales process, AST S.p.A. generally has no involvement in the case of sales from AST USA's inventory. AST concludes that the existence of selling functions provided by AST USA for its Channel 1 sales as described in the preliminary results does not alter the fact that AST S.p.A. is principally responsible for these sales. Petitioners argue that AST's Channel 1 sales transactions are CEP sales. Petitioners maintain that the Department correctly evaluated the record evidence with respect to AST's Channel 1 sales and properly classified these sales as CEP sales. Based on an analysis of AST's questionnaire responses, petitioners claim that for AST's back-to-back sales, AST USA conducts all contact with the U.S. customer and every aspect of the sale. Further, petitioners assert that AST S.p.A.'s involvement in the sales process is limited to determining whether AST can produce the merchandise and to negotiating a proposed order confirmation with AST USA. Petitioners argue that AST's claims that its back-to-back sales transactions do not qualify as CEP sales are inconsistent with its statements in the questionnaire response that AST USA markets and sells AST products in the United States. Petitioners contend that AST's arguments are not convincing and lack substance. Petitioners claim that certain statements made by AST in its brief, including that AST USA serves as the primary contact for the U.S. customers, AST USA is responsible for notifying AST S.p.A. of the details of a particular order, and AST USA invoices and collects payment from the U.S. customer, support the Department's determination that AST's Channel 1 sales were made in the United States. Moreover, petitioners maintain that AK Steel does not require that sales pass through a U.S. affiliate's inventory in order to be considered CEP sales. Petitioners argue that the involvement by AST S.p.A. in the sales process does not demonstrate that AST USA is not making sales in the United States. Petitioners assert that the Department's interpretation and application of AK Steel is appropriate and consistent with past practice. Citing Preliminary Results and Rescission in Part of Antidumping Duty Administrative Review: Gray Portland Cement and Clinker From Mexico, 66 FR 47632, 47634 (September 13, 2001), petitioners note that in recent cases the Department has classified sales as CEP sales in circumstances similar to those involving AST's back-to-back sales. Citing Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Stainless Steel Bar From Korea, 66 FR 40222, 40224 (August 2, 2001), petitioners also claim that even in cases where the foreign producer reaches an agreement with the U.S. customer on overall volume and pricing, the Department has still found sales to be CEP sales when the final documents are executed by the U.S. affiliate. Petitioners observe that in other proceedings involving AST as well as in the original investigation on stainless steel sheet and strip in coils ("SSSS") from Italy, the Department has found AST's back-to-back sales to be CEP sales. Petitioners explain that in the recent determination in grain-oriented electrical steel ("GOES") from Italy, AST stated that its U.S. sales which were reported as EP sales should be reclassified as CEP under the AK Steel test. See Grain-Oriented Electrical Steel From Italy: Notice of Preliminary Results of Antidumping Administrative Review, 65 FR 54215, 54218 (September 7, 2000). Petitioners note that this conclusion was supported and implemented in the GOES final results. See Grain- Oriented Electrical Steel From Italy: Final Results of Antidumping Administrative Review ("GOES Final Results"), 66 FR 14887 (March 14, 2001), and accompanying Issues and Decision Memorandum ("GOES Decision Memorandum"). Petitioners also point out that the Department reached a similar result in the investigation that is the basis for this review. See Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Sheet and Strip in Coils from Italy ("SSSS Final Determination"), 64 FR 30750, 30762-64 (June 8, 1999). Petitioners argue that the back-to-back sales transactions in the GOES review and the SSSS investigation are virtually identical to the back-to-back sales process described by AST in this review. Consequently, petitioners maintain that the Department's finding in the preliminary results that AST's back-to-back sales are CEP sales is strongly supported by precedent. Department's Position: We disagree with AST, and continue to find that AST's back-to-back U.S. sales transactions were made "in the United States" by AST's affiliate, AST USA, on behalf of AST S.p.A. within the meaning of section 772(b) of the Act and, thus, should be treated as CEP transactions (see AK Steel, 226 F.3d at 1375). The evidence on the record does not support AST's claims that for its back-to-back U.S. sales transactions AST S.p.A., not AST USA, makes the sale to the unaffiliated U.S. customer from Italy. To the contrary, the description provided by AST regarding the sales process for its back-to- back U.S. sales transactions indicates that, for these sales, the merchandise was sold (or agreed to be sold ) in the United States. Specifically, for these sales, AST USA, which is headquartered in White Plains, New York, performs the following functions: (1) takes title to the subject merchandise; (2) invoices and collects payment from the unaffiliated U.S. customers; and (3) plays a role in determining the U.S. price in a collaborative effort with AST S.p.A. and the U.S. customer. See AST's January 26, 2001 supplemental questionnaire response at SA-8 through SA-10 and Cost and Sales Verification Report for Acciai Speciali Terni S.p.A. ("AST Verification Report") (July 31, 2001) at Exhibits 34 and 35. Moreover, as noted by petitioners, the Department has held that in finding CEP classification to be appropriate, "U.S. sales affiliates need not be determined to have independently set U.S. prices and other terms of sale...." See Certain Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products From Korea: Final Results of Antidumping Duty Administrative Reviews, 65 FR 13359 (March 13, 2000) and accompanying Issues and Decision Memorandum at Comment 12; see also Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Stainless Steel Bar From Korea, 66 FR 40222, 40224 (August 2, 2001). Thus, because AST USA is responsible for invoicing and collecting payment from the U.S. customer and takes title to the merchandise, pursuant to AK Steel, for the final results we have continued to treat AST's reported back-to-back U.S. sales as CEP sales. We note that this determination is consistent with the Department's determination in the original investigation in this case in which a similar fact pattern for AST's back- to-back U.S. sales existed. See SSSS Final Determination, 64 FR at 30762- 64. Comment 2: CEP Offset AST argues that the Department should apply a CEP offset in the final determination. AST alleges that the Department's analysis in denying AST a CEP offset was inconsistent with the applicable legal standard. Specifically, AST maintains that the Department did not focus its analysis on the transactions between AST S.p.A. and AST USA. AST maintains that once the Department examines the selling functions performed by AST S.p.A. for sales to AST USA (i.e., the CEP transaction), it will be evident that the CEP transaction is made at a less advanced level of trade ("LOT") than the LOT of AST S.p.A.'s home market sales. Although AST agrees with the Department's determination in the preliminary results that there is only one LOT in the home market, AST disagrees with the Department's determination that the home market LOT is comparable to CEP LOT. AST claims that the examination of the relevant marketing stage and selling functions for purpose of the CEP offset must focus on the intermediate transaction between AST S.p.A. and AST USA, and the selling functions performed therewith by AST S.p.A. AST asserts that the Department did not distinguish between the selling functions performed in connection with the CEP transaction and the selling functions performed in the sales transaction between AST USA and the unaffiliated U.S. customer. Citing the "Selling Activities Chart" provided in Exhibit 13 to AST's October 11, 2001 Section A Response, AST claims that in comparison to the selling functions performed by AST USA for AST USA's sales to the unaffiliated U.S. customer, the selling functions performed by AST S.p.A. in conjunction with the CEP transactions are more routine and less intensive. AST maintains that this difference is due to the fact that all of the customized selling functions that must be performed in connection with the sale to the unaffiliated customer have been transferred to AST USA. AST notes that the "Selling Activities Chart" indicates that the only significant selling activities that are performed by AST S.p.A. for the CEP transactions are: 1) minimal processing of customer orders' at AST USA's direction; 2) arranging for freight (normally to the U.S. port); 3) the provision of credit to AST USA; and limited warranty services. Explaining that freight arrangements involve routine shipment from AST's facilities to AST USA and that the credit arrangement are between two affiliates, AST characterizes the level of activity for AST S.p.A.'s selling functions as extremely low, repetitive, and routine in nature. AST argues that, in contrast, AST S.p.A. performs numerous customized selling functions in the home market including but not limited to: 1. providing both pre-sale and continuous technical assistance; 2. providing analyses of samples; 3. providing prototypes and trial lots; 4. soliciting sales and acting as a point of contact with unaffiliated customers; 5. receiving, analyzing, processing, and confirming orders; 6. carrying inventory and providing just-in-time services (in the case of inventory sales); 7. making freight arrangements to the final destination; 8. approving customer credit; 9. issuing sales invoices; 10. making collection on sales; and 11. performing claim investigations. AST contends that the virtually all of the above-referenced selling functions performed by AST S.p.A. in the home market are performed by AST USA in the U.S. market. AST states that it disagrees with the Department that the degree and difference in selling functions performed between the home market transaction and CEP transaction are not substantial. AST claims that while some selling activities overlap in a nominal sense (e.g., extending credit, processing customer orders, freight and delivery arrangements, provision of warranty, and pre-sale technical assistance), an examination of these selling activities reveals stark distinctions. First, AST notes that for CEP sales the credit is extended to AST S.p.A.'s own affiliate and characterizes the activity as risk free and completely routinized. In contrast, AST maintains that in the home market, the extension of credit involves the risk of multiple customers, with varying degrees of credit risk, individual credit arrangements, and all of the additional transaction costs associated therewith. Second, AST contends that the processing of orders for CEP transactions involves a single party that has placed the order in accordance with established sales, payment, and delivery terms whereas home market sales involve many customers with individualized sales and payment terms, and delivery requirements. Third, AST argues that there is no reasonable comparison between the warranty and pre-sale technical services provided by AST S.p.A. for the CEP transactions and those provided for home market sales. AST maintains that warranty claims between AST S.p.A. and AST USA are rare and easily dealt with. For warranty claims made by the unaffiliated U.S. customer, AST asserts that though AST S.p.A. is responsible for ultimately approving claims and paying reimbursements, AST USA performs a substantial amount of the initial warranty-related activity and processing. In contrast, AST explains that for home market sales, AST S.p.A. handles all of the claims- related activity and processing. With respect to pre-sale technical advice, AST argues that the activities provided by AST S.p.A. for the CEP transactions are fundamentally different than the activities performed for home market sales. AST claims that most pre-sale technical advice for U.S. sales are provided by AST USA. AST also contends that the pre-sale technical advice provided by AST S.p.A. is provided to the unaffiliated customer, not AST USA, and thus is not relevant to the Department's CEP analysis. AST concludes that the home market sales activities are different and more involved and intensive than those associated with the CEP transactions, which AST claims reflects the more advanced stage of marketing of the home market sales. Accordingly, AST argues that because there is no comparable LOT in the U.S. market to which the home market LOT can be compared in order to calculate a LOT adjustment to compensate for a difference in LOT, a CEP offset is required under 19 CFR 351.412(f) of the Department's regulations. Petitioners argue that the Department should reject AST's request for a CEP offset. Petitioners maintain that in the preliminary results, the Department properly concluded that no difference in selling functions and no difference in levels of trade exists in the U.S. and home markets. Petitioners contend that under the SAA, the Department will only make the CEP offset where "there is a difference in the level of trade...." Statement of Administrative Action, Uruguay Round Agreements Act, H. Doc 103-316 Vol. 1, 103d Cong. 2d Sess. at 829 (1994) ("SAA"). Additionally, citing Antidumping Duties; Countervailing Duties; Final Rule ("Final Rule"), 62 FR 27296, 27370 (May 19, 1997), petitioners claim that section 351.412(f) of the Department's regulations "clarifies that the Department will grant a CEP offset only where a respondent has succeeded in establishing that there is a difference in levels of trade ...." Petitioners contend that AST is falsely assuming that a CEP offset is automatic. Citing Industrial Nitrocellulose form the United Kingdom; Notice of Final Results of Antidumping Duty Administrative Review, 64 FR 6609, 6614 (February 10, 1999); Extruded Rubber Thread from Malaysia; Preliminary Results of Antidumping Duty Administrative Review, 63 FR 60295, 60296 (November 9, 1998); and Notice of Preliminary Determinations of Sales at Less Than Fair Value and Postponement of Final Determinations-- Stainless Steel Round Wire From Canada, India, Japan, Spain, and Taiwan; Preliminary Determination of Sales at Not Less Than Fair Value and Postponement of Final Determination--Stainless Steel Round Wire From Korea, 63 FR 64042, 64048 (November 18, 1998), petitioners state that the Department has routinely denied CEP offsets when there are no LOT differences after the adjustments called for by section 772(d) of the Act (19 U.S.C. § 1677a(d)) are made. Petitioners argue that AST has failed to demonstrate that it is entitled to a LOT adjustment or a CEP offset in this case. They claim that AST's argument is characterized by a lack of references to questionnaire response evidence of differences in selling function in the U.S. and home market and between the U.S. and home market. Petitioners maintain that under the statute and under the Department's regulations, AST has the burden of proving its entitlement to a LOT adjustment or CEP offset. SAA at 829 and Final Rule, 62 FR at 27370. Petitioners also discount AST's claim that there is a difference between the "routine" activities performed by AST S.p.A. for the CEP transactions and the more "intensive" activities performed by AST S.p.A. for home market transaction. Petitioners note that in the preliminary results the Department found that for AST's back-to-back U.S. sales, AST S.p.A. is more involved in the sales process and provides a higher degree of freight and delivery arrangements. Preliminary Results, 66 FR at 41522. Petitioners also claim that in the preliminary results, the Department rejected AST's argument that certain of its selling activities for channel one sales were low or "routine." Id. Petitioners maintain that the Department's preliminary finding that AST made sales in the home and U.S. markets at the same LOT is correct. Petitioners argue that the Department's finding in the preliminary results was based on a careful examination of the information provided by AST on the chain of distribution and selling functions in both the home and U.S. markets. Petitioners contend that AST has not cited to any additional information of record that warrants a change to the Department's preliminary decision not to make a LOT adjustment or a CEP offset. Petitioners state that they disagree with AST's claims that the Department did not consider section 772(d) of the Act (19 U.S.C. § 1677a(d)) in declining to grant AST a CEP offset. Petitioners assert that the Department examined the levels of trade that existed following the adjustments specified under section 772(d) of the Act and found that these adjustments did not alter the channels of trade or selling functions upon which the determination regarding LOT is based in this case. Moreover, petitioners claim that a determination in this review that there is no difference in levels of trade within or between the home and U.S. markets, and therefore no basis for the granting of a CEP offset, is supported by the Department's finding in the recent Italy GOES review involving AST and in the initial investigation of the case under review. See GOES Final Results, 66 FR at 14887; GOES Decision Memo, at Comment 3; and SSSS Final Determination, 64 FR at 30754. Petitioners conclude that in light of the record evidence in this review and the Department's prior findings, in its final results, the Department should find that AST merits no CEP offset. Department's Position: We disagree with AST, and have continued to deny AST a CEP offset for the final results. In accordance with section 773(a)(1)(B) of the Act, to the extent practicable, we determine normal value based on sales in the comparison market at the same level of trade ("LOT") as the EP or CEP transaction. For CEP sales, if the normal value ("NV") level is more remote from the factory than the CEP level and there is no basis for determining whether the differences in the levels between NV and CEP sales affect price comparability, we adjust NV under section 773(A)(7)(B) of the Act (the CEP offset provision). See Notice of Final Determination of Sales at Less Than Fair Value: Certain Cut-to-Length Carbon Steel Plate from South Africa, 62 FR 61731, 61732-33 (November 19, 1997). AST has argued that the comparison market LOT in the home market is different (and more advanced in the chain of distribution) than the LOT of the CEP sales, and that it is not possible to calculate a LOT adjustment to compensate for this difference in LOT. In the preliminary results, the Department found that AST's claims of additional and more advanced selling functions for home market sales in comparison to CEP sales were either unsubstantiated or insufficient to support a finding of different LOTs. See Preliminary Results, 66 FR at 41522-23. In the preliminary results, the Department determined that there was one LOT in the home market. See Preliminary Results, 66 FR at 41522. Because neither party disputes this determination, the Department continues to find that there is one LOT in the home market. At issue here is the comparability of the home market LOT to the CEP LOT, and, specifically, the level of selling functions performed by AST in the home market and CEP LOT. As explained above, the Department has continued to classify all of AST's U.S. sales as CEP sales. In determining the LOT for NV, the LOT is the starting-price sales in the comparison market or, when NV is based on constructed value, that of the sales from which we derive selling, general, and administrative expenses and profit, while the LOT for CEP sales is the level of the constructed sale from the exporter to the affiliated importer (i.e., the sales transaction between AST S.p.A. and AST USA). See 19 CFR 351.412(c)(1). For sales in the home market, AST performs all sales-related activities, including carrying inventory and providing just-in-time services (for sales from inventory) arranging for freight and delivery; pre-sale and continuous technical assistance; trial lots; warranty services (except for sales from inventory which do not carry a guarantee or warranty); price negotiation; processing customer order; sales calls and visits; and extending credit. For the CEP LOT, the Department examines the LOT following the adjustments called for by section 772(d) of the Act (19 U.S.C. § 1677a(d)). In our preliminary results, we reviewed the selling functions and services performed by AST in the U.S. market, as represented by AST in its responses. We found that the selling functions performed by AST for CEP sales, regardless of channel of distribution, include processing AST USA inquiries and purchase orders; invoicing AST USA; extending credit to AST USA; freight and delivery arrangements from AST's plant to the U.S. port (including the cost of transporting the goods to the European port, port handling, and ocean freight), and warranty services. See Preliminary Results, 66 FR at 41522. An analysis of the selling functions performed by AST for its CEP sales and home market sales reveals that AST performed many of the same selling functions such as processing customer orders; extending credit; freight and delivery arrangements; and warranty services. In the home market, AST performed the additional selling functions of providing pre-sale and continuous technical assistance, offering prototypes and trial lots, and price negotiation. In addition, AST has maintained that it performed some of the selling functions at a higher degree (i.e., services such as warranty, extending credit, sales visits, freight and delivery arrangements) for home market sales than the CEP transaction. We disagree with AST's contention in its case brief that the differences in credit arrangements, order processing, and delivery arrangements between the CEP transaction and the home market transaction are "stark." The selling functions are identical, the only difference being in the alleged intensity in which the selling functions are performed. Moreover, AST has not provided evidence to quantify the difference in intensity between the home market and CEP transaction. AST has simply established that for CEP sales, the transaction is with its affiliated importer, while home market sales may involve many customers (some of whom are also affiliated with AST) with individualized credit, sales and payment terms, and delivery arrangements. Moreover, as we noted in the preliminary results, the comparability of AST's indirect selling expenses in each market does not support a finding that other selling activities related to the sales process (e.g., sales visits, credit risk, freight and delivery arrangements, and order processing) are performed at a substantially higher degree in the home market than the U.S. market. The chart at Exhibit A-13 of AST's October 10, 2000 questionnaire response indicates the degree and location of selling activities performed by AST S.p.A. and AST USA on behalf of home market and U.S. sales. Based on an analysis of this chart, is clear that AST USA performs the vast majority of sales functions for U.S. sales to the unaffiliated customer, and, thus, by extension the selling functions captured in AST S.p.A.'s U.S. indirect selling expense ratio must primarily relate to selling expenses incurred by AST S.p.A. in connection with the CEP transaction. Consequently, we determine that the following selling functions performed by AST S.p.A. for the CEP transactions and for home market sales are similar: sales visits, extending credit risk, arranging for freight and delivery, and processing orders. The only areas of difference with respect to the selling functions performed for the CEP transaction and home market sales are, therefore, the provision of warranty services, prototypes and trial lots, pre-sale and continuous technical services, and price negotiation. With respect to warranty services, although there were no U.S. warranty claims during the POR, all U.S. sales of prime merchandise carry a warranty or guarantee. AST has indicated that for home market sales AST S.p.A. is responsible for handling all the claims-related activity and processing whereas for U.S. sales, AST USA performs "a substantial amount of the initial warranty- related activity and processing." However, AST did not provide any information to substantiate its claim that the provision of warranty services for home market sales is "fundamentally different" than the provision of warranty services for the CEP transaction. Also, proprietary information submitted by AST indicates that selling activities associated with price negotiations and the provision of prototypes and trial lots by AST in the home market were not substantial on a cost per-unit basis. See Final Analysis Memorandum. Price negotiations are a subpart of the overall sales process, the expenses for which are captured in indirect selling expenses. The data submitted by AST indicate that AST's indirect selling expenses are comparable in both markets. Although AST asserts that the Department must disregard those selling functions performed by AST S.p.A. in connection with the transaction between AST USA and the unaffiliated customer, with respect to the indirect selling expenses reported by AST S.p.A. for U.S. sales, AST has not suggested that any of the indirect selling expenses reported in the "DINDIRSU" variable relate to the sale to the unaffiliated U.S. customer. Further, we only disregard those functions for which expenses have been deducted for the CEP. Had AST claimed that certain expenses reported in the "DINDIRSU" variable related to the transaction with the unaffiliated U.S. customer, it would have been necessary to deduct these expenses from the CEP transaction. Because AST made no such adjustment, we presume that the indirect selling expenses in the "DINDIRSU" variable all pertain to the CEP transaction and have included the corresponding selling functions in our analysis. Finally, with respect to the provision of pre-sale technical assistance, the Department agrees with AST in part. In the preliminary results, the Department noted that it appears that AST offers pre-sale technical assistance for its CEP sales based on the fact that AST reported technical service expenses in both markets. See Preliminary Results, 66 FR at 41522. In its case brief AST contends that the pre-sale technical advice provided by AST S.p.A. is provided to the unaffiliated customer, not AST USA, and thus is not relevant to the Department's CEP analysis. Proprietary information indicates that the provision of technical services in the home market is not a significant expense; therefore, we find that any difference in the technical services provided for home market sales and the CEP transaction is insufficient to support a finding of different LOTs. See AST's November 6, 2000 questionnaire response at B-34, C-46, Exhibit B-12, and Exhibit C-15. Consequently, for purposes of the final results, we continue to find that AST's claims of additional and more advanced selling functions for home market sales in comparison to CEP sales are either unsubstantiated or insufficient to support a finding of different LOTs. See 19 CFR 412(c)(2). Accordingly, we determine that sales in the home market and in the U.S. market were made at the same LOT and have not make a LOT adjustment or CEP offset. Comment 3: Major Inputs from Affiliated Suppliers Petitioners argue that the Department should adjust AST's reported cost of production for certain raw materials that AST purchased from affiliated parties, because information provided by AST demonstrates that these inputs were not sold to AST at market prices. Citing Notice of Final Determination of Sales at Less Than Fair Value: Certain Cold-Rolled Flat- Rolled Carbon-Quality Steel Products from Brazil ("Cold-Rolled Steel from Brazil"), 65 FR 5554, 5580 (February 4, 2000); Certain Cut-to-Length Carbon Steel Plate from Mexico: Final Results of Antidumping Duty Administrative Review ("CTL Plate from Mexico"), 65 FR 8338 , 8340 (February 18, 2000); and Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Round Wire from Canada ("Round Wire from Canada"), 64 FR 17324, 17335 (April 9, 1999), petitioners assert that the Department's practice is that major inputs purchased from affiliated suppliers should be valued at the highest of the market price, transfer price, or the affiliated supplier's cost of production. Petitioners note that AST reported that it purchased certain raw materials used to produce SSSS from affiliated suppliers. Petitioners contend that these are major inputs because they are basic materials used in the production of SSSS. Petitioners explain that during verification the Department obtained worksheets that list the volume and value and average unit price for AST's purchases of raw materials from affiliated and unaffiliated suppliers. See AST Verification Report at pages 11-12 and Exhibit 15. Petitioners maintain that based on the information contained in these worksheets, for certain raw materials the Department should adjust AST's reported cost of production to reflect the market price for each of these raw materials. AST argues that the Department appropriately used the transfer price of raw materials purchased from AST's affiliated suppliers in its calculation of AST's COP. Citing its questionnaire responses and the Department's verification report, AST asserts that in response to requests from the Department it provided detailed information concerning its purchases of raw materials from affiliated parties. See AST's Section D Questionnaire Response at D-3 (November 7, 2000); AST's Supplemental Questionnaire Response at SD-18, SD-19, Exhibit D-30 (March 22, 2001); and AST Verification Report at pages 12 and 15, Exhibit 15. AST contends that the effect of adjusting AST's cost of manufacture for the raw materials at issue would be de minimis. AST maintains that even if petitioners' claims with respect to AST's raw material purchases were successful, under the statute and the Department's regulations, the only adjustments that can be made under the major input rule are adjustments to the value of the major inputs actually purchased from affiliated parties. AST claims that because the amount of raw materials purchased from affiliated suppliers is minuscule, application of petitioners' proposal would result in a minimal increase in AST's cost of manufacture. Thus, AST argues that based on the alleged inconsequential effect of petitioners' proposed changes, the Department should continue to use transfer prices to value these raw materials. With respect to petitioners' substantive arguments, AST alleges that the major input rule is not applicable in this case because the transfer price has not been found to be lower than the suppliers' cost of production, as is required under section 773(f)(3) of the Act (19 U.S.C. § 1677b(f)(3)). AST claims that petitioners' brief misstates the law and that neither the statute or the Department's regulations automatically prescribe use of "the highest of the market price, transfer price, or the affiliated supplier's cost of production" for purposes of valuing major inputs purchased from affiliated parties. Citing section 773(f)(3) of the Act (19 U.S.C. 1677b(f)(3)) and 19 C.F.R. 351.407(b) of the Department's regulations, AST claims that the Department can only resort to the highest of transfer price, market price, or COP if it has "reasonable grounds to believe or suspect that an amount represented as the {transfer price} of such input is less than the cost of production of such input." AST asserts that petitioners' case brief makes no mention of this requirement nor do petitioners make such an allegation. Consequently, AST argues that the Department cannot disregard the transfer price for these materials. Moreover, AST argues that assuming arguendo that the major input rule could apply in this case despite the absence of any allegation regarding the affiliated suppliers' COP, the major input rule would still be inapplicable to this case because the raw materials at issue cannot be considered major inputs. Citing Cold-Rolled Steel from Brazil, 65 FR at 5580, AST maintains that when determining whether an input is major, the Department considers "both the percentage of the input obtained from affiliated suppliers (as opposed to unaffiliated suppliers) and the percentage the individual element represents of the product's cost of manufacture." For the raw materials at issue, AST submitted a chart showing the percentage of each raw material purchased from affiliated suppliers versus the percentage of each raw material purchased from unaffiliated suppliers as well as the percentage each raw material purchased from affiliated suppliers accounts for cost of manufacture. AST contends that the tiny amount of raw materials purchased by AST from affiliated suppliers and their minimal significance when compared to total cost of manufacture contradicts petitioners' argument that the raw materials at issue are major inputs. Consequently, AST argues that the Department's approach in the preliminary results was appropriate and should be affirmed in the final results. Department's Position: We disagree in part with petitioners. Section 773(f)(2) allows the Department to test whether transactions between affiliated parties involving any element of value required to be considered in calculating COP (i.e., major or minor inputs) are at prices that "fairly reflect * * * the market under consideration." Section 773(f)(3) allows the Department to further test whether transactions between affiliated parties involving a major input are at prices above the affiliated supplier's cost of production. In other words, if an understatement of the value of a major input would have a significant impact on the reported cost of the subject merchandise, the statute allows the Department to insure that the transfer price or market price is above the affiliated supplier's COP. Final Determination of Sales at Less Than Fair Value; Stainless Steel Sheet and Strip in Coils from Germany, 64 FR 30710, 30747 (June 8, 1999). The determination as to whether an input is considered major is made on a case-by-case basis. See Final Rule, 62 FR at 27362. In determining whether an input is considered major, among other factors, the Department looks at the percentage of the input obtained from affiliated suppliers (versus un-affiliated suppliers) and the percentage the individual element represents of the product's cost of manufacture ("COM") (i.e., whether the value of inputs obtained from an affiliated supplier comprises a substantial portion of the total cost of production for subject merchandise). Id. See also Cold-Rolled Steel from Brazil, 65 FR at 5580. At the Department's request and in accordance with section 773(f)(2), for those raw material inputs purchased from affiliated parties, AST provided a chart showing the volume and value purchased from affiliated and unaffiliated suppliers during the POR. See AST Verification Report at pages 11-12 and Exhibit 15. At verification, we examined both the percentage of the input obtained from affiliated versus unaffiliated suppliers and the percentage of the product's COM represented by the specific elements of value. The limited amounts of the inputs obtained from affiliated suppliers, combined with the relatively small percentage the individual elements represent of the product's COM, mitigates the effect purchases of these inputs from affiliates would have on AST's total COP. For specific information on each relevant input, see Final Analysis Memorandum. Accordingly, we determine that in this review, section 773(f)(3) of the Act does not apply to those certain raw materials AST purchased from affiliated parties. We note that in CTL Plate from Mexico and Round Wire from Canada, there was no issue as to whether the input in question constituted a "major input"; therefore, the cases are inapposite. Moreover, in Cold-Rolled Steel from Brazil, 65 FR at 5580, the Department determined iron ore to be a major input using the same criteria that the Department used to determine that the raw material inputs at issue here were not major inputs (i.e., the percentage of the input obtained from affiliated suppliers (versus unaffiliated suppliers) and the percentage the individual element represents of the product's COM). In Cold-Rolled Steel from Brazil, the Department found that the respondent purchased significant amounts of the inputs from their affiliate and that the iron ore represented a relatively large percentage of COM. Although we do not consider the inputs at question to be major inputs, nevertheless, we agree with petitioners that the prices paid to certain affiliated parties for raw material inputs were below market price. In this case, however, the relatively large percentage of purchases from unaffiliated suppliers, the relatively small percentage of the elements' value to the per-unit cost, and the relatively small difference between transfer price and market value, rendered any adjustment to cost insignificant. See section 777A(a)(2); 19 CFR 351.413. Therefore, for the final results we have continued to rely on AST's reported cost of production. Comment 4: Home Market Short-Term Interest Rate Petitioners argue that the Department should recalculate the weighted- average short-term interest rate that AST used to determine imputed credit expenses. Citing Import Administration Policy Bulletin 98.2 (February 23, 1998), petitioners claim that the Department's practice is to use borrowings in the currency in which the sales are denominated to calculate the short-term interest rate to use for calculating imputed credit expenses. AST concurs with petitioners that foreign currency borrowings should be excluded from the calculation of the home market interest rate. AST notes that certain foreign currency borrowings were inadvertently included in the calculation of the home market short-term interest rate. As an attachment to its brief, AST provides a recalculation of the short-term interest rate using the short-term loan figures reported by AST. AST requests that the Department use this interest rate to recalculate AST's home market imputed credit expenses. Department's Position: We agree with petitioners and AST that the Department does not include foreign currency borrowings in its calculation of the short-term interest rate. See Import Administration Policy Bulletin 98.2. Exhibit C-35 to AST's May 28, 2001 questionnaire response and AST Verification Exhibit 53 indicate that short-term borrowings in foreign currencies (i.e., currencies other than Italian Lira) were included in AST's calculation of the weighted average interest rate based on the loan balance on September 30, 2000 (i.e., the end of fiscal year 2000). We note that for purposes of the preliminary results, the interest rate used in AST's calculation of home market imputed credit expenses was based on the short-term interest rate in effect as of September 30, 1999. For purposes of the final results, we have recalculated AST's home market imputed credit expenses using the average of the revised weighted-average short- term interest rate as of September 30, 2000 and the short-term interest rate as of September 30, 1999. This weighted-average interest rate for 1999 and 2000 was provided by AST in Attachment RB-2 of its rebuttal brief, dated October 2, 2001. Comment 5: U.S. Insurance Revenue Petitioners argue that the Department should disallow AST's claimed insurance revenue for its U.S. sales because there are several defects with the claim. First, petitioners assert that AST has provided contradictory information to the Department regarding the records associated with insurance revenue for AST's U.S. sales. Petitioners maintain that AST's claim at verification that the records for insurance revenue for AST's U.S. sales are maintained at AST USA's headquarters is contradicted by AST's earlier statements on the record of this proceeding. Petitioners cite to AST's statements in its supplemental questionnaire, dated January 26, 2001, that "AST USA does not itself insure shipments from AST. AST insures each international shipment." Petitioners also cite to AST's claims in the same submission that "{b}ecause AST USA does not insure shipments, claims submitted by AST USA cannot be provided." Petitioners contend that AST maintains documents regarding U.S. insurance claims at AST's office in Italy, and that AST's assertion that the records are kept in the United States was designed to prevent the Department from reviewing these records during verification. Moreover, petitioners claim that because verification was requested by petitioners in this proceeding, the Department was required to verify the claim. Consequently, petitioners maintain that because AST did not have the necessary records for the Department to verify AST's claim during verification, the Department should reject this claimed adjustment under section 351.401(b)(1) of the Department's regulations. Petitioners explain that there are other problems with AST's insurance claim which they maintain further support their argument that the Department should reject AST's claim. Petitioners assert that AST stated in its January 26, 2001 questionnaire response that costs associated with its claimed insurance revenue should be attributed only to sales of non- prime merchandise. As such, petitioners charge that there is no basis for AST to add insurance revenue to the prices for sales of prime merchandise when the costs or losses associated with the insurance revenues are associated only with sales of non-prime merchandise. Petitioners state that the Department should allocate all of AST's insurance revenues only to sales of non-prime merchandise. Additionally, noting that AST allocated its insurance revenues over all sales, petitioners argue that AST failed to calculate its claimed adjustment to U.S. price on as specific a basis as is feasible. Citing a table AST submitted at Exhibit C-34 to its January 26, 2001 questionnaire response, petitioners contend that AST had in its possession the information (i.e., the specific product associated with each claim) needed to calculate the insurance revenue that applied only to sales of the subject merchandise. Petitioners state that in calculating the insurance revenue for its sales in Italy, AST reported only the insurance revenues for SSSS. AST Verification Report at page 22; see also AST's May 28, 2001 questionnaire response at S2B-12. Petitioners claim that AST should have reported its U.S. insurance revenues in the same manner that it reported insurance revenues for its sales in Italy. Moreover, petitioners allege that AST failed to demonstrate that its allocation methodology did not cause inaccuracies or distortions. On the contrary, petitioners charge that it is evident that AST's allocation caused distortions or inaccuracies and should be rejected by the Department. Petitioners claim that under section 351.401(b)(1) of the Department's regulations, the interested party in possession of relevant information has the burden of establishing the amount and nature of a particular adjustment. Moreover, citing to the preamble to the Department's regulations, petitioners contend that the Department will treat claimed adjustments in a manner that is adverse to the submitting party if the party that is in possession of the information fails to meet its burden of proof. See Final Rule, 62 FR at 27344. Petitioners argue that because AST was in possession of the specific information needed to submit its claimed addition to U.S. price for insurance revenue on a product specific basis, the Department should disallow AST's claimed U.S. insurance revenues as an addition to U.S. price. AST argues that the Department properly allowed AST an adjustment for insurance revenue on its U.S. sales. Citing Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Stainless Steel Sheet and Strip in Coils from Mexico, 64 FR 124 (January 4, 1999) and Notice of Preliminary Results of Antidumping Duty Administrative Review: Ferrosilicon From Brazil, 62 FR 16763, 16765 (April 8, 1997), AST claims that the U.S. price must be adjusted to account for insurance proceeds as long as the Department determines that these are "reasonably attributable to the subject merchandise...." AST states that in its Section C questionnaire response it notified the Department that it had incurred insurance revenue in connection with subject merchandise that had been damaged in transit. See AST's November 6, 2000 questionnaire response at C-29. AST also notes that in its questionnaire responses, it explained to the Department that because the insurance revenue at issue was generated by a large number of claims of small amounts, it would be impracticable to tie the insurance revenue to specific transactions. See AST's May 28, 2001 questionnaire response at S2C-1; AST's January 26, 2001 questionnaire response at SC-11. AST explains that in light of the impracticability of tying the insurance revenue to specific transactions and pursuant to section 351.401(g)(1) of the Department's regulations, it allocated the amount of the insurance revenue over all of its U.S. sales. AST asserts that petitioners' allegation that AST falsely claimed that the documentation related to the U.S. insurance claims is maintained in the United States is unfounded and insulting, particularly given the fact that the adjustment to the U.S. price for insurance revenue claims is de minimis. AST claims that although AST S.p.A. obtains and pays for marine insurance, it is AST USA that submits insurance claims in connection with U.S. shipments and maintains in its facilities the documentation relevant to the claims. AST contends that contrary to petitioners' assertions, it has never stated that the records relating to insurance claims for U.S. shipments are maintained by AST S.p.A. With respect to petitioners' cite to certain of AST's statements in its January 26, 2001 supplemental questionnaire, AST maintains that while the cite in question (2) erroneously suggests that AST S.p.A., not AST USA, submits the insurance claims, it does not suggest that AST S.p.A. maintains documentation related to the claims. Citing its November 6, 2000 questionnaire response at C-29 and its May 28, 2001 questionnaire response, AST notes that in all of its other submissions, AST has properly noted that AST USA submits and collects U.S. insurance claims. Moreover, AST maintains that in the original investigation of this case, it was not until the sales verification of AST USA in White Plains, New York, that the Department was able to review documentation relating to AST's U.S. insurance claims. AST explains that in this proceeding the Department determined not to conduct a verification of AST USA. AST also notes that it was AST's understanding that only the documentation maintained in Italy would be verified during the home market verification. AST argues that the fact that the Department did not review documentation related to U.S. insurance claims does not prevent the Department from relying on information submitted by AST. Citing Inland Steel Industries, Inc. v. United States, 967 F. Supp. 1338, 1369 (CIT 1997), AST explains that the Court of International Trade has noted on numerous occasions, "verification is a spot check and is not intended to be an exhaustive examination of the respondent's business." Thus, AST asserts that the Department properly relied on the information submitted by AST during the course of this review. AST further argues that the allocation methodology used by AST was appropriate under the circumstances. AST submits that while the two allocation methodologies submitted by petitioners (i.e., tying insurance revenue from non-subject merchandise to non-subject sales and allocating the insurance revenue over all U.S. non-prime sales of subject merchandise) would have been more accurate, neither of the methodologies advocated by petitioners would have been feasible for AST. AST maintains that because the U.S. insurance revenue related to a large number of small claims, it was necessary to allocate the entire amount of insurance revenue over all of AST's U.S. sales. Moreover, in a footnote, AST notes that summary chart provided at Exhibit C-34 to its January 26, 2001 supplemental questionnaire response does not identify POR insurance claims relating to subject merchandise. AST alleges that petitioners' proposal to allocate all of AST's insurance revenue to non-prime sales would be more distortive than AST's methodology because it does not allocate any of the insurance proceeds received on non-subject merchandise to non-subject sales. Instead, according to AST, petitioners' proposal allocates the entire insurance revenue amount over only non-prime sales of the subject merchandise. AST explains that it used different reporting methodologies to report home and U.S. insurance revenues because of differences in the number of claims and in the way information regarding the claims was maintained. Citing its May 28, 2001 questionnaire response at S2B-12 and AST Verification Report at Exhibit 52, AST states that in the home market there were fewer claims than for U.S. sales. Furthermore, AST claims that in the home market, debit notes for insurance revenue claims are identified by a specific code. Thus, AST concludes that because these factors were not present with respect to U.S. sales, it had no choice but to allocate the entire amount of the U.S. insurance revenue. AST reiterates that the allocation methodology used by AST was not inaccurate or distortive, and the Department acted well within the law in accepting the methodology in the preliminary results. Department's Position: We agree with AST. At the outset, we reject petitioners' claim that the Department should wholly reject AST's claimed insurance revenue adjustment. In its November 6, 2000 questionnaire response, AST informed the Department that during the POR, shipments were damaged in transit before reaching the United States. Moreover, AST explained that it allocated insurance claims over all U.S. sales because the insurance claims are tracked on a ship-by-ship basis. See AST's January 26, 2001 questionnaire response at SC-11. AST further reported that AST S.p.A. is responsible for the cost of insuring each international shipment. Id. With respect to AST's ability to report insurance revenue on a transaction-specific basis in the original investigation, AST claimed that it was able to do so because the claims at issue were so large. AST maintained that in the present review, there were no large-scale insurance claims. See AST's May 28, 2001 questionnaire response at S2C-1. Thus, based on its alleged inability to tie specific claims to sales of the subject merchandise, AST calculated an insurance revenue factor using AST USA's trial balance amount, which is realized and recognized by AST USA's accounting system during the POR. Petitioners suggest that the table provided by AST at Exhibit C-34 of AST's January 26, 2001 questionnaire response has the necessary information needed to calculate the insurance revenue applicable to sales of the subject merchandise. However, the table does not include the necessary information to conclusively determine whether a claim was for subject merchandise during the POR. More importantly, though, AST did not use this listing to determine AST USA's insurance recovery, and there is no obvious tie between the insurance revenue amount reported in the table and the insurance revenue amount reported in the response. Consequently, we find that based on the evidence available to the Department, AST reported its insurance revenue claims on the most-specific basis practicable. Because this insurance revenue pertained to both subject and non-subject U.S. sales, AST allocated the insurance revenue over all of AST's U.S. sales. We do not find this allocation to be distortive or inaccurate since both the numerator and the denominator in the calculation include as their universe all U.S. sales. Moreover, we determine that petitioners' proposed methodology to allocate insurance revenue only to non-prime merchandise is not appropriate under these circumstances. With respect to petitioners' allegation that AST withheld information from the Department during the verification of AST in Italy, we disagree. AST has never reported to the Department that AST S.p.A. maintains the documentation related to AST's insurance revenue claims for its U.S. sales. In this proceeding the Department determined at its own discretion to conduct a verification only at AST S.p.A's headquarters in Italy, and the documents maintained therein. Based on AST's statements that the claims relating to the insurance revenue reported by AST are maintained at AST USA's facilities, the Department did not examine AST's reported insurance revenue claims for its U.S. sales (see AST Verification Report at pages 27-28), and instead chose to rely on AST's reported information regarding this adjustment. Therefore, for purposes of the final results, we have continued to make an adjustment to the U.S. price for insurance revenue. RECOMMENDATION: Based on our analysis of the comments received, we recommend adopting all of the above changes and positions, and adjusting the margin calculation programs accordingly. If accepted, we will publish the final results of the review and the final weighted-average dumping margin in the Federal Register. AGREE___________ DISAGREE___________ _________________________ Faryar Shirzad Assistant Secretary for Import Administration _________________________ Date _________________________________________________________________________ footnotes: 1. Back-to-back transactions are transactions where an order is placed with AST USA, and the merchandise is shipped directly from the factory to the customer or to the customer via a further processor. 2. "{B}ecause AST USA does not insure shipments, claims submitted by AST USA cannot be provided. A list of the actual insurance claims submitted by AST to its shipper is provided in Exhibit C-34." See AST's January 26, 2001 questionnaire response at SC-11.