65 FR 55003, September 12, 2000 A-580-807 ARP: 6/1/98 - 5/31/99 Public Document G3O8: MJH MEMORANDUM TO: Troy.H. Cribb Acting Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary for Import Administration SUBJECT: Issues and Decision Memo for the Final Results of the Antidumping Duty Administrative Review of Polyethylene Terephthalate Film, Sheet and Strip from Korea 6/1/98 through 5/31/99 Summary We have analyzed the comments and rebuttals of interested parties in the 1998- 1999 administrative review of the antidumping duty order covering Polyethylene Terephthalate Film, Sheet, and Strip (PET film) from Korea (56 FR 25660). As a result of our analysis, we have made changes in the margin calculations. 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 administrative review for which we received comments and rebuttals by parties: 1. Accounting for B-grade Film Costs 2. Calculation of CEP Profit 3. Inclusion in SKC's U.S. Sales Listing of Merchandise Subsequently Exported from the United States 4. Calculation of US Indirect Selling Expenses 5. Proper Home Market Comparison for Model DS10. Background On May 8, 2000, the Department of Commerce (the Department) published the preliminary results of administrative review of the antidumping duty order on PET film from Korea. Imports covered by this review are shipments of all gauges of raw, pretreated, or primed PET film, whether extruded or coextruded. The films excluded from this review are metallized films and other finished films that have had at least one of their surfaces modified by the application of a performance-enhancing resinous or inorganic layer of more than 0.00001 inches (0.254 micrometers) thick. Roller transport cleaning film which has at least one of its surfaces modified by the application of 0.5 micrometers of SBR latex has also been ruled as not within the scope of the order. PET film is currently classifiable under Harmonized Tariff Schedule (HTS) subheading 3920.62.00.00. The HTS subheading is provided for convenience and for U.S. Customs purposes. The written description remains dispositive as to the scope of the product coverage. The review covers the period June 1, 1998 through May 31, 1999 and three manufacturers/exporters: HS Industries (HSI), Hyosung Corporation (Hyosung) and SKC Limited (SKC). We invited parties to comment on our preliminary results of review. Discussion of the Issues 1. Accounting for B-grade film Comment 1: Consistent with previous administrative reviews of this case, SKC objects to the Department's equal allocation of scrap costs to A- and B-grade film. SKC contends that its allocation methodology is reasonable and consistent with widely accepted accounting concepts. In support of its argument, SKC cites to the March 8, 1996 case brief filed in the second and third administrative reviews of this case. (See Attachment 1 of SKC's June 7, 2000 case brief.) SKC states that allocating the cost of scrap film equally to A-and B- grade films improperly overstates the cost of B-grade films while understating the cost of A-grade films. SKC contends that its methodology of initially allocating costs equally among A-grade film, B-grade film, and scrap, and then reallocating the cost of scrap to the cost of A-grade film is consistent with accepted cost accounting methodologies. SKC also asserts that its methodology is consistent with the Department's treatment of jointly produced products in numerous other antidumping proceedings, wherein the Department recognized that a pure quantitative, or physical measures approach to cost allocation is unreasonable where there is significant difference in the value of the jointly produced products. SKC cites Elemental Sulphur from Canada 61 FR 8239, 8241-8243 (March 4, 1996) (Sulphur from Canada); Oil Country Tubular Goods from Argentina 60 FR 33539, 33547 (June 28, 1995) (OCTG from Argentina); Canned Pineapple Fruit from Thailand, 60 FR 29553, 29560 (June 5, 1995) (Pineapple from Thailand) in support of its position. SKC maintains that it is the Department's well-established practice to calculate costs in accordance with a respondent's normal cost accounting system unless the system results in an unreasonable allocation of costs, and cites Pineapple from Thailand as support for this assertion. SKC states that its reported cost of manufacturing (COM) data were calculated in accordance with its normal and long-established management cost accounting system. SKC notes that in the first review of this case (covering the period November 30, 1990 through May 31, 1992), the Department allocated all costs associated with the production of scrap film to A-grade film. SKC contends that this methodology was upheld by the Court of International Trade (CIT). (See E.I DuPont de Nemours & Co.. v. United States, 4 F. Supp. 2d 1248, 1254 (C I T 1998) (DuPont). Finally, SKC argues that the Department's allocation methodology is "no longer tenable" in light of the decision reached by the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit) in Thai Pineapple Public. Co., Ltd. v. United States, No. 97-1424,-1437 (Fed. Cir. July 28, 1999) (Thai Pineapple). SKC asserts that in Thai Pineapple the Court rejected the use of a weight-based allocation methodology where that methodology was inconsistent with the company's own books and records, and where the cost allocation methodology used by the company was neither price-based nor circular. Based upon the foregoing, SKC concludes that the Department should allocate all scrap costs to A-grade film. Petitioners (1) argue that the Department should continue to allocate scrap costs equally between A -and B-grade film, as the Department has done in the second through seventh administrative reviews of this case. Petitioners argue that allocating yield losses equally between A-and B-grade film is consistent with the Federal Circuit's ruling in IPSCO v. United States, 965 F. 2d 1056 (Fed Cir. 1992) (IPSCO). Petitioners note that the circumstances of this case are indistinguishable from IPSCO since A-and B-grade films are also produced "simultaneously in a single production process." Petitioners further contend that in accepting SKC's reported costs for the first review, the Department predicated its acceptance upon the understanding that SKC had equally assigned costs to A-and B-grade films. Petitioners note that SKC's allocation methodology assigns all scrap cost to A- grade film. Finally, petitioners assert that the facts in this case are distinguishable from those in Thai Pineapple. Petitioners contend that A- and B-grade film have identical production inputs, whereas in Thai Pineapple the production process differs for the various pineapple products involved. Because SKC's allocation methodology does not allocate scrap costs equally to A- and B-grade film, petitioners assert that the Department should continue to reject SKC's allocation methodology. Department's Position: We agree with petitioners. As we explained in the final results of previous reviews of this order, we have determined that A- and B-grade PET film have identical production costs. Accordingly, we continue to rely on an equal cost methodology for both grades of PET film in these final results. See Polyethylene Terephthalate Film, Sheet and Strip from the Republic of Korea: Final Results of Review and Notice of Revocation in Part, 61 FR 35177, 33182-83 (July 5, 1996) (Second and Third Reviews); Polyethylene Terephthalate Film, Sheet and Strip from the Republic of Korea; Final Results of Review and Notice of Revocation in Part, 61 FR 58374, 58375-76, (November 14, 1996) (Fourth Review), Polyethylene Terephthalate Film, Sheet and Strip from the Republic of Korea; Final Results of Review, 62 FR 38064, 38065-66 (July 16, 1997) (Fifth Review), Polyethylene Terephthalate Film, Sheet and Strip from the Republic of Korea; Final Results of Review, 63 FR 37334, 37335-36 (July 10, 1998) (Sixth Review), andPolyethylene Terephthalate Film, Sheet and Strip from the Republic of Korea; Final Results of Review and Notice of Intent Not to Revoke in Part, (64 FR 62648-62650) November 17, 1998 (Seventh Review). Moreover, as noted in the final results of the second through seventh reviews, the CIT has also ruled that our allocation of SKC's production costs between A-grade and B-grade film is reasonable (see E.I DuPont de Nemours & Co., Inc. v. United States, 932 F. Supp. 296 (CIT 1996)). As petitioners have indicated, our acceptance of SKC's allocation of scrap costs in the first review of this case was based upon our understanding that SKC had properly allocated the costs of A-and B-grade film. In that review we did not verify SKC's cost data. We determined that no verification was necessary because SKC was verified in the original investigation. Based upon the evidence existing in the record during the proceeding, we accepted SKC's allocation methodology because we were satisfied that SKC had calculated actual costs consistent with the Federal Circuit's ruling in IPSCO. (See Polyethylene Terphthalate Film, Sheet and Strip from the Republic of Korea, 60 FR 42835, 42839-40 (August 17, 1995).) During the second and third administrative reviews, however, we carefully examined SKC's allocation methodology and conducted a thorough verification of SKC's accounting records. We determined that the allocation methodology employed by SKC fails to capture the actual production costs of A-and B-grade film. Based upon this determination, we have consistently required SKC to allocate yield losses equally between A- and B-grade film since the second review of this case. Further, we have determined that A- and B-grade film undergo an identical production process that involves an equal amount of material and fabrication expenses. The only difference in the resulting A -and B-grade film is that at the end of the manufacturing process, a quality inspection is performed during which some of the film is classified as high quality A-grade product while other film is classified as lower quality B-grade film (see Fourth Review at 61 FR 58375). We continue to reject SKC's argument that DuPont affirmed its accounting methodology. DuPont does not require the Department to accept an allocation methodology that does not accurately capture the actual cost of A-and B-grade film. In DuPont the CIT concluded that the Department's acceptance of SKC's calculations in the first review was supported by substantial evidence. The Court further concluded that the calculations properly reflected SKC's actual costs of production. The CIT, however, did not affirm SKC's allocation methodology. It merely accepted the allocations resulting from the methodology because the record evidence indicated that those allocations reflected actual production costs as required by IPSCO. In contrast, in the six previous reviews of this case, the Department has determined that SKC's allocation methodology fails to capture the actual cost of A -and B-grade film. We continue to maintain that SKC's reliance on Sulphur from Canada, Pineapple from Thailand, and OCTG from Argentina is misplaced. In Sulphur from Canada the Department accepted respondent's treatment of sulphur as a by-product of natural gas production and its consequent assignment of all production costs to natural gas production and none to sulphur production in its normal records. (See Sulphur from Canada 61 FR at 8240-44 (comments 2 &3).) The Department, therefore, accounted only for the further processing costs of sulphur that respondent incurred after the sulphur gas was removed from the well. When accepting respondent's methodology, the Department conducted a relative value analysis of the sulphur and found that sulphur was an "insignificant" by-product of natural gas operations. (Id. at 8241.) The Department noted that Husky did not have the option of disposing of or selling sulphur gas in the state it is recovered from the well because it is a poisonous substance and the respondent was required by law to process the gas into a safe form before disposing of it. (Id. at 8244.) Likewise in OCTG from Argentina, respondent's production process produced two grades of pipe: primary and secondary. (See OCTG from Argentina, 60 FR at 33547.) However, because the secondary pipe was of such an inferior quality that it could not be sold for normal OCTG applications, the Department determined that the relative value of secondary pipe was "insignificant" compared to OCTG and primary pipe. Id Therefore, the Department allocated all common production costs to the primary pipe and subtracted the revenue received from the small amount of sales of secondary pipe from the total cost of manufacture of the primary pipe. See Id. In the instant case A- and B-grade films are produced in the same production process, with the only difference between A- and B-grade films being a different end-quality categorization. B-grade film is commercially saleable as a form of PET film. Thus, unlike the situations in Sulphur from Canada and OCTG from Argentina, B-grade film is not an "insignificant" by-product of PET film production. Further, Pineapple from Thailand, may be distinguished from the instant case becausePineapple from Thailand concerned the appropriate cost methodology for products manufactured in a joint production process where the primary raw material, pineapple fruit, is split apart, with different parts of the raw material going through different production processes to produce canned pineapple fruit and other pineapple products, e.g., pineapple juice. (See Pineapple from Thailand, 60 FR at 29560-61.) A joint production process occurs when "two or more products result simultaneously from the use of one raw material as production takes place." (See Keeler et. al., Management Accountants Handbook, Fourth Edition at Chapter 11, Page 1.) A joint production process produces two distinct products and the essential point of a joint production process is that "the raw material, labor, and overhead costs prior to the initial split-off can be allocated to the final product only in some arbitrary, although necessary manner." Id. The identification of different grades of merchandise does not transform the manufacturing process into a joint production process which would require the allocation of costs. In this case, since production records clearly identify the amount of yield losses for each specific type of PET film, our allocation of yield losses to the films bearing those losses is reasonable, not arbitrary. (SeeFourth Review, 61 FR at 58575-76.) It is the Department's practice to calculate costs in accordance with a respondent's management accounting system where that system reconciles to the respondent's normal financial and cost accounting records and results in a reasonable allocation of costs. (See Sixth Review, 63 FR at 37334). Management accounting deals with providing information that managers inside an organization will use. Managerial accounting reports typically provide more detailed information about product costs, revenue, and profits. They are used to identify problems, objectives, or goals, and possible alternatives. In order to respond to the Department's questionnaires, SKC officials devised a management accounting methodology for allocating costs incurred in the film and chip production cost centers to individual products produced during the period of review. SKC adopted this cost accounting system to reflect a management goal (i.e., to respond to the Department.) Under this system, SKC assigns the yield loss from the production of A- and B-grade films exclusively to the A- grade films. This methodology helps management to focus on the film types with low yields. However, notwithstanding SKC's management's concern that it accurately portray the cost of its A-grade products, this managerial accounting methodology is not appropriate for reporting the actual costs of A- and B-grade products. As previously noted, A-and B-grade films undergo an identical production process. B-grade film is made using the same materials, on the same equipment, at the same time as the A-grade film. Because A-grade and B-grade film are made from identical production inputs, SKC's reliance on Thai Pineapple is misplaced. As the Federal Circuit noted, the production process "is entirely different for the various pineapple products produced." (See Thai Pineapple at 8.) In contrast, A-and B- grade PET films are, as in the IPSCO case, produced from an identical production process. Further, contrary to SKC's argument, the Federal Circuit's ruling in Thai Pineapple does not require the Department to revise its methodology in this case. In Thai Pineapple the Federal Circuit upheld Commerce's acceptance of the allocation methodology in the foreign producer's normal books and records because that methodology reasonably reflected the foreign producer's cost of production. See Thai Pineapple at 12-14. The Federal Circuit stated: To the extent that the records of [the foreign producer] reasonably reflect the costs of production, Commerce may rely upon them. See NTN Beaning Corp., 74 F. 3d at 1206. Conversely, if the records are not reasonably reflective of cost, Commerce may appropriately deviate from them. See Thai Pineapple at 13. In this case, as explained above, the Department has found the accounting methodology employed by SKC in its books does not reflect the actual costs of A- and B- grade products. Because A- and B- grade film undergo an identical production process using the same production inputs, the Department's allocation of scrap cost equally to A- and B- grade film is appropriate, and is consistent with the Federal Circuit's ruling in Thai Pineapple. Comment 2. Calculation of CEP Profit SKC contends that the Department erroneously included indirect selling expenses incurred outside the United States in calculating the total amount of U.S. selling expenses to which the CEP profit ratio is applied. (These indirect selling expenses are represented by the computer variables DINDIRSU and DINVARU.) SKC asserts that §772(f)(2)(B) of the Tariff Act limits the deduction to those selling expenses associated with economic activity in the United States. Petitioners did not comment on this matter. Department's Position: We agree with SKC. In these final results we have adhered to our established policy and limited the CEP profit ratio only to U.S. indirect selling expenses incurred in the United States. We have revised our computer program to reflect this change. (See Import Administration Policy Bulletin No. 97/1 Calculation of Profit for Constructed Export Price Transactions (September 4, 1997).) Comment 3. Inclusion in SKC's US Sales Listing of Merchandise Subsequently Exported from the United States Petitioners contend that the Department should remove transactions classified as "export sales to foreign countries" from SKC's U.S. sales listing. Petitioners assert that SKC erroneously included such transactions in its U.S. sales listing, as evinced by invoices bearing "ship to" addresses outside the United States. Finally, petitioners contend that the Department should include in its calculation of normal value any such export sales of PET film that were subsequently shipped to South Korea . SKC contends that it excluded "export sales to foreign countries" from its U.S. sales reconciliation. (See SKC January 20, 2000 Response to the Department's Request for Additional Information, at Attachment 14 (Attachment 14).) SKC, acknowledges, however, that it inadvertently included in its US sales listing a small amount of PET film that was subsequently manufactured into micro-coated film (MCF). SKC agrees that these transactions should be removed from its sales listing. SKC contends, however, that since MCF is outside the scope of the order, the Department would have no occasion to use home market sales of MCF for comparison purposes. Department's Position: SKC specifically excluded "export sales to foreign countries sales" from its U.S. sales reconciliation. (See Attachment 14.) The reporting error noted by petitioners concerns sales of PET film that was further manufactured into MCF and subsequently exported outside the United States. We have excluded these transactions from our final results. Further, we disagree with petitioners assertion that the Department should use sales of MCF subsequently exported to Korea in its margin calculations since MCF is not within the scope of the order. Comment 4: Calculation of U.S. Selling Expenses Petitioners note that SKC calculated U.S. indirect selling expenses by dividing the total selling expenses incurred by SKC America (SKCA) by SKCA's total U.S. sales. Petitioners argue that this allocation understates SKC's U.S. indirect selling expenses because SKC used a total sales value that included merchandise subsequently exported from the United States. Petitioners further assert that other U.S. selling expenses may be similarly understated through inclusion of these sales. SKC contends that the expenses incurred by SKCA pertain to all of the SKCA's sales. SKC argues that since SKCA's pool of expenses includes merchandise subsequently exported from the United States, SKC properly included such sales in its allocation of US selling expenses to its CEP sales. Department's Position: We agree with SKC. SKC properly allocated SKCA's expenses to its CEP sales. The expenses in question pertain to all of the sales handled by SKCA. Because SKCA's total sales include merchandise that was subsequently exported from the United States, SKC properly allocated a portion of SKCA's total selling expenses to those sales. Comment 5. Proper Home Market Comparison for Model DS10. Petitioners argue that the Department should compare U.S. sales of models DS15, DS18, DS20, DS20C, and DS68 to home market sales of model DS91 instead of model DS10. Petitioners contend that DS91 is a more appropriate comparison model because DS91, like US models DS15, DS18, DS20, DS20C, and DS68, is a "data storage" product. Petitioners assert that model DS10 is a "pre-leader" tape designed for "coating with magnetic media." SKC argues that DS10 provides the closest match to the U.S. models in question. SKC asserts that DS91, like DS10 is a "pre-leader" tape and that the only major difference between the two models is that model DS91 receives an anti-static treatment whereas model DS10 does not. SKC observes that U.S. models DS15, DS18, DS20, DS20C and DS68 receive no anti-static treatment. Finally, SKC notes that the Department matched those U.S. models to DS10 in the seventh review of this case, and that the Department fully verified the model match criteria submitted by SKC in the course of that review. (See Memorandum to the File: Sales Verification of SKC Co., Ltd. at 5-6. (June 7, 1999).) Department's Position: We agree with SKC that model DS10 forms a more appropriate match to US models DS15, DS18, DS20, DS20C, and DS68 then does model DS91. SKC's product specification sheets establish that model DS91 receives an anti-static treatment whereas home market model DS10, and US models DS15, DS18, DS20, DS20C, and DS68 do not. (See SKC October 4, 1999 Questionnaire response at A- 18 and A-19.). Accordingly, in these final results we have used home market model DS10 as the basis of comparison for US models DS15, DS18, DS20, DS20C, and DS68. 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 results of review and the final weighted-average dumping margins for all reviewed firms in the Federal Register. AGREE_______ DISAGREE_______ _________________________ Troy H. Cribb Acting Assistant Secretary for Import Administration ________________________ (Date) _________________________________________________________________________ Footnote: 1. E.I. DuPont De Nemours & Company and Mitsubishi Polyester Film LLC.