66 FR 33526, June 22, 2001 A-580-844 Investigation 4/1/99-3/31/00 Public Document GIIO4:mjm MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Bernard T. Carreau Deputy Assistant Secretary Import Administration, Group II DATE: June 14, 2001 SUBJECT: Issues Memorandum for the Antidumping Duty Investigations of Steel Concrete Reinforcing Bars from the Republic of Korea Summary We have analyzed the comments of the interested parties in the antidumping duty investigation of steel concrete reinforcing bars (rebar) from the Republic of Korea (Korea). As a result of our analysis of the comments received from interested parties, we recommend making changes in the margin calculations for the respondent, as discussed in the "Margin Calculations" section of this memorandum. We also recommend that you approve the positions we have developed in the "Discussion of the Issues" section of this memorandum. Background The Department of Commerce (the Department) initiated this antidumping investigation of rebar from the Korea on July 18, 2000. (1) See Initiation of Antidumping Duty Investigations: Steel Concrete Reinforcing Bars from Austria, Belarus, Indonesia, Japan, Latvia, Moldova, the People's Republic of China, Poland, the Republic of Korea, the Russian Federation, Ukraine, and Venezuela, 65 FR 45754 (July 25, 2000). The preliminary determination was published on January 30, 2001. See Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Steel Concrete Reinforcing Bars From the Republic of Korea, 66 FR 8348 (January 30, 2001) (Preliminary Determination). Since the preliminary determination, we verified the questionnaire responses of Dongkuk Steel Mill Co., Ltd. (DSM) and Korea Iron & Steel Co., Ltd. (KISCO), the respondents, on February 12 through February 23, 2001, and on March 28 through March 30, 2001. (2) The petitioner and respondent filed case briefs on May 21, 2001 and rebuttal briefs on May 29, 2001. The petitioner and respondent withdrew their request for a public hearing on June 1, 2001 and June 8, 2001, respectively. I. List of Issues Below is the complete list of the issues in this investigation for which we received comments from parties: Issues Relating to Both DSM and KISCO 1. Collapsing 2. Allocation of Selling, General, and Administrative Expenses Issues Relating to DSM 3. Level of Trade Adjustment 4. Inventory Carrying Cost 5. U.S. Short-Term Interest Rate Calculation 6. Unreported Affiliated Party 7. Gain on Disposal of Fixed Assets 8. Short-Term Interest Expense Rate 9. Foreign Exchange Gains and Losses 10. Scrap Recovery Issues Relating to KISCO 11. U.S. Short-term Interest Rate Calculation 12. Upward Price Adjustments 13. General and Administrative Expense Rate II. Changes in the Margin Calculations Since the Preliminary Determination Based upon our analysis of the comments received from interested parties, we recommend making the following revisions to the calculations used in the preliminary results: (1) revise DSM and KISCO's inventory carrying cost, (2) include a new U.S. direct selling expense, USBANKU, in our calculation of the net U.S. price for sales through DSM's U.S. affiliate, (3) adjust KISCO's general & administrative (G&A) expense rate and interest expense rate, and (4) adjust DSM's G&A expense rate and interest expense rate. For a further discussion of these changes, see Memorandum from Mark Manning to the File, "Calculation Memorandum of the Final Determination for the Investigation of Dongkuk Steel Mill Col., Ltd., and Korea Iron & Steel Co., Ltd.," June 14, 2001; Memorandum from Michael Harrison to Neal Halper, "Cost of Production and Constructed Value Calculation Adjustments for the Final Determination," June 14, 2001; and Memorandum from Robert Greger to Neal Halper, "Cost of Production and Constructed Value Calculation Adjustments for the Final Determination," June 14, 2001. III. Discussion of Issues Issues Relating to Both DSM and KISCO Comment 1: Collapsing The petitioner urges the Department to reject the respondent's argument that DSM and KISCO should not be collapsed for purposes of the final determination because DSM reduced its direct equity ownership in KISCO to a percentage less than the five percent threshold used by the Department to define affiliation. The petitioner notes that this reduction in ownership occurred in December 2000, nine months after the end of the period of investigation (POI). According to the petitioner, the Department is directed to consider events that occur only during the POI, while events that occur outside the POI should be considered in the context of an administrative review. Moreover, the petitioner notes that the issue of DSM's reduced ownership in KISCO was raised during verification, beyond the deadline for submission of new information. The petitioner argues that the Department has not had sufficient time to investigate this issue properly and the petitioner has had no opportunity to inquire about or otherwise address this information. The petitioner also argues that even if the Department were to consider DSM's reduced ownership in KISCO, the companies remain affiliated due to the Chang family's position as significant shareholders and senior managers in each company. Regarding the respondent's argument that the uncle-nephew relationship between the principle owner of KISCO and his two nephews, who are the principle owners of DSM, is not sufficient to make DSM and KISCO affiliated under the antidumping statute, the petitioner contends that this argument disregards the fact that members of the Chang family hold senior management positions at both companies. The petitioner notes that the Department cited to the Chang family relationship with DSM and KISCO as one of the factors used in finding that a common ownership and managerial overlap exists between the two companies. Lastly, the petitioner notes that DSM's reduction in direct ownership of KISCO is only one of several factors considered by the Department in its collapsing analysis and that none of the other factors have changed since the December 5, 2000 determination to collapse. According to the petitioner, a change in one factor, which occurred outside the POI, is insufficient to reverse our conclusion. The petitioner observes that DSM and KISCO still produce similar products such that they may shift production from one company to another without significant retooling, and that there exists a significant potential for the manipulation of price or production between the two companies. The respondent argues that the Department collapsed DSM and KISCO into a single entity because DSM owned a significant percentage of the outstanding shares of KISCO. However, in December 2000, the respondent notes that DSM reduced its ownership in KISCO to a percentage less than the five percent threshold section 771(33)(E) of the Act uses to define affiliation. As a result, the respondent argues that, as of December 2000, DSM is no longer affiliated with KISCO and no longer owns sufficient shares in KISCO to control or influence that company. Furthermore, the respondent asserts that the Department collapses companies in a dumping investigation to prevent future shifts in pricing and production between the companies to take advantage of differences in the dumping margins. Since DSM no longer owns a significant portion of KISCO's outstanding stock, and thus does not control KISCO, the respondent argues that there is no reason to believe that the companies will be able to shift production and sales in the future to take advantage of differentials in the dumping margins. Therefore, the respondent concludes that the Department should reverse its decision to collapse DSM and KISCO into a single entity for purposes of this investigation. Department's Position: We agree with the petitioners. DSM sold the majority of its shares in KISCO during December 2000, nine months after the POI. Because the Department is obligated to consider information concerning circumstances that existed and events that occurred only during the POI, we have not included DSM's reduction in ownership in our final collapsing analysis. Therefore, pursuant to section 771(33)(E) of the Act, we continue to find that DSM and KISCO were affiliated during the POI due to DSM's equity ownership in KISCO. Moreover, as the discussion below indicates, we also find that DSM and KISCO are affiliated under section 771(33)(A) of the Act through the Chang family's position as primary shareholders and senior managers in DSM and KISCO. When considering whether to collapse two companies into a single entity for the purposes of an antidumping investigation or administrative review, section 351.401(f) of the Department's regulations states that the Department will treat two or more affiliated producers as a single entity where: (1) those producers have production facilities for similar or identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities; and (2) where there is a significant potential for the manipulation of price or production. In identifying a significant potential for the manipulation of price or production, the factors the Department may consider include: (A) the level of common ownership; (B) the extent to which managerial employees or board members of one firm sit on the board of directors of an affiliated firm; and (C) whether operations are intertwined, such as through the sharing of sales information, involvement in production and pricing decisions, the sharing of facilities or employees, or significant transactions between affiliated producers. In our December 5, 2000 decision to collapse DSM and KISCO into a single entity for the purposes of this investigation, we found that (1) DSM and KISCO are affiliated due to direct stock ownership under section 771(33)(E) of the Act, (2) a shift in production would not require substantial retooling (if any), and (3) there is a significant potential for price or production manipulation due to, among other factors, evidence of significant common ownership and management overlap by senior managers who (a) have a significant influence over the production and sales decisions of both companies, (b) belong to the same family, and (c) are former managers of the other company. Based on this analysis, we found that the record evidence weighs in favor of collapsing DSM and KISCO for the purposes of this antidumping investigation of rebar from Korea. The Department normally considers companies to be affiliated when one company owns five percent or more of the other's equity. However, section 771(33) of the Act also provides alternative methods for parties to be considered affiliated. In particular, section 771(33)(A) of the Act states that "members of a family, including brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants" shall be considered "affiliated" or "affiliated persons." We disagree with the respondent's argument that this section of the statute applies only to the types of family relationships expressly listed and does not apply to less- directly related individuals (such as uncles and nephews). Section 771(33)(A) states that "members of a family" shall be considered "affiliated" and does not limit family relationships strictly to brothers, sisters, and spouses. In fact, the word "including" in this section of the statute indicates that the family relationships expressly listed are only examples of a larger set of relationships to which the statute applies. Therefore, we find nothing in the statute to prevent it from applying to uncle-nephew relationships, aunt-niece relationships, or cousin-cousin relationships. In regard to this investigation, it is undisputed that during the POI members of the Chang family were major shareholders and held senior management positions with DSM and KISCO. As of December 1999, a date within the POI, Chang Sang Tai was the primary owner and chairman of DSM and his brother, Chang Sang-Don, was the primary owner and chairman of KISCO. Two of Chang Sang Tai's sons, Chang Se-Joo and Chang Se-Wook, were major shareholders in DSM and several other Chang family members also held stock in DSM. See DSM verification Exhibit D2. Also in December 1999, Chang Se-Joo was vice president of DSM. See DSM/KISCO November 13, 2000 Section A supplemental questionnaire response at Exhibit SA-2. As these relationships demonstrate, the Chang family's ownership and position as senior managers in both companies provide this family the ability to control the operations of DSM and KISCO. For this reason, we consider DSM and KISCO to be affiliated through the Chang family, pursuant to section 771(33)(A) of the Act. As the discussion above indicates, the Chang family is deeply involved in the operations of DSM and KISCO. During the POI, DSM and KISCO were affiliated through DSM's equity ownership in KISCO. Therefore, at the time of our December 5, 2000 decision to collapse DSM and KISCO, we did not analyze whether the two companies were affiliated due to the Chang family's relationship with both companies. For this final determination, however, we have examined both avenues of affiliation and find that DSM and KISCO were affiliated through both DSM's equity ownership in KISCO and the Chang family's relationship with both companies. Because we have continued to find DSM and KISCO affiliated under section 771(33) of the Act, we continue to find that it is appropriate to collapse both companies into a single entity for the purpose of this investigation. For a more detailed analysis of our collapsing determination, see the Collapsing Memorandum. Comment 2: Allocation of Selling, General, and Administrative Expenses The petitioner argues that the respondent's methodology of allocating its selling, general, and administrative (SG&A) expenses based on the ratio of total salaries to the salaries of personnel responsible for domestic sales, export sales, and G&A activities attributes an excessive amount of SG&A expenses to domestic sales and G&A activities, leaving a distortively small amount of expense attributable to export sales. The petitioner notes that in a previous case involving KISCO and Union Steel Manufacturing Co., Ltd. (Union), a steel producer affiliated with KISCO, the Department stated that Union's methodology of allocating its indirect selling expenses based on the number of employees may cause inaccurate results because a large portion of the indirect selling expenses were not incurred based on the number of employees. As a result, the Department recalculated Union's indirect selling expenses by allocating the total expense on the basis of percentage of domestic sales to total sales. See Circular Welded Non-Alloy Steel Pipe from the Republic of Korea; Final Results of Antidumping Duty Administrative Review, 63 FR 32833, 32841 (June 16, 1998) (Steel Pipe from Korea). The petitioner notes that DSM and KISCO removed from the total SG&A expenses those expenses that are clearly direct selling expenses and G&A expenses. The remaining expenses are of a mixed nature and were allocated to indirect selling expenses and G&A expenses on the basis of salaries. The petitioner argues that allocating the mixed expenses by relative salaries is distortive. The petitioner urges the Department to instead follow its normal practice for allocating mixed expenses by dividing the total of these mixed expenses by the company-wide cost of sales to obtain one G&A expense rate. The respondent notes that both DSM and KISCO record their SG&A expenses in a single cost center, where expenses are tracked in the accounting system by the type of expense (e.g., salaries, rent, supplies), but not the nature of the activity (e.g., export sales, domestic sales, G&A activities). In order to respond to the Department's questionnaire, the respondent states that DSM and KISCO allocated their SG&A expenses to domestic sales, export sales, and G&A activities according to the ratio of salaries for personnel in domestic sales offices, export sales offices, and offices that conduct G&A activities to total salaries. The respondent argues that its allocation methodology is appropriate and non-distortive for several reasons. First, the respondent contends that salary, which accounts for a significant portion of DSM and KISCO's total SG&A expenses, can be allocated to domestic sales, export sales, and G&A activities on an actual basis because DSM and KISCO's accounting system separately identifies the department in which each employee works. The respondent states that allocating salary on the basis of cost of goods sold (COGS) or sales value, as proposed by the petitioner, would distort the allocation of salary because this expense can be allocated on an actual basis through the use of the salary ratios. Second, the respondent asserts that most of the non-salary SG&A expenses consist of the overhead costs of the companies' offices from which the SG&A employees operate. The respondent argues that these overhead expenses, such as rent, are correlated with the number of people in each office, rather than the value of sales generated by that office. According to the respondent, the cost of rent, for example, is determined primarily on the floor space taken up by the office's personnel. Therefore, allocating rent based on sales value would not reflect the actual rent incurred by each sales office or G&A department. Third, the respondent argues that the petitioner's suggestion to allocate indirect selling expenses based on relative sales value (or COGS) is not feasible because there are no sales (or COGS) associated with G&A activities. The respondent contends that the petitioner's methodology would result in expenses being assigned to either domestic sales or export sales, but none to G&A activities. Furthermore, the respondent notes that by assigning no expenses to G&A, the Department is unable to calculate a cost of production (COP) or constructed value (CV). Fourth, the respondent argues that the evidence on the record indicates that both DSM and KISCO use a greater number of sales offices and employees to handle their domestic sales. For this reason, the respondent claims that the evidence of the record demonstrates that domestic sales require a substantially greater effort by the companies than do export sales. Thus, an allocation methodology that assigns a larger percent of SG&A expenses to domestic, rather than export, sales is appropriate. Lastly, the respondent notes that the Department has in past cases accepted allocations of total SG&A expenses between domestic sales, export sales, and G&A activities based on head-counts or relative salaries when such allocations reasonably reflect the manner in which the expenses are incurred. Department's Position: We agree with the respondent. When transaction-specific reporting is not feasible, the Department's practice is to consider allocated expenses, provided we are satisfied that the allocation methodology used does not cause inaccuracies or distortions. See 19 CFR 351.401(g)(1). Indirect selling expenses, by definition, cannot be identified with specific transactions and thus, must be allocated to reported sales. Whether a particular allocation methodology used is reasonable is determined on a case-by-case basis. Furthermore, the Department may accept allocation methodologies provided they do not result in inaccuracies or distortions and are based on data which can be verified. See Micron Technology, Inc. v. United States, 99 CIT 12, Court No. 96-06-01529, Slip Op. 99-12 (CIT January 28, 1999). We accepted the respondent's allocation methodology because we believe that it was a reasonable methodology in this case. Concerning the petitioner's argument that the Department should follow the precedent set in Steel Pipe from Korea, we note that past case history with respect to DSM and KISCO is mixed. The petitioner is correct that in Steel Pipe from Korea, the Department rejected an allocation methodology based on relative salaries in favor of a relative sales value methodology. However, we note that the Department accepted the salary-based methodology in a more recent case involving DSM. Specifically, DSM used an identical methodology as the one used in this investigation for allocating its SG&A expenses in the investigation of cut-to-length steel plate. See Memorandum to the File, "Previous Allocation of Selling, General, and Administrative Expenses," dated June 7, 2001; and Notice of Final Determination of Sales at Less Than Fair Value: Certain Cut-To-Length Carbon-Quality Steel Plate Products from Korea, 64 FR 73196 (December 29, 1999) (Plate from Korea). In that investigation, DSM's salary-based allocation was not raised as an issue by the petitioner and was accepted by the Department as reasonable. When evaluating the reasonableness of an allocation methodology the Department must base its decision on the facts on record of that particular proceeding. Although we did consider the determinations regarding allocation methodology in Steel Pipe from Korea and Plate from Korea, our current determination is based on the facts of the instant investigation. We find that the respondent's salary-based allocation is reasonable in this case. Issues Relating to DSM Comment 3: Level of Trade Adjustment The petitioner claims that the respondent's argument that the Department should grant a level of trade (LOT) adjustment, or a constructed export price (CEP) adjustment, is incorrect since DSM's U.S. and home market sales are at the same LOT. The petitioner argues that the Department correctly deducted U.S. indirect and direct selling expenses from DSM's CEP sales, and agrees that because of these deductions, the LOT of the CEP sales does not include the sales functions that give rise to the deducted U.S. direct and indirect expenses. The petitioner, however, argues that removing these sales functions does not move DSM's CEP sales to a less advanced LOT than its home market sales. Specifically, the petitioner claims that an analysis of the sales functions reported by DSM in its Section A response indicates that DSM provides nearly identical services for its CEP sales as those provided for its home market sales. Thus, the petitioner concludes that DSM's CEP sales are made at the same LOT as its home market sales. The respondent argues that the Department's LOT analysis was flawed in two respects. First, the respondent claims that the Department constructed the LOT for its sales through Dongkuk International, Inc. (DKA) in a manner that is inconsistent with the methodology used for calculating the CEP for those sales. Specifically, the respondent notes that the Department constructed the LOT for CEP sales by "examining the selling functions performed by DSM and its affiliated {companies} in Korea, and excluded the functions performed by DKA in the United States." See Respondent's Case Brief at 4. Thus, the respondent concludes that the Department included in its LOT analysis the sales functions performed by DSM in Korea that give rise to certain direct selling expenses for CEP sales, such as warranty and credit. The respondent also states that the Department calculated DKA's CEP by "deducting all direct selling expenses incurred by DSM and DKA, and all indirect selling expenses incurred by DKA, from the prices for DKA's sales to its customers." See Respondent's Case Brief at 3. Thus, the respondent argues that DKA's adjusted CEP does not include any of the sales functions that give rise to the U.S. direct selling expenses, regardless of whether the sales functions were incurred in Korea or the United States. Pursuant to Article 2.3 of the WTO Antidumping Agreement, the respondent argues that the relevant LOT for CEP sales is the level after the adjustments to construct the export price have been made. For this reason, the respondent contends that the "correct" LOT for DSM's CEP sales should not include those sales functions incurred in Korea that give rise to U.S. direct selling expenses that were excluded from U.S. price to derive the CEP. According to the respondent, "DSM extends credit and provides certain warranties to its home-market customers, and that DSM and DKA jointly extend credit and provide warranties to the unaffiliated U.S. customers." See Respondent's May 21, 2001 Case Brief at 6. The respondent argues that the "correct" LOT for CEP sales should not include these services provided by DSM in Korea since the expenses arising from these services were deducted as part of the process for "constructing" the export price. Since DSM provides credit and warranty services to its home market customers, and the "correct" LOT analysis should not include any sales functions incurred in Korea that give rise to direct selling expenses for CEP sales, the respondent asserts that CEP sales are made a different LOT than home market sales. For this reason, the respondent concludes that a LOT adjustment is appropriate. The respondent's second reason for claiming that the Department's LOT analysis is flawed is that, assuming the Department's method for constructing the LOT was appropriate, the Department's analysis ignores the sales functions performed by DKA. According to the respondent, the final LOT (i.e., the LOT that incorporates the sales functions performed in both Korea and the United States) for DKA's sales to unaffiliated U.S. customers is the same as the LOT for the respondent's sales to home market customers. Since DKA performs certain sales functions for its U.S. sales, such as market research, contacting potential U.S. customers, and following up on quality complaints, DSM and its affiliates in Korea do not have to perform all of these functions in their entirety. The respondent argues that for home market sales, all of these sales functions are performed in their entirety by DSM and its Korea affiliates. Thus, the respondent concludes that DSM and its Korean affiliates must perform a greater level of services on home-market sales than they do on U.S. sales, because they cannot split responsibility for these activities with DKA. Therefore, the respondent concludes that the services performed by DSM and its affiliates on U.S. sales cannot have been as great as the services they performed on home-market sales. Since the LOT for CEP sales must be less advanced than the LOT for home market sales, the respondent concludes that a CEP offset is required by the statute. Department's Position: We agree with the petitioners. The respondent's first argument concerning LOT is that the Department improperly "constructed" the LOT for CEP sales to include direct selling activities that had been excluded from the CEP used in the margin calculation. The respondent's argument is incorrect because it bases this argument on a faulty understanding of both section 772(d)(1) of the Act and the deductions we used in our dumping calculations. The respondent contends that in calculating the CEP used in the margin calculations, the Department, pursuant to section 772(d)(1) of the Act, deducted certain direct selling expenses (such as credit and warranties) incurred by DSM for its sales through DKA. This assertion is incorrect. Section 772(d)(1)(B) of the Act directs the Department to deduct from the starting price for CEP sales "expenses that result from, and bear a direct relationship to the sale, such as credit expense, guarantees and warranties." In Micron Technology, Inc. v. United States, the CAFC held that "the only expenses deductible under the first three subsections of 19 U.S.C. §1677a(d)(1) are those expenses arising specifically out of the sale of the subject merchandise in the United States to an unaffiliated purchaser, as opposed to those general expenses incurred by the foreign producer or exporter in all sales, without regard to the identify or location of the purchaser." See Micron Technology, Inc. v. United States, 243 F. 3d 1301, 1309 (Fed. Cir. March 7, 2001) (Micron Decision). Moreover, the CAFC stated in the Micron Decision that "{t}he SAA further provides that such expenses {under section 772(d)(1)(B) of the Act} may be deducted from the constructed export price only 'to the extent they are incurred after importation.' " See Micron Decision, 243 F. 3d, at 1309. Pursuant to section 772(d)(1)(B), the Department deducted from CEP sales the selling expenses incurred by DKA in the United States for its sales to unaffiliated U.S. customers. We did not, contrary to the respondent's assertion, deduct any selling expenses incurred by DSM in Korea. As discussed in the Department's preliminary calculation memorandum, the Department deducted the following expenses incurred by DKA: early payment discount, imputed credit expense, indirect selling expense, and commission expense. The only expenses incurred by DSM that were deducted from CEP sales were movement charges, pursuant to section 772(c) of the Act. See Memorandum to the File, "Calculation Memorandum of the Preliminary Determination for the Investigation of Dongkuk Steel Mill Co., Ltd., and Korea Iron & Steel Co., Ltd.," dated January 16, 2001 at 4 and 5. Thus, pursuant to section 772(d)(1) of the Act, the Department deducted only DKA's selling expenses incurred in the United States and did not deduct selling expenses incurred by DSM in Korea in calculating the CEP. Concerning the respondent's contention that DSM and DKA jointly extended credit and provided warranty service to unaffiliated U.S. customers, we note that the respondent reported for CEP sales DKA's, rather than DSM's, imputed cost of credit in its Section C response. In addition, the respondent reported in its Section C response that DSM and DKA incurred no warranty expenses for rebar sold in the U.S. market during the POI. For this reason, the respondent's assertion that DSM jointly provided credit and warranty services for CEP sales is incorrect. Furthermore, the selling functions reported in the Section A response also indicate that DSM did not jointly provide these selling services for CEP sales. Concerning warranty services, the respondent reported in its Section A response that warranty services were provided only "rarely" by DSM for CEP sales and not at all by DKA. With respect to credit services, the respondent did not include credit services as a selling function, so we did not include it in our LOT analysis. Given that the Department deducted only selling expenses incurred in the United States from the starting price of sales through DKA, we disagree that there was an inconsistency between how the Department constructed the CEP used in the margin calculations with how the Department constructed the LOT for CEP sales used in our LOT analysis. In both analyses, the Department removed only those selling expenses, and by extension the sales functions that give rise to those expenses, that were incurred in the United States. We also disagree with the respondent's second argument, that the Department's LOT was based on the illogical assumption that the sales functions performed by DKA had no effect on the LOT for CEP sales. The respondent is correct in that DKA does perform certain sales functions for CEP sales in the United States, but is incorrect in stating that DKA's sales functions had no effect on our analysis. When conducting a LOT analysis, the Department examines the sales functions, and the associated intensity with which the sales functions are provided, that are reported in the Section A response. The analysis contained in our January 16, 2001 LOT memorandum was based upon the respondent's October 23, 2000 supplemental response, which separately listed functions for DSM and DKA and the intensity with which DSM and DKA provided the sales functions. For example, the respondent states in its case brief that DKA provides market research, contacts potential U.S. customers, and follows up on quality complaints. See Respondent's Case Brief at 7. In its supplemental Section A response, the respondent reported that for CEP sales DSM and DKA "sometimes" provide market research, DSM "always" and DKA "often" makes sales calls and demonstrations, DSM "always" and DKA "sometimes" has interactions with customers, and DSM "rarely" and DKA "not at all" provides warranty services. We took into account the respondent's separation of sales functions by using in our LOT analysis only the functions reported for DSM. Thus, contrary to respondent's assertion, by using only the functions reported for DSM, our analysis appropriately excluded the sales functions provided by DKA. As a result, we found that the LOT for CEP sales is at the same LOT as the home market LOT. See the Memorandum from Ronald Trentham to Tom Futtner, "Level of Trade Analysis: Dongkuk Steel Mill Co., Ltd. and Korea Iron & Steel Co., Ltd.," dated January 16, 2001. Since we appropriately excluded the sales functions provided by DKA, we continue to find that the LOT for CEP sales is at the same LOT as the home market LOT. Therefore, as in the preliminary determination, we have not granted DSM's request for a LOT adjustment because there is no difference in the LOT between the home and U.S. markets. Furthermore, we have also not granted DSM's request for a CEP offset since we find that the LOT of CEP sales is the same as the LOT of home market sales. Comment 4: Inventory Carrying Cost The petitioner notes that the respondent calculated its inventory value, which is a component in the overall inventory carrying costs calculation, by using a ratio of COGS to sales value, and then multiplying this ratio by the reported gross unit price. The petitioner argues that the Department's standard practice for calculating inventory value is to use the actual inventory value, rather than the method described above. The petitioner urges the Department to adjust DSM's overall inventory carrying cost calculations by using the actual inventory value rather than the method used by the respondent. The respondent notes that inventory carrying cost measures the imputed interest expense of carrying merchandise in inventory and is calculated by multiplying the inventory carrying period by the daily interest rate by the inventory value. Because companies record the value of their inventory on a cost basis, the respondent argues that the inventory value component of the overall formula should reflect the cost of the merchandise in inventory, and not the eventual selling price of the merchandise. Thus, respondent claims that it would be "proper to calculate inventory carrying costs using those unit cost figures {reported in its Section D response} as the inventory value." See Respondent's Rebuttal Brief at 8. However, the respondent states that when it prepared its initial Section B and C responses, it had not yet calculated the unit costs reported in Section D. Therefore, it reported inventory value as the ratio of COGS to sales, and multiplied this ratio by the reported gross unit price. According to the respondent, in the absence of using per-unit costs as the inventory value, the ratio of COGS to sales is necessary in order to remove the distortion caused by using the gross unit price as a surrogate inventory value. The respondent concludes that it is this ratio that brings its inventory carrying cost calculation into conformity with the Department's standard practice. Department's Position: We agree with petitioners. Inventory carrying cost measures the imputed interest expense of carrying merchandise in inventory and is calculated by multiplying the inventory carrying period by the daily interest rate by the inventory value. Regarding the inventory value, because companies typically value their inventory on a cost basis, the Department prefers to use the reported per-unit, total cost of manufacture (COM) as the inventory value. We note that the respondent, in its rebuttal brief, agrees with this methodology and states that the reason it did not report inventory value on a cost basis is because its per-unit costs were not completed when it reported its initial Section B and C responses. Since the respondent's per-unit, total COM is available to the Department, we recalculated DSM and KISCO's inventory carrying cost using the following methodology: inventory carrying period (calculated on a value basis for fiscal year 1999) multiplied by the daily home market interest rate (the annual interest rate divided by 365) multiplied by the inventory value (the reported per-unit total cost of manufacturing for each product). Comment 5: U.S. Short-Term Interest Rate Calculation The petitioner notes that during DSM's verification, the Department found that DSM included non-U.S. dollar-denominated interest expenses and balances in the calculation of its U.S. short-term interest rate. The petitioner argues that the Department instructed DSM to remove the non- U.S. dollar-denominated loans from the interest rate calculation, but the Department was unable to reconcile the revised calculations to DSM's financial statement. Because of this discrepancy, the petitioner recommends that the Department use, as facts available (FA), the single highest interest rate on any borrowings during the POI for DSM's non-U.S. dollar-denominated loans. The respondent states that DSM initially calculated its short-term U.S. interest rate based on the average interest paid on foreign currency short- term borrowings. The respondent states that it incorrectly believed that this account included only U.S. dollar-denominated borrowings. When the Department's verifiers found the non-U.S. dollar-denominated borrowings in this account, the respondent states that DSM complied with the request to recalculate the interest rate without these non-U.S. dollar loans. According to respondent, DSM's original calculation had the benefit of being taken directly from DSM's accounting records, and thus tied directly to DSM's financial accounting system. The revised interest expenses, argues the respondent, do not match to DSM's accounting system because the revised expenses no longer contain the non-U.S. dollar-denominated loans. However, the respondent contends that the Department's verifiers checked the revised numbers to ensure that only the non-U.S. dollar-denominated loans were removed from the accounting totals. The respondent notes that the verification report for DSM states that the verifiers were unable to find "any instances w{h}ere the revised loan tables were any different than the originally reported tables aside from their omission of any loans other than U.S. dollar loans." See DSM's verification report at 19. Thus, the respondent argues that the Department did verify the revised interest rate calculation and that there is no basis for applying FA. Department's Position: We agree with the respondent that its post-verification sales listing contains the revised U.S. interest rate calculations we requested. See respondent's May 23, 2001 data submission. Moreover, we examined the verification exhibits submitted on March 5, 2001 and are satisfied that DSM removed only the non-U.S. dollar denominated loans from the overall borrowings balance, which reconciled to DSM's accounting system. Therefore, the application of FA is not necessary. Comment 6: Unreported Affiliated Party The petitioner states that it was not until verification that DSM disclosed the existence of another affiliated party that supplied production inputs to DSM. According to the petitioner, this non-disclosure calls into question the integrity of all reported raw material costs. The petitioner argues that because the respondent failed to report this relationship and its significance in a timely manner, the Department did not have the opportunity to examine the integrity of the related-party pricing in relation to the major-input rule. Therefore, the petitioner recommends that the Department use, as FA, the highest single per-unit cost for scrap input purchased from any source for all of DSM's production. The respondent argues that DSM notified the Department at the start of verification that it had inadvertently omitted from its list of affiliated suppliers a company from which it purchased a small amount of indirect materials, specifically cast iron rollers used in the rolling process (rather than scrap, as asserted by the petitioner). The respondent notes that as indirect materials, the cost of these rollers is included in fabrication costs in DSM's normal accounting records, rather than as part of materials cost. According to the respondent, these rollers could not have accounted for more than a small percentage of DSM's total COM. Lastly, the respondent argues that the discovery of minor errors such as this is not unusual and does not call into question the integrity of the response. Therefore, the respondent concludes that the petitioner's arguments are without merit and should be rejected. Department's Position: We agree with the respondent. In this case, the nature of the disclosure is minor and does not have a discernible impact on our analysis. Furthermore, because the respondent volunteered this information on the first day of both the cost and sales verifications, the Department's verifiers were able to pursue this matter during verification. Because the affiliated company supplied cast iron rollers, an indirect material, rather than a raw material input directly used to manufacture rebar, the Department does not consider the impact of DSM's omission a major discrepancy that calls into question the overall integrity of the respondent's questionnaire responses. Comment 7: Gain on Disposal of Fixed Assets DSM argues that the Department should include its gains on disposal of tangible assets in the calculation of the G&A expense ratio. DSM claims that the Department was inconsistent in its preliminary determination by excluding the gains arising from the sale of these assets but at the same time including the losses in its G&A ratio calculation. Further, DSM contends, the Department's practice is to include gains and losses on the disposal of fixed assets in G&A, even if the gain or loss arises from the sale of an entire manufacturing facility provided that facility had been used to produce subject merchandise. See Antifriction Bearings (Other Than Tapered Roller Bearings) and Parts Thereof From France, Germany, Italy, Japan, Romania, Sweden, and the United Kingdom; Final Results of Antidumping Duty Administrative Reviews, 64 FR 35590, 35614 (July 1, 1999) (Antifriction Bearings-1999) and Final Determination of Sales at Less Than Fair Value: Fresh Cut Roses from Ecuador, 60 FR 7019, 7042 (February 6, 1995). Petitioners argue that the Department should not include DSM's gains on the sale of land as an offset to G&A. Because DSM did not depreciate or capture any portion of the value of the land in its costs, petitioners assert, they can not now use the land disposal gain as an offset. Petitioners contend that the Department has disallowed this same type and magnitude of adjustment with respect to DSM in Plate from Korea, 64 FR 73196, 73209. Petitioners argue that DSM's reliance on Antifriction Bearings-1999 as support for including the gain is misplaced. In Antifriction Bearings-1999, petitioners assert, the respondent's claimed offset consisted of the current portion of the gain on the sale of a plant, which is a depreciable asset. In the instant case, petitioners maintain, DSM's claimed offset to G&A expenses is the entire gain on the sale of a non-depreciable asset that exceeds DSM's total reported G&A expenses. Department's Position: We disagree with DSM that the Department should include, as an offset to G&A expense, the gain incurred on the sale of non-depreciable assets. It is the Department's practice to include gains or losses on the routine sale of fixed assets in reported G&A. In the instant case, however, the gain relates to a non-routine sale of land, which is a non-depreciable asset. See DSM cost verification report at page 24 and Exhibit 19. As noted in Plate from Korea, a gain or loss on the sale of a non- depreciable asset, particularly one as significant as that incurred by DSM, warrants separate treatment. This is due to the fact that no depreciation expense associated with this asset was accounted for in the COP. This is especially true in light of the fact that non-depreciable assets, which are not consumed in the production process and generally retain their value regardless of the state of a particular industry, are normally not treated as a depreciable asset. Depreciation expense is generally not calculated on these assets, which means that no costs associated with these expenses are included in the COP or CV. Therefore, we do not consider it appropriate to include in COP the associated gain on the disposal of this type of asset when it is sold. As DSM has noted, it would also not be reasonable to exclude the gain but include the loss in the G&A ratio calculation. As a result, we have excluded both the gain and the loss for the final determination. Comment 8: Short-Term Interest Income DSM maintains that the Department should use the revised figure for short- term interest income provided at verification in its calculation of the financial expense ratio. DSM points out that in its initial questionnaire responses it calculated short-term interest income using an allocation ratio based on its unconsolidated financial statements. DSM notes that at verification it provided a revised calculation which separately detailed the short-term interest income for DSM and the other major companies included in the consolidated financial statements based on the actual interest income and short-term and long-term deposits. Citing Final Determination of Sales at Less Than Fair Value; Stainless Steel Sheet and Strip in Coils from the United Kingdom 64 FR 30688, 30710 (June 8, 1999) (SSSS from the United Kingdom), DSM maintains that the Department has accepted such allocations in the past when a respondent's financial statements don't separately identify short-term and long-term interest income. DSM asserts that the calculation presented at verification is more accurate and should therefore be used in the final determination. Petitioners argue that the Department should reject DSM's claimed adjustment for short-term interest income. According to petitioners, the Department should not allow an adjustment for interest income based on a ratio of short-term deposits to total deposits because such a ratio does not accurately capture the actual amount of short-term interest income. Petitioners assert that short-term and long-term deposits earn interest at different rates which is not reflected in the ratio approach used by DSM. Further, petitioners maintain, DSM failed to provide evidence of its real short-term interest income despite ample opportunity to do so. Department's Position: We disagree with the petitioners assertion that DSM's short-term interest income offset should be rejected in its entirety. We acknowledge that an adjustment for short-term interest income based on a ratio of short-term to total deposits in some cases does not accurately capture the actual amount of interest income when short-term and long-term deposits earn interest at different rates. See Circular Welded Non-Alloy Steel Pipe from the Republic of Korea, 63 FR 32833, 32848 (June 16, 1999). However, the adjustment that DSM is claiming is only partially based on such a ratio. At verification, we reviewed the interest income accounts for DSM and one of the other subsidiaries and determined that the claimed short-term interest income for these entities resulted from short-term deposits. See DSM cost verification report at page 25 and Exhibit 25. While we agree with DSM's assertion that the Department has allowed interest income allocations based on deposits in past cases (see, e.g., SSSS from the United Kingdom), in this case there is verified information on the record that enables us to calculate a more precise offset. Therefore, for the final determination we have used the verified short-term interest income rate to calculate the short-term interest income for the consolidated entity. Comment 9: Foreign Exchange Gains and Losses DSM argues that the full amount of its net exchange gains on foreign currency debt should have been included in the calculation of the financial expense ratio because the full amount of those gains is included in its financial statements, which are prepared in accordance with Korean GAAP. DSM asserts, however, that if the Department insists on amortizing those gains it should revise the amortization methodology that it used in the preliminary determination. DSM contends that the amortization methodology used in the Department's preliminary financial expense ratio calculation was not accurate as it was based on the average life of DSM's long-term loans. DSM contends that the Department's methodology would only be appropriate if the loans were structured so that the full loan principal was repaid only at the end of the term. According to DSM, the Department should use the methodology DSM presented at verification because it more accurately reflects the structure of its foreign currency debt. DSM points out that these loans are paid in increments over the life of the loan, and as such are the same as a series of loans with different maturities. Petitioners argue that the Department should not revise its amortization of DSM's foreign exchange gains and losses to include the non-current portions of those gains and losses as an offset to financial expenses. According to petitioners, the Department should not consider DSM's proposed calculation because it is new information and does not corroborate, clarify or support facts already on the record. Additionally, petitioners assert, even under DSM's assumption that a loan should be treated as a series of loans with different maturities, only the portion related to the loan due in the first year would be included. Petitioners contend that the loan amounts due in the second or third years would not be short-term and that foreign exchange gains or losses on those amounts would only be realized in later periods when repayment begins. Petitioners cite Memorandum to Troy H. Cribb from Richard W. Moreland, Re: Issues and Decision Memorandum for the Administrative Reviews of Antifriction Bearings (Other Than Tapered Roller Bearings) and Parts Thereof from France, Germany, Italy, Japan, Romania, Singapore, Sweden and the United Kingdom dated August 11, 2000 and maintain that the Department's well- established practice is to include only the gains and losses related to the current portion of foreign-denominated loans. Department's Position: We disagree with DSM that the Department should include the full amount of its exchange gains on foreign currency debt in the calculation of the financial expense ratio. It is the Department's established practice to include only the current portion of foreign exchange gains and losses associated with long-term debt. See Final Results and Partial Rescission of Antidumping Duty Administrative Review: Canned Pineapple Fruit from Thailand 63 FR 43661, 43669 (August 14, 1998) (Canned Pineapple from Thailand). As such, non-current portions of those gains and losses should be excluded as offsets to financial expenses. In determining the current portion of exchange gains and losses on foreign currency debt, the Department's preferred methodology has been to amortize the gains and losses based on the repayment schedule of the underlying loans. See Canned Pineapple from Thailand. This methodology recognizes that most loans are not structured to be repaid in full at the end of their term, but rather are paid in varying increments over the life of the loan. In this case, we amortized DSM's net exchange gains on foreign currency debt using the future repayment schedule for foreign currency denominated debt and not, as DSM asserts, using a straight-line average life of the loans. We disagree with DSM's assertion that each of its foreign currency denominated loans is the same as a series of loans with different maturities. Even if that were the case, as petitioners have noted only the portion actually due in the first year would be relevant. DSM's proposed methodology attempts to relate portions of loans due in subsequent years to the current year and ignores the actual repayment terms of the loans. We therefore disregarded DSM's proposed amortization and continued to amortize DSM's net exchange gains from debt based on the foreign currency denominated debt repayment schedules in the company's financial statements for the final determination. Comment 10: Scrap Recovery DSM argues that the Department should revise its cost calculations to reflect the actual revenue received from scrap sales. DSM states that the scrap revenue offset reported in the questionnaire response was based on the figures recorded in its normal cost accounting system. DSM points out that these figures are based on estimated market values and that no adjustment is made to the cost center costs to reflect the difference between that value and the actual sales value. DSM contends that it presented the Department with the information needed to calculate the scrap revenue offset based on the actual sales values at verification, and that the Department should use that information in its final determination. Petitioners argue that if the Department allows DSM to use the new, verified, actual "market prices" for scrap in the calculation of its scrap recovery offset, then the Department should use the same values to adjust the cost of scrap inputs in DSM's reported costs. Additionally, petitioners assert that the Department would also need to conduct its arms length test on scrap inputs using the new values. Petitioners note that DSM does not argue that its new market value information is relevant to any other amounts reported for scrap costs. According to petitioners, fairness and consistency dictate that the same market values should be used in all areas of DSM's cost reporting. Department's Position: We disagree with DSM that the Department should revise its cost calculations to reflect the actual revenue received from scrap sales. The estimated market values used to value scrap generated in DSM's normal cost accounting system are the same per-unit values used to value self- generated scrap placed into inventory. See DSM cost verification report at page 15. Increasing the per-unit values credited to the cost centers without correspondingly increasing the per-unit values of the scrap inputs would be inconsistent and distort the reported costs. As a result, we have continued to use the scrap revenue offset calculated based on the estimated market values in the company's cost accounting system for the final determination. Issues Relating to KISCO Comment 11: Upward Price Adjustments The petitioner notes that during verification, the Department found several unexplained upward, home market price adjustments, which were not reported in KISCO's "other discounts" data field. The petitioner recommends that the Department should apply the upward adjustment found during verification to these sales as appropriate. The respondent notes that the Department requested KISCO to include the upward price adjustment for the relevant home market customers in its post- verification revised home market sales listing. The respondent states that KISCO complied with this request and that the Department has accurate price discount information in the post-verification sales listing. Department's Position: We agree with the respondent that its most recent sales listing contains the revised price adjustments we requested. We have included these adjustments in our final calculations. Comment 12: U.S. Short-term Interest Rate Calculation The petitioner states that the Department discovered during verification that two of KISCO's U.S. dollar-denominated borrowings were actually denominated in yen. The petitioner argues that KISCO's U.S. market interest rate must be based only on U.S. dollar borrowings. In order to correct for this discrepancy, the petitioner recommends that the Department should use, as FA, the single highest interest rate on any borrowings during the POI for KISCO's non-U.S. dollar-denominated loans. The respondent notes that the Department requested KISCO to revise its reported U.S. market interest rate to exclude the yen-denominated borrowings from its U.S. interest rate calculations. The respondent notes that KISCO reported the revised interest rate in its post-verification U.S. market sales listing. The respondent argues that KISCO complied with this request and that the Department has accurate U.S. interest rate information in the post-verification sales listing. Therefore, the respondent concludes that there is no basis for using FA to derive KISCO's U.S. short-term interest rate. Department's Position: We agree with the respondent that the revised sales listing contains the revised U.S. interest rate calculations we requested. During verification, we requested KISCO to correct the minor errors we found in its calculation of the U.S. short-term interest rate. Because KISCO complied with our request, and revised its sales listing accordingly, the application of FA is not necessary. Comment 13: General and Administrative Expenses Respondent argued that KISCO's miscellaneous gain should be included in the calculation of KISCO's G&A expense rate. The respondent points out that the miscellaneous gains relate to expenses that were included in G&A in KISCO's cost buildups so, therefore, the gains should also be included in KISCO's cost calculations. See KISCO cost verification report at page 20. Petitioners did not comment on the issue. Department's Position: We agree with the respondent and have included KISCO's miscellaneous gains in the calculation of KISCO's G&A expense rate. At verification, we determined that the miscellaneous gains on KISCO's financial statement related to the general operations of the company as a whole and were included in KISCO's cost calculations as G&A expenses. Recommendation Based on our analysis of the comments received, we recommend adopting the positions described above. If these recommendations are accepted, we will publish the final determination and the final weighted-average dumping margins in the Federal Register. Agree ____________ Disagree_______________ Let's Discuss___________ _______________________________ Faryar Shirzad Assistant Secretary for Import Administration Date _______________________________________________________________________ footnotes: 1. The petitioner in these investigations is the Rebar Trade Action Coalition (RTAC), and its individual members, AmeriSteel, Auburn Steel Co., Inc., Birmingham Steel Corp., Border Steel, Inc., Marion Steel Company, Riverview Steel, and Nucor Steel and CMC Steel Group. (Auburn Steel was not a petitioner in the Indonesia case). 2. The Department collapsed DSM and KISCO into a single entity, referred to as DSM/KISCO or the respondent, for the purposes of this antidumping investigation. See Memorandum from Ronald Trentham to Tom Futtner, “Decision Memorandum: Whether to Collapse Dongkuk Steel Mill Co., Ltd. and Korea Iron and Steel Co., Ltd. Into a Single Entity,” dated December 5, 2000 (Collapsing Memorandum).