66 FR 64107, December 11, 2001 A-580-831 ARP: 11/04/98 - 04/30/2000 Public Document IA/III/IX: BF MEMORANDUM TO: Bernard Carreau Acting Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary for Import Administration, Group III SUBJECT: Issues and Decision Memorandum for the Administrative Review of Stainless Steel Plate in Coils From the Republic of Korea for the Period of Review ("POR") November 4, 1998 through April 30, 2000 SUMMARY: We have analyzed the case and rebuttal briefs of interested parties in the 1998-2000 administrative review of the antidumping duty order of stainless steel plate in coils from the Republic of Korea. As a result of our analysis, we have made changes from the Notice of Preliminary Results and Partial Recission of Antidumping Duty Administrative Review for Stainless Steel Sheet and Strip in Coils From the Republic of Korea, 66 FR 41530 (August 8, 2001) ("Preliminary Determination"). The specific calculation changes for Pohang Iron & Steel Co., Ltd. ("POSCO") can be found in Analysis for the Final Determination of Stainless Steel Plate in Coils from the Republic of Korea: Pohang Iron & Steel Co., Ltd. ("POSCO Final Analysis Memorandum"). 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 comment and rebuttal briefs by interested parties. Comment 1: Costs for Certain Products that were Reported in a Distortive Manner Comment 2: Reporting of Home Market Sales Comment 3: Home Market Credit Comment 4: Indirect Selling Expenses for POSAM Comment 5: Unrecognized Bad Debt Comment 6: Duty Drawback Comment 7: Export Warranty Expenses Comment 8: General and Administrative ("G&A") Expense Calculation Comment 9: Valuation of Re-introduced Scrap Comment 10: Cost for Affiliate-supplied Inputs Comment 11: POSCO's L-grade Adjustment Comment 12: Energy Cost Comment 13: Financial Expenses Comment 14: Imputed Credit Expenses in the Calculation of Indirect Selling Expenses Comment 15: Deferred Foreign Exchange Losses I. Changes Since the Preliminary Results •We adjusted POSCO's reported costs to include an amortized portion of its deferred foreign exchange losses. •We adjusted POSCO's reported foreign exchange ratio to include gains and losses associated with cash, A/P, "other" accounts, and loans payable in the numerator. •We reversed our position on affiliated party inputs from the preliminary results and, for these final results, we are not making an adjustment to POSCO's costs for an affiliated party input. • We revised POSCO's per-unit G&A expense to apply POSCO's G&A ratio to the sum of the revised cost of manufacturing plus packing. • We calculated an adjustment for warranty expense and included it as an adjustment to U.S. price. • We have recalculated home market credit for POSCO's U.S. dollar home market sales using POSAM's U.S. dollar interest rate instead of POSCO's Korean won interest rate. • We have recalculated POSAM's indirect selling expenses to adjust the amount of interest expense applicable to U.S. sales of subject merchandise and to take into account an offset for imputed credit. II. Discussion of the Issues Comment 1: Costs for Certain Products that were Reported in a Distortive Manner Petitioners argue that POSCO submitted distorted costs for certain products, as evidenced by the fact that in a few instances nearly identical products have sizable differences in cost. Petitioners state that these cost differences are highly anomalous when considering all other product characteristics are identical. Petitioners contend that POSCO's method of averaging individual product group costs could result in unusual variations, if production of an individual product occurred with inconsistent frequency. Petitioners state that under the law, the Department must consider whether the reported costs "reasonably reflect the costs associated with the production and sale of the merchandise." In this instance, they allege that the costs reported for certain products do not reasonably reflect the POR cost associated with producing that product. Rather than reporting the average cost of producing all of the same products throughout the POR, POSCO chose to isolate costs of individual production runs for a finished product and then to average costs to arrive at a POR cost. The petitioner argues that this methodology distorts the reporting of average POR costs where the individual products were not in consistent quantities throughout the POR. Therefore, the petitioner strongly urges the Department to adjust reported costs to reflect the inherent distortion in POSCO's cost reporting by either using the higher cost product for both products or to weight-average the costs of the two products. POSCO disputes the allegation that its costs are distorted and objects to any suggestion of adjustment to its costs. POSCO argues that its cost accounting system and its reporting methodology have been closely scrutinized in this case as well as in the numerous other cases in which POSCO participates. POSCO states that in this review, the Department spent time at POSCO's Pohang works verifying the validity of the cost accounting system and confirming that POSCO had adhered to the cost methodology prescribed by the Department in other proceedings, including the original investigation of this case. POSCO contends that under its verified methodology for assigning costs, POSCO does not select individual production runs, as suggested by petitioner but, instead, matches the merchandise sold with the product manufactured. POSCO states that the linking criteria are product, production process and production time period and as the Department has verified, differences in production costs can occur as a result of this linking process. Furthermore, POSCO argues that the Department verified the differences in cost for two of the CONNUMs highlighted by the petitioner. A comparison of the build-up of the cost for the two products confirms that one of the primary causes of the cost difference is the fact that one CONNUM was not produced in the second half of 1999, the period which had higher material costs. Therefore, the cost for the other CONNUM is higher due to the fact that the actual costs incurred in producing that product were higher. The respondent strongly contends that the cost differences bear no relationship to the trimming process. Finally, POSCO points out that it followed the same approach for all products manufactured in the cost reporting period and this approach is consistent, logical and has been verified as such. Therefore, POSCO argues that the verified costs require no further adjustment. Department's Position: We agree with POSCO. The Department verified POSCO's cost accounting system, both the standards and the variances. In accordance with section 773(f)(1) of the Act, the Department relies on the books and records of POSCO as long as they accurately reflect the cost to produce the merchandise under review and have historically been used by the respondent. POSCO, like numerous other respondents, simply applied the period-specific variances to its product-specific standard costs. Where appropriate, POSCO weight-averaged the costs from the two fiscal years that coincide with the POR. POSCO is correct that the "anomalous" product costs reported occur because certain products included in a few CONNUMs were produced in only one of the two fiscal years. Moreover, the costs reported by POSCO represent the actual cost of producing the products during the POR. Therefore, we have not, as requested by petitioners, adjusted POSCO's reported product costs to reflect a theoretical amount as if the products were produced in both fiscal years. Comment 2: Reporting of Home Market Sales Petitioners claim that POSCO reported certain home market sales from POSCO to an affiliated customer but did not report the resales from this affiliated customer to its customers despite instructions in the Department's antidumping questionnaire requiring respondents to report sales from affiliated resellers to unaffiliated customers. Furthermore, petitioners note that the Department's questionnaire instructs respondents that, if sales to all affiliated customers constitute less than five percent of a respondent's sales in the foreign market, or if you are unable to collect information on such resales, to contact the Department so that the Department may consider a possible exemption. Petitioners note that POSCO stated, in its November 17, 2000 supplemental questionnaire response, that it sold subject merchandise to one affiliated customer in the home market which then resold the merchandise in the home market. In this same questionnaire response, petitioners note that POSCO stated that it reported its sales to this affiliated customer but not the resales of this affiliated customer because the quantity sold to the reseller accounted for a small percentage of the home market database. Petitioners argue that POSCO should have reported these sales, especially considering that the actual quantity is unknown and that these sales may have matched to a significant proportion of U.S. sales. Because POSCO did not report these resales of this affiliated customer, petitioners argue that the Department should apply partial adverse facts available to POSCO's U.S. sales, if any, for which there is no identical home market match and to create extra observations in the home market sales listing based on the upstream control numbers, sale date, and quantity, and assigning, as an adverse inference, the highest gross price reported in POSCO's home market sales database. POSCO rebuts petitioners' arguments, stating that the quantity sold by its affiliated customer in the home market and not reported to the Department was negligible at less than five percent of its total home market sales. Also, POSCO argues that, in accordance with the Department's regulations and practice, it reported its sales to the affiliated customer but not the affiliate's resales. POSCO argues that it cooperated with the Department but that it was not required to report the affiliated party's resales, citing 19 C.F.R. section 351.403(d) and Certain Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products from Korea, 63 FR 48173, 48174 (September 9, 1998); Antifriction Bearings (Other Than Tapered Roller Bearings) and Parts Thereof From France, Germany, Italy, Japan, Sweden, and the United Kingdom, 66 FR 36551, Analysis Memorandum at Comment 3 (July 12, 2001)(final admin. rev.); and Certain Cold-Rolled Flat-Rolled Carbon- Quality Steel Products from Turkey, 65 FR 1127, 1134 at n.4 (January 4, 2000)(preliminary determination). Also, POSCO argues that, at verification, the Department verified that POSCO's sales to affiliated parties were limited to those reported on the database. Department's Position: POSCO's sales (based on quantity) of the foreign like product to an affiliated party in the home market constituted less than five percent of the quantity of all of POSCO's sales of the foreign like product in the home market. We disagree with petitioners that the actual quantity is unknown because POSCO reported the quantity of its sales to the affiliated party (see POSCO's November 17, 2000 supplemental questionnaire response and POSCO's January 8, 2001 supplemental questionnaire response) and, at verification, we did not discover any additional affiliated party sales. Section 351.403(d) of our regulations states that "the Secretary normally will not calculate normal value based on the sale by an affiliated party if sales of the foreign like product by an exporter or producer to affiliated parties account for less than five percent of the total value (or quantity) of the exporter's or producer's sales of the foreign like product in the market in question." Therefore, in accordance with our regulations, we did not require POSCO to report sales of the foreign like product by the affiliate. Moreover, because POSCO was not required to report these resales by an affiliated party, we disagree with petitioners' proposal to apply partial adverse facts available to certain sales. Therefore, the use of partial facts available, adverse or otherwise, is unwarranted in this case. Consequently, we are making no changes to our calculation for the final results of review based on this comment. Comment 3: Home Market Credit Petitioners argue that the Department should recalculate home market credit for POSCO's dollar-denominated sales to reflect POSCO's dollar, rather than Korean won, interest rate. Also, petitioners argue that the Department should use the verified won interest rate, as reported in the Department's May 31, 2001 Sales Verification Report ("SVR"), and not the won interest rate reported by POSCO in its response. POSCO argues that the Department made a typographical error in its SVR when it reported POSCO's won interest rate figure. POSCO argues that the Department verified its won interest rate in verification Exhibit 19B and that this verified won interest rate is different from the won interest rate reported by the Department in its SVR. POSCO notes that it used its won interest rate for local sales in dollars in the home market because POSCO did not have a separate U.S. dollar interest rate during the period of review. POSCO notes that it does not object to the Department using the U.S. borrowing rate for local letter of credit ("l/c") sales in dollars of POSCO's wholly-owned selling arm in the United States, POSAM, if this minor modification is consistent with precedent. Department's Position: We agree with POSCO that the Department made a typographical error for the won interest rate in its SVR and that the verified won interest rate is in Verification Exhibit 19B. We agree with petitioners that the Department should recalculate POSCO's home market credit for its dollar- denominated sales to reflect POSCO's dollar, rather than won, interest rate. Policy Bulletin 98.2 states that "for the purposes of calculating imputed credit expenses, we will use a short-term interest rate tied to the currency in which the sales are denominated." Therefore, for the final results of this review, we are recalculating POSCO's home market credit for POSCO's dollar-denominated sales, using POSAM's U.S. borrowing rate, consistent with the Department's practice. See Final Determination of Sales at Less Than Fair Value; Oil Country Tubular Goods from Austria, 60 FR 33551, 33555 (June 28, 1995). Comment 4: Indirect Selling Expenses for POSAM Petitioners claim that POSCO significantly understated the indirect selling expenses incurred in the United States by POSAM, its wholly-owned selling arm in the United States. Petitioners claim that, although the denominator in the indirect selling expense ratio calculation reflects the total value of sales reported on POSAM's consolidated financial statements, the numerator reflects the expenses listed on POSAM's unconsolidated financial statements and thus, omits certain selling, general and administrative ("SG&A"), interest, and other expenses attributable to sales of the subject merchandise in the U.S. market. Furthermore, petitioners contend that the expenses reported in the questionnaire response significantly understate the selling expense ratio reported on POSAM's audited financial statements for fiscal year 1999. Consequently, petitioners propose that the Department adjust POSAM's indirect selling expenses upward to account for the expenses omitted in POSCO's calculation. POSCO contends that POSAM provided both the total value of indirect selling expenses and the total value of sales in the United States on the basis of its unconsolidated financial statements, and did not mix information from the consolidated and unconsolidated balance sheets to determine the numerator and denominator of the indirect selling expense ratio, as claimed by petitioners. POSCO argues that the adjustment for selling expenses is governed by section 772 of the Act, which, according to POSCO, defines indirect selling expenses as the general expenses of the company involved in selling the subject merchandise during the period of review. POSCO argues that this definition demands that indirect selling expenses must be reasonably attributed to sales of the subject merchandise in order to be included in the reported deductions for antidumping duty purposes. As a result, POSCO argues that the indirect selling expense ratio should be based on the expenses and sales of the party actually selling the merchandise during the period of review. POSCO contends that in this review, POSAM was the entity responsible for sales of subject merchandise in the United States and that neither of its two consolidated subsidiaries have had any involvement in the sale of the subject merchandise. As a result, POSCO argues that all of the expenses incurred for selling the subject merchandise in the United States are recorded in the unconsolidated financial statements. Therefore, POSCO contends that it properly reported its indirect selling expenses based on POSAM's unconsolidated financial statements, as it did in the original investigation. POSCO argues that petitioners' proposed indirect selling expense ratio is unreasonable because the Section A response and verification report document that only one person at POSAM is involved in the sale of subject merchandise. Consequently, according to POSCO, it is not plausible that POSAM's indirect selling expenses could be higher than POSCO's indirect selling expense ratio in the home market. Accordingly, POSCO argues that the Department has no basis for changing the methodology used to calculate U.S. indirect selling expenses in the preliminary results of review. Department's Position: We agree with POSCO. We note that POSCO derived its reported U.S. indirect selling expenses entirely from POSAM's unconsolidated financial statements. Petitioners' contention that POSCO mixed the information used to derive the numerator and denominator in its calculation of the indirect selling expense ratio from the consolidated and unconsolidated financial statements is not supported by information on the record. Although the total value of sales reported in Exhibit 21 of POSCO's September 11, 2000 Section C response ties to the consolidated financial statements reported in Exhibit 14 of POSCO's August 14, 2000 Section A response, it also ties to POSAM's detailed profit and loss statement provided in sales verification exhibits ("SVE") 9A and 9B. These exhibits show that all of POSAM's sales income reported on the consolidated financial statements was derived from the sale of steel products and not from the income produced by either of POSAM's subsidiaries which do not sell steel products. Furthermore, there is no other evidence on the record showing that the total reported value of sales is inflated. We disagree that POSCO omitted any selling expenses applicable to sales of the subject merchandise during the POR, simply by calculating its indirect selling expenses on the basis of its unconsolidated financial statements. Neither of POSAM's two wholly-owned subsidiaries in the United States sold the subject merchandise during the POR. All of POSAM's reported selling expenses reconcile to POSAM's audited financial statements provided in Exhibit 14 of POSCO's August 14, 2000 Section A response. Finally, we disagree that POSCO was remiss by not reporting any of the specific proprietary expenses identified in petitioners' July 9, 2001 case brief, simply because they were lower than the expenses reported on the consolidated financial statements. As POSCO noted in its case brief, POSAM is the entity exclusively charged with selling POSCO's steel in the United States, and neither of its two other subsidiaries sold the subject merchandise during the period of review. Consequently, we are making no changes to our calculation of POSCO's U.S. indirect selling expenses for the final results of review. Comment 5: Unrecognized Bad Debt Petitioners argue that the Department inappropriately failed to account for POSAM's unrecognized bad debt expenses derived from sales that were made in 1997 during the period of the original investigation. Petitioners note that, in response to instructions from the World Trade Organization ("WTO") dispute settlement panel, the Department issued an amendment to the final determination of sales at less than fair value in the original investigation without revising its calculations to account for bad debt attributed to sales that were made during the period of investigation. Petitioners allege that these sales have never been paid for, and that POSCO has not acknowledged bad debt attributed to them in any of POSAM's audited financial statements issued since the original investigation. Furthermore, petitioners allege that, in 1999, in the final results of the original investigation of stainless steel plate in coils from Korea, POSCO stated that it still expected to be paid for these sales, despite the fact that it had reversed the sales (thus acknowleding a loss) in its books and records by issuing negative invoices to the customer for the unpaid merchandise, effectively classifying the sales as a type of bad debt. Petitioners contend that since POSCO still expected payment in 1999, the loss should be recognized in this review as an expense incurred in 1999 and expressed as a percentage of total sales of subject merchandise in the United States during 1999. Alternatively, petitioners propose that the Department allocate the total amount of the bad debt incurred in 1997 to POSCO's sales of subject merchandise during the period of review ("POR"). Petitioners claim that this would be conservative in that it allocates the bad debt expense attributed to fiscal year 1999 to stainless steel flat product sales during the entire 18-month POR - a period which is longer than the fiscal year. However, if this outcome is not acceptable to the Department, petitioners allow that the most conservative and absolute minimum alternative adjustment would be to add the stainless flat products-related bad debt expense to POSAM's overall general expenses. POSCO contends that the Department verified (and the WTO Panel confirmed), that the bankrupt sales referenced by petitioners were written off within the period of the original investigation, at year-end 1997, and that there was no bad debt recorded on POSCO's financial statements for the POR. Consequently, POSCO argues that these sales bear no relationship to the current administrative review period of November 4, 1998 through April 30, 2000. Furthermore, POSCO contends that all of POSAM's indirect selling expenses were reported in this review, and bad debt was not among them. Consequently, POSCO maintains that the Department has no basis to attribute any alleged costs associated with the bankrupt sales written off in 1997 to the current administrative review. Department's Position: We agree with POSCO's assertion that the bankrupt sales at issue were written off within the period of the original investigation, at year-end 1997, and that there was no bad debt recorded in POSAM's audited financial statements during the period of review. Therefore, because these expenses were incurred prior to the period of review, we have no basis for including bad debt arising from 1997 sales in our margin calculation. Therefore, we made no changes to our calculation for the final results of review. Comment 6: Duty Drawback Petitioners contend that POSCO did not demonstrate that it met the Department's two-pronged test to determine whether an upward adjustment to export price for duty drawback would be warranted. Petitioners explain that this test specifies that: first, the import duty and rebate be directly linked to, and dependent on, one another; second, POSCO must demonstrate that there were sufficient imports of the imported material to account for the duty drawback received for the export of the manufactured product. Petitioners claim that POSCO did not demonstrate that the import duty and rebate are directly linked to, and dependent on, one another, but simply allocated a particular duty refund amount to a particular U.S. sale. In addition, petitioners contend that POSCO failed to demonstrate that the reported duty drawback amount was supported by sufficient imports of the imported material, and instead assigned specific refunds to U.S. sales. Petitioners contend that the amounts reported in POSCO's questionnaire response do not indicate that there were sufficient import duties paid to account for all of the rebates granted upon export of the subject merchandise. Finally, petitioners contend that POSCO failed to demonstrate that reported drawback amounts represent a proper allocation of all drawback amounts received for all exports of products that used the imported materials. Therefore, petitioners contend that the Department should deny POSCO's claimed duty drawback adjustment. POSCO claims that it received duty drawback on all exports of the subject merchandise to the United States during the POR. POSCO explains that it filed applications with the Korean Customs authority, which predicate the drawback amount on direct links between specific exports and the import licenses evidencing importation of duty-paid raw materials suitable for the manufacture of the exported good. POSCO notes that companies are required to provide supporting documents which demonstrate the amount of duty paid for the quantity of imported raw material used to manufacture the exported finished product. POSCO then calculated the total amount of drawback applicable to each sale on a contract-by-contract basis. POSCO claims that the Department has verified in numerous proceedings, including this one, that the Korean duty drawback system effectively limits the amount of drawback to the amount of duties actually paid on raw material imports. Thus, POSCO claims that the Korean duty drawback system meets the requirements for an adjustment to U.S. price pursuant to 19 U.S.C. § 1677b and the Department's traditional two-part test. POSCO further argues that neither Korean Customs law nor the Department's practice requires POSCO to demonstrate that a particular import of raw material was physically linked to a specific, exported finished product in order to obtain the duty drawback adjustment. POSCO contends that the duty drawback application provides a demonstrated link between imports of raw materials and finished exports. Finally, POSCO argues that the Department verified POSCO's reported duty drawback amounts in detail at verification and found no discrepancies. Consequently, POSCO claims that petitioners have failed to establish a basis upon which years of precedent should be discarded. As a result, POSCO argues that the Department has no basis to disallow POSCO's duty drawback adjustment in this review. Department's Position: We agree with POSCO. The Department has verified duty drawback in Korea numerous times, and has confirmed that the Korean duty drawback program satisfies both requirements of the Department's two pronged test. (For the Department's two-pronged test, see Investigation of Steel Wire Rope from India, Issues and Decision Memorandum from Notice of Final Determinations of Sales at Less Than Fair Value: Steel Wire Rope From India and the People's Republic of China; Notice of Final Determination of Sales at Not Less Than Fair Value: Steel Wire Rope From Malaysia, 66 FR 12759 (February 28, 2001).) The Korean government requires companies to demonstrate the quantity of imported inputs used in the production of subject merchandise, the applicable duties assessed upon those imports, and the total quantity of exported merchandise to obtain a duty drawback. In addition, the Korean government determines for each exported product, the allowable usage rate of each input subject to duties. The government then requires companies to demonstrate that they have imported a sufficient quantity of the inputs to account for the amount of duty drawback applied for and no additional duty drawback. During the verification of this review, we tested the duty drawback applicable to both export sales and local letter of credit sales. See pp. 24, 30 and 31 of the SVR. We examined the full range of documents which demonstrate both the requirements of Korea's duty drawback program and POSCO's application. We traced the drawback amounts to proof of payment, and found no discrepancies. Consequently, we have accepted POSCO's duty drawback claim and will made no changes to our calculation for the final results of review based on duty drawback. Comment 7: Export Warranty Expenses Petitioners contend that the Department's SVR demonstrates that POSCO could not tie its warranty expense worksheet to its financial statements, and could not resolve discrepancies with respect to its claim that it incurred no warranty expenses during the POR. Petitioners argue that the Department should allocate the amount paid and the "unresolved discrepancy" amount to U.S. sales during the POR even if the payments originated from claims on sales made prior to the POR. Petitioners claim that, since warranties, by definition, are incurred after a sale takes place, such expenses are properly attributed to the sales in the period in which the warranty expenses are acknowledged on the company's books and records. POSCO claims that it did not incur any warranty expenses on U.S. sales of subject merchandise during the POR. POSCO contends that petitioners misconstrue the Department's verification report when they request that the Department should allocate an amount that had been paid to a U.S. customer during the POR to U.S. sales in the POR. POSCO contends that the Department's verification report clearly states that the above-referenced warranty claim was "acknowledged during 1999 for a U.S. sale that occurred prior to the POR in sheet." Therefore, POSCO argues that since the warranty claim was not associated with sales of subject merchandise during the POR, the Department should dismiss petitioners' arguments. POSCO further claims that the expenses which petitioners claimed represented an "unresolved discrepancy" had no relationship to U.S. sales of subject merchandise during the POR. POSCO claims that the Department reviewed detailed documentation regarding POSCO's warranty claims at verification and determined that "no warranty expenses were recorded at all for the sheet case or in the questionnaire response during the POR or for plate sales to the United States." Finally, POSCO contends that the alleged discrepancy amount, expressed as a percentage of POSCO's total export sales of stainless steel products was negligible. POSCO argues that the expenses were acknowledged during the POR for sales that occurred prior to the POR, and should be attributed to the period in which the sales were made, and therefore, no adjustment is warranted. Department's Position: We disagree with POSCO. As documented in the sales verification report, we found that POSCO paid substantial warranty claims for stainless steel products sold in the United States during the two year period prior to the POR. We determine that the actual POR warranty expenses, which were reported as zero in POSCO's response, are unrepresentative of the actual warranty expenses POSCO is likely to pay for sales during the period of review, based on its historical record of warranty claims. Therefore, in accordance with section 772(d) of the Act and section 351.402(b) of the regulations, we made an adjustment for warranty claims for the POR by dividing the total stainless steel warranty claims reported in SVE 41, which was for fiscal years 1997, 1998, and 1999, by the total U.S. stainless steel sales value reported for the corresponding time period. Since this amount includes the "unresolved discrepancy" above, we made no further adjustments for that discrepancy. This methodology is reasonable because it is based on POSCO's historical experience for warranty expenses for its stainless steel products. See NSK Ltd., v. Koyo Seiko, 190 F. 3d. 1321, 1332 (Fed. Cir. 1999). The amount of the warranty expense adjustment is reported in the POSCO Final Analysis Memorandum. Comment 8: G&A Calculation Petitioners argue that the Department should: (1) include the inventory valuation loss discovered at verification in POSCO's G&A expense; (2) recalculate the G&A ratio on a packing-inclusive basis in order to neutralize the packing-inclusive denominator used to calculate the ratio; and (3) disregard the miscellaneous income as unrelated to production of the merchandise under investigation. POSCO argues that the inventory loss was included in the G&A expense ratio and the Department's cost verification report mistakenly indicated that POSCO did not include the inventory valuation loss in its reported G&A ratio. POSCO points out that including the loss again would be double- counting an expense. In regard to the petitioner's request to recalculate the G&A ratio based on the packing-inclusive basis, POSCO did not dispute this suggestion. However, POSCO noted that the impact of this adjustment is negligible and that the ratio remains the same. Regarding the petitioner's comment on POSCO's miscellaneous income, POSCO argues that the Department obtained and examined the details of the miscellaneous income reported on POSCO's audited financial statements, noted no unusual items, and established that this income was associated with production, and was therefore, correctly included in the reported G&A. Department's Position: We agree with POSCO that the inventory loss was included in the G&A expense applied to the reported COPs and constructive values ("CVs"). See Cost Verification Exhibit 32. We further agree with POSCO that the miscellaneous income that they included in the G&A expense should continue to be allowed, because, contrary to petitioners' assertion that miscellaneous income must relate to the production of the merchandise under investigation, the Department includes miscellaneous income even if it relates to the general operations of the entity. As long as the miscellaneous income or expense item represents a general business expense item, and is not a separate line of business, then it is appropriately classified as a G&A item. See U.S. Steel v. U.S., 998 F. Supp. 1151 (CIT 1998). Finally, we agree with petitioners that because the denominator in the G&A expense ratio includes packing, the G&A rate should be applied to the COP with packing included. Therefore, for the final determination, we have applied the G&A rate from the preliminary determination to the COP, plus packing. Comment 9: Valuation of Re-introduced Scrap Petitioners point out that POSCO's reported costs should be adjusted to reflect the variances from standard scrap costs as POSCO's valuation of re- introduced scrap is understated. POSCO argues that the Department confirmed that the variances between the standard and actual costs were included in the reported costs through the numerous reconciliations and cost build-ups performed during the course of the verification, and that the Cost Verification Report ("CVR") indicated that there were no disparities between the standard and actual cost valuation. POSCO continues that petitioners are incorrect that "re- introduced scrap value was understated." POSCO points out that the Cost Verification Exhibit ("CVE") 16 illustrates that re-introduced scrap was properly valued. POSCO adds that it applied the same value for recovered and re-introduced scrap. As evidence, POSCO notes that the credit for recovered scrap is the same as the cost of the reintroduced scrap. Therefore, POSCO contends that no adjustment should be made. Department's Position: We agree with POSCO that the variances were included properly in the reported costs. Furthermore, we note that the Department reconciled the reported costs to POSCO's books and records and found no unaccounted items. We also agree with POSCO that petitioners are incorrect as to the re-introduced scrap issue. When POSCO recovers scrap metals from its production process, it credits the cost of production for the recovered amount, using a conservative estimate of the market price of the scrap. This, in turn, slightly overstates production costs since more value could have been credited. However, the slight overstatement of production costs is offset when the recovered scrap is re-introduced into the production process because POSCO uses the same conservative estimate of market value to value the re-introduced scrap. Therefore, we have not made the adjustment suggested by petitioners for the final determination. Comment 10: Cost for Affiliate-supplied Inputs In the Preliminary Results, the Department increased the transfer price of POSCO's purchases of a (proprietary) raw material input from an affiliated party on the basis that the "market price was higher than both the reported transfer price and the affiliate's cost of production." POSCO contends that the Department's adjustment to the reported cost for affiliate-supplied inputs in the preliminary results of review was unjustified as POSCO's transfer costs for affiliate-supplied inputs were identical to its prices from unaffiliated parties. POSCO states that it has emphasized the importance of making accurate, i.e., monthly, comparisons between the per-unit market and transfer prices, as the prices and quantities purchased varied throughout the POR. POSCO asserts that the Department's comparison between the market prices and the transfer prices was faulty since the Department compared the prices based on a total weighted average rather than the month-by-month unit prices. POSCO contends that the Department ignored variation in price and quantity throughout the comparison period and thereby distorted the conclusion. POSCO further questions that the Department's decision to adjust the transfer price was based on a comparison between a weighted- average transfer price from the affiliate to POSCO and a weighted-average price from an unaffiliated supplier. POSCO claims that the unit prices paid by POSCO to the unaffiliated and the affiliated supplier were identical. The only reason the average price used by the Department for comparison varies by supplier is that POSCO purchased different quantities from those suppliers at different times during the POR and when these prices and quantities are weight-averaged together, it appeared that the prices were different. Therefore, POSCO urges that the reported transfer prices must be used in the final results for purposes of calculating material costs. Petitioners argue that the Department properly disregarded POSCO's reported transfer prices. The petitioners state that the Department's comparison methodology is proper because costs in this proceeding have been reported for a specific period of review. Therefore, the analysis of POR weighted average input prices and costs is consistent with the Department's use of POR weighted averages in determining POSCO's costs. Petitioners contend that POSCO should not be permitted to pick the calculation of prices based on what generates the most preferable results in the Department's analysis. Petitioners state that the Department appropriately adjusted POSCO's transfer price to reflect the purchase price more accurately. Petitioners further contend that POSCO's reported transfer and "market" prices are unreliable and the Department should further adjust reported costs to correct for POSCO's improper reliance on transfer prices from affiliates and the "market" price in reporting costs. Department's Position: We agree with POSCO. The verification exhibits show that prices between POSCO and its affiliated supplier were identical to those between POSCO and its unaffiliated supplier for each month. Therefore, these prices offer a better comparison than POR weighted-average input prices and costs due to contemporaneity and identical pricing. See Cost Verification Exhibit 25. We find that only the quantities varied, thus causing the difference in the POR weighted-average price. Therefore, we find that the transfer prices were made at arm's length prices and accordingly have not made an adjustment to the transfer prices for the final determination. Comment 11: POSCO's L-grade Adjustment Petitioners argue that POSCO's allocation of costs among "L" and "non-L" grades is inappropriate. Petitioners state that the "L" grade allocation of costs are too high compared to the "non-L" grade considering the differences between them represent an insignificant amount of only one input. Therefore, petitioners urge the Department to recalculate reported costs to eliminate POSCO's "L" grade adjustments. POSCO defends its allocation methodology stating that POSCO made the L- grade adjustment consistent with the methodology in the investigation to comply with the Department's instructions to account for the physical characteristics of the merchandise. POSCO argues that petitioners' analysis of the differences between the standard products and the L-grade products addresses only the alleged differences in the cost of this input and not the customer requirements which were examined at the sales verification. Therefore, POSCO contends that the L-grade adjustment is necessary to reflect the differences in the merchandise. Department's Position: We agree with POSCO. First, we note that there are significant differences between L and non-L grades of stainless steel. For example, 304L can have as much as 5 percent more of a costly input than the non-L 304. In addition, because steel grades are defined in part by a range of acceptable quantities of the elements included in the grade, the producer can meet a customer's order based on the requested grade specifications, albeit with lower levels of certain elements or may fill an order with a product that has higher than the minimum requirements specified by the customer. When several similar products can be used to fill a customer's order, because all of the products meet the limited set of customer specified characteristics, then it is appropriate for POSCO to report, as POSCO did, the cost of the product actually used to fill the order. The Department's normal practice is to have respondents report unique product costs for each matching control number ("CONNUM") produced (as defined by the product characteristics used for the case). The reported cost of the CONNUM, to which the actual product used to fill the order belonged, is applied in the cost test and CV, not the costs of the theoretical products that could have been used to fill the order. Therefore, we have not made the adjustment suggested by petitioners for the final determination. Comment 12: Energy Cost Petitioners argue that the Department should ensure that variances between energy costs have been reflected in the submitted costs. POSCO contends that the Department verified that POSCO accounted for all variances in its reported energy costs. Department's Position: We agree with POSCO that the appropriate energy costs were included in the standard cost build-ups and, furthermore, that any difference between standard and actual costs was captured through POSCO's applied variances. See Cost Verification Exhibits 14 and 28-31. Comment 13: Financial Expenses Petitioners argue that the Department should recalculate POSCO's reported financial ratio to omit offsets for estimated short-term income and gains from foreign-denominated debt to the extent the reported gains constitute estimates. Petitioners state that only actual short-term income and eligible foreign exchange gains should serve as an offset. POSCO argues that its adjustments for short-term interest income and foreign exchange gains are the actual amounts. POSCO states that its consolidated financial statements do not segregate interest income between short and long term, nor do they split exchange gains and losses into different categories. So, in accordance with the methodology applied and accepted in all other cases in which POSCO has participated, POSCO used the actual experience on an unconsolidated basis to split the actual amounts on the consolidated statements into the relevant categories. For above reason, POSCO contends that no additional adjustments need be made to POSCO's financial expenses. Department's Position: We agree with POSCO. Because of the difficulties in obtaining the details of short-term interest income across all its consolidated companies, we find it reasonable in POSCO's case to use the unconsolidated financial statements and records of POSCO (i.e., the respondent/producer) to estimate the amount of short-term interest income. We note that POSCO is by far the largest of the consolidated companies and can reasonably be presumed to represent the bulk of any short-term interest income in the consolidated entity. Therefore, for the final determination we have continued to include POSCO's off-set for short-term interest income. Comment 14: Imputed Credit Expenses in the Calculation of Indirect Selling Expenses POSCO contends that the Department overstated the amount of interest expenses included in the calculation of U.S. indirect selling expenses by limiting the imputed-credit offset to the amount of imputed credit attributed to sales of subject merchandise as reported on the computer sales listing. Rather, POSCO argues that the imputed-credit offset should represent the amount of imputed credit expenses attributed to financing accounts receivable which includes imputed credit attributable to sales of non-subject merchandise. In addition, POSCO contends that the Department double counts the imputed credit expenses listed on the sales tape by deducting them from U.S. price twice: once in the circumstance of sale adjustment for imputed credit and once in the adjustment for indirect selling expense. POSCO explains that section 351.401(b)(2) of the Department's regulations explicitly prohibits the double counting of expenses. Therefore, POSCO argues that imputed credit expenses should be classified either as direct selling expenses in the imputed credit adjustment or as indirect selling expenses in the indirect selling expense adjustment, but not both in the same review. Furthermore, POSCO contends that we cannot classify them as direct expenses in one review and indirect in another. POSCO contends that the Department further erred in limiting its exclusion of imputed credit expenses to the value of credit expenses attributable to subject merchandise and not to sales of non-subject merchandise as well. POSCO points out that a number of the prior cases, including CIT Court decisions, affirmed POSCO's position that it is appropriate to exclude all of the interest expenses associated with financing accounts receivable from the calculation of indirect selling expenses in the United States. POSCO further maintains that the Department's decision in the final results of the sixth review of flat- rolled steel from Korea (Certain Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products From Korea: Final Results of Antidumping Duty Administrative Reviews, 64 FR 12927, 12932 (March 16, 1999) ("Flat Rolled - 5") ) and in the preliminary results of this review, to deduct only the imputed credit expenses reported on POSCO's databases, i.e., the direct credit expenses associated with the reported subject sales, is blatantly inconsistent with the requirements of the U.S. antidumping law and with the WTO Antidumping Agreement. Finally, POSCO contends that even indirect selling expenses must be "reasonably attributed" to the sales of subject merchandise in order to be included in an adjustment for antidumping duty purposes. POSCO argues that, even if the imputed credit expenses associated with the non-subject merchandise could be described as indirect selling expenses, POSCO maintains, they could not be reasonably attributed to the sales of the subject merchandise, since they bear no direct relationship to the sales of the subject merchandise. Consequently, POSCO maintains, the Department's decision to include these expenses in calculating indirect selling expenses for this review is distortive and must be corrected in the final results. Petitioners contend that POSCO erroneously claims that the Department's normal practice is to deduct all imputed credit expenses for both subject and non-subject merchandise from U.S. indirect selling expenses and that Departmental practice allows respondents to reduce actual financing costs for the opportunity costs associated with imputed credit expenses on all other non-subject products sold by U.S. affiliates. In contrast, petitioners claim that the Department's policy, set forth in Flat Rolled - 5 is that, under certain circumstances, the Department may consider making such adjustments in calculating indirect selling expenses incurred by U.S. affiliates. Although the Department found it appropriate to exclude interest expenses associated with non-subject merchandise in that review, petitioners claim that there is no policy of automatically reducing constructed export price ("CEP") selling expenses to account for imputed credit expenses. Petitioners note that in the subsequent administrative review of flat rolled, Final Results of Antidumping Duty Administrative Reviews: Certain Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products From Korea, 66 FR 3540, (January 16, 2001) ("Flat Rolled - 6), the Department found it appropriate to deduct only the imputed credit expenses for subject merchandise from the interest expenses included in POSCO's indirect selling expenses, and explained why it did not do so in previous reviews. Petitioners note that the Department relied on the basic principle that money is fungible and stated that financial indirect selling expenses, such as interest expenses, are allocated to all sales in a particular market "because, regardless of which unit incurred them, they relate to the general financing of the entire corporate entity." Petitioners claim that the Department made clear that "it is our practice to include interest expenses incurred by the U.S. affiliate in the total pool of U.S. indirect selling expenses under section 772(d)(1)(D) of the Act." Moreover, petitioners noted that the Department stated that "the fungibility of money is a basic principle applicable to our treatment of financing indirect selling expenses" and properly determined that "no portion of U.S. interest expenses should be segregated and attributed to non-subject merchandise sales." Petitioners argue that the Department's decision in Flat-Rolled - 6 to deduct only imputed credit expenses for subject merchandise from the total interest expense used to calculate indirect selling expenses is not sudden reversal of practice as claimed by POSCO. Rather, the Department clearly explained that it did not deduct the imputed credit attributable to sales of non-subject merchandise because "after taking into account potential double-counting, there were no or virtually no expenses remaining. Had there been an appreciable amount of U.S. interest expenses remaining, we would have included these expenses in the pool of U.S. indirect selling expenses." Flat-Rolled - 6, Issues and Decision Memorandum at Comment 1. Thus, petitioners argue, the Department's policy has always been not to allow offsets for hypothetical imputed credit expenses of non-subject merchandise in the pool of U.S. indirect selling expenses. Petitioners argue that POSCO's contention that the Department's adjustment constitutes double counting on the grounds that credit expenses are direct selling expenses and direct selling expenses cannot be included in calculating the ISE ratio is erroneous, since there is no basis for presuming that such imputed credit expenses are necessarily incurred. Petitioners argue, as the Department stated in Import Policy Bulletin 98.2, credit expenses derived from extended payment terms are usually built into the price of the sale. Therefore, petitioners argue that there is no presumptive link between the total value of interest expenses and extended credit policies: companies who grant extended credit terms may incur no borrowing costs, whereas companies that do not grant extended credit terms still incur significant borrowing costs. Petitioners argue that if the Department nevertheless makes an adjustment for imputed credit expenses, the absolute maximum that the Department should deduct is the imputed credit expenses reported in POSCO's U.S. sales database, consistent with the recent final results in Flat-Rolled-6. Petitioners contend that POSCO grossly overstated its imputed credit expenses attributed to sales of subject and non-subject merchandise and the Department should, at most, deduct no more than the actual imputed credit expenses reported in its U.S. sales database. Finally, petitioners contend that an examination of POSAM's proprietary sales information reveals that the basis of POSCO's accounts receivable calculation may not be appropriate as a determinant of accounts receivable financing, as indicated in the analysis memorandum for the preliminary results of review. See Analysis for the preliminary results of stainless steel plate in coils from Korea - Pohang Iron & Steel Company ("POSCO"), dated May 31, 2001. Petitioners argue that POSCO may have overstated its adjustment for imputed credit attributed to accounts receivable financing. Consequently, petitioners argue the Department properly adjusted POSCO's imputed expense calculation and deducted only the actual imputed credit expenses reported in its sales listing. Department's Position: We agree with POSCO that the imputed credit calculation used to offset interest expenses included in indirect selling expenses is not correct. In Flat Rolled - 5, we explained that under appropriate circumstances, we may exclude some portion or all of a U.S. sales affiliate's interest expenses in its calculation of indirect selling expenses. Furthermore, we explained that we must determine the appropriate universe of CEP deductions on a case-by-case basis because the activities of U.S. sales affiliates differ considerably across cases. We agree with POSCO that our calculation of indirect selling expenses, which is done on a POSAM-wide basis, takes into account all of the indirect selling expenses of the company and allocates them over all of POSAM's sales in the United States. As a result, the offset for imputed credit is not calculated on the same basis as all of the other expenses included in indirect selling expenses, since the offset is limited to sales of subject merchandise, whereas all of the other expenses are reported on a company-wide basis. Therefore, we have adjusted POSCO's reported interest expenses to determine a net interest expense ratio applicable to U.S. sales of subject merchandise alone, thereby eliminating the double count attributed to imputed credit, and appropriately attributing the reported expenses to sales of subject merchandise. This method, by allocating a portion of the total interest expense to subject merchandise and disregarding the remainder, directly addresses POSCO's concern about including interest expenses associated with non-subject merchandise in the calculation of indirect selling expenses. This allocation is appropriate in order to ensure that the deduction for double counting is taken from a pool of expenses at the same level as the offset, e.g., subject merchandise. This more accurately ensures that no non-subject merchandise interest or imputed credit is applied to subject merchandise. To calculate indirect selling expense, we first eliminated interest expense from the calculation of indirect selling expenses, and then separately calculated an adjustment for net interest expense applicable to sales of subject merchandise and for the remaining indirect selling expenses. We then added the two separate adjustments to obtain the total indirect selling expenses applicable to sales of subject merchandise in the United States during the POR. We calculated the amount of interest expense applicable to sales of subject merchandise by multiplying the reported POSAM-wide interest expenses by the ratio of total U.S. sales of subject merchandise reported on the computer sales listing to the amount of total U.S. sales of all merchandise reported in exhibit 21 of POSCO's September 11, 2000 section C response. We then deducted the total value of imputed credit expense reported on the computer sales listing from the amount of interest expense applicable to sales of subject merchandise. We divided the amount of net interest expense applicable to U.S. sales of subject merchandise by the total value of sales to the United States reported on the computer sales listing to obtain the interest expense ratio applicable to gross unit price as reported on the computer database. We then summed the amount of indirect selling expense and interest expense to obtain the total amount of indirect selling expense applicable to each U.S. sale of subject merchandise reported on the computer sales listing. Comment 15: Deferred Foreign Exchange Losses POSCO argues that the Department's adjustment to G&A for the full amount of deferred foreign exchange losses was inconsistent with precedent. POSCO argues that it recorded all of its deferred foreign exchange losses against retained earnings in 1999 in accordance with new Korean GAAP. POSCO states that in the original investigation, it initially capitalized these losses and these losses were to be amortized over time, which was consistent with Korean GAAP at that time. POSCO also claims that the Department included only the amortized portion of the loss booked during the POR in G&A in the original investigation. However, in this review, in spite of reporting the cost consistent with the new Korean GAAP, which requires POSCO to record the entire deferred foreign exchange losses against retained earnings, the Department adjusted POSCO's COP to include the entire balance of the losses. POSCO contends that in order to ensure consistency with precedent, the Department should amortize the losses over the life of the corresponding liabilities. POSCO further argues that there are several other cases addressing the change in Korean GAAP and gives as an example, Dynamic Random Access Memory Semiconductors of One Megabit or Above From the Republic of Korea: Final Results of Antidumping Duty Administrative Review, 65 Fed. Reg. 68,976 (November 15, 2000) ("DRAMS from Korea"), where the Department continues to include only the amortized portion of the cost in respondents' COP. POSCO strongly urges that the deferred losses must be amortized over the remaining life of the amortization period in the final results. Petitioners argue that the Department's adjustment to G&A for the full amount of deferred foreign exchange losses was proper. Petitioners contend that POSCO booked the full amount of its deferred losses in accordance with Korean GAAP which had changed from the original investigation and since POSCO wrote off the entire balance of its deferred losses in 1999, the Department properly adjusted POSCO's COP to include the entire balance of these losses rather than just the amortized portion of the loss. Petitioners contend that the Department's methodology is consistent with section 773(f)(1)(A). According to the statute, costs are normally calculated based on the records of the producer of the merchandise if the records are in accordance with the exporting counties' generally accepted accounting principles; and if the costs associated with the production of the merchandise are reasonably reflected. Petitioners argue that since the Department normally uses a company's GAAP-consistent, normal books and records and expressly rejects alternative cost methodologies that respondents prepare expressly for responding to the questionnaire in the antidumping inquiry, the Department's decision was proper in all respects. Petitioners also countered that POSCO only argues the Department should have amortized the losses because it did so in the original investigation, and that it did not provide any evidence regarding whether the inclusion of the entire balance of the unamortized deferred losses "reasonably reflect the cost" associated with its COP. Petitioners contend that if the Department accepts POSCO's argument, it will distort the costs in subsequent administrative reviews since the remaining balance of deferred losses would never be recognized in subsequent income statements. In such a case, the Department would have to determine the hypothetical unamortized foreign exchange loss balance for assets from prior periods for use in subsequent reviews, despite this loss already having been recognized in its full amount in prior years. Petitioners contend that the proper accounting would be extremely difficult. Therefore, petitioners urge the Department to continue to include the full amount of deferred foreign exchange losses in the G&A. Department's Position: We disagree with petitioners that the full amount of deferred foreign exchange losses should be included in the G&A. Prior to 1999, POSCO capitalized its foreign exchange losses to be amortized over time. In 1999, the unamortized losses still remained on the company's books, and POSCO, according to changes in Korean GAAP, moved these losses directly to retained earnings, without affecting the profit and loss statement. We note that, while this may be appropriate for Korean accounting purposes, for antidumping purposes this new practice fails to reasonably reflect the cost of producing the subject merchandise, as the respondent's new accounting treatment of these losses does not change the fact that these losses represent an additional cost of financing to the company. Therefore, for the final determination, we have included an amortized portion of the losses in the respondent's COP, which is consistent with our decision in DRAMS from Korea. 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 investigation and the final weighted-average dumping margins in the Federal Register. AGREE___________ DISAGREE___________ ______________________ Bernard Carreau Acting Assistant Secretary for Import Administration Date