67 FR 3149, January 23, 2002 A-580-847 Investigation Public Document IA/I/2/SEC MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Richard W. Moreland Deputy Assistant Secretary for Import Administration SUBJECT: Issues and Decision Memorandum for the Final Determination of the Antidumping Duty Investigation of Stainless Steel Bar from Korea ("Final Decision Memorandum") Summary We have analyzed the comments of the interested parties in the stainless steel bar ("SSB") from Korea investigation. As a result of our analysis of these comments, we have made changes in the margin calculations as discussed in the "Margin Calculations" section of this 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 investigation for which we received comments by parties: COMMON ISSUES 1. Product Characteristics and Matching Methodology 2. Duty Drawback 3. Application of the Major Input Rule 4. Ministerial Errors COMPANY SPECIFIC ISSUES Changwon Specialty Steel Co. Ltd. ("Changwon") 5. Treatment of Changwon's U.S. Sales Made Through POSTEEL's U.S. affiliate 6. Whether to Grant a Constructed Export Price ("CEP") Offset Adjustment for Changwon's CEP sales 7. Interest Rate Selection 8. General and Administrative ("G&A") Expenses 9. Denominator Used To Calculate G&A and Interest Ratios Dongbang Industrial Co. Ltd . ("Dongbang") 10. Treatment of Class II SSB 11: Selection of Cost for Products which were Not Produced but Sold During the Period of Investigation ("POI") Background On August 2, 2001, the Department of Commerce ("the Department") published the preliminary determination of the SSB from Korea investigation. See Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Stainless Steel Bar from Korea, 66 FR 40222 (August 2, 2001) ("Preliminary Determination"). We conducted verification in August through September 2001. Although the deadline for this determination was originally December 16, 2001, in order to accommodate certain verifications that were delayed because of the events of September 11, 2001, the Department tolled the final determination deadline in this and the concurrent SSB investigations until January 15, 2002. For purposes of this investigation, the term "stainless steel bar" includes articles of stainless steel in straight lengths that have been either hot-rolled, forged, turned, cold-drawn, cold-rolled or otherwise cold-finished, or ground, having a uniform solid cross section along their whole length in the shape of circles, segments of circles, ovals, rectangles (including squares), triangles, hexagons, octagons, or other convex polygons. Stainless steel bar includes cold-finished stainless steel bars that are turned or ground in straight lengths, whether produced from hot-rolled bar or from straightened and cut rod or wire, and reinforcing bars that have indentations, ribs, grooves, or other deformations produced during the rolling process. Except as specified above, the term does not include stainless steel semi-finished products, cut length flat-rolled products (i.e., cut length rolled products which if less than 4.75 mm in thickness have a width measuring at least 10 times the thickness, or if 4.75 mm or more in thickness having a width which exceeds 150 mm and measures at least twice the thickness), products that have been cut from stainless steel sheet, strip or plate, wire (i.e., cold- formed products in coils, of any uniform solid cross section along their whole length, which do not conform to the definition of flat-rolled products), and angles, shapes and sections. The stainless steel bar subject to this investigation is currently classifiable under subheadings 7222.11.00.05, 7222.11.00.50, 7222.19.00.05, 7222.19.00.50, 7222.20.00.05, 7222.20.00.45, 7222.20.00.75, and 7222.30.00.00 of the Harmonized Tariff Schedule of the United States ("HTSUS"). Although the HTSUS subheadings are provided for convenience and customs purposes, the written description of the scope of this investigation is dispositive. The POI is October 1, 1999, through September 30, 2000. We invited parties to comment on our preliminary determination. The petitioners and respondents submitted their case briefs on November 16, 2001, and their rebuttal briefs on November 27, 2001. All parties withdrew their request for a hearing on November 28, 2001. Margin Calculations We calculated export price ("EP"), normal value ("NV"), cost of production ("COP") and constructed value ("CV") using the same methodology stated in the preliminary determination, except as follows: Changwon: We accepted Changwon's exclusion from the home market sales listing of sales of stainless steel billets because billets are raw materials used in the production of SSBs (see Memorandum from the Team to the File re: Calculation Memorandum for the Final Determination for Changwon Specialty Steel Co., Ltd., dated January 15, 2002 ("Changwon Calculation Memorandum") and Changwon's Cost and Sales Verification Report, dated November 9, 2001 ("Changwon's VR") at 4 and 27). We accepted Changwon's correction of its interest revenue calculation, certain warranty expenses as well as certain inland freight charges in its home market sales listing (see Changwon Calculation Memorandum). We accepted respondent's corrected U.S. short-term interest rate and imputed credit calculation (see Changwon Calculation Memorandum and Comment 7 below). We accepted Changwon's corrections to duty drawback for certain U.S. sales and the adjustment to the direct selling expense ratio applicable to Changwon's affiliate, POSTEEL (see Changwon Calculation Memorandum). We disallowed Changwon's claimed offset for gains on marketable securities to its reported G&A expense. We further adjusted Changwon's G&A rate by recalculating Changwon's reported cost of goods sold value exclusive of packing (see Changwon Calculation Memorandum and Comments 8 and 9 below). We corrected a ministerial error by reclassifying Changwon's sales through POSTEEL as CEP sales (see Memorandum from the Team to Louis Apple re: The Petitioners' Ministerial Error Allegations Regarding the Preliminary Determination, dated August 24, 2001 ("Ministerial Error Allegation Memorandum") as well as Comment 5 below). We also adjusted Changwon's calculation of NV by adding interest revenue (rather than deducting it) and corrected an error with respect to home market credit expenses which were inadvertently set to zero. We also made an additional correction to account for the omitted duty drawback adjustment related to local export sales. Finally, we have added (rather than deducted) the cost of U.S. packing to NV (see Ministerial Error Allegation Memorandum and Comment 4 below). Dongbang: We accepted Dongbang's correction to its home market database, namely its correction of its home market interest rate. We recalculated Dongbang's indirect selling expense ratio based on our verification findings (see Dongbang's Cost and Sales Verification Report, dated November 7, 2001, at 28 ("Dongbang's VR") and Memorandum from the Team to the File re: Calculation Memorandum for the Final Determination for Dongbang Industrial Co., Inc., dated January 15, 2002 ("Dongbang Calculation Memorandum"). We accepted Dongbang's correction of duty drawback and inventory carrying costs in its U.S. sales listing (see Dongbang Calculation Memorandum). We accepted Dongbang's raw material cost adjustment to correct Dongbang's over-allocation of scrap revenue to direct material (see Dongbang VR at 5 and Dongbang Calculation Memorandum). We adjusted Dongbang's G&A ratio by removing the scrap sales revenue from Dongbang's reported total G&A expenses (see Dongbang VR at 36 and Dongbang Calculation Memorandum). We adjusted Dongbang's recalculation of an affiliated supplier's COP to account for fiscal year 2000 G&A and interest amounts (rather than fiscal year 1999). Using Dongbang's affiliated supplier's recalculated COP, we revised our major-input analysis of Dongbang's raw material cost to reflect, on a grade-specific basis, the highest of COP, transfer price or, when available, market price (see Dongbang Calculation Memorandum and Comment 3 below). We made an adjustment to the costs reported for certain products sold but not produced during the POI (see Dongbang Calculation Memorandum and Comment 11 below). We corrected a ministerial error by adding (rather than deducting) the cost of U.S. packing to NV (see Ministerial Error Allegation Memorandum and Comment 4 below). Discussion of the Issues COMMON ISSUES Comment 1: Product Characteristics and Matching Methodology With respect to the important product characteristics such as general finish, grade and size group, the petitioners urge the Department to not only define the reporting and matching policies but also to enforce them uniformly across respondents and cases in the SSB investigations. General Finish: With respect to general finish, Changwon requests that the Department, contrary to its preliminary determination findings, recognize forging as an additional type of general finish (in addition to the hot and cold finishes listed in the Department's questionnaire). Changwon argues that forging is part of a different production process (i.e., billets and blooms are used in the production of SSBs using a cold- drawing or rolling process while ingots are forged to target size using forging-press machines). According to Changwon, since the Department verified the different production processes used by Changwon, the Department should recognize forging as an additional general type of finish. The petitioners respond to Changwon's request to consider forging as an additional type of general finish by stating that forging is a type of general finish and not a distinct physical characteristic unto itself. The petitioners counter that product distinctions are appropriately based on actual physical characteristics. Therefore, the petitioners argue that forging should not be considered a distinct physical characteristic. As the petitioners have argued with respect to other product characteristics (i.e., size ranges and grades), the petitioners urge the Department to reject individual respondents self-serving attempts to gerrymander the matching process and instead to apply a consistent matching methodology to all companies. Grade: With respect to grades, the petitioners disagree with Dongbang's extremely narrow grade designations. Specifically, the petitioners point out that Dongbang uses several codes to represent grade 304 and argue that a slight change in chemical composition should not warrant a "new" grade but rather should be considered as belonging to the same grade "family." Therefore, the petitioners request that the Department group all grades with similar chemical contents within one "family" of grade. With respect to defining grades, Dongbang contends that it has been the Department's established practice to rely on the chemical content ranges to set boundaries for product matching purposes. To support its position, Dongbang cites to the Final Determination of Sales at Less Than Fair Value: Stainless Steel Wire Rod from Korea, 63 FR 40405 (July 29, 1998), where, for purposes of the analysis, AISI grades were not collapsed with non-AISI grades based on their varying chemical content ranges. In addition, Dongbang argues that the statute and regulations require the Department to focus on differences in "physical characteristics." To support its position, Dongbang cites to section 771(16) of the Tariff Act of 1930, as amended ("the Act"). According to Changwon, because differences in chemical content are a significant determinant in physical characteristics of SSBs, the Department appropriately examined the differences in chemical content when distinguishing grades of subject merchandise for product matching purposes in the preliminary determination. Size: With respect to size, the petitioners allege that Changwon's proposed size groupings are based mainly on differences in the general and final finishes of the product which are already taken into account by using these characteristics in the model matching criteria. Furthermore, the petitioners argue that Changwon did not provide justification for its size groupings nor support its size groupings with differences in its normal records. Therefore, the petitioners argue that the Department should reject Changwon's proposed size groupings in favor of the three groupings set forth in the Department's questionnaire for cost of production purposes and use the actual product size for price-to-price comparisons. Further, the petitioners maintain that the Department twice requested Changwon to report its costs according to the size ranges as shown in the original questionnaire and that Changwon, despite not maintaining size ranges in its books and records, continued to report its cost databases using its own proposed size ranges. Thus, for cost purposes, the petitioners request that the Department collapse Changwon's reported size ranges in accordance with the Department's questionnaire instructions where possible and to apply an adverse inference where not possible. With respect to Dongbang's price-to-price comparisons, the petitioners request that the Department continue matching using actual size, as was done in the preliminary determination. Changwon responds that it had to create additional size ranges because it produces many sizes of SSBs greater than 25.4 millimeters in size (i.e., the largest range defined by the Department). Changwon maintains that its proposed four size groupings are needed to differentiate among the large and very large bars that Changwon produces. According to Changwon, these additional size categories are needed not only to account for the different production processes required for the larger bars but also to capture the resulting varying product characteristics. Changwon notes that the petitioners did not provide any rationale supporting their request for combining all sizes above 25.4 millimeters into one category. Changwon argues that it is not logical to create a different bar size range for bars roughly one half-inch apart (i.e., the equivalent of 12.7 millimeters), then lump together everything above 25.4 millimeters, where the spread in size is much more significant. Therefore, Changwon urges the Department to use the size ranges it provided for bar sizes larger than 25.4 millimeters. Department's Position: Where specific issues concerning product characteristics and matching have been raised by the parties in this investigation, we have addressed them below. General Finish: With respect to the general finish product characteristics of the Department's matching criteria, the Department's questionnaire recognizes two types: hot-finished and cold-finished. Changwon reported a third type of finishing category (i.e., forged) that was not listed in the Department's questionnaire. We agree with the respondents that, during verification, we verified that forging is a different production process (involving a reheated ingot) than for example a rolling process (involving a cold-drawn billet or bloom) (see Changwon's VR at 14). However, we also agree with the petitioners in that the SSBs that undergo a forging versus any other hot-rolling process do not present unique product characteristics not yet captured by the Department's established product matching hierarchy. We reviewed the information on the record and continue to find no basis on which to distinguish between hot-rolling and hot-forging because we continue to believe that there is not sufficient evidence that these processes yield different properties that result in different physical characteristics of the subject merchandise. Grade: With respect to the grade characteristic of the Department's matching criteria, we have continued to accept Dongbang's distinctions in grade based on each different chemical composition within a grade "family" in accordance with the Department's April 3, 2001, instructions. In its April 3, 2001, letter the Department sent respondents in all SSB investigations additional detailed instructions regarding the reporting of grade. First, the Department requested that the respondents report the applicable AISI grade for each of their U.S. and home market sales, or, if no AISI grade was applicable, the relevant grade. Second, the Department asked that the respondents sequentially order these grades so that the most similar grades fall closest to each other in the order. Third, the Department instructed each respondent to complete tables providing for each U.S. grade their three most similar home market grades based on chemical composition. Fourth, the Department also requested that the respondents provide a table identifying the chemical composition (i.e., chemical content range) of each grade, and report each grade with unique chemical composition as a separate code, regardless of whether it was an AISI or other internationally recognized grade (i.e., as defined by international steel agencies) or an internal grade (i.e., a grade definition based on a chemical composition unique to the manufacturer) in the same family. While, in some instances, the respondents did use various codes for grades within a particular grade "family" (e.g., grade 304), the coding was designed in such a way that all variations within that grade family, whether due to differing international standards or internal grade variations based on differing chemical composition, were assigned code numbers closely grouped together. As a result, the first, second and third most similar grades within the 304 grade group would be matched among each other prior to being matched to another grade classification (e.g., 304L). In addition, the tables provided by the respondents identifying the chemical composition of each grade allowed the petitioners and the Department to review respondents' grade coding. Furthermore, we verified that each respondent's grade coding system was consistent with our instructions and was reasonable based on chemical composition (see, e.g., Dongbang VR at 9). Therefore, we find that Changwon, as well as Dongbang, has provided the grade information in the manner in which it was requested by the Department, and consequently have continued to accept their grade designations for purposes of the final determination. Size: With respect to the size characteristic of the Department's product matching criteria, the Department provided respondents with three size ranges for cost reporting purposes and required the respondent to report actual size for sales reporting purposes. The cost size ranges are as follows: "01" = less than or equal to ½ inch (12.7 mm); "02" = greater than ½ inch or equal to 1 inch (25.4 mm); and "03" = greater than 1 inch. Therefore, size ranges "01" and "02" each covered a 12.7 mm size increment while the upper limit of size "03" was undefined. In a supplemental questionnaire dated June 8, 2001, the Department informed the respondents that they could report sizes in accordance with their normal books and records. However, if costs were not differentiated by size in their normal books and records, then the Department required that the three specific size ranges should be used. Based on our verification findings, Changwon is a producer of very large SSBs. On the other hand, Dongbang produces mainly the smaller sized bars. As a result, the production processes, equipment facilities, and the resulting SSBs produced by the two Korean respondents are very different. Together they cover a large array of product characteristics with only a small area of overlap between the two companies. With respect to Changwon's size reporting for cost purposes, the company did use the first two size ranges provided by the Department, even though size range codes "01" and "02", as defined by the Department, did not necessarily follow its different production processes due to size. Because size varies significantly for Changwon when producing bars of 25.4 mm or greater, however, Changwon created four additional size ranges and defined the range limits based on differences in the production processes required to produce each category of the larger size bars even though these additional size ranges were not recognized in its normal books and records (see Changwon's VR at 15-16). Dongbang, on the other hand, reported size ranges based on the Department's three size ranges as well as five size ranges it designated to be appropriate which were not recognized in its normal books and records but rather based on its production processes. However, in Dongbang's case, the size ranges provided in the Department's questionnaire were adequate since the company does not produce large size bars. Accordingly, we have used the size ranges included in the Department's questionnaire for this respondent, not the five size ranges originally proposed by Dongbang. In Changwon's case, however, given the large sizes of SSBs produced by the company, range "03" appears much too broad to properly distinguish among products with sizes in that range. Therefore, we agree with Changwon that range "03" needs to be further defined. In addition, we also agree with Changwon that the various production processes which the larger bar sizes undergo establish natural and logical size ranges. Therefore, we have continued to accept the size ranges proposed by Changwon for cost purposes in the final determination. With respect to price-to-price comparisons, we agree with the petitioners and continue to use actual size (versus size ranges). While this issue was not raised extensively in this investigation, certain other respondents in the concurrent SSB investigations have variously argued that since the Department has allowed companies to group products into size ranges for purposes of reporting their COP, the Department should redefine its exact size product matching characteristic by using some form of size ranges. Since these arguments by respondents are similar, we are addressing them collectively. These respondents first argue that since the Department has collected all of the product characteristics and cost information at the disaggregated level, there is no technical impediment to redefining product characteristics using some form of ranges. Secondly, they argue that the Department identified "comparable merchandise" when it defined its size ranges for cost reporting purposes and determined that it would treat stainless steel bar products within these size ranges as identical or virtually identical. Thus, once the comparable merchandise is identified, pursuant to 19 CFR 351.414(d), the Department should have compared the average prices within one size range sold in the United States to those in the same size range in the home market. Lastly, respondents cite to SKF USA Inc. v. United States, 263 F.3d 1369, 1382 (Fed. Circ. August 24, 2001) ("SKF") as holding that "Commerce cannot give the term 'foreign like product' a different definition (at least in the same proceeding)." We disagree with respondents that the Department has used different definitions of foreign like product in the same proceeding and that we should make the price comparisons based on the size product groupings used for the cost of production analysis. Section 771(16)(A) of the Act defines "foreign like product" as merchandise that is "identical in physical characteristics." The Department reviewed comments by parties to these investigations prior to defining six physical characteristics of stainless steel bar that it considered appropriate for model matching criteria. Section 777A(d)(1)A)(i) of the Act specifies that the Department compare "the weighted average of the normal values to the weighted average of the export prices (and constructed export prices) for comparable merchandise." In the Preliminary Determinations in these investigations, the Department's price averaging groups were defined by the six physical characteristics reported by each respondent, although some modifications may have been made by the Department on a case-by-case basis. It is significant to note that EP (and CEP) and NV prices were defined by the exact same physical characteristics reported by a respondent, meaning that the same definition of foreign like product was used for both price averaging groups. With respect to respondents' arguments that different definitions were used to define the "size" physical characteristic for price averaging and cost reporting, we note that the preamble to the Department's regulations (61 FR 7339) states that "the Department's practice is to calculate costs consistent with the model matching criteria it develops at the outset of an investigation or review, after having received the views of the interested parties. The product categories developed in such fashion generally account for significant differences in actual costs affecting price. The Department intends to continue this practice because it prevents any manipulation of the cost analysis through changes in internal product classifications." Thus, while we take the model match (product definition) criteria into account in determining the appropriate methodology for reporting cost, this does not mean that in every case we can or must calculate a unique cost for every unique product (CONNUM) identified by our product definition criteria. Nor does it mean that if we accept or adopt a cost methodology that yields the same cost for two products, we must consider those two products to be a single product (CONNUM), or a single foreign like product for model matching purposes. Finally, we disagree with the specific argument that the Department's use of size ranges for cost reporting purposes results in or is based on the use of a different definition of foreign like product. For purposes of reporting costs, the Department instructed the respondents to follow the 3 size ranges proposed by the Department, with the significant caveat that if the company's normal books and records differentiate the production costs associated with size using slightly different ranges, and the company wished to report cost using company-specific ranges, then they should contact the Department. See, Memorandum to Susan Kuhbach and Louis Apple "Selection of Model Matching Criteria for Purposes of Issuing the Antidumping Duty Questionnaire," dated February 20, 2001. The Department initially created the 3 size ranges for reporting costs in recognition of its experience in SSB bar cases that respondents may not keep their cost records by specific sizes and that costs generally do not vary within specific ranges of sizes. The Department also recognized that companies that do record their costs by internally unique size ranges, may use cost ranges different than those proposed by the Department, thus the caveat that such companies "should contact the Department." Certain companies did indeed contact the Department on this issue, which led the Department to revise its size reporting requirements for these companies with respect to cost: "The original cost questionnaire requested that parties contact the Department if they planned to depart from the designated size ranges. Therefore, for clarification and consistency between companies we request the following. Your reported per-unit COPs and CVs must account for cost differences between shapes (e.g., rounds, flats, rectangles, etc.). For size differences within shapes, you must follow the size categories from your normal books and records (i.e., inventory valuation or existing cost accounting records). If you do not differentiate costs by size in your normal books and records then you must use the ranges identified by the Department in the original questionnaire. See, Dongbang Supplemental Section D Questionnaire, dated June 8, 2001, at 3. Thus, for cost reporting purposes, these companies were advised to follow the size categories maintained in their ordinary books and records. The record in these investigations shows that parties complied with these instructions by reporting their costs based on exact sizes, company- specific size ranges or the Department's size ranges. Unless adjustments to a particular respondent's cost size ranges were warranted based on the results of verification (as explained above for Changwon) or other information on the record, it is reasonable to conclude that respondents have reported their costs for specific sizes on as specific a basis as possible for that company, whether that is exact size, company size range, or the Department's alternative size range. Thus, where a respondent reported cost by size ranges, the cost for any specific range corresponds to the exact cost for any specific size within that range, and we have not applied different definition of foreign like product in defining price averaging groups and in calculating cost. Comment 2: Duty Drawback The petitioners argue that EP may be increased by the amount of rebated import duties only where two criteria are both affirmatively demonstrated: (1) the import duty and rebate must be directly linked to, and dependent on, one another; and (2) there were sufficient imports of the imported material to account for the duty drawback received for the export of the manufactured product. To support their position, the petitioners cite to the Notice of Final Determination of Sales at Less Than Fair Value: Steel Wire Rope from India, 66 FR 12759 (February 28, 2001) and accompanying Issues and Decision Memorandum. The petitioners point out that this two- prong test used by the Department was upheld by the Court of International Trade in Viraj Group, Ltd. v. United States, Slip. Op. 01-104 at 19 (Ct. Int'l Trade Aug. 15, 2001) ("Viraj Group"). With respect to Changwon and Dongbang, the petitioners allege that, although each company demonstrated at verification that the amount it reported as duty drawback corresponded to an amount of duty drawback paid and received, it did not demonstrate that total drawback received during the POI was equally allocated to all export sales (i.e., to U.S. and other export markets) nor that the duties paid on imports were sufficient to justify the duty drawback received upon export. Furthermore, the petitioners argue that each company did not establish a direct link between the duty paid and the rebate received and, consistent with agency and judicial precedent, the Department cannot allow either company a duty drawback adjustment. With respect to Changwon, the petitioners note large unexplained variations among its reported grade-specific duty drawback amounts and raise the possibility of data manipulation. With respect to Dongbang, the petitioners highlight that Dongbang's duty drawback ratio was based on a fixed percentage which decreased during the POI. As such, the petitioners cite to Viraj Group where the Court of International Trade upheld the Department's rejection of duty drawback when paid on a "pre-established determination of import content that fail{s} to link the rebate to the import duty actually paid" (see Viraj Group, Slip. Op. 01-104 at 16, 20). Changwon responds that its drawback system is the same system as the Korean drawback systems the Department previously verified in connection with numerous other Korean cases. Changwon maintains that in those other cases, the Department consistently found that the Korean drawback system establishes a linkage between the import duty and the rebate. Furthermore, Changwon argues, the documents themselves demonstrate linkage. The import permit (the total quantity of which can only be used once) provides confirmation that the exporter actually imported a sufficient quantity of raw material to justify the duty drawback claim. Therefore, Changwon argues that the data on the record of this proceeding demonstrates that drawback received on Changwon's exports is linked to and cannot exceed the amount of duty paid by Changwon on its imports. Changwon also explains that some sales may have limited drawback amounts because the import permit quantities had already been fully used. In such cases, the actual drawback received and reported was less than the theoretical amount that might have been claimed if drawback had been allowed in excess of the duties actually paid on imports. Dongbang states that it uses an abbreviated duty drawback procedure available for small- and medium-sized companies to avoid excessive paperwork. Dongbang argues that the Indian Duty Entitlement Passbook program upheld by the Court of International Trade in Viraj Group is different from the Korean duty drawback system used by Dongbang in that the Indian system granted duty drawback according to a fixed percentage based on a pre-determined import content for export merchandise. According to Dongbang, obtaining duty drawback through the abbreviated Korean system is different in that the Korean system sets the drawback rate based on the rebate ratio of other exporters who receive duty drawback and is based on actual usage quantity of imported raw material. Finally, in support of its argument, Dongbang cites to Color Television Receivers from Korea, 51 FR 41365, 41368-69 (November 14, 1986), in which the Department accepted the fixed rate duty drawback claim where the rate was set based on actual usage because the Department found this method to be a reasonable estimation of the duties paid upon importation. Therefore, Dongbang argues that the Department should continue to accept Dongbang's duty drawback claim. Department's Position: The first prong of the Department's two-prong test requires the Department to analyze whether the foreign country in question makes entitlement to duty drawback dependent upon the payment of import duties. This ensures that a duty drawback adjustment will be made only where the drawback received by the manufacturer is contingent on import duties paid or accrued. The second prong requires the foreign producer to show that it imported a sufficient amount of raw materials (upon which it paid import duties) to account for the exports, based on the amount it claimed in rebates (see Notice of Final Determination of Sales at Less Than Fair Value: Steel Wire Rope from India, 66 FR 12759 (February 28, 2001) and accompanying Issues and Decision Memorandum at Comment 4). With respect to the first prong of the test, we find that both respondents provided ample documentation during verification showing that the import duty paid and rebate granted are directly linked to, and dependent on, one another. We examined the full range of documents which demonstrate both the requirements of Korea's duty drawback program and both respondents' applications (see Dongbang VR at 24 and Changwon VR at 38). We traced the drawback amount to proof of payment and found no discrepancies. Specifically, during Changwon's verification, we tested the duty drawback applicable to both export sales and local export sales (see Changwon's VR at 38). During Dongbang's verification, we reviewed the Korean law explaining the usage ratio for duty drawback and how the government insures that no overpayment is incurred in the process (see Dongbang's VR at 24). With respect to the second prong of the test, we are also satisfied that the documentation (e.g., the import permit for raw material, the certificate of raw material used, the duty drawback application) and explanations provided to us by the respondents at verification are sufficient proof that the Korean government requires companies to demonstrate the quantity of imported material used in the production of subject merchandise, the applicable duties assessed upon those imports, and the total quantity of exported merchandise required to obtain duty drawback. While Dongbang uses the abbreviated form of the Korean duty drawback method, it still must report information to the Korean government regarding actual import duties paid on inputs used to produce the exported merchandise (i.e., SSBs) for which it claims drawback (see Dongbang's VR at 24). Therefore, we find that the Korean system is different from the Indian system in that the Korean system sets the drawback rate based on the actual usage quantity of imported raw material. Consequently, we have used Changwon's and Dongbang's reported duty drawback amounts, as verified, in our final analysis. Comment 3: Application of Major Input Rule With respect to Changwon, the petitioners argue that Changwon failed to report billets as a major input for producing the finished product. Accordingly, because Changwon failed to supply all of the necessary information for the major input analysis, the petitioners argue that the Department should apply the major input rule for all inputs supplied from its affiliate, Pohang Iron and Steel Co., Ltd. ("POSCO"), where possible, or apply an adverse inference when the necessary information is not available. In addition, the petitioners request that the Department apply the major input rule on the other affiliated supplier inputs. With respect to Dongbang, the petitioners urge the Department to continue applying the major input rule to Dongbang's purchases of raw material from its affiliate by using the higher of Dongbang's affiliate's COP, transfer price or market price. The petitioners argue that Dongbang did not cooperate with the Department because it provided only the higher of the transfer price and COP but failed to include market price, despite the Department's repeated requests for that information. In addition, the petitioners allege that Dongbang's transfer prices were not consistent with market prices. Therefore, the petitioners argue, the Department correctly made an adverse inference in the preliminary determination in raising Dongbang's raw material costs obtained from its affiliate to market price and urge the Department to continue doing so in the final determination. Changwon responds that it did not report data on its billet purchases from POSCO because those billets represented only a very small percentage of the cost of manufacture ("COM"). Since Changwon calculated and reported an average cost per CONNUM, Changwon argues that the average cost for all billets purchased from POSCO would represent a very small portion of the total cost and therefore billets are not major inputs. For the remaining major inputs (i.e., other than billets), Changwon states that, contrary to the petitioners' claim, it has reported all the necessary cost and price information which was examined by the Department at verification. In addition, Changwon states that no adjustment is warranted for those inputs since the transfer prices for all inputs were equal to market value and/or above the supplier's cost, as verified by the Department. Dongbang argues that the petitioners' argument and the preliminary determination fail to take into account the fact that Dongbang's purchase of raw materials from unaffiliated suppliers does not reflect the same mix of grades of raw material as Dongbang's purchases of raw materials from its affiliate, Dongbang Special Steel Ltd. ("DSS"). To avoid this distortion, Dongbang argues, the Department should compare DSS's COP with the price of raw material purchased from unaffiliated suppliers, on a grade-specific basis rather than on an aggregate basis. Finally, Dongbang states that of the four grades it purchased from unaffiliated suppliers during the POI, only two were used in the production of subject merchandise and for both of those grades, the reported unit cost exceeded the transfer prices Dongbang paid to unaffiliated suppliers. Therefore, Dongbang requests that, for purposes of the final determination, the Department use the cost of raw material as reported, without any adjustments. Department's Position: With respect to Changwon's non-reporting of billets as part of COM, we agree with respondent. The simple fact that certain elements in the build- up of Changwon's cost were provided by affiliated parties does not, ipso facto, lead to the conclusion that the major input rule applies. That is, the Department must consider whether the portion of all inputs obtained from affiliates are "major" as a prerequisite for applying the major input rule. The reason the Department examines the cost of production relating to affiliated-party transactions for only "major" inputs is clear. As the Statement of Administrative Action ("SAA") notes, section 773(f)(3) of the Act was added "to address diversionary input dumping by authorizing Commerce to inquire whether the transfer between 'related' persons (i.e., 'affiliated' persons under section 773(f)(3)) of such an input is at a price below the input's production cost. H. Rep. 576, 100th Cong., 2d Sess. 595 (1988)." H. Doc. 316, 103d Cong., 2d Sess. 838 (1994)("SAA"). The ability for respondents to engage in "diversionary input dumping" is negated if the portion of the total production costs accounted for by affiliated-party transactions is minimal. In this case, petitioners have not specifically argued that the affiliated-party transactions in question are sizeable enough to be considered major. In fact, record evidence compels the Department to conclude that the cost of billets procured from the affiliated supplier, as a percentage of COM, are insignificant (see Changwon VR at Cost Exhibit 20). Therefore, we have not applied the major input rule methodology to billets due to the specific facts of this case. With respect to the other affiliated party inputs questioned by the petitioners, we did apply the major input rule, where appropriate (see Changwon's VR at 20). In the preliminary determination, the Department adjusted Dongbang's reported cost of direct material purchased from its affiliate DSS because the reported costs reflected the higher of DSS's COP and transfer price, but not market price. The total reported market price for the POI, as shown in Exhibit SD-5 of Dongbang's Supplemental Section D response, dated June 29, 2001, was an aggregate and not a grade-specific price. Since the reported market price of all grades purchased during the POI, on average, was higher than the average transfer price or COP reported, the Department had no market price alternative other than to use the amount provided in Exhibit SD-5. Therefore, the Department increased Dongbang's reported material cost by applying a ratio based on the total average price of raw materials purchased from unaffiliated suppliers over the total average COP of the raw materials purchased from DSS. During verification, Dongbang provided the Department with DSS's COP, transfer prices and market prices, where available, of raw material on a grade-specific basis. Because a grade-specific raw material price comparison is less distortive, for purposes of the final determination, we have applied the major input rule using the verified grade-specific data provided by Dongbang at verification. Specifically, we compared Dongbang's reported raw material prices against the highest of market price, transfer price or COP, where possible, and compared them against the higher of DSS's COP or transfer price, when no market price purchases were available for a specific grade. However, for those grades where market prices were available, the above-described grade-specific analysis resulted in an insignificant difference between affiliated and unaffiliated party purchases (see Dongbang Calculation Memo for further calculation details). Therefore, in accordance with 19 CFR 351.413, we made no adjustment to Dongbang's reported raw material costs, as revised based on verification findings. Comment 4: Ministerial Errors For both Changwon and Dongbang, the petitioners reiterated their ministerial error allegations made in their August 6, 2001, ministerial error allegation submissions. The respondents did not respond to the petitioners reiteration of the ministerial error correction request in their case or rebuttal briefs. Department's Position: For the final determination, we have corrected the ministerial errors identified in the Department's Ministerial Error Allegation Memorandum. Specifically, for Changwon, we adjusted NV by adding interest revenue (rather than deducting it) and corrected for the Department's inadvertent error of setting home market credit expenses to zero in the SAS program. We reclassified Changwon's sales through its U.S. affiliate, POSAM, as CEP sales (see Comment 5 below). We also made an additional correction to account for the omitted duty drawback adjustment related to local export sales. For both Changwon and Dongbang, we adjusted NV by adding (rather than deducting) the cost of U.S. packing. COMPANY-SPECIFIC ISSUES Changwon Comment 5: Treatment of Changwon's US sales Made through POSTEEL's U.S. Affiliate Changwon argues that the Department's treatment of Changwon's sales to the U.S. market made through POSTEEL's U.S. affiliate, Pohang Steel America Corp. ("POSAM"), as CEP sales in the preliminary determination is not consistent with the requirements of the statute. The statutory definition of "export price" and "constructed export price," Changwon argues, indicates that sales are classified as EP or CEP based on the identity and location of the actor by whom the merchandise was first "sold or agreed to be sold". To support its position, Changwon cites to sections 772(a) and (b) of the Act. Changwon maintains that, since the SSB was first "agreed to be sold" by Changwon, the Korean producer, the Department has to reconsider its analysis of this issue to conform to the statutory requirements. The petitioners respond that Changwon's proposition would require the Department to ignore all final sales activities between POSAM and the U.S. customer and focus instead on Changwon's initial discussions with U.S. customers as representative of the sale. The petitioners cite numerous precedent supporting the Department's preliminary decision (1) to classify those sales as CEP. The petitioners also argue that, in addition to this ample and very specific precedent, it is a fact that POSAM executes contracts in the United States with U.S. customers and that it takes title to the imported merchandise and collects payment. These facts, the petitioners argue, are the relevant aspects of the Department's analysis and support a CEP classification. Department's Position: In order to determine whether Changwon's sales through its U.S. affiliate, POSAM, are EP or CEP sales, we carefully examined the totality of circumstances surrounding Changwon's U.S. sales process for those sales. In particular, we reviewed this channel of distribution as described below. In general, we verified that during the POI Changwon (located in Changwon City, Korea) sold the subject merchandise to its affiliate POSTEEL (located in Seoul, Korea) which in turn sold it to its affiliate POSAM (located in New Jersey, USA). POSAM then sold the subject merchandise to the first unaffiliated U.S. customer (see Changwon's VR at 25). Specifically, for U.S. sales made only through POSAM, the U.S. customer first issues a price inquiry to POSAM. Based on the U.S. customer's inquiry, POSAM subsequently sends POSTEEL a firm bid. POSTEEL then reviews the pricing information with Changwon. Ultimately, Changwon is the entity that sets the final price or sends a counter-offer through POSTEEL and POSAM, because Changwon typically does not contact the unaffiliated U.S. customer directly (see Changwon's VR at 25). For these sales, Changwon sends POSTEEL the mill certificate and the shipping company sends POSTEEL the bill of lading. POSTEEL is responsible for shipping the merchandise from Changwon's factory to the Korean port and then for arranging shipment to the U.S. port. POSTEEL issues its invoice to POSAM for payment of the goods. POSAM takes title to the goods once it pays POSTEEL for the goods. POSAM then issues its sales invoice to the unaffiliated U.S. customer and collects payment for the goods (see Changwon's VR at 25). Having reviewed the evidence on the record of this investigation regarding respondent's reported EP sales, we conclude that sales between the foreign producer (i.e., Changwon) and the U.S. customer were made "in the United States" by POSTEEL's U.S. affiliate on behalf of Changwon within the meaning of section 772(b) of the Act, and, thus, should be treated as CEP transactions (see AK Steel Corp., et al. v. United States, 226 F.3d 1361, 1374 (Fed. Cir 2000) ("AK Steel ")), even though Changwon has the final price setting authority (see also Cold-Rolled and Cold- Resistant Carbon Steel Flat Products from Korea, Final Results of Administrative Review, 65 FR 13359 (March 13, 2000) and accompanying Decision Memorandum at Comment 12. Specifically, although Changwon initially reaches the agreement with the U.S. customer on the estimated overall volume and pricing of merchandise through POSTEEL and its U.S. affiliate POSAM, the final documents are executed by POSAM in the United States. See respondent's March 20, 2001 section A response at A14-18. Therefore, we continue to treat Changwon's reported EP sales through POSTEEL and POSAM as CEP sales in the final determination. (See Polyvinyl Alcohol from Japan: Preliminary Results of Antidumping Duty Administrative Review, 66 FR 11140 (February 22, 2001) (where the Department determined that pursuant to AK Steel sales through a U.S. affiliate were made "in the United States" and were therefore classifiable as CEP transactions), as upheld by Polyvinyl Alcohol from Japan: Final Results of Antidumping Duty Administrative Review, 66 FR 29286 (May 30, 2001).) Comment 6: CEP Offset Adjustment for Changwon's CEP sales Changwon argues that, if the Department continues to treat its sales through POSAM as CEP sales, a level-of-trade ("LOT") adjustment is warranted under the CEP offset provision of the statute to account for differences between the actual LOT of the home-market sales and the constructed LOT of the U.S. sales. Changwon explains that by "constructing" an EP, the Department deducts all direct selling expenses incurred by Changwon and POSAM and all indirect selling expenses incurred by POSAM from the U.S. prices POSAM charged to its U.S. customers. Changwon further states that Changwon and its affiliates provide certain direct sales services (such as extending credit and providing warranties), as well as indirect service activities, to home market customers and to unaffiliated U.S. customers. According to Changwon, if the Department were to simply compare the LOT of its home market sales to the LOT of its U.S. sales through POSAM, the Department would find that a LOT adjustment is not appropriate since the LOT is equivalent in both markets. Changwon argues, however, that this analysis does not account for the fact that while the U.S. price now no longer includes, for example, the cost of extending credit or providing warranties (and as such is reflective of a lower LOT), the NV still includes those selling expenses and therefore is reflective of a higher LOT. The petitioners argue that the record shows that POSAM behaves exactly like any other U.S. customer in dealing with Changwon, in that it transmits purchase orders and payments through POSTEEL, which then invoices the U.S. customer. In addition, the petitioners point out that credit and warranty expenses are generally direct expenses and, therefore, an adjustment is made for them regardless of whether a sale is classified as EP or CEP. The petitioners further state that the only additional U.S. selling expenses relative to Changwon's sales to POSAM are for "Freight and Delivery Arrangement" expenses which are also deducted from the starting price for EP and CEP sales. Finally, the petitioners cite to precedent involving POSAM in which no CEP offset was warranted. In support of their position, the petitioners cite to Stainless Steel Plate in Coils from the Republic of Korea: Preliminary Results of Antidumping Duty Administrative Review, 66 FR 30699 (June 7, 2001). Department's Position: In the preliminary determination, we found Changwon's EP and CEP sales to be at the same LOT as that of the home market, and therefore did not grant any LOT or CEP offset adjustment. (For a detailed discussion of our preliminary LOT determination, see Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement Final Determination: Stainless Steel Bar from Korea, 66 FR 40222 at 40226 (August 2, 2001).) Specifically, we found that in comparing the EP/CEP LOT, after making the appropriate deductions under section 772(d) of the Act, against the home market LOT, we noted that the same selling activities at the same level of intensity are performed in both markets (see Preliminary Determination at 66 FR 40226-40227). No additional information has come to our attention since the preliminary determination to warrant a reversal of our preliminary decision. Furthermore, we agree with the petitioners that adjustments would be made for the expenses associated with the selling functions referred to by Changwon (i.e., extending credit and providing warranties) as direct selling expenses regardless of whether the Department treated these sales as EP or CEP. In addition, other than the two selling functions mentioned by Changwon, the respondent has not demonstrated that the home market LOT is at a more advanced LOT than the U.S. LOT. Since we found that there is no compelling information on the record which would reverse our preliminary LOT determination, we conclude that since we are matching EP and CEP sales to sales at the same LOT in the home market, Changwon does not qualify for a LOT adjustment or a CEP offset adjustment pursuant to section 773(a)(7)(A) or (B) of the Act. Comment 7: Interest Rate Selection The petitioners contend that the Department discovered at verification that Changwon had incorrectly reported its U.S. imputed credit interest rate using non-U.S. borrowings. Therefore, the petitioners request the Department to make an adverse inference on Changwon's U.S. interest rate for purposes of calculating imputed credit for U.S. sales. Changwon maintains that the Department did not find any errors in the reported U.S. interest rate calculation for Changwon or POSAM. Changwon states that while it originally used POSTEEL's short-term borrowings to calculate the U.S. interest rate, in preparing for verification POSTEEL discovered that it did not have any U.S. borrowings because all of its borrowings were in a foreign currency, not in U.S. dollars. Changwon states further that it discovered this error at the beginning of verification and proposed using the average U.S. prime rate instead for calculating this expense. Department's Position: Exhibit C-12 of Changwon's April 17, 2001, section B&C questionnaire response ("BCQR") details how Changwon calculated its imputed credit expenses based on the particular channel of distribution. For Changwon's U.S. sales made directly through unaffiliated trading companies to unaffiliated U.S. customers and for sales made through POSTEEL to unaffiliated trading companies, Changwon stated that it calculated imputed credit expenses based on the outstanding balance and interest amount paid on Changwon's foreign currency short-term borrowings in effect during the POI (see BCQR at page 67 and Exhibit C-12.) At the beginning of verification, however, Changwon stated those borrowings were really based on POSTEEL's non-U.S. short-term borrowings (see Changwon Sales Verification Exhibit 16). Consequently, at verification Changwon provided the Department with a revised U.S. borrowing rate obtained from the Federal Reserve Bank and based on short-term borrowing rates in effect during the POI. This Federal Reserve rate is 8.95 percent. We also note that Dongbang, the other respondent in this investigation, also did not have a specific U.S. borrowing interest rate and therefore used the same short-term U.S. interest rate of 8.95 percent, in effect during the POI, for its imputed credit calculations. The use of this rate has not been disputed by the petitioners in Dongbang's case. The Statement of Policy in the Import Administration Policy Bulletin 98.2, dated February 23, 1998, reads as follows: "For purposes of calculating imputed credit expenses, we will use a short- term interest rate tied to the currency in which the sales are denominated. We will base this interest rate on the respondent's weighted- average short-term borrowing experience in the currency of the transaction. In cases where a respondent has no short-term interest borrowings in the currency of the transaction, we will use publicly available information to establish a short-term interest rate applicable to the currency of the transaction... For dollar transactions, we will generally use the published average short-term lending rate calculated by the Federal Reserve to impute credit expenses." Therefore, in accordance with the Department's stated policy, we have accepted Changwon's correction of its U.S. interest rate and its use of the 8.95 percent rate as a publicly available rate for purposes of calculating imputed credit expenses incurred on U.S. sales made directly through unaffiliated trading companies to unaffiliated U.S. customers or through POSTEEL to unaffiliated trading companies. We note further that the interest rate used to calculate imputed credit expenses for sales made through Changwon's other channel of distribution (i.e., sales through Changwon's U.S. affiliate POSAM) was verified without discrepancy (see Changwon VR at Sales Exhibit 16). Comment 8: G&A Expenses The petitioners argue that Changwon inappropriately offset its G&A expenses with a gain on the disposal of marketable securities in the minor correction presented on the first day of verification. Furthermore, the petitioners note that gains on securities should not be allowed as offsets to G&A expenses. The petitioners argue that Changwon did not provide an explanation or justification for this change; therefore, the offset should be disallowed. The petitioners also question several expense items (i.e., amortization of intangible assets and amortization of discounts on bonds issued) appearing in Changwon's cash flow statement that were not included in the G&A numerator and do not appear to have been reported elsewhere in the response. The petitioners request that the Department add those expenses to the G&A numerator. Changwon responds that, as explained during verification, the "gain on the disposal of marketable securities" reflects a gain on its money market fund, which is a form of short-term interest income. According to Changwon, the expense at issue was not a gain on sales of stock or other investments. Because the gain arose from a short-term deposit of working capital in a money market fund, Changwon contends that it is properly offset against G&A expenses. Finally, Changwon asserts that all expenses have been accounted for and identifies where and how the expenses questioned by the petitioners have been classified (i.e., either in the G&A numerator or in interest expenses). Department's Position: Generally, the Department's policy is to offset financial expenses (not other G&A expenses) with short-term interest income. Therefore, in this case, we disagree with Changwon's argument that short-term gains on marketable securities should be allowed as an offset to the G&A rate calculation. Furthermore, the Department's policy is to calculate the financial expense rate at the highest level of consolidation. Because Changwon's financial expenses were calculated at the consolidated level, any allowable offsets to financial expenses have already been taken at that level. Thus, we disagree with Changwon, and have disallowed the offset to G&A for gains on marketable securities. (For a detailed explanation, see Changwon Calculation Memorandum.) As for the other items questioned by the petitioners, we reconciled the reported costs to the audited financial statements and did not find that these items (i.e., amortization of intangible assets and amortization of discounts on bonds issued) were excluded from the reported costs. Comment 9: Denominator Used to Calculate G&A and Interest Ratios The petitioners suggest that, because Changwon did not remove packing expenses from its cost of goods sold ("COGS"), the Department should use Changwon's COGS on a packing-inclusive basis for its G&A and interest expense ratios when recalculating Changwon's COP and CV. Changwon responds that the Department has data on the record which enables it to calculate a revised COGS on a packing-exclusive basis as well as revised general and interest expense ratios. Department's Position: We agree with Changwon. We have the necessary information to calculate a revised COGS net of packing and therefore have made that revision. In order to recalculate Changwon's revised G&A rate, we deducted packing expenses from Changwon's COGS and divided the revised G&A expense (see comment 8 above) by the revised COGS (i.e., exclusive of packing). We also used the revised COGS (i.e., exclusive of packing) to recalculate Changwon's financial expense rate. As a result of this recalculation, however, we note that Changwon's financial expense percentage does not change (see Changwon Calculation Memorandum for calculation details). Dongbang Comment 10: Treatment of Class II SSB Dongbang contends that a class II type product has distinctively different physical properties than a Class I type product. Those properties (i.e., significant endurance at high temperatures, high hardness or high surface brightness) are acquired through a production process that requires a larger diameter of raw material for the same diameter size of product output than a non-Class II product and inflicts more wear and tear on the machinery. As a result, Dongbang asserts, Class II products incur a higher per-unit cost than non-Class II products and that the Department should distinguish between Class I and Class II products when making its product comparisons. In response to the Department's preliminary finding that Dongbang failed to show Class I and Class II products would constitute a separate grade with respect to chemical composition, citing to section 771(16) of the Act, Dongbang argues that the absence of chemical composition is not dispositive under the statute and the regulations which would require the Department to focus on differences in "physical characteristics." Finally, Dongbang asserts that just because two products have the same chemical composition (e.g., coal and diamonds) this does not mean that they have the same physical characteristics. The petitioners state that Dongbang originally classified its sales of Class II product separately from round products in its reported shape code. In resubmitting its sales databases, Dongbang then reclassified its sales of Class II SSB as being a different grade. According to the petitioners, the Department found at verification that it "did not see any evidence that the chemical composition between a grade 304 Class I and a grade 304 Class II is any different" and therefore the two products should not be classified as separate grades. Department's Position: We disagree with Dongbang that Class II products should be classified as a separate grade. As mentioned in Dongbang's VR at 9, we did not find any evidence that a Class II and a Class I product, of identical grade, reflect any difference in chemical composition. As was clearly indicated in the Department's April 3, 2001, letter regarding grade classification and reporting, we requested all respondents to provide the chemical composition of each grade not only as a defining characteristic of the grade itself but also of the respondent's proposed most similar grade matches. Therefore, because in this case the Department bases the definition of grade on chemical composition, we cannot classify a Class II product to be of a different grade than a Class I product. While we agree that a Class II type product may have distinctive physical properties from a Class I product as a result of employing different production processes, we do not believe that those properties can be classified under any of the product characteristics defined by the Department and commented on by the parties. Further, we do not find the resulting physical property differences to be significant enough to warrant the creation of a new product characteristic to be included in the current product matching hierarchy. Therefore, we have continued to treat both Class I and Class II products of the same grade as identical products with respect to grade for purposes of the final determination. Comment 11: Selection of Cost for Products Which Were Not Produced but Sold During the POI The petitioners urge the Department to apply adverse facts available for the cost of those products sold but not produced during the POI. The petitioners state that even though Dongbang used the most similar control number as a surrogate, it did not explain what the product characteristic differences were with respect to those products not produced during the POI. According to the petitioners, failure to report the cost differences associated with the physical differences between the comparison products is equivalent to comparing two products with different product characteristics and no difmer adjustments. This situation, the petitioners argue, requires the use of adverse facts available. In support of its argument, the petitioners cite to Gray Portland Cements and Clinker from Mexico; Final Results of Antidumping Duty Administrative Review, 64 FR 13148, 13258 (March 7, 1999) (Cement from Mexico) where the Department applied facts available in its final determination because the respondent did not provide information regarding process or production differences attributable to differences in physical characteristics. In Cement from Mexico, the Department noted that section 773(a)(6)(C)(ii) of the Act directs it to "make an adjustment to NV to account for differences in the physical characteristics of merchandise where similar products are compared." The egregiousness of Dongbang's reporting omission, according to the petitioners, clearly warrants the use of adverse fact available. As facts available, the petitioners suggest that all home market products sold, but not produced, during the POI, be considered below the COP. For all U.S. products sold, but not produced, during the POI, where CV is required, the petitioners request the Department to apply the highest transaction-specific calculated margin found for Dongbang's U.S. sales, as facts available. Dongbang asserts that the petitioners' argument is without merit because it informed the Department that it was using a surrogate cost for merchandise sold, but not produced, during the POI. Dongbang cites to the verification report which describes the sample product reviewed during verification. Other than size, Dongbang maintains that the control number reviewed and the surrogate control number "have identical product characteristics". In addition, Dongbang explains that if it had reported actual costs incurred for the production of this merchandise, a reconciliation of costs prior to the POI would have been necessary. According to Dongbang, the Department's established precedent in similar situations is to use the cost of the most similar control number as a surrogate cost. To support its position, Dongbang cites to Certain Cold- Rolled and Corrosion-Resistant Carbon Steel Flat Products from Korea: Final Results of Antidumping Duty Administrative Review, 62 FR 18404, 18429 (April 15, 1997). Department's Position: We agree in part with the petitioners. During the POI, Dongbang sold certain SSB products that were not produced during the POI ("products at issue"). For purposes of reporting the cost of these products, Dongbang used the actual cost of the most similar products which were produced and sold during the POI ("surrogate products") to approximate the cost of the products at issue (see Dongbang's VR at 41). However, it did not account for the cost differences attributable to the physical differences between the products at issue and the surrogate products. Therefore, we find that an adjustment to the respondent's reporting methodology is necessary to account for these cost differences. In making this adjustment, as explained further below, we have used the respondent's verified cost data reported for other products produced and sold during the POI ("similar products") which differ from the surrogate products in the same manner as the products at issue. Contrary to the petitioners' claim, we do not find that the use of adverse facts available is warranted in this case because Dongbang fully cooperated with the Department throughout this investigation and fully complied with the Department's requests for information with respect to this issue. Specifically, we determined the adjustment by calculating a simple average of the difference in variable COM ("VCOM") between the surrogate products and the similar products (see Dongbang Calculation Memorandum for adjustment details). We applied this adjustment to Dongbang's reported costs for the products at issue which were used in our final analysis. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions. If these recommendations are accepted, we will publish the final determination and the final weighted-average dumping margins for the investigated firms in the Federal Register. Agree____ Disagree____ _____________________________________ Faryar Shirzad Assistant Secretary for Import Administration _____________________ (Date) ___________________________________________________________________________ footnote: 1. Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Sheet and Strip in Coils From the Republic of Korea, 64 FR 30664, 30667 (June 8, 1999); Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Plate in Coils from the Republic of Korea, 64 FR 15443, 15445 (March 31, 1999); Certain Cold-Rolled and Corrosion-Resistant Carbon Steel Flat Products from Korea: Final Results of Antidumping Duty Administrative Reviews, 64 FR 12927 (March 16, 1999); AK Steel Corp., v. United States, 226 F.3d 1361, 1374 (Fed. Cir. 2000).