67 FR 12520, March 19, 2002 A-588-825 POR: 8/1/99-7/31/00 Public Document IA/III/VII: TGG MEMORANDUM TO: Faryar Shirzad 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 Oil Country Tubular Goods, Other Than Drill Pipe From Korea: August 1, 1999 through July 31, 2000 SUMMARY: We have analyzed the case and rebuttal briefs of interested parties in response to Oil Country Tubular Goods From Korea: Preliminary Results of Antidumping Duty Administrative Review, 66 FR 46999 (September 10, 2001) ("Preliminary Results"). As a result of our analysis, we have made changes from the Preliminary Results. The specific calculation changes can be found in our "Memorandum from Thomas Gilgunn, Case Analyst, to Dana Mermelstein, Program Manager, Oil Country Tubular Goods, Other Than Drill Pipe From Korea: Analysis Memo for Final Results" ("Final Analysis Memo"), dated March 11, 2002. We recommend that you approve the positions we have developed in the "Discussion of the Issues" section of this Issues and Decision Memorandum. Below is the complete list of the issues in this administrative review: General Issues 1. Freight Revenue and U.S. Price 2. Constructed Export Price Selling Expenses in Korea 3. Date of Sale for SeAH's Third Country Sales 4. SeAH's G&A and Interest Expense 5. SeAH's Warranty Expenses Comment 1: Freight Revenue and U.S. Price SeAH maintains that for certain sales, Pusan Pipe of America (PPA), SeAH's U.S. subsidiary, charged the U.S. customer separately for the freight and product portions of the price. SeAH states that for these sales, PPA was responsible for delivery and incurred a freight expense. In those instances in which the freight and product prices were charged separately, SeAH reported the freight revenue (FRTREVU), added it to the gross unit price (GRSUPRU), and reported the total gross unit price (TGRSUPRU) in the U.S. sales database. SeAH also maintains that it reported actual inland freight from the warehouse to its customer (INLFWCU) in its U.S. sales database. SeAH notes that the sales verification confirmed that freight revenue is part of the price to the customer, and PPA which was responsible for all its U.S. sales, paid for the freight separately. SeAH contends that for certain sales, in the preliminary margin calculation program, both the FRTREVU and INLFWCU were deducted from TGRSUPRU, the starting price for the U.S. price. SeAH argues that this was an error in the calculation of U.S. price, because by deducting both FRTREVU and INLFWCU from TGRSUPRU, the Department effectively double- counted the freight expense which is deducted from TGRSUPRU. Maverick Tube Corporation, IPSCO Tubulars, Inc. and Lone Star Steel Company, and United States Steel LLC (domestic parties) argue that, based on SeAH's explanation of the relationship between FRTREVU and TGRSUPRU, SeAH should have reported INLFWCU for each sale for which it reported FRTREVU as part of TGRSUPRU. The domestic parties further contend that treating GRSUPRU as equal to TGRSUPRU for sales where SeAH has reported FRTREVU as part of TGRSUPRU but has not reported a related INLFWCU would incorrectly inflate the starting point for U.S. price. The domestic parties argue that if the Department treats GRSUPRU as equal to TGRSUPRU for sales where SeAH has reported FRTREVU as part of TGRSUPRU but has not reported a related INLFWCU, the Department must also deduct the INLFWCU. The domestic parties argue that where there is no actual INLFWCU reported, the Department should use adverse facts available to fill the gap in the record for the freight deduction. Department Position: We agree with SeAH, in part. Based upon the facts of the instant case, both the freight revenue (FRTREVU) and inland freight from the warehouse to the customer expense (INLFWCU) should not be deducted from the total gross unit price (TGRSUPRU). Instead, we have added FRTREVU to GRSUPRU to calculate TGRSUPRU and then deducted INLFWCU as part of U.S. movement expenses. However, we agree with the domestic parties that, based on SeAH's explanation of the relationship between FRTREVU and INLFWCU, SeAH should have reported INLFWCU for each sale for which it reported FRTREVU as part of TGRSUPRU. According to SeAH's explanation, its affiliate, PPA, charges FRTREVU to its U.S. customer in order to offset the INLFWCU it incurs to deliver the subject merchandise. However, for certain sales, SeAH reported FRTREVU as part of TGRSUPRU but did not report a corresponding INLFWCU. Using TGRSUPRU as the starting price for these sales would incorrectly inflate the starting price for U.S. price, since SeAH did not report the corresponding INLFWCU expense. At verification, we reviewed certain sales for which SeAH claimed FRTREVU and reported INLFWCU. However, in their rebuttal brief, the domestic parties identified sales for which SeAH reported FRTREVU but did not report a corresponding INLFWCU. For these few sales, we must apply facts otherwise available for dealing with this omission. We disagree with the domestic parties' argument that the Department should apply adverse facts available to fill the gap in the record for the INLFWCU. Section 776 (a) (2) of the Act provides that: If an interested party or any other person-- (A) withholds information that has been requested by the administering authority; (B) fails to provide such information by the deadlines for the submission of the information or in the form and manner requested, subject to subsections (c) (1) and (e) of section 782; (C) significantly impedes a proceeding under this title; or (D) provides such information but the information cannot be verified as provided in section 782 (i), the administering authority shall, subject to section 782 (d), use the facts otherwise available in reaching the applicable determination under this title. Moreover, section 776 (b) of the Act provides that the Department must find that an interested party "has failed to cooperate by not acting to the best of its ability to comply with a request for information," in order to use an inference that is adverse to the interests of that party in selecting from among the facts otherwise available. The omission of INLFWCU affects only a few sales and involves a relatively minor expense. Therefore, we do not consider that an adverse inference is warranted. However, the Department's analysis must take into account that SeAH did not report the INLFWCU associated with the FRTREVU for these sales. Accordingly, as facts otherwise available, to the extent that SeAH did not report INLFWCU to offset FRTREVU, the Department has not included FRTREVU as part of the TGRSUPRU. Comment 2: Constructed Export Price Selling Expenses in Korea SeAH argues that the Department erred in deducting the foreign indirect selling expenses (DINDIRSU) and foreign inventory carrying costs (DINVCARU) incurred by SeAH from U.S. price in the calculation of the net constructed export price (CEP). SeAH contends that these deductions are inconsistent with the Department's practice, as set forth in the preamble to the regulations, the Department's antidumping manual, as well as numerous cases, which limits the deduction for selling expenses to those associated with economic activities occurring in the United States. SeAH contends that it provided all of the information necessary to identify the expenses associated with economic activity in the United States in the form of a selling functions chart listing the activities related to sales and identifying the party responsible for the activity and the degree of involvement. According to SeAH, this chart confirms that PPA was responsible for all selling functions associated with sales to unaffiliated U.S. customers. Further, the chart shows that SeAH's involvement was limited to arranging for delivery of the merchandise to PPA's inventory. Since SeAH provided all of the information necessary to determine which expenses were associated with the sales to the U.S. customer, SeAH urges the Department to correct the inadvertent programming error which resulted in the deduction of foreign indirect selling expenses from U.S. price. The domestic parties argue that SeAH is incorrect in characterizing the Department's practice regarding the deduction of indirect selling expenses and inventory carrying costs incurred in the home market. The domestic parties cite to a decision by the Court of International Trade which, according to the domestic parties, permits the Department to deduct these expenses. The CIT stated that "under the statute, Commerce has the authority to deduct indirect selling expenses that are associated with the sales of exports in the United States from CEP, whether incurred in the United States or the home market." Mitsubishi Heavy Industries v. United States, F4 F. Supp. 2d 1183 (Ct. International Trade 1999). The domestic parties further argue that the Department's regulations, at section 351.402(b), direct the Department in determining whether these expenses should be deducted. The regulations state "[i]n establishing constructed export price under section 772(d) of the Act, the Secretary will make adjustments for expenses associated with commercial activities in the United States that relate to the sale to an unaffiliated purchaser no matter where or when paid. The Secretary will not make an adjustment for any expense that is related solely to the sale to an affiliated importer in the United States." The domestic parties argue that pursuant to the regulations, the Department's practice, as illustrated in Decision Memorandum in Porcelain- on-Steel Cookware from Mexico: Final Results of Antidumping Duty Administrative Review, 65 FR 30068 (May 10, 2000), Comment 3, has been to deduct indirect selling expenses and inventory carrying costs when the expenses relate to the sale to an unaffiliated purchaser. The domestic parties note that SeAH makes no argument and has provided no information showing that the selling functions captured in these two expenses relate to SeAH's sales to PPA, their affiliated reseller, as opposed to PPA's sales to unaffiliated customers in the United States. The domestic parties further note that SeAH failed to respond to specific requests in the Department's questionnaire for information regarding the selling activities performed and services offered in the U.S. and foreign markets by SeAH and its affiliate for both transactions with the affiliated importer and the U.S. affiliate's resales to unaffiliated U.S. customers. The domestic parties argue that the indirect selling expenses which SeAH reported as "Strategic and Economic Planning" are more naturally geared to generating and supporting sales to unaffiliated customers. Finally, the domestic parties argue that the regulations, at section 351.504(b)(1), establish that the burden is on the respondent to document that the selling functions captured in the indirect selling expenses and inventory carrying costs relate solely to affiliated party sales. Because SeAH was the sole possessor of the information needed to establish this fact, and failed to provide the information, the domestic parties argue that SeAH is not entitled to an adjustment to remove these expenses from the CEP deductions. Department Position: We agree with the domestic parties. Pursuant to section 772(d) of the Act, the Department will make adjustments for expenses associated with commercial activities in the United States that relate to the sale to an unaffiliated purchaser no matter where or when paid. As such, the Department's practice has been to deduct foreign indirect selling expenses (DINDIRSU) and foreign inventory carrying costs (DINVCARU) when such expenses relate to the sale to an unaffiliated U.S. purchaser. (See Porcelain-on-Steel Cookware From Mexico: Final Results of Antidumping Duty Administrative Review, 65 FR 30068, (May 10, 2000).) Moreover, we disagree with SeAH's contention that it provided all information necessary to demonstrate the extent to which the expenses covered by DINDIRSU and DINVCARU relate to SeAH's sales to PPA. To the contrary, SeAH has not established that the sales functions covered by DINDIRSU and DINVCARU relate solely to its affiliated party transactions with PPA. While SeAH did submit a list of selling functions identifying those performed by SeAH and those by PPA, this list identified only one selling activity covered by DINDIRSU: "Strategic and Economic Planning," a selling function which we conclude is normally geared toward generating and supporting sales to unaffiliated customers. Section 351.401(b)(1) of the Department's regulations establishes the respondent's burden to document that the selling functions captured in the DINDIRSU and DINVCARU relate solely to affiliated party sales. SeAH failed to provide the information necessary to demonstrate what selling expenses covered by DINDIRSU and DINVCARU should be removed from the deduction to CEP. As such, we will continue to include DINDIRSU and DINVCARU in our deductions from CEP. Comment 3: Date of Sale for SeAH's Third Country Sales The domestic parties argue that the Department should not use purchase order date as SeAH's date of sale for third country transactions. The domestic parties cite the Department's regulations, at section 351.401(i), to support their argument that the invoice date is the appropriate date of sale. The regulation states "[i]n identifying the date of sale of the subject merchandise or foreign like product, the Secretary will normally use the date of invoice, as recorded in the exporter or producer's records kept in the ordinary course of business." While SeAH contends that the purchase order date is more appropriate because the material terms of sale were fixed in the purchase order, and those terms did not change prior to shipment, the domestic parties argue that this is not dispositive of the date of sale. The domestic parties contend that the Preamble to the regulations discusses the fact that "the date on which the terms of a sale are first agreed is not necessarily the date on which those terms are finally established." (See 62 FR 27348-49 (May 19, 1997).) While the material terms of the third country sale were not renegotiated after the purchase order was issued, the domestic parties argue that there was nothing to preclude such renegotiation, and proprietary information in the purchase order itself supports a conclusion that renegotiation was possible. SeAH argues that purchase order date is the proper date of sale for its third country sales. According to SeAH, the regulations at section 351.401(i) provide that the "Secretary may use a date other than the date of invoice if the Secretary is satisfied that a different date better reflects the date on which the exporter or producer establishes the material terms of sale." SeAH cites to the Department's practice of using an alternative date of sale when presented with satisfactory evidence that the material terms of sale are established on a date other than the invoice date, which the Department did in the preliminary results of the instant review. See Certain Large Diameter Carbon and Alloy Seamless Standard Line and Pressure Pipe from Mexico, 65 FR 39358 (June 26, 2000), and accompanying Decision Memo at Comment 2; see also Circular Welded Non-Alloy Steel Pipe and Tube from Mexico, 65 FR 37518 (June 15, 2000), and accompanying Decision Memo at Hylsa Comment 1. SeAH argues, contrary to the domestic parties' claim that renegotiation of sales terms was not precluded after the purchase order date, that such renegotiation of sales terms was explicitly precluded by the executed contract itself (provided as Verification Exhibit 8), which reads "[w]ritten acceptance of this order within the time specified herein or where not specified within a reasonable time constitutes a binding contract upon the supplier . . . " The binding nature of the contract was further evidenced, according to SeAH, by the fact that the material terms of the agreement were not altered, in any way, subsequent to the purchase order. Domestic parties rely on the fact that the contract stated "[n]o modification hereof shall be enforceable unless agreed on in writing by Buyer and Seller." To the contrary, SeAH argues, only a fully executed amendment to the contract would have been sufficient to alter the terms of sale; and, SeAH notes, none of the terms were altered. SeAH also notes the fundamental principal of contract law that an agreement between two parties can be amended by subsequent agreement between the parties, and argues that if the freedom of parties to amend their contracts by subsequent agreement demonstrates that changes between contract date and invoice date are routine, no contract would ever be deemed final and the Department would never use order date as date of sale. SeAH also rejects the domestic parties' reliance on the similarity of the sales processes in the U.S. and third-country markets as support for using the invoice date in the third-country market. According to SeAH, the sales processes are not similar. As documented in the verification report, PPA did not receive written purchase orders for most U.S. sales, PPA Sales Verification Report at 3, and thus, the purchase order could not be the first written instrument establishing or finalizing the terms of sale in the U.S. market. As the third country customer was a new one, and the product order was an odd length, an official written purchase order was required. Further differences are evident in the fact that U.S. transactions were shipped from inventory in the United States and the invoice accompanies the shipment. Sales to the third country were produced to order, shipped directly from Korea, and invoiced subsequent to shipment. Department Position: Section 351.401(i) of the regulations states that the Department will normally use date of invoice as date of sale unless a different date "better reflects the date on which the exporter or producer establishes the material terms of sale." The record shows that the purchase order date is the date that the material terms of sales for SeAH's third country sales were established. The record also shows that the material terms of sale were not altered after they were set in the purchase order. As such, we will continue to use purchase order date as the date of sale for SeAH's third country sales. Comment 4: SeAH's G&A and Interest Expense The domestic parties argue that, rather than use SeAH's fiscal year 1999 financial statements to calculate G & A and interest expense as the Department did for the preliminary results of review, the Department should use SeAH's fiscal year 2000 financial statements. The domestic parties note that SeAH's financial reporting year is the calendar year and that, therefore, SeAH's 1999 financial statements cover only five months of the POR (August 1, 1999 through December 31, 1999), whereas the financial statements for 2000 cover seven months of the POR (January 1, 2000 through July 31, 2000). The domestic parties cite to the Department's antidumping questionnaire which illustrates the Department's practice of requiring that G&A and net interest expense ratios be calculated using the financial statements for the year most closely corresponding to the POR. In this case, according to the domestic parties, the ratios must be based on the financial statements for the year 2000. The domestic parties note that although SeAH provided its 2000 financial statements after its initial questionnaire response, SeAH did not recalculate the G&A and interest expense ratios based on its 2000 financial statements. The domestic parties cite to Certain Hot-Rolled Carbon Steel Flat Products from Thailand 66 FR 49622 (September 28, 2001) in which the Department used one period's financial statements for the preliminary determination, and the next reporting period's financial statements for the final determination, because they had become available in the interim and because "[i]t is our practice to calculate interest expense rate based on the company's audited consolidated financial statements for the fiscal year that most closely corresponds to the POI." Decision Memorandum in Certain Hot-Rolled Carbon Steel Flat Products from Thailand, 66 FR 49622 (September 28, 2001). SeAH objects to the use of the 2000 financial statements to recalculate G&A and interest expense ratios. Given that SeAH's financial statements for the second of the two years covered by the POR are not finalized and translated until approximately six months after the first questionnaire is issued, SeAH has consistently used the first year's financial statements for calculating G&A and interest expense ratios. SeAH contends that it has used the first year's financial statements for calculating G&A and interest expense ratios in previous administrative review of this antidumping order. More importantly, SeAH notes, the Department verified G&A and interest based on the FY 1999 financial statements, and found no discrepancies. Verification Report at 16-17. SeAH argues that, had the Department or petitioners felt it necessary to base the ratios on the fiscal year 2000 statements, the request for that information should have been made earlier in the proceeding so the numbers could have been reconciled and verified. Specifically, SeAH contends that, although the 2000 financial statements were placed on the record after verification, the data needed to account for certain non-operating gains and losses are not on the record. Finally, SeAH argues that, if the Department accepts domestic parties' request, the result would be additional administrative burden for SeAH in future reviews. SeAH contends that as long as its reporting is consistent, there is no reason to impose such a requirement nor a basis for the Department to adjust SeAH's verified data. Department's Position: We agree with SeAH, in part. In the previous administrative reviews of this antidumping duty order, the Department accepted SeAH's use of financial statements covering the first part of the POR for calculating G&A and interest expense ratios. In the instant review, we note that the Department verified G&A and interest expense based on the FY 1999 financial statements. We agree that, had the Department decided that SeAH should have recalculated G&A and interest expense ratios based on the fiscal year 2000 statements, the request for that information should have been made earlier in the proceeding so the numbers could have been fully analyzed by the Department. Although SeAH submitted fiscal year 2000 financial data, we have not considered this data as the basis for calculating G&A and interest expense ratios because SeAH has not been given the opportunity to adjust the fiscal year 2000 financial data to account for certain non-operating gains and losses, as is normally the practice for antidumping purposes. As such, the Department will continue to use the verified G&A and interest expense ratios based on the FY 1999 financial statements for these final results. However, for any future administrative reviews of this antidumping duty order, we will reconsider this issue and will request respondents to submit G&A and interest expense ratios based the financial statements covering the largest part of the POR. Comment 5: SeAH's Warranty Expenses The domestic parties argue that, contrary to SeAH's claim that it did not incur any warranty expenses on its U.S. sales, such expenses were incurred by SeAH in the form of shipping charges on returned merchandise. They cite to Brass Sheet and Strip from Canada, 64 FR 46344, 46346 (August 25, 1999), in which the Department noted that warranty expense should include the freight cost associated with returning defective merchandise. U.S. Steel urges the Department to use the information provided by SeAH about merchandise returns to make a reasonable estimate, using facts available, of the shipping costs incurred by SeAH on such returns. SeAH argues that the Department should dismiss the domestic parties' requested use of facts available for calculating freight costs associated with warranty expenses, since no merchandise was returned to SeAH and SeAH incurred no unreported freight costs. SeAH contends that the only evidence offered by the domestic parties that SeAH incurred unreported warranty expenses is a credit memo issued to a U.S. customer. SeAH argues that the domestic parties wrongly assume that this credit memo was for returns associated with valid warranty claims. In particular, SeAH contends that the sample credit note chosen by domestic parties was shown to have been issued to correct an invoicing error, not to record a merchandise return, or a warranty claim. See Verification Report at 7-8, and Verification Exhibit 7. Accordingly, SeAH contends that there is no basis for the use of facts available since SeAH incurred no unreported freight costs associated with warranty expenses. Department's Position: Section 776 (a) (2) of the Act provides for the use of facts available if an interested party or any other person withholds information that has been requested by the administering authority; fails to provide such information by the deadlines for the submission of the information or in the form and manner requested, subject to subsections (c) (1) and (e) of section 782; significantly impedes a proceeding under this title; or provides such information but the information cannot be verified as provided in section 782 (i). Under such circumstances, the administering authority shall, subject to section 782 (d), use the facts otherwise available in reaching the applicable determination under this title. There is no evidence on the record to suggest that SeAH has incurred unreported warranty expenses. At verification, the Department found that the credit memo in question was shown to have been issued to correct an invoicing error rather than for a warranty claim. The credit memo was appropriately reported as an adjustment to the U.S. sale for which the credit memo was issued. As such, we cannot conclude that this credit memo reflects unreported warranty expenses. Accordingly, there is no information on the record to suggest that SeAH took the actions envisioned in section 776(a)(2) of the Act. Since there is no basis for considering this to be a warranty expense, there is no basis for applying facts available to calculate warranty expenses. 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 results and the final weighted-average dumping margins in the Federal Register. Agree________ Disagree ________ _______________________________ Faryar Shirzad Assistant Secretary for Import Administration _______________________________ Date