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FINAL RESULTS OF REDETERMINATION ON REMAND PURSUANT TO CRESCENT FOUNDRY CO. PVT. LTD., ET. AL. V. UNITED STATES Slip. Op. 99-5 (Ct. Int'l Trade, January 8, 1999) SUMMARY In accordance with the U.S. Court of International Trade's (CIT) order in Slip. op. 99-5 (Jan. 8, 1999), Consol. Court No. 95-09-01239, the Department of Commerce (the Department), pursuant to the U.S. Court of Appeals for the Federal Circuit's (CAFC) opinion in Kajaria Iron Castings Pvt. Ltd. v United States, 156 F.3d 1163 (Fed. Cir. September 8, 1998) (1) (Kajaria), has prepared these final results of redetermination on remand with respect to the final results of the 1990 countervailing duty administrative review of iron-metal castings from India. Certain Iron-metal Castings from India: Final Results of Countervailing Duty Administrative Review, 60 Fed. Reg. 44,849 (Aug. 29, 1995). Pursuant to the Court's remand instructions, the Department has recalculated the program rates for the subsidies conferred under section 80HHC of India's Income Tax Act (section 80HHC) and the company-specific total ad valorem rates. We have recalculated the rates, in conformity with the CAFC's September 8, 1998 opinion in Kajaria, using a methodology which eliminates from the section 80HHC calculations 1) the influence of the subsidies that were provided in the form of CCS over-rebates and 2) the influence of income in the form of International Price Reimbursement Scheme (IPRS) rebates provided with respect to non-subject castings. Finally, we have recalculated the all-other rate and determined the company-specific total ad valorem rates pursuant to the CAFC's September 8, 1998 opinion. REMAND ANALYSIS In Kajaria, the CIT had previously affirmed the Department's original calculations of the subsidies provided to the Indian producers/exporters of iron-metal castings (the Producers). The CAFC then reversed, in part, and affirmed, in part, the CIT's decision. It held that the Department erred in its calculations of the amount of section 80HHC subsidies provided by the Government of India (GOI) to the Producers, but affirmed the Department's methodology for calculating the all-other rate and determining the company-specific total ad valorem rates. Pursuant to the CIT's instructions and in conformity with CAFC's opinion, we have amended our calculations of the section 80HHC program rates, the all-other rate, and the company-specific total ad valorem subsidy rates for the 1990 administrative review. In the 1990 administrative review, the Department determined that the Producers received, inter alia, countervailable subsidies in the form of 1) CCS over-rebates based on port and harbor service charges rather than allowable taxes and 2) tax deductions on export profits under section 80HHC. The Department determined that the section 80HHC tax deduction resulted in an "untied" export subsidy to the Producers and calculated the company-specific program rates by dividing the amount of tax savings realized by each company by the total value of its export sales. In addition, the Department determined that the Producers did not receive IPRS rebates with respect to subject castings, but did receive IPRS rebates with respect to exports of non-subject merchandise. Consequently, the Department determined that, for the period 1990, the IPRS program was not used with respect to subject castings. Preliminary Results, 60 FR 4592, 4595 (January 24, 1995). In Kajaria, the CAFC disagreed with the our treatment of section 80HHC tax deduction as an "untied" subsidy. We cannot agree with Commerce's decision to treat the portion of the section 80HHC deduction attributable to IPRS rebates as an untied subsidy. The portion of section 80HHC deduction based on the IPRS rebates was not an untied subsidy, but rather a subsidy tied to non-subject castings because the rebates were particular to non-subject castings. Kajaria, 156 F.3d. at 1176. Reversing the CIT's decision in part, the CAFC held that "Commerce acted beyond its statutory authority in countervailing benefits received on non-subject merchandise." Id. at 1180. The CAFC also held that the Department's "methodology double counted the subsidies the Producers received from the CCS over-rebates, by countervailing both the over-rebates and the section 80HHC deduction attributable to those over-rebates." Id. The CAFC remanded these two issues to the CIT for further proceedings. However, it upheld the CIT's decision sustaining the Department's methodology of using the rates of all of the companies (including significantly different higher rates and BIA-based rates) to calculate the all-other rate. Id. We amended our calculations of the section 80HHC program rates in the following manner. We first adjusted the calculations with regard to the influence of income in the form of IPRS rebates on exports of non-subject merchandise. The companies' section 80HHC tax deduction claims are based on their profit on export income. Therefore, for each company, we adjusted the benefit (numerator) by subtracting the amount of tax actually paid from the amount of tax the company would have been liable to pay absent an estimated amount of section 80HHC deduction attributable to profit earned on exports of non-subject merchandise. We factored profit attributable to exports of non-subject merchandise out of the section 80HHC deduction because IPRS rebates for non-subject merchandise can only influence, and be reflected in, the component of profit earned on non-subject merchandise. To estimate the amount of the section 80HHC tax deduction attributable to profits earned on exports of non-subject merchandise, we took the ratio of the value of non-subject exports to the value of total exports and applied it to the total amount of the section 80HHC deduction claimed. We considered this result to be the only possible estimate of the amount of section 80HHC tax deduction that is attributable to exports of non-subject merchandise. (2) We subtracted this amount from the total amount of the section 80HHC deduction actually claimed. Because this result is the portion of the section 80HHC deduction that is attributable only to exports of the subject castings, it is not influenced by IPRS rebates. We then adjusted the calculations with regard to the subsidies provided in the form of CCS over-rebates. Once again, it not possible to ascertain from the information on the record how much of a given company's section 80HHC tax deduction for export profit is attributable to the countervailable CCS over-rebates. The financial information the Producers placed on the record clearly indicates that the Producers record their CCS rebates in their financial statements as income just as they record export sales revenues as income. They then deduct expenses from their aggregated income in order to determine profit. Because CCS rebates (including the CCS over-rebates) are treated as income, it follows that CCS rebate income contributes to a Producer's profit as all of its income does. In the administrative review, we determined that the CCS over-rebates were provided to the Producers at the rate of 4.24% ad valorem. Therefore, we assumed the contribution of the CCS over-rebate income to a company's profit is commensurate with this ad valorem rate and reduced each company's actual 80HHC claim by an additional 4.24 percent. These two adjustments resulted in a recalculated section 80HHC deduction for each company. We derived the benefit (numerator) for each company by calculating the tax savings on its recalculated amount of 80HHC deduction. By factoring out the amount of the 80HHC tax deduction attributable to exports of non-subject merchandise exports, whether IPRS or otherwise, we eliminated any influence that IPRS rebates tied to non-subject merchandise have on the calculation of the benefit from the section 80HHC tax deduction (numerator). By prorating the section 80HHC deduction in this manner, we derived a new "tied" amount of section 80HHC deduction that is attributable to subject merchandise only. By further reducing this "tied" amount by the rate at which CCS over-rebates were received, we eliminated from the calculation the profit generated by those CCS over-rebates. Since the benefit (numerator) is now "tied" to subject merchandise, we followed our standard principles for the attribution of "tied" benefits and factored exports of non-subject merchandise out of the denominator as well. Therefore, we used the value of exports of subject castings as the denominator rather than the value of sales of all exports. This was done to ensure that both the numerator and the denominator reflect values attributable only to subject castings. The calculations remain "apples-to-apples" comparisons which are consistent with the court's instructions, the countervailing duty law, the Department's regulations, and our longstanding practice. These recalculated rates are listed below under "Remand Results." They are slightly lower than the rates calculated for the administrative review because, consistent with the Court's reasoning, IPRS rebates tied to non-subject merchandise can only affect the taxable income of non-subject merchandise. Once all of the profit attributable to non-subject merchandise (and thus to all of the IPRS rebates ) is factored out of the calculation of the benefit from the 80HHC tax deduction, the amount that remains is "tied" solely to subject merchandise. Therefore, the most appropriate denominator to use in calculating the subsidy rate is exports of subject merchandise. Finally, we recalculated the all-other rate by taking the weighted-average of all of the Producers' company-specific program rates. We then determined whether each Producer's individual company-specific rate was significantly different than the all-other rate. If so, the Producer was assigned its individually-calculated rate. If not, it was assigned the recalculated all-other rate. REMAND RESULTS Per the instructions of the Court, we have recalculated the company-specific 80HHC program rates for the 1990 period. For each Producer, we first calculated the amount of the company's section 80HHC deduction that was attributable to exports of subject castings. We then factored out of that amount the contribution to profit stemming from income in the form of CCS over-rebates. In so doing, we have 1) ensured that the recalculated total company-specific rates and the recalculated all-other rate are free of any "double-counting" and 2) eliminated from the calculations any influence of income in the form of IPRS rebates provided with respect to non-subject castings. We also recalculated the all-other rate. The rates in the first table below are the original and recalculated rates for the section 80HHC program. The rates set forth in the second table are the original and recalculated total ad valorem rates for each Producer.
80HHC Program Ad Valorem Rate Comparison
Original Recalculated Remand
Program Rate Program Rate
Carnation Enterprise Pvt. Ltd. [ ]
Crescent Foundry Co. Pvt. Ltd. [ ]
Kajaria Castings Ltd. [ ]
Kejriwal Iron & Steel Works [ ]
Nandikeshwari [ ]
Overseas [ ]
R.B. Agarwalla & Co. [ ]
R.S.I. [ ]
Ragunathv [ ]
Serampore Industries Pvt. Ltd. [ ]*
Sitarem [ ]
Super Castings (India) [ ]
Tirupati [ ]
UMA Iron & Steel Co. [ ]
Company-specific and Final Rate Comparison
Original Recalculated Final Total
Administrative Remand Ad Valorem
Review Rate Rates Rates
Carnation Enterprise Pvt. Ltd. [ ] 10.05%
Crescent Foundry Co. Pvt. Ltd. [ ] 10.05%
Kajaria Castings Ltd. [ ] 10.05%
Kejriwal Iron & Steel Works [ ] 10.05%
Nandikeshwari [ ] 4.26%
Overseas [ ] 18.25%
R.B. Agarwalla & Co. [ ] 10.05%
R.S.I. [ ] 10.05%
Ragunath [ ] 10.05%
Serampore Industries Pvt. Ltd. [ ]* 10.05%
Sitarem [ ] 21.64%
Super Castings (India) [ ] 10.05%
Tiruptati [ ] 10.05%
UMA Iron & Steel Co. [ ] 10.05%
All-other Rate 10.16% 10.05%
* The rates for Serampore have increased due to a clerical error. This error is explained in the calculation sheet. Attached are (1) a summary of comments received in response to our draft remand redetermination, (2) the Department's response to these comments, and (3) our calculations for these remand results. ___________________________________
Richard W. Moreland Date: April 8, 1999 COMMENT SECTION Comment 1: The Engineering Export Promotion Council of India (EEPC) and the Producers take issue with the Department's approach with respect to IPRS rebates provided for non-subject merchandise. They argue that "it does not even address the IPRS since it uses ratios based on values of exports when IPRS is not even included in such values." EEPC's and Producers' Comments (March 31, 1999) (Comments) at 4. They argue that the Department's use of ratios incorrectly apportions "the IPRS in each company's profit to non-subject and subject castings alike -- according to export values." Id. at 4. They contend that Department must "deduct the IPRS rebates from profit and then calculate the total tax savings based on all exports, i.e., both subject and non-subject castings in the denominator or, if the Department prefers a denominator based on subject castings only, to first deduct the IPRS rebates from profit, then calculate the remaining profit attributable to subject castings by using a ratio of the values of subject merchandise to non-subject castings, and then divide by subject castings only." Id. Department Position: We disagree with the EEPC and the Producers. Section 80HHC allows for the deduction of profit on income associated with exports. The information placed by respondents on the record shows that IPRS rebates are treated as income, not profit. While income in the form of IPRS rebates contributes marginally to a company's overall profit, income in the form of IPRS rebates is not deductible, as such, under section 80HHC. It is this misunderstanding on the part of the Producers--incorrectly equating, on a dollar-for-dollar basis, IPRS income with profit deducted under section 80HHC--that lies at the core of their misguided comments. Under the IPRS program, the Producers must first incur specific expenses, such as the expense of purchasing domestic inputs at higher prices than imported inputs, before they are eligible to receive IPRS rebates. It is basic accounting that profit is the difference between income and expenses. See Black's Law Dictionary (5th ed. 1979) at 1090. Because the section 80HHC program only allows for a deduction of profit, it is not appropriate simply to reduce the amount deducted under section 80HHC by the amount of income recorded as IPRS rebates. If a portion of the numerator is removed on the basis of being "tied" to non-subject merchandise, then, in the interest of consistency, it is necessary to separate out all other portions which are "tied" to non-subject merchandise. To do this, we used sales ratios to estimate the amount of profit deducted under section 80HHC that can reasonably be attributable only to subject castings and then divided by exports of subject castings. This "tied" methodology eliminates the influence of non-subject merchandise from both the numerator and the denominator and thereby results in calculations that are not influenced by IPRS rebates on non-subject merchandise in any way. In determining the rate of subsidy to subject merchandise, it is the Department's longstanding practice to divide the benefit (the numerator) by the category of sales to which it is related, that is, by exports of subject merchandise for a benefit that is "tied" to subject merchandise or by total exports for "untied" export subsidies. Either method provides fair and accurate results. As explained above in the Remand Analysis section, the Department originally determined in the administrative review that section 80HHC tax deductions were "untied" export subsidies to the Producers. The India Tax Act identifies section 80HHC as a "Deduction in respect to profits retained for export business" and makes clear that companies may claim a tax deduction equal to the profit derived from all exports, not the amount of income realized from exports. See S.80HHC(1). (Attached as Appendix 1). (3) Therefore, in calculating the rate of subsidization, the Department did not attempt to ascertain the amount of income the Producer realized from its exports in order to determine the countervailable benefit (the numerator). Rather, the Department determined the benefit (the numerator) to be the amount of tax savings realized by the Producer had it not claimed a section 80HHC tax deduction, that is, had it not deducted its profit on the income it realized from all of its exports. See the "Original Calculations" in the attached calculation sheets. As explained above, section 80HHC allows for a deduction equal to profit on exports, not the amount of income attributable to exports. Because the deduction is equal to the amount of profits realized on all exports, the Department respectfully maintains that its original methodology of treating section 80HHC subsidies as "untied" export subsidies is the correct way to countervail the program. The Department's standard methodology of dividing the "untied" subsidy by total exports does not over-or understate the value of the subsidy to subject merchandise. The portion of the profit deducted under section 80HHC which stems from income in the form of IPRS rebates on exports of non-subject merchandise is subsumed in the calculation by the fact that the very exports against which those IPRS rebates were received are included in the denominator. This position notwithstanding, we have adopted a new calculation methodology in order to conform with the CAFC's holding in Kajaria. Instead of treating the section 80HHC subsidy as an "untied" subsidy, we are now using our "tied" methodology, pursuant to the CAFC's opinion. This methodology accurately determines the rate of subsidization on subject merchandise because the calculation remains an "apples-to-apples" comparison. Both the numerator and the denominator are attributable to the same universe of merchandise, exports of subject castings. The EEPC and Producers contend that the appropriate calculation methodology is to subtract a Producer's total IPRS income from its section 80HHC deduction, calculate the tax savings on that remainder, and then divide by total sales. We strongly disagree with such an approach. It is incorrect to subtract income from the amount of section 80HHC deduction as though it were profit. The benefit (the numerator) under the section 80HHC program is the amount of tax savings on the profit (not income) that a given Producer realized and claimed as a deduction with respect to the income associated with its exports. A portion of the section 80HHC tax deduction is profit generated from income in the form of IPRS rebates which were received on exports of non-subject merchandise. The rest consists of profit on income generated from export revenues (both subject and non-subject) and profit stemming from export income in the form of CCS rebates. IPRS rebates are clearly treated as income in the Producers' financial statements. They represent a small component of the aggregate income figure used to derive profit. Once expenses are deducted, the resulting profit figure is naturally much less than aggregate income. The error of the approach proposed by the EEPC and the Producers can be seen from the fact that, in some cases, the Producer's IPRS income approaches or even exceeds the amount of profit it deducted under section 80HHC. For example, information on the record indicates that RSI's section 80HHC deduction for its accounting year ended March 1990 tax return was [ Rs. ]. See Appendix 2 at 1 and 2. (4) In its financial statements, RSI's IPRS income ("Reimbursment against Pig Iron") for the year ended March 31, 1990, is listed as [ Rs. ]. See Appendix 3 at 1. (5) If IPRS rebates were profit, then the value of a Producer's section 80HHC deduction should at least equal the value of IPRS income that the Producer generated for the same period. But, it does not. IPRS rebates are treated as income like other forms of income. They contribute marginally to overall profit, but they do not constitute profit. This can be seen in the Producers' financial statements. In RSI's financial statement, IPRS rebates are listed as income ("Reimbursement against Pig Iron") which is included in an aggregate income figure; profit is calculated by subtracting expenses from that aggregate income. See Appendix 3 at 1 and 2. For these reasons, the methodology proposed by the EEPC and the Producers of reducing the section 80HHC deduction, which is an amount of profit, by the value of IPRS income, makes no sense at all. In RSI's case, reducing the 80HHC deduction by IPRS income would result in a negative number several times the value of the deduction. We divided the amount of section 80HHC deduction attributable to subject castings by exports of subject castings. As explained above in the Remand Analysis section, it is not possible to ascertain from the information on the record how much of the profit deducted under section 80HHC is attributable to non-subject merchandise and how much is attributable to subject merchandise. The record does not contain such a breakdown. Therefore, we used a ratio based on export sales values to derive an estimated amount of profit generated from non-subject merchandise. We are assuming, absent information to the contrary, that the average margin of profit on subject and non-subject merchandise is the same. We then subtracted this amount out of the section 80HHC deduction and calculated the tax savings on the remainder. This result (the numerator) divided by exports of subject castings is the rate of subsidy. By deducting profit on exports of non-subject merchandise from the numerator and the value of exports of non-subject merchandise from the denominator in this manner, we have factored out of the calculations the profit attributable to non-subject castings, whether IPRS-related or otherwise. Thus, we disagree that our use of ratios based on export values does nothing more than apportion IPRS rebates to both subject and non-subject castings alike. Comments at 4. Prorating the section 80HHC deduction as we have done is a reasonable method for estimating the profit attributable to subject castings, while at the same time attributing the profit from income in the form of IPRS rebates solely to non-subject merchandise.
Comment 2: The EEPC and the Producers take issue with the Department's treatment of CCS over-rebates in its calculation of the section 80HHC subsidies. They argue that the Department should use a methodology of "multiplying total export sales value by the individual company's over-rebate rate and then subtracting the resultant product from "taxable profit without 80HHC deduction." " Id. at 9. Department Position: We disagree with the EEPC and the Producers. Once again, the argument of the EEPC and the Producers is based on the misunderstanding that income in the form of CCS over-rebates is deductible under section 80HHC as though it were profit. Section 80HHC allows for the deduction of profit on income associated with exports, yet the record shows that CCS rebates are treated as income, not profit. The Producers must first incur the expense of paying indirect taxes before they are eligible to receive CCS rebates. Since profit is the difference between income and expenses, it is not appropriate simply to reduce the amount deducted under section 80HHC by the amount of income attributable to CCS over-rebates. Instead, we used sales ratios to estimate the amount of profit deducted under section 80HHC that is attributable only to subject castings and then divided by exports of subject merchandise. This "tied" methodology eliminates the influence of non-subject merchandise from both the numerator and the denominator. We then reduced the amount of section 80HHC deduction "tied" to profits on export of subject merchandise by an estimated amount of profit deducted under section 80HHC stemming from income in the form of CCS over-rebates. Like IPRS rebates, CCS rebates are clearly treated as income in the Producers' financial statements. They represent a small component of the aggregate income figure used to derive profit. Once expenses are deducted, the resulting profit figure is naturally much less than aggregate income. The error of the approach proposed by the EEPC and the Producers can be seen from the fact that, in some cases, the Producer's CCS income approaches or even exceeds the amount of profit it deducted under section 80HHC. For example, information on the record indicates that RSI's section 80HHC deduction for its accounting year ended March 1991 tax return was [ Rs. ]. See Appendix 2 at 1 and 2. In its financial statements, RSI's CCS income ("Cash Assistance") for the year ended March 31, 1990, is listed as [ Rs. ]. See Appendix 3 at 1. If CCS rebates were profit, then the value of a Producer's section 80HHC deduction should at least equal the value of CCS income that the Producer generated for the same period. But, it does not. CCS rebates are treated as income like other forms of income. They contribute marginally to overall profit, but they do not constitute profit. This can be seen in the Producers' financial statements. In RSI's financial statement, CCS rebates are listed as income ("Cash Assistance") which is included in an aggregate income figure, and profit is calculated by subtracting expenses from that aggregate income. See Appendix 3 at 1 and 2. For these reasons, the methodology proposed by the EEPC and the Producers of reducing the section 80HHC deduction, which is an amount of profit, by the value of CCS income, makes no sense at all. In RSI's case, reducing the 80HHC deduction by CCS income would result in a negative number. As explained above in the Remand Analysis section, we estimated the contribution to the profit deducted under section 80HHC from income in the form of CCS over-rebates to be commensurate with the ad valorem rate at which those over-rebates were received. The EEPC and the Producers erroneously claim that CCS rebates constitute profit that is deductible under the section 80HHC program. Their example, in which the full value of the countervailable CCS over-rebates would be subtracted from the section 80HHC deduction, is based on their misguided understanding, as explained above, that profit deducted under section 80HHC equates with income on a dollar-for-dollar basis. See Comments at 8. Because CCS over-rebates are not profit but rather income which contributes marginally to overall profit, and because the information on the record does not permit a precise breakdown of the amount of profit from CCS rebates that was attributable to subject and non-subject merchandise, it is reasonable to estimate the magnitude of the contributions. 1. The CAFC's opinion in Crescent Foundry Co. Pvt. Ltd., et al. v. United States, Slip op. 97-1494 (Sept. 8, 1998), is an unpublished opinion which relies on the rationale set out in Kajaria. 2. Because it is not possible to ascertain from the information on the record how much of a given company's section 80HHC tax deduction is attributable to exports of subject castings and how much is attributable to exports of non-subject merchandise, we assumed that a given company realized the same amount of profit per unit of subject merchandise exports as it did per unit of non-subject merchandise exports. In order to attempt to determine the amount of profit attributable to exports of subject and non-subject merchandise, we would need to analyze specific cost and pricing data for individual sales. While the period of review is 1990, the data we would need to analyze pertains to sales made and profit earned in the previous year or even 1988 or 1987, depending on the individual tax returns filed. This information is not on the record of this administrative review. 3. Submitted as Annexure VIII of the EEPC's March 13, 1992, response to the Department's original questionnaire for the 1990 administrative review. 4. Submitted as Annexure 5 of the RSI's March 13, 1992, response to the Department's original questionnaire for the 1990 administrative review. 5. Submitted as part of Annexure 3 ("Annual Accounts") of RSI's March 13, 1992, response to the Department's original questionnaire for the 1990 administrative review. |