66 FR 50406, October 3, 2001
                                                            A-533-820
                                               POI: 10/1/99 - 9/30/00
                                                      Public Document
                                                    G2/O4: NN/TPF/JSC

September 21, 2001

MEMORANDUM TO: Faryar Shirzad 
               Assistant Secretary
                 for Import Administration

FROM:          Bernard T. Carreau
               Deputy Assistant Secretary 
                 for Import Administration, Group II

SUBJECT: Issues and Decision Memorandum for the Final Determination in
the Antidumping Duty Investigation of Certain Hot-Rolled Carbon Steel 
Flat Products from India

Summary

We have analyzed the comments and rebuttal comments of interested parties
in the investigation of certain hot-rolled carbon steel flat products (hot-
rolled) from India for the period October 1, 1999 through September 30,
2000. As a result of our analysis, we have made changes, including
corrections of certain inadvertent clerical errors in the preliminary
margin calculations. We recommend that you approve the positions we have
developed in the Discussion of the Issues section of this memorandum for
this final determination.

Background

On May 3, 2001, the Department of Commerce (Department) published the
preliminary determination of the antidumping duty investigation of certain
hot-rolled carbon steel flat products from India. See: Certain Hot-Rolled
Carbon Steel Flat Products from India; Preliminary Determination of Sales
at Less Than Fair Value and Postponement of Final Determination, 66 FR
22157 (May 3, 2001) (Preliminary Determination). The period of
investigation (POI) is October 1, 1999, through September 30, 2000. We
gave interested parties an opportunity to comment on our preliminary
determination. On August 1, 2001, the respondents, Ispat Industries Ltd.
(Ispat) and Essar Steel Ltd. (Essar), and the petitioners (1), submitted
case briefs; and on August 9, 2001, all parties submitted rebuttal briefs.
The Department received requests for a public hearing from both
petitioners and respondents which were later withdrawn; therefore no
public hearing was held. Although the deadline for this determination was
originally September 17, 2001, in light of the events of September 11,
2001 and the subsequent closure of the Federal Government for reasons of
security, the time frame for issuing this determination has been extended
by four days.

List of Issues

Below is the complete list of issues in this investigation for which we
received comments and rebuttal comments from parties:

Common Issues

1.  Duty Drawback Adjustment - DEPB Program 
2.  The Appropriate Date of U.S. Sales 
3.  Inclusion of Excise Taxes in Reported Costs 


Essar Steel Ltd.

4.  Duty Drawback Adjustment- Verification 
5.  Duty Drawback Adjustment- Advance License Program 
6.  U.S. Imputed Credit Expenses Disallowed in the Preliminary
Determination 
7.  Treatment of Pre-Operative Expenses 
8.  Treatment of Cost of Services Provided by an Affiliated Party 
9.  Use of the Revised Interest Expense Ratio 
10. Unreported U.S. Sales 
11. Use of Updated Credit Periods to Calculate Home Market Credit Expenses 


Ispat Industries Ltd.

12. Capitalization of Production Costs 
13. Start-Up Adjustment - Hot-Strip Mill 
14. Exclusion of Costs Related to Start-Up 
15. IMIL "Learning Curve"/Start-Up Adjustment 
16. Overstated General and Administrative (G&A) Expenses 
17. Scrap Revenue Offset to Costs 
18. Proper Classification of Bad Debt Expense 
19. Adjusting Home Market Price in the Cost Test for Imputed Credit
Expense 
20. Identifying the Proper Quality Characteristics 
21. Calculating Credit Expenses Based on Home Market Price and Excise Tax 
22. Verification Corrections 
23. Ministerial Corrections 


Discussion of the Issues

Common Issues

Comment 1: Duty Drawback Adjustment under the Duty Entitlement Passbook
Program 


Essar notes that although the Department rejected its claim for the duty
entitlement passbook program (DEPB) adjustment in the preliminary
determination (2), it has accepted the validity of the DEPB program in
prior cases. See Certain Welded Carbon Standard Steel Pipes and Tubes from
India; Final Results of New Shippers Antidumping Review, 62 FR 47632,
47635 (September 10, 1997) (Pipes and Tubes from India), in which the
Department found that "[T]he Indian Passbook system constitutes a proper
drawback program." In the instant case, Essar contends that it
sufficiently demonstrated a direct link between the imported inputs that
are subject to duty drawback and the exportation of the finished product.
As such, Essar concludes that its has met the linkage requirements, and is
thus entitled to the claimed duty drawback adjustment under this program.


Essar explains that the DEPB program permits exporters to earn credits to
offset the basic Customs duties and import surcharges that apply to the
imported inputs needed to produce an exported product. The credit is equal
to a specified percentage of the value of the exported product. The
Government of India (GOI) establishes the amount of this credit based on
the deemed import content of the said exported product. Essar notes that
under the DEPB, exporters are granted an export credit of 14 percent. The
credits are recorded in a "pass book" and are valid for 12 months. See
Verification of the Sales and Cost Responses of Essar Steel Ltd. in
Antidumping Investigation of Certain Hot-Rolled Carbon Steel Flat Products
from India, (Essar Verification Report), at 18-19. 

Essar notes that during the instant investigation, the Department stated
that DEPB licences were not directly tied to a company's exports because
the licenses can be freely transferred among Indian companies. See Essar
Verification Report at 18. Essar dismisses this statement by noting that
its pre-export DEPB licenses are not transferrable and are subject to an
actual user condition. Moreover, Essar notes that it did not transfer many
of its post-export DEPB licenses but used them to import the raw materials
needed to produce subject merchandise. (3) 

Essar also claims that the instant circumstances are clearly
distinguishable from those in Stainless Steel Round Wire from India; Final
Determination of Sales at Less Than Fair Value, 64 FR 17319, 17320 (April
9, 1999) (Round Wire from India) (cited by the Department in the
Preliminary Determination). In that case, the Department found that the
respondent could not supply information explaining how the GOI calculates
the amount of duty refunded under the DEPB program. Further, Essar notes
that in Round Wire from India, the Department found that the DEPB credits
were not based on the actual amount of duty paid. In contrast, Essar
contends that in the instant investigation, unlike Round Wire from India,
it has provided extensive information on the methodology used by the GOI
to calculate the amount of duty refunded. Moreover, Essar notes that the
Department verified the amount of duty refunds it received. Therefore,
Essar contends that the Department should grant the drawback adjustment
for the full amount of duties that were rebated or not collected under the
DEPB program. Alternatively, Essar maintains that the Department should
grant an adjustment for sales for which DEPB licenses were utilized and
not transferred. 

Ispat contends that the Department should not have denied the duty
drawback adjustment under the DEPB program because there is evidence of a
link between rebated import duties and the materials used to produce
exported products. Ispat notes that the Department preliminarily rejected
the claim for duty drawback under the DEPB program citing Round Wire from
India wherein the Department stated that it has repeatedly rejected the
claim for duty drawback under the DEPB program due to the lack of a direct
linkage between the imported material and refunded duties. However, Ispat
maintains that the Department has accepted the DEPB program as a
legitimate duty drawback program in Pipes and Tubes from India, where the
respondent company demonstrated that there was a direct link between the
imported material and duties refunded upon exportation of subject
merchandise. (4) 

To further support its argument, Ispat maintains that the facts in the
instant investigation are "clearly distinguishable" from those in Round
Wire from India, 64 FR at 17320. Ispat contends that in the instant
investigation it explained how the GOI calculates the amount of duty
refunded; whereas in Round Wire from India, the respondent was unable to
do so. Further, Ispat notes that in Round Wire from India the Department
found that the incentive credits received under the DEPB system were not
based on the actual amount of duty paid, and therefore disallowed the duty
drawback. Nevertheless, if the Department does not grant the full drawback
adjustment, Ispat urges it to adjust U.S. price for the amount of drawback
up to the amount of actual import duties (basic and CESS) paid under the
DEPB program during the POI. See Ispat Brief, at 40.

In response to Essar's and Ispat's arguments, petitioners claim that the
DEPB program is not a legitimate drawback program under U.S. law, and thus
both Essar's and Ispat's claims must be denied. Petitioners note that in
order to be entitled to a duty drawback adjustment, the respondent must
demonstrate that: (1) the import duty and rebate are "directly linked to,
and dependent upon, one another," and (2) "there were sufficient imports
of the imported raw materials to account for the drawback received on the
exported product." See Stainless Steel Bar from India; Final Results of
Antidumping Administrative Review, 63 FR 13622, 13625 (March 20, 1998).
Petitioners claim that the duty drawback adjustment should be denied
because in Stainless Steel Wire Rod from India; Final Results of
Antidumping Administrative Review, 65 FR, 31302, (May 17, 2000) (Wire Rod
from India) the Department, citing two prior countervailing duty cases,
found that the above requirements were not met by the DEPB program. 

Petitioners believe that Essar's reliance on Pipes and Tubes from India
is misplaced since this is not a case where the Department permitted a
drawback under the DEPB program, rather it permitted an adjustment under
the previous passbook scheme. Petitioners argue that in a subsequent case,
the Department explicitly concluded that reliance on the 1997 decision in
Pipes and Tubes from India to support a duty drawback adjustment for the
DEPB program is misplaced. See Decision Memorandum at Comment 3, Wire Rod
from India, 65 FR at 31302. Petitioners claim that the instant case is not
distinguishable from Round Wire from India, because even though Essar and
Ispat provided documentation explaining how the duty is calculated, the
explanation does not rectify the inability of the DEPB program to link all
imports to exports. Rather, the record evidence establishes that the "the
GOI confers rebates under DEPB regardless of the amount of import duties
paid. The credits are based on the deemed import content of the subject
merchandise," or "14 percent of the FOB value of the exported product in
the case of steel products." Consequently there is no link between the
import duties a company pays and the DEPB credits the company receives. 

In summary, petitioners argue that both Essar and Ispat failed to meet
both prongs of the duty drawback test as articulated above. They claim
Essar and Ispat did not establish a direct link between the amount rebated
and the import duties paid nor did either Ispat or Essar show it had a
sufficient quantity of the imported inputs to account for the amount of
DEPB credits received on exports.

Department's Position:

We agree with petitioners. When evaluating a duty-drawback program, the
Department considers (1) whether the import duty and rebate are directly
linked to, and dependent upon, one another; and (2) whether the company
claiming the adjustment can show that there were sufficient imports of the
imported raw materials to account for the drawback received on the
exported product. See Pipes and Tubes from India, 62 FR at 47634. The
Court of International Trade (CIT) has upheld the reasonableness of this
test. See, e.g., Federal-Mogul Corp. v. United States, 862 F. Supp. 384,
409 (CIT 1994). In the instant investigation, we find that neither Essar
nor Ispat has proven that the DEPB credits received necessarily are linked
to the duties that were imposed on the imported input materials they used
to produce hot-rolled steel for export. In fact, record evidence indicates
that neither Essar nor Ispat calculated the value of the credits they
received under the DEPB program based on the duty on the input materials
they actually imported (i.e., iron ore, alloying elements, etc.); rather,
they calculated their respective credits based upon the duties associated
with the theoretical amount of input materials that the GOI determined was
necessary to produce hot-rolled steel. According to the GOI's
calculations, companies were entitled under the DEPB program to duty
rebates of 14 percent of the FOB export value of hot-rolled steel
regardless of whether any of the inputs were imported. See Verification of
the Sales Response of Ispat Industries Ltd. in the Antidumping Duty
Investigation of Certain Hot-Rolled Carbon Steel Flat Products from India
(Ispat Verification Report) at 9 on the public record in room B-099 of the
main Commerce Department building; see also Essar Verification Report at
18. Because these credits were not calculated based on the amount of input
material imported or the import duties thereon, the amount of the import
duties and the export rebates received are not directly linked.
Additionally, we found that a significant majority of Essar's DEPB
licenses were transferable during the POI, further demonstrating that the
rebates on a company's exports are not tied directly to the duties on
imported input materials under the DEPB program. See Essar Verification
Report at 18. Therefore, we continue to find that neither Essar nor Ispat
has met the first part of the Department's test for increasing U.S. price
by duty-drawback.

While in Pipes and Tubes from India we found that the link between the
import duties paid and the export rebates received was sufficient, as
noted above, such a link does not exist in the instant case. Because we
have not found a direct link in the instant case, we have not considered
whether Essar or Ispat met the second part of our standard. As a result,
for purposes of this final determination, we have continued to deny a duty
drawback adjustment under the DEPB program for both Essar and Ispat's U.S.
sales.

Comment 2: The Appropriate Date of U.S. Sales 

Petitioners contend the record demonstrates that the terms of sale for
Essar's U.S. sales are established as of the date of the final amendment
to the letter of credit rather than the date of the final invoice. See
Essar's Supplemental Section A Questionnaire Response, at AS-2. In support
of this position, petitioners note that Essar claims it does not commence
manufacturing until after it receives the final amendment to the letter of
credit. Additionally, petitioners believe that evidence provided by Essar
regarding the frequency of changes in material terms of sale between the
date of the initial letter of credit and the final invoice date does not
demonstrate that the date of invoice is the most appropriate date of sale.
Specifically, petitioners note that the record evidence Essar provided
only contains data regarding changes made to materials terms between the
date of the initial letter of credit and the invoice date rather than data
regarding changes made after the final amendment to the letter of credit.
According to petitioners, Essar does not explain this apparent
contradiction between the record and its claims. In addition, petitioners
discount Essar's argument that it cannot use the letter of credit
confirmation date as the date of sale because subsequent amendments are
not tracked electronically and the letters of credit often cover multiple
shipments. Petitioners contend that if Essar establishes the material
terms of sale prior to the date of invoice and it has not provided this
information to the Department, facts available should be used in light of
Essar's failure to provide all relevant information to the Department.
However, in the alternative, if the Department chooses to continue to use
the sales data provided by Essar, petitioners argue that the Department
should use the date of the letter of credit as the date of sale because
the terms of sale are established in the letter of credit.

Essar argues that it reported the date of sale as the date of invoice,
consistent with the Department's practice. Essar states that the invoice
date is the appropriate date of sale for its U.S. sales because all terms
and conditions of sale are finalized on the date of invoice. Furthermore,
according to Essar, the invoice date is recorded as the date of sale in
its accounting system. Moreover, Essar states that all terms of sale are
fixed on the date of the invoice, and there are no amendments made after
that date.

Essar contends that the record demonstrates that its letters of credit
are frequently amended (approximately 79 percent of U.S. sales during the
POI had amended letters of credit) and are therefore an inappropriate
basis for date of sale. See Essar's Questionnaire Response at AS-4 and
Exhibits AS-1 and AS-2 (March 19, 2001). In addition, Essar notes that it
records all sales in its accounting system based on the date of invoice.
The information recorded in the system on the date of invoice includes the
price, quantity, product characteristics and other details required to
respond to the Department's questionnaires. Essar maintains this
information is not recorded on the date of the letter of credit or the
date of any amendments thereto. As a result, Essar claims that it would be
unreasonably burdensome to require it to search through every amendment to
every letter of credit in order to correlate the data on the letter of
credit with the data reported in its accounting system. Additionally,
Essar argues that the Department verified Essar's date of sale
methodology. Essar claims the Department reviewed the order negotiation
process both in the home market and the United States, including
information on how final terms of the sale are established, finding no
discrepancies. Therefore, Essar concludes that the invoice date is the
appropriate date of sale for Essar because all terms and conditions of the
sale are finally determined by the date of the invoice.

Ispat argues that the Department should use as the U.S. date of sale the
date of the letter of credit, or the date of the last amendment to the
letter of credit, rather than the invoice date used in the Preliminary
Determination. Ispat claims the Department's statement in the Preliminary
Determination noting that Ispat indicated that the invoice/shipment date
is the most appropriate date of sale is incorrect. See Preliminary
Determination, 66 FR at 22160. Ispat contends that the record of this
investigation consistently shows that the final terms of sale, e.g., price
and quantity, were usually set prior to the issuance of an invoice.
Further, Ispat cites the Department's Sales Verification Report, where the
Department noted that it "'clarified how U.S. sales are made pursuant to a
letter of credit' and 'reiterated that the invoice for U.S. sales is
created after the bill of lading is received.'" (5) Therefore, Ispat
argues that the final terms of price and quantity are set on the date of
the letter of credit or the date of the last amendment thereto, not the
invoice date.

Petitioners also argue that the Department should use the date of sale
originally reported by Ispat which is the date of the letter of credit, or
the date of the last amendment thereto. Petitioners contend that the
record of this investigation consistently shows that the final terms of
sale, e.g., price and quantity, were usually set prior to the issuance of
the invoice.

Department's Position: 

With regard to the date of sale for Essar's U.S. sales, we agree with
Essar. Section 351.401(i) of the Department's regulations notes that the
Department normally will consider the date of sale to be the sales invoice
date recorded in the exporter's or producer's records kept in the ordinary
course of business. However, the regulation goes on to note that the
Department may use another date as the date of sale if it is satisfied
that a different date better reflects the point at which the exporter or
producer established the material terms of sale. In the instant
investigation we have not used the date of amendments to letters of credit
as the date of sale because these dates are not tracked electronically in
Essar's system and paper copies of these amendments are not consistently
maintained by the company in the normal course of business. Absent
adequate records documenting all the amendments to letters of credit and
the dates thereto, the invoice date is a better date of sale given that
all terms of sales are fixed at the invoice date and no other amendments
can be made to the sales terms. In addition, the record indicates that the
date of the letter of credit cannot be used as the date of sale because
the terms of sale change after the initial letter of credit is prepared.
Further, the letters of credit usually covered multiple shipments, and are
not correlated with individual shipments. As a result, with respect to
Essar, we will continue to use the date of invoice as the date of U.S.
sales for purposes of the final determination.

With regard to Ispat's U.S. sales, we agree with both Ispat and
petitioners. The Department confirmed at verification that the letter of
credit date, or the date of the last amendment to the letter of credit
represents the date when the terms of sale, e.g., price and quantity are
finalized for all U.S. sales. Accordingly, the Department has calculated
Ispat's final margins using the date of sale originally reported (i.e.,
the date of the letter of credit or amended letter of credit).

Comment 3: Inclusion of Excise Taxes in Reported Costs 

Petitioners argue that the Department should not allow respondents to
exclude excise taxes (a form of modified value added tax (modvat)) on
inputs from the reported cost of production (COP) because they failed to
provide any evidence that the excise taxes were refunded. Citing CIT
rulings on a similar issue involving value added tax (VAT), petitioners
claim that Essar must provide evidence that the taxes it paid on inputs
were recovered, prior to exportation of the finished product, through
taxes collected on domestic sales. Petitioners maintain that tax ledgers
simply showing taxes paid and collected are not sufficient evidence
because they do not establish sales-specific correspondence. See AIMCOR v.
United States, 141 F. 3d 1098, 1109-1110 (Fed. Cir. 1998); AIMCOR v.
United States, 20 CIT 606 (1996). Moreover, petitioners contend that any
questions regarding this issue were put to rest by the Court's decision in
Camargo Correa Metais, S.A. v. United States, 200 F. 3d 771 (Fed. Cir.
1999) (Camargo) (wherein the Court found that unless taxes are remitted or
refunded upon exportation they should be included in constructed value). 

However, petitioners contend that Essar failed to provide any evidence
that the excise tax paid on inputs used in products sold in the home
market was recovered at the time of sale, despite the Department's
attempts to obtain additional information regarding the excise tax.
Petitioners also note that Ispat failed to provide such evidence.
According to petitioners, respondents indicated that excise taxes paid on
inputs are not refunded or rebated when products are exported but are used
to offset excise taxes collected on home market sales. Therefore,
petitioners request that the Department include the excise tax in
respondents' COP and constructed value (CV). 

Respondents claim the record demonstrates that the internal taxes they
paid on inputs were refunded. Specifically, respondents note that the
excise duties and sales taxes on purchases of inputs are deducted from the
taxes they pay on home market sales (i.e., taxes paid on inputs are used
to reduce the amount of collected taxes on sales that must be remitted to
the government). According to respondents, this deduction or offset of one
expenditure against another is the equivalent of a refund. 

Moreover, respondents note that they do not incur a net cost, and thus
there is no basis for including the internal taxes in reported costs.
According to respondents, the record shows that the excise duty each
company recovered/collected during the POI exceeded the amount of taxes
each company paid. Specifically, Essar points to its trial balance
accounts for excise duty recovered and paid during the POI which indicate
that tax "refunds" exceeded taxes paid. Ispat points out that the same tax
rate is paid on inputs and sales of finished goods, and that its domestic
sales revenue clearly exceeds the cost of inputs consumed. Thus, Ispat
contends that it does not incur a net cost. 

With respect to petitioners claim that a respondent must provide evidence
of a specific correlation between taxes and sales, respondents note that
the Department never asked them to provide such evidence. Nevertheless,
Ispat claims that it is clear from the manner in which the modified VAT
system works that it bears no excise tax cost. Essar notes that the
Department's questionnaire instructed it to report the net amount of
internal taxes incurred during the POI that were not refunded or
recovered. According to Essar, it fully responded to the Department's
question by reporting that internal taxes are deducted from taxes paid on
home market sales and excluding the tax from reported costs since it was
refunded. Moreover, Essar notes that the Department did not require it to
provide further proof that the tax was refunded.

Furthermore, Ispat argues that the Department does not require VAT to be
reported in response to its questionnaire and it will not make assumptions
regarding VAT where it has not requested such information. See Certain
Welded Carbon Steel Pipes and Tubes from Thailand; Final Results, 64 FR
60910 (October 13, 2000) (Welded Pipes and Tubes from Thailand) and
accompanying Decision Memorandum at 10. Citing to Welded Pipes and Tubes
from Thailand, Essar notes that the Department held it will not include
internal taxes in the COP when it has not sought information regarding the
tax. In Welded Pipes and Tubes from Thailand, petitioners argued that the
Department should include the internal VAT in CV because the respondent
failed to demonstrate that VAT is rebated and/or refunded prior to
exportation of the subject merchandise. Respondents note that the
Department rejected petitioners' argument in that case stating that
section D of the questionnaire does not require respondents to report
information about VAT. According to respondents, the instant case is
similar to Welded Pipes and Tubes from Thailand in that the Department's
questionnaire specifically instructed them to report only the net amount
of taxes remaining after refunds or rebates and they provided the
information requested. Thus respondents maintain there is no basis for
adding internal taxes to their cost of production. Finally, respondents
claim that petitioners reliance on AIMCOR v. United States and Camargo, is
misplaced because these cases are limited to the unique facts of the
Brazilian tax system. 

Department's Position:

We disagree with petitioners. For both Essar and Ispat, the record
indicates that, during the POI, the excise duty or modvat recovered
through sales exceeded that paid on inputs. Thus, excise duty on inputs
does not constitute a cost to either company. Our approach in analyzing
this issue in the instant review is consistent with that outlined in
several administrative reviews of silicon metal from Brazil (e.g., Silicon
Metal from Brazil: Preliminary Results of Antidumping Duty Administrative
Review, 63 FR 42001, 42004 (August 6, 1998); Silicon Metal from Brazil:
Notice of Final Results of Antidumping Duty Administrative Review, 64 FR
6305, 6308, (Feb. 9, 1999) and Final Results of Antidumping Duty
Administrative Review: Silicon Metal From Brazil 65 FR 7497, 7499. The
Court's decision in Camargo, the case to which petitioners cite, is not
applicable to the current investigation. Although, pursuant to the Court's
instructions, the Department included VAT taxes in constructed value in
the Final Results of Redetermination Pursuant to Court Remand in Camargo,
the Department noted in the final remand that its current methodology
(i.e., post-Uruguay Round Agreements Act (URAA) methodology (the POR for
the Camargo case predated the URAA) is to exclude from constructed value
any portion of the VAT tax demonstrated to have been recovered by
respondents. See in the Final Results of Redetermination Pursuant to Court
Remand in Camargo, at page 4. Therefore, following the Department's
current practice, we have not increased the reported costs by modvat. 


Company Specific Issues

Essar 

Comment 4: Duty Drawback Adjustment - Verification 

Petitioners state that the Department should continue to deny Essar's
duty drawback adjustment under the DEPB program as well as the Advance
License program because Essar did not submit sufficient information prior
to verification to support its claim for a duty drawback adjustment under
these programs, and it submitted new information regarding these programs
at verification. According to petitioners, Essar's failure to submit
sufficient information regarding these programs prior to verification
precluded it from having the opportunity to substantiate its claims for a
duty drawback adjustment at verification. Petitioners contend that the
Department reviewed documentation on the record prior to the preliminary
determination and found that Essar failed to support its entitlement to a
duty drawback adjustment for either program. Because of Essar's failure to
supply adequate evidence in support of its claimed adjustment at the
preliminary determination, petitioners claim that the Department should
not have allowed Essar to provide supporting documentation during
verification.

Essar did not comment on this issue.

Department's Position: 

We disagree with petitioners. The Department may request clarification of
any information on the record at any time during the proceeding. See 19
CFR 351.301(c)(2)(2000). Based upon the Department's regulatory authority
to obtain information in order to enable it to render a decision, we
properly obtained clarifying information at verification regarding Essar's
claim for a duty drawback adjustment under the DEPB and the Advanced
License programs. We note that the Department's verification outline for
both the cost and sales verification of Essar states that we will accept
information that corroborates, supports, or clarifies information already
on the record. See Letter from Howard Smith to Essar Steel Ltd., re: Sales
Verification Outline of Essar Steel Ltd. (May 23, 2001). Therefore, rather
than deny Essar's duty drawback adjustment because the company provided
clarifying information on drawback programs at verification, we have
examined the entire record regarding these programs in order to decide
whether to grant the drawback adjustment. See Comments 1 and 5 of this
memorandum.

Comment 5: Duty Drawback Adjustment under the Advance License Program

Essar contends that the record in this investigation shows that it is
entitled to a duty drawback adjustment under the Advance License program.
According to Essar, the Advance License program exempts it from customs
duties on imports of certain inputs that go into the production of hot-
rolled steel. A specific limit is placed on the quantity of materials that
can be imported duty free under this program. This limit on imported
inputs is determined by applying a standard relationship between inputs
and outputs to the quantity of finished products to be exported by the
company. This standard relationship is established by the GOI. The company
stipulates in its application under the Advance License program the
quantity of exports to be made and the corresponding quantity of materials
to be imported. If the application is approved and the license is issued,
the company posts a bond equivalent to the dutiable amount on the imports,
and must export the quantities stated in the licence within an 18 month
period in order not to forfeit the bond. 

Essar points to record information regarding the requirement to provide
two types of documentation to link imports and exports under the Advance
License program - the bill of entry for imports consumed in India and the
shipping bill for exports under Indian law. The bill of entry provides
information on the type of merchandise being imported. The shipping bill
provides information on the steel being exported, the type of duty
drawback program against which the exports were made, the related sales
invoice number and the number of the Advance License being used. Each
Advance Licence has a unique number. Essar states that failure to produce
export documents demonstrating that it produced and exported steel
utilizing the raw material listed on each of its Advance Licenses would
result in forfeiture of the bond the company must post for each Advance
License to guarantee payment of import duty. Essar claims that it provided
evidence during verification that it had fulfilled all of the obligations
of each of the Advance License bonds that it posted during the POI. See
Essar Verification Report at 17-18. Also, Essar notes that the documents
it used in the Advanced License program provide all the information
necessary to track imports (e.g. the type of merchandise imported, the
port of shipment, country of origin, quantity, value, amount of exempted
duties, the specific license number, the quantity and type of exported
steel, and the type of duty drawback) to exports under this program. 

As further evidence that the Advance License program satisfies the first
prong of the Department's duty drawback test, Essar notes that the GOI has
established the precise quantities of inputs that a company may claim for
drawback under the Advance License program. Essar states that the GOI
audits the export shipments to verify the linkage between the quantity of
raw materials imported by the company and the exports the company makes of
hot-rolled steel manufactured from those inputs. Based upon these aspects
of the program and evidence presented at verification, Essar contends that
it has satisfied both prongs of the Department's duty drawback test and is
therefore eligible for a duty drawback adjustment to its U.S. sales.

Petitioners argue that under the Advance License program the import duty
and the rebate are not "directly linked to, and dependent upon, one
another," and thus, the Advance License program fails to meet the first
prong of the Department's duty drawback test. Specifically, petitioners
cite the Final Affirmative Countervailing Duty Determination: Certain Cut-
to-Length Carbon-Quality Steel Plate from India, 64 FR at 73131 (Dec. 29,
1999) (CTL Plate from India) in which the Department conducted an
extensive investigation of the Advance License program, as well as the
DEPB program, and found that under these programs there was no means of
determining whether home market or imported inputs were used in the
production of the exported products. Petitioners also cite Stainless Steel
Wire Rod from India; Final Results of Antidumping Administrative Review,
65 FR at 31302 (May 17, 2000), and the accompanying Decision Memorandum at
Comment 3 (Wire Rod from India) where the Department found that there was
no system in place to link inputs consumed in production with exported
merchandise. 

Petitioners believe that the SION (the standard the GOI uses to calculate
the quantity of imports that are eligible for duty drawback based on a
specified quantity of exports), does not represent Essar's actual
production experience during the POI. Therefore, the actual exports could
contain a quantity of imported product different from that reflected by
SION. According to petitioners, the Advance License program does not
ensure that imported items, or even inputs comparable to such items, are
actually used to produce merchandise that is exported. Rather, petitioners
argue that the Advance License program merely mandates that a company
import items that could be used to produce the subject merchandise, not
items that were in fact used. 

Additionally, petitioners contend that the Advance License program is not
a proper drawback program under U.S. law because it allows drawback on
imported items that are not raw materials. Petitioners cite Stainless
Steel Bar from India; Final Results of Administrative Review, 63 FR 48965
(August 10, 2000) (Stainless Steel Bar from India) and the accompanying
Decision Memorandum at Comment 1 where the Department stated that a
respondent must show "there were sufficient imports of the imported raw
materials to account for drawback received on the exported product"
(emphasis added). Since such items are not raw materials, the duty that
was rebated on such items is not eligible for drawback, and thus,
according to petitioners, Essar is not entitled to a drawback adjustment.
Thus, petitioners maintain that in the event that the Department does
permit drawback under the Advance License program, it should not permit
drawback on items that are not raw materials.

Department's Position:

We agree with Essar. Based upon our findings at verification, we conclude
that Essar has met both parts of the Department's two pronged test: (1)
whether the import duty and rebate are directly linked to, and dependent
upon, one another; and (2) whether the company claiming the adjustment can
show that there were sufficient imports of the imported raw materials to
account for the drawback received on the exported product. At
verification, Essar provided record evidence linking the import duty
payable and the duty drawback received. Specifically, the Department
established this link through its examination of entry bills and shipping
documents. See Essar Verification Report at 16 -18. In addition, Essar
explained the methodology it used to calculate the duty drawback
adjustment and provided the respective Advanced Licenses under which it
imported raw materials free of duty, provided such materials were used in
the production of exported products within a specified time frame. 

Moreover, when importing raw materials under the Advance License program,
Essar posts a bond that guarantees the value of duties normally applicable
to the imports. If Essar fails within 18 months to export the quantities
it committed to make in the relevant Advanced License, it does not receive
the full amount of the bond posted during the importation of the products.
At the Department's verification Essar was able to demonstrate that it did
not forfeit any portion of the bonds posted for Advance Licenses.
Therefore, we find that Essar satisfied the first prong of the
Department's duty drawback test. See Essar Verification Report at 16-17.

Furthermore, in establishing the link between import duty payable and
duty drawback received, Essar was able to demonstrate that there were
sufficient imports of raw materials to account for the duty drawback on
exports of the manufactured product. We note that the GOI's input/output
standard is based on the manufacturing process used by Essar to produce
hot-rolled steel. See Essar Verification Report at 16-18. Based on the
foregoing, we find that the second prong of the Department's duty drawback
test has been met.

Finally we note that petitioners' reliance on Wire Rod from India and
Stainless Steel Bar from India is misplaced because these cases involve
the Department's findings with respect to the DEPB program, not the
Advance License program. Additionally, there is no evidence on the record
that Essar imported anything other than the materials necessary for the
production of hot-rolled steel under the Advance License program.
Therefore, because Essar has satisfied both prongs of our duty drawback
test, we have granted the duty drawback adjustment under the Advance
License programs.

Comment 6: U.S. Imputed Credit Expenses Disallowed in the Preliminary
Determination

Although the Department preliminarily decided to disallow Essar's U.S.
credit expense adjustment for certain sales because they had missing
payment dates, payment dates outside the POI, or payment dates earlier
than the shipment/invoice date, Essar maintains the Department should
grant this adjustment for the final determination since it supplied the
missing information and the Department verified the information.
Specifically, Essar notes that, in response to the Department's
supplemental questionnaire, it supplied the missing payment dates that it
was not able to supply at the time of its questionnaire response either
because payment had not been received or it had been unable to determine
the exact date of payment. Moreover, Essar notes that it reported the
appropriate date for payments received after the POI or prior to the
shipment/invoice date. See Essar's Supplemental Questionnaire Response, at
3- 4 (May 4, 2001). In fact, Essar states that at verification, the
Department examined three advance payment sales and matched the payment
dates reported for each of these sales to the payment dates recorded in
accounting documents.

After analyzing Essar's post-Preliminary Determination submission of
payment information, petitioners argue that the Department should disallow
the negative credit expense adjustment claimed for certain sales because
these sales do not involve advance payments. Due to the proprietary nature
of this information, a complete discussion is included in the Department's
Calculation Memorandum dated September 17, 2001. See Calculation
Memorandum from John Conniff to the File, September 21, 2001 (Essar
Calculation Memorandum).

Department's Position:

We agree with Essar, in part, and petitioners. Based upon our examination
of the information on the record and our findings at verification, with
one exception, we have allowed the adjustment for imputed U.S. credit
expenses based upon the actual payment dates reported in the sales
database filed on July 12, 2001. This database incorporates all of the
above-mentioned corrections to the originally reported payment dates. The
exception involves negative credit expense adjustments for certain sales.
Specifically, we have denied the negative credit adjustment for those U.S.
sales where we determined that the money received by Essar prior to
shipment is not an advance payment on the sale. See Essar Calculation
Memorandum from John Conniff to the File, September 17, 2001.

Comment 7: Treatment of Pre-Operative Expenses

Petitioners contend that Essar failed to include costs from its
"Preoperative/Trial Run Account" (pre-operative account) in the reported
COP. This account consists of interest, G&A expenses, depreciation, and
salary and wage expenses associated with capital expenditures for a new
operational facility at Essar's plant. Petitioners argue that the record
demonstrates that these costs were incurred during the POI and are related
to the production of the subject merchandise and therefore should have
been reported as a part of COP.

First, petitioners note that although the Department has allowed
respondents to capitalize and amortize costs where such cost are incurred
during the pre-production or testing phase, such is not the case here. See
Dynamic Random Access Memory Semiconductors of One Megabit and Above from
Taiwan; Final Determination of Sales at Less Than Fair Value, 64 FR 56308,
56318 (October 19, 2000). Petitioners claim that Essar was in full
production during the POI producing hot-rolled steel and hot-briquetted
iron (HBI), which is an input for subject merchandise. In addition,
petitioners refer to Essar's Annual Report which shows that the company
was utilizing nearly all of its capacity and did not have any trial runs
of any product during the fiscal year that ended March 31, 2000.
Petitioners further claim that there was no use of raw materials for trial
runs, no opening and closing inventory of trial runs and no sales of trial
merchandise.

Second, petitioners claim that the ongoing projects associated with the
pre-operative account must relate to the subject merchandise because
Essar's only production operations involve the subject merchandise and an
input therein. Although Essar identified one of the ongoing projects
associated with the account as a "cold-rolling mill," petitioners maintain
that there is no evidence on the record that Essar is involved in the
production of cold-rolled steel or the construction of a new cold-rolling
facility. Therefore, petitioners contend it is clear that all the assets
of the company that were depreciated during the POI were related directly
or indirectly to the production of the subject merchandise. 

Additionally, petitioners argue that even if the pre-operative costs have
been capitalized in accordance with Indian generally accepted accounting
principles (GAAP) it does not mean the costs should be excluded from COP.
Petitioners note that under section 773(f)(1)(A) of the Act, costs should
normally be reported based on the records of the producer if such records
are kept in accordance with the GAAP of the exporting country...and
reasonably reflect the costs associated with the production and sale of
the merchandise (emphasis added). Petitioners point out that the
Department has repeatedly rejected proposed cost methodologies that
conform to local GAAP where such methodologies do not fully and accurately
reflect the respondents's cost to produce the subject merchandise during
the relevant period. See Dynamic Random Access Memory Semiconductors from
Korea; Final Results of Antidumping Administrative Review, 65 FR 68976
(November 15, 2000) (DRAMs from Korea), and accompanying Decision
Memorandum at Comments 3 and 9. Thus, petitioners claim that the
capitalized costs which relate to the subject merchandise, should not be
excluded from the reported costs just because they are capitalized under
Indian GAAP. 

Finally, petitioners contend that even if the Department finds that the
expenses in the pre-operative account do not relate to the subject
merchandise, certain types of expenses recorded in that account, namely
interest, G&A, and salary and wages must be included in COP. With respect
to interest expenses, petitioners note that the Department has an
established practice to treat money as fungible and thus financial
expenses in the pre-operative account should be treated like all other
financial expenses. See Silicon Metal from Brazil; Final Results, 65 FR
7497, 7500 (Feb. 15, 2000) (noting the fungibility of money within a
corporate entity). Also, petitioners argue that G&A and salary and wage
expenses are period expenses that relate to the general operations of the
company and therefore must be included in COP. See the Department's
Antidumping Questionnaire, January 11, 2000 at D-27 stating that "G&A
expenses are those period expenses which relate indirectly to the general
operations of the company rather than directly to the production process."
Thus, petitioners urge the Department to include the costs in the pre-
operative account in Essar's reported costs.

Essar counters petitioners' arguments by stating that independent
auditors certified that it compiled its accounts in accordance with
applicable Indian accounting standards. Essar argues that the Department
is required to base a respondent's costs on records kept in accordance
with the GAAP of the exporting country as long as the method of accounting
reasonably reflects the cost associated with the production and sale of
merchandise. See section 773(f)(1)(A) of the Act.

According to Essar, there is no indication that its method of accounting
for pre-operative costs (i.e., treating all costs associated with assets
and capital construction as fixed assets or capital work-in-progress) is
distortive. See Essar's Response, Exhibit A-6 (February 8, 2001).
Additionally, Essar argues that its accounting policy is consistent with
U.S. GAAP. Essar states that it values its fixed assets at historical
cost, which U.S. GAAP defines as "the actual amount paid at the date of
acquisition, including all normal expenditures of readying an asset for
use." See Williams, Jan R. Miller GAAP Guide Restatement and Analysis of
Current FASB Standards, 2000, at 12.05 (Miller GAAP Guide). According to
Essar, "all normal expenditures" include period expenses such as G&A and
salary and wage expenses which petitioners argue should be excluded from
capitalized costs.

With respect to interest expenses, Essar counters petitioners' argument
that interest expenses associated with the pre-operative account should
not be capitalized by noting that U.S. GAAP requires capitalization of
interest cost associated with capital work-in-progress. See Miller GAAP
Guide, at 24.05. Thus, Essar states that even if the costs in the pre-
operative account were incurred during the POI and related to the
production of subject merchandise, it does not mean that they should be
included in the current COP. 

Essar disagrees with petitioners' claim that Essar's capitalized costs
must relate to the production of subject merchandise, because it only
produces subject merchandise. Essar argues that while capitalized costs
may result in the production of the subject merchandise in the future,
they do not relate to production during the POI because the costs were
incurred to procure and install equipment that was not ready for use
during the POI. Essar notes that its accounting policies clearly dictate
that capitalized costs are costs that were incurred to purchase, install,
commission and finance assets that are not yet ready for use. Furthermore,
Essar notes that capitalized costs relating to new assets will be
reflected in its costs after installation of the assets is completed and
the assets are put into production. At that point, according to Essar, the
capitalized costs are transferred to the fixed asset value and the
depreciation expense is included in its COP. 

Finally, Essar notes that the Department examined its pre-operative
account expenses during verification and tied the capital work-in-progress
account to Essar's financial statement and found no discrepancies.

Department's Position: 

We agree with Essar. During the POI, Essar accumulated costs in its pre-
operative account that related to future operations, not current
production. When the company was able to identify pre-operative expenses
for future projects, the expenses were transferred within Essar's
accounting system to the capital works-in-progress accounts. Further,
while capitalized costs may result in the production of subject
merchandise in the future, we verified that the assets in question were
not used to produce subject merchandise during the POI, nor was any of the
machinery involved in service during the POI. See Essar Verification
Report at 32. Moreover, at the Department's verification we were able to
substantiate that the capital accounts were fully transferred to the
capital work-in-progress account as reflected on page 19 of the 1999-2000
audited Financial Statement. See Essar Verification Report at 32.

Furthermore, petitioners' reliance on DRAMs from Korea is misplaced. The
Department ruled in DRAMs from Korea that research and development for
future semiconductor projects benefitted current production of semi-
conductor products; thus all of these costs should be included in the COP.
In the instant case, the assets with expenses recorded in the capital work-
in-progress accounts were not in use, nor did they provide any benefit for
production of the subject merchandise during the POI. Therefore, the
amounts capitalized in the pre-operative accounts should not be included
in the COP for subject merchandise during the POI. As such, for purposes
of the final determination, we will continue to utilize Essar's costs as
reported to the Department in its post-verification submission on July 12,
2001.

Comment 8: Treatment of Costs of Services Provided by an Affiliated Party 

Petitioners argue that in accordance with section 773(f)(2) of the Act,
the Department should disregard the transfer price of the iron ore pellet
conversion services Essar purchased from its wholly-owned subsidiary Hy-
Grade Pellets, Ltd. (Hy-Grade) because the market price for these services
is higher than the transfer price. See Essar Verification Report, at 28-
29. Petitioners request that the Department recalculate the reported COP
to account for this difference in price between the market rate and the
transfer price.

Essar did not comment on this issue.

Department's Position:

We agree with petitioners. In accordance with section 773(f)(2) of the
Act, we are adjusting Essar's transfer price to reflect the market value
of iron ore pellet conversion services because we found at verification
that the transfer prices for these services were below market price. See
Essar Verification Report at verification exhibits 7 and 15. Therefore, we
have adjusted Essar's reported COP to reflect the market price of iron ore
pellet conversion services obtained at verification. 

Comment 9: Use of the Revised Interest Expense Ratio

Petitioners contend that Essar revised its previously reported interest
expense ratio at the start of verification which was after the deadline
for the submission of factual information. Petitioners maintain that the
record does not contain any information in support of the revised interest
expense ratio presented at verification. They argue that since the
Department was able to verify the originally reported interest expense
ratio, it should continue to use this interest expense ratio in its final
determination.

Essar disagrees with petitioners. Essar states that the Department
verified the revised interest expense ratio. According to Essar, the
Department traced the cost of sales, interest expense, and interest income
that was used to calculate the revised ratio to its audited financial
statements and noted no discrepancies.

Department's Position: 

We agree with petitioners. The Department was unable to substantiate the
revision to the interest expense ratio that Essar presented at the
beginning of verification. Therefore, we have disregarded Essar's proposed
revision and continue to use in our calculations the interest expense
ratio used in the Preliminary Determination and verified by the Department.

Comment 10: Unreported U.S. Sales 

Petitioners argue that Essar's attempt to report additional U.S. sales to
the Department at verification should be disregarded and that these sales
should not be utilized in calculating the company's antidumping duty
margin. See Essar Verification Report, at 4. Petitioners argue that it is
the Department's practice to accept new information during verification
only when the information constitutes minor corrections to information
already on the record. According to petitioners, the aggregate total of
the invoices represent more than a minor correction, and thus should be
considered new information and rejected.

Petitioners believe that Essar had numerous opportunities to submit this
information throughout the case. Additionally, petitioners assert that the
information provided by Essar on the missing sales was untimely and that
Essar did not provide enough information to enable the Department to
perform margin calculations on the sales in question. Because Essar failed
to provide information in a timely manner, petitioners state that the
information could not be timely verified and that the Department should
therefore apply adverse facts available under section 776(a) of the Act. 

Petitioners argue that the application of facts available is warranted
because the necessary information relating to the unreported sales is not
on the record. Petitioners state that although Essar provided the total
quantity and value for the improperly omitted sales, other information
pertinent to the Department's investigation was not placed on the record
in accordance with the deadlines specified. Petitioners argue that it is
not possible to determine the product details necessary to construct the
relevant CONNUMS, nor the gross unit price and other pertinent
adjustments. In total, according to petitioners, it is not possible to
determine eight of the eleven model matching characteristics necessary to
construct a CONNUM for these U.S. sales. Thus, the information regarding
the unreported U.S. sales is not only untimely, but incomplete.

Further petitioners contend that Essar failed to act to the best of its
ability. Despite repeated opportunities, Essar failed to submit
information related to the missing sales in a timely manner. Moreover, it
had no explanation for how these sales could have remained undetected
throughout the proceeding. In addition, the record contains no evidence of
extenuating circumstances that would explain Essar's failure to report the
omitted sales in a timely manner. Petitioners argue that in prior cases,
where the respondent failed to report certain U.S. sales until just before
verification, the Department only accepted this new data because the
respondent in the case provided detailed information regarding the sales.
See Stainless Steel Sheet and Strip in Coils from Italy; Final
Determination of Sales at Less Than Fair Value, 64 FR 30750, 30757 (June
9, 1999). Additionally, petitioners note that in other cases, the
Department applied adverse facts available to omitted US. sales even
though such sales constituted a small percentage of the database, and
respondent identified the sales at the outset of verification and provided
complete documentation for the sales. See Stainless Steel Sheet and Strip
in Coils from Germany; Final Determination of Sales at Less Than Fair
Value, 64 FR 30710, 30732 (June 8, 1999) (Stainless Steel Strip from
Germany). 

Petitioners claim that the instant case is readily distinguishable from
other cases in which the Department accepted new information related to
U.S. sales as minor corrections. According to petitioners, in Stainless
Steel Sheet and Strip in Coils from Korea; Final Determination of Sales at
Less Than Fair Value, 64 FR 30664, 30680 (June 8, 1999) the respondent
presented data regarding a single U.S. sale at the outset of verification
and the Department was able to examine and verify information relating to
the omitted sale. In Certain Large Diameter Carbon and Alloy Seamless
Standard, Line and Pressure Pipe from Mexico; Final Determination of Sales
at Less Than Fair Value, 65 FR 39358, 39358 (June 26, 2000), and
accompanying Decision Memorandum at Comment 7 and Certain Cut-to-Length
Plate Products from Japan; Final Determination of Sales at Less Than Fair
Value, 64 FR 73215, 73233-34 (December 29, 1999) the Department accepted
information for previously omitted U.S. sales, that the respondent
submitted at the outset of verification, for which full information was
placed on the record and verified. 

Petitioners conclude that there was no misunderstanding by Essar
concerning the sales which it was required to report and that the missing
sales do not represent a "minor" correction. Petitioners claim Essar
failed to use its best efforts to comply with the Department's request for
information. Thus, according to petitioners, the Department should apply
adverse facts available for the sales in question.

Essar counters petitioners' arguments stating that in order to apply
adverse facts available, the Department must find that Essar "failed to
cooperate by not acting to the best of its ability." Essar states that
there is no evidence of any deliberate or willful withholding of
information by it during the course of the investigation. Essar argues
that petitioners' request for the Department to apply facts available to
the sales in question is misplaced because the record demonstrates that
the company fully cooperated with the Department throughout the
investigation. Essar believes that it inadvertently failed to include the
missing sales in its questionnaire response because it believed that the
sales had been booked and shipped before the beginning of the POI.
According to Essar, in preparing for verification it found that the
invoices for these sales were dated October 3, 1999, two days after the
beginning of the POI.


Essar believes that the petitioners exaggerate the importance of these
sales. Essar argues that the percentage of total sales that these
transactions represent are so insignificant as to be treated as de minimis
or the equivalent of zero under the antidumping law. According to Essar,
petitioners offer no reason why the Department should treat the failure to
report these sales as warranting adverse facts available when it was
corrected at verification. Further, Essar argues that there is no legal or
factual basis for applying adverse facts available in calculating dumping
margins on the sales that were reported as minor corrections at
verification. If the Department does not have sufficient information on
these sales to conduct a complete margin analysis, it should apply a
"neutral" facts available. Essar cites Stainless Steel Wire Rod from
Taiwan; Final Determination of Sales at Less Than Fair Value, 63 FR 40461,
62 (July 29, 1998) as an example of the Department's use of a weighted-
average dumping margin for neutral facts available. Furthermore, Essar
argues that even if the Department were to apply adverse facts available,
it must reject petitioners' proposal to apply the highest calculated
margin for Essar's other U.S. sales. 

Additionally, if the Department chooses to resort to facts available,
Essar urges the Department to avoid basing dumping margins for the sales
in question on aberrational margins for other sales. See Stainless Steel
Strip from Germany at 30714 (where the Department applied the highest non-
aberrational margin to the unreported sales). In that case, the Department
examined the frequency distribution of the margins calculated from
respondent's reported data and utilized the result as a neutral facts
available. See Stainless Steel Strip from Germany at 30714. 

Department's Position: 

We agree with respondents, in part. During the proceedings the Department
made several requests for information concerning the total quantity and
value of Essar's reported sales to the United States during the POI. At
verification Essar presented the Department with a number of sales which,
according to Essar, had been inadvertently excluded from its U.S. sales
submissions. According to section 782(d) of the Act, where the Department
determines that a response to a request for information does not comply
with the request, the Department will so inform the party submitting the
response and will, to the extent practicable, provide that party the
opportunity to remedy or explain the deficiency. If the party fails to
remedy the deficiency within the applicable time limits, the Department
may, subject to section 782(e), disregard all or part of the original and
subsequent responses, as appropriate. 

We provided Essar with opportunities throughout the investigation to
remedy any deficiencies in its U.S. sales database through our
questionnaires and at verification. At verification, Essar was able to
identify the transactions that it omitted from its U.S. sales database,
but was unable to provide all of the accompanying expense data that was
necessary to include these transactions in our antidumping calculations.
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 and the Commission shall, subject to
section 782(d), use the facts otherwise available in reaching the
applicable determination under this title."

A complete and accurate US sales database is essential to our dumping
analysis. Key information concerning the omitted transactions was not
included in the corrections Essar presented at verification, and thus the
information provided is not sufficient to calculate a margin for these
transactions. See Rhone Poulenc, Inc.,v. United States, 899 F.2d 1185,
1191 (Fed. Cir. 1990). Therefore, as we cannot include these transactions
in our margin calculation, we have determined that it is necessary to use
facts available for the sales information that is missing. 

With respect to the use of adverse inferences, we note that according to
section 776(b) of the Act, if the Department finds that an interested
party "has failed to cooperate by not acting to the best of its ability to
comply with a request for information," the Department may use information
that is adverse to the interests of the party as facts otherwise
available. We find that there is no evidence on the record that Essar has
not fully cooperated with the Department's requests for information
throughout the proceedings in a timely manner. Essar duly reported the
errors in its sales reporting on the first day of verification in
accordance with the Department's policies as outlined in our verification
agenda. See Letter from Howard Smith to Essar Steel Ltd., re: Sales
Verification Outline of Essar Steel Ltd. (May 23, 2001). In the
Department's view, Essar's failure to account for these missing sales
represents a minor error in recording the proper invoice date for a small
number of sales at the beginning of the POI, not a failure to cooperate
with the Department. The fact that these sales were shipped shortly before
the POI began but invoiced shortly thereafter lead to this error. The
mistake also involved an insignificant percentage of Essar's total sales
to the US during the POI. Therefore, we are not applying adverse facts
available for the sales in question. However, because we do not have all
the necessary information for these sales in order to calculate a dumping
margin, we are assigning a neutral facts available rate to these sales
based upon the weighted-average dumping margin calculated for Essar's U.S.
sales.

Comment 11: Use of Updated Credit Periods to Calculate Home Market Credit
Expenses

Petitioners state that although Essar initially used a credit period of
87 days to calculate credit expenses for all home market sales, it
subsequently reported unique credit periods for each home market customer.
However, in the Preliminary Determination the Department calculated credit
expense in the home market based on a credit period of 87 days for all
customers regardless of the actual number of days reported for a specific
customer. See Preliminary Determination at 20. Petitioners urge the
Department to revise Essar's credit expenses in the home market to reflect
the reported customer-specific credit periods.


Essar did not comment on this issue.

Department's Position: 

We agree with petitioners. Using Essar's revised sales tape, we
calculated credit expenses using the actual number of days between
shipment and payment for specific customers, as opposed to the one credit
period used in the Preliminary Determination.

Ispat 

Comment 12: Capitalization of Production Costs 

Ispat argues that only the cost data for the period April 2000 through
September 2000 (P2) should be used by the Department, and that the cost
data for the period October 1999 through March 2000 (P1) should not be
used. Ispat claims that commercial production did not begin until P2 and
that prior to P2 all expenses incurred at the hot-rolling mill were
capitalized as permitted under Indian GAAP. Ispat states that prior to P2,
all costs were recorded under a single asset account for financial
statement reporting. Ispat claims that using actual costs for P1
incorporates errors related to the imprecise classification of costs in
the accounting system prior to P2 because Ispat did not control the
accounts where expenses were booked. Additionally, Ispat argues that its
"hot-strip mill division (HSM) was not operating in the ordinary course of
business prior to" P2, therefore, the Department should rely only on the
reported P2 costs rather than costs for the entire 12 months of the POI.
Ispat references the Antidumping Duty Investigation of Fresh Tomatoes From
Mexico; Notice of Preliminary Determination of Sales at Less Than Fair
Value and Postponement of Final Determination, 61 FR 56608, 56613,
(November 1, 1996) (Fresh Tomatoes From Mexico) and the Antidumping Duty
Investigation of Certain All-Terrain Vehicles From Japan; Notice of Final
Determination of Sales at Less Than Fair Value, 54 FR 4864, 4868, (January
31, 1989) (Certain All-Terrain Vehicles From Japan) as cases where the
Department used cost data for a period other than the entire 12-month POI. 

Ispat asserts that the Department is required to follow a company's
accounting treatment if it is in accordance with local GAAP. Ispat points
out that Ispat's auditors allowed capitalization adjustments and
therefore, the Department should allow it in this investigation. Also,
Ispat argues that the estimated production volume it used to value
inventory and as allowed by its auditors, is a reasonable estimate of the
post start-up results. Additionally, Ispat claims that the estimated
production volumes (which are based on capacity utilization) that it used
to calculate inventory values and its claimed start-up adjustment is a
conservative figure when compared to other Indian and U.S. hot-rolled
steel producers. Ispat states that demand for hot-rolled coils is not a
factor affecting its capacity utilization as Ispat's cold-rolling plant
would consume any excess hot-rolled coils produced. Ispat argues that the
upward trend in production volumes will continue once the technical
difficulties can be resolved. 

Petitioners state that according to section § 351.204(b)(1), the
Department normally will examine merchandise sold during the four most
recently completed fiscal quarters in an antidumping investigation. To be
comparable and consistent, the Department also examines the COP for the
same period, which in this case is P1 and P2. Petitioners assert that the
Department should disregard Ispat's arguments of incorrect classifications
of expenses because it is the responsibility of the respondent to report
such data as accurately as possible. Petitioners argue that if the errors
in the cost data are serious (and to the extent the P1 cost data is not
usable), the Department should apply facts available to the COP data for
P1. Petitioners point out that in Fresh Tomatoes From Mexico, the
Department needed to collect cost data outside of the POI because of the
subject merchandise's growing season, which does not exist in the instant
case. Petitioners also point out that since P1 falls within the POI it is
not necessary to obtain cost data from outside the POI as was the case in
Certain All-Terrain Vehicles From Japan. Petitioners refer to Section
773(f)(1)(A) of the Act which allows the Department to reject cost
methodologies that conform to local GAAP if such costs do not accurately
reflect a respondent's costs to produce subject merchandise. See
Antidumping Duty Administrative Review of Dynamic Random Access Memory
Semiconductors from Korea, 65 FR 68976 (November 15, 2000). 

Department's Position: 

We continue to disagree with Ispat's capitalization of production
expenses from P1 and have included those costs in the costs of producing
the merchandise under consideration in these final results. Under section
773(f)(1)(A) of the Act, the Department is directed to follow the normal
records of the exporter or producer if such records are kept in accordance
with home country GAAP and reasonably reflect the costs associated with
the production and sale of the merchandise under consideration. Ispat's
production expenses are capitalized in the company's normal records. We
will follow this treatment, only if it reasonably reflects the costs
associated with the production of hot-rolled carbon steel. In this case,
we find that Ispat's capitalization of production expenses was excessive
and resulted in unreasonable per-unit costs for subject merchandise.
Information Ispat provided for P1 and P2 production volumes demonstrates
that it was producing and selling significant volumes of subject
merchandise during all months of both periods. Based on the information
Ispat provided about the amount of inputs into the electric arc furnace,
number of heats run per month, inputs into the rolling mill, hot-rolled
coil output from the rolling mill and the significant amount of Ispat's
sales to the United States during the POI, we have determined that the HSM
was fully functioning and should have been recording its costs of
operations rather than capitalizing its operating costs. For a detailed
analysis, see the Final Determination Cost Calculation Memo dated
September 21, 2001. Rather, Ispat continued to capitalize production costs
long after the company began producing and selling significant quantities
of hot-rolled steel produced at the HSM facility. The Department also
rejects Ispat's use of estimated production volumes in its calculation of
the COP. Even though the estimated volumes were allowed under Indian GAAP
to value ending inventory, they do not reflect Ispat's actual production
volumes and should not be used in the claimed start-up adjustment to
calculate the COP. Moreover, the Department does not agree with Ispat's
claim that the reported P1 costs contain an error factor. In the March 26,
2001 supplemental D questionnaire at question number 6, the Department
requested separate cost files for P1 and P2, and stated "[t]o calculate
POI costs, we intend to weight-average the costs reported in the two
separate cost files. Identify any adjustments that Ispat thinks may be
necessary to make accurate calculations." These questions provided Ispat
with an opportunity to correct any errors relating to the imprecise
classification of costs in the accounting system in P1. Ispat did not make
any adjustments or claims for necessary adjustments. 

Ispat's exclusion of P1 costs understated its total costs, which also
resulted in an understatement of the per-unit cost of producing the
merchandise under consideration. Therefore, for these final results we
continued to disallow the capitalization of production costs and
consequently increased the reported cost of manufacturing (COM) to reflect
the additional production costs.

We note that the cases cited by Ispat are factually distinct from this
case. In both Fresh Tomatoes From Mexico and Certain All-Terrain Vehicles
From Japan, it was necessary for the Department to use data from outside
the POI to obtain costs that were representative of the production
process. This situation does not exist in this case because the costs of
the production process were fully captured in P1 and P2 and were verified. 

Comment 13: Start-Up Adjustment - HSM

Ispat argues that the evidence on the record indicates that it satisfied
the requirements for a start-up adjustment at its new production facility.
Ispat claims that the statute does not contemplate the start-up period to
end with the beginning of commercial production but rather that the start-
up period continues through the initial phase of commercial production. As
a result, Ispat states that the Department should consider whether its
production levels were limited by technical factors associated with the
initial phase of commercial production, not whether it had reached
commercial levels of production during the POI. Ispat further claims that
the number of units processed (i.e., starts) at the new facility were
below the volume considered appropriate under Indian GAAP and the
"commercial rated" capacity of the new facility. Furthermore, Ispat claims
that production data obtained at verification demonstrates that Ispat's
production was not stabilized during the POI. 

Ispat refers to Antidumping Duty Review of Brass Sheet and Strip from the
Netherlands; Notice of Final Results and the Determination Not to Revoke
the Antidumping Duty Order, 65 FR 742, 743 (January 6, 2000) (Brass Sheet
and Strip) as a case, similar to Ispat's situation where the Department
granted a start-up adjustment. Ispat points out that in that case, the
Netherlands' respondent continued to operate its old ring caster while
working out the technical problems that limited production at its new
facility. Ispat claims that this scenario is similar to its continued use
of direct-reduced iron (DRI) from the sponge iron plant (SIP) while
performing test run production at the Metallics India, Ltd. (IMIL) hot-
metal facility. 

From the cost verification report dated June 28, 2001, Ispat cites
numerous examples of difficulties that contributed to its claimed start-up
adjustment. Ispat states that these problems are associated with
installing highly complex and capital intensive equipment at a new
facility and cannot be described as normal maintenance problems. According
to Ispat, the statute only requires that the technical problems are
associated with the initial phase of production. Ispat points out that the
statute does not permit quantitative or subjective analysis of the nature
of the technical problems affecting production.

Petitioners argue that the information on the record clearly shows that
Ispat had reached a commercial level of production prior to the start of
the POI. Petitioners state that production throughout the POI was both
significant and consistent which would indicate that technical factors did
not affect production levels. Moreover, petitioners note that although
Ispat compared production volumes to levels considered appropriate under
Indian GAAP or the facility's rated capacity, units processed should be
used to determine whether production levels were limited by technical
factors. See Agro Dutch Foods Ltd., v. United States, 110 F. Supp. 2d 950,
955 (CIT 2000) (quoting the Statement of Administrative Action (SAA) at
166, 1994 U.S.C.C.A.N. at 3864) (Agro Dutch Foods) stating that "units
processed are to be the measure of production levels" and "the start-up
period may end well before a company achieves optimum capacity
utilization." 

Additionally, petitioners point out that contrary to the statute's
instructions, Ispat calculated its start-up adjustment based on the
difference between actual costs and theoretical costs. Petitioners state
that Ispat did not provide any costs for a period after the start-period.
As a result, if a start-up adjustment was given, the Department would need
to substitute the costs incurred for P2 for the costs for the entire POI.

Finally, petitioners urge the Department not to allow Ispat to allocate
costs based on imputed production volumes because Ispat was not in a start-
up phase and, even if such a methodology was used in Ispat's books, it
does not reflect the cost of producing subject merchandise. Petitioners
note that the CIT has held the Department "must reject GAAP consistent
methodologies when they are distortive and do not reflect actual costs."
American Silicon Technologies, et. al v. United States, Slip Op. 99-34
(CIT, April 9, 1999) at 17 (citing Thai Pineapple Pub. Co. Ltd. v. United
States, 946 F. Supp. 11, 20 (1996)). In addition, petitioners point out
that imputed production volumes were only used to value Ispat's inventory
of hot-rolled coils for financial statement purposes. They were not used
to calculate the cost of goods sold. 

Department's Position:


We have disallowed Ispat's claimed start-up adjustment. Section
773(f)(1)(C)(ii) of the Act provides the following:

     adjustments shall be made for start-up operations only where-- 
     (I) a producer is using new production facilities or producing 
     a new product that requires substantial additional investment, 
     and (II) production levels are limited by technical factors 
     associated with the initial phase of commercial production. 

For purposes of subclause (II), the initial phase of commercial 
production ends at the end of the start-up period. Moreover, with 
respect to commercial production, the SAA states:

     [T]o determine when a company reaches commercial production 
     levels, Commerce will consider first the actual production 
     experience of the merchandise in question. Production levels
     will be measured based on units processed. ..... A producer's
     projections of future volume or cost will be accorded little 
     weight, as actual data regarding production are much more
     reliable than a producer's expectations. See SAA at 836. 

In determining whether commercial production levels have been achieved,
the administrating authority shall consider factors unrelated to start-up
operations that might affect the volume of production processed. According
to the SAA, "any determination of the appropriate start-up period involves
a fact-intensive inquiry" and includes a consideration of "factors
unrelated to start-up operations that may have affected the volume of
production processed, such as demand, seasonality, or business cycles."
The SAA further states that the 

     start-up [period] will be considered to end at the time the 
     level of commercial production characteristic of the merchandise,
     producer, or industry concerned is achieved. The attainment of 
     peak production levels will not be the standard for identifying 
     the end of the start-up period, because the start-up period may 
     end well before a company achieves optimum capacity utilization.
     In addition, consistent with the basic definition of a start-up 
     situation, Commerce will not extend the start-up period so as to 
     cover improvements and cost reductions that may occur over the life
     cycle of a product. See id. 

We do not find respondent's reference to Brass Sheet and Strip to be
persuasive. In Brass Sheet and Strip, the Department granted a start-up
adjustment because it found that the respondent did not reach commercial
levels of production until several months into the POI. Moreover, the
Department determined when commercial levels of production began in that
case based on the number of units processed at the facility, consistent
with the SAA at 836.

As noted in the Department's cost verification report dated June 28,
2001, we found that inputs into Ispat's production process and output from
its rolling mill did not vary significantly throughout the POI or even
through March 2001, the most current information provided by Ispat. See
the detailed analysis provided in the Final Cost Calculation Memo dated
September 17, 2001. In initiating this case, Ispat was identified as one
of India's two largest producers or exporters of hot-rolled steel, which
together account for more than 60 percent of the total exports to the
United States. See Memorandum from Timothy Finn To Holly A. Kuga,
"Selection of Respondents," dated January 10. 2001. In order to be
considered one of the two largest Indian exporters to the United States,
Ispat had to generate significant sales and produce significant quantities
of the merchandise under consideration. The production statistics
contained in Attachment 1 to the June 28, 2001 cost verification report
confirms the significance of Ispat's production quantities during the POI.
The production data provided by Ispat comparing the inputs into production
for the six months prior to the POI to the inputs into production for the
six months after the POI (i.e., a range of two years) may indicate
improvements and cost reductions that occurred over the life cycle of the
production process. Furthermore, the SAA at 838 states

[S]pecifically, companies must demonstrate that, for the period under
investigation or review, production levels were limited by technical
factors associated with the initial phase of commercial production and not
by factors unrelated to start-up, such as marketing difficulties or
chronic production problems. 

The reference to "chronic production problems" in this quote suggests
that, at some point, even technical problems no longer define the start-up
period. We do not believe that the technical difficulties Ispat
experienced qualify as sufficient technical factors under section
773(f)(1)(C) of the Act. Despite Ispat's claim, the kind of chronic
production problems experienced by Ispat do not constitute technical
factors which are unique to a start-up operation especially when the
volume of production starts at the facility are considered.

Finally, Ispat's calculation methodology for its claimed start-up
adjustment is incorrect. The SAA at 837 states: 

     [I]n certain situations, the start-up period may extend beyond 
     the period of investigation or administrative review, possibly 
     even beyond the deadline for Commerce's final determination. In
     such cases, Commerce must cut off the submission of additional 
     information to allow itself time to analyze and verify the data,
     as well as to provide interested parties with an opportunity to 
     comment on the data. Commerce will use as start-up costs the most
     recent costs incurred prior to the end of the start-up period that
     Commerce reasonably can take into account without delaying the 
     timely completion of the investigation.

In the instant case, contrary to the SAA at 837, Ispat used costs based
on theoretical volumes, not actual costs incurred prior to the end of the
alleged start-up as a benchmark for the start-up adjustment. 

Comment 14: Exclusion of Costs Related to Start-Ups

Ispat identified several costs which it excluded from the reported cost
of producing the merchandise under consideration. Ispat claims that in
each case the excluded costs were related directly to start-up related
problems. The first group of expenses Ispat excluded were depreciation
expenses related to capital assets not yet commissioned. Ispat argues that
there were no benefits derived from these assets prior to commissioning,
therefore the costs should not be included in the reported cost of
production. Ispat notes that only one-half of the rolling mill's capacity
was being utilized during the POI, and that utilization was significantly
limited due to start-up problems. Because of these problems, Ispat did not
depreciate any costs of the rolling mill, which were allowable under
Indian GAAP. Ispat requests that if the Department makes an adjustment for
unrecorded depreciation on the rolling mill, the adjustment only be for
one half of the allowable depreciation which it attributed to Phase I
capacity. 


The second group of expenses Ispat excluded were interest expenses
incurred as the result of pre-operative and trial run activities in Phase
I and Phase II construction (6). Ispat states that the interest expenses
relating to Phase II construction were correctly capitalized and should be
excluded from the interest rate calculation because the Phase II
facilities did not produce a single ton of material during the POI. Also,
Ispat argues that the interest expenses capitalized relating to Phase I
should not be included in the interest rate calculation because they were
capitalized in accordance with Indian GAAP. Ispat asserts that the
capitalization of interest costs relating to the construction of capital
assets is specifically allowed under U.S. GAAP. Ispat cites U.S. GAAP
which states that "{c}apitalization of interest is based on the principle
that a better measure of acquisition cost is achieved when certain
interest costs are capitalized. This results in a better matching of
revenue and costs in future periods." Furthermore, Ispat points out that
the reported interest rate calculation was based on Ispat's March 31, 2000
consolidated financial statements. 

The third group of expenses that Ispat argues should be excluded are the
G&A expenses capitalized by Ispat in its audited financial statements.
Ispat claims that these expenses are related to the stabilization of the
new Phase I facilities and equipment. Ispat asserts that the specific
nature of the expense relating to the hot-strip mill division is not
relevant, rather, any expense tied to the hot-strip mill division incurred
during the project phase can be capitalized. Ispat states that this
treatment is consistent with the basic matching principle of accounting
theory that expenses should be matched with the benefits derived from
them. 

Petitioners argue that pursuant to the Act, all costs related to the
production of the subject merchandise must be included in Ispat's reported
costs. Thus, Ispat must include all depreciation expenses, interest
expenses and G&A expenses associated with Phase I construction.
Petitioners point out that the evidence on the record shows that Ispat was
well into commercial production before the beginning of the POI and all
costs associated with Phase I should be included. Petitioners assert that
certain assets were not depreciated during the POI which were used in the
production of merchandise under consideration. Petitioners refer to
section 773(f)(1)(A) of the Act which allows the Department to reject cost
methodologies that conform to local GAAP if such costs do not accurately
reflect a respondent's costs to produce subject merchandise. See DRAMs
from Korea at 68976. 

Petitioners maintain that the G&A and interest expenses capitalized as
preoperative and trial run expenditures and capital work-in-progress
should be included in Ispat's G&A and financial expense ratio
calculations. Petitioners claim that Ispat was operating at commercial
production levels for the entire POI, thus all of its G&A and interest
costs should be expensed. Petitioners also state that because G&A expenses
are period costs which relate to the general operations of the company
rather than directly to the production process, all G&A expenses incurred
during the period must be included in the calculation. Furthermore,
petitioners argue that because money is fungible within a corporate
entity, the Department should treat financing expenses related to
construction or preoperative and trial run expenditures in the same manner
as interest expenses from conventional financing. Petitioners also claim
that the Department should include in Ispat's financial expense ratio
calculation the capitalized interest expenses relating to Phase II
construction. Petitioners argue that due to the fungible nature of money,
the financing expenses relating to Phase II construction should be treated
the same as all other financing expenses. Petitioners also point out that
there is no evidence on the record specifically distinguishing interest
expenses incurred with respect to Phase I from interest expenses incurred
with respect to Phase II.


Department's Position:

We agree with the petitioners in part. As noted above, under section
773(f)(1)(A) of the Act, the Department is directed to follow the normal
records of the exporter or producer if such records are kept in accordance
with home country GAAP and reasonably reflect, the costs associated with
the production and sale of the merchandise under consideration. Therefore,
because Ispat's production expenses are capitalized in the company's
normal records, we must follow this treatment only if it reasonably
reflects the costs associated with the production of hot-rolled carbon
steel.

In this case, however, we find that Ispat's capitalization of
depreciation, G&A expenses, and interest expenses was excessive, and
resulted in unreasonable per-unit costs for subject merchandise. By
capitalizing these costs, Ispat essentially argues that it did not receive
any benefit from production at the HSM during the POI. We disagree with
Ispat. We believe it did receive benefits from the HSM production during
the POI. 

Based on the significant quantities of units processed and produced at
the facility in question, and the significant sales of merchandise under
consideration during the POI, we believe that all costs associated with
Phase I construction should be included in the reported costs.
Specifically, all the allowable depreciation associated with the rolling
mill and all other assets used in the production of the merchandise under
consideration should be included in the reported costs. It is clear based
on Ispat's production data that the rolling mill and other equipment
associated with Phase I construction were providing benefits during the
POI. Also, all of the G&A expenses that were incurred and capitalized
during the fiscal year ended March 31, 2000 should be included in the G&A
rate calculation. The Department considers G&A costs as period costs which
relate to the general operations of the company rather than directly to
the production process. See: Antidumping Duty Investigation of Stainless
Steel Sheet and Strip in Coils From Japan; Notice of Final Determination
of Sales at Less Than Fair Value, 64 FR 30574, 30589 - 30591, (June 8,
1999). As a result, all G&A expenses incurred during the period must be
included in G&A rate calculation. Moreover, the capitalized interest
expenses pertaining to phase I construction should be included in Ispat's
financing expense ratio. However, the capitalized interest relating to
phase II construction should be excluded. 

As noted in the June 28, 2001 cost verification report, the Department's
verifiers examined documentation supporting Ispat's classification of
capitalized interest as relating specifically to either Phase I or Phase
II construction. Furthermore, as U.S. GAAP states, "[T]he objectives of
capitalizing interest are (b) to charge a cost that relates to the
acquisition of a resource that will benefit future periods against the
revenues of the periods benefitted." See Financial Accounting Standard 34.
As noted previously, the assets relating to Phase I construction were
clearly producing a benefit (i.e., revenue) during the POI. Thus the
associated interest costs should be captured in the costs reported to the
Department. However, the assets relating to Phase II construction were not
placed in production and thus were not providing benefits to Ispat during
the POI. Therefore, the associated interest costs for these items were
properly capitalized. 

Comment 15: IMIL "Learning Curve"/Start-Up Adjustment 

Ispat made adjustments to its reported costs, as well as the costs
recorded in its books and records, to account for its initial test
production at the IMIL facility. Specifically, Ispat reduced material
costs recorded in its financial accounts by booking a "learning curve"
adjustment consisting of additional expenses related to IMIL trial runs.
These additional expenses were then capitalized. Ispat claims that the
methodology used to identify and capitalize the IMIL test run expenses is
reasonable, in accordance with Indian GAAP, and was accepted by Ispat's
auditors. Moreover, Ispat claims this methodology conforms with the
Department's standards for a start-up adjustment. 

Nevertheless, even if the Department does not accept this adjustment,
Ispat claims that a start-up adjustment should be made to reflect
increased costs associated with bringing the IMIL facility "on stream."
Ispat claims that IMIL's hot-metal facility is new and the initial
incorporation of the IMIL's hot-metal output into the hot-rolled coil
production caused a significant number of technical problems that affected
the output of hot-rolled coil. Ispat states that its increase in
production costs were directly attributable to the attempt to bring the
IMIL facility on line.

Hence, Ispat urges the Department to accept its "learning curve"
adjustment or make the same change as a start-up adjustment.

Petitioners argue that Ispat's production levels were not limited in any
way by the IMIL facility coming on line. Petitioners point out that the
facts on the record show that Ispat's productions levels did not change
significantly from the time before hot metal was used in production
through the time hot metal was used in production. Thus, Ispat did not
prove that its was entitled to a start-up adjustment for hot metal. The
burden of demonstrating entitlement to a start-up adjustment rests with
the party making the claim. See: Antidumping Duty Investigation of
Stainless Steel Wire Rod from Spain; Notice of Final Determination of
Sales at Less Than Fair Value, 63 FR 40391, 40402 (July 29,1998)
(Stainless Steel Wire Rod From Spain). According to petitioners, Ispat's
production levels were not limited by technical factors associated with
bringing the IMIL facility on line. Petitioners also point out that
contrary to the statute's instructions, Ispat calculated its start-up
adjustment for the IMIL facility based on the difference between actual
costs incurred prior to the start-up period and costs incurred during the
start-up period. Petitioners contend that the rationale for using this
methodology is flawed because it assumes that the difference in costs
between the two periods is related solely to the use of the hot-metal
input during the start-up period compared to the use of direct reduced
iron (DRI) in the period prior to the claimed start-up period. 

Department's Position:

We disagree with Ispat and have disallowed the "learning curve"
adjustment associated with the hot metal received from IMIL. According to
section 773(f)(1)(C)(ii) of the Act, adjustments "shall be made for start-
up operations only where- (I) a producer is using new production
facilities or producing a new product that requires substantial additional
investment, and (II) production levels are limited by technical factors
associated with the initial phase of commercial production. The start-up
adjustment is intended for new facilities or new products made by a
respondent. The start-up adjustment is not meant to account for the
respondent's testing of new types of raw materials. We agree with
petitioners that similar to Stainless Steel Wire Rod from Spain, Ispat
failed to demonstrate why it was entitled to claim a start-up adjustment
as the result of switching to a new type of raw material. The SAA states
at 838 that "[T]he Administration intends that the burden will be on
companies to demonstrate their entitlement to a start-up adjustment." 

We also disagree with Ispat's assertion that because the "learning curve"
adjustment is in accordance with Indian GAAP and was accepted by Ispat's
auditors, the Department is required to accept it. As stated in several of
the comments above, under section 773(f)(1)(A) of the Act, the Department
is directed to follow the normal records of the exporter or producer if
such records are kept in accordance with home country GAAP and reasonably
reflect the costs associated with the production and sale of the
merchandise under consideration. However, in the instant case, the
"learning curve" start-up adjustment does not reasonably reflect the costs
associated with the production and sale of the merchandise under
consideration. 

Issues pertaining to Ispat's claimed start-up adjustment for its HSM are
addressed in Comment 13 above.

Comment 16: Overstated G&A Expenses

Ispat claims that the Department overstated the company's G&A ratio by
including certain expenses in the numerator of the ratio that had already
been reported as part of COM. Ispat notes that this error can be corrected
by reducing the numerator, and increasing the denominator of the ratio by
these expenses. 

Petitioners agree with Ispat with respect to the double counted expenses
but they claim Ispat's revised calculation of the G&A ratio is incorrect
because it fails to incorporate the G&A items capitalized in the
preoperative and trial run expenditure account discussed in Comment 14
above.

Department's Position:

We agree with Ispat, in part, and will correct the double counting of
certain expenses in the G&A ratio. However, we have not used Ispat's
calculation of the revised G&A ratio as submitted in its case brief. See
the discussion of capitalized G&A expenses in Comment 14 above.

Comment 17: Scrap Revenue Offset to Costs 

Ispat asserts the Department should offset the reported COM by revenue
from the sale of scrap and trimmings. 

Petitioners agree that the Department should use the revenue from the
sale of scrap and trimmings to offset the reported COM for P2. Petitioners
state that no offset should be allowed for P1 costs because Ispat failed
to provide this information.

Department's Position:

We agree with petitioners that the revenue from the sale of scrap should
be offset against the reported costs for P2. We will not allow an offset
for scrap revenue in P1 because Ispat failed to submit this information.

Comment 18: Proper Classification of Bad Debt Expense

Petitioners argue that the Department should include expenses related to
Ispat's provision for bad debts in its reported costs. Petitioners
reference Color Televisions Receivers from Korea; Notice of Final Results
of Antidumping Duty Administrative Review, 53 FR 24975, 24983 (July 1,
1988) which states that "bad debts are general expenses that should be
included as part of the COP in the company's G&A expense ratio."

Ispat claims that the expenses related to its provision for bad debts
should not be included in its G&A costs because: (1) these expenses were
properly considered selling expenses rather than G&A expenses and (2) they
were unrelated to the subject merchandise produced at the HSM. Ispat
asserts that bad debt expenses are by definition only incurred if sales
are being made and, as such, these expenses clearly fall within the
definition of selling expenses rather than G&A expenses. Ispat references
Antidumping Duty Administrative Review of Antifriction Bearings (Other
Than Tapered Roller Bearings) and Parts Thereof From France, Germany,
Italy, Japan, Romania, Sweden, and the United Kingdom; Notice of Final
Results of Antidumping Duty Administrative Reviews, 64 FR 35590, 35607
(July 1, 1999), which considered "bad debt expense to be either direct or
indirect depending on the relationship between the bad debt and the sale."
Furthermore, Ispat notes that the Department's Antidumping Manual (1991)
at Chapter 8, p. 38 specifically identifies bad debt reserves as selling
expenses by stating, "[E]xpenses incurred in maintaining bad debt reserves
are considered indirect {selling} expenses because they are incurred
regardless of whether there are bad debts incurred during a particular
period of time." Furthermore, Ispat points out that any expenses reported
in Ispat's income statement for the 1999 - 2000 fiscal year do not relate
to the HSM division because all expenses identified with that division
were capitalized on the financial statements. 

Department's Position:

We disagree with petitioners. The Department does not include bad debt
expense in G&A expenses. Our practice of excluding bad debt expense from
G&A expenses was outlined in the Notice of Final Determination of Sales at
Less Than Fair Value: Stainless Steel Round Wire from Taiwan, 64 FR 17336,
17338 (April 9, 1999) where we stated that "{w}e do not agree with the
petitioners that Tien Tai's bad debt expense should be included in the G&A
expense calculation. Bad debt expense results from the inability to
collect payment from customers for sales, and is appropriately accounted
for as a selling expense. See Final Results of Antidumping Duty
Administrative Review: Porcelain-On Steel Cookware from Mexico, 63 FR
38373, 38381 (July 16,1998)." Therefore, we have not revised the G&A
expense to include bad debt expense because bad debt expense is a selling
expense. 

Comment 19: Adjusting Home Market Price in the Cost Test for Imputed
Credit Expense 

Ispat states that in the preliminary determination, the Department
incorrectly deducted imputed credit expenses from the home market prices
it used in the below cost test. Ispat asserts that section 773(b)(3)(B) of
the Act requires the Department to base COP on actual costs, and not
include imputed costs such as imputed credit expense. 


Petitioners did not comment on this issue.

Department's Position:

We agree with Ispat and will make the adjustment for the final
determination.

Comment 20: Identifying the Proper Quality Characteristics

Ispat maintains that the Department erred in the Preliminary
Determination by changing the quality characteristic codes reported for
hot-rolled steel produced to API (American Petroleum Institute)
specifications, to the code for "structural, non-high strength, low alloy"
steel (code 4) (7). 

Ispat contends that API grades are unique grades of steel produced to
meet strict quality specifications in order to make high-test line pipe
for transporting petroleum products. Ispat draws on the findings from the
Ispat Verification Report to support its argument that API grades are
distinct from ASTM standards in terms of both the rigors of API production
standards, and the necessity of using certain high-cost micro alloying
elements, that increase the COP compared to other structural steel grades.
Ispat does not dispute the fact that API grades can be used for the same
purposes as other steels classified as quality "4", but challenges the
notion that other steel grades considered quality "4" steel can be used
for the same purposes as API applications. Ispat likens the effect of the
coding change to, "put{ting} apples and oranges into the same barrel."

The petitioners did not comment on this issue.

Department's Position:

We disagree with Ispat. The Department believes that the eight quality
characteristics designated in the original questionnaire adequately cover
the different classifications possible for hot-rolled steel. Based on
record documents and company records reviewed during verification, we have
determined that the API grades sold in both the home market and U.S.
market during the POI more closely resemble the characteristics of quality
"4" steel than exhibiting unique quality characteristics. We have,
therefore, continued to re-classify quality characteristics "9" and "10,"
which Ispat reported for its API grade products, as quality characteristic
"4". We adjusted the cost of the control numbers (CONNUMs) accordingly, as
described in the Department's Calculation Memorandum dated September 21,
2001. See Calculation Memorandum from Timothy P. Finn to the File,
September 21, 2001 (Ispat Final Calculation Memorandum).

We also note that in other hot-rolled cases, the Department has similarly
reclassified respondents reported quality characteristics and assigned
specific quality characteristics from the eight originally designated by
the Department in its questionnaire. See Certain Hot-Rolled Flat-Rolled
Carbon-Quality Steel Products from Brazil; Final Determination of Sales at
Less Than Fair Value, 64 FR 38756, 38766-67 (July 19, 1999) (Flat Rolled
from Brazil).

Comment 21: Calculating Credit Expenses Based on Home Market Price and
Excise Tax

Ispat argues that the Department should calculate home market credit
expenses using a gross unit price that includes excise duty. In the
Preliminary Determination, the Department excluded excise duty from the
credit calculation by using only the reported gross unit price. Ispat
contends that excise duty should be added to the gross unit price used in
the credit calculation because it is booked in its accounts receivable as
part of gross unit price.

Petitioners contend that the Department must reject Ispat's adjustment
because there is no evidence on the record that Ispat paid the excise tax
at the date of shipment; therefore, there is no evidence that Ispat
incurred any opportunity cost on such funds between the shipment and
payment dates. Further, citing Flat Rolled from Brazil, petitioners state
that it is the Department's practice not to input credit expenses related
to such costs. Petitioners note that in Flat Rolled from Brazil the
Department did not input credit expenses related to VAT payments. 

Department's Position:

We agree with the petitioners. The instant situation is similar to that
found in Flat Rolled from Brazil. In that case, the respondent argued that
the entire payment due from the customer includes VAT taxes, and thus home
market credit expense should be imputed with respect to the taxes to be
paid by the customer. However, the Department disagreed with the
respondent in that case noting that "{i}t is the Department's practice not
to impute credit expenses relating to VAT payments. Nor is there any
statutory or regulatory requirement for making the adjustment proposed by
the respondent. While there may be an opportunity cost associated with the
respondent's prepayment of the VAT, this fact alone is not a sufficient
basis for the Department to make an adjustment in price-to-price
comparisons." See Flat Rolled from Brazil, 64 FR 38756, 38773. Following
the Department's reasoning in Flat Rolled from Brazil, the fact that Ispat
books excise tax in accounts receivable as part of gross unit price does
not provide a sufficient basis for imputing home market credit expenses
with respect to the tax. Therefore, we have deducted the amount of excise
tax from gross unit price in calculating the cost of imputed credit. 

Comment 22: Verification Corrections

Ispat urges the Department to revise certain payment dates for U.S.
sales; recalculate the reported commission expenses for home market sales;
and adjust certain expenses reported for two home market sales, in
accordance with the corrections presented at the outset of the sales
verification. 

Petitioners did not comment on this issue.

Department's Position:

We agree with Ispat. We have made these corrections for purposes of the
final determination.

Comment 23: Ministerial Corrections

Petitioners claim that in reassigning the quality reported for selected
CONNUMS, and recalculating weighted-average costs for these CONNUMS, the
Department incorrectly set the recalculated cost for the variable RHALLOYS
to zero. Petitioners maintain that this error should be corrected in order
to ensure that the Department properly calculates the cost of these
CONNUMS. 

Ispat contends that although the Department's programming language
assigns a zero value to the variable RHALLOYS, the total COM for the "RH"
cost (RHTCOM) variables includes the correct value for RHALLOYS. Thus,
according to Ispat, the corrections urged by petitioners will not affect
the cost test or the margin.

Department's Position: 

We agree with both parties in part. In the Preliminary Determination, the
Department inadvertently set the value of the variable RHALLOYS to zero.
See lines 743 and 1264 of the model match program. Also, Ispat is correct
in its assertion that the RHTCOM variable includes the correct value for
RHALLOYS. However, the Department did not utilize the variable RHTCOM or
the total COM in its cost test. At line 1329 of the preliminary model
match program and line 2401 of the preliminary margin calculation program,
the Department calculated the cost of direct materials by summing the
values reported for a number of variables including the variable RHALLOYS.
Therefore, we have made the correction described by petitioners for
purposes of the final determination.

Recommendation

Based on our analysis of the comments received, we recommend adopting the
positions described above. If these recommendations are accepted, we will
publish the final determination and the final weighted-average dumping
margins in the Federal Register.




Agree__________ Disagree__________ Let's Discuss___________




__________________________________

Faryar Shirzad 
Assistant Secretary
  for Import Administration



__________________________________
(Date)



________________________________________________________________________
footnotes:

1. The petitioners in this investigation are Bethlehem Steel Corporation,
Gallatin Steel Company, IPSCO Steel Inc., LTV Steel Company, Inc.,
National Steel Corporation, Nucor Corporation, Steel Dynamics, Inc., U.S.
Steel Group (a unit of USX Corporation), Weirton Steel Corporation,
Independent Steelworkers Union, and United Steelworkers of America
(collectively the petitioners). 

2. See Preliminary Determination, at page 22160; see also, Stainless
Steel Round Wire from India; Final Determination of Sales at Less Than
Fair Value, 64 FR 17319, 17320 (April 9, 1999). 

3. There are two types of licenses, known as pre-export and post-export
DEPB licenses. Credits issued under pre-export DEPB licenses are based on
the average export performance of an applicant over the preceding three
licensing years. Pre-export DEPB licenses are not transferrable. Credits
issued under post-export DEPB licenses are granted against exports already
made. Post-export DEPB licenses are transferrable. 

4. Certain Welded Carbon Standard Steel Pipes and Tubes from India; Final
Results of New Shipper Antidumping Review, 62 FR 47632, 47635 (September
10, 1997). 

5. Ispat Brief, at 35. 

6. Phase I construction refers to the construction of Ispat's hot-rolling
facility including production line I, while Phase II construction refers
to the construction of production line II. Both production lines are in
the same building, which is located at Ispat's Dolvi complex in
Maharashtra, India. 

7. Ispat assigned two different quality codes, not listed in the
Department's questionnaire, to its API grade products. Two codes were used
to differentiate the amount of ferro alloys used in API grades.