65 FR 31302, May 17, 2000 A-533-808 ARP: 12/1/97-11/30/98 Public Document IA/III/IX: SMB/LRL MEMORANDUM TO: Troy H. Cribb Acting Assistant Secretary For Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary For import Administration SUBJECT: Issues and Decision Memorandum for the Administrative Review of Certain Stainless Steel Wire Rod from India for the Period of Review ("POR") Covering December 1, 1997 Through November 30, 1998 Summary We have analyzed the comment and rebuttal briefs of interested parties in the 1997-1998 administrative review of the antidumping duty order covering certain stainless steel wire rod ("SSWR") from India. As a result of our analysis, we have made changes in the margin calculations. We recommend that you approve the positions we have developed in the "Discussion of the Issues" section of this memorandum. Below is the complete list of the issues in this administrative review for which we received comment and rebuttal briefs by interested parties. 1. Valuation of Raw Material Inputs 2. Modvat Tax 3. Duty Drawback 4. Date of Currency Conversion 5. Credit Expense 6. Double-Counting of Profit 7. Clerical Error Background On January 11, 2000, the Department of Commerce ("the Department") published the preliminary results of review and the partial rescission of its administrative review of the antidumping duty order on stainless steel wire rod from India (65 FR 1597). The merchandise covered by this order is stainless steel wire rod. The POR is December 1, 1997 through November 30, 1998. There is only one respondent in this case, Viraj Group, Ltd. ("Viraj"). We invited parties to comment on our preliminary results of review. We received written comments on February 16, 2000 from Viraj and petitioners. On February 22 and 23, 2000, we received rebuttal briefs from Viraj and petitioners, respectively. Discussion of the Issues Comment 1: The Valuation of Raw Material Inputs Petitioners argue that the Department erred in using VAL's(1) transfer prices to value stainless steel billets, the main raw material input used in producing SSWR. In so doing, petitioners contend that, because Tata and VIL are not affiliated, the Department incorrectly valued the cost of the billets as VAL's weighted-average selling price to an unaffiliated subcontractor, Tata SSL ("Tata"), who rolls the billets. Petitioners contend the Department should have used Tata's selling price to VIL, which represents the actual raw material input costs incurred by VIL in the production of the subject merchandise. Petitioners further claim that by valuing the cost of the billets using the weighted-average selling price from VAL to Tata, the Department failed to include the cost of the subcontractor's rolling charge or the modified value-added tax ("modvat") tax paid on the transaction. Consequently, petitioners contend, the Department understated the value of the raw material inputs in the preliminary results of review. Viraj claims that the Department correctly accounted for the cost of stainless steel billets in its preliminary results of review. It noted that the rolling charge for the billets was reported in Viraj's questionnaire response and was in fact used in the Department's calculations for the preliminary results of review. Viraj further contends that it demonstrated at verification that the modvat tax was refunded on each and every export sale. It further claims that page 6 of the Department's January 3, 2000 memorandum, Cost Verification of Viraj Impoexpo, Ltd. ("VIL") and Viraj Alloys, Ltd. ("VAL") in the Antidumping Administrative Review of Certain Stainless Steel Wire Rod from India ("Cost Verification Report") supports this contention. Department's Position: We disagree with petitioners that the Department improperly valued the cost of raw material inputs in this review. Contrary to petitioner's claim, our use of VAL's transfer prices to value stainless steel billets did not lead to the understatement or exclusion of any raw material input costs in our margin analysis. The subcontracting charges that the petitioners claimed were omitted from our analysis were reported in the field DIRLAB and included in the cost of production and CV. Consequently, we have accounted for the actual value of the raw billets and the processing charges paid by VIL for rolled billets. We also disagree with petitioners' contention that the modvat tax should be included in the raw material cost of production for SSWR. See Comment 2 below. Finally, we note that, with the exception of the modvat tax, the cost the Department has assigned for the raw materials provided to VIL is identical to the value proposed by petitioners. Comment 2: Modvat Tax Petitioners argue that VIL's payment to Tata of a modvat should not be excluded from the calculation of the cost of materials, based on petitioners' assertion that VIL failed to demonstrate that this tax was rebated upon exportation of subject merchandise. Petitioners claim that the Cost Verification Report shows that the price paid by VIL to Tata for billets rolled into wire rod did not include the modvat tax. Petitioners maintain that, since there is no evidence on the record that the modvat taxes were refunded upon exportation, these taxes should be included in the cost of production. Viraj maintains that the Department was correct in excluding the modvat tax from raw material costs. Viraj argues that it provided proof at verification that it received an excise duty refund on each and every export of the subject merchandise during the POI. Department's Position: We agree with Viraj. The modvat tax (an excise tax) is a type of value-added tax that is refunded upon export. Section 773(e)(3) specifies that "the cost of materials shall be determined without regard to any internal tax in the exporting country imposed on such materials or their disposition which are remitted on refunded upon exportation of the subject merchandise produced from such materials." We determined at verification that the modvat (excise) tax on exported merchandise was refunded. (See page 3 of the Cost Verification Report and verification exhibit 15). Consequently, because these taxes were refunded upon export of the subject merchandise, we have continued to exclude them from our determination of material cost in the calculations of CV for the final results of review. Comment 3: Duty Drawback Petitioners contend that the Department inappropriately added duty drawback to the U.S. price in its margin calculations. Petitioners claim benefits conferred by India's Duty Entitlement Passbook Scheme ("DEPB"), which rebates duties paid on raw materials imported for use in the manufacture of exported goods, do not meet the Department's two-pronged test for a duty drawback adjustment pursuant to section 772(c)(1)(B) of the Act. Consequently, petitioners contend that DEPB benefits should not be added to U.S. price as duty drawback for the purpose of calculating antidumping duty margins. Petitioners argue that the Department's two pronged test requires a company to demonstrate that (1) import duties and rebates are directly linked to and are dependent upon one another; and (2) the company claiming the adjustment can demonstrate that there are sufficient imports of raw materials to account for the duty drawback received on exports of the manufactured product. Petitioners claim that Viraj failed to establish a direct link between the import duties paid and the DEPB rebate granted by the government of India, since the amount of the rebate granted to Viraj during the POR was based on the FOB value of the exported finished product, rather than based on the amount of any import duties paid. Petitioners claim that in Stainless Steel Round Wire from India; Final Determination of Sales at Less than Fair Value ("Round Wire from India"), 64 FR 17319, (April 9, 1999), the Department rejected DEPB benefits as a duty drawback under section 772(c)(1)(B) of the Act, since the company in question failed to establish sufficient raw material imports and failed to establish a direct link between the raw material imported and the duty drawback received. Petitioners further contend that the Department found that the DEPB benefits conferred in this case were based on the FOB sales prices of the exported merchandise, rather than on the value of the import duties paid. Thus, petitioners contend, the circumstances in this proceeding are identical to those found in Round Wire from India, and no adjustment to U.S. price should be granted for duty drawback. Petitioners further claim that in Certain Iron-Metal Castings From India: Preliminary Results and Partial Rescission of Countervailing Duty Administrative Review ("Iron Metal Castings"), 64 FR 61592, 61597 (November 12, 1999), and Final Affirmative Countervailing Duty Determination: Certain Cut-to-Length Carbon-Quality Steel Plate From India ("CTL Carbon-Quality Steel Plate"), 64 FR 73131, 73139 (December 29, 1999), the Department found that the DEPB benefits did not constitute a legitimate drawback scheme and were, therefore, countervailable. Petitioners contend that section 351.519(a)(4) of the Department's countervailing duty regulations state that the entire amount of drawback is countervailable if the government does not have "in place and appl{ies} a system or procedure to confirm which inputs are consumed in the production of the exported product and in what amounts," or if the government has not "carried out an examination of actual inputs involved to confirm which inputs are consumed in the production of the exported product and in what amounts." Consequently, petitioners argue, the findings in these two countervailing duty cases indicate that the government of India has no system in place for determining whether the value of any DEPB benefits are equal to the amount of import duties paid on imported items that were consumed in the production of the exported subject merchandise. Similarly, petitioners further note that page 11 of the Department's Cost Verification Report explains that the government of India does not physically inspect any of the inputs used for subject merchandise and has no way of determining whether the value of any DEPB credits issued to VIL are equal to the amount of import duties paid on imported items used to make subject merchandise. Petitioners further claim that there is no way to verify that the raw materials listed in the bill of entry submitted by VIL to the government of India are used in the production of subject merchandise. Petitioners claim that the fact that VIL does not report the value of import duties (only quantity and value of raw materials), and that the government of India grants the benefits based on FOB value of the goods being exported, further supports the absence of a link between the duty paid and the benefits received. As a result, petitioners contend that the DEPB program does not meet either prong of the Department's two-pronged test for granting a duty drawback adjustment pursuant to section 772(c)(1)(B) of the Act. Viraj claims that the DEPB credit system rebates duties paid on raw material imports used in the manufacture of exported goods. Consequently, Viraj contends that the Department made an appropriate upward adjustment to U.S. price for duty drawback in accordance with section 772(c)(1)(B) of the Act. Viraj notes that page 5 of its June 25, 1999 submission stated that the "amount of the duty drawback received is directly linked to the amount of the duty to be paid on imported raw material." Viraj also notes that page 14 of its June 27, 1999 submission cites the government of India, Ministry of Commerce, Export and Import Policy April 1997 to March 2002 policy which states that "[T]he duty credit under the scheme shall be calculated by taking into account the deemed import content of the said export product. . . ." Viraj further argues that it uses the DEPB program to pay import duties on raw materials imported used in the production of the subject merchandise. Viraj maintains that in Certain Welded Carbon Standard Pipes and Tubes From India ("Pipes and Tubes from India"), 62 FR 47632 (September 10, 1997) , the Department held that if the DEPB program is used by the company to pay import duties on raw material used to make the subject merchandise, it is a proper duty drawback and should be recognized as such in the dumping margin calculations. Quoting from page 10 and 11 of the Department's January 3, 2000 memorandum, Sales Verification of Viraj Impoexpo, Ltd. ("VIL") in the Antidumping Administrative Review of Certain Stainless Steel Wire Rod from India ("Sales Verification Report"), Viraj maintains that the Department verified the DEPB received on sales to the U.S. of subject merchandise and checked the import duties on raw materials used to make subject merchandise for export. Viraj claims that petitioners misrepresent the information included in Viraj's response by quoting figures from VIL's financial statements showing imports and the DEPB received. Viraj argues that these figures should not be used as the basis for determining whether the DEPB programs can be used to make an adjustment to U.S. price for duty drawback for several reasons: they do not cover VAL, which produces the dominant raw material used in the manufacture of the subject merchandise; they are not limited to the merchandise subject to this review, but include other non-subject merchandise; they do not cover the same time period as the period of review. Also, Viraj claims that petitioners cite inappropriate and irrelevant Federal Register notices, countervailing duty cases and regulations which indicate that the Department denied duty drawback adjustments because the respondent at issue did not import sufficient quantities to justify the DEPB drawback amounts received or countervailing duty cases. Viraj contends that these cases are distinguishable from the record in this review since neither countervailing duties nor Viraj's ability to demonstrate a sufficient quantity of raw material imports are issues in this case. Viraj then continues that, if the Department denies the duty drawback adjustment to U.S. price, it should reduce the cost of raw material used in the constructed value ("CV") calculation. Viraj claims that it uses its DEPB benefits to reduce raw material costs. Viraj claims that Round Wire from India identifies cases where the "facts warranted an adjustment to CV for government (DEPB passbook) credits received because the revenues were 'directly' related to its purchases of domestic raw materials used to produce subject merchandise and represented an appropriate offset to the respondent's raw material costs." Viraj also claims that Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Bar from India, 59 FR 66915 (December 28, 1994) ("First Steel Bar Case from India") also demonstrates that DEPB credits are received because the revenues are 'directly related' to the purchase of raw materials used to produce the subject merchandise and that DEPB represents an appropriate offset to Viraj's raw material costs. Citing Stainless Steel Bar From India: Preliminary Results of Antidumping Duty Administrative Review and Partial Termination of Administrative Review, 62 FR 60482 (November 10, 1997) ("Second Steel Bar Case from India"), Viraj maintains that where no DEPB adjustment was granted to the U.S. price, an offset should be made to the per unit direct material costs for those sales using CV. Finally, Viraj argues that if U.S. sales prices are not increased for a DEPB credit, then third-country sales prices should be treated in a similar fashion. Viraj noted that in our preliminary results of review, the Department increased both the U.S. and third-country sales by the amount of the DEPB benefits. Viraj notes that increasing the third-country sales price by the amount of the DEPB benefits has the impact of increasing the revenue and profit derived from third country sales. As a result, it inappropriately increases the normal value ("NV") for those sales compared to CV. Viraj maintains that the purpose of a constructed value is to be a proxy for home market prices. Viraj argues that because DEPB is only available for exports, there should be no upward adjustment to third country sales prices for purposes of calculating the profitability of third country sales used in a constructed value, if there is no upward adjustment to U.S. price for DEPB benefits. Department's Position: We agree with petitioners. Section 772(c)(1)(B) of the Act provides that export price (or constructed export price) shall be increased by "the amount of any import duties imposed by the country of exportation which have been rebated, or which have not been collected, by reason of the exportation of the subject merchandise to the United States." The Department determines that an adjustment to U.S. price for a claimed duty drawback is appropriate when a company can demonstrate that it meets both parts of our two-part test. There must be: (1) a sufficient link between the import duty and the rebate, and (2) a sufficient amount of raw materials imported and used in the production of the final exported product. See Rajinder Pipes Ltd. v. U.S. ("Rajinder Pipes"), 70 F. Supp. 2d 1350, 1358. Viraj failed to establish the necessary link between the import duties paid and the rebate given by government of India to qualify for this adjustment. At verification, the Department reviewed bills of entry for raw materials which showed debits to duty paid for raw materials. See Sales Verification Exhibit 15. As we stated on pages 10 and 11 of our Sales Verification Report, we checked the amount of the DEPB received on sales to the U.S. of subject merchandise and the amount of import duties on raw materials used to make subject merchandise for export. We examined the amount of the debits granted toward the payment of duty on future imports of raw material as a result of the DEPB system. However, an analysis of Sales Verification Exhibit 15 does not demonstrate that the import duty paid and the duty drawback rebate were directly linked. Rather, they demonstrate that the amount of duty rebated is tied to the FOB price of the exported merchandise, and that the amount of drawback credit is determined by the Government of India's pre-established determination of import content of the exported merchandise. By relying on a pre- determined, assumed amount of import content, this method fails to link the rebate received to the amount of import duties actually paid on raw materials actually imported. Consequently, in accordance with the Department's determination in Round Wire from India, we have determined that a duty drawback adjustment under section 772(c)(1)(B) of the Act is not warranted. See also Stainless Steel Bar from India, 63 FR 13622, 13625 (March 20, 1998) (Administrative Review Final), in which we denied a duty drawback adjustment, finding that "because the credit was not calculated based on the product actually imported, the import duty paid and the rebate received are not directly linked." Respondent's reliance on the 1997 decision in Pipes and Tubes from India is misplaced; that case deals with an earlier drawback program. By contrast, the Department's 1999 decision in Round Wire from India deals directly with the DEPB program at issue here. In Round Wire, we found that "import duties Raajratna paid were not refunded upon exportation because the DEPB incentives were not directly based upon import duties Raajratna had paid on raw materials." Round Wire from India, 64 FR 17319, 17321. Here, as in Round Wire, we find that Viraj's receipt of DEPB payments were not directly based upon import duties it had paid on raw materials. Rather, Viraj's DEPB benefits were based on a pre-determined, notional proportion of the FOB value of its exports of stainless steel wire rod. This is consistent with our findings at verification in this review; therefore, we are basing our final results of review on the record evidence established in this review. Furthermore, as petitioners noted, the Department found in two 1999 countervailing duty cases, Iron Metal Castings and CTL Carbon-Quality Steel Plate, that the DEPB benefits did not constitute a legitimate drawback scheme according to the countervailing duty laws. As a result, these two cases establish evidence that the DEPB scheme does not meet both prongs of the duty drawback test pursuant to section 772(c)(1)(B) of the Act since they have established that the government does not have "in place and appl[y] a system or procedure to confirm which inputs are consumed in the production of the exported product and in what amounts," and the government has not "carried out an examination of actual inputs involved to confirm which inputs are consumed in the production of the exported product and in what amounts." See Iron Metal Castings (64 FR 61592, 51597) and CTL Carbon-Quality Steel Plate (64 FR 73131, 73139). Because the duty drawback credit is not linked with the amount of duty paid on imports used in the production of merchandise for export, but on the import content and the FOB value of the exported merchandise, it is irrelevant whether Viraj can justify whether sufficient imports were made to cover the quantity of exported merchandise. In a similar fashion, Viraj's claims that a duty drawback adjustment should be made based on the fact that it uses the drawback amount to pay for imports does not support either prong of our two-pronged test, and is therefore irrelevant with regard to whether an adjustment to U.S. price for duty drawback should be made. We disagree that any reduction to material cost for cost of production or CV is warranted based on the receipt of benefits under the DEPB program. Viraj did not establish that any import duties that were offset by the DEPB benefits were ever included in the company's books and records as a cost of materials. Furthermore, DEPB benefits are recorded on Viraj's financial statements as revenue, not as an offset to an expense. Therefore, in accordance with our findings in Round Wire Rod, we find no link between the revenue Viraj received and the cost of purchasing raw materials. Therefore, we have made no adjustment for cost of production or CV to offset the cost of materials for Viraj. Finally, we agree with Viraj that, since the Department has rejected Viraj's duty drawback claims, the duty drawback adjustments for third- country sales, which were made under the same DEPB program, should not be made. Consequently, we are not making any adjustments to U.S. price, third- country sales price or CV for DEPB benefits received for the final results of review. Comment 4: Date of Currency Conversion Viraj argues that the Department erred in using an exchange rate from September of 1997. It alleges that this exchange rate is irrelevant to every important date in this case and that, but for this exchange rate, there would be no margin. Viraj maintains that the exchange rate could have, and should have, been based on other relevant dates in the review. Viraj contends that the exchange rates on the purchase date, the ship dates, and the pay dates could have been used by the Department instead of a September exchange rate. Viraj argues that the Department should use April 16, 1998, the date of importation of the raw materials used to manufacture subject merchandise during the POR, as the basis of its exchange rate date. Viraj maintains that, because the Department calculates constructed value based on the actual weighted-average cost of production, the appropriate date to use in establishing the exchange rate is the date on which raw materials were imported. Viraj maintains that the Indian rupee devalued over 10 percent from a point in November 1997 to a point in December 1997, leading to an increase in Viraj's production costs during the POR. Viraj maintains that profitability is based on the exchange rate in existence when Viraj received payment for these sales and not when production costs were incurred. Regardless, Viraj claims that a distortion in the margin occurs because of the Department's use of a September 1997 exchange rate. Viraj further argues the Department should depart from normal currency conversion methodologies where declines in currency value distort the dumping margin calculation. Viraj notes that the Department, in Stainless Steel Sheet and Strip in Coils From the Republic of Korea: Final Determination of Sales at Less Than Fair Value, 64 FR 30665 (June 8, 1999), used modified benchmarks and daily exchange rates due to a precipitous and large decline in the value of the won. Viraj also contends that the Department could have used the exchange rate actually used by the South Indian Bank (Viraj's bank) when determining the amount of Indian rupees Viraj should receive on the sale. Viraj also argues that the Department is using a mechanical exchange rate that generates a dumping margin, which is unlawful. Citing Budd Co., Wheel & Brake Div. v. U.S., 746 F. Supp. 1093, 1099 (CIT 1990), it argues that a finding of sales at less than fair value by the Department based on a factor outside of the exporter's control is unfair. It also says that the purpose of antidumping legislation is to discourage sales at less than fair value and that this purpose would be ill-served by applying a mechanical formula. Viraj claims that Melamine Chemicals, Inc. v. United States, 732 F.2d 924, 933 (Fed. Cir. 1984) supports its argument that dumping margins should not be based wholly on the misapplication of exchange rates. Petitioners maintain that the Department used the correct exchange rate for Viraj's U.S. sales. Petitioners note that the Department's methodology for making currency conversions is to follow section 351.415(a) of the Department's regulations, which requires it to convert foreign currencies into U.S. dollars using the rate of exchange on the date of sale of the subject merchandise. In addition, petitioners note that the Department will ignore fluctuations in the exchange rate according to section 351.415(c) of the Department's regulations. Petitioners contend that Viraj has not demonstrated any reason for the Department to allow an exception to its general methodology and has not even argued for an exception. Petitioners argue that none of Viraj's suggested exchange rates (ship date, payment date, raw material importation date and the South Indian Bank credit payment date) conform to the Departments well-established methodology for determining exchange rates. Petitioners argue that the Department's preliminary margin calculation used the correct exchange rate when it used the daily exchange rate for the date of sale of the appropriate U.S. sales. Department's Position: We agree with petitioners. In accordance with section 773A of the Act, we applied the exchange rate in effect on the date of sale of the subject merchandise as the exchange rate in our calculations for the preliminary results of review. Contrary to Viraj's claim, we did not use September 1997 exchange rates in our preliminary margin calculations. See lines 194 through 202 in the Department's model match program and lines 112 through 121 of the Department's margin program for the preliminary results of review. We also disagree that any of the alternative dates that Viraj proposed as a date of currency conversion are in accordance with section 773A of the Act. Viraj has provided no record evidence that the exchange rates were misapplied. Pursuant to section 773A(a) of the Act and section 351.415 of the regulations, the Department used the exchange rate in effect on the date of sale, which is not the date that Viraj claimed it was in its case and rebuttal briefs, and ignored fluctuations in exchange rates. Because the Department used the exchange rates provided for in section 773A of the Act, we are making no changes with respect to the exchange rates used for the final results of review. Comment 5: Credit Expense Viraj argues that the Department double-counted its interest costs. Viraj explains that it offers extended credit terms of 90 to 120 days on its exports. At the time of export, the South Indian Bank loans Viraj money to cover its expenses between the date of shipment and customer payment. For this service Viraj pays interest on these loans known as "interest usance charges." Viraj notes that it did not report these expenses in its computer sales listing for the section B or C response, because the Department imputed credit expenses for the time period between the date of shipment and the date of payment. Viraj argues that these interest usance charges represent the same credit expenses for the time period between the date of shipment and the date of payment. Viraj notes that, in its preliminary results of review, the Department deducted the interest usance charges from the U.S. and third-country prices in addition to calculating imputed credit for the time period between the date of shipment and the date of customer payment. Viraj maintains that by imputing credit expenses for the time period between the date of shipment and the date of payment and by also deducting actual interest expenses from its U.S. and third country sales, the Department is double-counting its credit expense in its margin calculations. Petitioners maintain that the Department did not double-count VIL's interest costs. Petitioners argue that Viraj's interest usance charges are not imputed interest costs but rather actual bank charges incurred by VIL. Petitioners note that the description of the interest usance charges presented on page 5 of Viraj's case brief proves that they are in fact actual bank charges incurred in the process of financing export sales. Consequently, petitioners maintain that they were correctly included in the Department's preliminary margin calculations in addition to the imputed interest expense. Petitioners note that Appendix I-9 of the Department's antidumping questionnaire defines imputed expenses as "opportunity costs that are not reflected in the financial records of the company being investigated, but which must be estimated and reported for purposes of an antidumping inquiry." As a result, petitioners contend that imputed expenses should be included in the Department's margin calculations as well as actual interest expenses charged by the company. Petitioners argue that because such interest usance charges were recorded in VIL's financial records as actual selling expenses, and were not reported in VIL's sales listing as a direct expense, the Department was correct in including such expenses in its preliminary margin calculation. Department's Position: We agree with Viraj that its interest usance charges represent the same charges as an imputed credit expense, since the imputed credit expenses "represent the amounts that the Department attributes to theoretical interest expenses incurred between the shipment date and payment date" (see Notice of Final Results of Antidumping Duty Administrative Review: Certain Pasta From Italy, 65 FR 7349 (February 14, 2000)). Since the interest usance charges are actual bank charges incurred for extending credit with respect to sales of subject merchandise, there is no further need to impute credit expenses for the purposes of sections 772(c)(2) and 773(a)(6)(B) of the Act. Comment 6: Double-Counting of Profit Viraj argues that the Department double-counted profit in its determination of CV. Viraj contends that VIL is producer and exporter of the SSWR at issue. Viraj argues that it obtains its raw materials to make the SSWR from its affiliate, VAL. Viraj notes that in its preliminary results of review, the Department used the transfer price from VAL to VIL as the basis for direct material cost in its calculations of CV. Viraj contends that this transfer price includes an amount of profit for VAL and does not represent the actual cost of production of the raw material. Viraj further contends that the Department added an additional amount of profit to the CV. Viraj contends that the decision to add profit to CV in addition to the profit contained in the VAL to VIL transfer price effectively double- counts the profit, and represents a "profit on a profit." Viraj proposes, as a remedy, that the Department collapse VAL and VIL, and use VAL's actual cost of production for the raw material as the basis of its material cost. Viraj contends that this solution is reasonable because VIL and VAL are run by the same management, share the same offices and have side-by-side production facilities. Viraj further notes that VAL and VIL are part of the single entity known as the "Viraj Group." Viraj maintains that two companies that share the same management should be collapsed and treated as a single entity, in accordance with Pipes and Tubes from India. Viraj also argues that the actual raw material production cost should be used as the raw material cost of that entity, not its transfer price to itself, as in Stainless Steel Round Wire from Taiwan: Final Determination of Sales at Less Than Fair Value ("Round Wire from Taiwan"), 64 FR 17336 (April 9, 1999). Petitioners maintain that the Department did not double-count profit in its calculation of CV in its preliminary results of review by failing to collapse VIL and VAL. Petitioners agree that VIL and VAL are affiliated, but argue that this fact does not necessarily mean that the two companies must be collapsed for purposes of determining cost of production. Petitioners argue that, according to section 351.401(f) of the Department's regulations, the Department treats affiliated producers as a single entity only where those producers have production facilities for similar or identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities and where there is a significant potential for the manipulation of price or production. Petitioners argue that since VAL produces steel billets and VIL manufactures stainless steel bright bar and SSWR, the two companies perform different functions and cannot be collapsed. Petitioners point out that VAL produces the billets used for SSWR with equipment such as induction furnaces, an AOD converter, an ARC re-heater, ladle-wire injection and continuous casting machines, none of which are present at VIL. Furthermore , petitioners also contend that neither VAL nor VIL has the capability to perform the functions of the subcontractor Tata, namely rolling the steel billets, and therefore, there is no overlap of production capabilities between VIL and VAL. Petitioners point out that two recent cases determined that two or more affiliated producers will be collapsed only where producers have production facilities for similar and identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities: Notice of Final Determination of Sales at Less Than Fair Value: Certain Cold-Rolled Flat-Rolled Carbon-Quality Steel Products From Brazil, 65 FR 5554, (February 4, 2000); and Notice of Final Results of Antidumping Duty Administrative Review: Certain Pasta From Italy, 65 FR 7349, (February 14, 2000). Petitioners note that Viraj cites two cases in support if its proposition that VIL and VAL should be collapsed, but that the record evidence distinguishes Viraj from each case. Petitioners argue that Pipes and Tubes from India, in which Viraj argues that two companies who share the same management should be collapsed, involved collapsing two companies that produced and sold subject merchandise in the home market. Petitioners note that one of the Viraj companies, VAL, neither produces nor sells the subject merchandise. Petitioners further argue that Round Wire from Taiwan, rather than supporting Viraj's claim that VAL and VIL should be collapsed, actually supports petitioners' contention that the Department should have used VIL's acquisition cost from Tata rather than using the transfer price between VAL and VIL as the basis of raw material costs. Petitioners contend that in Round Wire from Taiwan, the Department stated that transactions between collapsed companies were based on the actual cost to the group as a whole. However, petitioners further contend that in Round Wire from Taiwan, the Department noted that it was its "preference" to rely on the affiliate's acquisition cost of the wire rod inputs. Department's Position: We disagree that profit was double-counted in our determination of CV and that VAL and VIL should be collapsed, either for the purpose of determining direct material costs used in the cost of production or CV, or for profit for CV. As explained in Comment #1 above, we used the transfer price between VAL and VIL as the basis of determining raw material costs. Consequently, the transfer price from VAL to VIL represents the actual price paid for the materials and is included in expenses reported on VIL's financial statements. Therefore, the Department's calculation of profit for CV, based on VIL's financial statements, does not include VAL's profit and thus does not represent a double- counting of profit. There is no basis to exclude VIL's profit from CV. Therefore, the Department appropriately calculated profit for CV in accordance with sections 773(e) and 773(f) of the Act and section 351.405(a) of the Department's Regulations. Regarding the issue of collapsing affiliated parties, the Department agrees with petitioners that the facts on the record do not support collapsing VAL and VIL for the purpose of determining the cost of production or CV. Section 351.401(f)(1) of the Department's regulations states that the Department will treat "two or more affiliated producers as a single entity where those producers have production facilities for similar or identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities and the Secretary concludes that there is a significant potential for the manipulation of price or production." VAL and VIL do not meet the requirements of section 351.401(f), nor is there any other basis for collapsing them. Despite the fact that VAL and VIL share the same management and the same office space, as petitioners noted above, VAL produces steel billets and VIL manufactures stainless steel bright bar and SSWR. First, VAL does not possess processing equipment, such as pickling or annealing equipment, for wire rod. In addition, as petitioners noted, VAL produces the billets used for SSWR with equipment such as induction furnaces, an AOD converter, an ARC re-heater, ladle-wire injection and continuous casting machines, none of which are present at VIL. Furthermore, it would require a substantial retooling of facilities for either VAL or VIL to restructure manufacturing priorities in order to produce the identical product of the other company. For these reasons, collapsing VAL and VIL for the purposes of the antidumping duty calculations is not warranted under section 351.401(f) of the Department's regulations. While Viraj has addressed issues expressly contemplated under section 351.401(f)(2) of the Department's regulations, we note that these items, which pertain to whether there is a significant potential for manipulation, are moot in cases where the Department has not found that producers have production facilities for similar or identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities. Therefore, we have made no changes to our profit calculations for CV for the final results of review. Comment 7: Clerical Error Viraj contends that the Department made an addition error in calculating CV. It stated that the total value calculated for CV by the Department was in error, and provided a revised number. DOC Position: Viraj failed to identify the addition error which caused the alleged incorrect figure for CV. It simply stated that the total figure used by the Department was wrong and gave a revised figure. It did not explain the basis of the calculation, or the origin of the revised figure. It did not reference any information on the record to explain why the figure obtained by the Department was incorrect. Therefore, we made no changes to our calculation for the final results of review. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions and adjusting all related margin calculations accordingly. If these recommendations are accepted, we will publish the final results of review and the final weighted- average dumping margins for all reviewed firms in the Federal Register. AGREE_____ DISAGREE_____ ______________________ Troy H. Cribb Acting Assistant Secretary for Import Administration (Date) ________________________________________________________________ footnote: 1. The Viraj Group consists of two affiliated companies, Viraj Alloys Limited ("VAL"), billet producer, and Viraj Impoexpo Limited ("VIL"), producer and exporter of the subject merchandise.