65 FR 34658, May 31, 2000 A-583-834 Investigation Public Document MEMORANDUM TO: Troy H. Cribb Acting Assistant Secretary for Import Administration FROM: Holly Kuga Acting Deputy Assistant Secretary for Import Administration Group II DATE: May 22, 2000 SUBJECT: Issues and Decision Memorandum for the Investigation of Certain Cold-Rolled Flat-Rolled Carbon Quality Steel Products from Taiwan Summary In Section I, we identify the issues in this investigation for which we received comments from the interested parties. Section II sets out the scope, or product coverage, of this investigation. Section III identifies the changes made in the margin calculation since the preliminary determination. Section IV analyzes the comments of the interested parties. Finally, we recommend approval of the positions developed for each of the issues. I. List of issues: 1. Country of Origin 2. Rejection of CSC's Special Incentive Program Discounts 3. Re-coding of certain CSC home market sales 4. Adverse inference for CSC's stevedoring expenses 5. Adverse inference for CSC's home market warranty expenses 6. Materials - scrap recovery 7. Materials - inventory valuation adjustments 8. General and administrative expense 9. General and administrative expense and financial expense ratios 10. Exchange gains and losses 11. Non-operating income and expenses 12. Scrap revenue 13. Short-term interest income II. Scope of Investigation For purposes of this investigation, the products covered are certain cold- rolled (cold-reduced) flat-rolled carbon-quality steel products, neither clad, plated, nor coated with metal, but whether or not annealed, painted, varnished, or coated with plastics or other non-metallic substances, both in coils, 0.5 inch wide or wider, (whether or not in successively superimposed layers and/or otherwise coiled, such as spirally oscillated coils), and also in straight lengths, which, if less than 4.75 mm in thickness having a width that is 0.5 inch or greater and that measures at least 10 times the thickness; or, if of a thickness of 4.75 mm or more, having a width exceeding 150 mm and measuring at least twice the thickness. The products described above may be rectangular, square, circular or other shape and include products of either rectangular or non- rectangular cross- section where such cross-section is achieved subsequent to the rolling process (i.e., products which have been "worked after rolling") -- for example, products which have been beveled or rounded at the edges. Specifically included in this scope are vacuum degassed, fully stabilized (commonly referred to as interstitial-free ("IF")) steels, high strength low alloy ("HSLA") steels, and motor lamination steels. IF steels are recognized as low carbon steels with micro-alloying levels of elements such as titanium and/or niobium added to stabilize carbon and nitrogen elements. HSLA steels are recognized as steels with micro-alloying levels of elements such as chromium, copper, niobium, titanium, vanadium, and molybdenum. Motor lamination steels contain micro-alloying levels of elements such as silicon and aluminum. Steel products included in the scope of this investigation, regardless of definitions in the Harmonized Tariff Schedules of the United States ("HTSUS"), are products in which: (1) iron predominates, by weight, over each of the other contained elements; (2) the carbon content is 2 percent or less, by weight, and; (3) none of the elements listed below exceeds the quantity, by weight, respectively indicated: 1.80 percent of manganese, or 2.25 percent of silicon, or 1.00 percent of copper, or 0.50 percent of aluminum, or 1.25 percent of chromium, or 0.30 percent of cobalt, or 0.40 percent of lead, or 1.25 percent of nickel, or 0.30 percent of tungsten, or 0.10 percent of molybdenum, or 0.10 percent of niobium (also called columbium), or 0.15 percent of vanadium, or 0.15 percent of zirconium. All products that meet the written physical description, and in which the chemistry quantities do not exceed any one of the noted element levels listed above, are within the scope of this investigation unless specifically excluded. The following products, by way of example, are outside and/or specifically excluded from the scope of this investigation: - SAE grades (formerly also called AISI grades) above 2300; - ball bearing steels, as defined in the HTSUS; - tool steels, as defined in the HTSUS; - silico-manganese steel, as defined in the HTSUS; - silicon-electrical steels, as defined in the HTSUS, that are grain- oriented; - silicon-electrical steels, as defined in the HTSUS, that are not grain- oriented and that have a silicon level exceeding 2.25 percent; - all products (proprietary or otherwise) based on an alloy ASTM specification (sample specifications: ASTM A-506, A-507); - non-rectangular shapes, not in coils, which are the result of having been processed by cutting or stamping and which have assumed the character of articles or products classified outside chapter 72 of the HTSUS. - silicon-electrical steels, as defined in the HTSUS, that are not grain- oriented and that have a silicon level less than 2.25 percent, and a) fully-processed, with a core loss of less than 0.14 watts/pound per mil (0.001 inch), or b) semi-processed, with core loss of less than 0.085 watts/pound per mil (0.001 inch); - certain shadow mask steel, which is aluminum killed cold-rolled steel coil that is open coil annealed, has an ultra-flat, isotropic surface, and which meets the following characteristics: thickness: 0.001 to 0.010 inch, width: 15 to 32 inches, chemical composition: carbon content less than 0.002 percent, by weight. - certain flapper valve steel, which is hardened and tempered, surface polished, and which meets the following characteristics: thickness: less than or equal to 1.0 mm; width: less than or equal to 152.4 mm; chemical composition: carbon content greater than or equal to 0.90 percent and less than or equal to 1.05 percent, by weight; silicon content greater than or equal to 0.15 percent and less than or equal to 0.35 percent by weight; magnesium content greater than or equal to 0.30 percent and less than or equal to 0.50 percent, by weight; phosphorus content of less than or equal to 0.03 percent, by weight; and sulphur content less than or equal to 0.006 percent, by weight; mechanical properties: tensile strength greater than or equal to 162 KgF/square mm; hardness greater than or equal to 475 Vickers hardness number; physical properties: flatness less than 0.2 percent of nominal strip width; microstructure: completely free from decarburization. Carbides are spheroidal and fine within 1 percent to 4 percent (area percentage) and are undissolved in the uniform tempered martensite; non-metallic inclusion: sulfide inclusion with area percentage less than or equal to 0.04 percent, and oxide inclusion with area percentage less than or equal to 0.05 percent; compressive stress: 10 to 40 KgF/square mm; surface roughness specifications: if thickness is less than or equal to 0.209 mm, will have roughness (RZ) less than or equal to 0.5 micrometer; if thickness is greater than 0.209 mm but less than or equal to 0.310 mm, will have roughness (RZ) of less than or equal to 0.6 micrometer; if thickness is greater than 0.310 mm but less than or equal to 0.440 mm , will have roughness (RZ) less than or equal to 0.7 micrometer; if thickness is greater than 0.440 mm but less than or equal to 0.560 mm, will have roughness (RZ) less than or equal to 0.8 micrometer; if thickness is greater than 0.560 mm, will have roughness (RZ) less than or equal to 1.0 micrometer. - certain ultra thin gauge steel strip, which meets the following characteristics: thickness less than or equal to 0.100 mm (+/- 7 percent), width: 100 to 600 mm; chemical composition: carbon content less than or equal to 0.07 percent by weight; manganese content greater than or equal to 0.2 but less than or equal to 0.5 percent by weight; phosphorus content less than or equal to 0.05 percent by weight; sulphur content less than or equal to 0.05 percent by weight; aluminum content less than or equal to 0.07 percent by weight; with the balance iron; mechanical properties: hardness equals full hard (HV 180 minimum); total elongation less than 3 percent; and tensile strength of 600 to 850 n/square mm. Physical properties: surface finish less than or equal to 0.3 micron; camber (in 2.0 m) less than 3.0 mm; flatness (in 2.0 m) less than or equal to 0.5 mm; edge burr less than 0.01 mm greater than thickness; and coil set (in 1.0 m) less than 75.0 mm. - certain silicon steel, which meets the following characteristics: thickness: 0.024 inch +/- 0.0015 inch; width: 33 inches to 45.5 inches; chemical composition: minimum silicon content of 0.65 percent, by weight, maximum carbon content of 0.004 percent, by weight, maximum manganese content of 0.4 percent, by weight; maximum phosphorus content of 0.09 percent, by weight, maximum sulphur content of 0.009 percent, by weight; maximum aluminum content of 0.4 percent, by weight. Mechanical properties: hardness of B 60-75 (aim 65); physical properties: smooth finish (30 - 60 microinches), gamma crown (in 5 inches) of 0.0005 inches, with measurement beginning one- quarter inch from slit edge; flatness of 20 i-unit maximum; coating of c3a - 0.08a maximum (A2 coating acceptable); camber (in any 10 feet) of one-sixteenth inch; coil size inside diameter of 20 inches. Magnetic properties: core loss (1.5t/60 HZ) NAAS of 3.8 watts/pound maximum. Permeability (1.5t/60 HZ) NAAS of 1700 gauss/oersted typical 1500 minimum. - certain aperture mask steel, which has an ultra-flat surface flatness and which meets the following characteristics: thickness: 0.025 mm to 0.245 mm; width: 381 mm - 1000 mm; chemical composition: carbon content of less than 0.01 percent, by weight, nitrogen content greater than or equal to 0.004 and less than or equal to 0.007 percent, by weight, and aluminum content of less than 0.007 percent, by weight. - certain annealed and temper-rolled cold-rolled continuously cast steel, which meets the following characteristics: chemical composition: carbon content of minimum 0.02 and maximum 0.06 percent, by weight; manganese content of minimum 0.20 and maximum 0.40 percent, by weight; maximum phosphorus content of 0.02 percent, by weight; maximum sulphur content of 0.023 (aiming 0.018 maximum) percent, by weight; maximum silicon content of 0.03 percent, by weight; minimum aluminum content of 0.03 percent, by weight and maximum 0.08 (aiming 0.05) percent, by weight; maximum arsenic content of 0.02 percent, by weight; maximum copper content of 0.08 percent, by weight; nitrogen content of minimum 0.003 percent, by weight and maximum 0.008 (aiming 0.005) percent, by weight. Non- metallic inclusions: examination with the S.E.M. shall not reveal individual oxides greater than 1 micron (0.000039 inch) and inclusion groups or clusters shall not exceed 5 microns (0.000197 inch) in length. Surface treatment as follows: the surface finish shall be free of defects (digs, scratches, pits, gouges, slivers, etc.) and suitable for nickel plating. Surface finish shall be extra bright with roughness, of 0 RA microinches (0 micrometers) to 7 RA microinches (0.2 micrometers) with an aim of 5 microinches (0.1 micrometers). - certain annealed and temper-rolled cold-rolled continuously cast steel, which meets the following characteristics: chemical composition: carbon content of less than 0.08 percent, by weight; silicon content of less than 0.04 percent, by weight; manganese content of less than 0.40 percent, by weight; phosphorous content of less than 0.03 percent by weight; sulfur content of less than 0.03 percent, by weight; aluminum content of 0.010 to 0.025 percent, by weight; nitrogen content of less than 0.0025 percent, by weight; additional properties: hardness of hv 85-110; matte surface; width tolerance of -0.0/+7 mm; annealed; tensile strength greater than 275n/square mm; elongation greater than 36 percent; thickness tolerance (guaranteed inside of 15 mm from mill edges) of +/-5 percent (aim of +/- 4 percent). - certain annealed and temper-rolled cold-rolled continuously cast steel, in coils, with a base weight of 55 pounds, which includes a certificate of analysis per cable systems international (CSI) specification 96012 and meets the following characteristics: chemical composition: maximum carbon content of 0.13 percent, by weight; maximum manganese content of 0.60 percent, by weight; maximum phosphorous content of 0.02 percent by weight; maximum sulfur content of 0.05 percent, by weight; additional properties: theoretical thickness of 0.0061 inch,+/- 10 percent of theoretical thickness; width of 31 inches; tensile strength of 45,000 to 55,000 psi; and elongation of a minimum of 15 percent in 2 inches. - certain full hard tin mill black plate, continuously cast, which meets the following characteristics: chemical composition: carbon content of minimum 0.02 percent, by weight and maximum 0.06 percent, by weight; manganese content of minimum 0.20 and maximum 0.40 percent, by weight; maximum phosphorus content of 0.02 percent, by weight; maximum sulphur content of 0.023 (aiming 0.018 maximum) percent, by weight; maximum silicon content of 0.03 percent, by weight; aluminum content of minimum 0.03 and maximum 0.08 (aiming 0.05) percent, by weight; maximum arsenic content of 0.02 percent, by weight; maximum copper content of 0.08 percent, by weight; nitrogen content of minimum 0.003 and maximum 0.008 (aiming 0.005) percent, by weight. Non-metallic inclusions: examination with the S.E.M. shall not reveal individual oxides greater than 1 micron (0.000039 inch) and inclusion groups or clusters shall not exceed 5 microns (0.000197 inch) in length. The surface finish shall be free of defects (digs, scratches, pits, gouges, slivers, etc.) and suitable for nickel plating. Surface finish shall be stone finish with roughness of 8 RA microinches (0.2 micrometers) to 24 RA microinches (0.6 micrometers) with an aim of 16 RA microinches (0.4 micrometers). - certain ultra-bright tin mill black plate meeting ASTM 7a specifications for surface finish and RA of seven micro-inches or lower. - concast cold-rolled drawing quality sheet steel, ASTM a-620-97, Type B, or single reduced black plate, ASTM A-625-92, Type D, T-1, ASTM A-625-76 and ASTM A-366-96, T1-T2-T3 commercial bright/luster 7A both sides, RMS 12 maximum. Thickness range of 0.0088 to 0.038 inches, width of 23.0 inches to 36.875 inches. - certain single reduced black plate, meeting ASTM A-625-98 specifications, 53 pound base weight (0.0058 inch thick) with a temper classification of T-2 (49-57 hardness using the Rockwell 30 T scale). - certain single reduced black plate, meeting ASTM A-625-76 specifications, 55 pound base weight, MR type matte finish, TH basic tolerance as per A263 trimmed. - certain single reduced black plate, meeting ASTM A-625-98 specifications, 65 pound base weight (0.0072 inch thick) with a temper classification of T-3 (53-61 hardness using the Rockwell 30 T scale). - certain cold-rolled black plate bare steel strip, meeting ASTM A-625 specifications, which meet the following characteristics: thickness: 0.0058 inch +/- 0.0003 inch; chemical composition: maximum carbon content of 0.13 percent, by weight; maximum manganese content of 0.60 percent, by weight; maximum phosphorous content of 0.02 percent, by weight; maximum sulfur content of 0.05 percent, by weight; mechanical properties: hardness: T2/hr 30t 50-60 aiming; elongation of greater or equal to fifteen percent; and tensile strength aiming for 51,000 psi +/- 4,000 psi. - certain cold-rolled black plate bare steel strip, in coils, meeting ASTM A-623, table ii, Type MR specifications, which meet the following characteristics: thickness: 0.0060 inch +/- 0.0005 inch; width of up to and including 10 inches +1/4 to 3/8 inch/-0; chemical composition: maximum carbon content of 0.13 percent, by weight; maximum manganese content of 0.60 percent, by weight; maximum phosphorous content of 0.04 percent, by weight; maximum sulfur content of 0.05 percent, by weight; mechanical properties: elongation of 15 percent in 2 inches, minimum; and tensile strength of 55,000 psi maximum. - certain "blued steel" coil (also know as "steamed blue steel" or "blue oxide") with a thickness and size of 0.30 mm x 0.42 mm and width of 609 mm to 1219 mm, in coil form. - certain cold-rolled steel sheet, whether coated or not coated with porcelain enameling prior to importation, which meets the following characteristics: nominal thickness: less than or equal to 0.019 inch; width of 35 inches to 60 inches; chemical composition: maximum carbon content of 0.004 percent, by weight; minimum oxygen content of 0.010 percent, by weight; and minimum boron content of 0.012 percent, by weight. - certain cold-rolled steel, which meets the following characteristics: chemical composition: maximum carbon content of 0.07 percent, by weight; maximum manganese content of 0.67 percent, by weight; maximum phosphorous content of 0.14 percent, by weight; maximum silicon content of 0.03 percent, by weight; physical and mechanical properties: width: 66 inches; thickness range of 0.800 to 2.000 mm; yield point (MPA) of 265 to 365; minimum tensile strength (MPA) of 440; and minimum elongation of 26 percent. - certain band saw steel, which meets the following characteristics: thickness less than or equal to 1.31 mm; width less than or equal to 80 mm; chemical composition: carbon content of 1.2 to 1.3 percent by weight; silicon content of 0.15 to 0.35 percent by weight; manganese content of 0.20 to 0.35 percent by weight; phosphorus content less than or equal to 0.03 percent by weight; sulphur content less than or equal to 0.007 percent by weight; chromium content of 0.30 to 0.5 percent by weight; and nickel content less than or equal to 0.25 percent by weight. Other properties: carbide: fully spheroidized having greater than 80 percent of carbides, which are less than or equal to 0.003 mm and uniformly dispersed; surface finish: bright finish free from pits, scratches, rust, cracks, or seams; smooth edges; edge camber (in each 300 mm of length) of less than or equal to 7 mm arc height; and cross bow (per inch of width) of 0.015 mm max. - certain transformation-induced plasticity (trip) steel, which meets the following characteristics: Variety 1: chemical composition: carbon content of 0.09 to 0.13 percent, by weight; silicon content of 1.0 to 2.1 percent, by weight; manganese content of 0.90 to 1.7 percent, by weight; physical and mechanical properties: thickness range of 1.000 to 2.300 mm (inclusive); yield point (MPA) of 320 to 480; minimum tensile strength (MPA) of 590; minimum elongation of 24 percent if 1.000 to 1.199 mm thickness range; minimum elongation of 25 percent if 1.200 to 1.599 mm thickness range; minimum elongation of 26 percent if 1.600 to 1.999 mm thickness range; and minimum elongation of 27 percent if 2.000 to 2.300 mm thickness range; Variety 2: chemical composition: carbon content of 0.12 to 0.16 percent, by weight; silicon content of 1.5 to 2.1 percent, by weight; manganese content of 1.1 to 1.9 percent, by weight; physical and mechanical properties: thickness range of 1.000 to 2.300 mm (inclusive); yield point (MPA) of 340 to 520; minimum tensile strength (MPA) of 690; minimum elongation of 21 percent if 1.000 to 1.199 mm thickness range; minimum elongation of 22 percent if 1.200 to 1.599 mm thickness range; minimum elongation of 23 percent if 1.600 to 1.999 mm thickness range; and minimum elongation of 24 percent if 2.000 to 2.300 mm thickness range; Variety 3: chemical composition: carbon content of 0.13 to 0.21 percent, by weight; silicon content of 1.3 to 2.0 percent, by weight; manganese content of 1.5 to 2.0 percent, by weight; physical and mechanical properties: thickness range of 1.200 to 2.300 mm (inclusive); yield point (MPA) of 370 to 570; minimum tensile strength (MPA) of 780; minimum elongation of 18 percent if 1.200 to 1.599 mm thickness range; minimum elongation of 19 percent if 1.600 to 1.999 mm thickness range; and minimum elongation of 20 percent if 2.000 to 2.300 mm thickness range. - certain corrosion-resistant cold-rolled steel, which meets the following characteristics: Variety 1: chemical composition: maximum carbon content of 0.10 percent, by weight; maximum manganese content of 0.40 percent, by weight; maximum phosphorous content of 0.10 percent, by weight; copper content of 0.15 to 0.35 percent, by weight; physical and mechanical properties: thickness range of 0.600 to 0.800 mm; yield point (MPA) of 185 to 285; minimum tensile strength (MPA) of 340; and minimum elongation of 31 percent (ASTM standard 31 percent equals JIS standard 35 percent); Variety 2: chemical composition: maximum carbon content of 0.05 percent, by weight; maximum manganese content of 0.40 percent, by weight; maximum phosphorous content of 0.08 percent, by weight; copper content of 0.15 to 0.35 percent, by weight; physical and mechanical properties: thickness range of 0.800 to 1.000 mm; yield point (MPA) of 145 to 245; minimum tensile strength (MPA) of 295; and minimum elongation of 31 percent (ASTM standard 31 percent equals JIS standard 35 percent); Variety 3: chemical composition: maximum carbon content of 0.01 percent, by weight; maximum silicon content of 0.05 percent, by weight; maximum manganese content of 0.40 percent, by weight; maximum phosphorous content of 0.10 percent, by weight; maximum sulfur content of 0.023 percent, by weight; copper content of 0.15 to 0.35 percent, by weight; maximum nickel content of 0.35 percent, by weight; maximum aluminum content of 0.10 percent, by weight; maximum niobium content of 0.10 percent, by weight; maximum titanium content of 0.10 percent, by weight; maximum vanadium content of 0.10 percent, by weight; maximum boron content of 0.10 percent, by weight; maximum molybdenum content of 0.30 percent, by weight; physical and mechanical properties: thickness of 0.7 mm; and elongation of greater than or equal to 35 percent. - certain porcelain enameling sheet, drawing quality, in coils, 0.014 inch in thickness, +0.002,-0.000, meeting ASTM A-424-96 type 1 specifications, and suitable for two coats. The merchandise subject to this investigation is typically classified in the HTSUS at subheadings: 7209.15.0000, 7209.16.0030, 7209.16.0060, 7209.16.0090, 7209.17.0030, 7209.17.0060, 7209.17.0090, 7209.18.1530, 7209.18.1560, 7209.18.2550, 7209.18.6000. 7209.25.0000, 7209.26.0000, 7209.27.0000, 7209.28.0000, 7209.90.0000, 7210.70.3000, 7210.90.9000, 7211.23.1500, 7211.23.2000, 7211.23.3000, 7211.23.4500, 7211.23.6030, 7211.23.6060, 7211.23.6085, 7211.29.2030, 7211.29.2090, 7211.29.4500, 7211.29.6030, 7211.29.6080, 7211.90.0000, 7212.40.1000, 7212.40.5000, 7212.50.0000, 7225.19.0000, 7225.50.6000, 7225.50.7000, 7225.50.8010, 7225.50.8085, 7225.99.0090, 7226.19.1000, 7226.19.9000, 7226.92.5000, 7226.92.7050, 7226.92.8050, and 7226.99.0000. Although the HTSUS subheadings are provided for convenience and U.S. Customs Service ("U.S. Customs") purposes, the written description of the merchandise under investigation is dispositive. III. Changes in the Margin Calculation Since the Preliminary Determination 1. On January 21, 2000, CSC submitted a version of its home market database in which it had corrected the errors identified while preparing for verification. CSC had also removed non-subject merchandise identified by the Department at verification from this version of the database. 2. As discussed in Comment 3 of Section IV, below, we re-coded certain sales observations for the home market. CSC had coded these sales observations as commercial-quality steel. We re-coded them as deep drawing- quality steel. 3. We revised CSC's reported costs to reflect the Department's methodology of assigning equal costs to both prime and non-prime merchandise. 4. We revised CSC's reported costs to include inventory reclassifications of slab and hot-rolled band. 5. We revised CSC's reported costs to include painting costs for electrical sheet. 6. We increased CSC's reported general and administrative expenses. 7. We recalculated CSC's reported short-term interest income offset. IV. Discussion of Interested Party Comments Comment 1: Country of Origin The petitioners argue that the Department should find that the product exported to the United States by Taiwan Tokkin ("Tokkin") is Japanese. Tokkin purchases cold-rolled steel coils from unaffiliated suppliers in Japan and re-processes this material in Taiwan into coils of cold-rolled strip for export to the United States. Both the cold-rolled product Tokkin imported from Japan and the product the company exported to the United States fall within the class or kind of merchandise defined in this investigation and the companion investigation of cold-rolled steel products from Japan. The petitioners argue that the Department would require a substantial transformation in Taiwan to alter the Japanese country of origin of the product that is ultimately exported to the United States. The petitioners argue that a substantial transformation did not occur in Taiwan because the cold-rolled coils Tokkin imported into Taiwan had physical characteristics similar to the coils of cold-rolled strip exported from Taiwan to the United States, and because the end uses of the Japanese and Taiwanese products were similar. The petitioners argue that the Department has avoided relying on percentages of value added in past cases when making findings concerning substantial transformation and should not do so in this case. According to the petitioners, relying on value-added percentages in this investigation would be particularly inappropriate because any such calculation would require a comparison of Tokkin's processing costs with its purchase price for the Japanese input steel. Inasmuch as Japanese exports of cold-rolled steel to the United States of the same class or kind as that exported to Tokkin were investigated by the Department and found to be sold at less than fair value, the petitioners argue that the Department should not rely on Japanese prices to Tokkin in any value-added calculations. The petitioners also argue that the United States has taken positions on the country of origin of U.S. imports in the contexts of proposed WTO standards, U.S. regulations for the administration of the NAFTA agreement, and the Comprehensive Agreement with the Russian Federation on steel products, all of which would preclude the Department from finding that Taiwan is the country of origin of Tokkin's exports to the United States. Tokkin argues that its exports to the United States constitute a new and different article from the merchandise imported from Japan and, accordingly, its re-processing operations in Taiwan constitute a substantial transformation of the input product imported from Japan under both Department precedent and the practice of the U.S. Customs Service. Tokkin contends that its re-processing of the Japanese input steel changes the physical characteristics of the Japanese material to a degree at least as substantial as the changes relied upon by the Department in substantial transformation analyses in other cases; e.g., reduced thickness, extended length, changed microstructure and significantly increased strength characteristics. Tokkin argues that, moreover, the characteristics of the Japanese input are such that it cannot be used to produce the products manufactured from Tokkin's output without first performing the same processing that Tokkin performs. In addition, Tokkin argues that the value added to the imported Japanese input product by its re-processing in Taiwan is a considerable part of the total value of the product exported to the United States. Finally, Tokkin argues that the U.S. government positions taken for WTO country-of-origin considerations, NAFTA regulations, or the Comprehensive Agreement with the Russian Federation on steel products are not relevant to the Department's determination in this investigation. According to Tokkin, the focus of the United States position on country of origin in each of these documents is different from its focus in the instant antidumping investigation. The Department's Position: In determining whether substantial transformation has occurred for the purposes of establishing the country of origin for Tokkin's cold-rolled strip product exported to the United States in this dumping investigation, we examine whether the degree of processing or manufacturing in Taiwan resulted in a new and distinct or different article from the cold-rolled steel input imported from Japan. See Certain Carbon Steel Butt-Weld Pipe Fittings from India, 60 FR 10545, 10546 (February 27, 1995). The Department has also stated in prior determinations that it is not bound by the country-of-origin and substantial transformation determinations made by other agencies of the U.S. government. See, e.g., Certain Cold-Rolled Carbon Steel Flat Products from Argentina, 58 FR 37062, 37065 (July 9, 1993). Rather, our determination is made on the basis of reviewing the totality of the circumstances presented to the Department solely for the purpose of the antidumping proceeding. When an input from country A is further processed in country B, without any change in the class or kind of merchandise taking place, the Department normally will consider the product exported to the United States as originating in country A. See, supra, Certain Carbon Steel Butt- Weld Pipe Fittings from India. In this case, the manufacturing process undertaken by Tokkin in Taiwan did not result in a change in the class or kind of merchandise between the Japanese cold-rolled steel coils and Tokkin's cold-rolled strip coils. In addition, although Tokkin did provide evidence of further processing of the Japanese cold-rolled steel coils in Taiwan, that further processing does not result in a substantial transformation within the context of this antidumping investigation. Tokkin's manufacturing process generally involves repetition of certain steps performed by Japanese producers. The data on the record indicate that the degree of transformation in this case is less than that found in cases where it was found that a product was transformed sufficiently to change the origin of the item. Therefore, based upon the totality of the circumstances in this proceeding, we recommend that the Department determine the country of origin for Taiwan Tokkin's cold-rolled strip coils to be Japan. Because all of the merchandise sold by Tokkin was of Japanese origin, we recommend that Taiwan Tokkin not be considered a respondent in this investigation of Taiwanese cold-rolled flat-rolled carbon quality steel products. Comment 2: Ordinary Course of Trade The petitioners argue that home market sales made under the "Special Incentive Program" that China Steel Corporation ("CSC") began during the last quarter of 1999 were outside CSC's ordinary course of business. The petitioners contend that these program sales were made at aberrational prices, lower than those of the company's other sales, resulting in lower profits than ordinary sales and, therefore, were not representative of home market sales. CSC argues that this program is one of several programs employed to promote sales in the company's home market during the period of investigation. Also, CSC argues that the price comparisons by which the petitioners determined that program sales were at aberrational prices were incorrect. According to CSC, these program sales did not qualify for other special discount programs, and the petitioners' comparisons failed to account for discounts and rebates on non-program sales. The Department's Position: In our view, the program in question is similar to other discount programs commonly offered by industrial manufacturers in different countries. This program very much operates as a loyalty discount. Its features are also similar to quantity discounts. In addition, we found that CSC's prices under this program, while lower than prices for many sales for which no discounts were granted, were not necessarily lower than the prices charged for the same products under other discount programs. For these reasons, we recommend finding that the home market sales in question were made in the ordinary course of trade. Comment 3: Foreign like product re-coding The petitioners urge the Department to reclassify certain merchandise sold in the home market as deep drawing quality. The relevant merchandise had been produced in response to orders for deep drawing quality, but the material produced did not meet the customers' specifications, and the material was sold to other customers as commercial-quality, not deep drawing-quality steel. The petitioners argue that the Department should classify products on the basis of their physical characteristics, not on their terms of sale. To classify sales on the basis of something other than the physical characteristics of the underlying merchandise would, the petitioners allege, create the potential for price manipulation when reporting sales. CSC argues that when its products do not meet customer specifications, the company takes the specifications of the merchandise as produced (as opposed to as ordered) and scans its customer files to match the specifications of the material with specifications previously ordered by other customers. The merchandise in question did not meet the deep drawing specifications called for in the customers' orders although it did meet the standards for commercial quality. It was sold to other customers, who could use the material, as commercial quality. Therefore, CSC contends that the merchandise is properly classified as commercial quality. The Department's Position: The merchandise at issue was to be manufactured to deep drawing-quality standards. As produced, this merchandise did not meet the deep drawing specifications called for in the manufacturing orders and was sold as overrun, commercial-quality material. Although the record supports the claim that the merchandise did not meet the customers' specifications for deep drawing-quality material, it does not establish that the material did not meet general industry deep drawing standards. The Department has a long-standing practice of classifying products on the basis of their physical characteristics, rather than on their descriptions for sale. See, e.g., Gray Portland Cement and Clinker from Mexico, 64 FR 13148, 13154 (March 17, 1999). Consistent with this practice, we recommend reclassifying the merchandise in question as deep drawing quality. Comment 4: Adverse facts available for stevedoring expenses The petitioners argue that the Department deducts expenses related to services provided by affiliated parties from gross price only if the expenses were shown to have been provided at arm's length. The petitioners allege that the sales verification report in this investigation demonstrates that CSC failed to demonstrate that the brokerage and handling services provided by CSC's affiliate were at arm's length. The petitioners urge the Department to apply the highest reported brokerage and handling expense to all of CSC's U.S. sales as adverse facts available. CSC contends that it provided evidence prior to verification that these expenses were at arm's length (in Exhibit C-18 of its October 8, 1999 response to the Department's Supplemental Questionnaire) and that the Department's verification report referred to an incorrect exhibit with respect to that data. The Department's position: We agree with CSC. At verification, we examined and collected source documentation to verify and support the accuracy of CSC's claimed stevedoring expense. We did not, however, collect additional source documentation at verification to support CSC's claim that its stevedoring expenses were based on arm's length transactions; documentation to this claim had already been provided by CSC in Exhibit C-18 of its October 8, 1999 questionnaire response. The Department's verification report, in discussing the arm's length nature of this expense, mistakenly cited to an exhibit collected at verification that, while related to this expense, was not related to the issue of arm's length. We are satisfied that the stevedoring expense was made at arm's length, as demonstrated at Exhibit C-18. Therefore, no adjustment is necessary. Comment 5: Adverse facts available for warranty expenses The petitioners argue that CSC failed to correct its home market warranty expenses in response to a Department request until after all deadlines for the submission of new information had passed. As an adverse inference, the petitioners urge that the Department deny the claimed adjustment for warranty expenses in the final determination. CSC notes that on October 8, 1999, it submitted Exhibits B-31 and B-33 in response to the Department's Supplemental Questionnaire. Exhibit 31 consists of a worksheet demonstrating the calculation of customer-specific warranty ratios. Exhibit 33 consists of source documents used for the calculations in Exhibit 31. The total amounts contained in Exhibit 31 did not match the total amounts calculated from the source documents contained in Exhibit 33. This discrepancy was noted by the petitioners in a letter to the Department, dated October 20, 1999. CSC corrected the discrepancy in a submission to the Department on October 29, 1999. The data the petitioners refer to was on the record prior to the preliminary determination. CSC further argues that, at the sales verification, the Department found that CSC had reported a very small amount of non-subject merchandise in its home market sales database. Removing this material from the home market sales database required that CSC change the denominator (i.e., specific customer purchases of in-scope merchandise) and recalculate the customer-specific warranty ratios. According to CSC, the information related to warranty expenses was not new. The Department's position: We agree with CSC. The petitioners' argument appears to be based upon their reading of a statement at page 25 of the sales verification report: In the collection of data related to warranty expenses reported to the Department, CSC's counsel made an error in preparing a monthly total for customer warranty claims. There was a clerical error made in calculating the month-by-month totals for customer warranty claims and accidental double counting took place.... The error referred to was brought to the Department's attention by the petitioners' letter of October 20, 1999. CSC corrected the error on October 29, 1999. Inasmuch as the corrections made in October 1999 were timely and CSC's recalculation of customer-specific warranty ratios was based on information already on the record, no adjustment is necessary. Comment 6: Materials -- Scrap Recoveries CSC argues that the Department erred in the preliminary determination by adjusting the reported scrap recovery values. CSC contends that the adjustment was based only on a sample, which it claims is not representative of all products. CSC asserts that it relied on its actual cost accounting system to report costs and that to use any other values would distort the reported costs. Further, CSC contends that it is necessary to adjust the reported costs by the full amount of secondary and salvage recoveries to avoid overstating the reported costs. CSC states that, in the aggregate, the average value of secondary and salvage merchandise recovered does not exceed the cost of prime merchandise, and that only in isolated cases does the value of the recovered material exceed the cost of manufacturing for a specific product. According to CSC, in most cases, the value of secondary and salvage material is less than the cost of manufacturing the related prime product. Because of this, CSC concludes that no adjustment to the reported recovery values is warranted. According to the petitioners, the Department should deny CSC's claimed scrap offset in making its final determination because the calculation methodology is fundamentally flawed and inconsistent with the Department's established cost accounting practices. The petitioners maintain that it is the Department's longstanding practice to treat non-prime merchandise as subject merchandise, and that CSC's treatment of these products as scrap is in contradiction to that practice. Further, the petitioners contend, it is the Department's practice to require respondents to report identical costs for all merchandise within a CONNUM regardless of whether it is prime or non-prime. According to the petitioners, CSC has not demonstrated that its production costs for non-prime merchandise are different than the production cost for prime merchandise. Additionally, the petitioners claim that the flawed scrap recovery methodology affects both cold-rolled manufacturing costs and hot-rolled manufacturing costs. By including revenues from non-prime products in its scrap offsets, the petitioners assert, CSC significantly misstated its CONNUM-specific costs. The petitioners cite to the Final Results of Antidumping Administrative Reviews: Certain Corrosion-Resistant Carbon-Steel Flat Products and Certain Cut-to-Length Carbon-Steel Plate from Canada, 65 FR 9243, 9246 (February 24, 2000) to support their contention that the Department has consistently denied claimed cost offsets for revenues associated with sales of products that are not by-products or scrap materials. The petitioners claim that there is no accurate means to correct the scrap offset and assert that CSC failed to provide a clear explanation of its methodology for reporting its scrap offsets prior to verification. Therefore, the petitioners conclude, the Department has no viable option but to exclude the entire claimed scrap offset from the submitted costs. The Department's position. We disagree with CSC's assertion that its reported scrap values should be relied on simply because they were based on its normal cost accounting system. Section 773(f)(1)(A) of the Act directs that the reported costs should be calculated based on a respondent's records if such records are kept in accordance with home country GAAP and reasonably reflect the costs of production. In this instance, we found that the values CSC assigned to its non-prime products at both the hot-rolled and cold-rolled stages were arbitrarily assigned, and were not reflective of the actual product-specific production costs incurred. As identified in the cost verification report, several of CSC's arbitrarily assigned non-prime recovery values actually exceeded the cost of producing the prime product that the company was attempting to produce. CSC had no reasonable explanation for this result. Our established practice is to calculate costs by allocating total production costs over both prime and non-prime quantities. As noted in both Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Plate in Coils from Belgium, 64 FR 15476, 15491 (March 31, 1999) and Final Results of Antidumping Administrative Review: Polyethylene Terephthalate Film, Sheet and Strip from the Republic of Korea, 61 FR 35177, 35182 (July 5, 1996) ("PET Film from Korea"), the same inputs and processing costs are incurred to produce both prime and non-prime products and the only difference between them is the classification that takes place at the end of the production process. Therefore the total production costs should be the same for all merchandise that falls within a CONNUM regardless of its classification as prime or non-prime. As for CSC's contention that the Department's preliminary adjustment was not representative, we note that the court has upheld our use of a respondent's data obtained by testing a sample. In Tatung Co. v. United States, 18 C.I.T. 1137, 1140 (1994) ("Tatung"), the court opinion stated "verification is like an audit, the purpose of which is to test information provided by a party for accuracy and completeness so that Commerce can justifiably rely on that information." In order to assess the impact of CSC's reporting methodology, as compared to the Department's preferred approach for assigning costs to non-prime merchandise, at verification we obtained detailed cost sheets for several products. Our analysis of these cost sheets showed that, in each instance, CSC's reported costs were understated. Since there are so many products that fall within the purview of this investigation, we did not obtain these detailed cost sheets for all products. While we acknowledge CSC's assertion that the average value of non-prime products may be less than the average cost of producing prime products, we note that this argument does not address the effect CSC's reporting methodology has on product-specific costs. For the final determination, we recommend adjusting the reported costs for those products tested using the product-specific data contained on the detailed cost sheets. For the remaining products, necessary information for adjusting the reported costs is not on the record. When necessary information is missing from the record, the Department must use the facts otherwise available, in accordance with section 776 of the Act. Section 776(b) of the Act permits an adverse inference when a respondent has failed to cooperate to the best of its ability. In this case, even though the necessary information is not on the record, the respondent cooperated with the investigation by providing cost data as recorded on its books. The values assigned in the company's books to its non-prime products at both the hot-rolled and cold- rolled stages were not reflective of the actual product-specific production costs; while this requires an adjustment of the reported costs, it does not establish that the respondent failed to cooperate to the best of its ability. Therefore, we recommend selecting non-adverse facts available. As non-adverse, gap-filling, facts available, we recommend adjusting the reported costs for those CONNUMs with a reported recovery rate exceeding a certain percentage of the reported cost of manufacturing by applying the adjustment percentage for the one product sampled, which had a high recovery rate. For the remaining CONNUMs, we recommend adjusting the reported costs based on the weighted-average of the adjustment percentages for the sampled products. Comment 7: Materials -- Inventory Valuation Adjustments CSC argues that the Department should not adjust the reported costs for inventory reclassifications of hot-rolled band and slab. CSC states that, while these amounts are reflected in its 1998 financial statements, they are not included in the reported costs. CSC cites section 773(f)(1)(A) of the Act and asserts that its financial statements do not reasonably reflect the actual costs of producing the merchandise under investigation. The costs reported to the Department, CSC asserts, are not affected by the financial statement treatment of these reclassifications. CSC contends that the reported costs reflect the company's production records and are based on the total costs for producing all slabs and hot-rolled bands in 1998. CSC asserts that any adjustment of the reported costs for these amounts would not be appropriate and would overstate the company's actual manufacturing costs. The petitioners argue that the Department should increase CSC's submitted costs to account for the unreported costs related to the inventory reclassifications. The petitioners contend that under section 773(f)(1)(A) of the Act, a respondent's costs should be calculated based on the company's accounting records. The petitioners note that CSC failed to include the costs associated with the inventory reclassifications in the reported costs. In addition, the petitioners maintain that there is no record evidence demonstrating that CSC should have reported its manufacturing costs differently than they were reported in the company's normal accounting records. The petitioners dispute CSC's claim that its audited financial statements overstate actual manufacturing costs. In fact, the petitioners assert, a company's financial statements are the basis of its submitted data, and the Department relies on them to verify the accuracy of that data. The petitioners argue that if the financial statement numbers are considered to be distorted, little validity can be ascribed to the other evidence in the case. The Department's Position. We agree with the petitioners that CSC's reported costs should be adjusted to account for the inventory valuation adjustments of slab and hot-rolled band submitted as reconciling items in CSC's overall reconciliations. In accordance with section 773(f)(1)(A) of the Act, a respondent's costs should be calculated based on the records of the exporter or producer if such records are kept in accordance with home country GAAP and reasonably reflect the costs of production. We find unpersuasive CSC's arguments that its inventory reclassifications unreasonably reflect the cost of producing the merchandise under consideration. CSC has treated all facts relating to this issue as proprietary. Hence, we are unable to discuss this issue fully in this public forum. For a complete discussion of this issue and the Department's inclusion of this item, see Memorandum to Neal Halper from Robert Greger, Re: Cost of Production and Constructed Value Calculation Adjustments for the Final Determination dated May 22, 2000. For the final determination, we recommend including these costs in the cost of production and constructed value. Comment 8: General and administrative expenses CSC argues that the Department erroneously included a portion of CSC's lower of cost or market inventory losses in its calculation of the general and administrative expense ("G&A") ratio at the preliminary determination. The Department should not include any amount for this theoretical loss on inventory in the G&A calculation, CSC contends, as the amount does not represent a realized expense to the company, and its inclusion would result in double counting costs. CSC claims that the loss represents only a potential loss, and as such cannot be treated as an actual expense in 1998. The petitioners argue that the Department should revise CSC's submitted G&A expenses to include all of the loss on inventory values. In support of their position petitioners cite Final Determination of Sales at Less Than Fair Value: Dynamic Random Access Memory Semiconductors of One Megabit and Above from Taiwan, 64 FR 56308, 56326 (October 19, 1999) ("DRAMs from Taiwan"), and assert that the Department routinely includes lower of cost or market ("LCM") adjustments on raw materials. The petitioners also state that both Taiwanese and U.S. GAAP require the application of a LCM principle. The Department's Position: We agree with the petitioners that the LCM adjustments made by CSC during the cost reporting period should be included in the reported costs. Consistent with section 773(f)(1)(A) of the Act, it is the Department's practice to rely upon a company's normal books and records when they are prepared in accordance with the home country's GAAP and reasonably reflect the cost of producing and selling the subject merchandise. We found that CSC includes its LCM adjustments as an element of current costs in its audited financial statements. CSC's claim that the Department's treatment will ultimately result in double- counting these costs is unsupported. These costs will only be included in the income statement one time. When the items are used in production, they will be recorded at the lower values to which they were adjusted. At verification we determined that all of CSC's inventory write-downs related to raw material inputs. Since raw materials are inputs into the cost of manufacturing, our general practice is to include LCM adjustments in the respondent's COP and CV. See, e.g., DRAMs from Taiwan; see also, Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Wire Rod from Italy, 63 FR 40422, 40430 (July 29, 1998). Accordingly, for this final determination, we recommend including CSC's LCM adjustment in the G&A calculation. Comment 9: General and administrative expense and financial expense ratios The petitioners contend that the Department should exclude warranty expenses from the denominator used in CSC's G&A and financial expense ratio calculations. The petitioners note that CSC's submitted manufacturing costs appropriately do not include warranty expense. The petitioners note, however, that the Department found at verification that CSC included warranty expense in the cost of goods sold amounts used in its G&A and financial expense ratio calculations. To be consistent with the manufacturing costs to which the G&A and financial expense rates are applied, the petitioners argue, these amounts must be excluded from the ratio calculations. CSC did not comment on this issue. The Department's Position. We agree with the petitioners that warranty expenses should be excluded from the cost of goods sold figure used in the denominator of CSC's G&A and financial expense ratio calculations. We note that CSC's submitted costs do not include warranty expenses. We also found at verification that CSC's cost of goods sold, as reported in its financial statements, included warranty expenses. Thus, in order to calculate the G&A rate on the same basis to which it is applied, we recommend excluding warranty expense from the denominator of the G&A ratio calculation. Comment 10: Exchange Gains and Losses Petitioners argue that the Department should exclude CSC's accounts receivable exchange gains from its G&A ratio calculation. Citing Final Determination of Sales at Less Than Fair Value: Hot-Rolled Flat-Rolled Carbon-Quality Steel Products from Japan, 64 FR 24329, 24349-50 (May 6, 1999), the petitioners state that it is the Department's established practice to exclude any foreign exchange gains or losses related to accounts receivable from respondents' reported costs. The petitioners assert that the Department does not consider exchange gains or losses from sales transactions to be related to manufacturing activities. CSC did not comment on this issue. The Department's Position: As noted in both 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, 5581(February 4, 2000) and Notice of Final Determination of Sales at Less Than Fair Value: Steel Wire Rod from Trinidad and Tobago, 63 FR 9177, 9181 (February 24, 1998) it is the Department's established practice to exclude foreign exchange gains and losses arising from sales transactions from a respondent's cost of production. The Department normally includes in its calculation of COP and CV foreign exchange gains and losses resulting from transactions related to a company's manufacturing operations. We do not consider sales transactions to be related to the manufacturing activities of the company. Accordingly, for the final determination, we recommend excluding CSC's foreign exchange gains from accounts receivable from the G&A ratio calculation. Comment 11: Non-operating Income and Expenses CSC argues that the Department should limit the inclusion of non- operating expenses in the G&A ratio calculation to those that are related to the general operations of the company, and include all income amounts that pertain to general operations as offsets to G&A expenses. CSC contends that non-operating revenue items for rent revenue, scrap revenue, compensation income, fine revenue and sales of material should be included as offsets to G&A expenses. Rent revenue, CSC asserts, should be included because it pertains to property for which the depreciation has already been included in the reported costs. Scrap revenue, CSC claims, is actually waste revenue, and that the cost of producing such waste is included in cost of goods sold. CSC claims that compensation income consists of payments from insurance companies for material losses in transit, and that it necessarily relates to production operations. Fine revenue, CSC contends, relates to payments collected from suppliers who have breached their supply contracts and, consequently, relates to production operations. Lastly, CSC asserts that sales of material relates to the sale of materials recovered from the production process, the costs of which were included in factory overhead. CSC argues that the Department should exclude miscellaneous non-operating expenses from the G&A calculation if it continues to reject certain items of non-operating income. CSC contends that waste revenue relates to the re- processing activity, and that the Department should either exclude the subcontractors' fees or include the waste revenue. CSC asserts that the assets to which the depreciation relates are not used in operations, and that the corresponding depreciation should thus be excluded. The petitioners argue that the Department should reject CSC's claims for the inclusion and exclusion of its non-operating income and expense items as untimely submitted factual information. While the petitioners do not dispute that it is appropriate to adjust G&A for income and expense items related to general operations, they maintain that the Department has consistently found that decisions on whether to accept certain income or expense items should be based on a review of the nature of the specific activity in question and its relation to general operations. The petitioners cite DRAMs from Taiwan, supra, in support of this position. The petitioners maintain that CSC did not include any non-operating income or expense items in its submitted G&A calculations in either its original or supplemental responses, and also did not provide any descriptions of these items. The petitioners assert that CSC had ample opportunity to submit information explaining how each of its non-operating income and expense items related to the general operations of the company. The petitioners contend that the Department should reject CSC's submitted explanations and offset the G&A calculation for the non-operating income and expense items deemed to be appropriate at verification. The Department's Position: We agree with both CSC and the petitioners that the Department should include only those non-operating income and expense items that are related to the general operations of the company. As noted in both DRAMs from Taiwan and Notice of Final Determination of Sales at Less Than Fair Value: Stainless Steel Round Wire from Taiwan, 64 FR 17336, 17338 (April 9, 1999), in calculating the G&A rate, it is the Department's practice to include revenues and expenses that relate to the general operations of the company. The CIT has agreed with the Department that "G&A expenses are those expenses which relate to the activities of the company as a whole ...." See U.S. Steel Group v. United States, 998 F. Supp. 1151 (CIT 1998). Consequently, in determining whether it is appropriate to include or exclude particular items from the G&A calculation, the Department reviews the nature of the item and its relationship to the general operations of the company. We have followed this general practice in determining which non-operating income and expense items to include in CSC's G&A ratio calculation. We obtained explanations at verification for rent revenue, scrap or "waste" revenue, compensation income, fine revenue and sales of material that showed these items to be related to CSC's general operations. At verification, we learned that rent revenue relates to related companies' use of facilities, and that waste revenue relates to sales of production related waste products. We also learned that compensation income is revenue from power stoppages. Finally, we learned that fine revenue relates to fees charged to suppliers who violated contracts and that sales of material relates to sales of production related supplies. See Cost of Production and Constructed Value Verification Exhibit 18. Regarding the miscellaneous expense items, we are relying on the information obtained at verification. Specifically, we note that subcontractor's fees for waste reprocessing and depreciation on certain assets are both related to general operations. For the final determination, we recommend including only those non-operating income and expense items related to CSC's general operations in the G&A expense ratio calculation. Comment 12: Scrap Revenue CSC argues that the Department should not adjust the cost of goods sold used in the denominator of the G&A and financial expense ratio calculations for scrap revenue. CSC contends that the Department erred in its preliminary determination by deducting this amount, and that the adjustment should be reversed because the revenue is not included in the cost of goods sold. In support of this claim, CSC states that the revenue is treated as non-operating income in its financial statements. The petitioners argue that the Department should adjust cost of goods sold to account for CSC's scrap revenue because CSC failed to adequately explain this item. The Department's Position: We agree with CSC that the Department should not adjust the cost of goods sold used in the denominator of the G&A and financial expense ratio calculations for scrap revenue. We learned at verification that scrap revenue was income from the sale of various waste products generated in the production process. See Memorandum to Neal Halper from Robert Greger, Re: Verification Report on the Cost of Production and Constructed Value Data Submitted by China Steel Corporation dated March 22, 2000. We note that CSC reports this revenue as non- operating income, and that it is not included in cost of goods sold in the company's financial statements. We also note that the associated costs are included in cost of goods sold. For the final determination, we recommend not reducing the denominator of the G&A ratio calculation for scrap revenue. Comment 13: Short-term Interest Income CSC argues that the Department should include all of its interest income derived from short-term sources as an offset in the financial expense ratio calculation. Moreover, CSC notes that, at the start of verification, it submitted an additional item for inclusion as short-term interest income received on bidding bonds, and contends that this income should be included as part of the short-term interest income offset. CSC explains that these bonds are time deposits posted as part of the project bidding process, and that the company earns interest on them. CSC acknowledges that it inadvertently included some long-term interest income in its short- term interest income calculation. CSC maintains that Department officials obtained the necessary information to make an adjustment for the long-term interest income. The petitioners argue that the Department should deny CSC's entire claimed interest income offset. According to the petitioners, CSC failed to demonstrate that the income was from short-term investments and the Department should follow its precedent set in Final Results of Antidumping Duty Administrative Review: Silicon Metal from Brazil, 64 FR 6305, 6323 (February 9, 1999) ("Silicon Metal from Brazil"). The petitioners contend that CSC has not shown that income received from bidding bonds is short- term in nature. The petitioners assert that the Department does not allow long-term interest income as an offset to interest expense since such activities are not related to current operations. According to the petitioners, the Department's findings at verification clearly show that at least a portion of CSC's reported offset is related to long-term interest income. The petitioners claim that there is no information on the record that would allow the Department to isolate the short-term portion of CSC's claimed offset, and that the Department should disallow the entire offset. The Department's Position. We agree with CSC that we should include all of its interest income derived from short-term sources as an offset in the financial expense ratio calculation. In calculating COP and CV, it is the Department's normal practice to allow a respondent to offset financial expenses with interest income derived from short-term sources. The Department does not, however, allow a respondent to offset its financial expense with income earned from long-term investing activities. See e.g., Timken v. United States, 852 F. Supp. 1040, 1048 (CIT 1994). Through verification testing, we found that CSC's claimed offset included long-term interest income. We acknowledge the petitioners' cite to Silicon Metal from Brazil, whereby the Department disallowed the respondent's entire claimed short-term offset as the respondent failed to prove that the income was from short-term sources. This case differs from Silicon Metal from Brazil in that CSC was able to demonstrate that most of its claimed offset was generated from short-term sources. Based on information obtained at verification, we recommend making an adjustment to exclude the long-term interest income from CSC's claimed offset for 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 results of review and the final weighted-average dumping margins in the Federal Register. Agree____ Disagree____ Troy H. Cribb Acting Assistant Secretary for Import Administration (Date)