66 FR 37638, July 19, 2001 A-570-827 Administrative Review POR 12/1/98-11/30/99 Public Document IA: P. Stolz MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Bernard T. Carreau Deputy Assistant Secretary, Group II Import Administration SUBJECT: Issues and Decision Memorandum for the Antidumping Duty Administrative Review on Certain Cased Pencils - December 01, 1998 through November 30, 1999 Summary We have analyzed the comments of the interested parties in the 1998-1999 administrative review of the antidumping duty order covering certain cased pencils from the People's Republic of China (PRC). As a result of our analysis of the comments received from interested parties, we recommend making no changes to our position in the preliminary results of this review. Specifically, 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 comments from parties: Whether the Department Should Continue to Base the Dumping Margin on Total Adverse Facts Available. Whether China First Pencil Co., Ltd. (CFP) and Three Star Stationery Industry Co., Ltd. (Three Star) Should be Treated as a Single Entity for Antidumping Purposes. Whether to Calculate a Dumping Margin for Sales to the U.S. Importer, Rose Art Industries, Inc. (Rose Art), regardless of whether adverse facts available are applied to all other sales. Whether to Use American Basswood Prices or Indonesian Slat Prices to Value Chinese Lindenwood. Whether to Use Sales Commissions and Bank Charges in Calculating a Dumping Margin. Whether to Use Indonesian Surrogate Values to Calculate the Dumping Margin. Background On January 9, 2001, the Department of Commerce (the Department) published in the Federal Register the preliminary results of the administrative review of the antidumping duty order on certain cased pencils from the PRC. In the preliminary results, we based CFP's dumping margin on total adverse facts available. See Notice of Preliminary Results of Antidumping Duty Administrative Review: Certain Cased Pencils from the People's Republic of China, 66 FR 1638 (January 9, 2001) (Preliminary Results). The period of review (POR) is December 1, 1998 through November 30, 1999. We invited parties to comment on our preliminary results of review. In response to this invitation, CFP and Three Star (respondents), and petitioners (the Pencil Section of the Writing Instrument Manufacturers Association, Sanford Corporation, Dixon-Ticonderoga Corporation, Tennessee Pencil Company, Musgrave Pencil Company, Moon Products, Inc., General Pencil Company, and Aakron Rule, Inc.,) filed case briefs on March 2, 2001 and rebuttal briefs on March 14, and 15, 2001, respectively. Rose Art Industries, Inc., a U.S. importer of the subject merchandise during the POR, filed a case brief on March 1, 2001. Margin Calculations Based upon our analysis of the comments received from interested parties, we recommend making no revisions to our preliminary results. Discussion of the Issues Comment 1: Whether the Department Should Continue to Base the Antidumping Margin on Total Adverse Facts Available Petitioners note that pursuant to section 776(a) of the Tariff Act of 1930, as amended (the Act), the Department may resort to facts available, in general, if a party withholds requested information, fails to provide requested information by the imposed deadlines, significantly impedes the proceeding, or provides requested information that cannot be verified. Additionally, petitioners note that section 776(b) of the Act permits the Department to use an inference adverse to a party in selecting from among the facts otherwise available if the party has failed to cooperate by not acting to the best of its ability. In interpreting these statutory provisions, petitioners state that before applying total adverse facts available, the courts have required the Department to find that: 1) the party did not submit necessary information in response to the Department's request, 2) the party failed to cooperate by not acting to the best of its ability to comply with the request, 3) the application of a total facts available rate is appropriate under the circumstances of the case, and 4) the Department determines the adverse rate chosen is relevant and reliable. See American Silicon Technologies, Inc. v. United States, 110 F. Supp. 2d 992, 1001- 1104 (Court of International Trade (CIT 2000). Petitioners believe that the facts in the instant review satisfy the statutory guidelines for applying total adverse facts available for the reasons discussed below. First, petitioners note that at verification, the Department found a significant quantity of third-country sales ultimately destined for the United States that CFP failed to report despite a specific request that it do so. Specifically, petitioners point out that the antidumping questionnaire requested that the respondent contact the Department's official in charge if it was aware of sales to third-countries that were ultimately destined for the United States. In response to this request, CFP replied "not applicable." However, petitioners state that, based on documentation for the unreported sales obtained at verification, CFP knew or should have known, at least as of the invoice date (i.e., date of sale), that these sales were destined for the United States. Petitioners note that many of the documents obtained by the Department at verification included clear references to U.S. destinations, references to the U.S. customer of the third-country reseller, and declarations that indicate a U.S. destination. Thus, petitioners conclude that CFP inexcusably withheld relevant information requested by the Department. Second, petitioners contend that CFP deliberately obstructed the Department's efforts to conduct this administrative review. In light of CFP's knowledge of the U.S. destination of its unreported third-country sales, petitioners assert that the failure to report these sales can only be considered deliberate. Moreover, petitioners note that at verification, CFP continued to deny that these transactions existed and took steps to impede the Department's attempts to uncover the unreported sales. Petitioners note that the verification report painstakingly documents CFP's obstructive behavior regarding the unreported sales. See petitioners' March 2, 2001 case brief (case brief) at page 14. Further, petitioners maintain that it was only after the Department discovered requested third-country sales documentation on a photocopy machine that CFP's "cover-up unraveled." See petitioners' case brief at page 14. Based on CFP's failure to report third-country sales destined for the United States and its refusal to provide requested documentation regarding such sales at verification, petitioners claim CFP failed to act to the best of its ability to comply with the Department's requests for information. Third, petitioners contend that the importance of the missing information and CFP's egregious behavior indicate that the use of total facts available is appropriate. Petitioners note that on several occasions CFP deliberately or, at best, negligently, failed to report a large percentage of its total U.S. sales - information that is central to the calculation of a dumping margin. Based on the significance and volume of the unreported information, petitioners assert that application of total adverse facts available is warranted. See Kawasaki Steel Corp. v. United States 110 F. Supp. 1029, 1041 (CIT 2000) ("if the missing information is important, and a large volume of that information is missing, it is logical to draw a more adverse inference because that would further the goal of creating an incentive for respondents to provide the information."). Further, petitioners claim that total adverse facts available is warranted because the record shows that CFP stood to benefit from withholding the requested information. See Gourmet Equip. Corp. v. United States, 2000 Ct. Intl. Trade LEXIS 82; Slip Op. 2000-78 at 14 (CIT 2000) ("Commerce is to consider the extent to which a party may benefit from its own lack of cooperation."). In addition, petitioners state that the application of total adverse facts available is appropriate as it would serve the statutory purpose of inducing future cooperation and tend to curb attempts by CFP to obtain a more favorable result than it would have if it had cooperated fully. See Ta Chen Stainless Steel Pipe, Inc. v. United States, 2000 Ct. Intl. Trade LEXIS 107; Slip. Op. 00-107 at 21 (CIT 2000). Moreover, petitioners note that the Department has found it critical for parties to submit timely, accurate information to allow sufficient time for its review. See Certain Circular Welded Non-Alloy Steel Pipe From Mexico; Final Results of Administrative Review, 65 FR 6136 (February 8, 2000) at Comment 1. Yet, petitioners point out that, in the instant review, significant information was not presented to the Department until verification was underway. Further, petitioners note that in the instant review, CFP's denial regarding the existence of such sales precluded the Department from issuing a supplemental questionnaire. Fourth, petitioners argue that the adverse facts available rate chosen in the preliminary results, 53.65 percent, is relevant and reliable because the rate has been re-calculated by the Department pursuant to a voluntary remand. In addition, the Department had corroborated the validity of this rate in two previous administrative reviews and a sunset review. The corroborated rate has a reasonable relationship to past practices of the industry and this qualifies as relevant for facts available. See Kompass Food Trading Int'l v. United States, Ct. Int'l Trade LEXIS 92, Slip Op. 00-90 at 11-12 (CIT 2000). Furthermore, petitioners state there is no information on the record indicating that this rate is inappropriate. Thus, petitioners conclude, the adverse facts available rate is corroborated, reliable, relevant and can be used by the Department. Additionally, petitioners state that the statutory provision under which the Department shall not decline to consider information submitted by a party does not apply to the information regarding unreported sales submitted by CFP at verification. Petitioners note that the statute (section 782 (e)) indicates the Department shall not decline to consider information where 1) the information is submitted by the established deadlines, 2) the information can be verified, 3) the information is not so incomplete that it cannot serve as a reliable basis for reaching a determination, 4) the interested party has demonstrated that it acted to the best of its ability in providing the information and meeting the requirements established by the Department with respect to the information, and 5) the information can be used without undue difficulty. Petitioners contend that none of these requirements have been met with respect to the unreported third-country sales destined for the United States because 1) the information was not submitted by the established deadline, 2) the information could not be verified because it was submitted too late, 3) the information does not indicate whether certain costs are included in the sales price and thus, it is incomplete, 4) the record indicates that CFP attempted to hide this sales data from the Department, and thus CFP did not act to the best of its ability in providing this information, and 5) the information cannot be used without undue difficulty because it is incomplete. Based on the foregoing, petitioners believe that the Department properly applied total adverse facts available in the preliminary results and should continue to do so for the final results of this review. CFP claims the Department should not apply total adverse facts available in the final results because 1) its failure to report certain U.S. sales was narrow in scope and inadvertent, and does not destroy the overall integrity of the reported data, and 2) it went to great lengths to cooperate with the Department in this review. CFP notes that the Department's preliminary facts available analysis and verification report focused on certain unreported U.S. sales through two third-country unaffiliated resellers.(1) CFP's views regarding the unreported sales are outlined below. With respect to pencil sales to third-country reseller A, CFP concedes that some of these sales should have been reported as U.S. sales; CFP believes it is an overstatement to conclude, as the Department did in its preliminary results, that the evidence clearly indicates that all pencil sales to reseller A are third-country sales ultimately destined for the United States. According to CFP, the evidence indicating possible knowledge of a U.S. destination for pencils sold to reseller A varies in quality. Specifically, CFP notes that of the total unreported pencil sales to reseller A, the Department found that documentation for a portion of these sales indicated only Hong Kong as the destination (reseller A is located in Hong Kong); documentation for another portion of these sales contained only the initials of reseller A's U.S. customer; documentation for a third group of these sales was identified by a shipping mark that referenced a U.S. city and state (the state was abbreviated); and, documentation for the last group of sales contained explicit references indicating that the ultimate destination for the merchandise was the United States. CFP acknowledges that it should have reported sales with invoices specifically indicating the United States as the ultimate destination. However, CFP notes that reseller A is a Hong Kong trading company, and such companies do not limit their commercial activities solely to transactions involving the United States. Thus, CFP contends that there is an insufficient basis for presuming that all sales to reseller A were destined for the United States, particularly where documents for other sales to this reseller either do not indicate the ultimate destination or bear only references to a location in the United States. Moreover, according to CFP, the fact that some documents included explicit instructions to ship directly to the United States, while others did not, evidences a distinction between those sales and sales without such explicit instructions. Finally, CFP notes that declarations on sales invoices which led the Department to believe that sales to third-country reseller B may be destined for the United States (a discussion of these sales is below), were not similarly found on invoices for sales to reseller A. See the Memorandum To the File From Paul Stolz, Proprietary Information Relating to Unreported U.S. Sales and the CFP-Three Star Relationship, dated concurrently with this "Issue and Decision Memorandum" (Proprietary Information Memorandum) at Item 1. This fact, according to CFP, further casts doubt on its supposed knowledge of the final destination of sales to reseller A. Thus, CFP argues that for the majority of pencil sales to reseller A, there is either no indication or only a vague indication that it knew or possibly could have known that the merchandise was destined for the United States. CFP makes the following specific observations regarding sales to reseller A where the documentation references the United States or a U.S. city and state. First, CFP explains that its failure to report sales with documentation indicating the United States as the ultimate destination was inadvertent. CFP notes that the documents indicating delivery to the United States were in the sales files of an employee who was not involved in preparing the response to the Department's questionnaire. Additionally, CFP claims that the unreported sales with documentation indicating delivery to the United States account for an exceedingly small percentage of the total value and volume of the reported U.S. sales. Therefore, CFP maintains its failure to report these sales does not merit the imposition of total adverse facts available. With respect to sales with a shipping mark referencing a U.S. city and state, CFP claims its officials were unaware that the referenced city was in the United States. According to CFP, the fact that an American citizen may recognize the referenced city as a U.S. destination should not lead to the presumption that CFP knew or should have known the same. Furthermore, CFP maintains that even if its staff had recognized that the city and state in question were in the United States, there is no reason to presume that the pencils it delivered to reseller A were ultimately destined for the United States since reseller A's U.S. customer is a trading company that may resell the pencils to customers outside of the United States. Finally, CFP claims that it had no reason to hide sales to reseller A from the Department. In fact, CFP notes that it had an incentive to report the sales in question because they were relatively high value sales and their inclusion in the sales file would decrease the overall dumping margin. With respect to pencil sales to third-country reseller B, CFP acknowledges that it arranged shipment of this merchandise directly to U.S. ports and thus, should have reported these sales. However CFP maintains that, for the reasons set out below, this omission does not warrant the use of total adverse facts available. First, CFP claims the omission of these sales was inadvertent. Moreover, CFP notes that the value of unreported sales to reseller B is not a significant portion of the total value of reported U.S. sales. Second, although the Department noted in its preliminary results that CFP was not forthcoming in providing documents regarding these sales and it offered no explanation for its actions, CFP contends that it did explain its actions. CFP states that its apparent unwillingness to immediately disclose all relevant sales documents was due to the fact that 1) the salesperson responsible for the sales in question no longer worked for CFP and thus, it took time to locate the requested documentation, and 2) CFP was extremely sensitive to certain commercial implications of disclosing the relevant sales documents which might be revealed to its U.S. customers and others. See the Proprietary Information Memorandum at Item 2. CFP notes that its sensitivity to this issue, coupled with its inexperience with antidumping proceedings explain its reticence. Third, CFP claims the Department's preliminary conclusion that it failed to provide information regarding sales to reseller B is incorrect. CFP acknowledges that it did not provide the requested documentation, in toto, in response to the verifier's first request, and its response to the Department's requests at verification was slower than it would have liked; however, CFP claims that the verification report and exhibits indicate that the Department ultimately obtained and verified the data in question. Thus, CFP maintains that the record does not support the assertion that it failed to cooperate by not providing complete information with respect to the sales in question and that any omission was inadvertent. See Nippon Steel Corp. v. United States, 118 F. Supp. 2d 1366, 1378 (CIT 2000) (the Court noted that the relevant question with respect to non-cooperation is whether the failure to provide the requested data is more than an inadvertent error). Furthermore, CFP states that its failure to report certain U.S. sales information is not significant enough to call into question the accuracy and completeness of all of its submitted information. CFP notes that the Department verified its factors of production information without noting any problems. Further, CFP claims that the Department cannot seriously challenge the completeness of the revised list of U.S. sales which includes the unreported sales noted above and is on the record of this review. In fact, CFP notes that, at verification, the Department literally reviewed each and every export transaction that it made during the POR and verified its total sales by reconciling them to its financial statement. In addition, CFP states that the Department took as verification exhibits source documents that establish all actual and potential U.S. sales not originally reported and, moreover, it verified these sales. Therefore, regardless of whether the Department uses the data for the originally unreported sales, CFP states that the Department cannot objectively decline to use the original sales database in order to calculate a margin. Also, CFP argues that the application of total adverse facts available is punitive because it went to great lengths to cooperate with the Department in this review. CFP notes that while the Department maintains wide discretion with respect to the application of facts available, the statute and the CIT have placed certain conditions upon its use. Most notably, before making any adverse inferences in selecting from among the facts otherwise available (adverse facts available), CFP points out that the Department must find that the party has failed to cooperate by not acting to the best of its ability. Additionally, CFP notes that in Borden, Inc v. United States, 4 F. Supp. 2d 1221 (CIT 1998) (Borden) the court held that to satisfy the statutory requirement for using adverse facts available, the Department must articulate its reason for finding that a party failed to cooperate to the best of its ability. Specifically, CFP notes that the court found in Borden that the Department could not use adverse facts available because it had "articulated no reason for finding {respondents'} failure {to provide information} was an unwillingness, rather than an inability to cooperate." See Borden at 1247. Yet, CFP points out that in the instant review it provided 1) complete factors of production data with virtually no errors, 2) the Department's verifiers with all the documents they requested and all the documents it had to produce, and 3) a U.S. sales database that, although imperfect, was corrected during the course of the review. Thus, CFP claims the record shows it cooperated with the Department in the review. Furthermore, CFP contends the Department's use of total adverse facts available in this proceeding is contrary to other recent court cases. CFP notes that in Mannesmannrohren-Werke AF v. United States , 120 F. Supp. 2d 1075 (CIT 2000) (Mannesmannrohren-Werke), the respondents refused, on four occasions, to provide the Department with data regarding major inputs purchased from affiliated suppliers and made a "materially false" statement intended to deflect the Department's inquiry. However, in that case, the Department limited the application of adverse facts available to the value of the major input (data the Department declined to accept at verification). CFP asserts that its conduct in the instant review is far less egregious than that of the respondents in Mannesmannrohren-Werke. CFP maintains that its situation is somewhat analogous to that found in Krupp Thyssen Nirosta GmbH v. United States, 2000 Ct. Intl. Trade LEXIS 91; Slip Op. 2000-89 at 21 - 22 (CIT 2000) (Krupp Thyssen). In Krupp Thyssen the Department asserted that multiple deficiencies in the respondents' further manufacturing data undermined the credibility of the entire response. However, CFP notes that in that case, the court remanded to the Department to consider whether the application of total adverse facts available was warranted based on evidence of unreliability of the other supplied data. Moreover, CFP notes that the Department has a statutory obligation to determine dumping margins as accurately as possible. See e.g. Rhone Poulenc, Inc. v. United States, 899 F.2d 1185, 1191 (Fed. Cir. 1990). Thus, CFP contends it is not only illogical to reject the information that the Department spent inordinate amounts of time collecting and verifying but would contravene the Department's statutory obligation. Also, CFP claims that in applying total adverse facts available the Department would be ignoring entirely CFP's verified customary selling practices and applying unduly punitive, aberrant facts that are not rationally related to CFP's verified sales. See Krupp Thyssen at 8 indicating adverse facts available must be non-aberrant, rationally related to sales, not unduly punitive and indicative of a respondents customary selling practices. Because, according to CFP, the Department has all the information on the record necessary to calculate a margin, it urges the Department not to use adverse facts available. Petitioners refute CFP's attempts to portray its behavior as something less than non-cooperation and argue that the facts support the use of total adverse facts available. First, petitioners claim that CFP did not support its assertion that its reporting failure was inadvertent with respect to sales to third-country reseller A where documentation referenced a U.S. destination. Second, with respect to sales to reseller A where documentation did not explicitly reference the United States as the ultimate destination (i.e., documents with the initials of reseller A's U.S. customer and a shipping mark indicating a U.S. city and state), petitioners point out that the documents that contained explicit references to the United States as the ultimate destination also included the initials of reseller A's U.S. customer and the U.S. city and state that appeared as a shipping mark. Therefore, the documents that referenced the U.S. customer's initials alone or together with a U.S. city and state, could easily be associated with the United States and they provide sufficient information from which to determine that the merchandise was destined for the United States. Consequently, petitioners maintain there is nothing to CFP's claim that it is being penalized for not being familiar with the geography of the United States. Third, petitioners dismiss CFP's argument that it did not necessarily know of the U.S. destination with respect to sales to reseller A because reseller A's U.S. customer could have resold the merchandise anywhere in the world. Petitioners observe that this reasoning would have meant CFP would not have had to report any of its direct U.S. sales because of the possibility that they could be resold outside of the United States. In any event, petitioners note that the documents prepared by CFP for the sales in question clearly indicate a U.S. destination and the Department quite properly focused on the destination provided in the commercial documents.(2) Fourth, petitioners claim that the fact that invoices for sales to reseller B contained certain declarations applicable to merchandise destined for the U.S., while invoices for sales to reseller A did not, does not indicate that sales to reseller A were not destined for the United States. See the Proprietary Information Memorandum at Item 1. Petitioners note that record evidence shows that the absence of such declarations is perfectly consistent with goods destined for the United States. Thus, petitioners conclude that CFP either deliberately withheld information from the Department or conducted a search of its records that was so deficient that it failed to act to the best of its ability. Additionally, petitioners contend that CFP's explanations regarding the unreported U.S. sales through third-country reseller B are unconvincing. First, petitioners claim that CFP never provided evidence that its failure to report these sales was inadvertent. Petitioners find this failure to provide a plausible reason for not originally reporting these sales troubling since CFP admits it made arrangements to ship the merchandise directly to the United States. According to petitioners, CFP's explanation as to why it did not initially provide the verifiers with requested documentation related to these sales (i.e., the possible commercial implications of disclosing the relevant sales documents (the nature of which is proprietary)) is the real reason for not reporting the sales in the first place. See the Proprietary Information Memorandum at Item 2. Moreover, regardless of the rationale behind the delayed presentation of these documents at verification, petitioners believe that CFP's excuse for the delay merely confirms that the company knew these were U.S. sales and deliberately failed to cooperate by withholding documents from the Department. In addition, petitioners claim that proprietary information regarding CFP's accounting records and sales practices further indicates that the company knew of the U.S. destination of these sales. See the Proprietary Information Memorandum at Item 3. Finally, petitioners state that even if CFP was inexperienced with verification, that does not entitle it to lenient treatment because its failure to report U.S. sales through reseller B in its questionnaire response had nothing to do with verification. Furthermore, petitioners argue that although CFP attempts to excuse its non- reporting of third-country sales by highlighting the overall volume of information it did present, the overall volume of submissions on all issues is irrelevant to whether CFP cooperated with Commerce on the specific issues at hand. According to petitioners, CFP's failure to report a large volume of important information warrants the application of an adverse inference since CFP stood to gain from withholding the information. See the Proprietary Information Memorandum at Item 4. Lastly, petitioners claim CFP's reliance on Mannesmannrohren-Werke and Krupp Thyssen are inapposite. Petitioners claim that in Mannesmannrohren-Werke the court did not consider the circumstances in which application of total facts available is appropriate, rather the discussion in that case concerned the Department's use of partial facts available. Moreover, according to petitioners, in Krupp Thyssen although the court found fault with the Department's reason for using total fact available in that case, that finding does not preclude application of total facts available in this case. CFP contends that petitioners mis-characterize the situation involving the unreported U.S. sales. First, with respect to sales to third-country reseller A, CFP contends that, rather than deny the existence of potential U.S. sales after the Department found the first of such sales, it provided extensive documentation regarding these sales, including documentation indicating that it had been notified about the U.S. destination for some of the sales. Thus, CFP states that it did not attempt to hide these sales from the Department. Additionally, CFP claims that it had no reason to know that the bulk of these sales were destined for the United States. CFP maintains that not all of the documentation relating to these sales definitely indicated a U.S. destination. Specifically, CFP maintains that there is nothing in the sales documents containing the initials of reseller A's U.S. customer and a reference to a U.S. city and state to suggest that it could or should have known these marks indicated a customer name and a geographic location. According to CFP, the initials of the U.S. customer and the references to the U.S. city and state were nothing more than unintelligible shipping marks to its staff. Further, CFP asserts that its knowledge that some of these sales were destined for the United States does not indicate that all of the sales were destined for the United States. CFP points out that even some of its known U.S. customers request delivery to markets other than the United States. Second, with respect to sales to third-country reseller B, CFP claims that contrary to petitioners' assertion that the omission of these sales was intentional, CFP demonstrated that the omission was inadvertent, it explained the delay in providing documents for these sales at verification, and, ultimately, it turned over all of the related sales documents requested by the Department. According to CFP, although its response was less than perfect, it deserves a calculated margin. Department Position: We disagree with CFP. We find that the facts on the record of the instant review require application of total adverse facts available under the statutory framework, as discussed below. Section 776(a)(2) of Act provides that, if an interested party (A) withholds information that has been requested by the Department; (B) fails to provide such information in a timely manner or in the form or manner requested subject to section 782(c)(1) and (e) of the Act; (C) significantly impedes a proceeding under the antidumping statute; or (D) provides such information but the information cannot be verified, the Department shall, subject to subsection 782(d) of the Act, use facts otherwise available in reaching the applicable determination. In addition, section 782(c)(1) of the Act provides that if an interested party "promptly after receiving a request from {the Department} for information, notifies {the Department} that such party is unable to submit the information requested in the requested form and manner," the Department may modify the requirements to avoid imposing an unreasonable burden on that party. Section 782(d) of the Act provides that, if the Department determines that a response to a request for information does not comply with the request, the Department will inform the person submitting the response of the nature of the deficiency and shall, to the extent practicable, provide that person the opportunity to remedy or explain the deficiency. If that person submits further information that continues to be unsatisfactory, or this information is not submitted within the applicable time limits, the Department may, subject to section 782(e), disregard all or part of the original and subsequent responses, as appropriate. Section 782(e) of the Act states that the Department shall not decline to consider information deemed "deficient" under section 782(d) if: (1) the information is submitted by the established deadline; (2) the information can be verified; (3) the information is not so incomplete that it cannot serve as a reliable basis for reaching the applicable determination; (4) the interested party has demonstrated that it acted to the best of its ability; and (5) the information can be used without undue difficulties. Furthermore, section 776(b) of the Act provides that the Department may use an inference adverse to the interests of a party that has failed to cooperate by not acting to the best of its ability to comply with the Department's requests for information. See also Statement of Administrative Action ("SAA") accompanying the URAA, H.R. Rep. No. 103-316 at 870 (1994). The record of this review shows that CFP withheld information requested by the Department within the meaning of section 776(a)(2)(A) of the Act, failed to provide information regarding sales destined for the United States in a timely manner within the meaning of section 776(a)(2)(B) of the Act and significantly impeded this proceeding within the meaning of section 776(a)(2)(C) of the Act. In its antidumping questionnaire response, CFP failed to identify any of its sales to parties in third countries of pencils destined for the United States, despite a direct request to notify the Department of such sales. CFP responded "not applicable" when the Department explicitly asked whether it "was aware that any of the merchandise {it} sold to third countries was shipped to the United States." See Section A of the Department's questionnaire dated February 23, 2000 A-7. As a result, the Department had no reason to ask further about such sales pursuant to section 782(d) of the Act. Additionally, we note that at no point during this administrative review, did CFP indicate that responding to the questionnaire presented difficulties, nor did it seek guidance on alternative reporting requirements, as contemplated in section 782(c)(1) of the Act. However, at verification, the Department found extensive documentary evidence that CFP sold subject merchandise to two unaffiliated parties (resellers A and B) in third countries and knew, or should have known, that the ultimate destination of the subject merchandise was the United States, especially since multiple shipments were made directly from CFP to the resellers' customers in the United States. See Verification Report at 15 - 22. As a result of CFP's failure to report its sales to parties in third countries of pencils destined for the United States, the Department was unable to issue supplemental questionnaires regarding such sales. Also, the Department was unable to properly plan verification procedures with respect to these sales. In addition, during the verification, even after these sales had been discovered by the Department, on more than one occasion, CFP officials impeded Department officials' ability to examine relevant sales documentation by claiming that the requested documentation did not exist, when in fact the verifiers had already uncovered clear evidence that such documentation did exist (see Part VI, section C of the Completeness section of the Verification of the Sales and Factors of Production Responses of China First Pencil Company, Ltd. (Verification Report), dated January 2, 2001, on file in the Central Records Unit, Room B-099 of the Main Department of Commerce building for details). CFP's actions during the verification required the verification team to divert a significant amount of time from its examination of factors of production in order to address the issue of unreported third-country sales. Consequently, pursuant to section 782(e) of the Act, we find it inappropriate to use the U.S. sales data on the record to calculate a dumping margin for CFP, as outlined below. First, with respect to subsection 782(e)(1) of the Act, CFP did not submit information regarding U.S. sales through third-country resellers within the established deadlines. In fact, CFP only provided information regarding such sales at verification, after the Department's verifiers discovered evidence of U.S. sales through third-country resellers. CFP had full access to this information, which was under its control, that it did not report. Second, with respect to section 782(e)(2) of the Act, we were unable to verify certain information critical to our analysis. Specifically, we disagree with CFP's contention that at verification the Department established the full universe of U.S. sales. Although we reviewed sales and shipping documents for a large percentage of CFP's export sales, there remain questions regarding a group of third-country export sales for which CFP never provided the type of detailed documentation ultimately obtained for the U.S. sales through reseller A and reseller B. While the Department did examine photocopies of invoices and shipping documents for this latter group of sales and, on their face, these documents did not indicate the sales were U.S. sales, the Department's verifiers requested additional documentation for these sales of the type that they had examined for other third-country sales, such as purchase orders, sales confirmations, certificates of origin, export customs declarations, faxes, insurance documents and miscellaneous correspondence. After claiming several times that no such documentation existed for these sales or for sales through third-country reseller B, eventually, in the face of persistent questioning by the verifiers, CFP supplied such documents for the reseller B sales, all of which demonstrated that sales to reseller B were destined for the United States. However, CFP never provided similar documentation for the other group of third-country export sales. Thus, we can not conclude that we have verified the ultimate destination of these sales. See the Proprietary Information Memorandum at Item 6. Furthermore, the fact that the Department was able to reconcile CFP's financial statement with the total value of reported as well as unreported sales identified at verification does not indicate, by itself, that the Department accounted for all unreported U.S. sales. In fact, the unreported U.S. sales identified at verification were discovered by examining detailed sales and shipping documents for certain sales reported as third-country sales for purposes of the overall quantity and value reconciliation. Finally, we note that none of the sales adjustment data has been verified with respect to these unreported U.S. sales. In addition, we are concerned that some U.S. sales may have been misclassified and reported by CFP as home market sales. At verification we examined documents for purported domestic sales made by CFP to a company which "received" the merchandise in China. However, documentation viewed at verification indicates that at least one sale of merchandise to this particular company was shipped directly to the United States by CFP. Furthermore, documents examined at verification did not demonstrate that the merchandise was actually sold to a company domiciled in China. See the Proprietary Information Memorandum at Item 5. Third, with respect to section 782(e)(3) of the Act, the unreported U.S. sales identified at verification constitute a significant percentage of the total quantity and value of the reported sales. Although CFP minimizes the extent of the reporting failure by limiting unreported sales to those with documents explicitly referencing the United States as the ultimate destination, the record indicates that CFP's knowledge of a U.S. destination should not be limited to such instances since documentation for the remaining such sales all contained some reference to either the U.S. Customer name, U.S. state, or the U.S. city of delivery. Thus, the preponderance of the information indicates CFP should have been aware of the U.S. destination of a majority of the sales to third-country reseller A. Furthermore, although CFP claims that its unreported sales to reseller B are not a significant portion of the total value of its reported sales, we note that the unreported sales through third-country resellers A and B, in toto, are a significant percentage of the total quantity and value of the reported sales. See the Proprietary Information Memorandum at Item 7. In addition, there are concerns regarding the prices of the unreported sales. See the Proprietary Information Memorandum at Item 4. Finally, with respect to this statutory element, we note that there remain sales for which we were unable to verify the ultimate destination and so we can not be certain that there are not additional unreported U.S. sales (see discussion above regarding section 782(e)(2) of the Act). Therefore, based on these facts we have determined that CFP's database is so incomplete that it can not be considered a reliable basis upon which to calculate a dumping margin pursuant to section 782(e)(3) of the Act. Fourth, with respect to section 782(e)(4) of the Act, by having information regarding sales to third-country resellers destined for the United States within its possession and failing to report this information to the Department, CFP failed to demonstrate that it acted to the best of its ability in providing the requested information. CFP made arrangements to ship some of the unreported third-country reseller sales directly to the United States. Yet, in response to a direct request in the antidumping questionnaire to notify the Department of such sales, CFP failed to do so and, more specifically, responded that this question was not applicable. However, the record clearly demonstrates that CFP knew of these sales at the time it prepared its questionnaire response. For example, with respect to pencil sales to third-country reseller A, documentation containing explicit references to the United States as the ultimate destination also include, in close proximity to such references, the same U.S. city, U.S. state, or U.S. customer reference that appears on documents which do not explicitly reference the United States. Thus, documents with references only to a U.S. city, and/or U.S. state/state abbreviation, and/or U.S. customer name could be readily associated with the United States. See Verification Report at page 15. In addition, a number of shipping documents list as "port of discharge" or "port of destination" the U.S. city in question. See Verification Report at Exhibit 23. Also See the Proprietary Information Memorandum at Item 8. Moreover, the record includes clear evidence that CFP made arrangements on multiple occasions to ship merchandise sold to third- country reseller A directly to the United States, including the merchandise with only the state references on the documents. With respect to CFP's claim that reseller A's U.S. customer might have sold the merchandise to a customer outside the United States, and thus, the merchandise may not have been ultimately destined for the United States, we note that this supposition is not supported by any specific evidence on the record. Although the Department's verifiers were unable to obtain any documentation indicating the shipping destination for a very small percentage of sales to reseller A, the weight of evidence indicates that CFP should have been aware that the vast majority of its sales to reseller A were destined for the United States. (See Part VI, section C of the Completeness section of the Verification Report for details.) Further, CFP explained that its failure to report these sales and its lack of responsiveness at verification was due, in part, to the commercial sensitivity of certain sales information. See the Proprietary Information Memorandum at Item 2. Thus, CFP has acknowledged that during the course of this review it intentionally withheld requested sales information from the Department. Additionally, with respect to CFP's relationship with the respondent Three Star (this issue is discussed in Comment 3 below), CFP unequivocally answered the Department's question, "Has China First {CFP} ever had any type of relationship with Three Star?" by describing certain interactions with Three Star (the nature of which is proprietary) as the only relationship between itself and Three Star. See CFP's August 21, 2000 supplemental response, question 5, at 3. However, as a result of information placed on the record by petitioners, CFP eventually acknowledged that there were additional aspects to its relationship with Three Star, aspects that it did not disclose previously. See the Proprietary Information Memorandum at Item 9. This raises additional concerns regarding CFP's level of cooperation and the veracity of its reported sales. CFP's failure to disclose the U.S. sales in question along with its failure to disclose certain facets of its relationship with Three Star are clear indications that CFP failed to act to the best of its ability in responding to the Department's questionnaire. As a consequence of the above analysis regarding sections 776(a) and 782(e) of the Act, we have determined that the use of total facts available is appropriate for CFP in this administrative review. Pursuant to section 776(b) of the Act, in applying facts available, the Department may use an inference adverse to the interests of a party that has failed to cooperate by not acting to the best of its ability to comply with the Department's requests for information. Although CFP argues that it went to great lengths to cooperate with the Department in this review, the record does not show that it acted to the best of its ability to comply with requests for information. In reviewing the evidence on the record, we find that CFP provided incomplete information in its questionnaire response, failed to provide information it had readily available, and, at verification, misled the Department about the availability of sales/shipping documents which substantiated the existence of unreported U.S. sales. The following summary of events that transpired at verification illustrates CFP's failure to cooperate by not acting to the best of its ability to comply with the Department's request for information. As we stated in the verification report: In response to the verification team's request to provide all documents related to certain sales invoices to third-country reseller B, CFP officials stated that they had no additional documents for this customer. However, later on the same day that the request was made, the verification team found the requested documentation on the company's copy machine. Consequently, the team asked company officials whether they had any additional documentation relating to any third-country sales including sales to reseller B. CFP officials stated that they had already given the Department all of the company's sales information. The team showed company officials examples of the types of documents it sought based on documentation CFP had provided for other sales, and asked if CFP had additional documents of this type. CFP stated that there were no additional documents. The team pointed out that, in fact, it had reviewed similar documents for other sales and, thus, the team knew this type of documentation existed. At this point, counsel for CFP objected to the repeated questioning of his client regarding this matter. However, after counsel consulted with CFP officials, they began bringing the verification team some of the documents it had requested. These additional documents clearly demonstrated that the pencils sold to reseller B were destined for the United States. The team again requested that CFP provide all relevant sales documents for these sales. The next day CFP provided the Department with a list of sales to reseller B; however, again the company did not provide the remaining requested sales documents. The team again reiterated its request for all associated sales documents. CFP later provided some additional documents for the sales to reseller B. See the Verification Report at 18-22. CFP's actions, described above, clearly show that it did not act to the best of its ability to cooperate with the Department's requests for information. CFP attempts to bolster its claim of full cooperation by noting the amount of information it did provide; however, we note that providing some information does not relieve a respondent of the requirement to act to the best of its ability in providing a complete response to the Department's questionnaire. Further, we disagree with CFP's assertion that its conduct in this review was far less egregious than that of the respondent in Mannesmannrohren-Werke (a case where the Department applied partial adverse facts available). Although CFP stated that the respondent in Mannesmannrohren-Werke, Mannesmann, refused to supply the Department with data regarding billets purchased from affiliates, Mannesmann did supply such information. However, Mannesmann did not report certain market price information requested by the Department because it claimed that it did not purchase billets from unaffiliated suppliers that are identical to those purchased from its affiliated supplier. At verification, the Department discovered one such purchase. After this discovery, the verifiers questioned Mannesmann officials who "informed the verifiers that there were in fact certain circumstances under which Mannesmann purchased billets from unaffiliated suppliers ..." Like Mannesmann, CFP made a materially false statement in response to the Department's questionnaire i.e., replying "not applicable" when the Department explicitly asked whether it "was aware that any of the merchandise {it} sold to third countries was shipped to the United States." See Section A of the Department's questionnaire dated February 23, 2000 A-7. However, unlike Mannesmann, CFP continued to make false statements at verification. On more than one occasion during the verification CFP claimed that requested documentation did not exist when, in fact, it did exist. Furthermore, in contrast to Mannesmann's forthright response at verification, once CFP's questionnaire response regarding third-country sales was found to be untrue, it was only through the diligent efforts of the verifiers and the fortuitous discovery of relevant documentation on CFP's copy machine that all of the unreported U.S. sales thus far identified were uncovered. In fact, if the verifiers had not decided to examine additional sales documentation, after having already proceeded from the sales to the factors of production stage of the verification, the unreported sales to reseller B might not have been uncovered. Additionally, the situation in the instant review is not akin to that in Krupp Thyssen. In that case, the Department's main reason for rejecting the entire database of the U.S. affiliated reseller and applying total adverse facts available was that it found the errors in the further manufacturing response to be so pervasive as to undermine the reliability of the entire response. However, the court rejected the Department's assertion, suggesting that there was insufficient evidence demonstrating that the errors discovered at verification called into question the rest of the reported cost data let alone the sales data. In contrast, the record evidence in this review clearly demonstrates that CFP's reporting failure involves the omission of a significant percentage of U.S. sales, an essential component of the response. Without this information it is impossible to calculate an accurate dumping margin. Moreover, contrary to CFP's assertion, the Department has not verified the data for the unreported sales discovered at verification. Moreover, CFP's pattern of behavior throughout this review heightens the Department's concerns with respect to possible unreported U.S. sales. Specifically, we note that CFP has made a series of materially false statements during the course of this review. First, CFP stated "not applicable" in response to our questionnaire in which we asked if CFP had made sales through third countries which were ultimately destined for the United States. Second, CFP stated that it did not have sales/shipping documents relating to certain third-country sales when in fact it had documents in its possession demonstrating that the merchandise sold to third-country resellers was destined for the United States. Third, CFP stated that its relationship with Three Star was limited to that of competitor when in fact the relationship between CFP and Three Star was more substantive. Fourth, CFP stated that none of its managers had been employed by Three Star in the four-year period prior to the POR, when in fact management level employees moved between CFP and Three Star in December 1997 (i.e., Mr. Huang Wei-Hu moved from Three Star to Great Wall, CFP's subsidiary, while Mr. Huang Zhen-Min, who was considered a mid-level manager within CFP (see CFP's August 21, 2000 supplemental response at 5), left Great Wall for Three Star). In addition, the piecemeal manner in which CFP has provided information regarding its relationship with Three Star and the extent to which its explanations of this relationship rely upon assertions of "bureaucratic mistakes" to explain documents that evidence an apparent relationship between CFP and Three Star, is further evidence of a pattern of behavior which raises concerns. In this review, we are using, as adverse FA, the highest margin from this or any prior segment of the proceeding. Specifically, we are using 53.65 percent, the currently applicable PRC-wide rate. This rate was the "recalculated" petition rate, which was "recalculated" for the final determination in the investigation. See Certain Cased Pencils From the People's Republic of China; Notice of Amended Final Determination of Sales at Less Than Fair Value and Amended Antidumping Order in Accordance With Final Court Decision, 64 FR 25275 (May 11, 1999). The rate we are using for adverse FA constitutes secondary information within the meaning of the SAA. See SAA at 870. Section 776(c) of the Act provides that the Department shall, to the extent practicable, corroborate secondary information from independent sources reasonably at its disposal. The SAA provides that "corroborate" means that the Department will satisfy itself that the secondary information to be used has probative value. The SAA at 870, however, states further that "the fact that corroboration may not be practicable in a given circumstance will not prevent the agencies from applying an adverse inference." In addition, the SAA, at 869, emphasizes that the Department need not prove that the FA are the best alternative information. To corroborate secondary information, to the extent practicable the Department will examine the reliability and relevance of the information to be used. The "recalculated" petition rate was corroborated by the Department in a prior segment of this proceeding and nothing on the record of the instant review calls into question the reliability of the "recalculated" rate. See Certain Cased Pencils From the People's Republic of China; Final Results of Antidumping Administrative Review, 63 FR 779 (January 7, 1998). With respect to the relevance aspect of corroboration, the Department will consider information reasonably at its disposal to determine whether a margin continues to have relevance. Nothing in the record of this review calls into question the relevancy of the selected margin. Furthermore, the rate has not been judicially invalidated. Thus we determine that it has probative value, and therefore, it is appropriate to use the "recalculated" petition rate as adverse FA. Comment 2: Whether CFP and Three Star Should be Treated as a Single Entity for Antidumping Purposes Petitioners contend that Three Star should be considered part of CFP for purposes of enforcing the antidumping duty order because the two companies are affiliated and have intertwined operations. Pursuant to sections 771(33)(E), (F) and (G) of the Act, petitioners alleged that CFP and Three Star are affiliated by virtue of common ownership and common control of the two companies. Petitioners note that the record shows Shanghai Light Industry Co., Ltd. (SLI) owns 100 percent of Three Star and 33.10 percent of the voting stock of CFP. Further, petitioners note that CFP's 1999 annual report states that "the company's major shareholder is SLI." In addition to this evidence regarding common ownership, petitioners point to record evidence that they provided indicating that CFP has now acquired the entire ownership stake (of SLI) in Three Star making it a subsidiary of CFP. Specifically, petitioners note that Three Star's 1999 annual 'yearbook' report, jointly filed by Three Star and CFP in the Pudong Branch of the Shanghai Administration Bureau of Industry and Commerce, specifies that CFP is the owner of Three Star, with an investment of 20 million yuan. Petitioners contend that the document is prima facie evidence of affiliation. Petitioners claim that there is no evidence on the record supporting CFP's explanation that a clerk at the Pudong branch filled in missing information regarding ownership by erroneously listing CFP as the sole owner of Three Star (Three Star's 1999 yearbook lists CFP as the 'Managing Department'). Petitioners argue that it is not credible that Three Star and CFP would have forgotten to include the ownership information in the yearbook, or that a clerk would have filled in this information without checking the veracity of this information. Petitioners also state that the clarification that respondents obtained from the Pudong Branch indicating that the 20 million yuan investment in Three Star is 'attributable' to SLI does not indicate why CFP was listed as the owner, or who currently owns the equity shares in Three Star. Petitioners further state that there is no evidence that the Pudong Branch made an independent evaluation of the ownership issue. Moreover, petitioners contend that CFP's internal newspaper lists Three Star as a CFP subsidiary or department. Petitioners note that while CFP claims it operates the newspaper on behalf of a pencil association, the name of the newspaper is "China First Pencil." Petitioners also note that the contact information in the newspaper lists CFP, and the articles in the newspaper cover CFP. Additionally, petitioners argue that CFP and Three Star are affiliated pursuant to sections 771(33)(F) and (G) of the Act because SLI is 'legally or operationally in a position to exercise restraint or direction over China First and Three Star. Petitioners contend that, under CFP's articles of association, SLI's shareholding in CFP gives it certain rights over CFP (the nature of these rights is proprietary). See petitioners' case brief at page 36. Further, petitioners point to record evidence that SLI has in fact exercised its right to direct Three Star. Specifically, petitioners note that, in January 1997, SLI appointed Mr. Hu Shu-Gang, to serve as legal representative of Three Star, a position he held concurrently with his position as CFP's legal representative until SLI removed him from the Three Star position in December 1997. Further, petitioners note that SLI, as a "self-proclaimed profit-making company," has a direct interest in Three Star's business success. Moreover, petitioners contend that the movement of managers between CFP and Three Star, the managers' concurrent leadership of both companies in 1997, and certain business relationships between the two companies (the nature of which is proprietary) indicate a close operational relationship that warrants treating the two companies as a single entity for antidumping purposes. Petitioners note that in December of 1997, CFP appointed Mr. Huang Zhen-Min (formerly president of one of CFP's subsidiaries) to succeed Mr. Hu as Three Star's legal representative. Petitioners point out that Mr. Huang himself was succeeded as president of the CFP subsidiary by a former vice president of Three Star. With respect to the concurrent leadership of CFP and Three Star by Mr. Hu in 1997, petitioners argue that, contrary to respondents' assertions, record evidence, including Three Star's "Notice of Business Corporation License," with Mr. Hu's signature as legal representative, Three Stars public filings, and SLI's retraction of Mr. Hu's appointment at Three Star, demonstrates that Mr. Hu was the de facto and de jure legal representative of Three Star in 1997. Lastly, in support of treating CFP and Three Star as one entity petitioners point to a certain proprietary relationship between CFP and Three Star and proprietary details regarding why CFP was identified as the "Managing Department" in Three Star's 1999 yearbook. For details regarding this proprietary information, see CFP's April 11, 2001 supplemental questionnaire response at 2 and 7. Also See the Proprietary Information Memorandum at Items 9 and 10. After arguing that CFP and Three Star are affiliated, petitioners next maintain that CFP and Three Star should be collapsed into a single entity because the nature of their affiliation presents a significant potential for manipulation of production, pricing or cost of the subject merchandise. Petitioners claim that SLI has the "means" and the "motive" to affect CFP and Three Star's production, pricing, and cost of pencils, noting that the profitability of CFP and Three Star will have a direct bearing on SLI's own profitability. Moreover, petitioners claim that if the Department adopts the preliminary results in the final (i.e., the 53.65 antidumping rate for CFP) the only way for SLI to maintain CFP's "competitive edge" in making sales to the United States will be by routing CFP's pencils through Three Star or shifting CFP's production to Three Star. Additionally, petitioners state that the relationship between CFP and Three Star meets the requirements for collapsing under section 351.401(f) of the Department's regulations. First, petitioners state that CFP and Three Star produce identical products, cased pencils, and "little if no retooling" would be needed if CFP were to make pencils for sale by Three Star. Second, petitioners contend that the facts point to a significant potential for manipulation of price or production among SLI, CFP and Three Star. Petitioners note that SLI has common ownership in both CFP and Three Star and that CFP's and Three Star's operations are intertwined through the movement of executives between the two companies and, in the case of Mr. Hu, concurrent leadership of both companies during 1997.(3) Petitioners also claim that certain proprietary dealings involving CFP and Three Star indicate a connection between the companies that supports collapsing them into a single entity. For details regarding this proprietary information, see petitioners case brief at 44, and petitioners May 8, 2001 affiliation comments at 21. See the Proprietary Information Memorandum at Item 9. Petitioners further state that, in general, there is a potential for SLI and/or CFP to "funnel" CFP's pencils through Three Star or to "manipulate" Three Star's operations to provide CFP with a cost benefit. Petitioners note that moving pencils through Three Star is particularly "enticing" because pencils produced by Three Star and sold through Guangdong Stationery and Sporting Goods Import & Export Co. (GSSG) are exempted from this antidumping duty order. Petitioners, citing to Nihon Cement Co., Ltd. v. United States,17 CIT 400, 425 (1993), FAG (UK) Ltd. v. United States, 24 F.Supp. 2d 297 (CIT 1998), and Electrolytic Manganese Dioxide from Japan; Final Results of Antidumping Duty Administrative Review, 65 FR 55939 (September 15, 2000) at Comment 2, contend that the Department, in its collapsing analysis, focuses on the possibility or potential of manipulation of production, pricing, or cost, and need not find that such manipulation has already taken place. Petitioners argue that if Three Star and CFP were collapsed, then subject merchandise produced by Three Star and exported by GSSG would be subject to the antidumping duty order. Currently, petitioners note, pencils manufactured by Three Star and exported by GSSG are excluded from the antidumping duty order. Petitioners argue that if Three Star were collapsed with CFP, it would no longer qualify as a separate producer, but would be treated as part of CFP's production facilities. Thus, according to petitioners, all of Three Star's pencils, including those exported by GSSG, would by subject to the antidumping duty order because they would then be produced by CFP. Finally, petitioners state that to the extent any factual information is missing from the record with respect to the affiliation and collapsing issue, the Department should, as adverse facts available, collapse CFP and Three Star because CFP has failed to act to the best of its ability to provide such information. Petitioners claim that with respect to the affiliation and collapsing issue, CFP has provided false responses, been dilatory in its responses, and deliberately failed to provide information which only came to light in response to information petitioners placed on the record. Consequently, petitioners claim the requirements for drawing adverse inferences under section 776(b) of the Act have been met. Respondents argue that CFP and Three Star are not affiliated. First, respondents dispute petitioners' assertions that CFP and Three Star are affiliated by virtue of their common ownership by SLI. Respondents note that SLI has administrative responsibility as a trustee for Three Star, a company owned by 'all the people,' but does not become involved with Three Star's operations or commercial activities. Respondents state that Three Star is a state-owned corporation, whose assets belong to 'All the People,' under the trusteeship of SLI to protect those assets in China's evolving, transitional economy. Respondents also contend that SLI has a similar relationship with CFP, except that, as the state's trustee, SLI holds shares in CFP because the company was privatized in large part in 1993. Respondents argue that SLI's shareholdings in CFP should not be viewed and analyzed using a market-economy analysis. Respondents explain that SLI, the largest shareholder of CFP, is a state-owned organization that does not operate independently from the government, and is a de facto, if not de jure, arm of the Shanghai Municipal government. Respondents state that SLI is no different from the administrative bureaus which have administrative oversight over various state-owned or "all the people" companies like those involved in every Chinese antidumping case before the Department. Respondents further explain that SLI is responsible for the "administrative oversight" of various state assets in the Shanghai area, including the state- owned shares of CFP (held by SLI as trustee), and is not involved in operating any of the companies over which it has "administrative oversight." Respondents point out that the Department, in granting partially or entirely-state-owned companies a separate rate, determines that these companies (like CFP) are sufficiently independent of the government and other exporters of the subject merchandise so as to be deemed separate from the PRC entity for purposes of the dumping analysis. Respondents state that this constitutes an acknowledgment by the Department that, as China's economy evolves, certain state 'ownership' interests will be accepted as necessary to the transformation of China's economy. Respondents contend that SLI's equity 'ownership" in CFP is not held in the traditional sense, but as a trustee of state assets that are, over time, being privatized, and should be treated as such. Respondents also stress that it is implausible to consider that a shareholding company (i.e., CFP) with virtually no commercial connection to a company owned by "all the people" (i.e., SLI) could be considered "so connected and intertwined" as to require that the two be treated as a single company. Respondents also claim that record documents demonstrate that the National Finance Center (a PRC government financing bureau), and not CFP, is the source of Three Star's original 20 million yuan capitalization. Respondents state that Three Star's appointed accounting firm, and not the Shanghai Administration Bureau of Industry and Commerce (the business licensing and administrative authority in Shanghai), mistakenly identified CFP as the source of this capitalization, and claim that this mistake is not surprising, given the confusion concerning the concept of ownership in China. Respondents stress that neither CFP nor SLI is the owner of Three Star, and if CFP had acquired the ownership of the initial capitalization in Three Star, that fact would be reflected in CFP's audited financial statements. Respondent argues that there is no information in CFP's audited financial statements that indicates that CFP has an ownership interest in Three Star. Additionally, respondents argue that Mr. Hu, CFP's chairman of the board, was never employed by Three Star, and point out that the Department verified that Mr. Hu was never employed at Three Star. Respondents state that documents placed on the record by petitioners do not support petitioners' claim that CFP and Three Star shared management. According to respondents, these documents were either not what they were represented to be (i.e., a business license was not actually a business license but a notice of a business license that was never issued) or are related to SLI's attempted appointment of Mr. Hu to a management position at Three Star, which was rejected by CFP's shareholders and board of directors. Moreover, respondents state that, even if the allegations regarding contemporaneous employment by Mr. Hu at both CFP and Three Star were true, they are irrelevant because the allegations relate to 1997, a year before the POR. Respondents further point out that Mr. Hu was not a manager or legal representative of CFP during the POR, but was the chairman of CFP's board of directors. Respondents also contend that it is not unusual that managers in one industry move from one company to another company within that industry, and it is "natural" that Three Star and SLI would look to another pencil producer for a "managerial candidate." In addition, respondents state that the Department verified that Mr. Huang never simultaneously held positions at both Three Star and CFP's subsidiary, Shanghai Great Wall Pencil Co., Ltd. (Great Wall) (an allegation made by petitioners in their February 15, 2001 submission at 3). Respondents also contend that the correct translation of the name of the newspaper at issue is "China Pencil," and not "China First Pencil," as petitioners contend. Respondents also argue that CFP does not manage or control Three Star's commercial operations, and that CFP can have no impact on the pricing, production, marketing or any other "meaningful" commercial function of Three Star. Respondents note that, even in the United States, companies are "opening their factory doors" to other companies to learn their systems, like Toyota's "Toyota Production System." Furthermore, respondents contend that the proprietary arrangement between CFP and Three Star was at arms length, reflects commercially reasonable business decisions and consequences, and is not indicative of CFP being in a position of control. See the Proprietary Information Memorandum at Items 9 and 10. Respondents argue that, even if there was an affiliation between CFP and Three Star, such an affiliation would have no effect, as the only subject merchandise involved in this review was that merchandise sold to the United States by CFP, and only the facilities that produced the CFP merchandise that was sold to the United States are necessary to determine CFP's factors of production. Respondents additionally contend that the potential for price manipulation among affiliated parties does not exist in nonmarket-economy cases where normal value is not based on actual company costs. Respondents argue that, even if CFP and Three Star were affiliated, there is no basis upon which to collapse them. Respondents state that, in this case, as in Iron Construction Castings from Canada, 55 FR 460 (January 5, 1990), the companies 'operate as distinct entities' "obviating" the 'ability of {one} company to manipulate its affiliate's prices and to affect production decisions.' Respondents claim that there is no possibility of price manipulation between CFP and Three Star. Respondents note that Three Star only operated as a producer for a separate company, GSSG, that exported pencils to the United States, and that CFP could not impact GSSG's prices to its U.S. customers. Respondents further state that both CFP and Three Star only have the incentives (as competitors) to eliminate one another from the market through price manipulation, but neither has the potential or capability to impose such control over the other. Moreover, respondents argue that, contrary to petitioners' assertion, and as verified by the Department, there were minimal transactions between CFP and Three Star during the POR. Respondents additionally point out that CFP's audited financial statements do not include a single reference to Three Star. Respondents claim that this indicates that SLI does not have a controlling interest in Three Star, and that SLI does not participate in the operations or management of CFP or Three Star. Respondents also note that section 351.401(f) of the Department's regulations is intended for market economy antidumping cases. Respondents state that collapsing a producer that does not export to the U.S. (Three Star) with an exporter to the U.S. (including one, like CFP, that is also a producer) serves no purpose in the antidumping analysis in a non-market economy case. Respondents additionally state that the only reason to collapse companies is to ensure that the production of all subject merchandise under the control of the respondent is included in the calculation of the cost of production. Respondents conclude that, since Three Star did not supply CFP with subject merchandise during the POR, Three Star is not subject to the CFP antidumping duty analysis. Finally, respondents argue that it is not appropriate to resort to facts available based upon petitioners' allegation that CFP engaged in obstructive behavior with respect to its relationship with Three Star. Respondents contend that information placed on the record to date does not reveal any level of interaction between CFP and Three Star that would have indicated that CFP should have reported Three Star as an affiliate. In addition, respondents claims that the Department has not formulated a clear framework with respect to affiliation in nonmarket economies and that the Department's questionnaire offers respondents no indication of what is expected with respect to reporting affiliates in the context of a nonmarket economy. Department Position: The record evidence regarding Three Star's relationship with CFP does not sufficiently support petitioners' argument that Three Star no longer qualifies as the producer identified in the excluded Three Star/GSSG transaction chain. We note that petitioners have constructed their argument for treating CFP and Three Star as a single entity based upon the regulatory framework for collapsing affiliated producers. While this regulatory framework is instructive, we have analyzed this issue by examining whether CFP and Three Star are connected in such a way that it would frustrate the purpose of the antidumping statute to continue to treat them as separate entities. Specifically, we have examined the information that petitioners placed on the record regarding the ownership structure of CFP and Three Star, the sharing and movement of legal representatives/managers between the two companies, and the business relationships between them and found it does not sufficiently demonstrate that these entities are intertwined in such a way as to call into question the Three Star/GSSG chain rate excluded from the order. In the less than fair value (LTFV) investigation, Three Star was identified as an "all the people" owned entity. See Section A questionnaire response of Shanghai Three Star Stationery Industry Corporation dated March 28, 1994, at 20 ( Notice of Final Determination of Sales at Less Than Fair Value: Certain Cased Pencils From the People's Republic of China, 59 FR 55625 (November 8, 1994)) attached to the Proprietary Information Memorandum. Although petitioners in the instant review contend that Three Star is now solely owned by CFP, the weight of the record evidence does not support this contention. While Three Star's 1999 annual "yearbook" indicates that CFP is the sole investor in Three Star, Three Star is not among the subsidiaries listed in CFP's 1999 audited financial statement nor would it be included in CFP's "Interests in Associates" account because CFP defines associated companies as those in which it owns not less than 20 percent.(4) Moreover, Three Star's 2000 business license indicates that it is an "all the people" legal entity. Additionally, we note that CFP submitted documentation dated March 6, 2000 and bearing the seal of the Pudong Branch of the Shanghai Industry and Commerce Management Bureau which indicates that SLI is the sole investor and managing authority of Three Star. The Department found at verification that although Three Star is "owned by all the people," SLI is the state-owned enterprise which oversees Three Star and serves as a trustee with ownership rights. Finally, proprietary financial information on the record of this review indicates that Three Star is a subsidiary of SLI, not CFP. For a discussion of this proprietary information, see the the Proprietary Information Memorandum at Item 11. Thus, the weight of the evidence indicates that CFP does not own Three Star. With respect to SLI's ownership of CFP and Three Star, we note that SLI is a state-owned enterprise which manages state-owned property as it is privatized. Thus, we do not find SLI's relationship with these two companies significantly different from the relationship between the government and respondents that is presumed in all non-market economy cases. Therefore, SLI's common ownership of CFP and Three Star is not a basis for treating the two companies as a single entity. Moreover, we do not find the evidence on the record concerning the sharing and movement of legal representatives/managers between CFP and Three Star to be persuasive. While the record indicates that managers of CFP and Three Star did move between the two companies prior to the POR, this does not indicate that the two companies are intertwined. Further, the evidence petitioners provided regarding managers concurrently employed at CFP and Three Star is not convincing. The record evidence regarding Mr. Huang Zhen-Min's employment at Three Star and CFP's subsidiary, Great Wall, indicates that he did not head both companies, from December 1997 through July 1999 as alleged by petitioners. Specifically, petitioners' own information indicates that Mr. Huang Wei-Hu joined Great Wall as president in December 1997, a position held by Mr. Huang Zhen-Min since 1995. See petitioners' August 7, 2000 submission (items 13-15 of the attachment) and petitioners' August 29, 2000 submission at 2. This information supports respondents' claim that Mr. Huang Zhen-Min left his position at Great Wall in December 1997 to join Three Star. In addition, at verification, the Department's verifiers examined Three Star's compensation records which indicated that Mr. Huang Zhen-Min was not employed at Three Star prior to his resignation from CFP. With respect to the allegation that Mr. Hu acted concurrently as CFP's and Three Star's legal representative, we find that there is insufficient evidence on the record demonstrating that Mr. Hu ever fulfilled the duties of Three Star's legal representative. The only evidence that Mr. Hu acted as Three Star's legal representative consists of documents regarding the change in legal representative, dated February 27, 1997, which contain his signature as the legal representative for Three Star. This stands in stark contrast to the facts in the 1997-1998 reviews of freshwater crawfish tail meat from the PRC wherein the Department found that two PRC exporters did not operate independently, in part, due to shared management, and thus, they should receive the same antidumping duty rate. See the Memorandum for Joseph A. Spetrini from Edward C. Yang, dated April 12, 2000, regarding the relationship of Ningbo Nanalian Frozen Foods Company. Ltd. and Huaiyin Foreign Trade Corporation (5) in Freshwater Crawfish Tail Meat From The People's Republic of China: Final Results of Administrative Antidumping Duty and New Shipper Reviews, and Final Recission of New Shipper Review, 65 FR 20948 (April 19, 2000) (Crawfish from the PRC). In Crawfish from the PRC, the Department found that the same individual, Mr. Wei, served, whether or not "officially", as vice general manager for two PRC exporters and played a significant role in both companies' sales and exports of crawfish. Unlike the record in the instant review, the record in Crawfish from the PRC contained evidence of specific activities that Mr. Wei engaged in on behalf of both companies. Further, we note that petitioners provided documentation indicating that Mr. Hu was appointed as Three Star's legal representative in January 1997. However, they also provided documents regarding a modification to Three Star's business registration dated March 1997 and signed by Mr. Deng Rui-Jun as legal representative of Three Star. Thus, it is not clear when, or if, Mr. Hu ever fulfilled the duties of Three Star's legal representative. Nevertheless, we note that the allegations regarding Mr. Hu's concurrent positions at CFP and Three Star relate only to 1997, not to the POR. Thus, even if this allegation was sufficiently supported, it does not necessarily indicate that CFP's and Three Star's operations were closely linked during the period under examination (i.e., December 1, 1998 through November 30, 1999). Finally, the information regarding interactions between CFP and Three Star (the nature of which is proprietary) does not sufficiently demonstrate that these entities are intertwined in such a way as to call into question the Three Star/GSSG chain rate excluded from the order. For a discussion of this proprietary information, see the Proprietary Information Memorandum. It is informative to note that Three Star is not treated as a subsidiary in CFP's 1999 audited financial statement. In note 2 of that statement, entitled , "Principal Accounting Policies", it states: "A subsidiary is a company over which the Company {CFP} has the power to govern its financial and operating policies so as to obtain benefits from its activities, notwithstanding its equity interest in that company" (emphasis added). Hence, if CFP does not have an equity interest in a company, but has the power to control the financial and operating policies of the company through other means, that company would be listed as one of CFP's subsidiaries. As noted above, Three Star is not listed as one of CFP's subsidiaries. This further supports the conclusion that CFP's interactions with Three Star do not weigh in favor of treating the two companies as one. Finally, we note that evidence regarding CFP's appointment of the former representative of Great Wall as Three Star's legal representative does not clearly indicate that CFP was acting of its own initiative. Rather, the evidence indicates that CFP requested that SLI allow Great Wall's representative to take the assignment at Three Star after resigning from Great Wall. Thus, we do not find that CFP's interactions with Three Star indicate that the two companies should be treated as a single entity for antidumping purposes. Therefore, based on the evidence in this review, we have not treated Three Star and CFP as a single entity. We will revisit this issue if additional evidence regarding CFP's and Three Star's relationship is presented in a future review. Comment 3 : Whether to Calculate a Dumping Margin for Sales to the U.S. Importer, Rose Art Industries, Inc. (Rose Art), Regardless of Whether Adverse Facts Available Are Applied to All Other Sales. Rose Art, a U.S. importer of CFP's pencils, argues that the Department's decision to apply total adverse facts available in this case is inherently inequitable, deprives it of due process, and constitutes an arbitrary and capricious application of antidumping provisions that is contrary to law. First, Rose Art contends that although it acted properly in its dealings with CFP, it is now being punished twice, once because third-country sales destined for its competitors in the United States may have avoided dumping duties, and once for the alleged wrong doing of CFP. Second, Rose Art states that applying a punitive margin to its entries when there are accurate CFP sales data that will result in a significantly lower, or possibly no margin, deprives it of substantial monies without affording it appropriate due process protection. Third, Rose Art states that the Department should recognize and give effect to those portions of CFP's questionnaire responses that are complete and provide a satisfactory basis for arriving at an accurate dumping margin for sales made by CFP to Rose Art. Rose Art notes that there is no indication in the Department's preliminary results that CFP's questionnaire responses relating to sales made to Rose Art were deficient, inaccurate, or otherwise compromised. Also, Rose Art argues that where the Department determines that requests for information are deficient, 19 U.S.C. 1677m(d) (section 782(d) of the Act) gives the Department the discretion to disregard all or part of the original and subsequent responses. Because the verification report does not raise questions concerning the accuracy of CFP's responses with respect to its sales to Rose Art, Rose Art claims those responses should not be disregarded. To do so, according to Rose Art, is to effectively damn the innocent as well as the guilty. Therefore, Rose Art maintains that the Department should avail itself of the discretionary authority allowed under section 782(d) of the Act, accept CFP's responses with respect to Rose Art, and compute and publish a separate dumping margin for CFP's sales to Rose Art. Department Position: For the reason's stated above with respect to Comment 1, we have applied total adverse facts available to CFP for the final results of this review. Due to the specific fact pattern described above we determined that application of partial facts available is not appropriate and have disregarded the reported sales and factors of production information submitted in CFP's questionnaire response for purposes of establishing a dumping margin. Since we are disregarding CFP's entire response, there is no basis for concluding anything even on an importer- specific basis. This determination is based on the activities of the respondent (CFP), and therefore the adverse facts available margin has been applied to all of CFP's exports of subject merchandise to the United States. Under U.S. antidumping laws, importers of merchandise from third-country resellers are required to identify the country of origin of the merchandise and to post appropriate antidumping duties. We note that the focus of the Department's analysis is on the producers and exporters, i.e. the parties who set the U.S. price. Furthermore, we disagree that Rose Art was denied due process. On January 26, 2000, in accordance with 19 CFR 351.221(c)(1)(i), we published in the Federal Register our Notice of Initiation of Antidumping and Countervailing Duty Administrative Reviews, 65 FR 4228 (January 26, 2000). On January 18, 2001, Rose Art submitted an entry of appearance to the Department as an interested party. On March 1, 2001, Rose Art submitted a case brief. Thus Rose Art was given appropriate notice of the proceeding and participated as an interested party. Comment 4: Whether to Use American Basswood Prices or Indonesian Slat Prices to Value Chinese Lindenwood. Petitioners argue that if the Department determines to calculate normal value using CFP's reported factors of production, the Department should calculate a surrogate value for Chinese lindenwood based on American basswood and that all necessary information to do so is on the record of this review. Moreover, petitioners argue that the Department should not rely on contracts for albasia wood slats submitted by CFP as a basis for establishing a surrogate value for lindenwood pencil slats because CFP did not submit information concerning albasia wood, because albasia wood is not similar to lindenwood and because albasia wood has no known use in pencil production anywhere in the world. In addition, petitioner argues that the contract prices submitted by respondent for albasia wood slats are deficient because there is nothing on the record to indicate that the contracts are bona fide or that they reflect market prices. Furthermore, petitioners argue that the Department has a preference to use publicly available, published information that reflects numerous transactions between many buyers and sellers to calculate surrogate values rather than isolated price quotes or single-input, producer-specific information. CFP notes that the only value placed on the record for pencil slats, the most significant material input for pencil production, is an Indonesian value for albasia wood slats. In addition, CFP argues that this value is an actual value taken from an actual transaction between two Indonesian parties and that albasia wood slats have the same critical production-oriented characteristics as Chinese Lindenwood. CFP argues that the Department has frequently used price quotes as surrogate values to value inputs in the calculation of normal value in nonmarket economy cases and should do so in this review. CFP contends that price quotes are often used because they represent the best available value for the input. CFP argues that the Department should not rely on petitioners' proposed theoretical and speculative methodology to value pencil slats. CFP argues that petitioners' proposal to calculate a surrogate value for lindenwood pencil slats based on U.S. prices for basswood lumber and logs and the process to manufacture them into pencil slats is imprecise and is based on conjecture which incorporates assumptions not related to CFP's particular circumstances. Department Position: The Department has not considered this comment since we are relying on total adverse facts available for the final results of this review. Comment 5: Whether to Use Sales Commissions and Bank Charges in Calculating a Dumping Margin. CFP argues that the commissions and bank charges it presented at verification should not be included in the calculation of a dumping margin for CFP. CFP notes that the Department does not make an adjustment for differences in circumstances of sale in nonmarket economy cases involving export price (EP) sales. See e.g. Pure Magnesium from the People's Republic of China, 63 FR 3085 (January 21, 1998) and Tapered Roller Bearings and Parts Thereof, Finished and Unfinished, from the People's Republic of China, 61 FR 65527 (December 13, 1996). Department Position: The Department has not considered this comment because we are relying on total adverse facts available for the final results of this review. Comment 6: Whether to Use Indonesian Surrogate Values to Calculate the Dumping Margin. CFP argues that the Department should use the Indonesian surrogate values it proposed to calculate a dumping margin. CFP notes that publicly available, reliable, useable, Indonesian data are available for every raw material used in its production of pencils, while these values are not available from Indian import statistics. Department Position: The Department has not considered this comment because we are relying on total adverse facts available for the final results of this review. Recommendation Based upon our analysis of the comments received, we recommend adopting all of the above positions. If these recommendations are accepted, we will publish the final results of review and the final weighted-average dumping margin for the reviewed firm in the Federal Register. Agree____ Disagree___ Faryar Shirzad Assistant Secretary for Import Administration (Date) ______________________________________________________________________________ footnotes: 1. CFP notes that the Department discussed sales to two other customers in its verification report but did not focus on these sales in its decision to resort to total facts available. According to CFP, evidence on the record shows that these sales transactions took place entirely within the PRC between companies located therein and therefore, they are not reportable sales. See Creatine Monohydrate from the People's Republic of China, 64 FR 71104, 71109 (December 20, 1999) (the Department stated that "we will not base export price on internal transactions between two companies located in the NME country."). 2. Petitioners claim that based on the evidence of a U.S. destination for almost all of the sales to reseller A, CFP should have known that the few sales to reseller A with no destination marks were also destined for the United States. 3. Petitioners note that to the best of their knowledge, Three Star does not have a board of directors, and there is no evidence as to the makeup of CFP's board. Thus, petitioners state that they cannot address the common board members criterion for finding a significant potential for the manipulation of price or production. See section 351.401 (f) of the Department's regulations. 4. CFP's 1999 financial statement was prepared in accordance with International Accounting Standards. The statement was audited by BDO Certified Public Accountants in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants.