65 FR 67347 November 9, 2000 A-421-805 ARP: 6/1/98 - 5/31/99 Public Document GIIOVI: DRM MEMORANDUM TO: Richard W. Moreland Acting Assistant Secretary for Import Administration FROM: Holly A. Kuga Acting Deputy Assistant Secretary for Import Administration SUBJECT: Issues and Decision Memorandum: Final Results of Administrative Review of Aramid Fiber Formed of Poly Para-Phenylene Terephthalamide from the Netherlands - 6/1/1998 through 5/31/1999; Final Results Summary We have analyzed the comments and rebuttal comments of interested parties in the 1998/1999 administrative review of the antidumping duty order covering aramid fiber formed of poly para-phenylene terephthalamide ("PPD- T aramid") from the Netherlands. As a result of our analysis, we have made no changes from our preliminary results. Below is the complete list of the issues in this administrative review for which we received comments and rebuttal comments by parties: 1. Constructed Export Price A. Consolidated Financial Statements Used to Calculate Financial Expenses (U.S. Indirect Selling Expenses) B. Credit Period for Imputed Credit Expenses Related to Consignment Sales C. Duties Related to Duty Drawback (Movement Expenses -- Canadian Duties) 2. Cost of Production A. Consolidated Financial Statements Used to Calculate Net Interest Expense B. Treatment of Goodwill Expenses We recommend that you approve the positions we have developed in the Discussion of Issues section of this memorandum. Background On July 6, 2000, the Department of Commerce ("the Department") published the Preliminary Results of Administrative Review of the Antidumping Duty Order on Aramid Fiber Formed of Poly Para-Phenylene Terephthalamide from the Netherlands, 65 FR 41626 ("Preliminary Results"). The period of review ("POR") is June 1, 1998, through May 31, 1999. This review covers one manufacturer/exporter, Twaron Products V.o.F. (formerly Aramid Products V.o.F.) and its U.S. affiliate, Twaron Products Inc. (formerly Akzo Nobel Aramid Products, Inc.) (collectively "Twaron Products"). We invited parties to comment on our Preliminary Results. We received comments on August 7, 2000, from E.I. Dupont de Nemours & Company ("petitioner"). On August 14, 2000, we received a rebuttal brief from Twaron Products. Discussion of the Issues Constructed Export Price Comment 1A: Consolidated Financial Statements Used to Calculate Financial Expenses (U.S. Indirect Selling Expenses) Petitioner contends that the Department should revise Twaron Products' reported U.S. indirect selling expenses, arguing that the calculation of the net interest expense, a component of indirect selling expenses, was improperly based on the consolidated financial statements of its parent company, Akzo Nobel Inc., and should have instead been based on the financial statements of Twaron Products Inc. (the exclusive sales agent of Twaron Products V.o.F.). Petitioner also asserts that the Department should reject Twaron Products' use of consolidated financial data in calculating the net interest expenses included in Twaron Products V.o.F.'s cost of production, because the consolidated financial data does not reflect Twaron Products V.o.F.'s actual financing expenses. Petitioner acknowledges that the Department generally uses consolidated financial expense data to calculate a subsidiary's financing expenses. However, petitioner asserts that this is not an automatic requirement. Further, petitioner contends that the Department must not use consolidated data where using the consolidated data would distort actual financing expenses. Petitioner asserts that such would be the case in the instant circumstance because Twaron Products' reported financial interest expense factor is unrelated to the financing requirements of Twaron Products' PPD- T aramid fiber business in the United States. Moreover, petitioner argues that Twaron Products justifies its use of consolidated figures on the grounds that the U.S. parent borrows on behalf of its related companies, and then charges the units a share of this cost, without explaining how it allocates the financing expenses. Petitioner argues that Twaron Products calculated the reported financing expenses based on outstanding loans between the U.S. parent and Twaron Products, and speculates as to the reasons why Twaron Products borrowed money from its parent company to finance its U.S. operations. Petitioner further argues that the Department and the Court of International Trade ("CIT") misapplied binding precedent when affirming the Department's use of Twaron Products' consolidated data in E.I. DuPont de Nemours & Co. v. United States, No. 96-11-02509, Slip Op. 98-7, 1998 WL 42598 (CIT January 29, 1998) ("DuPont I"). Moreover, petitioner contends that the Department and the CIT, in DuPont I, failed to follow the express mandate of the 1994 amendments to the antidumping statute, which directs the Department to capture "all of the actual costs incurred in producing and selling" the subject merchandise and to ensure that reported costs constitute a representative measure of the respondent's true costs. Twaron Products argues that the CIT's decisions in DuPont I, and more recently in E.I. DuPont de Nemours & Co. v. United States, No. 97-08-1335, Slip Op. 99-47 (CIT June 2, 1999) ("DuPont II"), properly affirmed the Department's use of Twaron Products' consolidated financial expense in the first, second, third, and fourth administrative reviews, respectively. Twaron Products urges the Department to follow the same methodology in the final results of this administrative review. Further, Twaron Products emphasizes that the petitioner did not point to any evidence or provide any new information to justify a deviation from the Department's standard practice of using the parent's consolidated interest expense in cases where there is a consolidated group of companies. Additionally, Twaron Products argues that petitioners' claim that the amendments to the antidumping statute set a new standard for calculating interest expense, is in error. Contrary to petitioner's argument, Twaron Products contends that neither the Statement of Administrative Action ("SAA") nor the amended section 773(f) of the antidumping statute directs the Department to change its existing practice. Twaron Products refers to the CIT's analysis of the statutory amendment and the SAA, and the CIT's subsequent finding that neither the amended statute nor the SAA mandated a change in Commerce's past practice with regard to the issue here. See DuPont I at 7-9. Moreover, Twaron Products points out that the petitioner's argument on the issue was rejected by the CIT in both DuPont I and DuPont II. Twaron Products claims that the only loans and corresponding interest expense on the books of Twaron Products Inc. and Twaron Products V.o.F. are intercompany loans from the parent companies, Akzo Nobel Inc. and Akzo Nobel N.V., respectively. In addition, Twaron Products argues that the Department has repeatedly verified that the financial statements of the subsidiary companies reconcile to the financial statements of the parent companies. Twaron Products explains that the only actual interest expense is recorded on the books of the parent companies because it is only these entities that actually borrow money and incur the related interest expense. Twaron Products asserts that it is only the parent that determines the sources of money, borrows the money, and incurs the actual interest expense and, therefore, petitioner's speculations on how and why companies borrow money and how a parent determines the amount of loans and interest are irrelevant because these are internal decisions that take into account a variety of factors. Department's Position: We agree with Twaron Products. In the first, second, third, and fourth administrative reviews, petitioner similarly urged the Department to rely on Twaron Products V.o.F.'s own financial records to determine its net interest expense, instead of following the Department's normal practice of using the parent company's financing expenses incurred on behalf of the consolidated group of companies. In the second, third, and fourth reviews, petitioner's emphasis has been on the interest expense included in U.S. indirect selling expenses rather than on the interest expense included in the cost of production ("COP") and constructed value ("CV") (as was the case in the first review). Nevertheless, the issues are the same for U.S. indirect selling expenses and COP/CV. The Department has consistently disagreed with petitioner's position, explaining in detail that any departure from our normal practice in this case is not warranted in light of Akzo Nobel N.V.'s majority ownership interest in Twaron Products V.o.F., which constituted prima facie evidence of the parent's corporate control. For a detailed explanation of this issue, see Aramid Fiber Formed of Poly-Phenylene Terephthalamide from the Netherlands: Final Results of Antidumping Administrative Review, 61 FR 51406, 51407 (October 2, 1996) ("Final Aramid Fiber I"); Aramid Fiber Formed of Poly-Phenylene Terephthalamide from the Netherlands: Final Results of Antidumping Administrative Review, 62 FR 38058, 38059-60 (July 16, 1997) ("Final Aramid Fiber II"); Aramid Fiber Formed of Poly-Phenylene Terephthalamide from the Netherlands: Final Results of Antidumping Administrative Review, 63 FR 37516 (July 13, 1998) ("Final Aramid Fiber III"); Aramid Fiber Formed of Poly-Phenylene Terephthalamide from the Netherlands: Final Results of Antidumping Administrative Review, 64 FR 61822, 61823 (November 15, 1999) ("Final Aramid Fiber IV"). On January 29, 1998, the CIT affirmed the Department's determination on this issue in the first administrative review, ruling that neither the SAA nor the amended statute mandates a change of practice with respect to using a parent company's consolidated statements when calculating the respondent's interest expense ratio, and that this practice is consistent with the principle of allocating costs in a manner that reasonably reflects the actual costs. See DuPont I at 8-9. Citing Gulf States Tube Div. of Quanex Corp. v. United States, Slip Op. 97-124, Consol. Court No. 95-09-01125, at 38-39 (CIT August 29, 1997), the Court noted in DuPont I that the focus of the analysis is on whether the consolidated group's controlling entity has the power to determine the capital structure of each member of the group. The Court concluded that the administrative record in prior reviews was supported by the Department's finding that Akzo Nobel N.V. was a controlling entity. In DuPont II, the CIT adopted its reasoning from DuPont I and again sustained the Department's determination on this issue in the second administrative review. In the instant administrative review, petitioner reiterates its position argued in the previous four reviews but does not point to any new evidence on the administrative record which would demonstrate that the parent, Akzo Nobel N.V., does not exercise corporate control over the respondent company. Thus, consistent with the Department's prior determinations and the CIT's decisions in DuPont I and DuPont II, we are using Akzo Nobel N.V.'s consolidated financial interest expense in computing the respondent's net interest ratio. Similarly, petitioner's contention that we should revise Twaron Products' reported U.S. indirect selling expense lacks merit. As the Department stated in the prior administrative reviews, the Department bases its calculations on the consolidated financial statements of the parent, not the subsidiary, when calculating the financial interest expense. This method is grounded in a well-established practice. See Final Aramid Fiber I at 51407 and Final Aramid Fiber II at 38060. As stated above, the focal point of the analysis is on the parent company's control over the subsidiary. See Final Results of Antidumping Duty Administrative Review: Porcelain-on-Steel Cooking Ware from Mexico, 58 FR 32095 at comment 9 (June 8, 1993) (indicating the parent has the power to decide the composition of the subsidiary's capital structure (i.e., to what extent the subsidiary will be financed by debt and equity)). In this instance, the petitioner has failed to produce any evidence to rebut the prima facie evidence of Akzo Nobel Inc.'s control over Twaron Products. For the reasons stated above, we are adhering to the Department's current practice in this final determination. Comment 1B: Credit Period for Imputed Credit Expenses Related to Consignment Sales Petitioner argues that Twaron Products misreported the date of shipment for consignment sales, thereby understating imputed credit for consignment sales in the United States. Petitioner contends that there is a substantial lag between the date of shipment (shipment from Twaron Products) and date of invoice for such sales. Petitioner suggests that the Department increase the number of days between Twaron Product's reported shipment date and payment date by the average number of days in inventory at the consignee's location. Twaron Products asserts that any additional cost would result in double- counting the opportunity cost incurred by Twaron Products. Twaron Products explains that petitioner assumes that merchandise leaves Twaron Products' inventory when the merchandise is shipped to the consignment customers. However, consignment inventory remains in Twaron Products' inventory until the customer notifies Twaron Products of its usage. Therefore, any imputed credit expense associated with these sales prior to invoicing is already captured in the inventory carrying expense. To demonstrate that consignment inventory is included in the inventory carrying cost calculation, Twaron Products points to the Department's verification report and Twaron Products' September 20, 1999, and March 20, 1999, responses. Department's Position: We agree with Twaron Products. Section 351.401(b)(2) of the Department's regulations specifically state, "The Secretary will not double-count adjustments." In this particular case, Twaron Products includes consignment shipments in its own inventory until it is notified by the customer of the sale. Moreover, the documentation included in Exhibit 30 of the Department's June 9, 2000, Verification Report at Exhibit 30 demonstrates that consignment inventory is already included in the overall inventory calculation reported in the inventory carrying expense field for the United States. Therefore, any addition to imputed credit expense associated with consignment sales would double- count the opportunity cost, prior to invoicing, which is already captured in inventory carrying expense. Comment 1C: Duties Related to Duty Drawback (Movement Expenses -- Canadian Duties) Petitioner contends that Twaron Products should have reported Canadian Customs duties because Twaron Products did not document the refund of Canadian duties on U.S. shipments. As support, petitioner states that Twaron Products never actually stated that it received refunds of such duties. Therefore, petitioner asserts that the Department should compute a Canadian Customs duty on all sales originating from Canada. Twaron Products asserts that the petitioner misrepresented the Department's requests in its supplemental questionnaire, as well as Twaron Products' responses. Twaron Products explains that the Department only asked for documentation for the duty refunded on these sales and that the Department never asked for documentation proving receipt of the duty drawback. In addition, Twaron Products states that the drawback issue was subject to verification, and the Department reviewed the expenses incurred due to merchandise being sold in the United States from Canadian inventory. Therefore, Twaron Products' certified statement that it receives refunds of the duties paid to Canadian Customs for products that are subsequently imported into the United States is not arguable. Department's Position: As explained in Twaron Products' original questionnaire response, Twaron Products is allowed to request a return on import duties when merchandise entering Canada is subsequently exported to the Untied States. Further, Twaron Products explained that the duty refunded is equal to the duty originally paid. Twaron Products submitted the relevant Canadian Customs regulations to support its claim in exhibit C-12 of its October 12, 1999, response. Therefore, we determined that the record evidence shows that Twaron Products properly did not include Canadian import duties as movement expenses incurred in shipping the merchandise from the Netherlands to the United States. Cost of Production Comment 2A: Consolidated Financial Statements Used to Calculate Net Interest Expenses The use of consolidated financial statements to calculate net interest expenses included in the COP is discussed in detail in Comment 1A. Comment 2B: Treatment of Goodwill Expenses Petitioner contends that Twaron Products' reported COP fails to include an amount for amortized goodwill expenses that should be added to Twaron Products' general expenses. Moreover, petitioner argues that the Department's treatment of Twaron Products' goodwill expenses in the first, second and third administrative reviews is not supported by substantial evidence on the record and is contrary to law, which requires the calculation of actual costs attributable to the production of the subject merchandise. Petitioner argues that the Department should amortize these costs over a period that covers the POR to avoid improperly understating the actual cost of producing PPD-T aramid fiber during the POR. Twaron Products argues that petitioner's position is unsubstantiated and contrary to law. Twaron Products notes that the proper treatment of the goodwill expenses was the focus of the first administrative review and was addressed by the CIT in DuPont I and DuPont II. Twaron Products further notes that the Department spent a significant amount of time gathering and analyzing all aspects of Akzo Nobel N.V.'s purchase of Twaron Products. See Final Aramid Fiber I at 51406. Twaron Products cites the CIT's rulings in DuPont I and DuPont II to affirm the Department's treatment of goodwill in the instant review. Respondent cites specifically to the CIT's approval of the Department's analysis, affirming that it was appropriate to isolate those components of goodwill that pertained to assets used in the production of subject merchandise. Twaron Products states that it complied with the Department's methodology in the second, third, and fourth administrative reviews, thereby accounting for the entire depreciation associated with those assets. Furthermore, Twaron Products notes that no additional amounts remained for the instant review. Finally, respondent contends that no circumstances exist warranting any deviation from the Department's prior approach, as affirmed twice by the CIT. Department's Position: The Department agrees with Twaron Products. As explained at length in the final results of the first, second, third, and fourth administrative reviews, and affirmed by the CIT in DuPont I and DuPont II, the Department accepted Twaron Products' accounting method for the amortization of goodwill expenses as reasonable. See Final Aramid Fiber I at 51406; Final Aramid Fiber II at 38063; Final Aramid Fiber III at 37516, and Final Aramid Fiber IV at 61822. The Department gathered and analyzed all aspects of the facts surrounding the goodwill issue during the first administrative review. Upon completion of its analysis, the Department determined that, for cost calculation purposes, it was appropriate to isolate those components of goodwill that pertained to assets used in the production of subject merchandise. See Final Aramid Fiber I at 51406. The Department verified that Twaron Products complied with the Department's decision in the first administrative review, and calculated its reported costs accordingly. The methodology used in the instant review is consistent with the final results of the first, second, third, and fourth administrative reviews. As a result, there are no additional amounts of goodwill that should be reported in the reported costs. Moreover, in DuPont I and DuPont II, the CIT rejected petitioner's arguments with respect to goodwill, affirming the Department's treatment of inventory write-downs and residual goodwill expenses. See DuPont I at 15-24 and DuPont II at 13. Therefore, for purposes of the instant review, the Department is using Twaron Products' reported COP and CV data in calculating the dumping margin. Recommendation Based on 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 Twaron Products in the Federal Register. AGREE____ DISAGREE____ Richard W. Moreland Acting Assistant Secretary for Import Administration Date