Notice of Final Determination of Sales at Less Than Fair Value: Engineered Process Gas Turbo-Compressor Systems, Whether Assembled or Unassembled, and Whether Complete or Incomplete, from Japan

DEPARTMENT OF COMMERCE

International Trade Administration

[A-588-840]

Notice of Final Determination of Sales at Less Than Fair Value:

Engineered Process Gas Turbo-Compressor Systems, Whether Assembled or

Unassembled, and Whether Complete or Incomplete, from Japan

AGENCY: Import Administration, International Trade Administration,

Department of Commerce.

EFFECTIVE DATE: May 5, 1997.

FOR FURTHER INFORMATION CONTACT: Louis Apple, Import Administration,

International Trade Administration, U.S. Department of Commerce, 14th

Street and Constitution Avenue, N.W., Washington, D.C. 20230;

telephone: (202) 482-1769, respectively.

THE APPLICABLE STATUTE: Unless otherwise indicated, all citations to

the Tariff Act of 1930, as amended (``the Act''), are references to the

provisions effective January 1, 1995, the effective date of the

amendments made to the Act by the Uruguay Round Agreements Act

(``URAA''). In addition, unless otherwise indicated, all citations to

the Department's regulations are to the current regulations, as amended

by the interim regulations, published in the Federal Register on May

11, 1995 (60 FR 25130).

FINAL DETERMINATION: We determine that engineered process gas turbo-

compressor systems (``EPGTS''), whether assembled or unassembled, and

whether complete or incomplete, from Japan are being, or are likely to

be, sold in the United States at less than fair value (``LTFV''), as

provided in section 735 of the Act.

Case History

Since the preliminary determination in this investigation (Notice

of Preliminary Determination and Postponement of Final Determination:

Engineered Process Gas Turbo-Compressor Systems, Whether Assembled or

Unassembled, and Whether Complete or Incomplete from Japan (61 FR

65013, December 10, 1996) (``Preliminary Determination'')), the

following events have occurred.

In January 1997, respondents Mitsubishi Heavy Industries, Ltd.

(``MHI'') and Mitsubishi Corporation (``MC'') submitted supplemental

questionnaire responses to the Department.

In February 1997, we verified the questionnaire responses of MHI

and MC in Tokyo and Hiroshima, Japan, and Houston, Texas. On March 10

and 11, 1997, the Department issued its reports on verification

findings.

On February 18, 1997, per the Department's instructions in the

preliminary determination, MHI, MC, and the petitioner, Dresser-Rand

Company, submitted comments on the issue of ``affiliation.'' On

February 21 and 24, 1997, MC and MHI, respectively, requested the

Department to strike certain portions of the petitioner's submission on

affiliation because it allegedly contained untimely new factual

information. After reviewing the petitioner's submission, the

Department determined on March 13, 1997, that certain information

presented therein constituted new factual information, untimely filed,

under section 353.31(a)(1)(i) of the Department's regulations, and

informed the petitioner that unless otherwise discussed in the

Department's verification reports, the information at issue would not

be considered for purposes of the final determination.

On February 28, 1997, per the Department's instructions in the

preliminary determination, the petitioner and MHI submitted comments on

the scope of the investigation, and suspension of liquidation

instructions.

The petitioner, MHI, and MC submitted case briefs on March 18,

1997, and rebuttal briefs on March 24, 1997. The Department held a

public hearing for this investigation on April 1, 1997.

Scope of Investigation

The products covered by this investigation are turbo-compressor

systems (i.e., one or more ``assemblies'' or ``trains'') which are

comprised of various configurations of process gas compressors, drivers

(i.e., steam turbines or motor-gear systems designed to drive such

compressors), and auxiliary control systems and lubrication systems for

use with such compressors and compressor drivers, whether assembled or

unassembled, and whether complete or incomplete. One or more of these

turbo-compressor assemblies or trains, may be combined. The systems

covered are only those used in the petrochemical and fertilizer

industries, in the production of ethylene, propylene, ammonia, urea,

methanol, refinery and other petrochemical products. This investigation

does not encompass turbo-compressor systems incorporating gas turbine

drivers, which are typically used in pipeline transmission, injection,

gas processing, and liquid natural gas service.

The scope of this investigation excludes spare parts that are sold

separately from a contract for an EPGTS. Parts or components imported

for the revamp or repair of an existing EPGTS, or otherwise not

included in the original contract of sale for the EPGTS of which they

are intended to be a part, are expressly excluded from the scope.

Compressors are machines used to increase the pressure of a gas or

vapor, or mixture of gases and vapors. Compressors are commonly

classified as reciprocating, rotary, jet, centrifugal, or axial

(classified by the mechanical means of compressing the fluid), or as

positive-displacement or dynamic-type (classified by the manner in

which the mechanical elements act on the fluid to be compressed).

Subject compressors include only centrifugal compressors engineered for

process gas compression, e.g., ammonia, urea, methanol, propylene, or

ethylene service.

Turbines are classified (1) As steam or gas; (2) by mechanical

arrangement as single-casing, multiple shaft, or tandem-compound (more

than one casing with a single shaft); (3) by flow direction (axial or

radial); (4) by steam cycle, whether condensing, non-condensing,

automatic extraction, or reheat; and (5) by number of exhaust flows of

a condensing unit. Steam and gas turbines are used in various

applications. Only steam turbines dedicated for a turbo-compressor

system are subject to this investigation.

A motor and gear box may be used as a compressor driver in lieu of

a steam turbine. A control system is used to monitor and control the

operation of a turbo-compressor system. A lubrication system is

engineered to support a subject compressor and steam turbine (or motor/

gear box).

A typical EPGTS consists of one or more compressors driven by a

turbine (or in some cases a motor drive). A compressor is usually

installed on a base plate and the drive is installed on a separate base

plate. The turbine (or motor drive) base plate will typically also

include any governing or safety systems, couplings, and a gearbox, if

any. The lube and oil seal systems for the turbine and compressor(s)

are usually mounted on a separate base plate.

The scope of this investigation covers both assembled and

unassembled EPGTS from Japan. Because of their large size, EPGTS and

their constituent parts are typically shipped partially assembled (or

unassembled) to their destination where they are assembled and/or

completed prior to their commissioning.

[[Page 24395]]

The scope of this investigation also covers ``complete and

incomplete'' EPGTS from Japan. A ``complete'' EPGTS covered by the

scope consists of all of the components of an EPGTS (i.e., process gas

compressor(s), driver(s), auxiliary control system(s) and lubrication

system(s)) and their constituent parts, which are imported from Japan

in assembled or unassembled form, individually or in combination,

pursuant to a contract for a complete EPGTS in the United States. An

``incomplete'' EPGTS covered by the scope of this investigation

consists of parts of an EPGTS imported from Japan pursuant to a

contract for a complete EPGTS in the United States, which taken

altogether, constitute at least 50 percent of the cost of manufacture

of the complete EPGTS of which they are a part. (See Comment 1 of the

``Interested Party Comments'' section of this notice for discussion on

the definition of ``incomplete EPGTS'' covered by the scope of this

investigation and the methodology the Department will use to calculate

the cost of manufacture.)

EPGTS imported from Japan as an assembly or train (i.e., including

turbines, compressors, motor and gear boxes, control systems and

lubrication systems, and auxiliary equipment) may be classified under

Harmonized Tariff Schedule of the United States (``HTSUS'') subheading

8414.80.2015, which provides for centrifugal and axial compressors. The

Customs Service may view the combination of turbine driver and

compressor as ``more than'' a compressor and, as a result, classify the

combination under HTSUS subheading 8419.60.5000.

Compressors for use in EPGTS, if imported separately, may also be

classified under HTSUS subheading 8414.80.2015. Parts for such

compressors, including rotors or impellers and housing, are classified

under HTSUS subheading 8414.90.4045 and 8414.90.4055.

Steam turbines for use in EPGTS, if imported separately, may be

classified under the following HTSUS subheadings: 8406.81.1020 (steam

turbines, other than marine turbines, stationary, condensing type, of

an output exceeding 40 MW); 8406.82.1010 (steam turbines, other than

marine turbines, stationary, condensing type, exceeding 7,460 Kw);

8406.82.1020 (steam turbines, other than marine turbines, stationary,

condensing type, exceeding 7,460 Kw, but not exceeding 40 MW);

8406.82.1050 (steam turbines, other than marine turbines, stationary,

other than condensing type, not exceeding 7,460 Kw); 8406.82.1070

(steam turbines, other than marine turbines, stationary, other than

condensing type, exceeding 7,460 Kw, but not exceeding 40 MW). Parts

for such turbines are classified under HTSUS subheading 8406.90.2000

through 8406.90.4580.

Control and other auxiliary systems may be classified under HTSUS

9032.89.6030 (``automatic regulating or controlling instruments and

apparatus: complete process control systems'').

Motor and gear box entries may be classified under HTSUS subheading

8501.53.4080, 8501.53.6000, 8501.53.8040, or 8501.53.8060. Gear speed

changers used to match the speed of an electric motor to the shaft

speed of a driven compressor, would be classified under HTSUS

subheading 8483.40.5010.

Lubrication systems may be classified under HTSUS subheading

8414.90.4075.

Although the HTSUS subheadings are provided for convenience and

customs purposes, our written description of the scope of this

investigation is dispositive.

Period of Investigation (``POI'')

The POI is April 1, 1995 through May 31, 1996.

Product Comparisons

Although the home market was viable, in accordance with section 773

of the Act, we based normal value (``NV'') on constructed value

(``CV'') because we determined that the merchandise sold in the home

market during the POI was not sufficiently similar to that sold in the

United States to permit proper price-to-price comparisons.

Fair Value Comparisons

To determine whether MHI's sales of EPGTS to the United States were

made at LTFV, we compared constructed export price (``CEP'') to NV, as

described in the ``Constructed Export Price'' and ``Normal Value''

sections of this notice.

Constructed Export Price

Pursuant to section 772 of the Act, the basis for the fair value

comparison is the price at which the merchandise is first sold to an

unaffiliated purchaser in the United States or for export to the United

States. MHI reported its sale to MC, a Japanese trading company, as an

export price (``EP'') sale on the grounds that MC is an unaffiliated

purchaser and, at the time of sale, MHI knew that the merchandise was

intended for export to the United States. However, based on our

examination of the sales documentation provided by MHI and MC and our

findings at verification, which demonstrate that MC and its U.S.

subsidiary, Mitsubishi International Corporation (``MIC''), acted as

MHI's selling agents in the U.S. transaction under investigation, we

have determined for purposes of this final determination that the

proper basis for the fair value comparison is the sale by MHI, through

MC/MIC, to the U.S. customer. Because MHI made this transaction through

agents acting on its behalf and thus subject to its control, we

determined that MHI and MC/MIC are affiliated within the meaning of

section 771(33) of the Act. Because the function of MC/MIC, as U.S.

sales agents, is beyond that of a ``processor of sales-related

documentation'' and a ``communications link'' with the unaffiliated

U.S. customer, we determined that the use of CEP is appropriate in the

final determination of this case (see Final Determination of Sales at

Less Than Fair Value: Large Newspaper Printing Presses and Components

Thereof, Whether Assembled or Unassembled, from Germany, 61 FR 38166,

38175-76 (July 23, 1996) (``LNPPs from Germany'')). (See Comment 2 in

the ``Interested Party Comments'' section of this notice for discussion

of principal-agency relationship between MHI and MC/MIC.)

In accordance with sections 772(b) and (c) of the Act, we

calculated CEP based on a packed, FOB Japanese port, duty paid price,

inclusive of spare parts, to an unaffiliated customer in the United

States through a Japanese trading company affiliated by virtue of an

agency relationship with the Japanese producer. We excluded from this

price any post-POI price amendments, in accordance with our standard

practice. (See LNPPs from Germany 61 FR at 38181-2). We made a

deduction from the starting price for MIC's cost of the non-subject

parts which were included in the U.S. sale. (See Comment 5 of the

``Interested Party Comments'' section of this notice.)

We also made further deductions from CEP pursuant to section 772(c)

and (d) of the Act based on the same methodology used in the

preliminary determination with the following exceptions:

1. We deducted the product liability expense which was reported in

the respondent's January 27, 1997, U.S. sales listing.

2. We deducted performance testing cost as a direct selling

expense. We reclassified the reported performance testing cost from a

manufacturing cost to a direct selling expense based on verification

findings which demonstrated that this type of test was optional and

only undertaken at the specific request of the customer in the

[[Page 24396]]

contract governing the sale. (See March 11, 1997, Report on the

Verification in Tokyo, Japan and Houston, Texas of Mitsubishi Heavy

Industries, Ltd. (``MHI'') and Mitsubishi Heavy Industries America

(``MHIA'') (``MHI Sales Verification Report'') at 31.)

3. We also deducted indirect selling expenses incurred by MHI that

related to economic activity in the United States, including certain

selling expenses incurred in Japan on the U.S. sale. (See Comment 6 in

the ``Interested Party Comments'' section of this notice.) (See also

April 24, 1997, Memorandum to the File Re: Office of Accounting

Constructed Value and Constructed Export Price Adjustments for Final

Determination)(``Calculation Memorandum'').)

4. We also deducted U.S. import duties as well as selling expenses

incurred by MC/MIC (see Comment 5 of the ``Interested Party Comment''

section of this notice).

Normal Value

For the reasons outlined in the ``Product Comparisons'' section of

this notice, we based NV on CV.

In accordance with section 773(e)(1) of the Act, we calculated CV

based on the sum of MHI's cost of materials, fabrication, selling,

general, and administrative expenses (``SG&A''), and profit, plus U.S.

packing costs.

We based CV on the same methodology used in the preliminary

determination with the following exceptions:

1. We increased cost of manufacture (``COM'') to include the

inventory loss related to the U.S. sale.

2. We recalculated the home market direct and indirect selling

expense rates based on only the home market sales made in the ordinary

course of trade. (See Comment 6 in the ``Interested Party Comments''

section of this notice.)

3. We recalculated CV profit based on only the home market sales

made in the ordinary course of trade.

4. We increased the COM of not only the U.S. sale, but also that of

the home market sales, to account for the excess of affiliated

suppliers' COP over the transfer price charged to MHI. (See Comment 16

in the ``Interested Party Comments'' section of this notice.)

Price to CV Comparisons

In comparing CEP to CV, we deducted from CV the weighted-average

home market direct selling expenses, including imputed credit and

installation-related expenses, pursuant to section 773(a)(8) of the

Act. (See Comment 10 in the ``Interested Party Comments'' section of

this notice.)

Currency Conversion

We made currency conversions into U.S. dollars based on the rate

applicable on the date of the U.S. sale due to a sustained movement in

the exchange rate, as calculated by the Department using the

methodology outlined in Policy Bulletin 96-1: Currency Conversions, 61

FR 9434 (March 8, 1996) (``Policy Bulletin 96-1'').

Section 773A(a) of the Act directs the Department to use a daily

exchange rate in order to convert foreign currencies into U.S. dollars,

unless the daily rate involves a fluctuation. It is the Department's

practice to find that a fluctuation exists when the daily exchange rate

differs from the benchmark rate by 2.25 percent. The benchmark is

defined as the rolling average of rates for the past eight weeks. When

we determine a fluctuation existed, we substitute the benchmark for the

daily rate, in accordance with established practice. Further, section

773A(b) directs the Department to allow a 60-day adjustment period when

a currency has undergone a sustained movement. A sustained movement has

occurred when the weekly average of actual daily rates exceeds the

weekly average of benchmark rates by more than five percent for eight

consecutive weeks. (For an explanation of this methodology, see Policy

Bulletin 96-1.) Such an adjustment period is required only when a

foreign currency is appreciating against the U.S. dollar. The use of

such an adjustment period was warranted in this case because the

Japanese yen underwent a sustained movement. (See Comment 15 of the

``Interested Party Comments'' section of this notice.)

Verification

As provided in section 782(i) of the Act, we verified the

information submitted by MHI and MC for use in our final determination.

We used standard verification procedures, including examination of

relevant accounting and sales/production records and original source

documents provided by respondents.

Interested Party Comments

Comment 1: Scope of Investigation.

The scope of this investigation covers EPGTS used in the

petrochemical and fertilizer industries, whether assembled or

unassembled, and whether complete or incomplete. (See Initiation of

Antidumping Investigation of Sales at Less Than Fair Value: EPGTS,

Whether Assembled or Unassembled, and Whether Complete or Incomplete,

from Japan (61 FR 28164, June 4, 1996)(``Initiation'').)

Since the initiation of this investigation, the petitioner and MHI

have debated two scope-related issues: (1) The definition of

``incomplete'' EPGTS, and (2) the end uses of the EPGTS covered by the

scope. For purposes of the preliminary determination, we clarified the

scope of this investigation to include, among other things: (1) EPGTS

used in the production of refinery products, and (2) ``incomplete''

EPGTS if the EPGTS parts (otherwise referred to as ``components'' or

``subcomponents'') imported from Japan pursuant to a contract for a

complete EPGTS in the United States, taken altogether, constitute at

least 50 percent of the cost of manufacture of the complete EPGTS of

which they are a part. (See Preliminary Determination at 65015.) Both

of these issues, the parties' comments, and the Department's position

are summarized below. For a complete discussion and analysis of these

issues, see April 24, 1997, Memorandum to Jeffrey Bialos, Principal

Deputy Assistant Secretary for Import Administration, from The Team Re:

Scope Issues (``April 24, 1997, Scope Decision Memorandum'').

1. Definition of Incomplete EPGTS

The petitioner asserts that the intent of the petition was to cover

turbo-compressor ``systems'' engineered (custom made) for a particular

plant process, and typically sold as a single unit at a single

negotiated price, whether complete or incomplete. According to the

petitioner, the intent of the petition was to include incomplete EPGTS

and incomplete components if sold as part of a complete EPGTS. In order

to define a subject incomplete EPGTS for purposes of the final

determination, the petitioner argues that the Department should combine

a ``cost-based'' test with an ``essential components'' test.

Specifically, the petitioner maintains that the Department should amend

its preliminary scope language to indicate that imports of EPGTS

compressors, steam turbines, or any collection of components from Japan

accounting for at least 50 percent of the total cost of manufacture of

the EPGTS are subject merchandise. In the petitioner's opinion, this

two-pronged approach is simple to administer, avoids circumvention and

is consistent with the intent of the petition and the record throughout

this investigation.

The petitioner believes that many of the problems identified by the

Department in the final determination of LNPPs from Germany and Japan

which discouraged the Department from pursuing an ``essence'' test and

[[Page 24397]]

encouraged it to pursue a ``cost-based'' test (e.g., the difficulty in

identifying the ``essence'' of a LNPP, given the great number of parts

and subcomponents; the insignificant portion of total value of the LNPP

represented by many of the critical elements identified by the

petitioner) are not present in this case. According to the petitioner,

there are four major components (i.e., compressor, driver (steam

turbine or motor/gear), control system, and lubrication system);

however, the compressor and turbine are the heart of the turbo-

compressor system both in terms of both function and manufacturing

cost.1 The petitioner cites several cases where the

Department applied essence criteria to define the scope of the

investigation where, as here, the essential components were readily

identifiable and dedicated for use in the complete product.

---------------------------------------------------------------------------

\1\ According to the petitioner, the compressor and turbine

together account for 80-90 percent of the total system cost.

---------------------------------------------------------------------------

On the other hand, if the design and engineering of the turbo-

compressor system takes place in Japan, but the compressor is

subcontracted to another country, the petitioner maintains that it is

appropriate to invoke the 50 percent cost-based test to determine

whether the incomplete EPGTS should be covered by the scope of the

investigation. This would also address the situation where an

incomplete compressor is imported, to be assembled after importation

with other components, or where the foreign manufacturer produces and

supplies nearly an entire turbo-compressor system, but neither the

compressors nor the steam turbines are complete upon importation.

Because individual components do not constitute an incomplete EPGTS

unless they are used to fulfill an EPGTS contract, the petitioner notes

that if the Japanese producer is supplying only individual components

to be included in a system manufactured by a U.S. or third country

supplier, the system will not be of Japanese origin and the components

will not be covered.

According to the petitioner, the purpose for establishing a two-

part test is to avoid, whenever possible, the complexity of a cost-

based test and to remove any incentive for a foreign manufacturer to

circumvent the ``essence'' test by shipping its compressors or steam

turbines in incomplete form. The petitioner notes further that its

proposed two-prong approach places no undue burden on the importer to

determine whether the components imported from Japan are essential

components or account for 50 percent of the cost of manufacture of a

system, and prevents the suspension of liquidation of non-scope

merchandise unless the foreign producer and U.S. importer do not comply

in a timely manner with the Department's certification requirements.

The petitioner also requests that the Department further define the

calculation methodology to be applied in the performance of the cost-

based test, asserting that all design and engineering costs, overhead,

testing costs, installation costs, and other manufacturing expenses

incurred in Japan with respect to the complete EPGTS (including the

costs of any production assists provided by the Japanese manufacturer

to U.S. or third country subcontractors) should be included in the

Japan content portion of the cost-based test. Accordingly, the

petitioner requests that the certification provided to Customs in the

case of merchandise alleged to be outside the scope of any order in

this case be amended to include such costs explicitly.

Lastly, while the petitioner acknowledges that the Department's

industry support determination was based on the producers of complete

turbo-compressor systems, the petitioner asserts that the producers of

complete EPGTS also produce incomplete EPGTS, and there is no evidence

that there are producers of incomplete EPGTS, including compressors and

turbines, in the United States other than those that the Department

considered in its industry support determination. The petitioner also

claims that complete and incomplete systems constitute a single like

product, and hence, support of only producers of complete systems in

the Department's industry support analysis is adequate. The petitioner

further maintains that it is irrelevant whether supporters of the

petition produced incomplete EPGTS, so long as they accounted for an

adequate percentage of production of the domestic like product, which

includes both complete and incomplete systems.

MHI argues that only complete systems are covered by the scope of

this investigation because only complete systems were subject to the

Department's industry support determination made prior to initiation,

and that determination cannot be revisited. MHI asserts that the

Department identified the domestic like product to be a complete system

and based its determination of industry support on the conclusion that

the petition was filed on behalf of the domestic industry. To the

extent that the Department finds that its industry support

determination covered something other than complete systems, MHI argues

that, at a minimum, the Department should not define a subject

incomplete EPGTS in terms of individual components, as suggested by the

petitioner's proposed ``essential components'' test, because this would

unlawfully expand the scope of the proceeding to include merchandise

(i.e., compressors and steam turbines) for which the Department did not

make a determination of industry support.

Further, MHI objects to the Department's use of a cost-based

approach to define ``incomplete EPGTS'' for which liquidation would be

suspended and, instead, proposes the adoption of a ``merchandise-

based'' approach whereby an incomplete system would be defined as two

or more system components, at least one of which is a compressor and

all of which are made in Japan. In MHI's opinion, the use of a cost-

based approach is inappropriate and unworkable because: (1) It does not

ensure that the order will cover only the merchandise produced by a

domestic industry for which the Department made its determination of

industry support; (2) it fails to identify subject merchandise in terms

of facts known at the time of importation; (3) there is uncertainty

with respect to the final cost of manufacture and the types of expenses

that should be included when calculating the final cost of manufacture

of the complete system; and (4) it is unlikely that the Japanese

producer will have available at the time of importation enough

information about the final cost of the system to allow it to complete

the requisite certification, particularly if the Japanese producer is

providing only a portion of a system which will be assembled or

completed with non-subject equipment produced by unaffiliated non-

Japanese manufacturers. In addition, MHI contends that even though a

cash deposit would not be required for EPGTS entries accompanied by a

certification that they constitute less than 50 percent of the cost of

manufacture of the complete system, the Department unlawfully has

directed Customs to suspend liquidation of allegedly non-subject

merchandise pending its determination of the final cost of the system.

According to MHI, duties may be imposed only on subject merchandise,

and the Department does not avoid this issue by waiving the cash

deposit requirement for merchandise certified to be outside the scope

of the order.

[[Page 24398]]

For these reasons, MHI asserts that the Department must adopt the

above-described ``merchandise-based'' definition of a subject

incomplete EPGTS for which liquidation would be suspended. In MHI's

view, its approach is more consistent with the Department's methodology

in past cases where essence criteria were used to define incomplete

merchandise covered by the scope. Also, MHI maintains that a

merchandise-based definition eliminates the problems inherent in both

the Department's and the petitioner's suggested definition of an

``incomplete'' system. Under MHI's definition, single components would

fall outside the scope, eliminating the possibility that the scope

could violate the Department's industry support determination. Further,

it would allow foreign manufacturers, U.S. importers, the Department,

and the Customs Service to determine at the time of importation whether

an entry is subject to the order and, thus, remove unnecessary

administrative burdens on all parties.

In addition, MHI contends that the petitioner's concern about

circumvention (which, in MHI's opinion, is not a valid concern in this

case) does not justify the cost-based test which would unlawfully

expand the scope of the investigation. Citing various past cases, MHI

points out that the Department has consistently rejected scope

expansions based on speculative allegations of circumvention and relied

on the circumvention provisions of the antidumping law to provide

relief even for petitioners who have direct evidence of circumvention.

DOC Position

We disagree with both the petitioner and respondent. In our

Preliminary Determination, we explained that because of their large

physical size, EPGTS are typically imported into the United States in

either partially assembled or disassembled form, perhaps in multiple

shipments over an extended period of time, and may require the addition

and integration of non-subject parts prior to, or during, the

installation process in the United States. Consequently, we stated that

we were concerned that because of the great number of parts involved,

there is the potential that the Customs Service may inadvertently

liquidate entries of subject merchandise based on its lack of

completeness at the time of importation. Therefore, for suspension of

liquidation purposes, we preliminarily decided to use the cost-based

test described above to determine what constitutes a subject incomplete

EPGTS. We noted that this approach has been used in past cases with

similar fact patterns. (See, e.g., LNPPs from Germany and Japan, 61 FR

38166, 38139, July 23, 1996).

In order to determine whether the imported merchandise constitutes

a subject incomplete EPGTS through the performance of the cost-based

test, we stated in our preliminary determination that we would have to

wait until all of the parts comprising an EPGTS are imported and the

complete EPGTS is produced. Thus, we suspended liquidation of all

importations of EPGTS parts from Japan at the preliminary cash deposit/

bond rate unless a certification was provided by the foreign

manufacturer/exporter that the parts to be imported, when taken

altogether, constitute less than 50 percent of the cost of manufacture

of the complete EPGTS of which they are a part.

For entries accompanied by the appropriate certification, we

directed the Customs Service to suspend liquidation at a zero deposit/

bond rate. We also required parties to provide to the Department in

advance of the entry with a copy of this certification along with the

following information which would be subject to the Department's review

and verification at a later date, if necessary: (1) The number of the

sales contract pursuant to which the parts are imported, (2) a

description of the parts included in the entry, (3) the actual cost of

the imported parts, (4) the most recent cost estimate for the complete

EPGTS and historical variance between estimated and actual costs, (5) a

schedule of parts shipments to be made pursuant to the particular EPGTS

contract, if more than one shipment is relevant, and (6) a schedule of

EPGTS production completion in the United States. (See Preliminary

Determination, 61 FR at 65018; and January 23, 1997, Letter from Louis

Apple to James Cannon et al. re: Clarification of Preliminary

Suspension of Liquidation Instructions * * * (``January 23, 1997,

Suspension of Liquidation Instructions Clarification Letter.'')

The scope of this investigation unambiguously covers EPGTS, whether

assembled or unassembled, and whether complete or incomplete. As stated

above, because of their large physical size, EPGTS are typically

imported into the United States in either partially assembled or

disassembled form, perhaps in multiple shipments over an extended

period of time, and may require the addition and integration of non-

subject parts prior to, or during, the installation process in the

United States. Given this fact, the Department, in its pre-initiation

analysis, included ``incomplete'' EPGTS within the scope of the

investigation to avoid creating loopholes for enforcement (including

those arising from differing degrees of completeness of the imported

merchandise) should an order result from this investigation. (See

October 8, 1996, Memorandum to Jeffrey Bialos, Principal Deputy

Assistant Secretary from The Team Re: Scope.) We were, and still are,

concerned that because of the great number of parts involved, the

Customs Service may inadvertently liquidate entries of subject

merchandise based on a lack of completeness at the time of importation.

The inclusion of the term ``incomplete'' in the scope, however, raised

the issue of how to define the minimum level of incompleteness on which

the Customs Service should suspend liquidation in order to maintain the

effectiveness of any order that may be issued. For purposes of the

preliminary determination, we defined this minimum level to be 50

percent of the cost of manufacture of the complete EPGTS. This approach

has been used in past cases with similarly complex merchandise and

importation processes (see LNPPs from Germany and Japan).

Further, contrary to MHI's suggestions, we note that from the

Department's standpoint, it is not, and never has been, the individual

components or subcomponents of the system per se that are at issue, but

the combination of these components or subcomponents (i.e., the extent

of an ``incomplete system'') imported pursuant to a contract for a

complete EPGTS in the United States that would constitute covered

merchandise whether by cost, essence, or some other approach (i.e., the

sum of importations pursuant to a contract for a highly engineered and

integrated turbo-compressor system, not the individual importations of

the components or subcomponents, themselves.)

In formulating our decision for purposes of the final

determination, we made the following observations. First, the intent of

the petition was to include incomplete EPGTS. (See, e.g., petition at 6

* * * '' [T]his petition encompasses turbo-compressor systems, * * *

whether assembled or unassembled and whether complete or incomplete at

the time of entry'' (emphasis added).) In this regard, we note our

authority to clarify the scope of an investigation, in general, and in

a manner which reflects the intent of the petition, in particular.

(See, e.g., LNPPs from Germany 61 FR at 38169 (July 23, 1996); Minebea

Co., Ltd. v. United States, 782 F. Supp. 117, 120 (CIT 1992) (the

Department uses its ``broad discretion to define and clarify the scope

of an antidumping

[[Page 24399]]

investigation in a manner which reflects the intent of the

petition'').)

Second, incomplete EPGTS have been covered by the scope of this

investigation since our initiation. (See Initiation at 28165 * * *

''The scope of this investigation includes incomplete and unassembled

systems.''); and Preliminary Determination at 65013, 65015).)

Third, our industry support determination did not preclude us from

considering less than complete systems in the scope of the

investigation. Our industry support determination was based on the

domestic like product which was defined as complete systems, including

individual components/subcomponents and combinations of components/

subcomponents to the extent they are designed and dedicated to a

specific system typically designed to contract specifications. (See

Initiation, 61 FR at 28164.) This follows from the fact that specific

components per se are not covered by the scope of the investigation

unless they are included in the contract for the initial system

designed and dedicated for use in the complete system. Therefore, a

showing of industry support by U.S. manufacturers of components or

subcomponents who do not manufacture or sell complete systems was not

necessary. We note further that our definition of like product with

respect to our industry support determination is consistent with the

International Trade Commission's definition of like product in its

preliminary injury determination.2 (See USITC Publication

2976 (July 1996) at 8-10.)

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\2\ The ITC found preliminarily that complete and incomplete

systems are part of the same domestic like product based on

application of its semi-finished products analysis. The ITC stated

that: (1) there is no independent use for an incomplete system other

than to be assembled into a specific and complete system and,

therefore, an incomplete system is dedicated for use in that EPGTS

system; (2) incomplete and complete systems share many of the same

characteristics and functions; and (3) there does not appear to be

an established price for incomplete systems because complete systems

are manufactured pursuant to a contract; thus, there are no

independent sales or markets). See USITC Publication 2976 (July

1996) at 8-10.

---------------------------------------------------------------------------

In order to determine the level of industry support for the

petition, the Department contacted five U.S. companies identified by

the petitioner as producers of EPGTS, including Dresser-Rand Company,

and requested that they provide production data on the number of

compressor casings, (i.e., compressor shells which, by definition, are

not complete systems), and the number and value of complete systems

produced. Based on the information we received from these producers and

that contained in the petition, we concluded that the producers who

supported the petition accounted for more than 50 percent of the total

production of the domestic like product. (See Initiation; May 28, 1996,

Memorandum from Mary Jenkins and Howard Smith to The File Re: Industry

Support; and May 28, 1997, Initiation Checklist.) We note that there is

no evidence on the record indicating that there were U.S. producers of

the like product other than the five producers contacted by the

Department that should have been considered in its pre-initiation

industry support analysis.

Fourth, while both the petitioner and MHI seem to agree that as a

practical matter, an incomplete EPGTS must include a compressor (as it

is the most critical component which typically accounts for over 50

percent of the manufacturing cost of a complete EPGTS) we do not

believe that this 50 percent threshold is reached in a situation where

only a compressor is imported pursuant to a contract for a multi-train

EPGTS system which includes multiple compressors, turbines, and other

components.

Further, there are other difficulties inherent in accepting either

the petitioner's or MHI's approach. Because of the large number of

parts involved, the disassembly inherent in the importation process,

and the potential for multiple shipments, an ``essence'' approach is

difficult to administer by Customs without a comprehensive list of

parts (identified at the most minimal level of disassembly

realistically possible) comprising the essential complete component(s),

which has not been provided by the petitioner or respondent. While the

petitioner defines certain parts of a compressor and turbine in its

attempt to define ``incomplete compressors and turbines'' covered by

the scope in the petition,3 the parts identified do not

represent such a comprehensive list. Also, respondent's approach does

not resolve the question of whether the critical component(s) would

constitute subject merchandise if it were incomplete in some minor way.

---------------------------------------------------------------------------

\3\ The petitioner defines incomplete compressors and turbines

for purposes of the petition as follows: ``An incomplete compressor

* * * consists of either half of the casing * * * or the casing and

end-caps * * * or * * * the rotor, whether or not mounted * * *.''

``An ``incomplete'' steam turbine * * * includes (1) either half of

the turbine casing, whether or not mounted on a platform; or (2) the

turbine rotor, whether or not mounted in the casing.'' See petition

at 7 and 9.

---------------------------------------------------------------------------

In addition, we note that MHI's definition of ``incomplete,'' which

must include at least a complete compressor, restricts the scope much

further than the petition, the Department's initiation, and preliminary

determination. It would also allow an exporter to circumvent any order

resulting from this investigation, simply by subcontracting the

manufacture of the system compressor to another country.

In sum, we believe that the approach pursued in the preliminary

determination is reasonable, predictable, administrable, and consistent

with our industry support determination. Under this approach, an

imported incomplete system is covered by the scope of this

investigation to the extent that its parts (imported pursuant to a

contract for an EPGTS) comprise a certain minimum percentage of the

cost of manufacture of the complete system. In response to MHI's

argument that we would not know at the time of importation whether the

imported incomplete merchandise was subject to duty, we acknowledge

that in order to perform the cost-based test, we will have to wait

until all of the parts/components comprising the system are imported

and the complete system is produced, and that we will suspend

liquidation on all imported EPGTS parts in the meantime. However, in

the case of multiple shipments of components and component parts, the

necessity for all shipments to be completed before the Department could

determine whether or not the imported merchandise was subject to any

order that may be issued in this case would also be relevant to the

essence approach, in that the identification of the critical

component(s) could only take place after all importations have been

made.

Further, by suspending liquidation at a zero cash deposit rate if

the Japanese producer/exporter provides the appropriate certification

and the requisite data substantiating the certification that the cost

of the imported parts satisfies the 50 percent test, we believe that

the importer would be relieved of the financial burden of posting cash

deposits which would otherwise be required and not reimbursed until

such time as the Department was able to make a determination as to

whether the imported parts constituted subject merchandise (i.e., after

the EPGTS is completed in the United States). At the same time, this

approach provides sufficient safeguards to protect U.S. firms from

potentially dumped subject merchandise.

With respect to the respondent's concern that the Japanese producer

may not know the final costs of the system so as to be able to certify

accurately that the cost of the parts comprising the incomplete system

is less than 50 percent of the cost of manufacture of the

[[Page 24400]]

complete system if he is providing only a portion of the complete

system, we note that if an affiliate is supplying the additional parts

to complete the system pursuant to a contract in the United States, we

would naturally require that the Japanese producer/exporter provide,

with the assistance of its affiliate, the actual final costs of the

complete system. If an unaffiliated party is involved in the completion

of the system in the United States, we would require that the Japanese

producer/exporter include in its cost calculation the estimated or

actual price for the parts supplied by the unaffiliated party. If the

Japanese producer were supplying only individual components outside of

a contract for a complete system (i.e., not ``pursuant to a contract

for a complete EPGTS''), then its merchandise would not be covered by

the scope of the investigation and the issue is moot.

Therefore, for purposes of the final determination, we continue to

define ``incomplete'' EPGTS covered by the scope as we did in our

preliminary determination. Further, we appreciate the parties' concerns

over the methodology to be used to calculate the cost of manufacture of

the incomplete system in order to administer the cost-based test.

Consequently, we have determined that it is appropriate to calculate

this cost of manufacture inclusive of all costs incurred by the

producer in Japan, including design and engineering, materials,

overhead, quality control testing, and other manufacturing costs such

as engineering assists provided to U.S. or third country

subcontractors. In addition, we intend to issue suspension of

liquidation instructions pursuant to the final determination similar to

those issued in connection with the preliminary determination with some

modification. Specifically, we will modify these instructions, as

follows: (1) To suspend liquidation of EPGTS parts at a zero cash

deposit/bond rate if the interested party (i.e., the Japanese producer/

exporter or U.S. importer) provides the requisite data substantiating

its claim that the cost of the imported EPGTS parts satisfies the 50

percent test within the context of a scope inquiry proceeding; (2) to

require that the requisite data substantiating the interested party's

claim, followed by an appropriate certification, be provided to the

Department instead of to the Customs Service; (3) to include the cost

calculation methodology described above; (4) to require the provision

of certain additional information; and (5) to require that if the

foreign producer/exporter finds that the costs reported to the

Department were understated and that the cost of manufacture of the

imported elements will be over 50 percent of the cost of manufacture of

the EPGTS of which they are a part, that the party inform the

Department immediately. See ``Suspension of Liquidation'' section of

this notice for details.

2. EPGTS Used in the Production of Refinery Products

MHI argues that the Department unlawfully expanded the scope of the

investigation after initiation to include EPGTS used in the production

of refinery and other petrochemical (downstream) products because this

expansion included products outside the Department's determination of

industry support which cannot be revisited after the initiation phase

of an investigation. MHI contends that the record strongly suggests

that the Department's industry support determination was made only with

respect to the production of EPGTS used in the production of five

specific chemicals listed in the petition: ethylene, propylene,

ammonia, urea or methanol.

The petitioner contends that the Department properly clarified the

scope of the investigation to include EPGTS for use in the production

of refinery and other petrochemical products. The petitioner asserts

that the petition was intended to cover all EPGTS, not only the five

end uses specified in the notice of initiation. The petitioner also

asserts that the Department's scope clarification does not conflict

with the Department's industry support determination because the

producers consulted by the Department in its industry support

determination constitute the universe of EPGTS suppliers, including

EPGTS used in the production of refinery and other petrochemical

products.

DOC Position

We disagree with MHI for the reasons already outlined in our

October 8, 1996, decision memorandum on this topic. In that memorandum,

we stated that the petition was intended to cover EPGTS used to produce

refinery products, as well as the other end uses already specified in

the notice of initiation. It was never the Department's intention to

revise the scope to exclude merchandise which the petition intended to

cover. Rather, in an attempt to draft a clear and concise scope

definition, the Department altered the original scope language in the

petition, inadvertently limiting the end uses of the subject

merchandise beyond what was intended by the petition. We noted that the

Department has the discretion to clarify the scope at any time during

the investigation in general, and in a manner which reflects the intent

of the petition, in particular. (See, e.g., LNPPs from Germany, 61 FR

at 38169; and Minebea Co., Ltd. v. United States.)

Accordingly, we clarified the scope to include EPGTS used in the

production of refinery products. We noted that this clarification did

not conflict with our industry support determination prior to the

initiation of this investigation. Our industry support determination

related to the production of EPGTS systems used generally in the

petrochemical and fertilizer industries, without distinction based on

the type of application within these industries (e.g., refinery,

ethylene, etc.). (See October 8, 1996 Memorandum to Jeffrey Bialos from

the Team Re: Scope.) Moreover, there is no evidence on the record to

indicate that there were U.S. producers of EPGTS used in the

manufacture of refinery products other than those contacted by the

Department in its industry support determination that should have been

considered in the Department's analysis. As stated in our May 28, 1996

Initiation Checklist, ``* * * we contacted all known producers and

asked them to provide production data * * *.'' (See also Initiation, 61

FR at 28164.)

Therefore, for purposes of the final determination, we find no

reason to depart from our original decision to clarify the scope of the

investigation to include EPGTS used in the production of refinery

products.

Comment 2: Agency vs. Reseller.

Throughout this investigation, the petitioner and MHI have argued

over whether EP or CEP methodology should be used to establish the

basis for the U.S. starting price. In this case, MHI sold subject

merchandise to MC (a Japanese trading company) which, in turn, sold

merchandise to the U.S. customer through MIC (MC's U.S. subsidiary).

MHI reported its sale to MC as an EP transaction on the grounds that MC

is allegedly an unaffiliated reseller and, at the time of sale, MHI

knew that the merchandise was intended for export to the United States

(i.e., the ``trading company'' rule). In our preliminary determination

in this investigation, we determined that MC and MIC were acting as

MHI's selling agents, not as independent resellers, in the transaction

under investigation. This determination was made based on our

preliminary examination of the sales documentation provided by MHI,

which showed that MHI played an integral role in the U.S. sale.

Accordingly, we determined preliminarily that the

[[Page 24401]]

proper basis for the fair value comparison was the sale by MHI, through

MC/MIC, to the U.S. customer. Because MHI made this transaction through

a U.S. agent which was acting on its behalf, we preliminarily

determined that the use of CEP, rather than EP, was appropriate. (See

Preliminary Determination, 61 FR at 65013.)

The petitioner, MHI, and MC submitted extensive comments in their

case and rebuttal briefs on this topic for purposes of the final

determination. These comments and the Department's position are

summarized below. For a complete discussion and analysis, see April 24,

1997, Memorandum to Jeffrey Bialos, Principal Deputy Assistant

Secretary for Import Administration, from The Team Re: Whether MC and

its U.S. Subsidiary, MIC, Acted as Agents of MHI or Independent

Resellers in the U.S. Sale Made to (the U.S. Customer), and the

Consequences of this Finding in Determining the Appropriate Basis for

U.S. Price (``April 24, 1997, Agency Decision Memorandum'').

The petitioner argues that the Department should continue to treat

the U.S. sale as a CEP sale in the final determination on the grounds

that MC/MIC and MHI are ``affiliated persons'' under section 771(33)(G)

of the Act because in the negotiation and sale of MHI's EPGTS to the

U.S. customer, MC and MIC acted as sales agents.4 The

petitioner states that the record evidence, augmented by verification

findings, establishes that MHI was integrally involved throughout the

sales negotiation process and that MC/MIC acted as agents for the

producer, not as independent purchasers/resellers. The petitioner

points to various facts on the record which reveal that MHI effectively

controlled the price and all other material terms of sale which were

ultimately agreed upon with the U.S. customer such as: (1) There were

both direct and indirect communications between MHI and the U.S.

customer throughout the transaction; (2) there were no significant

differences between MIC's bid proposals to the U.S. customer for the

subject merchandise which were ultimately accepted by the U.S. customer

and those prepared by MHI for MC/MIC; (3) inquiries from the U.S.

customer on the cost impact of proposed specification changes, both in

the pre-and post-sale period, were relayed by MIC directly to MHI and

MHI issued cost impact reports to the U.S. customer via MIC, except in

one case in which MHI dealt directly with the customer; and (4) MC and

MIC do not possess the necessary technical capacity or expertise

regarding cost, price, production/delivery schedules and post-sale

servicing to negotiate the U.S. sale.

---------------------------------------------------------------------------

\4\ The petitioner also argues that MHI and MC/MIC are otherwise

affiliated within the meaning of section 771(33)(F) of the Act. That

is, even assuming MC and MIC did not act as agents for MHI, the

petitioner maintains that the overall corporate relationship between

the companies, including equity ownership, common directors, and

numerous other ties establish that MC and MIC were, in effect,

controlled by MHI.

---------------------------------------------------------------------------

Further, the petitioner asserts that both under pre- and post-URAA

antidumping law and practice, MC and MIC would be considered affiliated

parties as MHI's agents, and thus their sales would warrant CEP

treatment. In addition, the petitioner notes that the ``trading

company'' rule does not apply to transactions between affiliated

parties or between agents and principals, such as the transaction at

issue in this case.

MHI argues that the Department's decision to treat MHI's U.S. sale

as a CEP sale in the preliminary determination based on its finding

that MC/MIC acted as MHI's U.S. selling agents, contradicts the

statute, Department practice, and the facts of this investigation. MHI

contends that the Department's preliminary analysis was flawed for

several reasons. First, MHI maintains that MHI's/MC's relationship

fails to meet the criteria for establishing an agency relationship and

the record establishes that MC was a purchaser of MHI's merchandise.

While MHI admits that some of the facts on the record may show that MHI

and MC acted cooperatively in making the U.S. sale, MHI asserts that

this cooperation does not diminish the fact that MHI and MC were still

independent companies, each seeking to maximize its own profit, and

does not provide a basis for determining that an agency relationship

existed. Citing Restatement (Second) of Agency section 12-14 (1957)

(``Restatement''), MHI asserts that a principal/agency relationship is

characterized by three criteria, all of which must be met in order for

an agency relationship to exist, but none of which are met in this

case: (1) The agent must have authority to alter the principal's legal

relationship to third parties; (2) the agent must have a fiduciary duty

to the principal or must act primarily for the benefit of the

principal; and (3) the principal must have the right to control the

conduct of the agent with respect to matters entrusted to him. Among

other things, MHI points out that the pre- and post-contract

correspondence reviewed by the Department confirms that, especially as

to commercial matters, the U.S. customer dealt almost exclusively with

MIC; no documents on the record establish that MC bound or was able to

bind MHI to the U.S. customer or to any other third party. MHI points

to other facts on the record to demonstrate that MHI and MC acted as

independent companies, each operating on its own behalf and not

controlling the other.

Further, MHI explains that if the factors enumerated in section 14J

of the Restatement (which assist in distinguishing an agent from a

reseller) are applied to the facts of this case, it reveals that MC was

a purchaser and reseller of MHI's merchandise. MHI points out: (1) The

sales documentation on the record demonstrates that only MIC had direct

communication with the customer on commercial matters prior to and

after sale, and MHI was involved in post-sale logistical and technical

negotiations with the U.S. customer; (2) the sales documentation

submitted by MHI established that title and risk of loss was

transferred from MHI to MC; (3) MC's scope of supply to the U.S.

customer differed from MHI's scope of supply to MC; (4) MC had the

right to retain the difference between what it paid to MHI and the

revenue it received from the U.S. customer; (5) MC had the right to

deal with the goods of persons other than MHI, as evidenced by examples

of head-to-head competition between the two companies in sales of

subject and non-subject merchandise during the POI; and (6) while MHI's

identity was disclosed to the U.S. customer because of the custom-built

nature of the goods and the fact that the manufacturers are specified

in the customer's request for quotation, MIC dealt directly with the

U.S. customer in its own name, and not on MHI's behalf.

Second, MHI contends that the rejection of prices between

unaffiliated parties for purposes of calculating CEP contradicts the

language and the logic of the Act. MHI asserts that the Department has

no legal authority to reject the sale price between two unaffiliated

parties and to resort to CEP methodology, even if it finds an agency

relationship based on cooperative marketing. MHI explains that under

pre-URAA law (section 771(13) of the Act), the Department was permitted

to collapse a principal and its agent for purposes of determining U.S.

price. According to MHI, the URAA (section 771(33) of the Act, as

explained in the Statement of Administrative Action (SAA) at 153)

repealed this provision and replaced it with the requirement that

prices may be rejected only between affiliated parties. MHI argues that

in order for the Department to make a determination of affiliation, it

must find that ``control,'' as defined under section 771(33) of the

Act, exists outside

[[Page 24402]]

and independent of the transaction under investigation. According to

MHI, ``control'' must be interpreted as the ability to force another

party to act against its own economic interests.

Third, MHI asserts that the Department's departure in its

preliminary determination from the ``trading company'' rule without

explanation was improper. MHI states that under normal practice, the

Department will treat a respondent's sale to a trading company as a

U.S. sale if the foreign manufacturer knows at the time of sale that

the merchandise is destined for the United States. While MHI reported

its U.S. sale in line with this settled practice, MHI asserts that the

Department rejected it without explanation.

Fourth, MHI argues that the U.S. sale meets the requirements of an

EP sale in accordance with section 772(a) of the Act and the

Department's proposed regulations (19 CFR 351.401). MHI contends that

its U.S. sale is an EP sale because: (1) MHI sold the merchandise to MC

prior to exportation; no inventorying was required or performed; and

(2) MHI's U.S. economic activity for this sale was de minimis and its

U.S. affiliate, MHIA, at most functioned as a communications link with

MHI's head office and Hiroshima plant on technical issues. Because

MHI's U.S. sale has none of the characteristics of a CEP sale, MHI

concludes that it should be treated as an EP sale.

Finally, MHI maintains that the existence of an agency relationship

does not convert a sale to CEP that would otherwise be classified as an

EP transaction. MHI argues that nothing in the Act or the Department's

proposed regulations support the conclusion that the involvement of an

unaffiliated party (even if characterized as an agent) itself, warrants

CEP methodology. MHI points out that considering a sale between a

principal and end user through an unaffiliated selling agent as a CEP

transaction ignores the purpose for distinguishing EP and CEP

transactions and results in distortive antidumping analysis. MHI

explains that the adjustments to CEP which are not relevant to EP exist

to eliminate distortions caused by selling functions and associated

profits accruing to the manufacturer by reason of sales activities in

the United States. In this case, however, MHI asserts that no U.S.

activities or profits accrue to the manufacturer where it does not

operate in the United States. Since the sale between the manufacturer

and the end user is an arm's-length border price, albeit negotiated

through the agent, no purpose is served by treating the transaction as

CEP merely based on the agent's involvement. Nothing in the nature of

the agency relationship suggests that the agent's commission from the

manufacturer would not be at arm's length. MHI states further that

under CEP analysis, the agent's commission would not be treated as a

circumstance of sale adjustment, but as affiliated party activity that

must be deducted, with profit, from CEP to ``construct'' an EP.

According to MHI, if the Department utilizes CEP methodology for

this sale, in effect, it would mandate that commissions per se cannot

be made at arm's length and would fail to recognize a fundamental

distinction between affiliation and agency, namely that agents may be

either affiliated or unaffiliated with their principals. According to

MHI, this distinction is reflected in the different definitions of

control that exist in common law with respect to agents and the

antidumping statute's treatment of affiliation. MHI explains that in

common law, a principal's ``control'' over an agent focuses on

manifestations of consent between the parties; thus, the agent remains

free to engage in arm's-length negotiations with the principal over its

compensation and other terms of the agency. MHI explains further that,

in contrast, the scope of ``control'' as it relates to affiliated

parties under the Act extends to the very terms of the parties'

relationship and whether or not the controlling party can induce the

controlled party to accept economic terms that the controlled party

would not otherwise accept. MHI points out that in this latter context

the Act requires the Department to disregard the price (or commission)

established between the parties because that price is assumed not to be

at arm's length. Where, however, the principal has no control over the

terms of agency the agent accepts, no reason exists for the Department

to disregard that commission. Thus, without other indicia of

affiliation, MHI contends that applying a CEP methodology to a

principal/agent relationship, thereby equating agency with affiliation,

violates the intent of the EP/CEP distinction and distorts the

antidumping analysis. Accordingly, MHI argues that a sale by a

principal through an unaffiliated selling agent to an unaffiliated U.S.

end user should be treated as an arm's-length EP transaction where the

commission accrued by the agent is accounted for as a circumstance of

sales adjustment.

Like MHI, MC contends that MC and MIC acted as resellers and not as

sales agents for MHI in the U.S. transaction at issue because: (1) The

required characteristics of an agency relationship are not fulfilled,

and (2) the parties' commercial behavior, sales documentation and

internal accounting records are consistent with a purchase/resale

relationship. According to MC, the price between MHI and MC is the

relevant U.S. price (pursuant to the ``trading company'' rule) because

MHI knew that the ultimate destination of the merchandise was the

United States and MHI and MC are unaffiliated parties.

Specifically, MC asserts that under U.S. law, an agency

relationship has several required characteristics which are not present

in the transaction under investigation. For example, it cannot exist

without an explicit agreement from the principal authorizing the agent

to act on his behalf in a specified context, and explicit consent by

the agent to act on the principal's behalf and only at the principal's

direction; and the agent does not act independently, pursuing his own

economic interests, but rather is acting exclusively to promote the

interests of the principal. According to MC, in a typical sales agent

relationship, the agent's job is to locate potential customers for the

principal. The principal makes all commercial decisions and takes

whatever profits accrued from the transaction. The agent is compensated

based on the principal/agent agreement. By contrast, resellers, while

they must cooperate with the seller to conduct business, they are

independent in their actions, take on more initiative and

responsibility, and bear more risk in the transaction than an agent

does. Specifically, resellers (1) Take title to the goods, (2) carry

the risk of loss, and (3) are compensated based on the spread or mark-

up that they can achieve independently on a resale. Based on the

behavior of the parties in the transaction and the documentation on the

record, MC maintains that MC and MIC acted as independent resellers in

the U.S. sale at issue. MC points out that if MC and MIC had been

acting as sales agents in the transaction at issue, MHI would have: (1)

Asked MIC or MC to solicit possible customers for MHI; (2) negotiated

all commercial terms and entered into the contract with the customer;

and (3) received the profit from the transaction, while MC/MIC would

have merely received a commission pursuant to the agency agreement.

According to MC, the record demonstrates that the sale at issue did not

occur in this manner.

Moreover, MC states that the legal documentation and internal

accounting records of the transaction at issue likewise confirm that

MC/MIC acted as

[[Page 24403]]

independent purchasers and resellers. MC asserts that the legal

documentation shows that MC and MIC each took title to the MHI turbo-

compressor equipment, bore the risk of loss and were fully responsible

for the further completion of the sale at issue. MC also asserts that

MC's and MIC's internal accounting records reflect purchase and sale

transactions, show that the price received from the resale customer is

higher than the price paid by MC/MIC to its supplier, and do not report

any commission.

Finally, like MHI, MC disagrees with the petitioner's argument that

the alleged agency relationship between MHI and MC is grounds for a

finding of affiliation. MC maintains that by its nature, a transaction-

specific agency relationship could not rise to the level of permanence,

significance, and control necessary to support a finding of affiliation

that is suggested by the Department's proposed regulations.

DOC Position

We agree with the petitioner. We determine that a principal and

agent in a sales transaction, even if unrelated in a broader corporate

sense, are ``affiliated'' within the meaning of section 771(33) of the

Act. For the purpose of determining U.S. price, the pre-URAA law

(section 771(13)) included an explicit reference to principal-agent

relationships in the definition of ``exporter'' and, in practice, sales

agents and their principals were deemed affiliated for the purpose of

calculating U.S. price. (See, e.g., Final Determination of Sales at

Less Than Fair Value: Furfuryl Alcohol from South Africa, 60 FR 22550

(May 8, 1995) (``Furfuryl Alcohol from South Africa''); Electrolytic

Manganese Dioxide from Japan: Final Results of Antidumping

Administrative Review, 58 FR 28551 (May 14, 1993) (``Electrolytic

Manganese Dioxide from Japan'').) In the URAA, Congress repealed this

provision and replaced it with the new definition of ``affiliated

persons'' in section 771(33) of the Act. While there is no explicit

reference to agents in new section 771(33), we nevertheless interpret

the new definition to include agents for several reasons. First, the

legislative history is clear that Congress intended to expand, not

limit, the definition of ``affiliated persons'' beyond that which

existed under the pre-URAA law. Second, the new law defines an

affiliated party to include ``any person who controls any other

person'' or ``any person which is legally or operationally in a

position to exercise restraint or direction over another person.''

Thus, this definition covers principal-agent relationships because, by

definition, a principal controls its agent. The agent may act only to

the extent its actions are consistent with the authority granted by the

principal. Thus, control of the principal over its agent is the

hallmark of an agency relationship. (See Restatement, section 14.)

While we agree that an agent may negotiate at arm's length the

terms of an agency agreement, we disagree with MHI that this leads to

the conclusion that there is no control within the meaning of section

771(33). With respect to activities undertaken pursuant to the agency

(e.g., the sale of merchandise), the principal unquestionably controls

the agent. Further, the very narrow definition of control proffered by

MHI (i.e., the ability to force another party to act against its own

economic interests) is inconsistent with the Act. The Act defines

control as the ability, legally or operationally, to direct or restrain

the acts of another. It is irrelevant whether that control is exercised

to the benefit or detriment of the controlled party.

In light of this interpretation, we believe that, contrary to the

respondents' assertions, the ``trading company'' rule does not apply in

cases where, as here, an agency relationship exists. This rule provides

that when a foreign producer sells subject merchandise to an

unaffiliated trading company in the home market with knowledge that the

merchandise will be sold for exportation to the United States, the

producer's price to the unaffiliated trading company (and thus EP) is

the appropriate basis for U.S. price. (See Forged Steel Crankshafts

from Japan, 52 FR 36984, October 2, 1987.) In a case where the trading

company acts as the foreign producer's selling agent, however, the

foreign producer and trading company would be considered affiliated by

virtue of their principal-agent relationship. The trading company rule

has been rejected in past cases with similar factual patterns where an

agency relationship exists between the producer and trading company.

(See Color Television Receivers, Except for Video Monitors, from

Taiwan, 53 FR 49706, 49711, December 9, 1988.)

Based on our analysis of the facts of record, we find that MC/MIC

were acting as agents on MHI's behalf in the U.S. sale at issue. The

analysis of whether a relationship constitutes an agency is case-

specific and can be quite complex; there is no bright line test. For

example, although agency relationships are frequently established by a

written contract, this is not essential. Under general principles of

agency, the focus of the analysis is whether it is agreed that the

agent is to act primarily for the benefit of the principal, not for

itself. (See Restatement, sections 1 cmt.b. and 26 cmt.a. See also

sections 14J and 14K.)

The Department has examined allegations of an agency relationship

in only a few cases and has focused on a range of criteria including:

(1) The foreign producer's role in negotiating price and other terms of

sale; (2) the extent of the foreign producer's interaction with the

U.S. customer; (3) whether the agent/reseller maintains inventory; (4)

whether the agent/reseller takes title to the merchandise and bears the

risk of loss; and (5) whether the agent/reseller further processes or

otherwise adds value to the merchandise. See, e.g., Furfuryl Alcohol

from South Africa, 60 FR 22550; Electrolytic Manganese Dioxide from

Japan, 58 FR 28551.

In this case, based on an examination of these and other pertinent

criteria outlined in the April 24, 1997, Agency Decision Memorandum, we

found that an agency relationship existed between MHI and MC/MIC in the

sales transaction at issue. In particular, we note that the record

evidence demonstrates that MHI effectively controlled the price, among

other terms of sale, in the transaction with the U.S. customer. The

evidence also shows that MHI conducted some marketing of its product to

the U.S. customer in the pre-sale period, and that its identity was

disclosed throughout the sales documentation governing the sale in a

manner indicative of a principal-agent relationship. In addition, MC/

MIC did not maintain inventory of, or further process, the subject

merchandise. Although MC/MIC took title to the merchandise and bore the

risk of loss, and that most of MHI's contact with the customer during

the pre-sale period was indirect and limited to technical matters, we

believe that based on the totality of the circumstances, that MC/MIC

was under MHI's control in the transaction at issue and, therefore, an

agency relationship existed.

Therefore, we determine that MHI and MC/MIC are ``affiliated''

within the meaning of section 771(33) of the Act by virtue of their

principal-agent relationship, not on the basis of the broader corporate

relationship between the parties. Having determined that the parties

are affiliated, we then considered whether the EP or CEP methodology

was appropriate. Based on the extensive role of MC/MIC in the U.S.

sales process, we have used CEP methodology in the final determination.

Comment 3: Corporate Affiliation under Sections 771(33)(F) and (G)

of the Act.

[[Page 24404]]

The petitioner contends that MHI and MC/MIC are affiliated within

the meaning of section 771(33)(F) of the Act. The petitioner contends

further that because of their interlocking corporate relationship, MHI

and MC are legally or operationally in a position to exercise restraint

or direction over the other, and that the record contains sufficient

evidence of common control between the two companies. The petitioner

urges the Department to evaluate the indicia of control (i.e.,

corporate grouping, joint venture agreement, debt financing, close-

supply relationship) described in the SAA cumulatively within the

context of control by a corporate group.

Further, the petitioner believes, contrary to respondents, that

``control'' within the meaning of section 771(33) of the Act, does not

require that one party has the power to coerce another to act against

its own interest and that this power extends beyond a particular

transaction. The petitioner states that no statutory principle embodies

this requirement. The petitioner believes that ``control'' within a

particular transaction is particularly important in cases, such as the

instant one, where there are few individual transactions and a producer

may have strong influence over the ultimate purchaser by virtue of

longstanding relationships.

MHI maintains that MHI and MC do not satisfy the requirements for

``control'' specified in sections 771(33)(F) and (G) of the Act and,

therefore, should not be treated as affiliated parties in the

Department's final antidumping analysis. MHI believes that to justify a

finding of control, the Department must: (1) Be able to identify the

controlling party and the controlled party; (2) examine MHI's and MC's

corporate relationship outside the confines of a specific transaction;

and (3) find evidence of the ability to exercise economic coercion

where one party can force the other party to act against its own

interest. MHI asserts that it is unlawful and illogical to conclude, as

the petitioner does, that affiliated parties exercise mutual control,

or that control can be diffused among a group of companies, the

membership of which is not defined legally. According to MHI, the

Department must determine that MHI controls MC, or MC controls MHI, or

some identifiable third party controls them both. Moreover, MHI states

further that this determination must be made in light of business and

economic reality, suggesting that the control relationship must be

significant and not easily replaced.

Further, MHI maintains that its analysis of the facts in this

investigation shows that MHI and MC did not have the ability to

exercise restraint or direction under the control indicia enumerated in

the SAA.

Like MHI, MC claims that MC and MHI do not qualify as

``affiliated'' persons under section 771(33) of the Act based on an

analysis of their relationship in terms of each of the control indicia

enumerated in the SAA. MC asserts that the affiliation issue was

already examined in the final determination of LNPPS from Japan (61 FR

38156-38157) where the Department ruled that the potential indicators

of control between MHI and MC taken individually were an insufficient

basis of finding control, and that the record facts with respect to

MC's/MHI's relationship and their relationship with third parties have

not changed so as to warrant a reversal of that decision.

MC also repeats many of the same arguments and similar facts stated

by MHI regarding the issue.

DOC Position

The Department invited comments on this issue in its preliminary

determination and evaluated the relevant facts in this case in the

context of the control standard set forth in section 771(33) of the Act

and the SAA. (See April 24, 1997, Memorandum to Jeffrey P. Bialos,

Principal Deputy Assistant Secretary for Import Administration, from

Louis Apple Re: Summary of Evidence on the Record of the Investigation

Regarding Potential Affiliation of MHI and MC.) In the facts and

circumstances of this case, however, we have determined that the

Department does not need to render a determination on this issue

because we have already found an agency relationship to exist and, on

that basis, have found the parties to be affiliated pursuant to section

771(33) of the Act. Accordingly, as noted in Comment 2 above, the

Department used CEP methodology for this sale and has deducted the U.S.

import duties and actual selling expenses incurred by MC/MIC pursuant

to our practice set forth in Furfuryl Alcohol from South Africa.

Comment 4: Level of Trade (``LOT'')/CEP Offset.

The petitioner contends that MHI should not receive either a LOT

adjustment or a CEP offset because it did not establish that its U.S.

transaction with MC/MIC is at a different LOT from its home market

sales. According to the petitioner, the record does not demonstrate

that there are any quantitative or qualitative differences between

MHI's home market and U.S. selling functions. The petitioner believes

that, given the technical complexity of the subject merchandise and the

importance of customer specifications to each sale, the same set of

selling functions (e.g., bid preparation, warranty, and installation

supervision) were performed by MHI for its EPGTS sales in both the home

market and the United States. In support of this argument, the

petitioner cites to the Notice of Proposed Rulemaking and Request for

Public Comment explaining section 351.412(c)(2) of the Department's

proposed regulations, which states: ``where the selling functions and

activities are substantially the same, however, sales normally will be

considered to have been made at the same level of trade.''

MHI contends that if the Department determines that CEP is the

appropriate basis for United States price, and collapses the activities

of MHI with those of MC/MIC, the Department should grant MHI a CEP

offset. MHI contends that it qualifies for a CEP offset because: (1)

Its CV is at a different LOT from its U.S. sale; (2) no data exist to

examine the price comparability between different home market LOTs; and

(3) the U.S. sale occurs at a less advanced stage of distribution than

its home market sales. In the alternative, MHI asks the Department to

base the calculation of SG&A and profit for CV upon the home market

sale to the trading company (i.e., MC), because that sale is allegedly

at a LOT that is comparable to its U.S. sale.

MHI asserts that its home market sales include certain selling

functions not found in its sale to MC/MIC (e.g., initial customer

contact, sales support operations, and delivery), and that its home

market sales occur at a more advanced stage of distribution than its

sale to MC/MIC. Citing Aramid Fiber Formed of Poly Para-Phenylene

Terephthalamide from the Netherlands, 61 FR 51406, 51409 (1996), among

other cases, MHI argues that because the adjustments to CEP under

section 772(d) of the Act will create a LOT that is at a less advanced

stage of distribution than MHI's LOT in the home market. Accordingly,

MHI maintains that the Department should calculate a LOT adjustment to

MHI's CV in the form of a CEP offset, if it does not base CV selling

expenses and profit exclusively on MHI's home market sale to a trading

company.

DOC Position

We agree with the petitioner. In accordance with section

773(a)(1)(B)(i) of the Act and the SAA accompanying the URAA, H.R. Doc.

No. 316, 103d Cong., 2d Sess. at 829-831 (1994), to the extent

practicable, the Department will calculate NV based on sales at the

same

[[Page 24405]]

LOT as the U.S. sale(s). When the Department is unable to find sale(s)

in the comparison market at the same LOT as the U.S. sale(s), the

Department may compare sales in the United States to foreign market

sales at a different LOT. Pasta from Italy, 61 FR at 30330-30331. The

LOT of NV is that of the starting-price sales in the home market. When

NV is based on CV, the LOT is that of the sales from which we derive

SG&A and profit.

For both EP and CEP, the relevant transaction for LOT is the sale

from the exporter to the importer. While the starting price for CEP is

that of a subsequent resale to an unaffiliated buyer, the construction

of the EP results in a price that would have been charged if the

importer had not been affiliated. We calculate the CEP by removing from

the first resale to an independent U.S. customer the expenses specified

in section 772(d) of the Act and the profit associated with these

expenses. These expenses represent activities undertaken by, or on

behalf of, the affiliated importer and, as such, they tend to occur

after the transaction between the exporter and importer for which we

construct CEP. Because the expenses deducted under section 772(d) of

the Act represent selling activities in the United States, the

deduction of these expenses normally yields a different LOT for the CEP

than for the later resale (which we use for the starting price).

Movement charges, duties, and taxes deducted under section 772(c) do

not represent activities of the affiliated importer, and we do not

remove them to obtain the CEP LOT.

In order to determine whether foreign market sales are at a

different LOT than U.S. sales, the Department examines whether the

foreign market sales have been made at different stages in the

marketing process, or the equivalent, than the U.S. sales. The

marketing process in both markets begins with goods being sold by the

producer and extends to the sale to the final user, regardless of

whether the final user is an individual consumer or an industrial user.

The chain of distribution between the producer and the final user may

have many or few links, and the respondent's sales occur somewhere

along this chain. In the United States this is generally to an

importer, whether independent or affiliated. We review and compare the

distribution systems in the foreign market and the United States,

including selling functions, class of customer, and the extent and

level of selling expenses for each claimed LOT. Customer categories or

descriptions (such as trading company or end-user) are useful in

identifying different LOTs, but are insufficient to establish that

there is a difference in the LOT without substantiation. An analysis of

the chain of distribution and of the selling functions substantiates or

invalidates claimed customer classification levels. If the claimed

customer levels are different, the selling functions performed in

selling to each level should also be different. Conversely, if customer

levels are nominally the same, the selling functions performed should

also be the same. Different stages of marketing necessarily involve

differences in selling functions, but differences in selling functions

(even substantial ones) are not alone sufficient to establish a

difference in the LOT. A different LOT is characterized by purchasers

at different places in the chain of distribution and sellers performing

qualitatively or quantitatively different functions in selling to them.

When sales in the U.S. and foreign market cannot be compared at the

same LOT, an adjustment to NV may be appropriate. Section 773(a)(7)(A)

provides that, after making all appropriate adjustments to EP or CEP

and NV, the Department will adjust NV to account for differences in

these prices that are demonstrated to be attributable to differences in

the LOT of the comparison sales in the foreign market.

With respect to the CEP offset, the statute also permits an

adjustment to NV if it is compared to U.S. sales at a different LOT,

provided the NV is more remote from the factory than the CEP sales, and

we are unable to determine whether the difference in LOT between CEP

and NV affects the comparability of their prices.

This latter situation can occur where there is no foreign market

LOT equivalent to the U.S. sales level, or where there is an equivalent

foreign market level, but the data are insufficient to support a

conclusion on price effect. Where different functions at different LOTs

are established under section 773(a)(7)(A)(i), but the data available

do not form an appropriate basis for determining a LOT adjustment under

section 773(a)(7)(A)(ii), the Department will make a CEP offset

adjustment under section 773(a)(7)(B), which is the lower of: (1) The

indirect selling expenses on the foreign market sale; or (2) indirect

selling expenses deducted from the CEP starting price under section

772(d)(1)(D).

In applying these principles to the facts in this case, we began by

removing from the CEP starting price the expenses specified in section

772(d) of the Act and the profit associated with these expenses. These

expenses represent activities undertaken by, or on behalf of, MC/MIC in

connection with the first sale to an unaffiliated customer in the

United States. In this regard, we identified: direct and indirect

selling expenses incurred by MIC for initial customer contacts, sales

negotiations, communications, and shipping logistics in the United

States to the unaffiliated customer; installation-related expenses

incurred by MHI in the United States following shipment of the subject

merchandise to the unaffiliated U.S. customer; and, indirect selling

expenses incurred by MHIA relating to U.S. office maintenance and

technical support.

Next, we sought to compare the distribution systems used by MHI for

its U.S. and home market sales, including selling functions, class of

customer, and the extent and level of selling expenses for each claimed

LOT. In reviewing the selling functions performed by MHI for both the

U.S. and home market sales transactions, we considered all types of

selling activities, both claimed and unclaimed, that had been

performed. As noted above, it is the Department's preference to examine

selling functions on both a qualitative and quantitative basis. While

MHI and MC provided information on the nature of the varying selling

functions performed for the sales transactions in both the U.S. and

home markets, respondents did not provide the Department with data

quantifying these selling activities. Further, at verification, such

information could not be derived from records and accounting systems

maintained by respondents in the ordinary course of business.

When we examined the CEP transaction between MHI and MC/MIC, we

identified the following selling functions performed by MHI: sales

negotiation and bid preparation; maintenance of sales office; technical

specification development and monitoring; parts procurement activities;

shipping arrangements; performance testing; and warranty extension.

When we reviewed MHI's home market sales during the POI, we did not

consider the one sale found to be outside the ordinary course of trade

(i.e., below the cost of production). Instead, we focused upon the two

remaining sales which were nominally made at different customer

levels--that is, trading company and end-user. However, when we

analyzed the selling functions at both levels, we found that they were

basically the same. Specifically, MHI performed the following selling

functions in connection with both home market sales: initial customer

contact; sales negotiation and bid preparation; maintenance of sales

offices; technical

[[Page 24406]]

specification development and monitoring; parts procurement activities;

shipping arrangements; and warranty extension. The only selling

function that might have been different between the two sales was

installation activity. However, we have treated the expense relating to

installation activity as a direct selling expense for which we have

made a circumstances of sale adjustment pursuant to section 353.56(a)

of our regulations. (See Memorandum to Case File, April 24, 1997.)

As a result of this analysis, we have determined that an

examination of MHI's selling functions in the home market does not

validate the claimed customer classification levels. Therefore, we have

determined that MHI's home market sales in the ordinary course of trade

are not made at different LOTs, and we have based our calculation of

SG&A and profit for CV upon these sales. (See ``Constructed Value''

section of this notice for more details.)

Finally, we compared the LOT of the CEP sale to the LOT of CV.

Here, again, we found no significant difference. Indeed, with only two

exceptions, MHI did perform the same selling functions on its home

market sales that it did on its CEP transaction with MC/MIC. These

functions, as noted above, included: sales negotiation and bid

preparation; maintenance of sales office; technical specification

development and monitoring; parts procurement activities; shipping

arrangements; and warranty extension. The only exceptions concern (1)

Initial customer contact and (2) performance testing. As explained

above, initial customer contact for the CEP sale was performed by, or

on behalf of, MC/MIC. Therefore, this expense (and the profit

associated with it) was deducted from the CEP starting price pursuant

to section 772(d) of the Act. In connection with its home market sales,

while MHI claimed to have performed initial customer contact functions,

the Department was unable to verify the accuracy of this claim.

With respect to performance testing conducted for the CEP

transaction, the expense relating to this selling function is

insignificant when compared to the total sales value of the CEP

transaction (see Memorandum to the Case File, dated April 24, 1997).

This difference in selling function between the U.S. and home markets

is, therefore, not significant for purposes of our LOT analysis.

In conclusion, our analysis of the record evidence regarding the

distribution systems in the foreign market and the United States

(including selling functions, class of customer, and the extent and

level of selling expenses for each claimed LOT) does not reveal

sufficient differences to justify either a LOT adjustment or a CEP

offset. Although there appear to be differences associated with

customer categories, these differences are not borne out by an analysis

of the selling functions for the home market and CEP sale, which are

largely the same. See Gray Portland Cement and Clinker from Mexico, 62

FR 17148, 17155-58 (1997).

Comment 5: MC's/MIC's Expenses and Value of Non-Subject Parts.

The petitioner argues that all actual expenses incurred by MC/MIC

in the U.S. transaction which were not deducted in the preliminary

determination should be deducted in the final determination in

accordance with section 772 (c) and (d) of the Act. These expenses

include U.S. Customs duties paid by MIC and selling expenses incurred

by MC/MIC which are associated with U.S. economic activity. In

addition, the petitioner maintains that the Department should continue

to deduct the value of non-subject parts from the CEP starting price

based on the amount ultimately charged to the U.S. customer, rather

than MIC's actual costs because there is no evidence that the former

amount was not at arm's length.

MHI argues that the petitioner's suggested adjustments to U.S.

price should be rejected because: (1) CEP methodology is not warranted

in this case for the reasons it explained in Comment 2 above; and (2)

by using the MHI-to-MC price as the basis for starting price and thus

applying EP methodology, the Department would substantively accommodate

the adjustments proposed by the petitioner. MHI points out that all of

MC's/MIC's expenses for the U.S. sale are included in the difference

between the MHI's price to MC and MIC's price to the U.S. customer.

DOC Position

We agree with the petitioner, in part. Based on our decision in

Comment 3 above, we have deducted from CEP all actual expenses incurred

by MC/MIC in the transaction, including U.S. import duties, selling

expenses associated with U.S. economic activity, and MIC's cost of non-

subject parts from the CEP starting price.

Comment 6: U.S. Indirect Selling Expenses Incurred in Country of

Manufacture.

The petitioner contends that certain items that were reported as

part of MHI's indirect selling expenses were actually directly related

with US sales activities and as such should be deducted from CEP. The

petitioner identifies those items as pre-bid meetings, travel, and

salesman visits. Because the nature of the subject merchandise in this

investigation requires technical design to the customer's

specifications, the petitioner asserts that the above-noted selling

expenses incurred by MHI were necessarily attributable to the

commercial activity in the United States and, therefore, should be

deducted accordingly. To support this assertion, the petitioner cites

Pasta from Italy, 61 FR at 30352. In the absence of information

sufficient to identify these expenses as direct expenses, the

petitioner argues that the Department should reduce CEP by MHI's

corporate indirect selling expense rate, or at a minimum, deduct all of

the Japanese indirect selling expenses reported by MHI.

In contrast, MHI asserts that, first, it is improper for the

petitioner to base its argument on the assumption that CEP methodology

is warranted in this case. Further, MHI asserts that it is the

Department's practice to deduct from CEP only those U.S. selling

expenses actually incurred in the United States. In support of this

assertion, MHI cites to the Department's decisions in Calcium Aluminate

Flux from France, 61 FR 40396, 40397 (August 2, 1996) (``Flux from

France''), and Certain Internal-Combustion Industrial Forklift Trucks

from Japan, 62 FR 5592 (February 6, 1997) (``Forklift Trucks from

Japan''). According to MHI, there is no evidence on the record in this

investigation which connects MHI's reported indirect selling expenses

with U.S. economic activity.

DOC Position

We agree with petitioner that certain of the indirect selling

expenses incurred by MHI for the U.S. sale are associated with economic

activity that occurred in the United States. Specifically, during

verification, we identified certain pre-bid expenses, including travel

expenses, that are appropriately included in our deduction of CEP

expenses. We have accounted for these expenses in our final CEP

calculations. (See Calculation Memorandum.)

Comment 7: Other Unclaimed Expenses.

The petitioner argues that certain other direct selling expenses

allegedly related to shipment logistics should be deducted on the

grounds that they are necessarily attributable to U.S. economic

activity.

MHI disagrees. It contends that the Department verified that the

expenses at issue either were not incurred or were

[[Page 24407]]

properly reported as part of cost of production for the U.S. sale.

Therefore, MHI asserts that no deduction to CEP for these expenses is

warranted.

DOC Position

We disagree with the petitioner. As MHI correctly points out, we

verified that the expenses at issue either were not incurred or were

properly reported as part of cost of production for the U.S. sale. (See

March 11, 1997 MHI Verification Report at 32.) Therefore, we have not

made any adjustments to CEP for the alleged direct selling expenses.

Comment 8: Mitsubishi Heavy Industries America (MHIA Houston)

Selling Expenses.

The petitioner asserts that MHI improperly allocated MHIA Houston's

reported selling expenses over both U.S. and non-U.S. sales, thereby

understating the selling expenses incurred by MHIA Houston for the U.S.

sale. The petitioner argues that MHIA Houston's selling expenses should

be allocated over total U.S. sales of turbo-machinery given that a

significant portion of MHIA expenses were allocated to such sales and

MHIA's small size effectively precludes it from servicing sales in non-

U.S. markets. Therefore, the petitioner requests that the Department

reject MHI's allocation formula and allocate MHIA Houston's selling

expenses over U.S. sales only.

MHI disagrees, arguing that the Department verified that MHIA

Houston was involved in sales to countries other than the United

States. According to MHI, while the market for turbo-machinery is

worldwide, Houston is a major center for turbo-compressor manufacturers

and plant contractors. Therefore, it is not unusual for meetings to

take place in Houston for sales of turbo-machinery to both U.S. and

non-U.S. markets. Based on these factors, MHI asserts that its

allocation methodology for MHIA Houston's selling expenses is

reasonable and accurate, and should be accepted for the final

determination.

DOC Position

We agree with MHI. At verification, we reviewed documentation

showing that MHIA was involved in technical support activities relevant

to both U.S. and non-U.S. sales. We also verified the accuracy and

completeness of the indirect selling amount reported by MHI. (See March

11, 1997 MHI Verification Report at 30.) Therefore, we have deducted

MHIA's indirect selling expenses.

Comment 9: U.S. Credit Expense.

A. General Calculation Methodology

The petitioner asserts that the Department should reject the

portion of MHI's claimed U.S. credit expense which reflects credit

income for payment received prior to shipment (i.e., progress payment)

and, for purposes of the final determination, calculate credit expense

equal to the corporate interest rate multiplied by the final payment

amounts times the number of days between shipment and payment, divided

by the number of days in the calendar year (i.e., 365). According to

the petitioner, the progress payments on which MHI's reported credit

income is based are improperly characterized by MHI as a negative

credit expense; rather, these payments are a form of working capital

financing. Further, citing Cellular Mobile Telephones and Subassemblies

from Japan, 50 FR 45,447, 45,455 (October 31, 1995), the petitioner

argues that the Department does not include progress payments received

in its calculation without evidence of interest revenue resulting from

these payments. The petitioner notes that only if the Department

considers the cost to MHI of financing EPGTS as work-in-process during

the period between the dates of sale and shipment should the Department

offset that cost with the interest income imputed for progress

payments.

MHI and MC request that the Department continue to calculate MHI's

credit expense for the U.S. sale inclusive of the pre-shipment credit

income at issue. According to MHI, the inclusion of imputed credit

benefit for payments received prior to shipment and imputed credit

expense for payments received after shipment reflect MHI's total cost

of extending credit to its U.S. customer. MHI asserts that if the

Department were to calculate credit as the petitioner suggests, it

would result in a credit expense adjustment that fails to fairly

measure MHI's opportunity cost of extending credit to the U.S. versus

home market customers. MHI explains that, in this instance, the payment

terms for the U.S. sale require the U.S. customer to make advance

payments (or progress payments) prior to the shipment of merchandise

while payment terms for home market sales do not require pre-shipment

or progress payments. According to MHI, failure to include both

payments received before and after shipment of merchandise would ignore

the payment terms specific to the U.S. sale. Additionally, MHI points

out that the petitioner fails to recognize that MHI's cost of financing

production is comparable for both its U.S. and home market sales.

Because MHI incurs its production costs for both U.S. and home market

sales in yen, MHI asserts that the imputed cost of financing these

sales would be comparable. Thus, MHI maintains that the calculation

methodology adopted by the Department in the preliminary determination,

but for the short-term interest rate used (see Comment 9(B) below),

correctly measures MHI's opportunity cost of extending credit on behalf

of its U.S. sale.

MC also disagrees with the petitioner, arguing that the Department

considers production costs in its credit expense analysis only when the

terms of sale call for the payment of significant capital outlays (up-

front) prior to production and shipment, which did not happen in the

case of the U.S. sale. Further, MC takes issue with the petitioner's

argument that a credit income adjustment is allowed only if interest

revenues on pre-shipment payments were obtained, maintaining that

imputed credit expense amounts are calculated regardless of the

presence or absence of actual borrowings.

DOC Position

We agree with respondents and have calculated U.S. imputed credit

expenses inclusive of the credit income at issue in the final

determination.

The intent of making a circumstances of sale adjustment for imputed

credit expenses incurred in the U.S. and comparison markets is to

adjust for differences in the payment terms extended to customers in

the two different markets. In this case, ignoring the imputed credit

income in the calculation of U.S. credit expense would result in a

credit expense adjustment which would fail to accurately measure MHI's

opportunity cost of extending credit to U.S. versus home market

customers. We note that the Department has calculated credit using both

pre- and post-shipment payments in past cases involving large,

customized equipment with relatively long production periods. (See

Mechanical Transfer Presses from Japan: Final Results of Administrative

Review, 61 FR 52,910, 52,914 (1996).) In certain other past cases such

as LNPPS from Japan, the Department has determined it to be appropriate

to offset production financing costs with progress payments, as

suggested by the petitioner, because there were multiple progress

payments relevant to sales in both the U.S. and comparison market and

an unusually long production period associated with the subject

merchandise. In this case, however, only one progress payment

[[Page 24408]]

was made for a relatively small portion of the total contract price,

the production period was not unusually long (i.e., approximately one

year), and no progress payments are applicable to MHI's home market

sales made during the POI.

Therefore, we have determined that there is no need to use an

alternative calculation methodology which would offset credit income

associated with progress payments with production financing costs or

one that would exclude credit income altogether from the calculation.

B. Short-term Interest Rate

MHI argues that in calculating imputed credit expenses for the U.S.

sale the Department should use the actual cost of the short-term

borrowing reported by MHI. MHI maintains that the Department's decision

in the preliminary determination to use a dollar-denominated short-term

interest rate appears to be an automatic application of matching the

currency of the interest rate used to the currency of the sale.

According to MHI, this approach does not conform with economic

rationale in this case where most of MHI's short-term debt was

denominated in yen. In support of recalculating U.S. credit expense

using the interest rate based on yen-denominated borrowings, MHI cites

to (1) LMI-La Metalli Industriale, S.p.A. v. United States, 912 F.2d.

455 (Fed. Cir. 1990) (LMI) in favor of using the interest rate for

imputed credit calculations that is in accordance with ``commercial''

reality, and (2) United Engineering & Forging v. United States, 779 F.

Supp. 1375 (Ct. Int'l Trade 1991), aff'd, 996 F.2d. 1236 (Fed. Cir.

1993) (United Engineering) in favor of using the lowest rate at which

the respondent has borrowed or to which respondent has access.

Therefore, MHI requests that the Department use the lowest interest

rate to which the respondent would have access, i.e., the reported yen-

denominated interest rate, in calculating the imputed U.S. credit

expense in the final determination.

Further, MHI takes issue with the Department's reliance on the

rationale outlined in LNPPs from Japan for using a dollar-denominated

short-term interest rate in the preliminary determination of this case.

MHI asserts that the Department's reasoning for the use of such a rate

captures the value of the credit to the customer, rather than the cost

to the seller of extending credit, which is contrary to the calculation

of the LTFV margin which is made from the seller's perspective.

Specifically, MHI states that if the Department is attempting to

measure the value of the theoretical loan from the seller to the buyer

during the period between shipment and payment from the buyer's

perspective, then the interest rate used should be the rate in which

the receivable is denominated. However, because the antidumping law

seeks to calculate a dumping margin based on the seller's expenses, MHI

maintains that the rate in which the receivable is denominated is

irrelevant. Instead, MHI argues that the Department must calculate the

cost of this theoretical loan from the seller's perspective. To do so,

MHI contends that the Department must examine MHI's actual cost of

capital, which in this case is denominated in yen.

The petitioner argues that the Department correctly applied a U.S.

dollar-denominated interest rate to compute MHI's imputed credit

expense on the U.S. sale. The petitioner asserts that the LMI decision

on which MHI relies was based on whether the chosen interest rate

comports with ``usual and reasonable commercial behavior.'' Therefore,

the petitioner argues that it is necessary to consider the

circumstances as a whole and not merely conclude that the lowest

interest rate should be used. According to the petitioner, the

circumstances in this investigation are as follows: (1) The foreign

producer has borrowings in U.S. dollars; (2) the U.S. sale is in U.S.

dollars; and (3) over one year elapses between the date of shipment and

the date of payment. Based on these conditions, the petitioner finds it

reasonable to use a U.S. dollar-denominated rate for purposes of

calculating U.S. credit expense. In support of its argument, the

petitioner cites LNPPs from Japan.

DOC Position

We agree with the petitioner and have calculated U.S. credit

expense based on the U.S. dollar-denominated interest rate in the final

determination. As noted in the final determination of LNPPs from Japan

(61 FR 38160), when sales are made in, and future payments are expected

in, a given currency, the measure of a company's extension of credit

should generally be based on an interest rate tied to the currency in

which its receivables are denominated, as the seller is effectively

lending to its purchaser in that currency. (See also Final

Determination of Sales at Less Than Fair Value: Oil Country Tubular

Goods from Austria, 60 FR 33551, 33555 (June 28, 1995).) Indeed, in the

present case, the Department verified that MHI had U.S.-denominated

short-term borrowings, the existence of which indicates the ability and

preparedness of MHI to support its EPGTS activities which result in

U.S. dollar-denominated revenues by borrowing in U.S. dollars.

Consequently, the Department's approach is consistent with LMI.

Further, contrary to respondent's suggestion, such an approach does not

capture the value of the credit extended to the customer instead of the

cost of extending credit to the seller. Rather, the cost calculated is

the cost to MHI, matching its dollar-denominated borrowing rate to its

dollar-denominated receivables. Whether or not this also reflects the

value to the buyer is irrelevant. Therefore, there is no basis to

depart from the Department's well-established practice.

Comment 10: Circumstances of Sale Adjustment for Home Market Credit

Expenses.

MHI argues that in the preliminary determination, the Department

failed to make a circumstances of sale adjustment for home market

imputed credit expenses. Specifically, MHI asserts that the Department

reduced the CEP by the amount of imputed credit expenses related to

MHI's U.S. sale, but did not make a corresponding adjustment for home

market credit expenses by subtracting the reported home market credit

expense from CV. MHI asserts that CV profit includes all items in the

home market price that are not otherwise included in CV. MHI reasons

that since imputed credit expense is included in the home market price,

it is included in the calculation of CV through a combination of

interest expense and home market profit. Therefore, MHI contends that

in order to ensure a fair value comparison, the home market credit

expense should be subtracted from CV as a circumstance of sale

adjustment. MHI cites LNPPS from Japan to support its contention.

The petitioner contends that no such circumstances of sale

adjustment is appropriate when NV is based on CV. Citing LNPPS from

Japan, the petitioner also argues that because imputed credit is, by

its nature, not an actual expense that would be included in the

calculation of CV in accordance with section 773(2)(A) of the Act,

there is no basis for an adjustment to CV for this imputed expense.

DOC Position

We agree with MHI. While we would not add an amount for imputed

credit expenses in the calculation of CV pursuant to section

773(e)(2)(A) of the Act, such expenses are reflected in the calculation

of CV profit and interest expense. Under the URAA, for CV, the statute

provides that SG&A be based on actual amounts incurred by the exporter

[[Page 24409]]

for production and sale of the foreign like product (see section 773(e)

of the Act). After calculating CV in accordance with the statute, we

have, in essence, a NV. Consistent with section 773(a)(8) of the Act,

adjustments to NV are appropriate when CV is the basis for NV.

The Department uses imputed credit expenses to measure the effect

of specific respondent selling practices in the United States and the

comparison market. Therefore, we have deducted from CV home market

imputed credit expenses as a circumstances-of-sale adjustment in the

calculation of NV. (See Antifriction Bearings (Other Than Tapered

Roller Bearings) from France et al.; Final Results of Antidumping Duty

Administrative Reviews, 62 FR 2081, 2119-2120 (January 15, 1997).)

Specifically, we deducted an amount for home market imputed credit

expense based on a ratio of imputed credit expenses incurred on home

market sales made in the ordinary course of trade to corresponding

sales revenue.

Comment 11: Currency Conversion.

The petitioner contends that the exchange rate used in the

preliminary margin calculation was erroneously a ``sustained movement

rate'' and not the official exchange rate in effect on the date of the

U.S. sale as stated in the Department's preliminary determination

notice. According to the petitioner, the Department should not

automatically apply the ``mechanical formula,'' as outlined in the

Department's Policy Bulletin 96-1: Currency Conversions (61 FR 9434,

March 8, 1996) (``Policy Bulletin 96-1''), which results in the

sustained movement rate in this case, because the sustained movement

rate is not suited for cases where sales are few and sporadic. Rather,

according to the petitioner, it is better suited for continuous sales

of commodities from a price list or based on periodic price

negotiations. In this investigation, the petitioner notes that the

subject merchandise is not sold continuously from a price list or

annual supply contracts; EPGTS are sold one at a time, and only few

sales are made in any given period. Under these circumstances, the

petitioner asserts that the parties involved in the transaction of such

merchandise are aware of the exchange rates, the currency used in the

transaction, and the prospect of hedging in order to reduce the risk of

changes in the exchange rate between the date of sale and date of

shipment. Therefore, the petitioner urges the Department to revise the

currency conversion formula accordingly to reflect the actual exchange

rate in effect on the date of the U.S. sale in the final determination.

MHI disagrees with the petitioner, arguing that the petitioner's

description of the Department's currency conversion methodology is

limited to the Department's method for identifying exchange rate

fluctuations. In the case of sustained movement, MHI states that the

Department allows at least 60 days for exporters to adjust their

prices. Further, MHI notes that neither the Act, the SAA, the

legislative history, nor Policy Bulletin 96-1, limits the sustained

movement rule to scenarios with high volume sales or numerous

transactions.

DOC Position

We agree with MHI, and made all currency conversions into U.S.

dollars using the sustained movement rate which resulted from the

methodology described in Policy Bulletin 96-1. As explained below, we

do not believe that the facts in this case warrant departure from this

methodology. We note that the sustained movement rate was also

appropriately used in the Department's preliminary calculations, but

the Department incorrectly described it as the official exchange rate

in effect on the date of the U.S. sale in its notice of preliminary

determination.

Section 773(A) of the Act provides that the Department will convert

foreign currencies on the date of the U.S. sale, subject to certain

exceptions. Those exceptions require the Department to ignore

``fluctuations'' in the exchange rate and to provide respondent(s) in

an investigation at least 60 days to adjust prices after a ``sustained

movement'' in the exchange rate. Because neither the Act, the

Antidumping Agreement (Agreement on Implementation of Article VI, GATT

1994) nor the Department's proposed regulations provide detail on

defining fluctuations or sustained movements, we designed the exchange

rate model described in Policy Bulletin 96-1 in order to: 1) Implement

the statutory requirements in a timely fashion; 2) ensure that all

exporters, when they set their U.S. prices and whether under order or

not, can know with certainty the daily exchange rate the Department

will use in a dumping analysis; and 3) capture the model in simple

computer code to reduce administrative burdens in monitoring exchange

rates. Having used this model for at least one year, it remains our

intention now to evaluate it based on our experience and public

comments that we have received. However, we will continue to use the

current model until our evaluation is complete.

The model classifies each daily rate as ``normal'' or

``fluctuating'' based on a ``benchmark'' rate. The benchmark is a

moving average of the actual daily exchange rates for the eight

consecutive weeks immediately prior to the date of the actual daily

exchange rate to be classified. Whenever the actual daily rate varies

from the benchmark rate by more than two-and-a-quarter percent, the

actual daily rate is classified as fluctuating. If within two-and-a-

quarter percent, the actual daily rate is classified as normal. Actual

daily rates classified as normal are the official exchange rate for

that day. However, when an actual daily rate is classified as

fluctuating, the benchmark rate is the official rate for that day.

Whenever the weekly average of actual daily rates exceeds the

weekly average of benchmark rates by more than five percent for eight

consecutive weeks (the recognition period), the model classifies the

exchange rate change as a sustained movement. During the eight week

recognition period, the model continues to classify each daily rate as

normal or fluctuating and to substitute the benchmark rate for the

actual daily rate when the daily rate is fluctuating.

When a sustained movement is identified in the Department's

exchange rate model, increasing the value of a foreign currency in

relation to the dollar, as in the instant case, respondents under an

investigation are given 60 calendar days to correct their prices in

order to mitigate against distortions to the Department's antidumping

analysis that may be caused by sustained movement in the exchange rate.

The 60-day grace period is meant to apply to all respondents in a

variety of industries, irrespective of the volume or number of their

transactions in any given period. This 60-day grace period begins on

the first day after the recognition period. During that period, the

official rate in effect on the last day of the recognition period will

be the official rate in investigations.

In this case, the actual date of the U.S. sale fell within the 60-

day adjustment period previously described. On April 26, 1995, all of

the Department's criteria for a sustained movement were met, and the

Department found that a sustained movement had occurred. As a result,

all official exchange rates between April 26, 1995, and June 26, 1995,

including the rate on the date of the U.S. sale, were held at the April

26, 1995, rate.

We have no basis on which to depart from our current methodology.

Further, the petitioner's suggestion that the model should

differentiate the exchange rate used based on a respondent's

[[Page 24410]]

volume or number of transactions necessarily implies that the

Department would be required to develop an exchange rate model on a

case-specific basis. We do not agree that this would be appropriate. In

addition, it would unnecessarily increase administrative burdens on the

Department and on parties interested in monitoring the exchange rates

used by the Department in its antidumping analysis.

Comment 12: Treatment of the Home Market Sale Made at a Below-Cost

Price.

MHI contends that section 773(b)(1) of the Act does not permit the

Department to conduct a sales-below-cost investigation solely to

recalculate CV profit. MHI asserts that such an investigation may be

pursued only as a mechanism to reject below-cost home or third country

market sales as the basis for a price comparison. MHI allows that while

the CV profit calculation may be considered to be part of the

``determination of NV,'' section 773(b)(1) of the Act requires the

rejection of below-cost sales before the Department can resort to CV.

Moreover, according to MHI, the discussion of NV at section 773(b)(1)

of the Act addresses only home and third country market sales, and not

CV. Because the Department based its antidumping analysis on CV and not

on HM prices, MHI maintains that it was inappropriate for the

Department to conduct a sales-below-cost investigation.

Petitioner urges the Department to follow the methodology that it

used in the preliminary determination of this case and exclude from the

CV profit computation all HM sales made by MHI at below-cost prices.

Petitioner asserts that nothing in the statute, SAA, or agency practice

suggests that the Department may use below-cost sales as the basis for

CV profit. According to petitioner, section 773(a)(4) of the Act

establishes CV as a type of NV. In computing CV, the statute directs

the Department to include an amount for profit based on the actual

amounts realized by the producer in connection with home market sales

of the foreign like product. Petitioner notes that where home market

sales were made at below-cost prices, section 773(b)(1) of the Act

provides that the Department exclude such sales from its determination

of NV. Thus, petitioner concludes that because CV is a type of NV and

the profit from home market sales is a factor in computing CV, the

exclusion of below-cost sales under section 773(b)(1) must apply to

home market sales used as the basis for CV profit in the Department's

antidumping analysis. Petitioner adds that, under MHI's interpretation

of the statute, the Department would be precluded from determining

whether home market sales (and the profits from such sales) were made

within the ordinary course of trade in all cases where such sales are

not sufficiently similar to U.S. sales to allow for a price-based NV.

DOC Position

We agree with the petitioner that the Department has the authority

to conduct a sales-below-cost investigation regardless of whether the

HM prices are used as the basis for a price-based NV or solely for the

CV profit calculation. At the beginning of this case, we determined

that each EPGTS sold in the home and U.S. markets during the POI was

manufactured to custom specifications for a unique application and,

thus, would be too dissimilar to permit a price-to-price comparison

between the subject merchandise sold in the United States and the

foreign like product sold in Japan. Therefore, we determined that the

NV should be based on CV in accordance with section 773(a)(4) of the

Act.

Section 773(e)(2)(A) of the Act directs the Department to include

in CV an amount for profits earned from sales of the foreign like

product in the ordinary course of trade and for consumption in the

foreign country. The Act also states, at section 771(15), that below-

cost sales made within an extended period of time and in substantial

quantities are considered outside the ordinary course of trade.

Therefore, in cases where the petitioner provides the Department with

reasonable grounds to believe or suspect that the foreign like product

forming the basis for CV profit was sold at below-cost prices, we will

conduct a cost investigation and will exclude those sales determined to

be outside the ordinary course of trade.

Comment 13: Reasonable grounds to believe or suspect that home

market sales were made at below-cost prices.

MHI argues that the Department lacked reasonable grounds to believe

or suspect that sales were made at prices below their cost of

production prior to initiating its sales below-cost investigation. MHI

contends that the Department was mistaken in its characterization of

MHI's post-cost allegation adjustments as new factual information. MHI

insists that its November 22, 1996 rebuttal simply proved that

petitioner's analysis was incorrect and that the data used by MHI in

the rebuttal was, or could be, supported by reference to its previously

submitted questionnaire responses. MHI asserts that it is incumbent

upon the Department to specifically and precisely identify the new

factual information in MHI's rebuttal. MHI claims that the Department's

position that MHI submitted new factual information regarding the

aggregate profitability of its HM sales is far to vague for a reviewing

court to determine whether the Department correctly applied its own

policy.

Petitioner claims that despite MHI's November 22, 1996 rebuttal of

petitioner's below-cost sales allegation, the Department had reasonable

grounds to suspect a below-cost sale had been made in the HM.

Petitioner states that in its rebuttal, MHI maintained that petitioner

had committed a ``simple methodological error'' in its sales-below-cost

allegation. Petitioner argues that MHI's rebuttal, rather than

establishing that petitioner committed a methodological error, reveals

that MHI reallocated production costs among the HM contracts in such a

manner that each HM sale was shown to have been made at a profit.

Further, petitioner asserts that MHI's subsequent January 1, 1997

reallocation of production costs and concession that the sale in

question was below cost, refutes any argument that the Department's

rejection of the below-cost sale was unreasonable.

DOC Position

We disagree with MHI. The information provided by petitioner in its

sales-below-cost allegation provided reasonable grounds for us to

believe or suspect that MHI had sold the foreign like product at a

price that was less than the company's cost of production. Moreover,

contrary to MHI's claims, the data provided in its November 22, 1996

rebuttal comments constituted new factual information which we do not

consider in making our determination to initiate a sales-below-cost

investigation. Although the aggregate profitability of all home market

sales (reported in the third column of figures of Attachment 1 of MHI's

November 22, 1996, rebuttal) had been submitted in MHI's November 12,

1996, submission, the revised aggregate profitability of only home

market sales 1 and 2 (reported in the third column of figures of

Attachment 1 of MHI's November 22, 1996, rebuttal) included cost

adjustments, resulting in revised profits. The data in this column

represents new information which was not previously on the record.

Import Administration Policy Bulletin 94.1 sets forth the

Department's practice with respect to new factual information submitted

by respondents subsequent to the filing of a cost allegation by

petitioners or other interested parties. The Bulletin states that the

Department disregards any new information regarding the actual costs of

production

[[Page 24411]]

where such information is used to rebut portions of an allegation. As

noted in the Policy Bulletin, the Department's purpose in reviewing the

sufficiency of an allegation is not to determine if sales were in fact

made at below-cost prices. Instead, the Department must decide whether,

based on the information available to the petitioner at the time of the

allegation, there is sufficient reason to believe that below-cost sales

exist.

Comment 14: Home market sales made outside the ordinary course of

trade.

Petitioner claims that the SAA is clear that below-cost sales are

outside the ordinary course of trade for purposes of calculating profit

for CV. Petitioner cites the SAA and Section 773(e)(2)(A) of the Act as

establishing that:

(1) CV profit is to be calculated based on sales in the ordinary

course of trade;

(2) The Department may ignore sales that it disregards as a basis

for NV, such as below-cost sales; and

(3) Unlike current practice, in most cases, the Department would

use profitable sales as the basis for calculating CV profit.

Petitioner argues that section 771(15) of the revised act defines

the ordinary course of trade to exclude below-cost HM sales disregarded

under section 773(b)(1) and therefore below-cost sales rejected under

section 773(b)(1) will also be rejected as a basis for profits.

Petitioner maintains that the statute places the burden on MHI to

establish that any below-cost sales are ordinary and should not be

rejected. Petitioner asserts that therefore, it is clear that the HM

below-cost sale in this case should be considered to be outside the

ordinary course of trade and excluded from the CV profit computation.

In the alternative, MHI argues that even if one of its HM sales was

properly found to be below cost, that does not mean this sale should be

``automatically'' excluded from the calculation of CV. Citing FAG U.K.

v. United States, 945 F. Supp. 260 (CIT 1996) and a series of other

cases, MHI argues that the burden is on petitioner to show that this

below-cost sale was ``outside the ordinary course of trade'' within the

meaning of section 771(15) of the Act. This burden, MHI asserts, has

not been met and, therefore, all HM sales should be included in the

calculation of CV.

MHI also relies upon the SAA. According to MHI, the SAA's reference

to profitable sales providing the basis ``in most cases'' for the

calculation of profit in CV ``implicitly recognizes that there are

situations in which unprofitable sales will also be included in the

calculation.''

DOC Position

For the most part, we disagree with MHI. As we state above in

response to comment 1, section 773(e)(2)(A) of the Act provides that

the calculation of profit in CV shall be based upon ``the actual

amounts incurred and realized by the specific exporter or producer * *

* in connection with the production and sale of a foreign like product,

in the ordinary course of trade, for consumption in the foreign

country'' (emphasis added). Section 771(15) of the Act further states

that sales made below their cost of production within the meaning of

section 773(b)(1) of the Act are not within the ``ordinary course of

trade.'' The cases cited by MHI, including FAG U.K. v. United States,

were decided under the pre-URAA version of the statute. That statutory

language, unlike the current language, did ``not limit the meaning of

`ordinary course of trade' to sales made above cost.'' 945 F. Supp at

269.

We also cannot agree with MHI's reading of the SAA. At page 169,

the SAA states, in part:

Commerce will base amounts for SG&A expenses and profit only on

amounts incurred and realized in connection with sales in the

ordinary course of trade of the particular merchandise in question

(foreign like product). Commerce may ignore sales that it disregards

as a basis for normal value, such as those disregarded because they

are made at below-cost prices (emphasis added).

It is clear from the record of this case that MHI made a sale in

the HM at a price that was below the cost of production, within an

extended period of time, and in substantial quantities (i.e., outside

the ordinary course of trade). Accordingly, we believe that section

773(e)(2)(A) of the Act supports our decision to exclude this sale from

the CV profit computation. Because section 773(e)(2)(A) and its

interpretation in the SAA indicate that CV profit should be calculated

based on sales in the ordinary course of trade and that in most cases

the Department should use profitable sales as the basis for calculating

CV profit, it is our opinion that the party claiming that below-cost

sales should not be considered outside the ordinary course of trade

should generally bear the burden of proving such an assertion.

Comment 15: Valuation of Inputs Purchased From Affiliated Parties.

Petitioner contends that the valuation of affiliated party

purchases should reflect arm's length values, including usual profits

earned on arm's length transactions. Petitioner asserts that the

Department has adjusted MHI's reported costs of inputs purchased from

affiliated parties under the ``transactions disregarded'' clause of

section 773(f)(2) of the revised act, rather than the ``major inputs''

clause of section 773(f)(3), which MHI assumes to be our basis for the

adjustment. Petitioner argues that because the ``transactions

disregarded'' clause of Section 773(f)(2) states that the reported

costs should ``fairly reflect the amount usually reflected'', the

Department should add a reasonable profit to the affiliated supplier's

total cost in order to reflect an arm's length price. Petitioner claims

that because MHI did not purchase comparable services from an

unaffiliated supplier, and the affiliated supplier did not sell

comparable services to an unaffiliated purchaser, the Department must

determine an appropriate amount ``based on the information available as

to what the amount would have been if the transaction was between

persons who are not affiliated'' per section 773(f)(2). Petitioner

asserts that the Department should apply the profit earned by the

affiliated party on its sales to MHI pertaining to MHI's third country

sales, as reported in an earlier section B submission.

MHI maintains that the Department should not add profit to the

inputs received from affiliated parties. MHI contends that although

under the ``transactions disregarded'' and ``major input'' rules, the

Department is authorized to adjust transfer prices to reflect market

price or COP, neither of the rules allow the Department to construct a

market price. MHI asserts that the Department's options are to

substitute other market prices or COP for the transfer prices.

MHI also claims that charging profit on its affiliated supplier

purchases would conflict with the purpose of the statute by unfairly

inflating MHI's costs. MHI argues that because the affiliated supplier

in question is a wholly owned subsidiary of MHI's, by adjusting these

inputs to reflect their COP, the Department effectively treats them as

if MHI had produced them internally. MHI maintains that petitioner's

argument that the Department should add to the affiliated party's COP,

the profit that would have been earned by an unaffiliated supplier had

it provided the services to MHI would be distortive. Further, MHI

claims that petitioner has failed to demonstrate that the profit rate

that the affiliated supplier earned, not on sales to an unaffiliated

party, but rather on other sales to MHI, fairly reflects the amount

usually reflected in sales of merchandise under consideration in the

market under consideration'', as required by section 773(f)(2).

[[Page 24412]]

DOC Position

Under the transactions disregarded rule of section 773(f)(2) of the

Act, we requested MHI to submit the transfer prices for a selected

sample of inputs that it purchased from affiliated suppliers for use in

manufacturing the subject merchandise. In addition, we asked MHI to

provide the arm's length prices charged by those affiliates to

unaffiliated purchasers for the identical input or the arm's length

prices charged by unaffiliated suppliers for sales of the identical

input to MHI. Because MHI claimed that there were no such arm's length

transactions between unaffiliated parties, the company submitted the

transfer prices for its purchases from affiliated suppliers and the

affiliated suppliers' corresponding COPs. For those inputs obtained

from affiliated suppliers, we compared the transfer price paid by MHI

to the affiliates' cost of producing the input. In one instance, we

found that the cost of the input was greater than the transfer price

between MHI and the affiliated supplier. For this transaction, because

there were no comparable transactions of similar inputs between

unaffiliated parties on which to base a value for inputs, we followed

our practice of using the affiliated supplier's cost of production for

that input as the information available as to what the amount would

have been if the transaction had occurred between unaffiliated parties

(See Antifriction Bearings (other than Tapered Roller Bearings) from

France et. al.; Final Results of Antidumping Duty Administrative

Reviews, 62 FR 2081, 2115 (January 15, 1997).) We disagree with

petitioner that the profit earned on the services provided by the

affiliate in connection with MHI's third country sales is

representative of the services furnished in connection with the U.S.

sale. Notwithstanding the fact that the transaction occurred between

the same parties (i.e., MHI and its affiliated supplier), in this case,

the input in question consists of services performed by an affiliate.

The nature of these services and the unique character of the EPGTS

products for which they were performed give us no reason to believe

that the services were in any way similar or comparable to one another.

Comment 16: Affiliated Party Input Adjustment.

MHI states that the Department erred by adjusting the transfer

prices of not only the major inputs purchased from affiliated

suppliers, but also the minor inputs. MHI claims that because the

Department has not established that these minor inputs were purchased

at below-cost prices, the transfer prices of the minor inputs should

not be adjusted.

MHI contends that if the Department chooses to adjust MHI's U.S.

sale for all affiliated party purchases (i.e., major and minor inputs),

it should make a corresponding adjustment for HM sales.

Petitioner claims that there is no statutory or rational basis for

a parallel affiliated party purchases adjustment to HM production costs

for purposes of calculating CV profit. Petitioner states that section

773(e)(2) of the revised act indicates that ``actual'' HM profit earned

in the ordinary course of trade should be included in the CV

calculation. Petitioner argues that actual HM profits should not be

reduced to the extent that the foreign producer's inputs were purchased

from affiliated parties at non-arm's-length transfer prices. Petitioner

also argues that although sections 773(f)(2) and (3) of the revised act

expressly provide for affiliated party cost adjustments for CV

calculations, section 773(b)(3), which pertains to COP for HM price

comparisons, contains no provision for such adjustments.

DOC Position

As noted above, we adjusted MHI's reported cost of inputs purchased

from affiliates under the transactions disregarded rule per section

773(f)(2) of the Act. This section relates to all inputs obtained from

affiliates, not just major inputs. Accordingly, we applied the

calculated affiliated party adjustment to all inputs obtained from

affiliates.

We agree with MHI that the affiliated party adjustment applied to

CV should also be applied to the submitted cost of producing the HM

sales. Section 773(f) of the Act identifies special rules for the

calculation of COP and CV, one of which is the transactions disregarded

rule. Since the statute does not direct the Department to treat

affiliated party transactions differently for COP and CV, we applied

the same affiliated party adjustment to both CV and COP.

Comment 17: Calculation of the G&A Rate.

Petitioner urges the Department to revise its preliminary

calculation of MHI's G&A expenses to include all of the G&A expenses

incurred by the company at each of its various corporate levels.

Petitioner believes that the G&A expense rate used by the Department to

compute COP and CV in its preliminary determination failed to include

the administrative expenses of MHI's Hiroshima Machinery Works

(``HMW''), the facility that produced the subject merchandise, as well

as allocable portions of G&A expenses associated with other

organizational levels within the company. As evidence of this problem,

petitioner points to MHI's internal financial statements which report

amounts for ``general'' and ``internal G&A'' that petitioner claims

were not allocated to the subject merchandise under MHI's normal

accounting system and, likewise, were excluded from COP and CV under

the company's submission methodology.

MHI argues that it fully accounted for all G&A expenses in the

submitted COP and CV figures and that petitioner simply fails to

understand the company's normal internal accounting system and its

financial reporting methods. MHI claims that adjusting the G&A expense

rate as petitioner proposes would result in double-counting both G&A

and selling expenses. MHI notes the fact that the Department verified

the company's G&A expense calculation and found that all such expenses

had been properly included in the MHI's reported COP and CV figures.

DOC Position

We agree with MHI that it properly accounted for all G&A expenses

in the reported COP and CV amounts. Under the company's normal

accounting system, both G&A and selling expenses are combined and

allocated to EPGTS job orders through a factory overhead burden rate.

The SG&A amounts to be allocated are reflected in the ``general'' and

``internal G&A'' figures in the company's internal financial

statements. Because the Department requires respondents to report

separately the selling expenses incurred for the merchandise, MHI

segregated these expenses for the HMW before allocating G&A expenses to

each EPGTS as manufacturing overhead following its normal accounting

methodology. Thus, as noted by MHI, basing the G&A expense rate on

amounts from the company's internal financial statements would result

in double-counting expenses already accounted for as part of either

selling expenses or manufacturing overhead. We reviewed MHI's G&A

expense calculation as part of our verification of the company's COP

and CV submission and found that the reported costs reflected an

appropriate amount of G&A expenses incurred by the company at each of

its organizational levels.

Continuation of Suspension of Liquidation

In accordance with section 735(c) of the Act, we are directing the

Customs Service to continue to suspend liquidation of all entries of

EPGTS from Japan, as defined in the ``Scope of Investigation'' section

of this notice, that are entered, or withdrawn from

[[Page 24413]]

warehouse for consumption, on or after December 10, 1996, the date of

publication of our preliminary determination in the Federal Register.

We are also directing the Customs Service to suspend liquidation of all

entries of parts of EPGTS imported pursuant to a contract for a

complete EPGTS in the United States that are entered, or withdrawn from

warehouse for consumption, on or after December 10, 1996. For these

entries, the Customs Service will require a cash deposit or posting of

a bond equal to the estimated amount by which the normal value exceeds

the constructed export price as shown below. The suspension of

liquidation with respect to EPGTS parts will remain in effect provided

that the sum of such entries represents at least 50 percent of the cost

of manufacture of the complete EPGTS of which they are part. This

determination will be made only after all entries of parts imported

pursuant to an EPGTS contract are made and the complete EPGTS pursuant

to that contract is produced, unless a request for a scope inquiry is

made by an interested party at least 75 calendar days prior to the

intended date of entry of the EPGTS parts in which the interested party

claims that the parts to be imported, when taken altogether, constitute

less than 50 percent of the cost of manufacture of the complete EPGTS

of which they are a part. Upon receiving such a request, the Department

will initiate a scope inquiry and instruct the Customs Service to

suspend liquidation at a zero cash deposit rate/bond rate (depending on

which rate, if any, is effective at that time) if the party can

establish to the Department's satisfaction, through the submission of

the requisite information specified below, that the sum of the EPGTS

parts to be imported pursuant to a particular EPGTS contract represents

less than 50 percent of the cost of manufacture of the complete EPGTS

of which they are a part.

In such a review, we will require that the foreign producer/

exporter submit to the Department, where applicable and available, the

following information and documentation substantiating its claim that

all of the parts to be imported into the United States from Japan

pursuant to a particular EPGTS contract constitute less than 50 percent

of the cost of manufacture of the complete EPGTS of which they are a

part and, thus, are not subject merchandise: (1) The EPGTS sales

contract (and any amendments) pursuant to which the parts are imported;

(2) a diagram of the complete EPGTS; (3) a description of the parts

included in the entry(ies); (4) the actual or estimated cost of the

imported parts (depending on what is available prior to the time of

importation of the parts into the United States); (5) the most recent

cost estimate of the complete EPGTS, and data on historical variances

between estimated and actual costs of production of the EPGTS; (6) a

financial statement for the business unit that produces EPGTS; (7) a

schedule of parts shipments to be made pursuant to a particular EPGTS

contract, if more than one shipment is relevant; and (8) a schedule of

EPGTS production completion in the United States. The foreign producer/

exporter will also be required to serve the submitted materials upon

counsel for the petitioner on the earlier of: (i) The same day they are

filed with the Department, if an applicable Administrative Protective

Order (``APO'') is outstanding, or (ii) within one day of the issuance

of an applicable APO. Public versions of such materials will be served

upon counsel for the petitioner in accordance with section 353.31 of

the Department's regulations. The petitioner will have 15 calendar days

from the date of receipt of such documents for review and the filing of

comments. If, after providing this information to the Department, the

foreign producer/exporter finds that the costs reported to the

Department were understated and that the cost of manufacture of the

imported parts will be over 50 percent of the cost of manufacture of

the EPGTS of which they are a part, we will require that the party

inform the Department immediately. After the expiration of the 15-day

comment period, the Department will conduct its review of the submitted

documentation and will, to the extent practicable, make an expedited

preliminary ruling as to whether the merchandise falls outside of the

scope. If the Department determines preliminarily that such merchandise

is outside of the scope, for all such entries made pursuant to the same

EPGTS contract, the Department will instruct the Customs Service to

suspend liquidation at a zero deposit/bond rate.

Pursuant to the Department's preliminary ruling, the U.S. importer

will be able to declare a zero rate for the imported merchandise at

issue. Upon entry of the merchandise into the U.S. Customs territory,

the U.S. importer and/or foreign manufacturer/exporter will be required

to submit an appropriate certification to the Department concerning the

contents of the entry. An appropriate certification should read as

follows:

I [Name and Title], hereby certify that the cost of the

engineered process gas turbo-compressor system parts from Japan

contained in entry summary number(s) ______ pursuant to contract

number ______, including the cost of design and engineering incurred

by, and any assists provided by, the manufacturer or producer with

respect to the engineered process gas turbo-compressor system,

constitutes less than 50 percent of the cost of manufacture of the

complete engineered process gas turbo-compressor system of which

they are a part.

The Department will make a final scope ruling within the context of

an administrative review, if requested by interested parties.

Verification of the submitted information will occur within the context

of such review, when appropriate. If the Department finds in its final

ruling that the imported merchandise falls below the 50 percent

threshold, then the Department will instruct the Customs Service to

liquidate the entries at issue without regard to antidumping duties.

Conversely, if the Department finds that the imported merchandise falls

within the scope (i.e., because the actual total cost of the parts

imported pursuant to a contract for a complete EPGTS is 50 percent or

more of the cost of manufacture of the complete EPGTS of which they are

a part), then the U.S. importer will be subject to the assessment of

antidumping duties on the imported parts, together with any applicable

interest from the date of entry of such parts, at the rate determined

in the administrative review.

With respect to entries of EPGTS spare and replacement/repair parts

from Japan, we will instruct the Customs Service not to suspend

liquidation of these entries if they are not included in the original

contract of sale for the EPGTS of which they are intended to be a part.

In addition, in order to ensure that our suspension of liquidation

instructions are not so broad as to cover merchandise imported for non-

subject uses, foreign producers/exporters shall be required to provide

certification that the imported merchandise would not be used to

fulfill an EPGTS contract. An appropriate certification should read as

follows:

I, [Name and Title], hereby certify that this entry/shipment

does not contain merchandise that is imported from Japan pursuant to

a contract for an engineered process gas turbo-compressor system and

is, therefore, not subject to antidumping duties.

We will also request that the interested parties register with the

Customs Service the EPGTS contract numbers pursuant to which subject

merchandise is imported. These suspension of liquidation instructions

will remain in effect until further notice.

[[Page 24414]]

The weighted-average dumping margins are as follows:

------------------------------------------------------------------------

Weighted-

average

Exporter/Manufacturer margin

percentage

------------------------------------------------------------------------

Mitsubishi Heavy Industries, Ltd. (MHI)..................... 41.72

All-Others.................................................. 41.72

------------------------------------------------------------------------

International Trade Commission (``ITC'') Notification

In accordance with section 735(d) of the Act, we have notified the

ITC of our determination. As our final determination is affirmative,

the ITC will determine, within 45 days, whether these imports are

causing material injury, or threat of material injury, to an industry

in the United States. If the ITC determines that material injury, or

threat of material injury, does not exist, the proceeding will be

terminated and all securities posted will be refunded or canceled. If

the ITC determines that such injury does exist, the Department will

issue an antidumping duty order directing Customs officials to assess

antidumping duties on all imports of the subject merchandise entered,

or withdrawn from warehouse, for consumption on or after the effective

date of the suspension of liquidation.

This determination is published pursuant to section 735(d) of the

Act.

Dated: April 24, 1997.

Robert S. LaRussa,

Acting Assistant Secretary for Import Administration.

[FR Doc. 97-11384 Filed 5-2-97; 8:45 am]

BILLING CODE 3510-DS-P