# Industrial Phosphoric Acid From Israel: Final Results of Countervailing Duty Administrative Review

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A98-7352

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** March 20, 1998
- **Citation:** 63 FR 13626

## Text

DEPARTMENT OF COMMERCE

[C-508-605]

Industrial Phosphoric Acid From Israel: Final Results of
Countervailing Duty Administrative Review

AGENCY: Import Administration, International Trade Administration,
Department of Commerce.

ACTION: Notice of final results of countervailing duty administrative
review.

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

SUMMARY: On September 10, 1997, the Department of Commerce published in
the Federal Register its preliminary results of administrative review
of the countervailing duty order on industrial phosphoric acid from
Israel for the period January 1, 1995 through December 31, 1995 (62 FR
47645). The Department of Commerce has now completed this
administrative review in accordance with section 751(a) of the Tariff
Act of 1930, as amended. For information on the net subsidy for each
reviewed company, and for all non-reviewed companies, please see the
Final Results of Review section of this notice. We will instruct the
U.S. Customs Service to assess countervailing duties as detailed in the
Final Results of Review section of this notice.

EFFECTIVE DATE: March 20, 1998.

FOR FURTHER INFORMATION CONTACT: Christopher Cassel or Lorenza Olivas,
Office of CVD/AD Enforcement VI, Import Administration, International
Trade Administration, U.S. International Trade Administration, U.S.
Department of Commerce, 14th Street and Constitution Avenue, N.W.,
Washington, D.C. 20230; telephone: (202) 482-2786.

SUPPLEMENTARY INFORMATION:

Background

Pursuant to 19 CFR 355.22(a), this review covers only those
producers or exporters of the subject merchandise for which a review
was specifically requested. Accordingly, this review covers Rotem-
Amfert Negev Ltd. (Rotem). This review also covers the period January
1, 1995 through December 31, 1995.
Since the publication of the preliminary results on September 10,
1997, (Preliminary Results), the following events have occurred.
Pursuant to section 751(a)(3) of the Tariff Act of 1930, as amended, we
extended the final results to no later than March 9, 1998. See
Industrial Phosphoric Acid From Israel; Extension of Time Limit for
Countervailing Duty Administrative Review, 63 FR 1441 (January 9,
1998). On October 10, 1997, a case brief was submitted by the
Government of Israel (GOI) and Rotem, producer/exporter of industrial
phosphoric acid (IPA) to the United States during the review period
(respondents). On October 17, 1997, a rebuttal brief was submitted by
counsel for the FMC Corporation and Albright & Wilson Americas Inc.
(petitioners). On January 26, 1998, we provided petitioners and
respondents the opportunity to address the grant calculation
methodology followed in the Final Affirmative Countervailing Duty
Determination: Steel Wire Rod from Venezuela, 62 FR 55014 (October 22,
1997) (Wire Rod from Venezuela). That methodology has direct relevance
in this proceeding and the final determination in that case was
published after the preliminary results in this proceeding were
completed. Accordingly, on February 3, 1998, comments were submitted by
respondents and petitioners. On February 6, 1996, rebuttal comments
were submitted by respondents and petitioners.

Applicable Statute

Unless otherwise indicated, all citations to the statute are
references to the provisions of the Tariff Act of 1930, as amended by
the Uruguay Round Agreements Act (URAA) effective January 1, 1995 (the
Act). The Department of Commerce (the Department) is conducting this
administrative review in accordance with section 751(a) of the Act.

Scope of the Review

Imports covered by this review are shipments of industrial
phosphoric acid (IPA) from Israel. Such merchandise is classifiable
under item number 2809.20.00 of the Harmonized Tariff

[[Page 13627]]

Schedule (HTS). The HTS item number is provided for convenience and
U.S. Customs Service purposes. The written description of the scope
remains dispositive.

Verification

As provided in section 782(i) of the Act, we verified information
submitted by the GOI and Rotem. We followed standard verification
procedures, including meeting with government and company officials,
and examining relevant accounting and financial records and other
original source documents. Our verification results are outlined in the
public versions of the verification reports, which are on file in the
Central Records Unit (Room B-099 of the Main Commerce Building).

Subsidies Valuation Information

Period of Review

The period for which we are measuring subsidies (the POR) is
calendar year 1995.

Allocation Period

In British Steel plc. v. United States, 879 F.Supp. 1254, 1289
(February 9, 1995) (British Steel I), the U.S. Court of International
Trade (the Court) ruled against the allocation methodology for non-
recurring subsidies that the Department had employed for the past
decade, which was articulated in the General Issues Appendix, appended
to the Final Countervailing Duty Determination; Certain Steel Products
from Austria, 58 FR 37225 (July 9, 1993) (GIA). In accordance with the
Court's remand order, the Department determined that the most
reasonable method of deriving the allocation period for nonrecurring
subsidies is a company-specific average useful life (AUL) of non-
renewable physical assets. This remand determination was affirmed by
the Court on June 4, 1996. British Steel, 929 F.Supp 426, 439 (CIT
1996) (British Steel II). Accordingly, the Department has applied this
method to those non-recurring subsidies that have not yet been
countervailed.
For non-recurring subsidies received prior to the POR and which
have already been countervailed based on an allocation period
established in an earlier segment of the proceeding, it is not
reasonable or practicable to reallocate those subsidies over a
different period of time. Therefore, for purposes of these final
results, the Department is using the original allocation period
assigned to each nonrecurring subsidy received prior to the POR. This
conforms with our approach in Certain Carbon Steel Products from
Sweden; Final Results of Countervailing Duty Administrative Review, 62
FR 16549 (April 7, 1997). For additional discussion of this issue, see
Department's Position on ``Comment 6: Grants Previously Allocated
According to the U.S. IRS Depreciation Schedules, Should be Allocated
Over Rotem's Actual AUL'', below.
For non-recurring subsidies received during the POR, Rotem
submitted an AUL calculation based on depreciation and asset values of
productive assets reported in its financial statements. Rotem's AUL was
derived by adding depreciation charges for ten years, and dividing
these charges by the sum of average gross book value of depreciable
fixed assets for the related periods. We found this calculation to be
reasonable and consistent with our company-specific AUL objective.
Rotem's calculation resulted in an AUL of 24 years, and we have used
this calculated figure for the allocation period for non-recurring
subsidies which have not been previously allocated.

Privatization

(I) Background
Israeli Chemicals Limited (ICL), the parent company which owns 100
percent of Rotem's shares, was partially privatized in 1992, 1993 and
1994. In this administrative review, the GOI and Rotem reported that
additional shares of ICL were sold in 1995. We have previously
determined that the partial privatization of ICL represents a partial
privatization of each of the companies in which ICL holds an ownership
interest. See Final Results of Countervailing Duty Administrative
Reviews; Industrial Phosphoric Acid from Israel, 61 FR 53351, 53352
(October 11, 1996) (1994 Final Results).
In this review and prior reviews of this order, the Department has
found that Rotem and/or its predecessor, Negev Phosphates Ltd.,
received non-recurring countervailable subsidies prior to these partial
privatizations. Further, the Department has found that a portion of the
price paid by a private party for all or part of a government-owned
company represents partial repayment of prior subsidies. See GIA, 58 FR
at 37262. Therefore, in the 1992 and 1993 reviews, we calculated the
portion of the purchase price paid for ICL's shares that is
attributable to repayment of prior subsidies. In the 1994 review,
respondents reported that the GOI sold less than 0.5 percent of its
shares in ICL. Because this percentage of shares privatized was so
small, the percentage of subsidies potentially repaid through this
privatization could have no measurable impact on Rotem's overall net
subsidy rate. Therefore, we did not apply our repayment methodology to
the 1994 partial privatization. See 1994 Final Results, 61 FR at 53352.
However, we are applying this methodology to the 1995 partial
privatization of ICL during the POR because 24.9 percent of ICL's
shares were sold. This approach is consistent with our findings in the
GIA and Department precedent under the URAA. See e.g., GIA, 58 FR at
37259; Certain Hot-Rolled Lead and Bismuth Carbon Steel Products from
the United Kingdom; Final Results of Countervailing Duty Administrative
Review, 61 FR 58377 (November 14, 1996); and Final Affirmative
Countervailing Duty Determination: Certain Pasta From Italy, 61 FR
30288 (June 14, 1996).
(II) Modification of the Privatization Calculation Methodology
As noted above, in the 1992 and 1993 administrative reviews of this
order, we determined that the partial privatization of ICL, Rotem's
parent company, represented partial privatization of Rotem. Therefore,
in each of those reviews, we calculated the portion of the purchase
price paid for ICL's shares that was attributable to the repayment of
prior subsidies. Under this methodology, to determine the amount of
subsidies that are extinguished due to privatization, we calculate the
net present value (NPV) of the remaining allocable subsidies at the
time of privatization. For example, if the privatization took place in
1993, the NPV calculation for that transaction would be the remaining
benefit from all unamortized subsidies in 1993. However, in past cases
involving privatization or changes in ownership we recalculated the NPV
in subsequent review periods by including only the remaining benefit
from unamortized subsidies affecting that subsequent review period. For
example, if we calculated the NPV for a privatization that took place
in 1993, in the next administrative review, 1994, we would recalculate
the NPV using only those subsidies still allocable to 1994, i.e., the
remaining unamortized subsidies still benefitting the company in 1994.
We revisited that methodology in the 1995 countervailing duty
administrative review of lead and bismuth carbon steel products from
the United Kingdom. See Certain Hot-Rolled Lead and Bismuth Carbon
Steel Products from the United Kingdom; Final Results of Countervailing
Duty Administrative Review, 62 FR 53306 (October 14, 1997). In that
review, we determined that it is

[[Page 13628]]

not appropriate to modify the calculation of the NPV of the subsidies
existing at the time of sale. The change in ownership of a company is a
fixed event at a particular point in time. Thus, the percentage of
subsidies that may be extinguished due to privatization or reallocated
due to a change in ownership in a given year is also fixed at that same
point in time and does not change. Therefore, the pass-through
percentage will no longer be altered once it has initially been
determined in an investigation or administrative review. We have
modified the ICL privatization calculations in this administrative
review to reflect the change outlined above.

Analysis of Programs

Based upon the responses to our questionnaire, the results of
verification, and written comments from the interested parties, we
determine the following:

I. Programs Conferring Subsidies

A. Programs Previously Determined To Confer Subsidies
1. Encouragement of Capital Investments Law (ECIL) Grants. In the
preliminary results, we found that this program conferred
countervailable subsidies on the subject merchandise. Our review of the
record and our analysis of the comments submitted by the interested
parties, summarized below, has led us to modify our findings from the
preliminary results for this program. In particular, we followed the
methodology set forth in Wire Rod from Venezuela to calculate the
benefit from these non-recurring grants. Under this methodology, we
converted the grant amount into U.S. dollars on the date of receipt of
the grant. The benefit in the POR was then calculated using our
standard grant allocation methodology. For a detailed discussion of the
changes to the calculation methodology for this program, see the
Department's Position on ``Comment 9: Inflation Adjustment for Non-
Recurring Grants,'' below; see also the Calculation Memorandum to the
File, dated March 9, 1998 (public version on file in the Central
Records Unit of the Department of Commerce) (``Calculation Memo'').
Accordingly, the net subsidies for this program have changed and are as
follows:

------------------------------------------------------------------------
Rate
Manufacturer/exporter (percent)
------------------------------------------------------------------------
Rotem Amfert Negev......................................... 8.85
------------------------------------------------------------------------

2. Long-term Industrial Development Loans. In the preliminary
results, we found that this program conferred countervailable subsidies
on the subject merchandise. We did not receive any comments on this
program from the interested parties, and our review of the record has
not led us to change any findings or calculations. Accordingly, the net
subsidies for this program remain unchanged from the preliminary
results and are as follows:

------------------------------------------------------------------------
Rate
Manufacturer/exporter (percent)
------------------------------------------------------------------------
Rotem Amfert Negev......................................... 1 When we determine that a
benefit is ``tied'' to a product, there is an implicit assumption that
the benefit is intended to affect only that product. See Industrial
Nitrocellulose from France; Final Results of Countervailing Duty
Administrative Review, 52 FR 833 (January 9, 1987). In this case,
however, respondents have failed to provide any evidence on the record
demonstrating that ECIL grants 1, 3, 4, 7, and 15 were intended to
affect only the inputs that received the subsidy, and only the end
products that incorporated these inputs only during the POR. Rather,
ECIL subsidies are provided to inputs that are also incorporated into
other downstream products produced by the same integrated company.
Therefore, to the extent that ECIL grants are tied to phosphate rock
and green acid, they are also tied to the sales of all other
merchandise incorporating those inputs.
---------------------------------------------------------------------------

\1\ This position is also reflected in the Department's 1989
Proposed Rules, which define tied benefits as ``a benefit bestowed
specifically to promote the production of a particular product.''
Countervailing Duties: Notice of Proposed Rulemaking and Request for
Public Comments, 54 FR 23366, 23374 (May 31, 1989) (1989 Proposed
Rules).
---------------------------------------------------------------------------

It is also important to note that attribution is established at the
point the subsidy is bestowed, not the point at which it is used.
Otherwise, the subsidy is apportioned on a pro-rata basis in each
administrative review. Such a pro-rata apportionment contravenes our
policy of not examining the use of the subsidy to determine whether it
is countervailable. As stated in the GIA, ``nothing in the statute
directs the Department to consider the use to which subsidies are put
or their effect on the recipient's subsequent performance * * * nothing
in the statute conditions countervailability on the use or effect of a
subsidy. Rather, the statute requires the Department to countervail an
allocated share of the subsidies received by producers, regardless of
their effect.'' 58 FR at 37260; see also British Steel v. United
States, 879 F. Supp. 1254, 1298 (CIT 1995) (British Steel), appeals
docketed, Nos. 96-1401 to -06 (Fed. Cir. June 21, 1996); British Steel
Corp v. United States, 605 F. Supp. 286, 294-95 (1985) (``[I]t is
unnecessary to trace the use'' of funds), citing Michelin Tire Corp. v.
United States, 4 CIT 252, 255 (1982), vacated on agreed statement of
facts, 9 CIT 38 (1985). Such an interpretation is also supported by the
statute, as amended by the URAA. Specifically, Sec. 771(5)(C) of the
Act states that the Department ``is not required to consider the effect
of the subsidy in determining whether a subsidy exists.'' The SAA
further elaborates, noting that the ``definition of subsidy does not
require that Commerce consider or analyze the effect (including whether
there is any effect at all) of a government action on the price or
output of the class or kind of merchandise under investigation or
review.'' SAA at 256; H.R. Rep. No. 826, 103d Cong., 2d Sess., vol. 1
at 926 (1994) (SAA). As such, adoption of the attribution approach set
out in Pasta From Italy was reasonable because Rotem is also an
integrated producer, as are the pasta producers who own semolina
production facilities. In such cases, subsidies to inputs will be
attributed to the inputs and the downstream products that incorporate
the inputs.
Finally, we note that for subsidies ``tied'' to non-subject
merchandise, i.e., products that could not be inputs into IPA, such as
grants tied to fertilizers under Project 13, we did not include that
ECIL grant in calculating the subsidy rate. For the reasons set forth
above, for the purposes of these final results, the Department will
continue to allocate ECIL grants from Projects 1, 3, 4 and 7, and 15
over the sales of the inputs (phosphate rock and green acid) and the
downstream products made by Rotem during the POR (IPA, MKP, and
fertilizers).

Comment 4: ECIL Grants to Project 15

According to respondents, the input product produced by the Rotem
II facility, the plant that benefited from ECIL grant project 15, was
never intended as an input into IPA. Respondents claim that the
Department countervailed grants from project 15 on the basis of
statements by Rotem officials at verification that green acid from the
plant could chemically be used for IPA. According to respondents,
however, the relevant fact is that it is not economical to use this
green acid in the production of IPA. Therefore, respondents state, the
Department should find that grants to project 15 did not benefit IPA
during the POR.
Respondents further note that because the plant that benefited from
project 15 did not start operations until 1996, no benefit could
possibly have accrued to IPA in 1995 from these grants. This is
especially the case, since the grants to this facility were not
intended to be used in IPA production. Rather, the inputs were to be
directed to another product, not yet produced in 1995.
According to petitioners, respondents' argument that project 15
grants should not be countervailed because the facilities that
benefited from the grants were not in operation in 1995 is irrelevant.
Petitioners state that it is the potential use of the input that is
important, and not its actual use.
Department's Position. We disagree with respondents. Rotem II
produces green acid, which is an input into IPA as well as other
downstream products produced by Rotem. Respondents do not dispute that
green acid from Rotem II can be used in the production of all
downstream products, including the subject merchandise. In fact,
respondents confirmed that green acid from Rotem II could be
incorporated into IPA and Rotem's other end products. See Rotem VR.
Therefore, as explained in detail under in the Department's Position on
``Comment 3, ECIL Grants to Projects that Did Not Provide Inputs to IPA
During the POR,'' above, consistent with our policy concerning
corporate entities that produce both the inputs and the subject
merchandise, we appropriately attributed the grants provided to Rotem
II to the direct sales of green acid and all downstream products that
can be produced from green acid. Such an attribution approach is
consistent with the countervailing duty statute, and is in accordance
with the attribution approach followed in Pasta From Italy.
Respondents' argument that the Rotem II facility was not
operational in 1995 is also without merit. In light of our policy
concerning integrated producers, this fact is irrelevant. Under the
countervailing duty statute, the Department will find a countervailable
subsidy when a financial contribution has been provided and that
financial contribution has conferred a benefit upon the recipient.
While respondents may assert that green acid from Rotem II was directed
to another product not yet produced, there is no information on the
record of this proceeding indicating that green acid from Rotem II
cannot be an input into the production of IPA, or that the ECIL grants
to that facility are ``tied'' to the production of specific downstream
products. Therefore, we have appropriately attributed these grants to
Rotem's sales of green acid and to the sales of the company's
downstream products that incorporate green acid.

Comment 5: Rate of Inflation and Interest Rate To Be Used for ECIL
Grant Calculations for 1994 and 1995

Respondents contend that the interest rate used by the Department
to calculate the benefit during the POR from grants received in 1994
and 1995 under ECIL project 15 was incorrect. The interest rate in 1995
was calculated by adding the rate of inflation in 1994 to the real
interest on CPI-indexed bonds in 1995. According to respondents, the
rate of

[[Page 13632]]

inflation in 1995, not 1994 should have been added to that bond rate.
Respondents further argue that the Department selected an incorrect
inflation rate for 1995 from the Bank of Israel (BOI) Annual Report.
The Department has consistently used the average change in the rate of
inflation in its non-recurring grant benefit calculations. In 1995,
this figure was 10.0 percent. According to respondents, this is not the
actual rate of inflation during the year but the average change from
the prior year. The actual change during the period, respondents state,
was 8.1 percent, as noted in the BOI annual report.
Petitioners contend that the Department has consistently used the
average CPI change for the year in calculating the interest rate to be
used in the ECIL benefit calculations. Therefore, the Department should
not use a different CPI statistic in this administrative review, merely
because the new rate would be helpful to Rotem. Petitioners point out
that in 1994, the CPI change during the period was 14.5 percent, while
the average change was 12.3 percent. In that review, respondents did
not argue that the Department modify the CPI.
Department's Position. As explained in the Department's Position on
``Comment 9: Inflation Adjustment for Non-Recurring Grants,'' below, we
have modified the calculation methodology for ECIL grants. The new
approach does not require the use of NIS linked interest rates or the
Israeli CPI index. Therefore, this issue is now moot.

Comment 6: Grants Previously Allocated According to the U.S. IRS
Depreciation Schedules, Should Be Allocated Over Rotem's Actual AUL

Respondents argue that the Department correctly allocated non-
recurring grants received by Rotem over the company's average useful
life of assets (AUL) of 24 years. However, respondents note that the
Department erred in not applying that allocation period to all of
Rotem's non-recurring grants, including those received prior to the POR
and which had been previously allocated according to the U.S. Internal
Revenue Service depreciation schedules. According to respondents, the
benefit from these earlier grants is, therefore, overstated, and will
continue to be overstated if the allocation is not changed to reflect
Rotem's AUL. Respondents state this correction can be achieved by
taking the remaining balance in 1995 of previously allocated grants and
reallocating that amount over the number of years left in a 24-year
benefit stream that begins in the year the grant was received. This
approach avoids the possibility of over-countervailing or under-
countervailing the subsidy, because the entire benefit will be
countervailed over the 24 year period. Respondents further note that if
the Department found it reasonable to revise the ECIL grant
calculations prior to the POR with respect to the inflation adjustment,
it should also be reasonable and practicable to do so for the AUL
correction.
Petitioners contend that the CIT's decision in British Steel does
not require the Department to use a company-specific allocation period
for all subsidies. Rather, petitioners state that the Department
decided not to recalculate the AUL for subsidies received prior to the
POR because such a change could distort the allocation of the actual
benefits is fair and within the mandate of British Steel. Petitioners
further argue that nothing in British Steel or in any other decision
requires the Department to accept respondents' proposed method for
recalculating the allocation period for earlier grants. In fact,
petitioners note that the Department did not disturb previously
established allocation periods in administrative reviews of other
countervailing duty orders. See, e.g., Certain Carbon Cut-to-Length
Carbon Steel Plate from Sweden; Final Results of Countervailing Duty
Administrative Review, 62 FR 16551, 16552 (April 7, 1997), and Certain
Carbon Steel Products from Sweden; Final Results of Countervailing Duty
Administrative Review, 62 FR 16549, 16550 (April 7, 1997). Accordingly,
petitioners argue that the Department's allocation of prior subsidies
should remain unchanged.
Department's Position. Petitioners correctly note that in prior
cases we have not disturbed allocation periods established in prior
proceedings. This approach is reasonable and, as noted by petitioners,
is not in conflict with the CIT's decision in British Steel, which does
not require the Department to allocate non-recurring subsidies over a
company's AUL. Furthermore, maintaining established allocation periods
is both fair and practical, and modifying the allocation stream for
previously allocated subsidies can produce unfair results. For example,
it is conceivable that a company-specific AUL would yield a shorter
allocation period. In that case, it is possible that the subsidy may be
under-countervailed, in particular for subsidies that have reached the
point in the allocation stream beyond the total number of years in the
company-specific AUL. For these reasons, Rotem's 24-year company-
specific AUL will only be adopted for ECIL grants that have not been
previously allocated.

Comment 7: Grants Not Previously Considered in Subsidy Calculations
Should Be Allocated Over Rotem's Actual AUL

According to respondents, the Department has determined to
countervail certain grants in this administrative review that have not
been countervailed in prior reviews. Among these are grants received
prior to the POR. For these grants, respondents argue that the
Department should allocate these grants over Rotem's company-specific
AUL of 24 years, because these grants have not already been allocated
in past administrative reviews.
Department's Position. Grants from ECIL project 15, received in
1994, were not countervailed in the 1994 administrative review and
therefore have not previously been allocated. Therefore, we concur with
respondents that it is appropriate to allocate these grants over
Rotem's company-specific 24-year allocation period. However, we
disagree with respondents that there are ``numerous grants
countervailed this time that have not been countervailed in the past.''
In the 1994 administrative review, the Department countervailed grants
from projects that benefitted inputs that were not used in the
production of IPA during 1994. Moreover, in past administrative
reviews, ECIL grant projects to each of Rotem's phosphate rock and
green acid facilities had been countervailed. This includes grants to
the Arad and Zin mines, which Rotem claims in this review did not
benefit production of IPA. Accordingly, the allocation period for these
grants will not change in these final results.

Comment 8: The Denominator for Grants to Projects Not Tied Directly to
IPA

Respondents contend that the Department should not deviate from the
practice followed in the 1994 review of attributing grants not tied to
IPA over Rotem's total sales. This approach was modified in the
preliminary results of this review so that grants to Rotem's green acid
facilities were attributed to Rotem's total sales minus direct sales of
phosphate rock. (Grants tied to Rotem's phosphate rock facilities were
attributed to the company's total sales.) According to respondents,
this change is not justified by the Department's regulations.
Respondents state that the rationale for this change is found in
the tying provision of the 1997 Proposed Rules.

[[Page 13633]]

However, respondents note that these rules, while they provide
guidance, are not controlling in this review and are therefore not
applicable. Respondents further argue that this provision should only
be invoked for grants to an input that is essential to the production
of the downstream product. This is not the case with green acid, which,
while it has been an input into IPA, is not required for IPA
production.
Respondents further claim that under section 355.47 of the 1989
Proposed Rules, the Department is directed to attribute subsidies
either to total sales or to products to which the benefit is tied.
Therefore, if a grant is tied to several products, the Department will
allocate that grant over the sales of only those products. However,
respondents contend that where the subsidy is given to an input into
the subject merchandise, rather than directly to the subject
merchandise or several products including the merchandise under
investigation, the denominator should be the company's total sales.
Therefore, respondents argue that in the final results, the Department
should allocate all grants not tied directly to the subject merchandise
over Rotem's total sales.
Petitioners state that the Department is permitted to change its
methodologies and that the approach followed in this review is a
refinement of the methodology adopted in the 1994 proceeding. The
Department has determined that the approach with respect to ECIL
subsidies to Rotem's green acid facilities is a more precise
measurement of the benefit bestowed. According to petitioners, the
Department reasonably determined that because green acid is not an
input into phosphate rock, sales of phosphate rock cannot benefit from
a subsidy provided to Rotem's green acid facilities. Therefore,
petitioners argue, the Department's modification is a logical and
reasonable refinement of the new ``single-corporate-entity-input''
methodology.
Department's Position. Our determination that ECIL subsidies
provided to Rotem's green acid facilities are not attributable to
direct sales of phosphate rock is, as petitioners note, a logical
refinement of the attribution approach followed in the 1994
administrative review. During the course of this proceeding, we learned
that Rotem's total sales statistics include direct sales of phosphate
rock and direct sales of green acid. These are the principal inputs for
Rotem's end products. Under the approach first adopted in the 1994
final results of this order, we determined that subsidies to inputs are
appropriately attributable to the sales of the input and the sales of
downstream products that can incorporate that input. Therefore, we
excluded Rotem's direct sales of phosphate rock in calculating the
subsidy rate from ECIL grants for the green acid facilities. This is
logical given that phosphate rock is an input into green acid, but
green acid is only a downstream product of phosphate rock, and,
therefore, this approach accurately captures the universe of sales to
which the benefit applies. Subsidies to green acid production cannot
benefit the production of phosphate rock, and attributing such
subsidies to phosphate rock will understate the subsidy to green acid
and the end products that incorporate green acid.
Respondents' contention that the provision with respect to inputs
in the 1997 Proposed Rules should only be invoked for grants to an
input that is ``essential to the production of the downstream product''
is incorrect. The plain language of the proposed rules states that ``a
subsidy which is tied to the input product will be attributed to the
input and downstream products produced by that corporation.'' See 1997
Proposed Rules, Sec. 351.524(b)(5)(ii), 62 FR at 8855. Nothing in the
1997 proposed rules speaks of inputs that are ``essential to the
production of the downstream product.'' Nor do respondents provide any
justification for the rationale that subsidies tied to inputs that are
not ``essential to the production of the downstream product,'' be
attributed to a company's total production, including upstream
products. Rather, as the plain language of the proposed rules suggests,
such subsidies can only be attributed to production of the input and
the downstream products. Attributing such subsidies to upstream
products would, as noted above, understate the subsidy and attribute
the subsidy to products that did not benefit from the subsidy.
Respondents' reliance on the 1989 Proposed Rules for the
proposition that the Department is directed to attribute subsidies
either by total sales or by products to which the benefit is tied is
misguided. As a preliminary matter, we fail to see how this argument
reconciles with respondents' earlier claim that subsidies to Rotem's
green acid facilities provide competitive benefits only to green acid
and to downstream products, but only according to the exact proportion
that they were used to produce the downstream products. If this were
the case, respondents have failed to explain how these same subsidies
to green acid may also benefit a firm's total production, including
upstream production. Thus, respondents are incorrect on both accounts.
As outlined above, in order to make an apples-to-apples comparison, it
is imperative that both the numerator (the countervailable benefit) and
denominator (the universe of sales to which the benefit applies) used
in the Department's calculation of a subsidy reflect the same universe
of goods. Accordingly, this approach will remain unchanged in these
final results.

Comment 9: Inflation Adjustment for Non-Recurring Grants

Respondents argue that the inflation adjustment used by the
Department in the preliminary results to calculate the benefit from
non-recurring ECIL grants significantly overstates the benefit from
these grants. According to respondents, the Department should
``dollarize'' the grants, which would have the same effect as indexing
the grants for inflation. This approach would comport with Rotem's
actual business practices because most of the company's financing is in
U.S. dollars, and the company's financial statements are expressed in
U.S. dollars. Respondents further claim that converting the grant
amount into dollars would be consistent with the approach followed in
Wire Rod from Venezuela. Respondents suggest that the Department use
Rotem's long-term cost of U.S. dollar-denominated borrowing in 1995 to
calculate the benefit from the ECIL grants converted into dollars.
Respondents state that if the Department chooses not to dollarize,
then it should index the principal grant amounts and use a real
interest rate in the benefit calculation. In the preliminary results,
respondents argue, the Department incorrectly used a nominal interest
rate. This approach double counts inflation, once by adjusting the
principal by the inflation index, and again by accounting for inflation
in the calculation of the interest component of the benefit. Short of
making either of these adjustments, respondents contend the Department
should return to the original methodology followed in the 1994
administrative review.
According to petitioners, the Department correctly followed the
methodology adopted for the preliminary determination in Wire Rod from
Venezuela. Petitioners also reject respondents' argument that because
inflation was not as high as in Venezuela, the Department should return
to its original methodology to account for inflation if it does not
accept respondents' proposed methodology. Petitioners note that
respondents' own analysis identifies Israel as a high

[[Page 13634]]

inflation country. Moreover, petitioners point out that Israeli
companies have adjusted their financial statements throughout the
allocation period.
With respect to the methodology adopted in Wire Rod from Venezuela,
petitioners state that dollarization can be used in this case if the
Department applies exchange rates and interest rates that correctly
account for inflation. Accordingly, petitioners argue that the
Department should use a long-term, dollar-denominated interest rate as
a discount rate in the grant calculations. In particular, if the
Department is unable to locate a long-term fixed rate dollar-
denominated rate in Israel, petitioners contend that it is appropriate
to use the average long-term variable rate in dollars available to ICL,
Rotem's parent company, from private lenders during the POR. A long-
term rate, petitioners claim, reflects the economic benefit that Rotem
received from the subsidies. Petitioners reject respondents' argument
that the Department should use Rotem's long-term cost of borrowing
during the POR, because at least some of those loans are financed by
ICL and may, therefore, reflect below market interest rates.
Department's Position. We have modified the calculation methodology
for ECIL grants to conform with the approach followed in the final
determination of Wire Rod from Venezuela. This approach aligns with
respondents' proposed methodology to dollarize the grants at the time
they were received.
With respect to the discount rate to be applied to the grants, we
agree with petitioners that an interest rate reflecting the long-term,
U.S. dollar-denominated cost of borrowing to Israeli firms is most
appropriate. However, we have been unable to find such rates. While
Rotem's 1995 financial statements show the company's long-term cost of
borrowing in U.S. dollars, we are unable to segregate long-term
interest charged by Rotem's parent company, ICL, from the long-term
interest rate charged by financial institutions. As such, we have
turned to ICL's long-term cost of borrowing denominated in U.S. dollars
in each year from 1985 through 1995 as the most appropriate discount
rate. ICL's rates are shown in the notes to the company's financial
statements, which are public documents that have been placed on the
record of this proceeding. See ``Calculation Memorandum.'' For 1983 and
1984, we used the interest rate on short-term euro-dollar financing
because we were unable to locate an appropriate long-term dollar-
denominated interest rate for those years. See ``Calculation
Memorandum.'' In converting the ECIL grants into dollars, we used the
shekel/U.S. dollar exchange rates prevailing on the day the grants were
received by Rotem. This information is available from the Bank of
Israel. See the ``Calculation Memorandum'' for additional discussion of
this issue.

Comment 10: Timing of Inflation Adjustments for Non-Recurring Subsidies

According to respondents, in the preliminary results, the
Department incorrectly adjusted the ECIL subsidies to take into account
inflation for all grants dating back to 1986, the beginning of the
relevant period. Respondents argue that it is ``not appropriate to
adjust those grants that have already been adjusted by virtue of the
inflated interest, since adjusting both interest and principal for
inflation leads to a total subsidy greater than actually received.''
Therefore, respondents claim that the inflation adjustment should begin
in 1995, as ``inflation has already been captured in the interest rate
formula used for the grants prior to that year,'' and adjusting those
grants now double counts the effects of inflation.
Petitioners contend that dollarization should apply only to the
period marked by high inflation in Israel, i.e., between 1983 and 1986,
when inflation exceeded 30 percent. Petitioners state that this
conforms with the approach taken in Wire Rod from Venezuela. Starting
in 1987, petitioners argue, the remaining principal of the grants
should be reconverted into shekels and interest on the remaining amount
should be calculated using the rate of return on CPI-indexed commercial
bonds. Petitioners reject respondents' argument that adjusting the
principal of the grants received prior to 1995 would double count the
effect of inflation. According to petitioners, in previous years the
Department countervailed only the portion of the grants allocated to a
particular POR, while no allocation has been made for the portion that
will be countervailed in this review.
Department's Position. Respondents' argument that inflation has
already been captured for the grants in years prior to 1995 is
incorrect. The purpose of adjusting non-recurring grants for inflation
is to capture the impact of inflation on the nominal grant amounts.
This merely accounts for the fact that, when inflation is consistently
high, the value of non-monetary assets increases, and the value of the
subsidy that benefits the non-monetary assets also increases. By
converting the subsidy into dollars at the beginning of a high
inflation period, we are taking into account the real value of the
subsidy. To accurately capture that real value, we must adjust the
nominal value from the time that inflation has a measurable impact. In
this case, inflation was significant from the beginning of the
allocation stream, with annual inflation at over 100 percent. If the
adjustment is not made at the beginning of the allocation stream, in
particular during the high inflation period of 1983 through 1986, the
real value of the grant principal is eroded significantly. Therefore,
it is essential that the ECIL grants are dollarized from the beginning
of the allocation stream to preserve the real value of the grant and
the real benefit from those grants to Rotem. Further, Rotem converts
and maintains all of its financial records in U.S. dollars. Thus,
dollarization conforms with Rotem's own business practices. It is also
consistent with the approach followed in Wire Rod from Venezuela (62 FR
at 55014).
Respondents' claim that adjusting for inflation for years prior to
1995 overstates the countervailable benefit because the adjustment has
already been captured in prior reviews, is also without merit. As
explained above, the real benefit in 1995 will be significantly
understated if the adjustment is not made from the beginning of the
allocation stream. Further, the inflation adjustment used in prior
administrative reviews of this order added the rate of inflation to the
discount rate. This approach treats inflation as a benefit in each
year. However, as explained above, inflation increases the real value
of non-monetary assets, such as machinery, over time, and is not a
benefit in each year. Therefore, if anything, the impact of inflation
was underestimated in prior reviews because inflation was only
accounted for in the interest component of the benefit, while the
principal amount remained in constant terms during the entire
allocation period. Furthermore, petitioners correctly note that no
allocation has yet been made for the portion that will be countervailed
in this review, and therefore, the 1995 benefit has not yet been
adjusted and is not overstated. For these reasons, we determine that
dollarization is the most appropriate approach to capture the impact of
inflation on ECIL grants received by Rotem. As noted above, we also
determine that the grants should be dollarized throughout the entire
allocation period.

Comment 11: Privatization of ICL

Respondents allege that the Department's privatization methodology

[[Page 13635]]

is flawed. First, respondents state that each partial privatization of
ICL between 1992 and 1995 was at fair value, and that the privatization
process was highly competitive. Therefore, the stock price of ICL at
the time of privatization reflected all publically available
information about the company, including the fair value of the
subsidies bestowed upon Rotem up to privatization. This means that
investors who form expectations about ICL's projected cash flows would
include the full benefits of the subsidies Rotem received. Accordingly,
respondents argue that because the privatization price reflected the
fair value of ICL, including the fair value of Rotem's subsidies, those
subsidies are fully repaid to GOI with the sale of the company.
Respondents further claim that while ICL was only partially privatized
(51.48 percent of the company has been sold), the private party that
purchased ICL has gained control over the company, including control
over Rotem's business decisions. Thus, the effect on the pricing of
Rotem's products is ``as if none of the subsidies awarded to Rotem
prior to the privatization remain countervailable after the
privatization.''
Petitioners dispute respondents' claim that market forces have
adjusted the selling price of ICL to reflect the full value of Rotem's
subsidies. Even if this were the case, petitioners state that in 1995,
only 24.9 percent of ICL's stock was sold, and therefore, only a
portion of the subsidies could have been reflected in the sale price.
Petitioners also dispute respondents' contention that the issue of
control is a relevant factor in the privatization analysis. Again, even
if control were germane, petitioners note that the GOI still enjoys
``special rights'' to make business decisions, including (1) sales of
company assets, (2) structural changes such as voluntary liquidation,
reorganizations, or mergers that would impair the GOI's special rights,
and (3) investments or holding in shares of subsidiaries. Moreover, the
GOI retains over 48 percent ownership in the ICL.
Department's Position. The issue of whether a fair market value
privatization eliminates previous subsidies has already been addressed
by the Department. Respondents in the certain steel investigations made
similar arguments, stating that, since the fair market price of a
government-owned company must include any remaining economic benefit
from the subsidies, privatization extinguishes all remaining
unamortized subsidies. At the time, we disputed this assertion because
it rests on the assumption that subsidies must confer a demonstrated
benefit on production in order to be countervailable. As we stated,

[T]his is contrary to the CVD law, in which is embedded the
irrebuttable presumption that nonrecurring subsidies benefit
merchandise produced by the recipient over time. In sum, the
countervailable subsidy (and the amount of the subsidy to be
allocated over time) is fixed at the time the government provides
the subsidy. The privatization of a government-owned company, per
se, does not and cannot eliminate this countervailability.

GIA, 58 FR at 37263. This conclusion is also permitted under the change
in ownership provision of the Act, as amended by the URAA. The SAA
specifically states that the Department retains ``the discretion to
determine whether, and to what extent, the privatization of a
government-owned firm eliminates any previously conferred
countervailable susidies.'' SAA at 258. This is the conclusion we
reached in a recent countervailing duty proceeding, where we noted that
the Act ``purposely leaves the Department with the discretion to
determine the impact of a change in ownership on the countervailability
of past subsidies.'' Certain Hot-Rolled Lead and Bismuth Carbon Steel
Products from the United Kingdom, 61 FR 58377, 58379 (November 14,
1996).
We also disagree with respondents contention that, while ICL was
only partially privatized, by virtue of the private party's control
over the company, all of Rotem's prior subsidies are extinguished. As a
preliminary matter, the Department has always applied it's
privatization methodology to changes in ownership which resulted in the
transfer of control from one party to another. See e.g., Final
Affirmative Countervailing Duty Determination; Certain Steel Products
From the United Kingdom, 58 FR 37393 (July 9, 1993) and Final
Affirmative Countervailing Duty Determination: Steel Wire Rod From
Trinidad and Tobago, 62 FR 55003 (October 22, 1997).
Furthermore, respondents claim that the transfer of control has an
effect on the pricing of Rotem's products, so that none of the
subsidies awarded to Rotem prior to the privatization remain
countervailable after the privatization, is also without merit. As we
noted in the GIA, the Department does not, and is not permitted to
undertake an analysis of the effect of subsidies. In particular, we
stated `` the Department does not take account of subsequent
developments that may reduce any initial cost savings or increase in
output from a subsidy.'' GIA, 58 FR at 37261; see also, SAA at 256.
Therefore, whether and to what extent the pricing of Rotem's products
changes as a result of ICL's partial privatization is irrelevant for
determining whether Rotem's previously bestowed subsidies remain
countervailable. In any case, the Department's determination that
previously bestowed subsidies may continue to benefit the privatized
company during an arm's length transaction, has been upheld by the
Court of Appeals of the Federal Circuit. See Saarstahl AG v. United
States, 78 F.3d 1539, 1544 (Fed. Cir. 1996). For these reasons, our
preliminary finding with respect to ICL's partial privatization will
remain unchanged in these final results.

Comment 12: The Privatization Methodology

According to respondents, the Department's gamma methodology is
flawed. In particular, respondents state that the gamma is incorrectly
based on the average ratio of annual subsidies to Rotem's net worth.
Therefore, the Department is considering the annual flow of subsidies
to Rotem. However, the net worth in a given year reflects the
accumulated value of Rotem's equity. According to respondents, this
results in an undervalued gamma ratio. Therefore, respondents contend
the gamma calculation should consider the stock of countervailable
subsidies at the time of the privatization. This would be done by
dividing the total bestowed subsidies accumulated up to the
privatization by Rotem's equity capital just prior to ICL's
privatization.
Respondents also contend that the Department's gamma percentage is
understated because the denominators used in the gamma calculation are
expressed in adjusted U.S. dollars while the numerators are nominal
Shekel values. According to respondents, because the denominators (the
net worth amounts) are expressed in adjusted U.S. dollars, they reflect
inflation, while the grant amounts, the numerators, are expressed in
nominal terms. Therefore, respondents suggest the Department use Rotem
nominal net worth amounts submitted in the case brief. Alternatively,
respondents assert that the Department should convert the ECIL grants
into dollars at the exchange rate on the day of receipt of the grants.
Petitioners argue that the Department's gamma calculation used
Rotem's audited financial statements, which are an accurate tool for
this calculation. Petitioners further state that Rotem should not be
permitted to submit new net worth figures, after the Department has
conducted verification.

[[Page 13636]]

Department's Position. The gamma calculation attempts to derive a
reasonable historic surrogate for the percent that subsidies constitute
of the company's net worth in the year prior to privatization.
Respondents' proposed modification of the gamma calculation is flawed
because it incorrectly compares the value of Rotem's accumulated
subsidies in the year before privatization to the company's net worth
in that year. Such a comparison overstates the value of the subsidies
in relationship to the company's net worth because it assumes that a
company's net worth increases in direct proportion to the value of the
subsidies received by that firm. However, this is not the case, as
those values are depreciating from year to year. Simply stated,
respondents comparison ignores the fact that the value of subsidies is
eroding over time, i.e., a subsidy received in 1986 does not have the
same relative value as a subsidy received in 1994. Therefore,
respondents' approach overvalues the subsidies and thus grossly
overstates the ratio of Rotem's subsidies to net worth in the year
prior to privatization.
Although we also disagree with respondents' argument that the gamma
percentage is understated because the denominator is expressed in
adjusted U.S. dollars and the numerator in nominal shekels, this issue
is now moot because we have dollarized the ECIL grants.

Final Results of Review

In accordance with 19 CFR 355.22(c)(4)(ii), we calculated an
individual subsidy rate for each producer/exporter subject to this
administrative review. For the period January 1, 1995 through December
31, 1995, we determine the net subsidy for Rotem to be 8.93 percent ad
valorem.
We will instruct the U.S. Customs Service (``Customs'') to assess
countervailing duties as indicated above. The Department will also
instruct Customs to collect cash deposits of estimated countervailing
duties in the percentages detailed above of the f.o.b. invoice price on
all shipments of the subject merchandise from reviewed companies,
entered, or withdrawn from warehouse, for consumption on or after the
date of publication of the final results of this review.
Because the URAA replaced the general rule in favor of a country-
wide rate with a general rule in favor of individual rates for
investigated and reviewed companies, the procedures for establishing
countervailing duty rates, including those for non-reviewed companies,
are now essentially the same as those in antidumping cases, except as
provided for in Sec. 777A(e)(2)(B) of the Act. The requested review
will normally cover only those companies specifically named. See 19 CFR
355.22(a). Pursuant to 19 CFR 355.22(g), for all companies for which a
review was not requested, duties must be assessed at the cash deposit
rate, and cash deposits must continue to be collected at the rate
previously ordered. As such, the countervailing duty cash deposit rate
applicable to a company can no longer change, except pursuant to a
request for a review of that company. See Federal-Mogul Corporation and
The Torrington Company v. United States, 822 F.Supp. 782 (CIT 1993) and
Floral Trade Council v. United States, 822 F.Supp. 766 (CIT 1993)
(interpreting 19 CFR 353.22(e), the antidumping regulation on automatic
assessment, which is identical to 19 CFR 355.22(g)). Therefore, the
cash deposit rates for all companies except those covered by this
review will be unchanged by the results of this review.
We will instruct Customs to continue to collect cash deposits for
non-reviewed companies at the most recent company-specific or country-
wide rate applicable to the company. Accordingly, the cash deposit
rates that will be applied to non-reviewed companies covered by this
order are those established in the most recently completed
administrative proceeding, conducted pursuant to the statutory
provisions that were in effect prior to the URAA amendments. See 61 FR
28841. These rates shall apply to all non-reviewed companies until a
review of a company assigned these rates is requested. In addition, for
the period January 1, 1995 through December 31, 1995, the assessment
rates applicable to all non-reviewed companies covered by this order
are the cash deposit rates in effect at the time of entry.
This notice serves as a reminder to parties subject to
administrative protective order (APO) of their responsibility
concerning the disposition of proprietary information disclosed under
APO in accordance with 19 CFR 355.34(d). Timely written notification of
return/destruction of APO materials or conversion to judicial
protective order is hereby requested. Failure to comply with the
regulations and the terms of an APO is a sanctionable violation.
This administrative review and notice are in accordance with
section 751(a)(1) of the Act (19 U.S.C. 1675(a)(1)).

Dated: March 9, 1998.
Robert S. LaRussa,
Assistant Secretary for Import Administration,
[FR Doc. 98-7352 Filed 3-19-98; 8:45 am]
BILLING CODE 3510-DS-P

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-7352. Public record. Not legal advice.