F. Free-of-Charge Inputs
Respondents may report that they received from their U.S. customer(s) specific direct material or packaging inputs free of charge, and used these inputs to produce or pack the merchandise under investigation/review during the POI/POR.
Sections 773(c)(1)(B) and (3)(B) of the Act require the Department to value all inputs used to produce the merchandise under investigation/review. For purposes of constructing NV, the Department does not distinguish between purchased inputs and free-of-charge inputs. Accordingly, the Department will normally value the free-of-charge inputs by using a surrogate value for purposes of constructing NV. However, if the respondent sufficiently documents its claim that a free-of-charge input was received from its U.S. customer, in accordance with the criteria noted below, the Department will make an offsetting adjustment to the respondent’s reported U.S. price to include the value of the free-of-charge input.47
To sufficiently support its claim, a respondent must provide documentation which demonstrates that: (1) its U.S. customer(s) contracted with a third party for the purchase of the inputs in question and that the third party delivered the inputs to the respondent or its producer in a certain quantity on a certain date; (2) payment in full for the input(s) in question was made by the U.S. customer(s); and (3) the free-of-charge inputs were used in the required quantities for the respondent’s sales of subject merchandise to the applicable U.S. customers during the POI/POR (i.e.
, there must be a link between the consumption of the free-of-charge input and the sale of subject merchandise). Furthermore, the respondent must affirmatively state that the price to the U.S. customer is exclusive of the free-of-charge inputs. If these requirements are met, then the Department will normally make an upward adjustment to the U.S. sales price of the applicable sales transactions to reflect the U.S. customers’ expenditures for the free-of-charge inputs.
G. By-Product Offsets
In certain instances, a respondent will report by-products from producing the subject merchandise which it claims it either re-sold or re-used during the POI/POR. In those instances in which the respondent provides sufficient documentation to support its by-product claim, the Department allows a recovery/by-product credit in accordance with the Department’s practice.48
For this purpose, the Department grants an offset by deducting the surrogate costs for such by-products from the NV calculation.
2. Requirements for Claiming By-Product Offsets
The Department’s general practice is to grant offsets to NV for by-products which result from the final stage as well as from intermediate stages of production.49
Respondents are required to describe the disposition of the by-products
, and, if they are sold or returned to production, provide evidence thereof. Furthermore, they must explain any further processing of the by-products, and list the factors and quantities thereof used in the further processing. The Department subtracts from any offset the surrogate value of the further processing.
The Department’s general practice is to treat by-products in a manner consistent with the treatment by the surrogate company for the calculation of financial ratios50
in order to ensure that financial ratios and the costs to which they are applied are calculated in a consistent manner.51
For example, if the financial reports used to derive the surrogate financial ratios indicate that all
of the selected companies accounted for revenue from by-products as a credit to sales rather than as a debit to cost of manufacture, then the Department will deduct the by-product offset from NV after applying the surrogate financial ratios to cost of manufacture.52
H. Intermediate Inputs
Generally, subject merchandise is valued using the actual amounts of the factors utilized by the producer of the subject merchandise. If a producer of subject merchandise produces an intermediate product which it then uses in the production of subject merchandise, the Department usually values the purchased inputs used to produce the intermediate product, not the intermediate input itself.53
If a producer of subject merchandise obtains a factor of production from a supplier with which it is not
considered a single entity, even if the two companies are affiliated, the Department normally values the individual factor at the stage in which it is consumed by the producer of subject merchandise.
Conversely, if the producer of subject merchandise obtains a factor from a supplier with which it is
considered a single entity, the Department will generally value the inputs used by the supplier to make the producer’s factor of production. In other words, the factor obtained from the affiliated supplier is treated as an intermediate product of the collapsed single entity.
2. Practice Under the Applicable Statutory and Regulatory Provisions
The Department’s general policy, consistent with Section 773(c)(1)(B) of the Act, is to value the factors of production that a respondent uses to produce subject merchandise. If the NME respondent is an integrated producer, the Department takes into account the factors utilized in each stage of the production process.54
This is also in accordance with the Act and the Department’s regulations, which provide that in NME cases, the Department normally will calculate NV by valuing the Anonmarket economy producers’
factors of production in a market economy country.55
However, when it is proper to value the intermediate products of a producer, but no suitable surrogate values for the intermediate product exist on the record, the Department may look to other reliable valuation methods. One such method may be to value the upstream inputs used in the production of the intermediate product, where information for such valuation can be obtained from the producer’s subcontractor, an affiliated supplier, an unaffiliated supplier, or other sources of information, as appropriate.56
3. Practice With Respect to Valuing Intermediate Inputs
Generally, if the NME producer of subject merchandise is integrated, such that it self-produces a material input used in the manufacture of subject merchandise, the Department will take into account the factors utilized in each stage of the production process of that material input.57
In other words, the Department generally values any inputs obtained by the producer (i.e.
, purchased or otherwise obtained from an outside source) and used in producing intermediate inputs
, which are then used in the manufacture of subject merchandise. For example, in the case of preserved mushrooms from the PRC produced by a fully integrated firm
, the Department valued the factors that the producer used to grow the mushrooms, the factors it used to further process and preserve the mushrooms, and any additional factors the producer used to can the mushrooms, including any factors used to manufacture the cans (if produced in-house) because these factors reflected the subject merchandise producer’s own experience in the production of canned mushrooms.58
In certain instances the Department may not value the inputs to an intermediate factor produced by an integrated producer. These instances are determined on a case-by-case basis depending on the facts of the case. For example, in some cases, a respondent may report inputs used to produce an intermediate factor of production that accounts for a small share of total output. The Department recognizes that, in such cases, the increased accuracy in the Department’s overall calculations that would result from separately valuing each of those inputs may be so small as to not justify the burden of doing so. Therefore, in such situations, the Department would value the intermediate factor of production directly.59
In other cases, the Department may determine that valuing the inputs used in a production process yielding an intermediate product would lead to an inaccurate result because a significant element of cost would not be adequately accounted for in the overall factors buildup. For example, in the case of carbon and alloy steel wire rod from Ukraine, the Department addressed whether it should value the respondent’s factors used in extracting iron ore, an input to its wire rod factory. In that case, the Department determined that, if it were to value the extracting factors, the Department would not sufficiently account for the capital costs associated with the iron ore mining operation given that the surrogate used for valuing production overhead did not have mining operations. Therefore, because ignoring this important cost element would distort the calculation, the Department declined to value the inputs used in mining iron ore and valued the iron ore instead.60
Finally, in the case of fresh garlic from the PRC
, the Department determined that the books and records maintained by the respondents did not report or account for all of the relevant information and did not allow the respondents to identify all of the factors of production necessary to grow and harvest garlic. Accordingly, in order to eliminate distortions in the calculation of NV, the Department valued the intermediate product for all companies, rather than valuing all the inputs (e.g.
, garlic seed, pesticides, herbicides, fertilizer, plastic film, water and growing/harvesting labor hours) used to produce the intermediate product.61
Inputs Purchased from Affiliated Suppliers
When both producer and supplier are separate legal entities, a finding of affiliation between a producer and its supplier does not, in and of itself, justify a departure from the Department’s standard practice of valuing the factors of production consumed by the producer of subject merchandise.62 Moreover, in the remand of a case involving foundry coke from the PRC, the Department discussed its practice of not looking beyond the producer of subject merchandise to value the upstream inputs that a supplier uses to produce one of the producer’s factors.63
However, in certain instances, based on the facts on the record of the proceeding, a producer of subject merchandise and its supplier entity may be considered by the Department to comprise a single entity.64
For purposes of its NV calculation, when the producer and supplier are treated as a single entity, the Department may value the inputs purchased or otherwise obtained by the supplier from an outside source and used in producing intermediate inputs, which are then used in the manufacture of subject merchandise. This valuation methodology is analogous to the methodology described above, where the subject merchandise producer is, by itself, an integrated production entity.65
I. Financial Ratios
After the Department calculates the cost of materials, labor and energy in the NV calculation, the Department then adds in the other costs of production through financial ratios calculated, to the extent possible, by using publicly available financial statements of producers of comparable merchandise. 19 CFR 351.408(c)(4) directs the Department to value the respondent’s other costs incurred in the production of subject merchandise (i.e.
, factory overhead, SG&A, and profit) by deriving financial ratios66
from non-proprietary information gathered from producers of identical or comparable merchandise in the surrogate country. Among the surrogate producers of comparable products, the Department prefers to value financial ratios using data from those surrogate producers whose financial data will not be distorted or otherwise unreliable.67
For example, financial data from a surrogate country producer whose production process is significantly different from that of the respondent may be considered inappropriate compared to other available financial statements. Similarly, costs that do not appropriately reflect the respondent’s factory overhead costs and SG&A expenses may be rejected for financial data of another surrogate producer whose production process and costs do appropriately reflect the respondent’s factory overhead costs and SG&A expenses.68
The Department’s criteria for choosing surrogate companies are the: (1) availability of contemporaneous financial statements; (2) comparability to the respondent’s production process; and (3) public availability of information.69
In general, the Department’s preference is to use financial data from surrogate producers which is most contemporaneous with the period of investigation or review if other factors are satisfied (e.g.
, representativeness, specificity
When selecting surrogate producer financial reports for purposes of deriving surrogate percentages, the Department’s general preference is to use, where possible, the financial data of surrogate producers of identical merchandise.71
If there is no publicly available financial data for surrogate producers of identical merchandise, then the Department will use the financial data of surrogate producers of comparable merchandise. While the statute does not define comparable merchandise in selecting surrogate values for overhead, SG&A and profit, the Department has considered whether products have similar production processes, end uses, and physical characteristics. When evaluating production processes, the Department has taken into account the complexity and duration of the processes and the types of equipment used in production.72
In situations where the Department is able to choose among surrogate producer financial reports, the Department has expressed a preference for selecting the surrogate producers whose operations are most similar to those of the NME respondents.73
Moreover, the Department has an established practice of rejecting financial statements of surrogate producers whose production process is not comparable to (i.e.
, significantly different from) the respondent’s production process when more comparable information is available.74
Moreover, the Department’s preference is that the surrogate financial ratios represent the surrogate country’s industry as broadly as possible to minimize the chance of distortion. Therefore, when possible, it is the Department’s preference to use more than one surrogate producer’s financial data to reflect a broader representation of the experience of the surrogate industry.75
c. Publicly Available Information
The Department has expressed a preference to use publicly available financial data containing the level of detail necessary to make adjustments and/or capture all the necessary costs for purposes of calculating accurate financial ratios.76
Financial statements that are not readily available on the company website or through a routine request might not be considered public.
Separately Listed Elements
The financial statements of some surrogates might list depreciation separately rather than including it in factory overhead, or might list interest separately rather than including it in SG&A expenses. In those cases, the Department calculates a depreciation/factory overhead ratio based on the total of the surrogate’s depreciation and factory overhead expenses, and an SG&A ratio based on the total of the surrogate’s interest and SG&A expenses.
VII. Market-Oriented Industry (“MOI”)F. Special Topics1. Market-Oriented Industry (MOI)
Section 773(c)(1) of the Act allows the Department, in certain circumstances, to use the market- economy methodology described in section 773(a) of the Act to determine NV in an NME case. To identify those situations where the Department would use its market economy methodology and calculate NV based on domestic prices or costs in the NME, the Department developed MOI test. The MOI test determines whether the market-economy methodology may be applied only to the specific industry subject to the investigation or review.
Under the Department’s current practice, an affirmative finding of an MOI requires that certain conditions be met using a three-prong test77
For the merchandise under investigation or review, there must be virtually no government involvement in setting prices or amounts to be produced (“Prong 1”);
The industry producing the merchandise under investigation or review should be characterized by private or collective ownership (“Prong 2”);
Market-determined prices must be paid for all significant inputs whether material or non-material (e.g., labor and overhead) and for all but insignificant proportions of all the inputs accounting for the total value of the merchandise under investigation or review. Moreover, if there is any state-required production in the industry producing the input, the share of state-required production must be insignificant (“Prong 3”).
If these conditions are not met, the analyst should treat producers of the merchandise under investigation or review as NME producers, and calculate NV using the NME methodology described in this chapter.
The current MOI test is neither codified in the Act nor in the Department’s regulations.78
The MOI test was first articulated in 1992 in Lug Nuts From China
, 57 FR at 15053-55, and since its inception through 2008, the Department has received occasional requests from industries for consideration of MOI status. However, no industry has yet to be granted MOI status in an investigation or review.
Before applying the three-prong MOI test, a respondent’s MOI request must first meet the initial threshold of representing all or virtually all the producers in the industry in question.79
The request must also be submitted early enough in the proceeding to afford the Department sufficient time to collect and analyze the necessary data.80
Below are the three prongs of the MOI test:
Prong 1: Virtually no government involvement in setting prices or amounts to be produced. There is no definition of how much government involvement constitutes virtually no government involvement.
Prong 2: Private or collective ownership. While there may be state-owned enterprises in the industry, substantial state ownership would weigh heavily against finding an MOI.81
Prong 3: Market-determined prices must be paid for all significant input.