BINATIONAL PANEL REVIEW
PURSUANT TO
THE NORTH AMERICAN FREE TRADE AGREEMENT
Article 1904

IN THE MATTER OF:

Certain corrosion resistant steel sheet products originating in or exported from the United States of America
(Continued)

VII. INCOME RELATED TO ANTITRUST SUIT - BESSEMER & LAKE ERIE RR CO. (LTV)

Complainants argue that if the cost of settling the B&LE suit is deemed a cost of producing steel for USS, then the settlement in favour of the LTV in the same law suit should be considered a reduction in LTV’s costs of producing steel.

The Deputy Minister rejects Complainants’ argument on the ground that LTV submitted no evidence showing that it had taken any settlement proceeds into income during the period of investigation. The Deputy Minister cites to an LTV filing for the third quarter of 1993 which, referring to the B&LE settlement, states the "Company has not recognized any income or proceeds related to this contingent asset..."³⁰

Other evidence from USS’s records shows that USX did make a partial payment to ³¹ LTV in the last days of 1993. There is, however, no corresponding document from LTV showing when the payment was received or recognized. In either event, no payment was made, recorded or recognized during the period of investigation, January through June 1993. Accordingly, the Panel finds the Deputy Minister was not unreasonable in his evaluation of the evidence and the Panel affirms.

There is in principle no necessary relationship between the accounting treatment accorded the liability by USX Corporation and that reflected on the books of the judgment creditor. What is prudent recognition of a liability by the judgment debtor may be a premature taking into income by the judgment creditor.

In affirming the Deputy Minister’s position that the evidence does not support LTV’s claim, the Panel finds it unnecessary to address whether SIMA would have permitted or required the Deputy Minister to reduce LTV’s cost of producing steel because settlement money paid to it by USS was considered a cost to USS of producing steel.

VIII. CHANGES TO ALLOCATIONS

A. Energy Buyers v. USX

In 1992 an arbitrator issued an award against USX in a case titled Energy Buyers v. USX Corp. USX fully accrued this charge to the US Steel group in 1992; according to USX, in a previous investigation the Deputy Minister attributed the full charge to the cost of production for that year. In 1993, USX settled the matter for an amount less than the award. Most of the settlement was to be paid in 1993; some of it would be paid in 1994 and 1995.

U.S. Steel argued that savings from the settlement should be recognized as a credit in 1993, thereby reducing the cost of its sales during the period of investigation. The Deputy Minister disagreed, stating that "[i]t is the Department’s position to recognize these expenses when they are incurred" and that "[t]he [amount in question] is clearly not attributable to the P.O.I."³² The Panel upholds the Deputy Minister’s decision. U.S. Steel had accrued in 1992 what it believed would be the full cost of the settlement, even though the settlement fund would not actually be paid until sometime later. Having already determined that the predicted cost of the settlement would be treated as part of the cost of production in the year in which it was accrued, it is logical that the change in that prediction would affect costs for that year and not costs for some

on a per ton basis and that the Deputy Minister should have followed that approach. Complainant argues that its accounting methodology should have been followed by the Deputy Minister if in accordance with GAAP, barring compelling evidence to the contrary.

However, SIMA does not require Revenue Canada to follow GAAP. Cold-Rolled Steel note 6, at 49. While Article 2.1.1. of the recent 1994 Anti-Dumping Code favours the use of GAAP in the exporting country, it does not require that Revenue Canada apply it. In any event, the GATT’s 1994 Anti-Dumping Code was only adopted by Canada effective January 1, 1995 - after the Final Determination and period of investigation in this matter. subsequent year. The change in the cost of the settlement was not relevant to the cost of steel in 1993, and the Deputy Minister was correct in so deciding.

B. Inland I/N Kote Overhead

Complainants have asserted that the Deputy Minister unreasonably changed the allocations of overhead costs made by Inland and I/N Kote. Inland’s overhead costs had been allocated on a per ton shipped basis. The Deputy Minister allocated them on a cost of goods sold basis.

The Deputy Minister’s methodology was to apportion Inland’s overhead, research, GS&A, interest and other expenses as a percentage of the cost of goods sold. His rationale was that ³³ "the burden placed on each product for these fixed cost items is directly proportional to the cost of the product being produced." The Deputy Minister in particular noted that Inland has a relatively ³⁴ varied mix of steel products.³⁵

The Deputy Minister’s methodology was not unreasonable. While Inland’s approach might be considered reasonable as well, the Panel is not free to substitute another approach - even if more reasonable - than the Deputy Minister’s if his approach is reasonable.

For I/N Kote’s costs, the Deputy Minister did allocate them on a per ton shipped basis. Since I/N Kote does not produce the mix of products which Inland does, the Deputy Minister was reasonable in this approach since there was no concern that the per tonnage basis would not accurately reflect the cost of the subject goods.

The other reason which the Deputy Minister gave for choosing a per ton basis for I/N Kote was the difficulty in determining the cost of its total sales. Inland and Nippon Steel are equal partners in I/N Kote. The partnership agreement between them sets out how the cost of substrate supplied by Inland to I/N Kote shall be determined. Inland supplies all of the steel for I/N Kote at a transfer price which the Deputy Minister reasonably found [ ].³⁶ VIII. C. Exclusion of Joint Venture Profits from Cost of Production (LTV) During the period of investigation, LTV paid a tolling fee to two electrogalvanizing ventures for them to finish steel supplied by LTV. LTV Steel is a joint venturer in both operations with a 50% ownership in one and 60% in the other. Those ventures are referred to as LS-II and LSE/EGL. LTV submitted in its filings before the Deputy Minister that LTV’s profits from the joint ventures should have been excluded from the calculation of LTV’s cost of producing steel. The Deputy Minister agreed that it was appropriate to reduce the tolling fee by the amount of profit returned to LTV from the joint venture and did so for LS-II based on evidence from LTV’s internal books. However, for LSE/EGL, the Deputy Minister argued that he was unable to determine from LTV’s internal books what LTV’s profit was. In addition, LTV did not file the profit and loss statements of the joint venture.

LTV argues that it was unable to file the financial statement because it did not have the consent of the joint venture partner. Instead, the partner agreed to let the Deputy Minister look at the financial statement in Cleveland, Ohio, but not take away copies. LTV also argues that the Deputy Minister could have derived the profit from LTV’s books. The Panel affirms the Deputy Minister’s action. The Panel reviewed closely the evidence cited by LTV to prove LTV’s profit in LSE/EGL. The Panel agrees with the Deputy Minister that the evidence is inconclusive and does not prove what the profit was. We also find the Deputy Minister was not unreasonable in not travelling to Cleveland to look at the joint venture’s financial statements. It is unfortunate that the joint venture partner would not consent to the filing of the statements. However, the Deputy Minister cannot be faulted for requiring LTV to file evidence supporting its position for inclusion in the record.

IX. INCOME OFFSET

A. Use of Financing Income to Offset Financing Expenses (LTV and Inland) Facts

The Deputy Minister found that LTV’s short term interest income was related to steel production. Following the Cold Rolled Steel Panel decision, it then offset the income against LTV Steel and its affiliate LTV Management Group’s interest expenses down to zero. Since interest income exceeded expenses, some interest income was not applied as an offset to reduce LTV’s steel production costs. Complainants allege that the excess interest income should have been applied to reduce other costs such as plant or corporate overhead.

Inland’s interest from short term investments was not used as an offset because the Deputy Minister found no evidence the income was related to steel operations. Complainants argue

that since the segment of Inland under investigation only produces steel, the cash used to make the investment had to come from steel revenues and, therefore, should have been used as an offset. The Cold Rolled Steel decision on offsets In Cold Rolled Steel decision, the Panel rejected the Deputy Minister’s statement that SIMA does not permit the calculation of net costs in Section 16(2)(b) and 19(b) calculations. The Panel then considered several income items, specifically pension credits and interest income. Regarding pension credits, the Panel found that "the pension plan, both on the cost and on the income sides, forms an integral whole which related directly to steel workers and, therefore, to steel production. . . . The nature of the true cost of a pension plan makes it necessary to consider income accrued from the plan". The Panel also found that it was reasonable to apply ³⁷ pension income only as a reduction to pension costs. "Just as revenue from scrap is used to calculate the cost of raw materials and income from operating bank accounts helps determine the cost of interest expenses, so should the pension fund income be used to determine the cost of pensions"^.38

The reason for restricting the use of pension income was to avoid the unintended result of reducing the cost of steel production to zero by virtue of "well invested pension fund credits".³⁹

Regarding interest income, and following a remand and instructions from the Panel, the Deputy Minister offset interest income against interest expenses where it found evidence on the record that the income was related to steel production or to interest expense that had been deemed related to steel production. The language of the Panel’s Opinion remanding the Final Determination

and the Panel’s Opinion following remand require that the income item be matched to an expense ⁴⁰ item, such as steel related interest income to steel related interest expense. However, in that case, the interest income was not greater than interest expenses. Therefore, the question did not arise, as it did for pension income, whether the category of "interest" expense or cost could result in a credit that could be used to offset other expenses. The question also was not addressed as to whether "interest expense" as a cost category was overly narrow. Discussion The facts in this case require the Panel to consider the reasonableness of the Deputy Minister in (1) limiting LTV’s interest income to an offset of interest expense only and (2) deciding that Inland’s interest income was not proven to be related to steel production. The Deputy Minister, citing to language from Cold Rolled Steel states that interest income can be offset only where it is "related to financing or interest costs deemed to be related to the production of steel". In response, Complainants’ allege that the Deputy Minister has interpreted ⁴¹ the Cold Rolled Steel so narrowly that it would be "essentially impossible to obtain a credit". The ⁴² important factor, according to Complainants, is whether the income is related to steel production, not whether it can be factually linked to an expense item.⁴³ The Participants’ disagreement lies in whether and how closely linked or matched an income item must be to a cost for it to be properly considered for offset. In the Cold Rolled Steel

production than the expense item it offsets. Thus if income relates to an item already determined to be related to steel production, then it seems reasonable that the income should also meet the steel production relationship test.

Panel decision, the question of appropriate categories did not arise because interest income was less than interest expense. There was no need to ask whether the category of "interest expense" was unreasonably narrow.

The Deputy Minister argues that SIMA requires him to build costs, not to calculate income. The Panel agrees. Section 16(2)(b) of SIMA refers to the "cost of production," and ⁴⁴ Section 19(b) requires the construction of "the cost of production, an amount for administrative, selling, and all other costs. . . ." Thus, it is not the net income of the company that matters, but the costs attributable to the subject goods. These costs, of course, may be lowered by a related item of income; but this means that if a steel related income item is considered in the construction of production costs, the income item must be matched against some category of cost. The product must cost something. On the other hand, it makes no sense to require automatically that income arise out of or flow from the same transaction that gave rise to the expense. If that were the test, steel scrap revenues could not be offset against material costs. If an income item is appropriate for offset, it must relate in a reasonable, but not overly restrictive way, to a cost or even groups of costs of producing the product in question. It must also itself relate to subject goods.⁴⁵

Complainants point out that there is no "unity of accounting" for financial items such as there is for pension costs. For LTV, financial income and expense items were taken from LTV Steel Corporation as well as from LTV Management Corporation and "bundled" into a package of financing items. Complainants argue that the interest income which is related to steel production should not be limited to offsetting interest expense but should be used as well to offset either plant overhead or corporate overhead costs depending upon the source of the income.

The Panel believes there must be a reasoned analysis behind the category selection for offset purposes. The Deputy Minister’s stated reason in the record for limiting interest income to an offset of interest expense only, was that in the Cold Rolled Steel Panel decision, pension income was allowed as an offset against pension expense only. However, that Panel gave very specific reasons ⁴⁶ why the pension program should be considered as one unit. Those reasons do not apply to interest. It may be that it is reasonable to limit interest income offsets to interest expense, but the Deputy Minister has not supplied the rationale. Short term financing income is cash available to operations that a company could consider in costing its products. It may or may not be that the income is an appropriate offset to a broader category of cost than interest expense. The Panel does not believe that it should formulate reasons for the Deputy Minister. It is the responsibility of the Deputy Minister, rather than NAFTA panels, to fine-tune SIMA interpretations as they relate to specific facts. Therefore, the Panel remands for further consideration and policy formulation by the Deputy Minister the question of whether LTV’s interest income should be offset against a wider category of cost than interest expense.

With respect to Inland, the facts are not entirely clear. In the investigation, the Deputy Minister did not consider certain short term interest income for offset on the grounds that (1) Inland did not ask for the offset and (2) there was no evidence that the income is related to steel operations. In his brief, the Deputy Minister states that Inland did not establish that "this income ⁴⁷ was related to financing or interest costs related to steel operations". In reply, Complainants argue ⁴⁸ that the Inland Steel Flat Product Company only produces steel and that the interest income "could only have come from the sale of steel and. . . is therefore related to the production of steel".⁴⁹ Complainants argue the income should be offset against the administrative expenses of Inland.

The Panel cannot determine for certain whether any interest costs were charged to Inland’s Section 16(2)(b) and 19(b) costs. The briefs suggest that there were none although the record indicates otherwise. In either event, the threshold question is the reasonableness of the Deputy Minister’s factual determination that no evidence showed that the interest income related to steel production. The record does not provide detail about the interest. However, given the business of the company, which is amply supported by the record, the Panel finds it difficult to imagine that the ⁵⁰ interest income had any source other than returns from the short term investment of steel revenues. The Panel, therefore, remands the issue of short-term interest income for Inland with the following instructions:

1. If interest expense has been charged to Inland’s Section 16(2)(b) and 19(b) costs, then it should be offset by the amount of short-term interest income, unless there is evidence on the record that the interest income is not related to steel production.

2. If no interest expense has been charged to Inland’s costs, then the short-term interest income (unless it is not related to steel production), should be treated in the same way that the Deputy Minister determines to treat LTV’s interest income which is in excess of interest expense.

B. Offset of Pension Costs (Inland)

Complainants allege that a pension credit should have been applied to reduce Inland’s pension costs. The Deputy Minister, following the rationale in Cold Rolled Steel agrees that it is appropriate in certain circumstances to offset pension costs with pension income. However, the Deputy Minister interpreted Inland’s evidence to mean that the pension credit already represented a netting out of pension costs. Since the Cold Rolled Steel Panel approved the offsetting of pension costs down to, but not below, zero, the Deputy Minister did not recognize the pension credit in his calculation of Inland’s costs of production.

The Panel closely reviewed confidential evidence claimed by Complainants to prove that pension costs had not already been offset by pension income. The Panel, however, is unpersuaded by that evidence that the Deputy Minister’s conclusion was unreasonable. The Panel affirms.

Complainants also ask the Panel to remand the pension credit issue to permit Inland to submit additional evidence. They point out that prior to the Cold Rolled Steel decision, the Deputy Minister did not offset pension costs by pension income. Since that decision was released only days before the final determination in this investigation, Inland allegedly did not specifically submit all evidence in its favour on this point.

In the interest of finality, the Panel declines to remand and order the reopening of the record on this issue. Should there be a subsequent review by the Deputy Minister, Inland will have an opportunity to submit all relevant evidence at that time.

C. Bankruptcy Costs and Credit for Emerging From Bankruptcy (LTV)

Complainants argue that if LTV’s costs related to reorganizational bankruptcy are charged to the production of steel, then those costs should be offset by a certain extraordinary credit recorded by LTV upon emerging from bankruptcy. The Deputy Minister included LTV’s bankruptcy costs in the cost of steel production, but declined to offset them with the credit.

In considering LTV’s bankruptcy costs, the Cold Rolled Steel found that the costs, while unusual, "relate directly to the general operation of the company. Their inclusion as part of general corporate overhead that can be attributed to steel production provides a more accurate assessment both of the profitability of the steel operation and of its constructed costs". This Panel ⁵¹

finds the reasoning equally valid here and affirms as reasonable the Deputy Minister’s inclusion of bankruptcy expenses in LTV’s costs of production. The Panel also affirms the Deputy Minister’s decision not to offset the costs with the extraordinary credit. When LTV emerged from bankruptcy, it was able to settle many of its 1986 and earlier pre-petition liabilities for less than previously recorded. Since the liabilities had been carried on its books, LTV took a credit for the difference and showed it as an "extraordinary gain on debt discharge".⁵²

The Deputy Minister argues that before it will consider an offset to cost, the income offset (1) must be related to an expense and (2) must be available to the employer to reduce the cost in the period. He further argues that the debt discharge credit does not meet these tests: First, the ⁵³ credit has no impact on and is not related to the bankruptcy expenses, which were the costs of running LTV’s business during bankruptcy or to any other expense; Second, the credit does not generate income which could be used to pay or reduce current liabilities. The Deputy Minister’s analysis is not unreasonable and the Panel affirms. As stated earlier, SIMA requires the Deputy Minister to calculate the "cost" of producing the product under investigation. In some circumstances, an income item must be considered before the cost of an item or category can be calculated. While the debt discharge significantly reduces the company’s liabilities and improves its ability to continue in business, it is difficult to see how if affects the day-to-day costs involved in producing steel during the period of investigation.

X. DATE OF SALE

The complainants Inland, I/N Kote and LTV maintain that the Deputy Minister, in performing the costs’ analysis, employed a date of sale prior to the date of the actual sale, in law. The Deputy Minister maintains that his decision to consider the order confirmation date as the date of the sale for the final determination is supported by evidence submitted by Inland, I/N Kote, and LTV during the investigation and which is on the administrative record. Specifically, the Deputy Minister maintains that in response to questions B6 (Sale to Canada - Appendix 1) and C4 (Domestic Sales of Like Goods - Appendix 2), Inland, I/N Kote, and LTV clearly selected, reported and listed the order confirmation dates as the dates of sale as shown in their respective work sheet headings entitled "Date of Sale".⁵⁴

The Panel has reviewed the record and finds that at no time during the investigation did any Complainant advise the Deputy Minister that there was an issue with respect to the date of sale. No one appears to have advanced this argument or voiced any opposition to Revenue Canada’s date of sale methodology at any point prior to the panel proceedings, including during verification visits, responses to supplementary requests for information, and other meetings.⁵⁵ Furthermore, as is pointed out in the response brief of Stelco Inc., the request for information that was sent out by the Deputy Minister to the producers of the subject goods contains the following definition: Date of Sale - The date of sale is generally considered to be the date that the parties reach an agreement to purchase and sell the goods in question.

The date of the confirmation of the Order is usually recorded as the date of sale. Thus the complainants were on notice of the usual interpretation of the term "Date of Sale".

If they believed that the usual interpretation was inapplicable to the facts of their particular operations, they needed to bring this to the attention of the Deputy Minister. Accordingly, the Panel finds the Deputy Minister’s decision to consider the order confirmation date as the date of sale is supported by evidence on the administrative record that was submitted by Inland, I/N Kote and LTV during the investigation and was, consequently, reasonable. Indeed, the record indicates that the Deputy Minister simply relied on the data reported by the complainants as the date of sale. The panel affirms the Deputy Minister’s decision.

XI. CONCLUSION AND ORDER

For the reasons stated above, the Deputy Minister’s determination is hereby affirmed in part and remanded in part.

The results of this remand shall be provided by the Deputy Minister to the Panel within 45 days of this decision.

SIGNED IN THE ORIGINAL BY:

William E. Code, Chair

Harry First

D. Michael M. Goldie

Kathleen F. Patterson

Robert E. Ruggeri

Issued on the 23^rdday of June, 1995.  

¹ Canada Gazette, Part 1, July 16, 1994 [Volume 128, no. 29].

² SIMA, s.19(b). One reason why the Deputy Minister might be unable to determine normal value by looking at prices in the exporter’s home market is that the Deputy Minister must exclude sales "that do not provide for recovery

³ Special Import Measures Regulations, SOR 84/927, s.11(a), (c).

⁴ In the Matter of: Certain Beer Originating in or Exported from the United States of America by G. Heilman Brewing Co., Inc., Pabst Co., and the Stroh Brewery Co. for Use or Consumption in the Province of British Columbia, CDA-91-1904-01, 1992 FTAPD LEXIS 3(1992) Q.L. [1992] F.T.A.D. No. 4.

⁵ In the Matter of: Final Determination of Dumping Made by the Deputy Minister of National Revenue, Customs and Excise, regarding Gypsum Board Originating in or Exported from the United States, CDA-93-1904-01, 1993 FTAPD LEXIS 17 (1993), Q.L. [1993] F.T.A.D. No. 5.

⁶ In the Matter of: Final Determination of Dumping Regarding Certain Cold-Rolled Steel Sheet Originating in or Exported from the United States of America, CDA-93-1904-08, 1994 FTAPD LEXIS 12 (1994), Q.L. [1994] F.T.A.D. No. 6.

⁷ Gypsum, supra, note 5, at 25.

⁸ Id. at 26.

⁹ Id. at 27 (emphases added).

¹⁰ Id. at 29.

¹¹ Id. at 26.

¹² Id. at 29.

¹³ Cold-Rolled Steel at 23.

¹⁴ Id. at 24.

¹⁵ Id. at 25.

¹⁶ Id. at 28.

¹⁷ Id. at 23 - 24 (footnote omitted).

¹⁸ Id. at 28.

¹⁹ Exporter Summary at 11 and 13, Administrative Record, Index Page 103, Tab A, p. 417, 418.

²⁰ Administrative Record, Index Page 130 at p. 43 (SEC form 10-K, USX Corp.).

²¹ Complainant also argues that even if it is related to the subject goods, the B&LE litigation

²² Preliminary Exporter Summary at 12, Administrative Record, Index Page 103, Tab A, p. 418.

²³ Brief of the Deputy Minister of National Revenue for Customs and Excise at paras.72 and 73.

²⁴ Gypsum at 27.

²⁵ See 26 U.S.C. 9706 et seq.

²⁶ Cold Rolled Steel at 24.

²⁷ Id. at 25.

²⁸ It was not suggested to us that any accounting principle required the interest liability to be given any different treatment than that accorded the principal sum.

²⁹ Deputy Minister’s Brief at para. 65.

³⁰ Index p.38 at 120.

³¹ See U.S. Steel Group 1993 Annual Report, Index p. 103 at 240, 323.

³² Final Exporter Summary at 5, Administrative Record, Index Page 103 Tab J, p. 48. We note that in making its decision, the Deputy Minister did not rely on, or refer to, Generally Accepted Accounting Principles (GAAP) relating to prior period adjustments. Accordingly, our review of the decision is made without expressing any opinion on whether the Deputy Minister’s decision is in accord with such principles.

³³ Preliminary Exporter Summary at 11, Administrative Record Index Page 36, Tab U, p. 60.

³⁴ Id. at 11-12.

³⁵ Inland also argued that on its books the costs had been allocated in accordance with GAAP

³⁶ Exporter’s Summary, supra, note 33 at 3, (emphasis in original).

³⁷ Id. at 44-45.

³⁸ Id. at 45.

³⁹ Id.

⁴⁰ See Id. at 7, 48 and 49 and In the Matter of Final Determination of Dumping Regarding

⁴¹ Certain Cold-Rolled Steel Sheet Originating in or Exported from the United States of America, Panel No. CDA-93-1904-08 at 13-14. Deputy Minister’s Brief at paras. 179-180.

⁴² Reply Brief at para. 68.

⁴³ Id. at para. 69.

⁴⁴ Deputy Minister’s Brief at paras. 177-178; Transcript of Oral Argument at 208-209.

⁴⁵ However, an income item should not be subject to a higher standard of linkage to steel

⁴⁶ Administrative Record, Index Page 57, p. 68.

⁴⁷ Administrative Record, Index Page 37, p. 46.

⁴⁸ Deputy Minister’s Brief at para. 185.

⁴⁹ Reply Brief at para. 69.

⁵⁰ Administrative Record, Index Page 36, pp. 1-24.

⁵¹ Cold Rolled Steel at 23.

⁵² Administrative Record, Index Page 38, p. 109.

⁵³ Deputy Minister’s Brief at para. 194.

⁵⁴ Administrative Record, Index Page 33, Tab P, pp. 66-297 (I/N Kote); Administrative Record,

⁵⁵ Index Page 29, Tab N, pp. 202-253 (Inland Steel); Administrative Record, Index Page 40, Tabs 12, 13, pp. 66-121 (LTV Steel). Administrative Record, Vol. 36, Tab Y, Z, pp. 71-72.