IN THE MATTER OF:

Porcelain-on-steel cookware from Mexico

DECISION OF THE PANEL

APRIL 30, 1996

CINSA, S.A. DE C.V.

Complainants

v.

INTERNATIONAL TRADE ADMINISTRATION,

U.S. DEPARTMENT OF COMMERCE

Respondent

and

GENERAL HOUSEWARES CORP.

Intervenor

Before:

O. Thomas Johnson, Chairman

Victor Carlos Garcia-Moreno

Lewis H. Goldfarb

Kathleen F. Patterson

Alejandro Castaneda Sabido

Irwin P. Altschuler, David R. Amerine, Ronald M. Wisla, for CINSA, S.A. DE C.V.

Stephen J. Powell, Michelle Behaylo, for International Trade Administration, U.S. Department of Commerce

Joseph W. Dorn, Michael P. Mabile, Gregory C. Dorris, Stephen A. Jones, for General Housewares Corp.

I. FACTS

On December 2, 1986, the United States Department of Commerce, International Trade Administration ("Commerce" or the "Department") entered an anti-dumping duty order against Cinsa, S.A. de C.V. ("Cinsa") and another Mexican exporter, Acero Porcelanizado, S.A. de C.V. ("Apsa") in Porcelain-on-Steel Cooking Ware from Mexico, 51 Fed. Reg. 43,415 (1986).

On January 23, 1992, at the request of petitioner, General Housewares Corporation ("GHC"), Commerce initiated this fifth administrative review of the antidumping duties imposed upon Cinsa and Apsa. Porcelain-on-Steel Cooking Ware from Mexico, 57 Fed. Reg. 2704 (1992). The review covered United States imports from Cinsa and Apsa from December 1, 1990 through November 30, 1991. Id. The products at issue were ¹ porcelain- on-steel cooking ware, such as tea kettles that lacked self-contained electric heating elements. Id. In the preliminary results of the fifth administrative review, Commerce established dumping margins of 45.59 percent on Cinsa’s products. Porcelain-on-Steel Cooking Ware from Mexico, 59 Fed. Reg. 6616, 6618 (1994). These results reflected the Department’s use of the best information available ("BIA") to calculate Cinsa’s depreciation expenses. Commerce had made an adverse assumption for revalued depreciation because Cinsa had not provided a methodology to enable the Department to process the data that Cinsa had submitted concerning its fixed overhead cost during the period of review. The Department’s choice of BIA significantly increased Cinsa’s fixed overhead expenses as adjusted for depreciation.

The Department’s use of BIA in the preliminary results prompted Cinsa to provide a "Proposed Depreciation Adjustment" methodology to enable the Department to generate accurate figures for Cinsa’s depreciation cost based upon the revaluation of the Company’s assets. Commerce found Cinsa’s proposed methodology acceptable for calculating depreciation expenses given the data originally submitted in Cinsa’s questionnaire responses.

Commerce published the final results of its fifth administrative review on January 9, 1995, and imposed dumping margins of 27.96 percent. Porcelain-on-Steel Cooking Ware from Mexico, 60 Fed. Reg. 2378, 2381 (1995). The final results reflected the Department’s abandonment of the BIA methodology as well as certain adjustments made in response to other comments that the parties had submitted. On January 13, 1995, Cinsa notified Commerce that the final results contained a computation error. Commerce agreed and published an amended version of its final results on February 8, 1995. Porcelain-on-Steel Cooking Ware from Mexico, 60 Fed. Reg. 7521 (1995). The amended results of the fifth administrative review imposed a dumping margin of 13.35 percent on Cinsa’s exports of the covered products. Id. at 7522.

In this appeal to the Binational Panel established pursuant to Chapter 19 of the North American Free Trade Agreement ("NAFTA"), both GHC and Cinsa challenge certain aspects of the methodology that the Department employed in the fifth administrative review. GHC challenges (1) the Department’s departure from BIA in calculating Cinsa’s depreciation expenses in the final results of the review, as well as (2) the Department’s amendment of the final results to correct a computation error.

Cinsa supports the Department’s position on those issues but challenges the Department’s methodology with respect to (1) the use of revalued depreciation rather than historical-cost depreciation, (2) the inclusion of mandatory profit- sharing payments to employees as a cost of labor in calculating the cost of production ("COP") and constructive value ("CV"), (3) the offset of Cinsa’s short-term interest income only to the extent of interest expense, (4) the addition of the full amount of value-added taxes to Cinsa’s COP, (5) the failure to consider the color of Cinsa’s products in calculating foreign market value ("FMV"), and (6) the failure to correct an alleged error in cost data for item number 10158.

Cinsa had also challenged (1) the Department’s determination that pre-sale inland freight charges did not constitute expenses directly related to sales, (2) the Department’s use of similar merchandise rather than CV as a basis for calculating foreign market value, and (3) the Department’s failure to make a tax-neutral adjustment for all Mexican value-added taxes that were rebated or uncollected on exported products. Cinsa subsequently withdrew its claims before the Panel with respect to the first two of these issues. With respect to the issue of uncollected value-added taxes, the Department requested in its brief to the Panel that this question be remanded for administrative application of an appropriate tax-neutral methodology.

II. STANDARD OF REVIEW

Under Articles 1904(2) and 1904(3) and Annex 1911 of NAFTA, a Binational Panel is to determine whether a challenged antidumping determination was made in accordance with the laws of the importing country. NAFTA defines the importing country antidumping duty or countervailing duty law as "the relevant statutes, legislative history, regulations, administrative practice and judicial precedents to the extent that a court of the importing Party would rely on such materials in reviewing a final determination of the competent investigating authority." Art. 1904(2). The Panel may uphold a final determination or remand it for action not inconsistent with the Panel’s decision. Art. 1904(8). NAFTA obliges each Panel to issue written opinions supporting its positions with reasons for its conclusions. Annex 1901.2. These conclusions of its decision must be based "solely on the arguments and submissions of the two Parties." Annex 1903.2. Article 1904.3 of NAFTA provides that a Binational Panel "shall apply the standard of review set out in Annex 1911." In challenges to determinations by United States authorities, Annex 1911 requires that a panel "hold unlawful any determination, finding or conclusion found . . . to be unsupported by substantial evidence on the record, or otherwise not in accordance with law." 19 U.S.C.A. § 1516a(b)(1)(B) (1994 & Supp. 1996) (incorporated by reference into NAFTA, Annex 1911).

"Substantial evidence" is that which "a reasonable mind might accept as adequate to support a conclusion." Consolidated Edison Co. v. N.L.R.B., 305 U.S. 197, 229 (1938); see also Torrington Co. v. United States, 745 F. Supp. 718, 723 (Ct. Int’l Trade 1990), aff’d, 938 F.2d 1276 (Fed. Cir. 1991) (holding that Department determinations should be set aside only if they fail reasonableness test); Matsushita Elec. Indus. Co. v. United States, 750 F.2d 927, 933 (Fed. Cir. 1984). The Panel may not reweigh the evidence or substitute its judgment for that of the Department, even if the evidence could support alternative factual inferences and conclusions. Consolo v. Federal Maritime Comm’n, 383 U.S. 607, 620 (1966); Metallverken Nederland B.V. v. United States, 728 F. Supp. 730, 734 (Ct. Int’l Trade 1989). Although review under the substantial evidence standard is limited, the Panel nonetheless must conduct a meaningful review of the Department’s determination. Thus, the Panel must satisfy itself that an agency determination is supported by the administrative record as a whole, including evidence that detracts from the weight of the evidence upon which the agency relies. Universal Camera Corp. v. N.L.R.B., 340 U.S. 474, 477 (1951). Moreover, an agency’s determination must have a reasoned basis. American Lamb Co. v. United States, 785 F.2d 994, 1004 (Fed. Cir. 1986). The reviewing authority may not defer to an agency determination premised on inadequate analysis or reasoning. USX Corp. v. United States, 655 F. Supp. 487, 492 (Ct. Int’l Trade 1987). Like a reviewing court, a binational panel must extend deference to reasonable agency interpretations of a statute that the agency administers. National R.R. Passenger Corp. v. Boston & Me. Corp., 503 U.S. 407, 417 (1992). But when a statute remains silent or ambiguous with respect to a particular issue, "the question for the court is whether the agency’s answer is based on a permissible construction of the statute." Id. (quoting Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 843 (1984)). So long as the agency’s methodology and procedures constitute a reasonable means of effectuating the statutory purpose, a panel can neither substitute its judgment for that of the agency nor impose its own standards with respect to the sufficiency of the agency’s investigation or methods. Texas Crushed Stone Co. v. United States, 35 F.3d 1535, 1540 (Fed. Cir. 1994); Budd Co., Wheel & Brake Div. v. United States, 773 F. Supp. 1549, 1553 (Ct. Int’l Trade 1991).

III. DISCUSSION

Part A: Issues for Petitioner GHC

1. Use of Administrative Record Instead of Best Information Available

In the preliminary results of the fifth administra-tive review of February 11, 1994, Commerce made an adverse assumption for revalued depreciation and resorted to best information available ("BIA") pursuant to 19 U.S.C.A. § 1677e© (1994 & Supp. 1996). The Department’s use of BIA in the preliminary results prompted Cinsa to provide a "Proposed Depreciation Adjustment" methodology to enable Commerce to use the record evidence to arrive at an accurate determination of Cinsa’s depreciation cost based upon the revaluation of assets. Cinsa also provided a shorthand calculation that would yield a fixed overhead factor that included revalued depreciation.

Reviewing Cinsa’s administrative case brief, Commerce decided to calculate depreciation expenses based upon information that Cinsa had submitted, having found that the Company had "provided an acceptable methodology to arrive at a revised fixed overhead/direct labor ratio that incorporates revalued depreciation . . . ." Prop. Doc. 14. GHC argued during the administrative review that the Department’s use of BIA was "justified and reasonable" because Cinsa’s supplemental questionnaire response failed to report the revalued depreciation data that Commerce had requested on a "product-by-product basis." GHC also argued that BIA was appropriate because Cinsa had failed to report other fixed overhead costs on a revalued, as opposed to a historical, basis.

However, the Department confirmed in the final results that it had:

Commerce has stated that it agrees with the account of the procedural history of the case set forth in GHC’s brief but does not otherwise accept GHC’s statement of facts. According to the Department, the use of BIA significantly increased Cinsa’s fixed overhead expenses. The Department maintains that it was legally correct in calculating depreciation expenses based upon information that Cinsa submitted.

The Panel’s review of the law and the administrative record supports the Department’s interpretation. The BIA requirement only arises when the Department has determined that a respondent has failed to comply with an information request. The Department has considerable discretion in arriving at a determination of noncompliance. E.g., Daido Corp. v. United States, 893 F. Supp. 43 (Ct. Int’l Trade 1995). In this case, the Department determined that Cinsa had provided the information in an acceptable manner. Thus, no reason existed for Commerce to apply BIA. Cinsa provided data on depreciation expenses derived on a historical basis in addition to data necessary for computing any increase in fixed overhead costs attributable to the calculation of revalued depreciation. In short, there was no justification for Commerce to resort to BIA because Cinsa provided in its supplemental questionnaire response the requested revalued depreciation cost as a factor to be applied on a "product-specific" direct labor cost basis.

The Panel does not agree with GHC that the methodology that Cinsa submitted in its administrative case brief constituted new factual information that the Department should have rejected as untimely. The methodology constituted only a means of analyzing existing data—data that Cinsa had filed in a timely fashion—that had not occurred to the Department’s investigators. The investigators reviewed the methodology that Cinsa submitted and found that it was sound. The decision to adopt the methodology was, therefore, reasonable. Moreover, GHC’s argument that BIA should have been used because other assets may not have been revalued is unpersuasive and speculative. The Department never asked Cinsa about the revaluation of fixed costs other than depreciation. BIA, therefore, would have been inappropriate. Thus, the Panel agrees that Commerce reasonably exercised its discretion in determining whether Cinsa’s questionnaire answers were responsive. The Department has broad discretion to determine when and how to apply BIA. In this instance, Commerce found that Cinsa’s responses adequately responded to its requests for information. Cinsa responded in a timely manner to the Department’s questionnaire by reporting depreciation expenses based on historical and revalued cost.

2. Ministerial Error

After the final results were released on January 9, 1995, Cinsa alleged that the Department had made a "ministerial error" in calculating the cost of revalued depreciation for inclusion in fixed overhead. As described in the preceding section, Commerce decided not to use BIA in the final results and to rely instead upon inflation information and a methodology that Cinsa submitted in its administrative brief in order to calculate the cost of depreciation on a revalued, rather than historical, basis. Cinsa argued that Commerce had inadvertently applied a factor that revalued not only depreciation but also all fixed overhead items. Over GHC’s objection that no unintended ministerial error had occurred, Commerce agreed with Cinsa and, on February 8, 1995, released amended final results stating:

GHC, relying heavily upon the statutory term "unintentional" error, asks the Panel to find that Commerce erred in amending the final results because Commerce had fully intended to increase not only depreciation but also all items of fixed overhead by a revaluation factor that Cinsa supplied in its administrative brief. GHC refers the Panel to language in several Department memoranda stating that Commerce increased the "reported fixed overhead, which includes depreciation expenses, by [a percentage calculated on the basis of Cinsa’s information] rather than by [the BIA percentage used by Commerce in the preliminary results.]" Prop. Doc. 16; see also Prop. Doc. 14. GHC notes that the final results stated that the "Department has revised the calculation of fixed overhead based on information contained in Cinsa’s responses." 60 Fed. Reg. at 2378.

The preceding record citations prove, according to GHC, that Commerce fully intended to revalue all of fixed overhead, and not only the depreciation variable, by the factor. Thus, GHC argues, the "error" did not fall within the narrow category of clerical and unintentional errors that Commerce may correct following release of the final results. Rather the purported error, GHC maintains, reflects the Department’s revisitation of its judgment in selecting a particular methodology.

Commerce explains that due to the sheer volume of calculations required to produce the final results, it unintentionally failed to adapt Cinsa’s revised factor for revalued depreciation to the Department’s own computer program. As a result, the factor that the Department used was much higher than it had intended. The Department had sought to revalue depreciation according to the methodology that Cinsa suggested and not to revalue all other fixed overhead costs. After learning of its error, the Department had the discretion to make the correction.

The Panel’s review of the record and the factual setting in which this issue arises supports the Department’s explanation. Indeed, the thrust of Cinsa’s argument in its administrative brief was that the Department did not need to use BIA, which required a revaluation of all fixed overhead items in order to calculate revalued depreciation, a component of fixed overhead. Prop. Doc. 11 at 8-11 and Ex. 2. Cinsa furnished a methodology that would revalue depreciation alone within the context of the fixed overhead cost. The Department’s accountants wrote that they found that Cinsa "provided an acceptable methodology to arrive at a revised fixed overhead/direct labor ratio that incorporates revalued depreciation . . . ." Prop. Doc. 14. Another memorandum, one upon which GHC relied, repeats that Cinsa "had provided acceptable information with which to calculate cost of production." Prop. Doc. 16. The final results stated: "The Department has reviewed the information contained in Cinsa’s responses and found that adequate data was available for a more accurate calculation of COP." 60 Fed. Reg. at 2378, Pub. Doc. 74.

These documents support the Department’s view that it agreed with the thrust of Cinsa’s argument and intended to revalue depreciation but not every item of fixed overhead cost. Because the final results applied a factor increasing all fixed overhead items, it follows that the result was unintended. Commerce exercised its discretion to correct "ministerial errors" and corrected the computer program.

The Court of International Trade has stated that "[u]nder the statute, Commerce is given fairly broad discretion to determine what constitutes an unintentional ministerial error." Aimcor v. United States, No. 95-130, slip op. at 8 (July 20, 1995). Administrative determinations that both GHC and Commerce have cited demonstrate how this discretion has been exercised. The Panel has reviewed those determinations and does not agree with GHC that the discretion was exercised in an inappropriate manner in this case.

Part B: Issues for Respondent Cinsa

1. Calculation of Depreciation of Assets and Fixed Overhead Costs: Historical v. Revalued Methods

In determining the fixed overhead expense component of cost of production and constructed value, the Department’s practice is to include asset depreciation expenses and other fixed overhead expenses. Cinsa reported depreciation expenses to Commerce using a historical method based upon the actual price paid for the fixed asset. See Cinsa’s Questionnaire Response at 63-64, Exhibit 27; Prop. Doc. 2. Cinsa admitted that Mexican generally accepted accounting principles ("Mexican GAAP") also required the firm to use a revalued method of depreciation but asserted that this method should be employed only in the preparation of financial statements. See Cinsa’s Questionnaire Response at 38, 63-64 and Exhibit 31; Prop. Doc. 2.

Before publication of the preliminary results, Commerce requested, and Cinsa provided, additional information showing depreciation expenses calculated on both the historical-cost and revalued-cost basis. See Cinsa’s Supplemental Questionnaire Response at 20-22, Exhibit 4; Prop. Doc. 5. Cinsa defended its use of the historical method stating that its internal cost and accounting records reflected the historical method, as Mexican income tax law requires. See id. at 21.

In the preliminary results, Commerce calculated depreciation using the revalued method, basing its decision upon the fact that Mexican GAAP required Cinsa to revalue its assets and that the Company’s financial statements reflected these revalued assets. 59 Fed. Reg. 6616, 6618 (1994); Pub. Doc. 38.

In response to the preliminary results, Cinsa argued that Commerce should have calculated depreciation expenses using the historical method. See Cinsa’s Case Brief to the preliminary results at 3-4 & Exhibit 1; Prop. Doc. 11. Cinsa claimed that the Department’s practice was to calculate depreciation using the revalued cost only in cases involving a hyperinflationary economy and asserted that price levels in Mexico during the period of review ("POR") were not hyperinflationary. Id. Cinsa also stated that the revalued method "overstated" actual depreciation costs. Id.; Exhibit 1 at 2-4.

In its final results, Commerce rejected Cinsa’s hyperinflation argument, stating, "The Department followed Mexican GAAP and adjusted Cinsa’s COP data to reflect the revalued depreciation. This approach coincided with Cinsa’s financial statements which were also prepared in accordance with Mexican GAAP. It is the Department’s policy to adhere to the home market GAAP as long as the home market GAAP reasonably reflects actual costs

Thus, Commerce has determined that when a foreign country allows a company to revalue its assets, as opposed to relying upon historical cost, and when a company reflects the revalued basis in its financial statements, it is appropriate to accept the financial statements as reflecting actual cost." 60 Fed. Reg. at 2378 (Comment 1).

a. Exhaustion of Administrative Remedies

On appeal from the Department’s final results, Cinsa argues that Commerce incorrectly applied its depreciation cost test and that the revalued method "distorted" actual costs of production. GHC and Commerce argue that Cinsa is barred from raising this argument for failure to exhaust administrative remedies. Thus, before reaching this claim, the Panel must decide whether Cinsa adequately raised the argument during the administrative proceedings.

Both GHC and Commerce claim that Cinsa is barred from arguing that the use of revalued depreciation "distorted" actual depreciation costs because Cinsa did not raise this argument during the administrative proceedings. See Cinsa Case Brief to the preliminary results at 2-10 and Exhibit 1; Prop. Doc. 11. The Department’s regulations state that for final determinations in antidumping-duty reviews Commerce will only consider "written arguments in case or rebuttal briefs filed within the time limits." 19 C.F.R. § 353.38(a) (1995). With respect to the presentation of arguments following preliminary results, the regulations state:

The case brief shall separately present in full all arguments that continue in the submitter’s view to be relevant to the Secretary’s final . . . results, including any arguments presented before the date of publication of the preliminary . . . results. 19 C.F.R. § 353.38©(2). Cinsa asserts that it raised this argument during the administrative proceeding. Cinsa now contends that although it did not use the term "distorted," it claimed in its administrative brief that the revalued method "overstated" the depreciation expense. See Cinsa Case Brief at 8-25; Cinsa Final Reply Brief at 2-22.

On appeal from the administrative decision of the Department, the Panel must follow the "general legal principles" that would apply to the corresponding national court. NAFTA, Art. 1904, Annex 1911; see Certain Cut-To-Length Carbon Steel Plate From Canada, USA-93-1904-04 (1994). The Rules of the Court of International Trade state that the court, "shall, where appropriate, require the exhaustion of administrative remedies." 28 U.S.C.A. § 2637(d) (1994). Numerous court decisions have recognized this requirement.

See, e.g., United States v. L.A. Tucker Truck Lines Inc., 344 U.S. 33, 37 (1952); Rhone Poulenc, Inc. v. United States, 899 F. 2d 1185, 1189-90 (Fed. Cir. 1990); Timken Co. v. United States, 795 F. Supp. 438, 442 (Ct. Int’l Trade 1992); Budd Co., Wheel & Brake Div. v. United States, 773 F. Supp. 1549, 1555 (Ct. Int’l Trade 1991); Koyo Seiko Co. v. United States, 768 F. Supp. 832 (Ct. Int’l Trade 1991), aff’d, 972 F.2d 1355 (Fed. Cir. 1992); N.A.R., S.P.A. v. United States, 741 F. Supp. 936, 945 (Ct. Int’l Trade 1990); LMI-La Metalli Industriale, S.P.A. v. United States, 712 F. Supp. 959, 968 (Ct. Int’l Trade 1989). Moreover, the exhaustion rule is held to be particularly important in cases, such as this one, in which the action under review involves exercise of the agency’s discretionary power. See McCarthy v. Madigan, 503 U.S. 140, 145 (1992). Thus, if the Panel finds that Cinsa did not raise an argument in the administrative proceedings, the Panel will not consider that argument.

Both Commerce and GHC rely upon the decision in Rhone Poulenc, Inc. v. United States, in which the Court of Appeals for the Federal Circuit upheld the finding of the Court of International Trade that the respondent had not exhausted its administrative remedies. 899 F.2d 1185, 1191 (Fed. Cir. 1990). In Rhone Poulenc, the sole argument that the plaintiff presented during the administrative proceeding was that Commerce should not rely upon "best information otherwise available." On appeal, plaintiff argued that even if Commerce used BIA (taken from the administrative investigation four years earlier), Commerce should have revised the data to reflect for interest and exchange rates.

Before the Court of Appeals, plaintiff stated, Rhone Poulenc concedes that it never raised this argument before the ITA, but contends it is simply another angle to an issue which it did raise before the ITA, whether the 1980 data were the best information. It argues that the Supreme Court’s decision in Hormel v. Helvering authorized appellate courts to consider new arguments so long as the general issue was raised at the agency level.

Id. (citation omitted) (emphasis in original). In rejecting plaintiff’s argument, the Court of Appeals recognized that in exceptional cases, or particular circumstances when injustice might otherwise result, a reviewing court will consider new questions of law. Id. (citing Hormel, 312 U.S. at 556-57). The court did not agree, however, that an exception to the general rule was warranted in the circumstances of the case before it. The court relied in part upon its finding that plaintiff did not raise the argument at the administrative level "for tactical reasons." Rhone Poulenc, 899 F.2d at 1191 (citing 710 F. Supp. at 348-50). The court stated, "[f]ar from it being unjust to Rhone Poulenc, it would have been unjust to the ITA and wasteful of public resources to allow Rhone Poulenc to belatedly raise the argument under these circumstances." Rhone Poulenc, 899 F.2d at 1191.

There are recognized exceptions to the general rule of exhaustion of administrative remedies. For example, reviewing courts have held that exhaustion is not required when the Department’s proceeding did not afford an adequate opportunity for the party to raise the contested issue at the administrative level. American Permac, Inc. v. United States, 10 Ct. Int’l Trade 535, 642 F. Supp. 1187, 1188 (1986);

Philipp Bros., Inc. v. United States, 10 Ct. Int’l Trade 76, 630 F. Supp. 1317, 1324 (1986); Al Tech Specialty Steel Corp. v. United States, 11 Ct. Int’l Trade 372, 661 F. Supp. 1206, 1210 (1987); Suramericana de Aleaciones Laminadas, C.A. v. United States, 14 Ct. Int’l Trade 560, 746 F. Supp. 139 (1990), rev’d on other grounds, 966 F.2d 660 (Fed. Cir. 1992).

None of the exceptions to the general exhaustion rule applies in this case, however, because Cinsa claims only that its argument in the administrative proceeding below was "sufficiently specific" to satisfy the exhaustion rule. Cinsa admits that it did not use the term "distorted" in the administrative proceedings below but emphasizes that it clearly objected to the use of revalued depreciation in its comments to the preliminary results due to the company’s position that it believed the revalued method "overstates Cinsa’s normal production costs attributable to the subject merchandise." Cinsa’s Brief to the preliminary results, Exhibit 1 at 4. ² In support of its position, Cinsa relies upon NACCO Materials Handling Group, Inc. v. United States, a recent decision of the Court of International Trade. No. 95-134 (July 26, 1995). At issue in NACCO Materials was the inclusion of credit revenue in the short-term interest income offset to the financial expense component of COP and CV. During the administrative proceedings, the respondent had argued that credit revenue from end-users should not be merged with the sales price. On appeal, respondent extended its argument for the first time to the credit revenue from dealers. In that case, Commerce claimed that the argument concerning credit revenue from dealers was barred by the rule on exhaustion of administrative remedies. The court, however, disagreed, stating:

"[T]his Court finds plaintiffs do appear to have raised the issue in their brief to the agency. Although plaintiffs’ brief below does not explain that its argument captioned "The Financing Arrangement Is A Separate Transaction That Should Not Be Merged With The Sales Price For The Forklift" is leveled against adjustments for credit revenue generated on transac-tions with both end-users and dealers, the brief also does not expressly limit plaintiffs’ argument only to revenue earned in relation to end-users. Further-more, this generalized argument falls within a section in plaintiffs’ brief titled "THE DEPARTMENT SHOULD REJECT TOYOTA’S CLAIMED CREDIT REVENUE FOR ITS U.S. SALES." Thus, this Court rejects defendant’s contention."

Id. at 16-17. Although the NACCO Materials decision was issued (August 1, 1995) before the deadline for submission of opposition briefs (November 3, 1995), neither Commerce nor GHC distinguish the case.

The Panel finds that Cinsa’s argument in response to the preliminary results was sufficiently specific to satisfy the exhaustion of administrative remedies rule. The Panel relies on the court’s analysis in NACCO Materials Handling Corp. v. United States and finds that Cinsa raised the argument at issue in its brief to the agency. The company stated that although its "audited financial statement, prepared for purposes of Mexican taxation, utilized revalued depreciation, it is inappropriate for the ITA to use revalued depreciation for purposes of COP and CV when Cinsa’s historical depreciation, as reported in its financial statement, was also part of the administrative record."

Furthermore, although the section captioned, "THE ITA INCORRECTLY INCREASED CINSA’S REPORTED COST OF PRODUCTION AND CONSTRUCTED VALUE BY USING REVALUED DEPRECIATION RATHER THAN HISTORICAL DEPRECIATION" addressed the use of revalued depreciation in a non-hyperinflationary economy, Cinsa was clearly arguing that the revalued method did not accurately reflect costs of production.

b. Methodology for Calculating Depreciation

Cinsa argues that the Department’s decision to calculate the depreciation component of COP and CV using the revalued method was contrary to law and not supported by substantial evidence. Neither the antidumping statute nor the regulations instruct Commerce on the calculation of depreciation. See e.g., 19 U.S.C.A. § 1677b(b) (1994 & Supp. 1996); 19 C.F.R. § 353.50(a) (1995); 19 C.F.R. § 353.51(c) (1995). Because the statute is silent regarding the treatment of the depreciation expense, Commerce has broad discretion to make a reasonable interpretation of the statute and to make a reasonable choice among competing methodologies. Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 843 (1984); U.H.F.C. Co. v. United States, 916 F.2d 689, 698 (Fed. Cir. 1990); IPSCO, Inc. v. United States, 965 F.2d 1056, 1061 (Fed. Cir. 1992).

Cinsa argues that, in the case at hand, Commerce applied an incorrect legal test in determining whether use of revalued depreciation reasonably reflected the actual costs of production. Cinsa states in its brief that the Department " failed to analyze whether application of revalued depreciation in accordance with Mexican GAAP distorted Cinsa’s actual production costs, but merely assumed that since Mexican GAAP allowed for revalued depreciation, and such revaluation of assets appeared in Cinsa’s financial statements, those financial statements reflected actual costs." Cinsa Brief at 11.

The Panel finds that Cinsa has not succeeded in demonstrating that Commerce did not correctly apply its methodology or that the Department’s determination to use revalued depreciation, as required by Mexican GAAP and as reflected in the company’s financial statements, was unreasonable. Cinsa admits that Mexican GAAP does require Mexican companies to use the revalued method but insists that this requirement applies only to the Company’s preparation of its financial statements. Cinsa observes that the Mexican Income Tax Law requires that depreciation deductions be calculated using the historical method and that the internal cost and accounting books of the Company reflect use of the historical method.

The Panel finds no cases that would support the claim that Commerce is restricted to the depreciation methodology required for income tax purposes or to the methodology contained in the Company’s internal cost and accounting records. Contrary to Cinsa’s position, the Court of International Trade explicitly stated in NTN Bearing Corp. of Am. v. United States that Commerce is to refer to the home-market GAAP utilized in financial statements. Id., 826 F. Supp. 1435, 1441 (Ct. Int’l Trade 1993).

The Department’s reliance upon home market GAAP used for financial statements was most recently upheld by the Court of International Trade in Laclede Steel Co. v. United States, No. 94-160, slip op. at 29 (Oct. 12, 1994). In Laclede Steel, the plaintiff, a Korean steel producer, argued that Commerce should use historical costs because it was required by home-market GAAP as well as United States GAAP. The court disagreed with the plaintiff and supported the Department’s decision to use the revalued method relying, in part, upon a Korean law permitting domestic companies to revalue their depreciation costs for financial-statement purposes. Id. Furthermore, the court found that use of the historical method in that case would distort the production costs facing the Company:

"[U]se of Hyundai’s reported depreciation expenses at historical value would be distortive because such a methodology would overlook the significant impact that revaluing assets has had on Hyundai. The ripple effects caused by revaluation of Hyundai’s assets include, inter alia, a decrease in tax liabilities due to increased amounts of depreciation; an increase in equity reflected on the company’s balance sheets; a potentially enhanced stock value resulting from more available equity; and, an improved ability to acquire debt resulting from an increase in equity . . . . Hyundai seeks to reap the benefits of revaluation with respect to additional available liquidity, a lower tax liability, etc., and yet turn back the clock to take advantage of diminished depreciation expenses solely for purposes of this antidumping investigation." Id. at 23-24 (citation omitted).

The Panel finds the court’s analysis in Laclede Steel instructive with respect to the case at hand. Due to the revaluation of assets as reflected on the company’s financial statements, Cinsa should have enjoyed several benefits. Revalued assets translate into an increase in the equity values reflected on a company’s balance sheet, a potentially enhanced stock value resulting from greater equity, and an improved ability to acquire debt. Thus, the Panel finds that the Department’s decision to base depreciation expenses upon the revalued costs of assets and fixed overhead, as set forth in Cinsa’s financial statements, was reasonable.

Cinsa’s argument also asserts that Commerce failed to analyze whether application of revalued depreciation distorted Cinsa’s actual production costs. Cinsa claims that Commerce "merely assumed" that the use of revalued depreciation for financial statement purposes reflected Cinsa’s actual production costs.

In support of its position that Commerce did not properly analyze whether use of revalued costs would be distortive, Cinsa cites two recent decisions of the Court of International Trade that specifically discuss the Department’s reliance upon home-market GAAP for the depreciation expense, Laclede Steel Co. v. United States (No. 94-160, slip op. at 29 (Oct. 12, 1994)) and NTN Bearing Corp. of Am. v. United States (17 Ct. Int’l Trade 713, 826 F. Supp. 1435, 1441-42 (1993)). In both of these decisions, however, the court upheld the Department’s analysis as a reasonable reflection of actual costs. Most notably, in Laclede Steel, the court upheld the Department’s analysis as set forth in the final determination, which stated:

"We find in this case that Hyundai’s financial statements were prepared in accordance with Korean GAAP using a revaluation of its fixed assets. In their submissions, however, Hyundai deviated from its own accounting practice by reporting depreciation on a historical cost basis. Although in the United States assets are not normally revalued, U.S. GAAP states that when fixed assets are written up to market or appraisal value, the depreciation should be based on the written-up amount (ARB-43). Therefore, we consider revaluation to be an accurate methodology for valuing depreciation, and we have relied on it for purposes of this investigation." Circular Welded Non-alloy Steel Pipe From the Republic of Korea, 57 Fed. Reg. 42,942, 42,952 (1992) (Comment 33) (hereinafter Korean Pipe).

The Panel does not find in the final determination of Korean Pipe any fundamental difference from the case at hand in the Department’s discussion of its analysis used in determining that revalued assets reasonably reflected actual costs. The reference to U.S. GAAP in Korean Pipe applies equally to the facts of the present case. Moreover, as is clear from the court’s discussion in Laclede Steel, Commerce was relying upon expenses as recorded in the firm’s financial statements. No. 94-160, slip op. at 23-24 (Oct. 12, 1994). Furthermore, the Panel finds that respondents have failed to demonstrate that the Department’s decision to use Cinsa’s revalued depreciation expenses results in distortion of the company’s costs. The Panel finds substantial evidence on the record supporting the Department’s determination that revalued depreciation reasonably reflected actual costs.

The Panel refers to Cinsa’s Supplemental Questionnaire Response, which clearly shows Mexico was experiencing substantial inflation (at a rate of more than 25 percent) during the period of review. Cinsa noted the effects of the high inflation rate on depreciation expenses in its case brief, which illustrated how the use of revalued depreciation significantly increased the company’s depreciation expense. Moreover, Mexican GAAP recognizes the effect of inflation upon the value of assets and requires companies to revalue assets to compensate for the change. The Department has addressed the issue of the impact of high inflation upon depreciation expenses in several cases.

In Silicomanganese From Venezuela, Commerce decided to use revalued depreciation despite the fact that home market GAAP had permitted use of historical depreciation values during the period of review. 59 Fed. Reg. 55,436, 55,440 (1994) (Comment 10). In that case, the Department stated, "Depreciation enables companies to spread large expenditures on purchases of machinery and equipment over the expected useful lives of these assets. Not adjusting for the devaluation of currency due to high inflation results in the depreciation deferred to future years being understated in constant currency terms, and, therefore, distorts the Department’s COP and CV calculations."

Id. Moreover, Commerce has found in other antidumping cases involving Mexico that revaluation of assets was appropriate due to high inflation rates. See, e.g., Oil Country Tubular Goods from Mexico, 60 Fed. Reg. 33,567, 33,574 (1995); Gray Portland Cement and Clinker from Mexico, 58 Fed. Reg. 25,803, 25,806 (1993) (Comment 4).

Cinsa argues that Commerce’s practice is to use revalued depreciation only if the home market economy was experiencing hyperinflation during the period of review. To support this claim, Cinsa cites two cases in which Commerce calculated depreciation using revalued assets in the presence of hyperinflation. Cold-Rolled Carbon Steel Flat-Rolled Products from Argentina, 49 Fed. Reg. 48,588 (1984); Certain Carbon Steel Products from Brazil, 49 Fed. Reg. 28,298 (1984).

Furthermore, Cinsa cites the final determination in Certain Fresh Cut Flowers from Peru, which defined a hyperinflationary economy as, "one experiencing an annual inflation rate of more than 50%." 52 Fed. Reg. 7000 (1987). Cinsa points out that, by this standard, Mexico’s rate of inflation during the period of review was not hyperinflationary.

The Panel finds that Cinsa’s hyperinflation argument is without merit because it misstates the Department’s practice in choosing between historical and revalued costs for the calculation of the depreciation expense. As explained by Commerce and upheld by the Court of International Trade, the choice of methodology for calculating depreciation expense is based upon home market GAAP and turns upon whether the methodology adequately represents costs of production. In a hyperinflationary economy, use of a revalued method would be the preferred means of calculating depreciation. The Panel finds no cases, however, that support Cinsa’s position that Commerce only uses the revalued method in the context of a hyperinflationary economy. As noted by the Court of International Trade in Laclede Steel, when a company reaps the many advantages of revaluing its assets, it would be distortive to "turn back the clock" for purposes of an antidumping investigation. No. 94-160, slip op. at 23-24.

In conclusion, the Panel holds that Cinsa’s arguments during the administrative proceedings below were sufficiently specific to satisfy the exhaustion of administrative remedies rule, but the Panel does not agree with Cinsa’s claim that Commerce may only use the revalued method of calculating depreciation expenses when the home market country is experiencing hyperinflation. The Panel finds that the Department’s use of revalued depreciation is supported by substantial evidence in the record and is in accordance with applicable law.

Continue on to Section 2 of Part B: Profit Sharing

¹ Apsa is not a party to this Binational Panel appeal.

² The Panel does note, however, that the main thrust of Cinsa’s argument following the preliminary results was that the Department’s practice was only to use revalued depreciation in hyperinflationary economies.