IN THE MATTER OF:

Oil Country Tubular Goods from Mexico; Final Determination of Sales At Less Than Fair Value
(Continued)

2. Discussion and Decision of the Panel

The Panel considers that the question presented by TAMSA’s use of its finishing line allocation methodology presents two separate issues. The first issue is whether there is substantial evidence on the record in support of the Department’s decision to reject TAMSA’s use of that methodology because it was not shown by TAMSA to be reasonable and non-distortive. The second issue is whether there is substantial evidence on the record in support of the Department’s decision to select an alternative methodology based on standard costs. The Panel will address each of these issues below.

Rejection of TAMSA’s Finishing Line Allocation Methodology

It has already been noted that, for purposes of this antidumping investigation, TAMSA was required to submit to the Department product-specific COM data based on production during the POI, and to do so in a manner such that all manufacturing costs were allocated on a per-product basis. The December 28, 1994 Section D questionnaire did not impose a particular methodology on TAMSA in this regard, requiring only that the methodology selected by TAMSA be reasonable and non-distortive:

All variances between standard and actual costs resulting from manufacturing operations must be allocated to the subject merchandise using a reasonable methodology that does not distort per-unit costs. If your company uses an actual cost accounting system you must use this system in reporting COP/CV data. If your company does not calculate product specific per-unit costs or has more than one costing system, please contact the Office of Accounting. ³³⁴

TAMSA, therefore, bore the twin burdens of selecting a methodology that was inherently "reasonable" under the circumstances, and of proving to the satisfaction of the Department that this methodology was non-distortive under its usual conditions of application. As noted, TAMSA also bore the burden of discussing any unusual issues that might arise with the Department’s Office of Accounting, so that a resolution of those issues could be achieved in advance. ³³⁵

Aside from the obligations derived from the questionnaire, the Department appears in practice to have established three basic criteria for evaluating an allocation methodology reported by a respondent during a proceeding: (1) whether the respondent’s methodology is part of its normal accounting records; (2) whether the methodology comports with home market GAAP; and (3) whether the methodology results in allocations that reasonably reflect the costs associated with production of the subject merchandise. ³³⁶

In concrete cases, several alternative methodologies may be available to a respondent for selection and use-based on machine time, tonnage produced, value, labor-hours, standard costs, etc.; and it does not appear that the Department necessarily insists on any particular methodology, provided that the method ultimately selected by the respondent has the characteristics of being both reasonable and non-distortive.

However, it seems clear that total machine time is an allocation method often selected by respondents and readily agreed to by the Department at least for depreciation costs. As stated in the Final Determination itself:

The basic premise that machine time can be a reasonable and appropriate allocation basis for depreciation costs is well substantiated in both accounting [citation omitted] and Departmental practice (Final Determination of Sales at Less Than Fair Value; Steel Wire Rope from Korea 58 FR 11029, February 23, 1993. ³³⁷

The Department in its brief to the Panel appears to have extended this point, stating that it was "undisputed that, had TAMSA accurately based its allocation methodology for nonstandard costs on total machine time, Commerce would have accepted that as a reasonable allocation basis." ³³⁸

TAMSA’s selection of an allocation methodology, not based on total machine time, but based upon finishing line machine time, was, by its own admission, a matter of convenience and practical necessity. ³³⁹

Neither convenience nor practical necessity, however, can relieve TAMSA from its burdens of establishing the inherent reasonableness of its methodology and its non-distortive character when applied to the facts at hand.

The Panel finds that the Department was correct in having concluded that TAMSA has not in this case discharged those burdens. In general terms, the Panel would comment that an allocation methodology based on total machine time, since it reflects the overall machine time needed to produce a given product at every stage of production, is on its face inherently reasonable. The Department practice on this issue so reflects. However, an allocation methodology based on partial machine time -to be used as a proxy for such other stages of production- can be said to be inherently suspect, and the Panel believes that a respondent bears a heavy burden to establish that this proxy is in fact a reasonable representation of the costs incurred in those other production stages.

In this instance, even if it may be conceded that the theory of a "bottleneck" has some intuitive appeal, and even though TAMSA has argued vigorously to the Panel that the finishing line machine time is in fact "representative" of the earlier stages of OCTG production and thus of total machine time, the Panel ultimately must be guided by what, if anything, is contained on the administrative record that might prove or substantiate this claim. The Panel has thoroughly explored that record and does not find substantiating evidence of this kind. The cost verification exhibit noted previously does not appear to perform this function, ³⁴⁰ nor is there other evidence on the record that does so.

The issue before the Panel, however, is not so much whether there is substantial evidence to support TAMSA’s position, but whether, under the applicable standard of review, there is substantial evidence to support the position taken by the Department in the Final Determination. In its factual summary, the Panel has noted that the Department has made three different findings concerning TAMSA’s finishing line allocation method. The first was that TAMSA’s allocation method "distorts actual production costs because it shifts overhead expenses to products which undergo more finishing." Since the record clearly establishes that TAMSA produces a variety of products which do indeed vary by the amount of finishing time they undergo, the Panel finds that there is substantial evidence on the record to support this finding.

The Department’s second finding was that TAMSA’s allocation method "did not reflect the machine time for other processes performed." Under the circumstances, since TAMSA’s allocation method was specifically designed to eliminate the need to reflect the actual costs incurred in those other processes, using finishing line time as a proxy for those other costs, this statement amounts to a truism. Therefore, the Panel is compelled to find that it too is supported by substantial evidence on the record.

Finally, the Department found that machine time "is not the appropriate allocation basis for costs other than depreciation," although TAMSA had used it as well for the allocation of variances and other fixed costs. While the Panel is also prepared to sustain this finding, the Panel is concerned about the degree to which this broad language casts doubt on the existing practice of the Department to accept total machine time as a typical allocation methodology for nonstandard costs, knowing that such nonstandard costs will inevitably include variances and other fixed costs. ³⁴¹

It is not clear to the Panel whether the Department is attempting to describe a new rule of practice, or whether this statement should be limited to the context and confines of this particular case.

In sum, therefore, the Panel finds that TAMSA did not meet its burdens of establishing that its finishing line allocation methodology was both reasonable and non-distortive and finds, as well, that the decision of the Department to reject that allocation methodology was reasonable and supported by substantial evidence on the record.

Selection of Alternative Methodology

The second issue presented to the Panel is whether the Department’s selection of an alternative methodology based on standard costs- having rejected TAMSA’s finishing line allocation methodology- was supported by substantial evidence on the record. In the Panel’s view, this issue is directly affected by the standard of review, which requires the Panel to grant deference to the Department in its choice of methodologies to implement the antidumping statue. ³⁴²

It is the judgment of the Panel that the Department has adequately explained in the Final Determination and in the Team Concurrence Memorandum the basis for its selection of an alternative methodology based on standard costs, ³⁴³ and that this methodology, since it is entirely based on facts of record, is reasonable and permissible for the purposes at hand. Therefore, the Panel upholds the Department’s selection of an allocation methodology based on standard costs.

Remand

Finally, without further discussion, the Panel grants the remand requested by the Department to adjust the calculations made under the standard costs allocation methodology for those sales made within the POI of products produced outside the POI. ³⁴⁴

D. Offset for Non-Operating Income

1. Arguments of the Participants

TAMSA

TAMSA urges that the Panel consider the issue whether the Department’s preliminary objection to its offset for non-operating income, set out in the Team Concurrence Memorandum, is correct. ³⁴⁵

TAMSA indicates that this "issue is ripe for consideration and properly before this Panel." ³⁴⁶ Accordingly, TAMSA, in its Panel Rule 57(1) Brief argues in some detail concerning the substantive correctness of the Department’s views, although TAMSA fails in that brief to cite any authority on the procedural issue of ripeness itself.

The Department

For its part, the Department’s Panel Rule 57(2) Brief fails to address the substantive issue and focuses only on the procedural issue. The Department notes, ³⁴⁷ that the statement contained in the Team Concurrence Memorandum was merely an alternative or conditional recommendation made to the Department’s senior import administration officer prior to the ultimate decision to base the G&A expenses on 1994 data; that this recommendation did not rise to the level of a "final determination" subject to review by this Panel; that once the decision was made to use the 1994 data, no "case or controversy" existed with respect to the 1993 data, ³⁴⁸ and that the Panel may not render an opinion on an issue that the agency has expressly declined to reach. ³⁴⁹

North Star

North Star, in its Panel Rule 57(2) Brief, takes the same position as the Department on the procedural question, but also addresses at some length the substance of the challenge raised by TAMSA. ³⁵⁰

2. Discussion and Decision of the Panel

This Panel derives its authority from Article 1904 of the NAFTA. Article 1904(2) permits a panel to "review, based on the administrative record, a final antidumping ... duty determination of a competent investigating authority of an importing Party...." While panels may take into account the general legal principles (such as mootness) ³⁵¹ that a court of that importing Party might consider in such a review of a final determination, panels are authorized specifically to review only the Department’s final determination. They are not empowered to review challenges to specific findings or determinations contained in an underlying document in the record which are not addressed or contained in that final determination. In this instance the "finding" challenged by TAMSA was expressly not addressed or contained in the Final Determination, and therefore it is beyond the reach of this Panel.

The Supreme Court has had numerous opportunities to consider mootness and ripeness issues in administrative law cases, and in doing so has provided definitive support for the above conclusion. See, e.g., Unemployment Compensation Commission of Alaska v. Aragon, 329 U.S. 143, 155 (1946) ("A reviewing court usurps the agency’s function when it sets aside the administrative determination upon a ground not theretofore presented and deprives the [agency] of an opportunity to consider the matter, make its ruling, and state the reasons for its action.") In the present case, while it may be said that the Department, in its leadup to the issuance of the Final Determination, did consider the issue raised by TAMSA, and provided some reasoning, the missing element is that it failed to "make its ruling." At this juncture, there has been no ruling or final determination by the Department on the issue in question.

The Supreme Court has recognized the "constitutional dimension of the mootness doctrine." ³⁵² As stated in American Spring Wire:

In order to satisfy the "case or controversy" clause of Article III [of the United States Constitution] there must exist "a present, live controversy ... to avoid advisory opinions on abstract propositions of law." Tennessee Gas Pipeline Co. v. FPC, 606 F.2d 1373, 1379 (D.C.Cir. 1979) ("no jurisdiction over suits challenging administrative orders which are moot"). ³⁵³

If courts or binational panels lack jurisdiction to review administrative orders "which are moot," they most certainly lack jurisdiction to review administrative orders which have never been made. In this instance, of course, the Department has not made a final decision on the issue in question, and it is beyond the province of a court or binational panel to speculate as to how the Department may in fact rule. ³⁵⁴

As stated in Matsushita Elec. Indus. Co., Ltd. v. United States, "[i]t may very well be that the results of the final agency action will obviate the need for judicial review." ³⁵⁵

Based upon the foregoing, the Panel therefore expressly declines to consider the substantive challenge raised by TAMSA to the view expressed in the Team Concurrence Memorandum concerning TAMSA’s claimed non-operating income offset.

ARTICLE 1904

BINATIONAL PANEL REVIEW UNDER THE NORTH AMERICAN FREE TRADE AGREEMENT IN THE MATTER OF:

Oil Country Tubular Goods from Mexico; Final Determination of Sales At Less Than Fair Value

USA-95-1904-04

REMAND ORDER

The Panel ORDERS the U.S. Department of Commerce to make a determination on remand consistent with the instructions and findings set forth in the Panel’s opinion. The Department shall allow an appropriate period of time for North Star and TAMSA to comment on the proposed remand results. The final determination on remand shall be issued within ninety (90) days of the date of this Order.

ISSUED ON JULY 31, 1996

SIGNED IN THE ORIGINAL BY:

Harry B. Endsley, Chairman

Héctor Cuadra y Moreno

Raymundo-Emilio Enríquez-Sánchez

Frank G. Evans

Daniel G. Partan

³³⁴ Pub. Doc. 146, Fiche 26, Frame 35, at 10 (emphasis added)..

³³⁵ The Panel considers that this represents an opportunity as much as it does a burden, since it allows a respondent to clear up ambiguities, resolve issues and select methodologies that will be acceptable to the Department at the outset of an investigation, not toward the end of the investigation when it has become too late for the respondent to change course.

³³⁶ See Canned Pineapple, 60 Fed. Reg. at 29559 (response to Comment 6) ("[T]he Department’s practice is to rely on a respondent’s books and records prepared in accordance with its home country GAAP unless these accounting principles do not reasonably refelect costs asscociated with production of the subject merchandise.").

³³⁷ Fin. Det., 60 Fed. Reg. at 33573.See also Welded Carbon Steel From Singapore, 51 Fed. Reg. at 33104 (response to Comment 6) (allocating factory overhead based on total machine time rather than tonnage produced) and Shop Towels from Bangladesh, 57 Fed. Reg. at 3998-99 (response to Comment 5) (allocating fabrication and depreciation expenses based on total machine time rather than kilogram output).

³³⁸ Department Panel Rule 57(2) Brief, at 83.

³³⁹ The Panel again notes that North Star disputes that selection of this alternative methodology was even a practical necessity. See North Star Panel Rule 57(2) Brief, at 55 note 140.

³⁴⁰ See supra note 326.

³⁴¹ See supra text accompanying note 338.

³⁴² See supra notes 190, 191.

³⁴³ Id.

³⁴⁴See supra text accompanying note 323.

³⁴⁵ See supra text accompanying note 160.

³⁴⁶ TAMSA Panel Rule 57(1) Brief, at 71.

³⁴⁷ See Department Panel Rule 57(2) Brief, at 97-102.

³⁴⁸Citing North Carolina v. Rice, 404 U.S. 244, 246 (1971) ("[F]ederal courts are without power to decide questions that cannot affect the rights of litigants in the case before them.").

³⁴⁹ Citing Matsushita Electric Industrial Co. v. United States, 688 F. Supp. 617, 622 (Ct. Int’l Trade 1988) (issue not ripe for review because question could be considered upon a final determination), aff’d 861 F.2d 257 (Fed. Cir. 1988); and American Spring Wire Corp. v. United States, 569 F. Supp. 73, 75 (Ct. Int’l Trade 1983) (even an event that is likely to recur is no substitute for an actual controversy).Citing also SEC v. Chenery, 332 U.S. 194, 196 (1947) ("[A] reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.").

³⁵⁰ North Star Panel Rule 57(2) Brief, at 64-75.

³⁵¹ NAFTA Article 1911 explicitly states that "general legal principles" includes mootness (see supra note 165).

³⁵²See American Spring Wire, 569 F. Supp. at 74, citing Liner v. Jafco, 375 U.S. 301, 305 note 3.

³⁵³ American Spring Wire, 569 F. Supp. at 74. Accord North Carolina v. Rice, 404 U.S. at 246.

³⁵⁴ On subsequent reconsideration, nothing would prevent the Department from reaching, if it chose to do so, a decision favoring TAMSA on the substantive issue.

³⁵⁵ Matsushita Elec. Indus. v. United States, 688 F. Supp. at 622 ("At this time we do not know precisely what methodology Commerce will employ or what justification Commerce may have for any change in methodology it may make. Moreover, it is possible that Commerce may finally revoke the dumping order under whatever methodology it employs."), aff’d Matsushita Elec. Indus. v. United States, 861 F.2d 257, 260 (Fed. Cir. 1988).