A. Changes suggested in the Customs Tariff (Identification, Assessment and Collection of Anti-dumping Duty on Dumped Articles and for Determination of Injury) Rules ( hereinafter referred to as “the Anti-Dumping Rules”)
- Section 9B (1) (a) of the Custom Tariff Act, 1975 (hereinafter referred to as “the Act”) & Normal value determination for non-market economy countries.
Annexure I to the ant-dumping rules lays down the principles governing the determination of Normal Value, Export price and Margin of Dumping. The comparison between the Normal value and the export price has to be at the same level of trade, should be as near about as possible in terms of time of sale and most importantly should account for all factors which may affect price comparability.
Special provisions have also been provided (as per Rule 7 of Annexure I) for calculation of Normal Value in the case of non-market economy countries:
“In case of imports from non-market economy countries, normal value shall be determined on the basis of the price or constructed value in a market economy third country, or the price from such a third country to other countries, including India, or where it is not possible, on any other reasonable basis, including the price actually paid or payable in India for the like product, duly adjusted if necessary, to include a reasonable profit margin. An appropriate market economy third country shall be selected by the designated authority in a reasonable manner [keeping in view the level of development of the country concerned and the product in question] and due account shall be taken of any reliable information made available at the time of the selection. Account shall also be taken within time limits; where appropriate, of the investigation if any made in similar matter in respect of any other market economy third country. The parties to the investigation shall be informed without unreasonable delay the aforesaid selection of the market economy third country and shall be given a reasonable period of time to offer their comments.”
The normal value so arrived at is considered to be reflective of the market conditions of demand and supply and therefore free from all elements of state control, regulation and intervention including subsidies (which is the case with non-market economy countries). The export price considered is based on the actual import data (after accounting for adjustments to reduce it to ex-factory level) and therefore carries the effect of all prohibited and actionable subsidies (and not necessarily only export linked subsidies). The export price considered for dumping margin calculation is lower than what it would be without the effect of subsidies. Consequently the dumping margin (the difference of the Normal value and export price) accounts for the effect of the subsidies as one variable is free of subsidies and the other variable is influenced by subsidies.
Let us now examine the provisions of Section 9B (1) (a) of the Act:
“no article shall be subject to both countervailing duty and anti-dumping duty to compensate for the same situation of dumping or export subsidization.”
As the dumping margin calculation in the case of a non-market economy country accounts for the effects of the subsidy (as outlined above) , the intent is to prevent a dual levy of both anti-dumping duty (ADD) and countervailing duty (CVD) to cover the same situation of dumping or export subsidization. In the case of a dual investigation, the Authority addresses this question through a “higher of the two” principle i.e. the duty applicable would be higher of the anti-dumping duty or the countervailing duty. If the lower duty has already been levied, then only the differential portion of the higher duty would be levied. If the higher duty has already been levied, then there is no levy of the lower duty.
The stress is on the words “same situation”. Both anti-dumping and countervailing duty investigations in the case of non-market economy countries examine the issue of subsidization and accordingly the circumstances and factual details of the subsidy framework are clearly linked to the time point being referred to (as the framework itself changes over time).
Of course, while a subsidy investigation is focused only on the injurious effects of subsidies, the primary aim of a dumping investigation is to examine dumping behaviour and the effects of subsidy (through the construction of Normal value/surrogate Normal value and the comparison of the same with the export price) is only one of the elements which are considered in a dumping investigation. As dumping involves a comparison of export price and Normal value, additional elements may enter the equation other than subsidies alone:
- The full effect of the subsidy is not passed on to the customer in the export price.
- Even after removing the effect of the subsidy, the cost structure of the non-market economy country and the surrogate country may not be the same.
- The exporter may offer the product under consideration (PUC) for exports at different rates of return as compared to the rate of return built into or considered in either the surrogate normal value or the constructed normal value.
Further, the levy of either ADD or CVD is not a function of dumping margin or subsidy margin alone but of injury margin as well.
Based on the above quoted facts, the following scenarios are likely to emerge in the case of same period of investigation (POI) and same PUC in a dual investigation:
- Both dumping margin and subsidy margin are higher than injury margin and therefore the duty gets restricted to the injury margin i.e. both ADD and CVD are the same.
- Both dumping margin and subsidy margin are lower than injury margin. As such ADD is imposed based on dumping margin and CVD is imposed based on subsidy margin and effectively the higher of the two prevails (based on differential duty) which takes care of the injurious effects of both dumping as well as subsidization.
- Dumping margin is higher than injury margin but subsidy margin is lower than injury margin. ADD is imposed based on the injury margin but CVD is imposed based on the subsidy margin and effectively the higher of the two prevails (based on differential duty) which accounts for the injurious effects of both dumping as well as subsidization.
- Dumping margin is lower than injury margin but subsidy margin is higher than injury margin. ADD is imposed based on the dumping margin but CVD is imposed based on the injury margin and effectively the higher of the two prevails (based on differential duty) which accounts for the injurious effects of both dumping as well as subsidization.
It is evident that in a scenario where the POI is the same, the provisions of Section 9B (1) (a) of the Act can be easily complied with through “the higher of the two” principle.
However, in a scenario where there is an anti-dumping investigation followed by an anti-subsidy investigation or vice versa i.e. the PUC is the same but the POI is different, the “higher of the two” principle will not suffice. We may now consider the following implications of following the “higher of the two” principle in such cases:
- The POI is different and therefore it is not the same situation of dumping or export subsidization. Accordingly, the comparability required for following the “higher of the two” principle is not there.
- Duty is imposed not based on subsidy margin or dumping margin alone but on injury margin as well following the lesser duty rule. Not only dumping and subsidization but the injury has also been worked out with different time frames affecting comparability.
- One duty may be based on injury margin and the other may be based on dumping/subsidy margin again affecting comparability.
- As explained earlier, dumping includes various elements other than subsidy and a different POI calls for a re-examination of those elements as well.
Assuming that there is first an anti-dumping investigation followed by an anti-subsidy investigation with different POI but the same PUC, some scenarios can be easily thought of:
- ADD is levied on the basis of dumping margin and CVD is levied based on subsidy margin. However, the injury margin in the CVD case while being higher than the subsidy margin could still be lower than the dumping margin of the ADD case. In the CVD case, part of the injury is because of subsidy and part of it is because of other factors which includes dumping as well. However, since the dumping margin of the earlier case is higher than the injury margin of the CVD case, it implies that injury because of dumping has also come down and it calls for a mid-term review of the anti-dumping duty. Simply following a “higher of the two” principle without doing a mid-term review of ADD simultaneously with the CVD investigation would be fallacious.
- ADD is levied on the basis of dumping margin and CVD is levied based on injury margin. While subsidy margin in the CVD case is higher than the injury margin of the CVD case, it is possible that the dumping margin of the ADD case is also higher than the injury margin of the CVD case. It implies that injury on account of dumping has come down as well and therefore the CVD investigation should have been coupled with a mid-term review of ADD. Only then can the “higher of the two” rule be implemented.
It is possible to envision other scenarios similar to the ones described above and it is evident that in the case of ADD investigations and CVD investigations with same PUC and different POI, a simple application of the “higher of the two” principle will not suffice.
As a case in the point, some such instances which have happened in the past (in terms of concluded investigations) are listed below:
- Stainless Steel Flat Products
- Anti-Dumping duty was imposed on imports of Hot Rolled Flat products of Stainless Steel of Grade 304 vide Customs Notification # 28/2015-Cus (ADD) – DGAD Final Finding No. 14/30/2013-DGAD. Further, sunset review proceedings were initiated by DGTR vide Case No. (SSR) 07/2019 and Final Findings were issued on 29th of September’2020 which recommended anti-dumping duty. China PR was one of the subject countries and Normal value was constructed in both the original investigation as well as the Sunset Review investigations.
- Anti-Dumping duty was imposed on Cold Rolled Flat Products of Stainless Steel in widths of 600mm-1250mm vide Customs Notification # 61/2015-Cus(ADD)-DGAD Final Finding No. 15/04/2014-DGAD. This was the ADD imposed after Sunset Review. The original duty was imposed in 2010. Further, a second Sunset Review was initiated vide Case No. AD-SSR 08/2020 dated 30th of September’2020. China PR was one of the subject countries and again Normal value was constructed.
- Countervailing duty was imposed on imports of Stainless Steel Flat Products from China PR vide Custom Notification # 1/2017-Customs-CVD.
The PUC in the CVD case also included the PUC of the two ADD cases. Since there was a simultaneous levy of CVD and ADD for certain portions of the PUC, the Custom Notification sought to address this issue by clarifying that duty would only be charged for the differential amount in such cases i.e. the “higher of the two” principle was followed.
Although the case was agitated by certain interested parties in the Honourable High Court of Delhi, it was dismissed. However, the dismissal was not based on the grounds quoted above.
- Certain castings for wind operated Electricity Generators and windmills
CVD was levied vide Customs Notification # 1/2016-Cus (CVD) and ADD was levied vide Customs Notification # 42/2017-Cus (ADD). The issue of double levy has been clarified in the ADD Customs Notification by specifying levy for the differential amount.
If ADD and CVD investigations are not held simultaneously but in different time periods for the same PUC, then whatever is the sequence of the ADD and the CVD investigation (ADD followed by CVD or CVD followed by ADD), the latter investigation should ideally be coupled with a mid-term review of the first duty. It goes without saying that if the first duty has expired before the commencement of the second investigation, then this issue will not be relevant.
Keeping in view the aforementioned scenarios, it would be useful to frame certain guidelines which clearly elucidate the provisions of section 9(B)(1)(a).While simultaneous anti-subsidy and anti-dumping investigations on the same PUC and the same POI do not present an issue, there needs to be a framework for handling dual investigations with same PUC but different POI.
- Normal Value for non-market economy countries and Constructed Normal Value(CNV)
Rule 7 of Annexure I lays down the principles for arriving at the normal value in the case of non-market economy countries as described in the preceding paragraphs:
(i) On the basis of the price or constructed value in a market economy third country;
(ii) On the basis of the price from such a third country to other countries, including India;
(iii) Where the options listed above are not feasible, on “any other reasonable basis”, including the price actually paid or payable in India for the like product, duly adjusted if necessary, to include a reasonable profit margin.
While prices and costs in a non-market economy may not reflect market conditions (because of state intervention and control), the raw material mix, the process route being employed to manufacture the PUC, the efficiency and productivity parameters etc. in a non-market economy may be better as compared to the appropriate third market economy country or for that matter India (if the price paid or payable in India is taken as the basis for calculation of Normal value). Final cost is an outcome of both pricing of factors of production as well as efficiency in the utilisation of such factors of production. The fact that an economy is a controlled economy may impact input and output prices but has no bearing whatsoever on the efficiency in utilisation of factors of production.
One may argue that Normal values are based on selling prices which is different from costs. However, prices (as reflected in the Normal values) cannot be completely delinked from costs because even the prices considered for normal value have to provide for recovery of costs over the investigation period even if the Normal value being considered is a constructed one.
Cost structure of an appropriate third market economy country or India may be higher than that of a non-market economy country not just because the input prices are higher as compared to a controlled economy (market determined vs regulated) but also because of lower efficiency and productivity ratios or because of a less cost effective raw material mix. It is therefore important to distinguish between the effect of input price differentials (regulated vs non-regulated) and effects of other factors. Normal value may have to be constructed even in the case of market economy countries if it cannot be derived from the Questionnaire response of exporters or where the majority of exporters do not cooperate and the issue under discussion will be relevant in this scenario as well.
The question of efficiency is dealt with in the Manual of Operating Practices for Trade Remedy Investigation issued by Directorate General of Trade Remedies (hereinafter referred to as the “operating manual”) albeit in a limited fashion:
Para 13.18.3 of the operating manual states that in cases where the Normal value has to be arrived at by considering the third option (which is price paid or payable in India) and there are multiple domestic producers, the constructed normal value should be based on the data of the most efficient domestic producer.
However, this approach stops short of comparing the efficiency parameters of even the most efficient domestic producer with the average efficiency parameters of the country under investigation for arriving at a fair and reasonable judgement regarding constructed Normal value.
This factor may be actively considered while conducting anti-dumping investigations against non-market economy countries and suitable guidelines may be framed in this context.
- Principles for determination of Non-Injurious Price (NIP) – Annexure III to the anti-dumping Rules-Reasonable Return on capital employed
Clause (viii) of Annexure III provides that a reasonable return on capital employed may be allowed for recovery of interest, corporate tax and profit. The average capital employed is the sum of net fixed assets and net working capital on the basis of the average of the same at the beginning and at the end of the period of investigation.
The matter has been examined at length by the Directorate in the operating manual in paras 19.15 to 19.19. Investigations over the last 20 odd years have factored in a return of 22% on the capital employed in the working of NIP. The choice of reasonable rate of return is based on one of the 3 criteria prescribed in the Drugs Price Control Order, 1987 (which is no longer in existence) for fixation of drug prices.
A reasonable return on capital employed is usually based on a number of factors like the relative mix of debt and equity in the capital employed (with the desired return on equity being higher than that of debt because of the appurtenant risk), average rate of return enjoyed by similar industries worldwide, the best rate of return historically enjoyed by the domestic industry during periods not affected by dumping, growth trends of the industry in question (early, peak or mature stage of the product life cycle), competitive intensity between the local players, overall economic growth, cost of capital in the country and changes in the same, new projects or fully depreciated plants etc. The cost of capital does not remain the same because of changes in the aforementioned factors e.g. the interest cost has progressively come down over the last 2-3 years (even excluding the impact of COVID). Similarly, a lot of industries which were earlier in the sunrise stage are now at a mature stage or the degree and intensity of competition in the industry has increased because of which the profitability, growth and return on equity has come down (even without the effects of dumping).
As the concept of non-injurious price is important from the viewpoint of injury margin and in turn the duty levied, using only one standard approach may result in some industries getting undue production and other industries getting less than desired protection.
It would be in the interest of all interested parties to have a framework which provides for a certain degree of flexibility in deciding the reasonable rate of return based on industry requirements and objective criteria.
- “Domestic Industry” standing
Article 5.4 of the Agreement provides that “an investigation shall not be initiated pursuant to paragraph 1 unless the authorities have determined, on the basis of an examination of the degree of support for, or opposition to, the application expressed by domestic producers of the like product, that the application has been made by or on behalf of the domestic industry. The application shall be considered to have been made by or on behalf of the domestic industry if it is supported by those domestic producers whose collective output constitutes more than 50 per cent of the total production of the like product produced by that portion of the domestic industry expressing either support for or opposition to the application. However, no investigation shall be initiated when domestic producers expressly supporting the application account for less than 25 per cent of total production of the like product produced by the domestic industry.”
Similar provisions are enshrined in Rule 5 of the anti-dumping Rules.
However, the footnote to Article 5.4 of the Agreement additionally provides that in the case of fragmented industries involving an exceptionally large number of producers, authorities may decide support and opposition by using statistically valid sampling.
There are many industries in India which are fragmented comprising a large number of small scale units. A similar enabling provision in the anti-dumping Rules will provide greater clarity in dealing with such scenarios. The internal guidelines in this regard, if any, need to be formalized by being made a part of the anti-dumping Rules.
- Principles for determination of Non-Injurious Price (NIP) – Annexure III to the Rules- Best utilization of raw material, utilities and capacities
The NIP has to be arrived at after considering the best utilization of raw material, utilities and capacities. This intent is to isolate the injury caused by dumping and eliminating the effects of other factors which may have caused injury. Relevant extract from Annexure III is reproduced below:
The following elements of cost of production are required to be examined for working out the non injurious price, namely: —
(i) The best utilisation of raw materials by the constituents of domestic industry, over the past three years period and the period of investigation, and at period of investigation rates may be considered to nullify injury, if any, caused to the domestic industry by inefficient utilisation of raw materials.
(ii) The best utilisation of utilities by the constituents of domestic industry, over the past three years period and period of investigation, and at period of investigation rates may be considered to nullify injury, if any, caused to the domestic industry by inefficient utilization of utilities.
(iii) The best utilisation of production capacities, over the past three years period and period of investigation, and at period of investigation rates may be considered to nullify injury, if any, caused to the domestic industry by inefficient utilization of production capacities.
However, there should not be any presumption that mere increase in raw material consumption or utilities or decrease in capacity utilization is the result of inefficiencies or at least the presumption should be rebuttable.
As an example, the raw material mix in the previous years may be more efficient than the POI because of factors beyond the control of the domestic industry (this may happen in those cases where the Bill of Material is not fixed and the same PUC may be produced through different types of raw materials or through different combinations of raw materials). It may happen that the supply of an efficient raw material (efficient in terms of yields) is disrupted during POI because of certain force majeure conditions. This forces the domestic industry to use a less efficient raw material. If this development affects all producers of the PUC worldwide, then there is no reason to penalize the Domestic Industry alone for this. The cost structure and prices of all producers worldwide (including the domestic industry) will go up. This will get reflected in Normal Values as well as export prices. If best utilization of raw materials is considered for NIP, then import price will be on the higher side but the NIP will be based on lower raw material cost thereby lowering the injury margin.
However, if it is something which affects the domestic industry alone, then clearly the same needs to be excluded in calculation of NIP.
Similar issues may arise with respect to use of utilities and utilization of capacities.
Although the domestic industry has agitated on this issue from time to time, there has still not been any change in the framework.
It would be best if Annexure III is amended to at least make the presumptions regarding raw material, utilities and capacity utilization rebuttable.
B. Changes suggested in the Customs Tariff (Identification, Assessment and Collection of Countervailing Duty on Subsidized Articles and for Determination of Injury) Rules ( hereinafter referred to as “the Anti-Subsidy Rules”)
- Definition of “Domestic Industry”
Prior to 2020, there was a marked difference in the definition of “domestic industry” between the anti-dumping rules and the anti-subsidy rules.
The definition provided in Rule 2 (b) of the anti-dumping rules is as follows:
“domestic industry” means the domestic producers as a whole engaged in the manufacture of the like article and any activity connected therewith or those whose collective output of the said article constitutes a major proportion of the total domestic production of that article except when such producers are related to the exporters or importers of the alleged dumped article or are themselves importers thereof in which case [such producers may be deemed] not to form part of domestic industry
The meaning of the term “related party” is provided by way of an explanation to the aforementioned definition. The use of the word “may” clearly indicates that even if the domestic producer is related to the exporter or importer or has imported the product under consideration, the Authority has the discretion to allow the applicant to be considered as “domestic industry” if there are exceptional circumstances. Clause 4.9.20 of the operating manual examines this issue and certain indicative circumstances are indicated which may lead the Authority to provide such approval e.g. duty free import of the PUC to fulfil an export obligation or imports in negligible quantities etc.
However, the definition of the “domestic industry” as per Rule 2(b) of the anti-subsidy rules (prior to 2020) was somewhat different:
“domestic industry” means the domestic producers as a whole of the like article or domestic producers whose collective output of the said article constitutes a major proportion of the total domestic production of that article, except when such producers are related to the exporters or importers of the alleged subsidised article, or are themselves importers thereof, in which case such producers shall be deemed not to form part of domestic industry.
However, no explanation was provided for the term “related party”. The use of the word “shall” implied that the Authority had no discretion whatsoever in deciding whether a domestic producer qualified as domestic industry if the domestic producer was related to the exporter or importer of the PUC or was itself an importer of the PUC. Such a related domestic producer was compulsorily excluded from the definition of domestic industry.
The definition of “domestic industry” has now being amended as per Customs Notification # 10/2020-Customs (N.T.) on the following lines:
“means the domestic producers as a whole engaged in the manufacture of the like article or those whose collective output of the said article constitutes a major proportion of the total domestic production of that article, except when such producers are related to the exporters or importers of the alleged subsidised article, or like article from other countries or are themselves importers thereof:”
Further, an explanation has been inserted to explain the meaning of the term “related party”.
However, a perusal of this amendment gives rise to the following questions:
- Why was the amended definition not aligned to the one provided in the anti-dumping rules by simply replacing the word “shall” by “may” instead of completely removing the last segment of the earlier definition i.e.” in which case such producers shall be deemed not to form part of domestic industry”?
- Does this amended definition imply that the Authority now has the discretion to decide on the domestic industry status of the domestic producer where such producer is linked to the importer/exporter or is an importer of the PUC? Though the word “shall” has been removed, the interpretation can still be drawn the same way as earlier. The definition still appears to be close ended especially without the use of enabling provisions as provided in the definition of domestic industry under anti-dumping rules.
- If the intention of this amendment is to provide such discretion to the Authority, then what would be the status of those investigations –
- Which were initiated before the date of this amendment &
- Where Final Findings have still not being issued &
- Where the applicant domestic producer is found to be related to exporter/importer or is itself an importer of PUC
It would be best for all concerned if the Government can come out with some guidelines which clearly elucidate the legal interpretation of this definition.
- Principles for calculation of Non-Injurious Price (NIP)
Annexure III to the anti-dumping rules explains in fair amount of detail the guidelines which are employed to arrive at the calculation of the NIP. However, similar provisions are required in the anti-subsidy rules because the “lesser duty rule”” is applied even in CVD cases.
The anti-subsidy rules therefore need to be amended to include an annexure which defines the principles to be followed for calculation of NIP.