Since Hardware Co., Ltd. v. United States , 2011 CIT 146 ( 2011 )

Slip Op. 11-146
UNITED STATES COURT OF INTERNATIONAL TRADE
______________________________
:
SINCE HARDWARE (GUANGZHOU) :
CO., LTD., :
:
Plaintiff, :
:
v. : Court No. 09-00123
:
:
UNITED STATES, :
:
Defendant, :
:
and :
:
HOME PRODUCTS INTERNATIONAL, :
LTD., :
:
Def.-Int. :
______________________________:
OPINION AND ORDER
[Plaintiff’s motion for judgment on the agency record sustained,
in part, and the case is remanded.]
Dated: November 29, 2011
Dorsey & Whitney LLP (William E. Perry), for plaintiff.
Tony West, Assistant Attorney General; Jeanne E. Davidson,
Director, Patricia M. McCarthy, Assistant Director, Commercial
Litigation Branch, Civil Division, United States Department of
Justice (David S. Silverbrand and Carrie A. Dunsmore); Office of
Chief Counsel for Import Administration, United States
Department of Commerce (Thomas M. Beline), of counsel, for
defendant.
Blank Rome LLP (Frederick L. Ikenson, Peggy A. Clarke, and
Larry Hampel), for defendant-intervenor.
Court No. 09-00123 Page 2
Eaton, Judge: Before the court is the Department of
Commerce’s (the “Department” or “Commerce”) Final Results of
Redetermination Pursuant to Remand, dated February 17, 2011
(“Remand Results”). The matter was remanded by the court
following plaintiff Since Hardware (Guandozhou) Co., Ltd.’s
(“Since Hardware” or “plaintiff”) motion for judgment on the
agency record pursuant to USCIT R. 56.2, Since Hardware
(Guangzhou) Co. v. United States, 34 CIT __, __, Slip Op. 10-108
at 22 (Sept. 27, 2010) (not reported in the Federal Supplement)
(“Since Hardware I”), which challenged Commerce’s final results
of the Third Administrative Review of the antidumping order on
ironing boards from the People’s Republic of China (the “PRC”)
for the period of review (“POR”) August 1, 2006 through July 31,
2007, Floor Standing Metal-Top Ironing Tables and Certain Parts
Thereof from the PRC, 74 Fed. Reg. 11,086 (Dep’t of Commerce
Mar. 16, 2009) (final results) and the accompanying Issues and
Decision Memorandum (“Issues & Dec. Mem.”) (collectively, the
“Final Results”).
In the Final Results, the Department found that Since
Hardware’s questionnaire responses concerning its factors of
production were so unreliable that the application of adverse
facts available (“AFA”) under 19 U.S.C. § 1677e(b)(2006) was
warranted, not only for determining the company’s dumping
margin, but also in determining whether it operated free from
Court No. 09-00123 Page 3
the control of the PRC government.1 Based on this determination,
the Department concluded that Since Hardware was not entitled to
a company-specific rate and, therefore, it was assigned the PRC-
wide rate of 157.68%.2
In its motion for judgment on the agency record, plaintiff
challenged, inter alia, the Department’s findings with respect
to its separate-rate status. On this issue, the court held that
1
The court sustained Commerce’s determination to apply
AFA with regard to Since Hardware’s factors of production
because “it is clear that the Department acted reasonably in
determining that it could not rely on the material the company
placed on the record relating to the country of origin and
valuation of the factors of production.” Since Hardware I, 34
CIT at __, Slip Op. 10-108 at 20.
2
Whether Since Hardware is entitled to have a company-
specific rate assigned to it is an issue because the company
operates in the PRC, which is a non-market economy country. A
non-market economy country includes “any foreign country that
[Commerce] determines does not operate on market principles of
cost or pricing structures, so that sales of merchandise in such
country do not reflect the fair value of the merchandise.” 19
U.S.C. § 1677(18)(A); Shandong Huarong Gen. Group Corp. v.
United States, 28 CIT 1624, 1625 n.1 (2004) (not reported in the
Federal Supplement). The PRC has been determined to be a non-
market economy country and has been treated as such in all past
antidumping investigations. Zhejiang Native Produce & Animal
By-Products Imp. & Exp. Corp. v. United States, 27 CIT 1827,
1834 n.14 (2003) (not reported in the Federal Supplement)
(citations omitted).
When an exporter operates in a non-market economy country,
Commerce presumes it to be part of a country-wide entity
controlled by that country’s government. If that exporter can
establish that it is free from government control, however, it
is entitled to have its own “separate rate” based on its own
factors of production and sales data, or if AFA is applicable,
by an acceptable method.
Court No. 09-00123 Page 4
Commerce’s decision to deny Since Hardware separate-rate status
was unsupported by substantial evidence and contrary to law
because
[a]n examination of the record . . . reveals that none
of the unreliable information submitted by the company
is relevant to the question of government control. . .
. [T]he evidence that the company was not controlled
by the government (e.g., documentation substantiating
its claims that it is a wholly foreign-owned
enterprise registered in the PRC . . . and evidence
regarding de facto control over its export activities)
is far removed from questions relating to the origin
of the factors of production and their cost.
See Since Hardware I, 34 CIT at __, Slip. Op. 10-108 at 15.
Accordingly, on remand, the Department was instructed to
“reexamine the record to again determine if Since Hardware has
produced evidence sufficient to qualify for application of a
separate rate” in the assignment of its antidumping duty rate.
Id. at 22.
On remand, Commerce again declined to evaluate the merits
of plaintiff’s evidence that it was not subject to government
control. Rather, the Department determined that Since Hardware
failed to meet its burden of proving its independence from
government control. Commerce reached this determination by
concluding that the company’s responses to Commerce’s separate-
rate questionnaires could only be verified by reviewing Since
Hardware’s accounting records, which had previously been
determined to be unreliable. Remand Results at 2. In other
Court No. 09-00123 Page 5
words, Commerce found that plaintiff’s separate-rate
questionnaire responses were unverifiable and, therefore, could
not be considered as evidence. Based on this finding, Commerce
determined that plaintiff had failed to establish that it was
entitled to a separate rate, and retained its determination to
assign the company the PRC-wide rate of 157.68%.
Plaintiff filed its comments challenging the Remand Results
on March 31, 2011. See generally Pl.’s Objs. to Rem. Res.
(“Pl.’s Cmnts.”). The court has jurisdiction pursuant to 28
U.S.C. § 1581(c) and 19 U.S.C. § 1516a(a)(2)(B)(i). For the
reasons stated below, the matter is remanded to Commerce with
instructions.
STANDARD OF REVIEW
The standard of review is set forth in 19 U.S.C.
§ 1516a(b)(1)(B)(i), which provides, in relevant part, that the
court “shall hold unlawful any determination, finding, or
conclusion found . . . to be unsupported by substantial evidence
on the record, or otherwise not in accordance with law.”
Accordingly, “Commerce’s determinations of fact must be
sustained unless unsupported by substantial evidence in the
record and its legal conclusions must be sustained unless not in
accordance with law.” Norsk Hydro Canada, Inc. v. United
States, 472 F.3d 1347, 1357 (Fed. Cir. 2006).
Court No. 09-00123 Page 6
DISCUSSION
I. Remand Results
In the Remand Results, Commerce noted that Since Hardware
bears the burden of establishing its entitlement to a separate
rate by demonstrating both de jure and de facto independence
from the Chinese government. See Sigma Corp. v. United States,
117 F.3d 1401, 1405 (Fed. Cir. 1997). In determining whether de
jure independence is established, Commerce looks for: “(1) [a]n
absence of restrictive stipulations associated with an
individual exporter’s business and export license; (2) any
legislative enactments decentralizing control of companies; or
(3) any other formal measures by the government decentralizing
control of companies.” Fujian Mach. & Equip. Imp. & Exp. Corp.
v. United States, 25 CIT 1150, 1172, 178 F. Supp. 2d 1305, 1329
(2001) (citations omitted); Remand Results at 4.
The Department considers four factors in determining de
facto independence:
(1) [w]hether the export prices are set by, or are
subject to the approval of, a governmental authority;
(2) whether the respondent has authority to negotiate
and sign contracts and other agreements; (3) whether
the respondent has autonomy from the government in
making decisions regarding the selection of
management; and (4) whether the respondent retains the
proceeds of its export sales and makes independent
decisions regarding disposition of profits or
financing of losses.
Court No. 09-00123 Page 7
Coal. for the Pres. of Am. Brake Drum & Rotor Aftermarket Mfrs.
v. United States, 28 CIT 447, 457; 318 F. Supp. 2d 1305, 1313
(2004) (citations omitted); Remand Results at 4.
On remand, Commerce determined that Since Hardware
established de jure independence3 because it “provided a copy of
its business license issued by the Guangzhou Municipal
Industrial and Commercial Administration, and relied upon the
Foreign Trade Law which establishes a decentralization of
government control over business operations.” Remand Results at
5.
The Department further determined, however, that the
company failed to establish its de facto independence from the
PRC government because its separate-rate claim necessarily
relied on the same accounting records that the Department found
to be undependable in the Final Results. According to Commerce:
3
In its Draft Results of Redetermination, the
Department determined that Since Hardware had not established de
jure independence because it did not disclose a “change” in its
ownership structure, and this non-disclosure precluded the
Department from further inquiring into the nature of the
company’s ownership. Commerce, therefore, “conclude[d] that
this contradiction in Since Hardware’s responses, by itself,
renders Since Hardware’s separate rate portion of its
questionnaire response unreliable for granting Since Hardware a
separate rate.” Draft Results of Redetermination at 7.
Following receipt of Since Hardware’s comments to the Draft
Results, however, the Department acknowledged that, as a result
of an oversight, it had failed to see that Since Hardware’s
responses to the Department’s questionnaires concerning the
company’s ownership structure were consistent and, therefore,
they supported a conclusion that it had established de jure
independence. Remand Results at 2.
Court No. 09-00123 Page 8
[t]he respondent’s books and records, including
accounting documentation, especially in those cases in
which the respondent cites to its books and records to
support its claimed independence, are tied to the
determination regarding separate rate eligibility.
The Department previously found, and the court
affirmed, that Since Hardware’s submitted accounting
ledgers included unreliable data related to market
economy purchases.
Remand Results at 4. Thus, the Department takes the position
that it was required to reject the company’s answers to the
separate rate questionnaires because they were unverifiable
since they were based on the discredited records.
Specifically, the Department states that it “examined the
relevance of the books and records [found unreliable in the
Final Results] to the separate rate issue with respect to the
statements made by Since Hardware that supports a de facto
determination. In examining this question, we find a critical
nexus between certain statements made by Since Hardware and the
company’s books and records.” Remand Results at 6. Commerce
found the “critical nexus” to be that plaintiff’s questionnaire
responses concerning the first and fourth factors in the de
facto independence analysis ((1) the setting of export prices
and (4) the retention of proceeds and disposition of profits or
financing of losses) could only be verified by examining the
Court No. 09-00123 Page 9
company’s accounting records, which had already been determined
to be unreliable.4 Remand Results at 6.
In reaching this conclusion, the Department relied solely
on the verification procedures used in connection with Since
Hardware’s separate rate application during the First
Administrative Review.5 After placing its verification report
from the First Administrative Review on the record, the
Department found that the verification procedures used in that
review required it to examine Since Hardware’s accounting
records to verify the company’s claim that it set its own sales
prices and independently determined how to dispose of its
profits or finance its losses. See Remand Results at 14 (“As
detailed . . . in the Department’s verification report [from the
First Administrative Review], the Department verifiers conduct
4
The Department determined that Since Hardware’s
responses regarding the second and third de facto independence
factors (authority to negotiate and sign contracts; and autonomy
from government in selection of management) supported a
conclusion of independence.
5
The First Administrative Review covered the POR
February 3, 2004 through July 31, 2005. Plaintiff argues that
the Department is required to evaluate each segment of the
proceedings separately and, thus, it was improper to use
evidence from prior segments to support its conclusion in this
review. Commerce, however, merely relied on its prior
verification report as the source of its verification
procedures, rather than evidence of Since Hardware’s lack of
independence from the PRC government. Accordingly, the
Department’s mere reference to that verification report is not
unlawful.
Court No. 09-00123 Page 10
financial traces through each aspect of the respondent’s
accounting system.”).
With regard to the “setting of export price” factor, in
this Third Administrative Review, Since Hardware answered the
Department’s questionnaires, in part, by stating that it “based
prices for its . . . U.S. sales . . . on the production costs,
taking into consideration overhead and administrative expenses,
profit and other expenses incurred during the ordinary course of
business.” Since Hardware’s Section A Questionnaire Responses,
dated Oct. 25, 2007 (C.R. Doc. 2) (P.R. Doc. 15) (“Section A
Questionnaire Response”) at 6. Stated differently, Since
Hardware maintained that, at least in part, it set export prices
based on its production costs and profit objectives.
Commerce found that “[b]ecause Since Hardware’s Section A
questionnaire response implicates its production costs and
profit in making export pricing decisions, the Department
examines certain accounting records during a verification of a
respondent.” Remand Results at 7. The Department went on to
find that “[t]he separate rate response given . . . cites to
specific accounting ledgers and implicates the production costs
ledger in the accounting records. Under accounting principles,
and as evidenced by Department verification, these ledger
accounts must tie into the general ledger, which in turn ties
into the financial records.” Remand Results at 8.
Court No. 09-00123 Page 11
As has been noted, in the Final Results the Department
found that these ledgers were unreliable because Since Hardware
had misrepresented the source and cost of several of its
manufacturing inputs. In Since Hardware I, the court sustained
the determination that the company’s accounting records were
unreliable. See Since Hardware I, 34 CIT at __, Slip Op. 10-108
at 20. Thus, Commerce determined that the company’s
questionnaire responses concerning how it set its export prices
could not support a finding of de facto independence because
“[w]ithout reliable accounting ledgers, the Department cannot
verify this prong of the separate rates [sic] test.” Remand
Results at 8.
With regard to the fourth factor, concerning the company’s
retention and use of sales proceeds, Since Hardware responded,
in part, to the Department’s questionnaire by stating that it
“deposit[s] export earnings into [its] respective bank
accounts,” and “[t]he board of directors determines the
disposition of profits.” Section A Questionnaire Response at 8-
9. When asked whether it is required to exchange its foreign
currency for domestic currency, the company responded that it
was not, but rather it “use[s] foreign currency earned on the
sale of subject merchandise to fund its operational expenses.”
Section A Questionnaire Response at 9-10. In other words, as
part of its response to the Department’s questionnaires, Since
Court No. 09-00123 Page 12
Hardware claimed that it retained the profits it earned on
export sales, which it either deposited in bank accounts or used
to fund its operations.
As with the submissions regarding the first factor, the
Department found that it “is unable to rely upon the statements
concerning export proceeds in Since Hardware’s separate rate
application because such statements are unverifiable on the
ground that they rest on Since Hardware’s accounting
documentation.” Remand Results at 10.
As a result, the Department ultimately concluded that:
Since Hardware’s responses related to its export sales
process and its disposition of export proceeds
directly implicates its accounting system. As
demonstrated through reference to Since Hardware’s
verification from the first administrative review, the
Department verifies certain accounting ledgers and
traces a sample sale through to the general ledger.
Each sub-ledger is tied to the general ledger, and
Since Hardware cannot demonstrate that the unreliable
accounting documents are separate from its general
operating ledgers. Therefore, the Department cannot
conclude through verifiable evidence that Since
Hardware sets prices or retains revenue as it
explained in its Section A questionnaire response.
Remand Results at 11.
II. Analysis
Plaintiff argues that Commerce’s determination that it
failed to meet its burden of establishing its de facto
independence was unsupported by substantial evidence and
unlawful. Since Hardware asserts that the Department has not
Court No. 09-00123 Page 13
demonstrated that the integrity of its accounting system
necessarily impacted the determination of how it set its prices
or disposed of its sales proceeds. In other words, plaintiff
insists that reference to its unreliable accounting records was
not required for a determination of whether the company is
subject to government control because there is other sufficient
and verifiable material on the record from which this
determination could have been made. According to plaintiff,
that material includes evidence of “contractual authority and
independent decision-making, which could be shown by reference
to communications between a company and the government.” Pl.’s
Cmnts. 10.
The court finds merit in plaintiff’s argument. As a
result, as explained below, the Department’s determination is
remanded for two related reasons. First, by failing to consider
all of the record evidence relating to the company’s separate-
rate application, Commerce did not adhere to the court’s remand
instructions. Second, Commerce’s determination that Since
Hardware’s de facto independence questionnaire responses were
unverifiable was neither supported by substantial evidence nor
in accordance with law.
Court No. 09-00123 Page 14
A. By Not Considering Since Hardware’s Evidence of Its De
Facto Independence, Commerce Failed to Comply with the
Court’s Remand Order
In the Remand Order, the Department was instructed to
consider the evidence on the record concerning Since Hardware’s
independence from the PRC government. See Since Hardware I, 34
CIT at __, Slip Op. 10-108 at 22-23 (“[O]n remand Commerce shall
reexamine the record to determine again if Since Hardware has
produced evidence sufficient to qualify for application of a
separate rate.”). Although Since Hardware made reference to its
costs of production in responding to Commerce’s questionnaires
concerning how it set its export prices, its answers did not end
there. Much of plaintiff’s claim was based on its
representation that its export prices were determined through
negotiations with its customers. In support of its assertion,
the company submitted direct evidence of these negotiations.
For example, Since Hardware provided email correspondence
with its customers detailing the negotiations that took place.
See Since Hardware’s Supplemental Questionnaire Responses dated
May 20, 2008 (“Supplemental Questionnaire Response”) (C.R. Doc.
11) (P.R. Doc. 41) at Exs. 7, 14; Section A Questionnaire
Response at Ex. 7. In addition, the company provided purchase
orders, invoices, and packing slips, showing the terms of sale,
including price. See Supplemental Questionnaire Responses at
Ex. 11; Section A Questionnaire Response at Ex. 7. These
Court No. 09-00123 Page 15
materials tend to support Since Hardware’s claim that its prices
were the product of customer negotiation, rather than government
oversight or involvement.
Although this evidence was on the record, the Department
failed to consider it. Rather, Commerce found that Since
Hardware’s separate-rate questionnaire responses could only be
verified by looking at the company’s unreliable accounting
records. The additional materials submitted by plaintiff,
however, appear to demonstrate that, independent of its
accounting records, there is evidence that it set its export
prices without government oversight or direction.
In responding to the Department’s questionnaires concerning
the disposition of its sales proceeds, Since Hardware claimed
that they were deposited in the company’s bank accounts and used
to fund operations, as directed by the company’s management.
See, e.g., Section A Questionnaire Response at 8-9. During the
review, at the Department’s request, Since Hardware provided
evidence showing its U.S. sales, including a “sales
reconciliation,” which ostensibly demonstrated that the company
identified all of its U.S. sales. See Since Hardware’s Section
C Questionnaire Response and Sales Reconciliation, Nov. 13, 2007
(“Section C Questionnaire Response”). In response to
supplemental questionnaires, the company also provided revised
sales information, including updates concerning the receipt of
Court No. 09-00123 Page 16
payments from customers who ordered and received merchandise
during the POR, but remitted payment thereafter. See
Supplemental Questionnaire Response at 11, Ex. 16. Absent from
the record was any evidence that plaintiff disposed of its sales
proceeds at the direction of the PRC government.
It is worth noting that the Department did not request any
specific evidence from Since Hardware to support its claims
regarding its independent disposition of proceeds in its
supplemental questionnaires. Rather, Commerce’s follow-up
questionnaires focused exclusively on the accuracy of the
company’s sales data, suggesting that the Department was
concerned with ensuring that all of the company’s U.S. sales
were accounted for, and not with who directed how the sales
proceeds were disposed of. See, e.g., Supplemental
Questionnaire, A-570-888 (Dep’t of Commerce Apr. 18, 2008) at 6,
8-11. Thus, despite the opportunity to do so, Commerce did not
further explore the company’s claim that it disposed of its
sales proceeds at the sole direction of its management.
Because, on remand, the Department limited its analysis to
a finding that the unreliability of plaintiff’s accounting
records prevented verification, it did not examine or discuss
any of the record evidence that might have indicated that the
company retained its sales proceeds and made independent
decisions regarding the disposition of its profits or the
Court No. 09-00123 Page 17
financing of its losses. On remand, however, Commerce was
instructed to “reexamine the record to again determine if Since
Hardware has produced evidence sufficient to qualify for
application of a separate rate.” Since Hardware I, 34 CIT at
__, Slip Op. 10-108 at 22. Furthermore, the court instructed
that “Commerce may not assume that the portion of the record
relating to independence from government control has been
impacted by Since Hardware’s questionnaire responses to
unrelated matters.” Id. at 22-23. Commerce, in the Remand
Results, failed to follow these instructions by continuing to
assume that Since Hardware’s unreliable cost of production
accounting records prevented any evaluation of whether the
company was entitled to a separate rate.
“The failure of an agency to candidly comply with the
instructions in a remand order not only shows a disregard for
the issuing court’s authority, but it is also an act that is
contrary to law.” NSK Corp. v. United States, 33 CIT __, __,
637 F. Supp. 2d 1311, 1318 (2009) (citing Smith Corona Corp. v.
United States, 915 F.2d 683, 688 (Fed. Cir. 1990)). For this
reason alone, the Remand Results must be remanded.
Court No. 09-00123 Page 18
B. Commerce’s Determination That Plaintiff’s Separate-Rate
Questionnaire Responses Could Not Be Verified Was
Unsupported by Substantial Evidence and Contrary to Law
In addition to being inconsistent with the court’s remand
instructions, Commerce’s determination that plaintiff’s
separate-rate evidence could not be verified was not supported
by substantial evidence, and was contrary to the Department’s
own regulations.
1. Legal Framework for Verification
The respondent bears the burden of producing evidence of
its de facto independence, and Commerce may refuse to consider
any information submitted by a respondent that cannot be
verified. See 19 U.S.C. §§ 1677e(a)(2)(D), 1677m(e); see also
Shandong Huarong Mach. Co. v. United States, 30 CIT 1269, 1295,
435 F. Supp. 2d 1261, 1284 (2006). Conversely, where a
respondent timely provides verifiable evidence in response to
Commerce’s request, the Department is required, by statute, to
consider such evidence. 19 U.S.C. § 1677m(e).
Verification is the process by which Commerce confirms the
truth and accuracy of information and materials in a
respondent’s questionnaires. See Bomont Indus. v. United
States, 14 CIT 208, 209, 733 F. Supp. 1507, 1508 (1990)
(“Verification is like an audit, the purpose of which is to test
information provided by a party for accuracy and
Court No. 09-00123 Page 19
completeness.”). Commerce is required, by statute, to verify a
respondent’s submissions in certain circumstances. See 19
U.S.C. § 1677m(i). Where not statutorily required, the
Department, by regulation, has the discretion to conduct
verification. See 19 C.F.R. § 351.307(b)(2) (2011). Here,
Commerce was not required to verify Since Hardware’s
questionnaire responses dealing with its claim for an individual
rate; rather, the Department chose to exercise its discretion to
conduct this verification.
Pursuant to 19 C.F.R. § 351.307(c), whenever Commerce
conducts verification it is required to prepare a verification
report, which must contain “the methods, procedures, and results
of a verification.” In addition, Commerce’s chosen method and
ultimate findings during verification must be supported by
substantial evidence. Micron Tech. Inc. v. United States, 117
F.3d 1386, 1396 (Fed. Cir. 1997).
Although unverifiable information may be disregarded by
Commerce, generally the Department must make an effort to verify
information before it can reasonably be deemed unverifiable.
See China Kingdom Imp. & Exp. Co. v. United States, 31 CIT 1329,
1340 n.7, 507 F. Supp. 2d 1337, 1349 n.7 (2007).
Court No. 09-00123 Page 20
2. Commerce’s Determination That Since Hardware’s
Separate-Rate Responses Could Not Be Verified Was
Unsupported by Substantial Evidence and Otherwise
Contrary to Law
As noted, in conducting verification, Commerce found that
Since Hardware’s responses with respect to two de facto
independence criteria – export price setting and proceeds
disposition - could not be verified without reference to the
company’s unreliable accounting records. For the reasons stated
below, the court finds that Commerce’s determinations were
unsupported by substantial evidence and unlawful.
a. Setting of Export Prices
With regard to how Since Hardware set its export prices,
the Department found that the company claimed that it set its
export prices based on its production costs and desired profit
margins. Commerce, therefore, found that the company’s
separate-rate questionnaire responses could only be verified by
examining its accounting records, which Commerce determined, and
the court found, to be unreliable. As has been seen, however,
Since Hardware’s claim that it set its export prices based upon
production costs and desired profit margins was only part of its
argument that its prices were not set by government actors.
Plaintiff’s entire response to the Department’s inquiry as to
Court No. 09-00123 Page 21
“how your company sets the prices of the merchandise it exports
to the United States” was as follows:
Since Hardware directly handled the negotiations with
the U.S. customers for the sales of subject
merchandise. Since Hardware based prices for its
direct U.S. sales and the U.S. sales through Best
Unity6 on the production costs, taking into
consideration overhead and administrative expenses,
profit and other expenses incurred during the ordinary
course of business. . . . These prices are not
subject to review by or guidance from any governmental
organization.
Section A Questionnaire Response at 6-7. The Department’s
question, and plaintiff’s answer, were intended to determine how
Since Hardware set its prices, i.e., were the prices subject to
government approval. Commerce’s inquiry was not intended to
determine whether the company kept accurate records of its
production costs, or, for that matter, of its sales.
While the company’s accounting of its production costs may
be inadequate to verify its costs of production, plaintiff’s
other questionnaire responses indicate that Since Hardware’s
prices were set through direct and independent negotiations with
its U.S. customers. For example, the company explained that
“Since Hardware . . . negotiated directly with [its] customers
through fax, e-mail, telephone and personal meetings.” Section
A Questionnaire Response at 7; see also Section A Questionnaire
6
As Since Hardware explained, and the parties do not dispute,
Best Unity was Since Hardware’s Hong Kong affiliate, through
which it dealt with customers that did not want to deal with
suppliers within the PRC.
Court No. 09-00123 Page 22
Response at 13 (“All U.S. sales were made on a transaction-by-
transaction basis based upon the purchase orders issued by the
U.S. customer.”); Section C Questionnaire Response at 26.
Indeed, the Department relied on this very type of evidence to
verify Since Hardware’s independent price setting in the
verification report from the First Administrative Review. See
Verification of the Sales and Factors Responses of Since
Hardware in the First Administrative Review of Floor-Standing
Metal-Top Ironing Tables from the PRC, A-570-888 (Dep’t of
Commerce Jan. 22, 2007) (C.R. Doc. 1) (P.R. Doc. 1) at 7 (“The
team inquired of [upper level manager] as to how Since
negotiates and sets prices, and reviewed an example of price
negotiation for a sample sale.”). As noted supra, plaintiff has
provided documentation tending to demonstrate that its prices
were, in fact, set through its direct negotiation with
customers.
Commerce did not explain why these materials could not be
used to verify Since Hardware’s claim that it set its own export
prices independently. Indeed, Commerce’s determination that
plaintiff’s claim that it sets its own export prices could not
be verified without reference to its unreliable accounting
records does not appear to be in accord with the other record
evidence.
Court No. 09-00123 Page 23
In addition, Commerce does not explain why it insisted on
using the verification procedures from the First Administrative
Review rather than developing procedures to verify the evidence
produced in this review. It appears that Commerce’s purpose in
relying on the earlier procedure was to allow the Department to
continue to assume that the unreliability of Since Hardware’s
accounting records prevented the company from achieving
separate-rate status. As the court held in Since Hardware I,
however, Commerce has not explained how a finding resting on the
accounting records alone is supported by substantial evidence.
See Since Hardware I, 34 CIT at __, Slip Op. 10-108 at 15-16
(“An examination of the record, however, reveals that none of
the unreliable information submitted by the company is relevant
to the question of government control. . . . Put another way,
the evidence that the company was not controlled by the
government . . . is far removed from questions relating to the
origin of the factors of production and their cost.”).
In light of the foregoing, Commerce’s determination that
Since Hardware’s questionnaire responses concerning how it set
its export prices were unverifiable is not supported by
substantial evidence. Further, the Department failed to produce
a verification report, apparently believing that its obligation
to do so was excused by its determination that Since Hardware’s
accounting records were unverifiable. As noted, Commerce is
Court No. 09-00123 Page 24
required by its own regulation to produce such a report. See 19
C.F.R. § 351.307(c).7 “It is a familiar rule of administrative
law that an agency must abide by its own regulations.” See Fort
Stewart Sch. v. Fed. Labor Relations Auth., 495 U.S. 641, 654
(1990).
Here, rather than producing a verification report, Commerce
relied on the procedures found in a verification report from a
prior administrative review to excuse itself from following its
own regulation. Specifically, Commerce relied on its
verification report from the First Administrative Review to
establish that Since Hardware’s claim that it set its export
prices independently could only be verified by reviewing the
company’s accounting records. Section 351.307(c), however,
requires the Department to provide a verification report setting
forth its verification methodology, its efforts at verification,
and the results thereof, for this review. In other words, the
Department’s own regulation instructs it to establish procedures
to verify the evidence produced in each individual review.
It is no doubt true that Commerce may design its own
verification procedures. “By requiring that Commerce report, on
7
19 C.F.R. § 351.307(c) is entitled “Verification Report,”
and provides that “[t]he Secretary will report the methods,
procedures, and results of a verification under this section
prior to making a final determination in an investigation or
issuing final results in a review.”
Court No. 09-00123 Page 25
a case-by-case basis, the methods and procedures used to verify
submitted information, Congress has implicitly delegated to
Commerce the latitude to derive verification procedures ad hoc."
Micron Tech, 117 F.3d at 1397. Commerce may not, however, adopt
the verification procedures from a prior review, and then find
that the evidence in a latter review is unverifiable merely
because it is different from that produced in the prior review.
That is, Commerce’s verification procedures must be reasonable
under the circumstances presented. Id. at 1396-97; see also
China Kingdom, 31 CIT at 1340 n.7, 507 F. Supp. 2d at 1349 n.7
(“A deliberate refusal to subject certain factual information to
a verification procedure is not the equivalent of a valid
finding that . . . such information ‘cannot be verified.’”).
b. Disposition of Proceeds
Similarly, Commerce’s determination that it could not
verify Since Hardware’s claims regarding its disposition of
proceeds cannot be sustained on this record. Commerce hoped to
establish, by its questionnaires, whether the company kept the
proceeds from its sales, and made independent decisions on how
to use them in operating its business. In response to the
Department’s questionnaire concerning the disposition of its
sales proceeds, plaintiff claimed that “[t]here are no
restrictions on the use of Since Hardware’s or Best Unity’s
Court No. 09-00123 Page 26
export revenues. Since Hardware and Best Unity deposit export
earnings into their respective bank accounts. Their general
managers have authorized the accounting department to control
and to have access to their respective accounts.” Section A
Questionnaire Response at 8. In addition, Since Hardware
claimed that the “board of directors determines the disposition
of profits” and the company and its affiliates “may use freely
all foreign currency earnings on the sale of subject merchandise
to the United States . . . . There are no restrictions on the
use of retained foreign currency. Neither of these two
companies is required to sell the foreign currency to the
government . . . [and] foreign currency earned on the sale of
subject merchandise [is used] to fund its operational expenses.”
Section A Questionnaire Response at 9-10.
The Department found that it was “unable to rely upon the
statements concerning export proceeds in Since Hardware’s
separate rate application because such statements are
unverifiable on the ground that they rest on Since Hardware’s
accounting documentation.” Remand Results at 10. As with its
determination with respect to the setting of export prices, this
determination was based solely on the Department’s purported
inability to apply the verification procedures undertaken in the
First Administrative Review to the accounting records produced
in this review. See Remand Results at 6, 14-15.
Court No. 09-00123 Page 27
The Department maintains that the verification report from
the First Administrative Review shows that it verified the
questionnaire responses concerning disposition of proceeds by
“examin[ing] the individual notification of the payments and
transfers to ensure Since Hardware reconciled the ‘monies
received with the moneys owed’ and ‘k[ept] track of which
customers have paid.’” Remand Results at 9. In addition,
during the First Review, the Department “examined the production
sub-ledgers, and the overhead sub-ledgers, and determined
whether Since Hardware accurately documented the amount of money
received from export sales.” Remand Results at 10.
As with the determination dealing with the setting of
export prices, the methodology the Department chose to employ in
the First Administrative review cannot, by itself, support the
Remand Results. In the First Review, there was no determination
that Since Hardware’s accounting records were unreliable.
Accordingly, the Department had no occasion to determine whether
there were alternative means for verifying the company’s
questionnaire responses concerning its disposition of proceeds.
In other words, the verification report from the First
Administrative Review does not support Commerce’s conclusion
that reviewing Since Hardware’s accounting records is the
exclusive means of verifying that it does not dispose of its
proceeds at the direction of the PRC government.
Court No. 09-00123 Page 28
Moreover, as with its determination with respect to how the
company set its prices, the Department has neither conducted any
verification proceedings in this review, nor explained why it
cannot use other responses and documents to verify that Since
Hardware disposed of its sales proceeds free from government
control. In fact, the Department made no effort to verify Since
Hardware’s questionnaire responses through other means, such as
interviewing management, reviewing internal memoranda and board
of directors’ meetings, or requesting bank records. As with the
question of how plaintiff set its export prices, how it disposes
of its sales proceeds is a question of government involvement,
not accurate accounting. Accordingly, the Department’s focus
during verification should have been whether Since Hardware’s
claims regarding the absence of PRC government direction over
the company’s disposition of proceeds can be verified by
reliable and available questionnaire responses and other
documentation.
Without undertaking verification proceedings and preparing
a report outlining its verification process in this review,
including a reasoned explanation for why it could not verify
plaintiff’s questionnaire responses pertaining to its
disposition of sales proceeds, Commerce’s determination that
these responses were unverifiable is not supported by
Court No. 09-00123 Page 29
substantial evidence and contrary to law. See China Kingdom, 31
CIT at 1340 n.7, 507 F. Supp. 2d at 1350 n.7.
CONCLUSION AND ORDER
For the reasons stated, it is hereby
ORDERED that, upon remand, Commerce issue a redetermination
that complies in all respects with this Opinion and Order, is
based on determinations that are supported by substantial record
evidence, and is in all respects in accordance with law; it is
further
ORDERED that Commerce, in preparing the Remand
Redetermination, shall reexamine its conclusion with respect to
whether plaintiff established its de facto independence and is,
therefore, entitled to a separate rate, by considering all of
the questionnaire responses and documents on the record bearing
on this question; it is further
ORDERED that, if the Department continues to find that
verification of plaintiff’s separate-rate questionnaire
responses is necessary, it conduct verification and prepare a
report explaining its verification methods, procedures, and
findings, in accordance with 19 C.F.R. § 351.307(c). The
Department may not rely solely on the procedures found in the
verification report from the First Administrative Review on
remand. To the extent that the Department continues to find
Court No. 09-00123 Page 30
that plaintiff’s separate-rate questionnaire responses are
unverifiable, its reasoning and the evidence supporting this
finding should be set forth in its verification report; it is
further
ORDERED that, in the event the Department finds that Since
Hardware is entitled to a separate rate, it determine that rate;
it is further
ORDERED that the Department may reopen the record to
solicit any information it determines to be necessary to make
its determination; it is further
ORDERED that the remand result shall be due on May 29,
2012; comments to the remand results shall be due thirty (30)
days following filing of the remand results; and replies to such
comments shall be due fifteen (15) days following filing of the
comments.
_/s/ Richard K. Eaton
Richard K. Eaton
Dated: November 29, 2011
New York, New York