Commerce Stands by Surrogate Financial Ratio Calculation Method in Remand Results

The Commerce Department is sticking by its preferred methodology for determining surrogate financial ratios in an antidumping duty case following a remand from the Court of International Trade, the department said in Oct. 12 remand results submitted to the court. After CIT remanded the case to Commerce for its failure to address the concerns of the mandatory respondent, the agency returned with a more thorough backing of its surrogate financial ratio decision that it believes adequately addresses the respondent's concerns (The Ancientree Cabinet Co., Ltd. v. United States, CIT # 20-00114).

The case stems from a sales at less than fair value investigation into wooden cabinets and vanities from China in which The Ancientree Cabinet Co. was tapped to serve as a mandatory respondent. Commerce picked Romania as the surrogate country for determining normal value -- a move that was upheld by the court in the first decision (see 2107130032) -- and used the financial statements from the Romania-based company Sigstrat.

During the investigation, the antidumping petitioner, the American Kitchen Cabinet Alliance, submitted a methodology to calculate surrogate financial ratios that started with the cost of goods sold (COGS) from the surrogate company Sigstrat's financial statements. Ancientree, on the other hand, submitted two methodologies for calculating the ratios, one using Sigstrat's data starting with line items from the company's income statements, and the other that was just Commerce's methodology in the prior year's less than fair value investigation.

Breaking with the prior year's methodology, Commerce said that it prefers the methodology that starts with the COGS since it "identifies Sigstrat’s costs by function (i.e., COGS, SG&A, etc.), not type of transaction, and allows Commerce to properly classify the costs as either manufacturing costs, operating costs (i.e., SG&A costs), or financial expenses." However, this explanation was originally not available to Ancientree, hence the litigation.

In backing this contention, Commerce cited the 2019 CIT case Nantong Uniphos Chems. Co. v. United States, which upheld Commerce's decision to use COGS as the starting point for valuing overhead; selling, general and administrative expenses; and profit surrogate financial ratios. COGS captures the "vast majority of the costs of manufacture" relevant to the surrogate financial ratio calculation, Commerce said. Further, the line items from Sigstrat's financial statements, as Ancientree pushed for, fall victim to certain fallbacks.

"In the instant case, the line items from Sigstrat’s income statement do not permit us to ascertain Sigstrat’s direct manufacturing costs because ... they include costs related to both cost of manufacturing and SG&A, and do not distinguish between the two," the remand results said. "Thus, our chosen methodology ... is preferable to the methodologies submitted by Ancientree (which use line items from the income statement that do not distinguish between manufacturing and administrative costs)."

Also, Ancientree does not argue against the accuracy of the chosen surrogate financial ration calculation methodology, Commerce points out. "Accuracy was at the core of our decision to begin the financial ratio calculations with COGS," the remand results said. "By using COGS, and not the income statement line items as Ancientree suggested, we used the methodology which yielded the most precise ratios possible, given the information present on this record. Therefore, it was both reasonable and appropriate to rely on this methodology here, rather than the methodology used in MLWF from China 2016-2017," a case about multilayered wood flooring from China.