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TMI Blog2023 (11) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... h, Ms. Niharika Sharma and Shri Harsha Sri Nivas, Advocates for the DGAD Shri Shobh Nath, Deputy Director (Cost) for DGAD Shri Rakesh Kumar, Authorized Representative for the Central Government ORDER M/s. Reliance Industries Limited [the appellant], a domestic producer of 'Mono Ethylene Glycol [MEG]' in India, has filed this appeal to assail the Notification dated 27.10.2022 notifying that since the domestic industry had not suffered material injury in terms of the provisions contained in the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 [the 1995 Rules] it would not be appropriate to recommend levy of anti-dumping duty on the import of MEG. Accordingly, the designated authority terminated the investigation which was initiated by a Notification dated 28.06.2021. 2. The appellant with M/s. India Glycol Ltd., another Indian producer of MEG, had filed an application before the designated authority seeking imposition of anti-dumping duty on imports of MEG from Kuwait, Saudi Arabia and United States of America [the subject countries]. The designated authority issued a Notification dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethylene at its Ethylene plant, which it then converts into ethylene oxide for producing MEG at its MEG plant. As ethylene is not sold in the market, it is for the purpose of its Cost Accounting records, considered as a cost centre, and the ethylene captively produced is transferred to MEG plant at cost without any return or profit. 6. During the course of the investigation, the appellant had submitted that it was facing price injury on account of MEG being imported at dumped price from 2019-20 onwards. It was also submitted by the appellant that even though earlier there were considerable imports of the subject goods in the country, such imports were at fair prices and were on account of demand-supply gap in India. However, once the domestic industry enhanced capacities in 2018-19, the imports into India declined. Thereafter, from 2019-20, the imports in excess of demand-supply gap increased significantly, on account of dumping. The domestic industry also claimed that the landed price of the subject imports declined steeply over the injury period and was the lowest during the period of investigation. Further, the decline in landed price far outpaced the decline in the price of et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mping and injury margin determined by the designated authority are as below: S. No. Country Injury margin range Dumping margin range I. Kuwait a. Participating exporters 20%-30% 0%-10% b. Others 30%-40% 0%-10 II. Saudi Arabia a. All exporters 20%-30% 10%-20% III. USA a. All exporters 35%-45% 10%-20% 11. It can be seen that both dumping and injury margins determined by the designated authority are positive and significant. Yet, the designated authority, in the final findings, concluded that though there is significant dumping, but there is no material injury to the domestic industry. 12. The determination of injury is governed by the provisions of article 3 to the WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 [GATT], which is as under: "Part I: Article 3 Determination of Injury 3.1 A determination of injury for purposes of Article VI of GATT 1994 shall be based on positive evidence and involve an objective examination of both (a) the volume of the dumped imports and the effect of the dumped imports on prices in the domestic market for like products, and (b) the consequent impact of these imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant increase in the dumped imports, either in absolute terms or relative to production or consumption in India. With regard to the affect of the dumped imports on prices as referred to in sub-rule (2) of rule 18 the designated authority shall consider whether there has been a significant price under cutting by the dumped imports as compared with the price of like product in India, or whether the effect of such imports is otherwise to depress prices to a significant degree or prevent price increase which otherwise would have occurred, to a significant degree. ***** (iv) The examination of the impact of the dumped imports on the domestic industry concerned, shall include an evaluation of all relevant economic facts and indices having a bearing on the state of the industry, including natural and [Potential] decline in sales, profits, output, market share, productivity, return on investments or utilisation of capacity; factors affecting domestic prices; the magnitude of the margin of dumping; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital investments." 14. A perusal of article 3.1 of GATT and paragraph (i) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the domestic industry and the relevant extract of the disclosure statement is reproduced below: 16. In addition to the above, the following factors demonstrate that the domestic industry has suffered injury due to the subject imports. a. While the subject imports have declined, the same is an account of increased capacities of the domestic industry. It would be seen that the imports declined in 2018-19, but increased again in 2019-20. However, the imports have declined again in the period of investigation, due to Covid-19. b. Further, the volume of imports exceeds the demand-supply gap in the country. In fact, the imports in excess of demand-supply gap have increased over the period. Particulars 2017-18 2018-19 2019-20 Period of investigation Total demand ***** ***** ***** ***** Capacity of Indian industry ***** ***** ***** ***** Demand-supply gap 703,234 366,626 514,651 138,218 Volume of imports 1,065,947 632,261 786,548 551,611 Imports in excess of demand-supply gap 362,713 265,635 271,897 413,393 Volume of subject imports 905,364 541,087 707,961 523,864 Subject imports beyond demand-supply gap 202,130 174,461 193,310 385,646 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chieve that, it would have to reduce its prices to compete with the imports. Consequently, the imports would suppress or depress the prices of the domestic producer and its profits, cash profits, return on investment, etc. would suffer. Such an approach is usually adopted in a product like the present, as the producer would want to maintain its production, cannot hold material in store beyond storage limits and need to retain its market to ensure long term survival, utilize its capacities, labor and other resources." 23. The designated authority at paragraph 93 of the final findings also concluded that there is no requirement under the provisions to establish both volume and price injury, for making a determination of material injury. The relevant portion of the final findings is reproduced below: "93. The other interested parties have claimed that both significant volume and price effect must exist to conclude material injury. It is noted that with regards to determination of injury to the domestic industry, para (i) of Annexure-II to the Rules provides that the Authority must examine both, volume of dumped imports and price effect of dumped imports on the domestic prices and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have not increased as it should, due to the presence of subject imports. Price undercutting and Price Depression 28. Paragraphs 105 and 106 of the final findings note that there is price undercutting. During the course of hearing, the respondents have suggested that 'Price undercutting' alone cannot establish price effect of dumped imports and also that the price undercutting was not significant. 29. The final findings nowhere state that the price undercutting was not significant. In fact, the domestic industry consistently submitted that the price injury is evident as the imports are coming at prices not only below the prices of the domestic industry but even below the raw material price. In this regard, it would be useful to reproduce portion of the comments made by the appellant to the disclosure statement, which indicates that even ethylene (raw material) prices during the period of investigation were higher than MEG import prices. "B. i. Price undercutting 3. While the Authority has recorded the positive price undercutting, it has not been considered that the price of imports is even lower than the cost of raw material used to produce the subject goods based on interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce its prices to match the import prices. 34. From the trends recorded in the aforesaid Table, it is seen that while the cost of sales of the domestic industry has gone down from 100 to 87, i.e. by 13 indexed points over the injury examination period, selling price has declined by 35 indexed points. Thus, the decline in selling price is much more steep than the decline in cost. It would also be relevant to note that the landed value of subject imports declined by 38 indexed points. It is, therefore, evident that the landed value of the imports is having a depressing effect on the domestic prices. It is for this reason that the learned counsel for the appellant submitted that the domestic industry was forced to reduce its prices substantially more than the quantum of decline in cost. 35. The designated authority has examined price suppression/ depression by taking factors such as domestic industry profitability and volume effect of imports into consideration which, as noticed above, were not relevant and has not appreciate the aforesaid facts. Price effect can be established by price-undercutting alone and there is no need to establish price suppression or depression 36. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'effect ***** on prices in the domestic market for like products'." 38. Thus, as there is positive price undercutting as well as the imports have depressed the domestic prices, the requirement of paragraph (ii) are met in the present case. Examination of impact of dumped imports on the condition of the domestic industry as per paragraph iv 39. In connection with the second limb, namely, the examination of impact of dumped imports on the domestic industry, paragraph iv of the Annexure-II of the 1995 Rules provides as under: "(iv) The examination of the impact of the dumped imports on the domestic industry concerned, shall include an evaluation of all relevant economic factors and indices having a bearing on the state of the industry, including natural and [Potential] decline in sales, profits, output, market share, productivity, return on investments or utilisation of capacity; factors affecting domestic prices; the magnitude of the margin of dumping; actual and potential negative effects on cash flow, inventories employment, wages, growth, ability to raise capital investments." 40. Paragraph (iv) gives the broad guideline on the factors that the designated authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decline as compared to financial year 2017-18 and financial year 2018-19. The designated authority was required to return a finding of material injury only after examining all the relevant facts. 44. Some of the findings arrived at by the designated authority on the impact of the dumped imports on the state of domestic producers of like products are: Finding on profitability 45. From a perusal of the final findings, it can be seen that the designated authority has based its finding of absence of material injury solely on the fact that the profits and return on investments in the period of investigation of the domestic industry had increased from financial year 2019-20 level. The designated authority has brushed aside the low return on investment earned by the appellant during the period of investigation, on the basis that the same was on account of extensive capacity expansion done by the appellant in a fixed market size. The relevant finding of the designated authority are as follows: "120. The domestic industry has claimed that there is a significant decline in profitability parameters during the POI as compared to the base year. However, it is seen that the profits of dome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and has completely ignored the low return on investment. 50. In such Capital Intensive industry, the return on the capital employed is a true bench mark of the performance of the company. If the return on the capital employed is a meagre 9-10%, which is equal to the bank rate of return, no entrepreneur will invest in creating manufacturing capacities, as the entrepreneur can without any risk and effort earn a bank rate return. It is for this reason that while computing the fair selling price [NIP], the Trade Notice issued by the office of the designated authority provides for a Return on Investment of 22%. 51. Thus, while examining financial viability of the domestic industry, which is highly capital intensive, the designated authority should have considered the profit as 'Return on Investment (capital employed) and not 'profit' as % of cost/price. 'Profit' is a difference between the selling price and the cost of sales i.e. the expenses incurred for manufacture and sale of the product. While Return on Investment is the profit as a % of capital employed i.e. fixed assets + working capital (current assets-current liabilities), profit % is profit as a % of selling price. 52. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt factor for determining the profitability of the appellant. 55. It is not possible to accept the submission of the learned counsel for the respondents that the domestic industry was earning abnormal per unit profits of around 60% in the financial year 2017-18, which reduced to 20% during the period of investigation, but the domestic industry does not have a vested right of earning abnormal profits. 56. Learned counsel for the appellant further submitted that even otherwise, its cost of sales is significantly depressed as it does not factor in any interest on the capital invested by the company in itself. In this connection learned counsel pointed out that the appellant is primarily a self-financed capital intensive unit, and has very limited borrowing/loans. Ordinarily, when a company borrows money, the interest incurred on such borrowed money forms a part of the cost of sales of the product. However, if a company is self-financed, i.e. instead of borrowing, the company invests its own saving, no interest in added to the cost. As such, the interest cost that the company would have otherwise incurred had it borrowed money are not factored in the cost of production. In the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be a more pertinent criterion for deciding financial viability of the appellant. 60. A comparison of cost of sales of the appellant and its capital employed, as verified and confirmed by the designated authority, is as below: S.N. Particulars Unit 2017-18 2018-19 2019-20 Period of investigation 1. Cost of sales Rs/MT ***** ***** ***** ***** Trend Indexed 100 126 104 87 2. Capital Employed Rs/MT ***** ***** ***** ***** Trend Indexed 100 59 71 67 3. Return on CE % ***** ***** ***** ***** Trend Indexed 100 108 45 61 61. The appellant has submitted a confidential version. It is seen that the cost of sales is merely about 30% of the total capital employed. Thus, for such a capital intensive unit, to remain viable it has to not only recover its cost but also earn reasonable return on its investments. As such, return on investment, and not profit on cost, is the relevant parameter in the present facts to judge the profitability of the domestic industry. 62. Learned counsel for the appellant also submitted that since the appellant uses captive input (ethylene), if the designated authority was of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a whole, it is immaterial if a particular company produces some of its inputs captively. In our opinion, for the purpose of determination of NIP, the DA is always required to take into consideration the transfer price (market value) of the inputs and not their actual cost of captive production. This is because the entire investigation, analysis, recommendation and imposition are for the product under consideration for the whole domestic industry and not for the individual companies and inputs captively manufactured which may be involved in the production and sales of the goods." 65. Though subsequent to the said judgment, an amendment was made in the Anti-Dumping Rules, and Annexure-III was introduced for NIP determination but as regards determination of injury under Annexure-II, the law laid down by the Supreme Court would apply. Thus, if the designated authority was of the view that there is no injury as the domestic industry is able to sell at prices higher than its cost, it should have determined the cost of sales of the domestic industry on the basis of market price of ethylene. 66. The contention of the appellant is that on account of dumped imports coming below market pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion of absence of 'material injury' despite such significant dumping. 73. The submission advanced by the learned counsel for the appellant ha substance. It was necessary for the designated authority have examined these facts. Viability of the domestic industry ought to be examined as a whole 74. Learned counsel for the appellant, in the alternate, also submitted that the anti-dumping duties are imposed not only to protect the current manufacturing facilities but also ensure that the industry as a whole remains viable for future investments. 75. The designated authority should have appreciated that the cost benefit available to the appellant on account of captive manufacturing of the main raw material (ethylene), may not be available to other companies or any new company that may be set up. As such, while conducting the profitability analysis for examining impact of dumped imports on the condition of the "domestic industry", the designated authority should have considered the market price of ethylene while determining the cost of sales of the domestic industry. In this regard, reliance can be placed on the decision of the Supreme Court in the own case of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the present case, profit as a percentage of cost does not give the correct picture of the financial health of company and profit as a % of capital employed should be considered. 80. Learned counsel for the respondent also submitted that the low return on capital employed is on account of new investment. 81. With respect to the return of capital employed, the designated authority in paragraph 120 of the final findings made the following observations: "120. ***** Return on capital employed has also improved during the POI as compared to 2019-20. Due to extensive capital investment, the ROCE is about ***% during POI; which happens during initial period investment as the fixed market size of the product cannot absorb such huge burden of investment during the initial years. For conducting wholistic and objective assessment of economic parameters, Authority is also required to consider intervening trends during the injury investigation period and cannot rely merely only on end-to-end comparison." (emphasis supplied) 82. It needs to be remembered that capacity expansion can result in a low return on capital employed only in a situation where an industry may have expanded its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e return on capital employed. In common parlance return on investment should be bench marked with possible income when capital is deployed in other secured field of investment like banks etc. Further, the cost of borrowing varies from country to country. It is necessary to note that ROCE of 22% is generally considered as reasonable and adequate for DI. These findings have been upheld in appeals also." 90. In SI Group India, the Tribunal observed: "22. In this back drop, we find that the Appellant domestic industry could reasonably establish through present and past evidence that most of these parameters are satisfied in the present case. The dumping margin is in the range of 10-15% and is positive and above de-minimis. Despite anti dumping duty, the earning of domestic industry is meagre 2% and return of capital is around 5% against the normal return of 22%." 91. The submission of the learned counsel for the appellant is that in any case a return of 9% cannot be considered sufficient for a capital intensive business. Such a return can alternately be earned easily through more secured risk-free sources, and does not account for any return for the entrepreneur's risk. This would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is a likelihood of continuation or recurrence of injury if the duties are removed. Since the requirement and the purview of a review investigation is significantly different from an original investigation, the decision of the Gujarat High Court Nirma Limited given in a different factual backdrop cannot be applied in the present facts. While in a review investigation, negative injury margin (considering duties are already imposed) may not necessarily warrant a finding that the industry is not suffering any material injury or that there is no likelihood of continuation of injury if duties are withdrawn, in an original investigation the fact that the imports are coming at a price below the fair selling price or non-injurious price of domestic industry is a strong indicator of material injury being faced by the domestic industry. 97. Learned counsel for the respondents also submitted that intervening trend was rightly considered by the designated authority to conclude that there is no material injury. Learned counsel for the respondents also submitted that more focus should be attached to trend from 2019-20 and the period of investigation. 98. The consistent claim of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and Return on Capital Employed of the domestic industry have increased in the POL There is no impact on the ability of the domestic industry to raise fresh investment." 103. Thus, it is seen that with respect to the factors relevant for assessing the price injury of the domestic industry, the designated authority has relied only on the increase in profit and return on investment in the period of investigation as compared to 2019-20, and has ignored the fact that the profit and return on investment has remained significantly below 2017-18 and 2018-19 level. 104. Reliance on the WTO Panel report in Russian-Commercial Vehicles (Paragraph 7.41) is misplaced. The said paragraph deals with splitting of the period of investigation in two half year period and the trend examination made with respect to one half of the period of investigation as compared to the other. In these facts, the panel held that examination of intervening trend within the period of investigation is not precluded but in fact, at times necessary to examine the injury being faced by the domestic industry. 105. The designated authority, in the present case, has exclusively relied upon the marginal improvement in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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