Introduction
Lesser duty law
Meaning of NIP
Determination methodology of NIP as per Annexure-III
Industry concerns regarding NIP determination as per Annexure-III
In 2011, the government of India introduced the Non-Injurious Price (NIP) Law through an amendment to the existing legal provisions(1) and published the "Principles for determination of non-injurious price" through Annexure-III to the Custom Tariff (Identification, Assessment and Collection of Antidumping Duty on Dumped Articles and for Determination of Injury) Rules 1995. Prior to the introduction of this amendment to the rules, India had continuously used the concept of determining fair-selling price and injury margin.
India follows the lesser duty law, and, as per this law, the Directorate General of Trade Remedies (DGTR) shall recommend anti-dumping or anti-subsidy duty to be lower than the margin of dumping or subsidy if such lower duty is sufficient to address the injury to the domestic industry. Injury to the domestic industry is quantified in India as the difference between the NIP of the domestic industry and the landed price of dumped imports. As mentioned above, the NIP for the domestic industry is calculated by the DGTR as per Annexure-III to the Custom Tariff (Identification, Assessment and Collection of Antidumping Duty on Dumped Articles and for Determination of Injury) Rules.
NIP is the fair-selling (notional) price that the industry is expected to have fetched in the Indian market under normal circumstances (assuming there are no dumped or subsidised imports in the country) during the period defined.
Determination methodology of NIP as per Annexure-III
As per Annexure-III, the NIP must be determined by considering the information or data relating to cost of production for the period of investigation in respect of the producers that constitute the domestic industry. The following elements of cost of production must be considered to work out the NIP:
- the best utilisation of raw materials and utilities by the constituents of the domestic industry over the previous three-year period and the period of investigation. At the time of investigation, rates may be considered in order to nullify injury caused due to inefficient utilisation of raw materials and utilities;
- the best utilisation of production capacities, over the previous three-year period and the period of investigation. At the time of investigation, rates may be considered in order to nullify injury, if any, caused to the domestic industry by inefficient utilisation of production capacities;
- scrutiny of all expenses, grouped and charged to the cost of production. Any extraordinary or non-recurring expenses shall not be charged to the cost of production. The methodology used for the apportionment of common expenses is to be consistently applied, and the basis should be reasonable and scientific. The expenses include:
- research and development, unless specific to the product concerned;
- post-manufacturing expenses (eg, commission, discount and freight);
- excise duty;
- sales tax and other tax levies on sales;
- expenses on work done for other units;
- royalty; and
- the trading activity of the product under consideration unless it is related to technical know-how for the product;
- non-cost items – such as bad debts, donations, loss on sale of assets, or loss due to fire or floods – are not considered. Reasonableness of depreciation and interest cost are to be examined.
- a reasonable return (pre-tax) on the average capital employed for the product may be allowed for recovery of interest, corporate tax and profit. The average capital employed is the sum of the net fixed assets and the net working capital, which shall be taken on the basis of the average thereof at the beginning and at the end of the period of investigation. Elements of working capital are to be examined;
- if there is more than one domestic producer, the weighted averages of the NIP of individual domestic producers are to be considered. The respective share of domestic production of the subject goods may be taken as a basis for the computation of the weighted average NIP for the domestic industry as a whole.
Industry concerns regarding NIP determination as per Annexure-III
Raw materials and utilities optimisation
Annexure-III ignores the actual consumption of raw materials and utilities and instead considers input consumption at its lowest level over the previous three-year period and the period of investigation. The application of the law ignores the fact that the consumption of raw materials and utilities directly depends on a number of parameters, such as the product mix, the purity of the raw materials, the use of alternative raw materials or utilities, the level of work in process and the operating parameters. For example, the production of thicker tiles requires more raw material and a longer baking time, resulting in the consumption of more utilities. The difference in consumption may thus be bona fide, while the law is applied on the presumption that this is an inefficiency on the part of the domestic industry.
Capacity utilisation
The application of Annexure-III ignores the actual production volume of the domestic industry in the period of investigation and adopts the highest capacity utilisation achieved in the previous three-year period and the period of investigation. Annexure-III has termed this as "inefficient utilisation of production capacities". This ignores the fact that the capacity itself is a highly complex parameter and capacity utilisation depends on a number of factors, such as the product mix, routine repairs and maintenance and operating conditions. Annexure-III also disregards fundamental business operations, such as where producers wish to optimise their capacity utilisation and therefore do not attempt to restrict it. Even when the company might be improving its efficiency, the DGTR would proceed based on a wrong assumption and adopt a higher utilisation than in the past.
Optimum production
Annexure-III provides that the best achieved production over the injury period shall be considered for the purpose of determining the fixed overhead cost. Presumably, the fixed overhead cost (per unit of production) may be higher because of lower production. This is, however, a pure assumption without any legal basis. Factually, it may not be so in several situations. However, the production volume in a particular year can again be a function of product mixing. For example, the production of thicker tiles requires more raw material and a longer baking time, resulting in the consumption of more utilities and a lower utilisation of capacity. Thus, a lower production by the domestic industry may simply be due to an increase in the production of thicker tiles as opposed to a decrease in the production of thinner tiles.
Fixed, variable and semi-variable expenses
In the case of multi-product companies, most of the fixed expenses are apportioned to different products on some basis. The widely practised methodology in such cases is to apportion fixed expenses in the ratio of production volume and value or sales volume and value of different products. Therefore, if production was lower during the investigation period, the share of fixed expenses charged to the product itself would be lower. In such cases, it would be improper to determine the fixed overhead costs per unit at higher notional rate than past production. It cannot be assumed that the amount of fixed expenses charged to the product would have been the same at a higher level of production. Had the company produced more, the share of fixed expenses charged to the product itself would have been different (higher). Further, an expense may be a fixed expense for a particular period and a particular level of operation. The expense would be quite different if the level of operations were different. For example, a company incurring a fixed expense when using 40% of its capacity utilisation may not be able to run the operations with the same amount of expense if it were to produce and sell when using 80% of its capacity utilisation. Thus, even the fixed expenses are fixed with reference to the time period only at a certain level of operations and could vary significantly with a change in the level of operation.
Net fixed assets considered for return purpose
Annexure-III ignores the fact that the net fixed asset is a function of amount of the investment and the age of the plant. For example, if a company is considering the life of the plant to be 20 years, the net fixed assets value in the account books of the company would be almost nil after 20 years. Thus, if any constituent of the domestic industry has old plants and their book value of assets are almost depreciated, there shall be no return on the net fixed assets to be considered by the DGTR.
For further information on this topic please contact Pareesha at TPM Solicitors & Consultants by telephone (+91 11 4989 2200) or email ([email protected]). The TPM Solicitors & Consultants' website can be accessed at www.tpm.in.
Endnotes
(1) Notification No. 15/2011-Customs (NT) dated 1 March 2011.