Council Regulation (EC) No 74/2004 of 13 January 2004 imposing a definitive countervailing duty on imports of cotton-type bedlinen originating in India
Date: 2004-01-13
Institutions: Council of the European Union
Subjects: India, anti-subsidy proceeding, import, originating product, textile product

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Official Journal of the European Union

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(Acts whose publication is obligatory)

COUNCIL REGULATION (EC) No 74/2004

of 13 January 2004

imposing a definitive countervailing duty on imports of cotton-type bedlinen originating in India

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community,

Having regard to Council Regulation (EC) No 2026/97 of 6
October 1997 on protection against subsidised imports from
countries not members of the European Community (1), and in
particular Article 15 thereof,

Having regard to the proposal submitted by the Commission
after consulting the Advisory Committee,

Whereas:

A. PROCEDURE

1. Initiation

(1)

(2)

(3)

On 18 December 2002 the Commission announced by
a notice (notice of initiation) published in the Official
Journal of the European Communities the initiation of an
anti-subsidy proceeding with regard to imports into the
Community of bedlinen of cotton fibres, pure or mixed
with man-made fibres or flax (flax not being the domi-
nant
fibre), bleached, dyed or printed (cotton-type
bedlinen) originating in India (2) and commenced an
investigation.

The proceeding was initiated following a complaint
lodged in November 2002 by the Committee of the
Cotton and Allied Textile Industries of the European
Communities (Eurocoton or ‘the complainant’) on behalf
of producers representing more than 25 % of the total
Community production of cotton-type bedlinen. The
complaint contained prima facie evidence of subsidisa-
tion of the said product and of material injury resulting
therefrom, which was considered sufficient to justify the
initiation of an anti-subsidy proceeding.

Prior to the initiation of the proceeding and in accord-
ance with Article 10(9) of Regulation (EC) No 2026/97
the Commission notified the
(the basic Regulation),
Government of India (GOI) that it had received a prop-
subsidised
erly documented complaint alleging that

(1) OJ L 288, 21.10.1997, p. 1. Regulation as last amended by Regu-

lation (EC) No 1973/2002 (OJ L 305, 7.11.2002, p. 4).

(2) OJ C 316, 18.12.2002, p. 10.

(4)

(5)

imports of cotton-type bedlinen originating in India
were causing material injury to the Community industry.
The GOI was invited for consultation with the aim of
clarifying the situation as regards the contents of the
complaint and arriving at a mutually agreed solution.
Consultations with the GOI were subsequently held with
the Commission at
its offices in Brussels, where no
conclusive evidence was provided by the GOI which
could refute the allegations made in the complaint.
However, due note was taken of comments made by the
GOI with regard to the allegations contained in the
complaint regarding subsidised imports and material
injury being suffered by the Community industry.

The Commission officially advised the exporting produ-
cers and importers known to be concerned as well as
their associations, the representatives of the exporting
country concerned, the complainant and the other Com-
munity producers, known associations of producers as
well as known users, of the initiation of the proceeding.
Interested parties were given the opportunity to make
their views known in writing and to request a hearing
within the time limits set in the notice of initiation.

It was submitted that more than 45 days had lapsed
between the lodging date and the initiation date.
Pursuant to Article 10(13) of the basic Regulation, a
complaint shall be deemed to have been lodged on the
first working day following its delivery to the Commis-
sion by registered mail or the issuing of an acknowledge-
ment of receipt by the Commission. The issuing of the
acknowledgement of receipt took place on Thursday, 31
October 2002. Considering that Friday, 1 November was
a public holiday, the first working day following the
issuing of
receipt by the
Commission was Monday, 4 November 2002. Therefore,
4 November 2002 is to be considered as the lodging
date of
initiation was
published on 18 December 2002, which is clearly within
45 days of the lodging of the complaint. Consequently,
the notice of initiation was published within the deadline
of Article 10(13) of the basic Regulation.

the complaint. The notice of

the acknowledgement of

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Official Journal of the European Union

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(6)

(7)

(8)

(9)

2. Sampling

SAMPLING OF EXPORTERS/PRODUCERS IN INDIA

General

In view of the large number of exporters in India, the
Commission decided to apply sampling techniques in
accordance with Article 27 of the basic Regulation.

In order to enable the Commission to select a sample,
pursuant to Article 27(2) of the basic Regulation, expor-
ters and representatives acting on their behalf were
requested to make themselves known within three weeks
of the initiation of the proceeding and to provide basic
information on their export and domestic turnover, on
some particular subsidy schemes, and the names and
activities of all related companies. The authorities of
India were also contacted in this context by the Commis-
sion.

(13)

(14)

Preselection of the sample

More than 80 companies identified themselves, provided
the requested information within the three-week period
and had exported the product concerned to the Com-
munity during the investigation period. They were
considered as cooperating companies and were taken
the sample. These
into account
companies represented more than 90 % of
the total
exports of India to the Community.

in the selection of

The companies not finally retained in the sample were
informed that any anti-subsidy duty on their exports
would be calculated in accordance with Article 15(3) of
the basic Regulation, i.e. without exceeding the weighted
average amount of countervailable subsidies established
for the companies in the sample.

(10)

The companies which did not make themselves known
within the deadline set in the notice of initiation were
considered as non-cooperating companies.

Individual examination of the companies not selected in the
sample

Twenty-one cooperating companies not selected in the
sample requested the calculation of individual margins
of subsidy. In accordance with Article 27(3) of the basic
Regulation, their requests could not be accepted in the
current investigation since the number of exporters was
so large that individual examinations would have been
unduly burdensome and prevented completion of the
investigation in good time. The 21 companies in ques-
tion were informed of this fact accordingly.

SAMPLING OF COMMUNITY PRODUCERS

the basic Regulation,

In view of the large number of Community producers
supporting the complaint, and in accordance with
Article 27 of
the Commission
announced in the notice of initiation its intention to
select a sample of Community producers, based on the
largest representative volume of production and sales of
the Community industry, which could be reasonably
investigated within the
these
to
purposes,
provide information concerning production and sales for
the like product.

the Commission requested companies

available.

time

For

(15) On the basis of the replies received, the Commission
selected five companies in three Member States. In the
selection, the production and sales volume were consid-
ered aiming at covering the most representative market
size.

(16)

Two out of these five companies, which were among the
smaller ones, were not able to submit a complete list of
all transactions to unrelated customers during the inves-
tigation period and were therefore considered to be only
partially cooperating.

Selection of the sample

3. Investigation

(11) According to Article 27(1) of the basic Regulation, the
selection was based on the largest representative volume
of exports that could reasonably be investigated within
the time available. On this basis eight exporting produ-
cers (plus three related companies) were chosen to
constitute the sample, in consultation with the represen-
tatives of the companies, of the professional association
of exporters (Texprocil) and of the GOI. This sample
the product
represented 55 % of
concerned to the Community.

Indian exports of

(12)

Those companies selected in the sample which fully
cooperated during the investigation were attributed their
own subsidy margin and individual duty rate.

(17) A number of exporting producers

in the country
concerned, as well as Community producers, Com-
munity users and importers, made their views known in
writing. All parties who so requested within the set time
limit and showed that there were particular reasons why
they should be heard were granted the opportunity to be
heard.

(18) Questionnaire

replies were

received from the

five
sampled complainant Community producers,
from a
representative sample of eight exporting producers (plus
in India and one unrelated
three related companies)
importer in the Community.

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(19)

The Commission sought and verified all the information
it deemed necessary for the purpose of a determination
of subsidy,
injury, causality and Community interest.
Verification visits were carried out at the premises of the
following companies:

Community producers:

— Bierbaum Unternehmensgruppe GmbH & Co. KG,

Germany;

— Descamps SA, France;

— Gabel industria tessile SpA, Italy;

— Vanderschooten SA, France;

— Vincenzo Zucchi SpA, Italy;

Unrelated importers in the Community:

— Richard Haworth, United Kingdom;

Exporters/producers in India:

and

(TARIC

ex 6302 31 90

code
6302 31 10 90),
6302 31 90 90)
ex 6302 32 90 (TARIC code
6302 32 90 19). Bedlinen includes bed sheets (fitted or
flat), duvet covers and pillow covers, packaged for sale
either separately or in sets. All product types are similar
in their essential physical characteristics and in their
uses. They are therefore considered to be one product.

2. Like product

(23)

The product manufactured and sold in the domestic
market of India and that exported to the Community
from India as well as the product manufactured and sold
in the Community by the Community producers were
found to have basically the same physical characteristics
as well as the same uses and are therefore considered as
like products within the meaning of Article 1(5) of the
basic Regulation.

— The Bombay Dyeing

and Manufacturing Co.,

Mumbai

— Brijmohan Purusottamdas, Mumbai

— Divya Textiles, Mumbai

— Jindal Worldwide Ltd, Ahmedabad (related to Texcel-

1. Introduction

C. SUBSIDISATION

lence Overseas)

— Mahalaxmi Exports, Ahmedabad

— Nowrosjee Wadia & Sons, Mumbai (related to The

Bombay Dyeing and Manufacturing Co.)

— N. W. Exports Limited, Mumbai

(related to The

Bombay Dyeing and Manufacturing Co.)

— Pasupati Fabrics, New Delhi

— Prakash Cotton Mills Pvt., Ltd, Mumbai

— Texcellence Overseas, Mumbai

— Vigneshwara Exports Limited, Mumbai

(20)

The investigation of subsidisation and injury covered the
period from 1 October 2001 to 30 September 2002
(investigation period or IP). The examination of trends
relevant for the assessment of injury covered the period
from 1999 to the end of the IP (period considered).

(21) Given the need to examine further certain aspects of
subsidy,
injury, causality and Community interest, no
provisional anti-subsidy measures were imposed on
cotton-type bedlinen originating in India.

(25)

B. Product concerned and Like Product

1. Product concerned

(22)

The product concerned is bedlinen of cotton fibres, pure
or mixed with man-made fibres or flax (flax not being
the dominant fibre), bleached, dyed or printed origin-
ating in India, currently classifiable within CN codes
6302 21 00 81,
ex 6302 21 00
code
(TARIC
6302 21 00 89),
code
(TARIC
6302 22 90 19),

(TARIC
codes
ex 6302 22 90
ex 6302 31 10

(24) On the basis of

the information contained in the
complaint and the replies to the Commission's question-
naire, the following six schemes, which allegedly involve
the granting of export subsidies, were investigated:

(i) Duty Entitlement Passbook (DEPB) scheme

(ii) Duty-Free Replenishment Certificate (DFRC)

(iii) Export Promotion Capital Goods (EPCG) scheme

(iv) Advance Licence Scheme (ALS)

(v) Export Processing Zones/Export Oriented Units

(EPZs/EOUs)

(vi) Income Tax Exemption (ITES).

The schemes (i), (ii), (iii), (iv) and (v) specified in recital
24 are based on the Foreign Trade (Development and
Regulation) Act 1992 (No 22 of 1992) which entered
into force on 7 August 1992 (Foreign Trade Act). The
Foreign Trade Act authorises the GOI to issue notifica-
tions regarding the export and import policy. These are
summarised in the ‘Export and Import Policy’ docu-
ments, which are issued by the Ministry of Commerce
every five years and updated regularly. Two Export and
Import Policy documents are relevant to the IP of this
case; i.e. the five-year plan relating to the period 1 April
1997 to 31 March 2002, and the five-year plan relating
to the period 1 April 2002 to 31 March 2007. In addi-
tion, the GOI also sets out the procedures governing
India's foreign trade policy in the Handbook of Proce-
dures — 1 April 2002 to 31 March 2007 (Volume 1). A
similar Handbook of Procedures exists for the period 1
April 1997 to 31 March 2002. The Handbook of Proce-
dures is also updated on a regular basis.

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(26)

(27)

It was established at the verification visit to the GOI that
there have been no significant changes in relation to the
alleged subsidy schemes in the Export and Import Policy
during the IP. It is clear from the Export and Import
Policy covering the period 1 April 2002 to 31 March
2007 that licences/certificates/permissions issued before
the commencement of this Policy will continue to be
valid for the purpose for which such licence/certificate/
permission was issued unless otherwise stipulated.

References to the legal basis for the investigated schemes
(i) to (v) referred to in recital 24 are hereafter made in
relation to the Export and Import Policy covering the
period 1 April 2002 to 31 March 2007 and to the
‘Handbook of Procedures — 1 April 2002 to 31 March
2007’ (Volume 1).

(28)

is
Income Tax Exemption (vi), specified in recital 24,
based on the Income Tax Act of 1961 which is amended
yearly by the Finance Act.

2. Duty Entitlement Passbook (DEPB) Scheme

(a) Legal basis

(29)

The DEPB entered into force on 1 April 1997 by means
of Customs Notification 34/97. Paragraphs 4.3.1 to
4.3.4 of the Export and Import Policy and paragraphs
4.37 to 4.53 of the Handbook of Procedures contain a
detailed description of the scheme. The DEPB is the
successor to the Passbook Scheme which was terminated
on 31 March 1997. From the outset there were two
types of the DEPB, namely DEPB on a pre-export basis
and DEPB on a post-export basis. The GOI stressed that
the DEPB on a pre-export basis was abolished on 1 April
2000 and therefore the scheme is not relevant for the IP.
It was established that none of the companies enjoyed
any benefit under DEPB on a pre-export basis. Therefore,
it is not necessary to establish the countervailability of
DEPB on a pre-export basis.

(b) Eligibility

(30)

The DEPB on a post-export basis is available to manufac-
turer-exporters or merchant-exporters (i.e. traders).

been established by the Indian authorities for most
products, including the product concerned, on the basis
of standard input-output norms (SION). A licence stating
the amount of credit granted is issued automatically
upon receipt of the application.

(32) DEPB on a post-export basis allows for the use of such
credits to offset applicable customs duties on any subse-
quent
for goods the importation of
which is restricted or prohibited. Imported goods for
which such credits are used can be sold on the domestic
market (subject to sales tax) or used otherwise.

imports except

(33) DEPB licences are freely transferable and, as a conse-
quence, are frequently being sold. The DEPB licence is
valid for a period of 12 months from the date of
granting of the licence. The company has to pay to the
relevant authority a fee equivalent to 0,5 % of the DEPB
credit received.

(d) Conclusions on DEPB on post-export basis

(34) When a company exports goods, it is granted a credit
which can be used to offset amounts of customs duties
due on future imports of any goods or can just be sold.

(35)

The credit is automatically calculated on the basis of a
formula, using SION rates,
independently of whether
inputs have been imported, duty has been paid on them
or whether the inputs were actually used for export
production and in what quantities. Indeed a company
can claim a licence on the basis of past exports irrespec-
tive of whether it makes any imports or purchases goods
from other sources. The DEPB credits are considered to
be a financial contribution because they are a grant.
They involve a direct transfer of funds, as they can either
be sold and converted into cash, or used to offset import
duties, thus causing the GOI to forego revenue which is
otherwise due.

(c) Practical implementation of DEPB on post-export basis

(36)

(31) Under this scheme, any eligible exporter can apply for
credits, which are calculated as a percentage of the value
of exported finished products. Such DEPB rates have

Texprocil argued that where the exporter has actually
imported inputs that are used in the manufacture of the
export products and used the DEPB credits for paying
the customs duty on such imported inputs, no counter-
vailable benefit can be said to have devolved on the
exporter under the DEPB.

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(37)

In this context, Article 2(1)(a)(ii) of the basic Regulation
provides for an exception for, inter alia, drawback and
substitution drawback schemes which conform to the
strict rules laid down in Annex I(i), Annex II (definition
and rules for drawback) and Annex III (definition and
rules for substitution drawback).

in law upon export performance within the
gent
meaning of Article 3(4)(a) of the basic Regulation. There-
fore, the subsidy is deemed to be specific and thus coun-
tervailable.

(38) However, in this case, the exporter is under no obliga-
tion actually to consume the goods imported free of
duty in the production process and the amount of credit
is not calculated in relation to actual inputs used.

(e) Calculation of the subsidy amount for the DEPB post-

export basis

(39)

(40)

(41)

(42)

(43)

Furthermore, there is no system or procedure in place to
confirm which inputs are consumed in the production
process of the exported product or whether an excess
payment of import duties occurred within the meaning
of Annex I(i) and Annexes II and III to the basic Regu-
lation.

Lastly, exporters are eligible for
the DEPB benefits
regardless of whether they import any inputs at all. In
order to obtain the benefit, it is sufficient for an exporter
simply to export goods without demonstrating that any
input material was imported. Thus, even exporters which
procure all of their inputs locally and do not import any
goods which can be used as inputs are still entitled to
the DEPB benefits. Hence, the DEPB on a post-export
basis does not fulfil the criteria of Annexes I to III.

In the absence of a requirement that imported inputs be
consumed in the production process and a system of
verification as required by Annex II to the basic Regu-
the DEPB on a post-export basis cannot be
lation,
considered as a permitted drawback or substitution
drawback scheme
to Article
2(1)(a)(ii) of the basic Regulation.

(Annex III) pursuant

Since the above exception to the subsidy definition for
drawback and substitution drawback schemes, referred
to in recital 37, therefore does not apply, the issue of
excess remission does not arise and the countervailable
benefit is the remission of total import duties normally
due on all imports.

Based on the above, it was concluded that the GOI, by
issuing a freely transferable licence, provides the expor-
ters with a financial contribution under the DEPB. This
financial contribution by the GOI confers a benefit upon
the DEPB holder since the latter obtains free money
which as such would not be available in the commercial
market. Therefore, the scheme constitutes a subsidy. As
the subsidy can only be obtained by exports, it is contin-

(44)

The benefit for the companies was calculated on the
basis of the amount of credit granted in the licences,
which have been utilised or transferred during the IP.

(45)

(46)

(47)

(48)

In cases where the licences were used to import goods
without payment of applicable duties, the benefit was
calculated on the basis of total import duties foregone.
In cases where the licences were transferred (sold), the
benefit was calculated on the basis of the amount of
credit granted in the licence (face value) regardless of the
sales price of the licence, since the sale of a licence is a
pure commercial decision which does not alter the
amount of benefit (equivalent to the GOI's transfer of
funds) received from the scheme.

The amount of subsidy has been allocated over total
exports during the IP in accordance with Article 7 of the
the fees
basic Regulation.
necessarily incurred to obtain the subsidy have been
deducted.

In calculating the benefit,

It was established for one company that the Export and
Import Policy specifically excluded certain goods from
the eligibility for DEPB, since the export of such goods
for the
In this case,
licences.
was subject
it was
purpose of calculating the ad valorem subsidy,
the
considered appropriate to allocate the benefit of
DEPB (nominator), over the export
the
turnover of
products eligible for DEPB (denominator).

to special

Texprocil and several companies claimed that costs
incurred by paying specialised agents, sales commissions
and various other expenses should be deducted when
calculating the benefit under this scheme. In this regard,
it should be noted that using third parties for selling
licences is a purely commercial decision which does not
alter the amount of credit granted in the licences. In any
event, only costs necessarily incurred in order to obtain
a subsidy are deductible in accordance with Article
7(1)(a) of the basic Regulation. Since the above costs are
not necessary in order to qualify for the subsidy, the
claims were rejected.

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(49)

(50)

Texprocil and several companies claimed that the sale of
DEPB licences was subject to sales tax, and therefore the
benefit should be reduced accordingly. However, under
Indian tax law,
to sales tax is the
purchaser, not the seller. The seller merely collects the
sales tax on behalf of the relevant authorities. Conse-
quently, this claim was rejected.

the tax subject

Consequently, these claims were rejected.

(51)

Eight companies in the sample benefited from this
scheme during the IP and obtained subsidies ranging
from 1,45 % to 8,44 %.

Several companies submitted that the sales of their DEPB
licences would generate additional income, and thereby
increase their overall tax liability, most notably company
income tax. Therefore,
it was claimed that the benefit
obtained by these companies from DEPB transactions
should be reduced by the amount of income tax actually
payable. The companies also stated that this claim would
not be warranted if no income tax was payable during
the same period. Moreover, Texprocil claimed that DEPB
income is taxable at the uniform rate applicable to the
exporters, and that, where the exporter has actually paid
income tax on the DEPB benefits granted by the GOI,
the benefit received is lessened to the extent of income
tax.

When addressing these arguments it is first recalled that
a DEPB credit constitutes a grant at a given moment of
time. According to the information available,
it can
indeed not be excluded that these grants, at a later stage,
may increase a company's overall tax liability. However,
this would be a future event, and will depend on many
factors, most of which are influenced by commercial
decisions made by the company itself. Such factors do
not only relate to pricing and sales issues, but also
concern other issues that determine overall tax liability,
the
such as decisions concerning depreciation rates,
carrying forward of losses and many other factors. All
these decisions influence the tax bracket that will finally
be applied to the company in a specific tax year. It is
therefore not possible to determine exactly to what
extent benefits obtained from DEPB sales have contrib-
uted to the applicable tax rate.
In addition, had the
company concerned used their DEPB licences for the
purpose for which they are in fact intended, namely the
import of inputs, it would indeed have lowered its cost
and not increased its income, which may again have a
different impact on taxation.

3. Duty-Free Replenishment Certificate (DFRC)

(a) Legal basis

(52)

The legal basis for this scheme is contained in para-
graphs 4.2.1 to 4.2.7 of the Export and Import Policy
and paragraphs 4.31 to 4.36 of the Handbook of Proce-
dures.

(b) Eligibility

(53)

The DFRC is issued to a merchant-exporter or manufac-
turer-exporter for the imports of
inputs used in the
manufacture of goods without payment of applicable
duties.

(c) Practical implementation

(54) DFRC is a post-export scheme, which allows replenish-
ment,
i.e. duty-free import of inputs having the same
technical characteristics, quality and specifications as
those used in the export product. The quantity of such
inputs is determined on the basis of the SION. Such
imported goods can be sold on the domestic market or
used otherwise.

(55) Under this scheme, any eligible exporter can apply for a
certificate. DFRC is issued for import of inputs as per
SION as indicated in the shipping bills.

(56)

The DFRC only covers the inputs as prescribed in the
SION. The technical characteristics, quality and specifica-
tion of inputs allowed to be replenished have to match
those of the inputs used in the export product.

(57) DFRCs are freely transferable. The validity of the DFRC

is 18 months.

It is therefore clear that the granting of DEPB credits and
eventual
later taxation thereof constitute two indepen-
dent actions by the GOI. It is not for the investigating
authority to attempt to reconstruct the situation which
would prevail in the presence or absence of taxation. In
any event, this would not effect the calculation of the
amount of subsidy established during the IP.

(d) Conclusion on the scheme

(58) When a company exports goods, it is granted a certifi-
cate which can be used to offset amounts of customs
duties due on future imports of inputs physically incor-
porated in the exported goods or can just be sold.

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(59)

The certificates are considered to be a financial contribu-
tion because they are a grant. They involve a direct
transfer of
funds, as they can either be sold and
converted into cash, or used to offset import duties, thus
causing the GOI to forego revenue which is otherwise
due.

ensure and demonstrate that the quantity of inputs for
which drawback is claimed does not exceed the quantity
of similar products exported, in whatever form, and that
there is no drawback of import charges in excess of
those originally levied on the imported inputs in ques-
tion.

(60)

for

replenishment of

The GOI and Texprocil argued that the DFRC is a legiti-
mate substitution drawback scheme, since the scheme
provides
inputs used in the
exported product. Since the quantity, quality and tech-
nical characteristics and specifications match with inputs
used in the export product, the scheme is in the view of
the GOI and Texprocil permissible under the Agreement
(ASCM).
on Subsidies and Countervailing Measures
Texprocil also argued that, when assessing whether it is
a legitimate substitution drawback scheme, the relevant
condition is to look at what is being imported and not
who is importing. It was further argued that in so far as
the Government is concerned, no additional benefit is
granted.

(64) Under DFRC, which is

scheme

a post-export

as
mentioned in recital 54, there is a built-in obligation to
import only inputs that were consumed in the produc-
tion of the exported goods. These inputs have to be of
the same quantity and characteristics as the domestic
inputs used in the exported goods. On this basis, the
DFRC presents some of the characteristics of a substitu-
tion drawback scheme according to Annex III to the
basic Regulation. The investigation established, however,
there was no system or procedure in place to
that
confirm whether and which inputs are consumed in the
production process of the exported product or whether
an excess benefit of import duties occurred within the
meaning of Annex I(i), and Annexes II and III to the
basic Regulation.

(61) Article 2(1)(a)(ii) of the basic Regulation provides for an
exception for, inter alia, drawback and substitution draw-
back schemes which conform to the strict rules laid
down in Annex I(i), Annex II (definition and rules for
drawback) and Annex III (definition and rules for substi-
tution drawback).

(62)

It should be stressed that drawback systems imply the
refund of duties paid on imported inputs, which have
been consumed in the production process of an
exported product. However, in case of DFRC, there need
have been no import of inputs for which duties have
been paid or exempted for in the first place.

(63) Drawback systems can allow for the ex post refund or
drawback of
import charges on inputs which are
consumed in the production process of another product,
the latter
including situations where the export of
product contains domestic inputs having the same
quality and characteristics as those substituted for the
imported inputs (‘substitution drawback’ schemes).
It
would for instance be allowed for a company, in case of
a shortage of imported inputs, to use domestic inputs
and incorporate these in the exported goods, and then at
a later stage import the corresponding quantity of inputs
free of any duty. In this context, the existence of a verifi-
cation system or procedure is important because it
the exporting country to
enables the government of

(65)

(66)

(67)

Furthermore, the DFRC is, as mentioned above in recital
57, freely transferable. This implies that the exporter,
which is granted a certificate to offset amounts of
customs duties due on future imports of inputs, is under
no obligation actually to consume the imported inputs
in the production process or even actually to use the
certificate to import inputs (i.e. there is no actual user
condition). Instead, the exporter may decide to sell the
certificate to importers. Consequently, the DFRC cannot
be considered as a substitution drawback scheme in
accordance with the basic Regulation (1).

Based on the above, the GOI, by issuing a certificate
which is freely transferable, provides exporters with a
financial contribution. In these circumstances, the certifi-
cates actually represent a direct grant from the GOI to
the exporters concerned.

In conclusion, this financial contribution by the GOI
confers a benefit upon the DFRC holder, since the latter
obtains free money, which as such would not be avail-
able in the commercial market. Therefore, the scheme
constitutes a subsidy. As the subsidy can only be
obtained by exports, it is contingent in law upon export
performance within the meaning of Article 3(4)(a) of the
basic Regulation. Therefore, the subsidy is deemed to be
specific and thus countervailable.

(1) The fact that the DFRC may not be considered as a substitution
drawback scheme according to the basic Regulation (i.e. the Indian
legislation does not ensure that it will operate as a proper drawback
scheme) does not preclude the possibility that individual exporters
may use DFRC as a drawback scheme.

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(e) Calculation of the subsidy amount

contained in Chapter 5 of the 2002 to 2007 Export and
Import Policy and Chapter 5 of the Handbook of Proce-
dures.

(68) One exporter used the DFRC as a substitution drawback
scheme. This company was able to demonstrate that the
quantities of
imported inputs, which were exempted
from import duties, did not exceed the quantities used
for the exported goods. Moreover, the company was able
to demonstrate that there was no drawback of import
those originally levied on the
charges in excess of
imported inputs in question. It was therefore concluded
that,
in the case of this company, the exemption of
import duties on inputs were in accordance with the
provisions of Annexes I to III to the basic Regulation,
and therefore no benefit was conferred in the IP.

(69)

Two companies sold the certificates they had obtained.
Since the DFRC only covers the inputs given in the
SION, it would have been appropriate to establish the
benefit using the same methodology as under the DEPB,
i.e. calculating the benefit as a percentage of the value of
the exported finished products. As explained above, such
standard rates have been established by the Indian
authorities for most products,
including the product
concerned.

(70) However, the certificate under this scheme does not have
a face value, in the same way as the credits under the
DEPB scheme. The certificate shows the quantity of
inputs permitted for import as well as a maximum total
value up to which such inputs can be imported. In this
case, given the absence of a specific monetary value on
each certificate, it was not possible to establish a benefit
of the scheme on the basis of the value or the quantity
of the exported goods. In cases where the certificates
therefore considered
were transferred (sold),
reasonable to calculate the benefit on the basis of the
sales price of the certificate.

it was

(71)

(72)

The amount of subsidy has been allocated over total
exports during the IP in accordance with Article 7 of the
basic Regulation.

Two companies benefited from this scheme during the
IP. For one company the subsidy obtained was 3,08 %,
whereas for the other the subsidy established was negli-
gible.

4. Export Promotion Capital Goods (EPCG) scheme

(a) Legal basis

(73)

The EPCG scheme was announced on 1 April 1992.
During the IP the scheme was regulated by Customs
Notifications Nos 28/97 and 29/97 which entered into
the schemes are
force on 1 April 1997. Details of

(b) Eligibility

(74)

The scheme is available to ‘manufacturer exporters with
or without
supporting manufacturer(s)/vendor(s),
merchant exporters tied to supporting manufacturer(s)
and service providers’ (quoted from Chapter 5.2 of the
2002 to 2007 Export and Import Policy).

(c) Practical implementation

(75)

(76)

(77)

(78)

To benefit from the scheme, a company must provide to
the relevant authorities details of the type and value of
capital goods which are to be imported. Depending on
the level of export commitment which the company is
prepared to undertake, the company will be allowed to
import capital goods at either a zero or reduced rate of
duty.
the
imported capital goods must be used to produce
exported goods. Upon application by the exporter, a
licence authorising the import at preferential rates is
issued. An application fee is payable to obtain the
licence.

the export obligation,

In order

to meet

the benefit

The EPCG licence holder can also source the capital
goods himself indigenously. In such a case, the indi-
genous manufacturer of capital goods may avail himself
for duty-free import of components
of
required for manufacture of such capital goods. Alterna-
tively, the indigenous manufacturer can claim the benefit
of deemed export in respect of supply of capital goods
to an EPCG licence holder.

There is an export obligation in order to be eligible for
the EPCG scheme. The export obligation must be
fulfilled by the export of goods manufactured or
produced by using the capital goods imported under the
scheme. The export obligation involves a requirement to
export more than the average level of exports of the
same product achieved by the company in the preceding
three licensing years.

Recently, there has been a change in the conditions of
the scheme in respect of the calculation of the export
obligation. However, this is only applicable for licences
issued after 1 April 2003,
i.e. not covered by the IP.
Under the new rules, the companies will have eight years
to fulfil the export obligation (the value of exports must
be at least six times the value of the total duty exemp-
tion for imported capital goods).

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(d) Conclusion on EPCG scheme

(83)

(79)

(80)

(81)

(82)

The payment by an exporter of a reduced or zero rate of
import duty constitutes a financial contribution by the
GOI, since revenue otherwise due is foregone and a
benefit is conferred on the recipient by lowering the
duties payable or fully exempting him from paying the
import duties. Hence, the EPCG scheme is a subsidy.

The licence cannot be obtained without a commitment
to export goods. As the subsidy is contingent in law
upon export performance within the meaning of Article
3(4)(a) of the basic Regulation, it is deemed to be specific
and thus countervailable.

It was argued that the scope of the term ‘input’ in Annex
I(i) to the basic Regulation also covers capital goods,
since capital goods are essential inputs for production,
without the use of which no final product could ever
come into existence. It was further argued that it is only
with the use of capital goods that the raw materials are
converted into finished goods, and that the depreciation
charged on the capital goods represents the value of
capital goods used in the production of final products.
Therefore, duty exemption on capital goods used in the
production of the exported product should be treated as
duty exemption on inputs used in the production of the
exported products and such exemption should not be
treated as countervailable benefit within the meaning of
the basic Regulation.

In reply to these arguments, it is considered that capital
goods do not constitute ‘inputs’ within the meaning of
the basic Regulation because they are not physically
incorporated into the exported products. Consequently,
the above arguments are rejected.

(e) Calculation of the subsidy amount

The benefit to the companies has been calculated on the
the amount of unpaid customs duty on
basis of
imported capital goods by spreading this amount across
a period which reflects the normal depreciation period
of such capital goods in the industry of the product
concerned pursuant to Article 7 of the basic Regulation.
In accordance with the established practice, the amount
so calculated which is attributable to the IP has been
adjusted by adding interest during the IP in order to
reflect the value of the benefit over time and thereby
establish the full benefit of this scheme to the recipient.
Given the nature of the subsidy, which is equivalent to a
one-time grant, the commercial interest rate during the
IP in India (estimated at 10 %) was considered appro-
priate. The amount of subsidy was then allocated over
total exports during the IP, in accordance with Article 7
of the basic Regulation.

In respect of the calculation of the subsidy amount, it
was argued that a subsidy calculation, based on the
‘benefit to the producer’ perspective, requires the alloca-
tion of the subsidy amount (unpaid customs duties) attri-
butable to the IP over the whole production (domestic
plus exports) of the product concerned. It was further
argued that companies which also have domestic sales of
bedlinen used the same capital goods for their entire
production of bedlinen.

In reply to this, it is recalled that this scheme is contin-
gent solely upon export performance.
In accordance
with Article 7(2) of the basic Regulation, the benefit for
this scheme should therefore be allocated over export
turnover only since the subsidy is granted by reference
to a certain value of exports of goods within a certain
time period. Therefore, the claim that benefits under the
scheme should be allocated over
is
rejected.

turnover

total

(84)

Three companies benefited from this scheme during the
IP. Two companies obtained subsidies of 0,38 % and
2,0 % respectively, whereas for the third company the
subsidy established was negligible.

5. Advance Licence Scheme (ALS)

(a) Legal basis

(85)

The ALS has been in operation since 1977 to 1978. The
scheme is specified in paragraphs 4.1.1 to 4.1.7 of the
Export and Import Policy and parts of Chapter 4 of the
Handbook of Procedures.

(b) Eligibility

(86) Advance licences are available to exporters to enable
them to import inputs used in the production of exports,
duty-free.

(c) Practical implementation

(87)

The volume of imports allowed under this scheme is
determined as a percentage of the volume of exported
finished products. The advance licences measure the
units of authorised imports in terms of their quantity as
well as in terms of their value. In both cases, the rates
used to determine the allowed duty-free purchases are
established for most products,
including the product
concerned, on the basis of SION. The input items speci-
fied in the advance licences are items used in the
production of the relevant finished products.

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(88) Advance licences can be issued for:

(89)

It was established during the verification that only the
ALS referred to under (i) above (physical exports) was
used by one manufacturing-exporter during the IP. It is
therefore not necessary to establish the countervailability
of the categories (ii),
(iii) and (iv) of the ALS in the
context of this investigation.

(i) ‘physical exports: Advance Licences may be issued
for physical exports to a manufacturer exporter or
merchant exporter
tied to supporting manufac-
turer(s) for import of inputs required for the export
product’ (quoted from Chapter 4.1.1(a) of the 2002
to 2007 Export and Import Policy).

(ii) intermediate supplies: advance licences may be
issued for intermediate supply to a manufacturer-
exporter for the inputs required in the manufacture
of goods to be supplied to the ultimate exporter/
deemed exporter holding another advance licence.
The advance licence holder intending to source the
inputs from indigenous sources,
in lieu of direct
import, has the option to source them against
advance licences for intermediate supplies. In such
cases the quantities purchased on the domestic
market are written off from the advance licences,
and an intermediate advance licence is issued to the
benefit of the domestic supplier. The holder of such
intermediate advance licence is entitled to the
benefit of importing duty-free the goods needed to
produce those inputs delivered to the final exporter.

(iii) deemed exports: advance licences can be issued for
deemed export to the main contractor for import of
inputs required in the manufacture of goods to be
supplied to the categories mentioned in paragraph
8.2. of the Policy. According to the GOI, deemed
exports refers to those transactions in which the
goods supplied do not leave the country. A number
of categories of supply is regarded as deemed
exports provided the goods are manufactured in
India, e.g. supply of goods to Export Oriented Units,
supply of capital goods to holders of licences under
the EPCG.

(iv) advance release orders (AROs): the advance licence
holder intending to source the inputs from indi-
genous sources,
in lieu of direct import, has the
option to source them against AROs. In such cases
the advance licences are validated as AROs and are
endorsed to the supplier upon delivery of the items
specified therein. The endorsement of the ARO enti-
tles the supplier to the benefits of deemed exports
drawback and refund of terminal excise duty. In a
way, the ARO mechanism refunds taxes and duties
to the manufacturer supplying the product, instead
of refunding the same to the exporter in the form of
drawback/refund of duties. The refund of
taxes/
duties is available both for indigenous inputs as well
as imported inputs.

(d) Conclusions on the scheme

(90) Only exporting companies are granted licences, which
can be used to offset amounts of customs duties on
imports. In this regard, the scheme is contingent upon
export performance.

(91) As mentioned above, it was established that the ALS, in
respect of ‘physical exports’, was used by one investi-
gated company during the IP. The company used the
ALS for duty-free imports of inputs for exported goods.

(92)

The GOI claimed that
the ALS is a quantity-based
scheme, and that the inputs allowed under this licence
are with reference to the quantity of exports. It was also
submitted that whatever inputs are imported under the
ALS, the same inputs have to be used in the manufac-
turing of the exported products or for replenishment of
the stock of
inputs used in the products already
exported. According to the GOI, the imported inputs
have to be used by the exporter and no such inputs are
allowed to be sold or transferred.

(93) Although the ALS appears to be subject to actual user
condition,
it was noted that there was no system or
procedure in place to confirm whether and which inputs
are consumed in the production process of exported
goods. The system only shows that the goods imported
duty-free have been used in the production process, with
no distinction between the destination of
the goods
(domestic or export market).

(94) However,

this investigation,

for the purposes of

the
company in question was able to demonstrate that the
quantities of imported materials, which were exempted
from import duties, did not exceed the quantities used
for the exported goods. It was therefore concluded that,
in the case in question, the exemption of import duties
on inputs required for the export product were granted
in accordance with the requirements of Annexes I to III
of the basic Regulation.

(95)

Therefore, it is found that there is no benefit granted to
the company under this scheme.

(97)

(98)

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6. Export Processing Zones (EPZs)/Export Oriented

Units (EOUs)

(a) Legal basis

(96)

The EPZ/EOU scheme, which was introduced in 1965, is
an instrument under the Export and Import Policy invol-
ving export-related incentives. During the IP the scheme
was regulated by Customs Notifications Nos 53/97, 133/
94 and 126/94. Details of the schemes are contained in
Chapter 6 of the 2002 to 2007 Export and Import
Policy and Chapter 6 of the Handbook of Procedures.

(b) Eligibility

In principle, companies undertaking to export
their
entire production of goods and services may be set up
under EPZ/EOU scheme. Once the EPZ/EOU status is
granted, those companies can avail themselves of certain
benefits. There are seven identified EPZs in India. EOUs
can be located anywhere in India. They are bonded units
under the surveillance of customs officials in accordance
with Section 65 of the customs Act. Although compa-
nies operating within EOU/EPZ scheme are to export
their entire production, the GOI does allow these units
to sell a part of their production on the domestic market
under certain conditions.

(iii) exemption from income tax normally due on profits
realised on export sales in accordance with Section
10A or 10B of the Income Tax Act, for a 10-year
period up to 2010;

(iv) reimbursement of central sales tax paid on goods

procured locally;

(v) possibility of 100 % foreign equity ownership;

(vi) facility to sell a part of production in the domestic
market on payment of applicable duties, as an
exception to the general requirement to export the
entire production.

(100) EOUs or companies located in an EPZ should maintain,
in the specified format, a proper account of all imports
concerned and of the consumption and utilisation of all
imported materials and of
the exports made. These
should be submitted periodically, as may be required, to
the competent authorities.

(101) The importer must also ensure minimum net foreign
exchange earnings as a percentage of exports and export
performance as stipulated in the Export and Import
Policy. The entire operations of an EOU/EPZ are to be
done in customs-bonded premises.

(c) Practical implementation

Companies requesting EOU status or located in an EPZ
must apply to the competent authorities. Such applica-
tion must include details for a period of the next five
inter alia, planned production quantities,
years, on,
import requirements and
projected value of exports,
If the authorities accept the
indigenous requirements.
company's
and conditions
the
application,
attached to the acceptance will be communicated to the
company. Companies in EPZs and EOUs can be involved
in the production of any product. The agreement to be
recognised as a company under the EPZ/EOU scheme is
valid for a five-year period. The agreement may be
renewed for further periods.

terms

(102)

(99)

EPZ/EOU businesses are entitled to the following bene-
fits:

(i) exemption from import duties on all types of goods
(including capital goods, raw materials and consum-
ables)
required for manufacture, production or
processing, or in connection therewith;

(ii) exemption from excise duty on goods procured

from indigenous sources;

(d) Conclusions on EPZ/EOU

In the present investigation, the EPZ/EOU scheme was
used by one company for the import of raw materials,
capital goods and for the procurement of goods on the
domestic market.
In addition, the company used the
facility to sell a part of its production in the domestic
It was found that concessions related to the
market.
exemption from customs duties on raw materials and
capital goods, as well as the exemption from excise duty
on goods procured from indigenous sources and the
reimbursement of central
tax paid on goods
procured locally, were used by the company. Therefore,
the Commission examined the countervailability of these
concessions.
the EPZ/EOU scheme
regard,
involves the granting of subsidies as the concessions
constitute financial contributions by the GOI, since
revenues otherwise due are foregone and a benefit is
therefore conferred on the recipient. As the granting of
this subsidy is contingent in law upon export perfor-
mance within the meaning of Article 3(4)(a) of the basic
Regulation, it is therefore deemed to be specific and thus
countervailable.

In this

sales

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(103) As far as raw materials and consumables are concerned,
they can qualify for the exemption of Annex I(i) to the
basic Regulation only if
they are consumed in the
production process of the exported product and if there
is a verification system in place in order to confirm
which inputs are consumed in the production of the
exported goods and in what amount. It should be noted
that imports of machinery (capital goods) do not fall
under this exemption.

(104) Texprocil argued that, for the reasons stated under the
EPCG scheme in recital 81, the capital goods imported
under the EOU scheme should not be countervailable.

(105)

In reply to this, it should be recalled that, for the reasons
set out above in relation to the EPCG in recital 81,
capital goods do not constitute ‘inputs’ within the
meaning of the basic Regulation. Moreover, it has been
determined that this scheme is contingent in law solely
upon export performance. It is therefore deemed to be
specific and thus countervailable.

(106)

In the case of excise-duty exemption, it was found that
the duty paid on purchases by a non-EOU unit is cred-
ited as a drawback (CENVAT) and is utilised towards
payment of excise duty on domestic sales. Thus, by
exempting excise duty on purchases by an EOU unit, no
additional government revenue is foregone and conse-
quently no additional benefit accrues to the EOU.

(107) This is not the case in respect of reimbursement of
central sales tax paid on goods procured locally, since
this tax is not refundable for companies operating on
the domestic market. Paragraph 6.12 of the Export and
Import Policy stipulates that EPZs/EOUs are entitled to
this reimbursement provided the goods supplied are
manufactured in India. In other words, EOUs are, unlike
domestic
entitled to reimbursement of
central sales tax.

companies,

(108) Texprocil also argued that central sales tax payable on
inputs procured indigenously and used in the production
of
tax within the
meaning of Annex I(h) to the basic Regulation, and that,
accordingly, exemption of such prior stage cumulative
indirect taxes cannot be held to be countervailable.

the export product

is an indirect

(109) The illustrative list of export subsidies in Annex I to the
basic Regulation stipulates under item (h): ‘The exemp-
tion, remission or deferral of prior-stage cumulative
indirect taxes on goods or services used in the produc-
tion of exported products in excess of the exemption,
like prior-stage cumulative
remission or deferral of
indirect taxes on goods or services used in the produc-
tion of like products when sold for domestic consump-
tion; provided, however,
that prior-stage cumulative
indirect taxes may be exempted, remitted or deferred on
exported products even when not exempted, remitted or
deferred on like products when sold for domestic
consumption, if the prior-stage cumulative indirect taxes
are levied on inputs that are consumed in the production
of the exported product (making normal allowance for
waste). This item shall be interpreted in accordance with
the guidelines on consumption of inputs in the produc-
tion process contained in Annex II’.

(110)

It was argued that Annex I(h) to the basic Regulation
provides for the following:

‘(i) Prior-stage cumulative indirect taxes on inputs used
shall be

in the production of export product
exempt.

(ii) The only condition is that the prior-stage cumula-
tive indirect taxes should have been levied on those
inputs.

(iii) The exemption shall be granted even when such an
exemption is not given on like products when sold
for domestic consumption.’

(111)

(112)

In this respect, it should be noted that, for the purpose
of the basic Regulation,
indirect taxes are
multi-staged taxes levied, where there is no mechanism
the goods or
for subsequent crediting of the tax,
services subject to tax at one stage of production are
used in a succeeding state of production.

‘cumulative’

if

In addressing the arguments, it should be recalled that,
in accordance with Export and Import Policy, EOUs are
entitled to reimbursement of central sales tax paid on
goods procured locally.
is not a
requirement that goods have to be incorporated in the
production of exported goods. According to the GOI,
the tax subject in case of sales tax is the purchaser, and
central sales tax is in general not refundable.

In other words,

it

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(113) The reimbursement to EOUs of central sales tax paid on
goods procured locally is considered a countervailable
subsidy for the following reasons. Pursuant to the provi-
sions of Annex I(h) to the basic Regulation, the reimbur-
sement to EOUs (which are required to export) of central
sales tax paid on goods procured locally is an excess
remission when compared to goods sold for domestic
consumption (for which there is no reimbursement of
central sales tax). As mentioned above, paragraph 6.12
of the Export and Import Policy stipulates that EPZs/
EOUs are entitled to this reimbursement, provided that
the goods supplied are manufactured in India. EOUs are,
unlike companies
selling on the domestic market,
entitled to reimbursement of central sales tax. Moreover,
it has not been demonstrated that the reimbursement is
provided in accordance with the guidelines on consump-
tion of inputs in the production process (Annex II to the
basic Regulation). No evidence has been provided that
the GOI has in place and applies a system or procedure
to confirm whether inputs are consumed in the produc-
tion of the exported product and in what amounts. In
addition, the investigation established that the company
concerned procured under central sales tax exemption a
number of items which are not consumed in the produc-
tion of the exported goods. On this basis, it can only be
concluded that an excess payment has occurred.

(114)

In addition, it was argued that the relevant EOU in this
particular case is located in the Indian State of Uttar
Pradesh, and that, therefore, the sales tax law applicable
for this State should be considered for determining
whether non-EOUs located in the particular State are
exempt from paying sales tax or not.
It was further
argued that the Indian legislation, the State Trade Tax
Act, provides for granting exemption or concession from
payment of tax on the purchase of raw material and
packing material used in the manufacture of
the
exported goods. It was argued that the provision does
not distinguish whether the product is exported by an
EOU or a non-EOU.

(115) However,

it was established at the verification visit to
the GOI that central sales tax, and not local sales tax, is
applicable in case of inter-State sales. It was explained
that central sales tax is, in general, not refundable (apart
from the fact that EOUs are entitled to reimbursement
of central sales tax paid on goods procured locally).
However, with regard to the local sales tax, which is
applicable in case of sales within a State in India, the
local government decides on the granting of exemptions.

that a particular State may grant certain
The fact
different exemptions or concession from payment of tax
is not relevant when assessing the countervailability of
the scheme in respect of reimbursement of central sales
tax paid on goods procured locally. This argument is
therefore rejected.

(116)

In conclusion, as the subsidy is tied to an EPZ/EOU, it is
contingent in law upon export performance within the
meaning of Article 3(4)(a) of the basic Regulation. There-
fore, the subsidy is deemed to be specific and thus coun-
tervailable.

(e) Calculation of the subsidy amount

E x e mp ti on
mate r i als

fr om i mp or t

du ti e s

on

r a w

(117) During the verification visit, the nature and quantities of
imported materials were verified. The investigation
established that
the company sourced raw materials
domestically, and imported only small quantities. The
question of whether an excess remission of import duty
has occurred did therefore not arise.

E x e mp ti on fr o m i mp or t
g o ods

du ti e s on c a p i ta l

(118) Unlike raw materials, capital goods are not physically
incorporated into the finished goods. For calculation
purposes, the amount of duty foregone is equivalent to a
grant on each import of capital good. Consequently, the
benefit to the investigated company has been calculated
on the basis of the amount of unpaid customs duty on
imported capital goods by spreading this amount across
a period which reflects the normal depreciation period
of such capital goods in the industry of the product
concerned in accordance with Article 7 of the basic
Regulation. The amount so calculated which is then
attributable to the IP has been adjusted by adding
interest during the IP in order to reflect the value of the
benefit over time and thereby establish the full benefit of
this scheme to the recipient. Given the nature of the
subsidy, which is equivalent to a one-time grant, the
commercial interest rate during the IP in India (estimated
at 10 %) was considered appropriate. The total amount
of subsidy has then been allocated over total export
turnover of the EOU in accordance with Article 7 of the
basic Regulation. Based on this calculation, the company
obtained a subsidy of 6,85 %.

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R e i mbu r se me nt of c e n t r a l
g oo ds p r o c u r e d loc a l ly

sa l e s

ta x p a i d on

(119) The benefit was calculated on the basis of the amount of
central sales tax refundable for purchases during the IP.
The amount of subsidy has been allocated over total
exports during the IP in accordance with Article 7 of the
basic Regulation. Based on this,
it is found that the
company obtained a subsidy of 1,75 %.

7. Income Tax Exemption (ITES)

(a) Legal basis

(120) The Income Tax Act 1961 is the legal basis under which
Income Tax Exemption operates. The Act, which is
amended yearly by the Finance Act, sets out the basis for
the collection of taxes as well as various exemptions/
deductions which can be claimed. Among the exemp-
tions which can be claimed by firms are those covered
by Sections 10A, 10B and 80HHC of the Act, which
provide an income tax exemption on profits from export
sales.

(b) Eligibility

(121) Exemption under Section 10A can be claimed by firms
located in free trade zones. Exemption under Section
10B can be claimed by EOUs. Exemption under Section
80HHC can be claimed by any firm which exports
goods.

(c) Practical implementation

(122) To benefit

from the abovementioned tax deductions/
exemptions, a company must make the deduction/
exemption claim when submitting its tax return to the
tax authorities at the end of the tax year. The tax year
runs from 1 April to 31 March. The tax return must be
submitted to the authorities by the following 30
November. The final assessment by the authorities can
take up to three years after submitting the tax return. A
company may only claim one of the deductions available
under the three sections mentioned above.

(d) Conclusion on Income Tax Exemption

(123) Annex I(e) to the basic Regulation refers to the ‘full or
partial exemption … related to exports, of direct taxes’
as constituting an export subsidy. Under the Income Tax
Exemption, the GOI confers a financial contribution to

the company by foregoing government revenue in the
form of direct taxes which would be due if the income
tax exemptions were not claimed by the company. This
financial contribution confers a benefit to the recipient
by reducing its income tax liability.

(124) The subsidy is contingent in law upon export perfor-
mance within the meaning of Article 3(4)(a) of the basic
Regulation, since it exempts profits from export sales
only, and is therefore deemed to be specific.

(125) The GOI and Texprocil argued that Income Tax Exemp-
tion in respect of Section 80HHC is gradually being
phased out starting from the financial year April 2001
to March 2002. It was argued that it was therefore not
appropriate to countervail this scheme.

(126)

It was also argued that in terms of Subsection 1B of
the Income Tax Act, a specified
Section 80HHC of
percentage of export profits are exempt during the rele-
vant years as given in the table below:

Financial year

Assessment year

Percentage of export
profit allowed as a
deduction

2000-2001

2001-2002

80 %

2001-2002

2002-2003

70 %

2002-2003

2003-2004

50 %

2003-2004

2004-2005

30 %

2004-2005

2005-2006

0 %

(127)

it was established
In respect of the arguments made,
during the verification that the programme was still in
force at the end of the IP. Indeed, the actual rate of
export income being exempted from income tax was
70 % and the scheme will still continue to confer bene-
fits to exporting producers in India at the time of the
imposition of definitive measures. In accordance with
Article 15 of the basic Regulation, countervailing duties
should be imposed unless the subsidy or subsidies are
withdrawn or it has been demonstrated that the subsi-
dies no longer confer any benefit on the exporters
involved. Since
the Income Tax Exemption under
Section 80HHC clearly meets the criteria for the imposi-
tion of duties under Article 15 of the basic Regulation,
any benefits from it should be included in the total
amount of countervailing duty.

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(e) Calculation of the subsidy amount

(131)

(128) Claims for benefit under Sections 10A, 10B and 80HHC
are made when submitting a tax return at the end of the
tax year. As the tax year in India runs from 1 April to
31 March, the benefit was calculated on the effective
income tax exemption claimed during the tax year
ending during the IP (i.e. 1 April 2001 to 31 March
2002). This tax claim had to be filed on 30 September
2002 at the latest, i.e. at the time of the end of the IP.
The benefit to the exporters has therefore been calcu-
lated on the basis of the difference between the amount
of taxes normally due with and without the exemption.
The rate of corporate tax applicable during this tax year
was 35,7 %. The amount of subsidy has been allocated
over total exports, in accordance with Article 7(2) of the
basic Regulation.

It was also claimed that the DEPB income should be
deducted from the amount of taxable income. It was
argued that, in the absence of DEPB income, there would
have been no taxable profit derived from export sales.
This argument is without merit. Even if its inclusion was
appropriate, the DEPB benefit is given to eligible firms
in the form of a cash grant (i.e. a direct transfer of
funds), while the income tax exemption applies to
government
revenue ‘otherwise due’ being foregone.
Although the DEPB benefits clearly form part of a firm's
total revenue, the two subsidies result from two indepen-
dent actions by the GOI. It is not for the investigating
authority to attempt to reconstruct the situation which
would prevail in the absence of certain subsidies. In any
event, a firm's taxable profit, on exports or on all trans-
actions, is derived from a comparison of its total revenue
and costs, which are made up of many different
elements, and which result from all sorts of commercial
decisions and market forces. It would be unreasonable to
select one element (e.g. the DEPB income) and then set
this aside from the calculation. In any event, as explained
above, the benefit was calculated for all companies on
the effective income tax exemption claimed during the
tax year ending during the IP (i.e. 1 April 2001 to 31
March 2002).

(129) Although it was submitted that

the subsidy benefit
should be treated as nil, alternative methods were
suggested for the purpose of
the
subsidy margin, notably in relation to the applicable tax
rates.

the calculation of

(132) Six companies benefited from this scheme during the IP.
Five companies obtained subsidies ranging from 0,32 %
to 3,70 %, whereas for the sixth company the subsidy
established was negligible.

(130)

In this regard,
it is noted that Article 5 of the basic
Regulation provides that the amount of countervailable
subsidies should be calculated in terms of the benefit
conferred on the recipient which is found to exist during
the IP for subsidisation. As mentioned above, the benefit
was calculated on the basis of the amount of taxable
profit normally earned in the tax year 2001 to 2002 (i.e.
1 April 2001 to 31 March 2002) which ended halfway
through the IP. During the tax year 2001 to 2002
(which is the assessment year 2002 to 2003), the actual
rate of export
the percentage of export
income eligible for the tax exemption) being exempted
from income tax was 70 %. For the subsequent tax year
(i.e. from 1 April 2002 to 31 March 2003), the actual
rate of export income being exempted from income tax
is 50 %. It is considered that, as part of this latter tax
year falls within the IP of this proceeding, it is appro-
priate to make the calculation of the amount of counter-
vailable subsidies on the basis of a pro rata average of
the two rates which applied in the IP, i.e. 60 %. Appro-
priate adjustments have accordingly been made to the
amount of subsidy for the companies which availed of
this scheme.

income (i.e.

8. Amount of countervailable subsidies

(133) The amount of countervailable subsidies in accordance
with the provisions of the basic Regulation, expressed ad
valorem, for the investigated exporting producers ranged
ranging between 3,09 % and 10,44 %.

(134)

In accordance with Article 15(3) of the basic Regulation,
the subsidy margin for the cooperating companies not
included in the sample, calculated on the basis of the
weighted average subsidy margin established for the
cooperating companies in the sample, is 7,67 %. Given
that the level of the overall cooperation for India was
high (above 90 %), the residual subsidy margin for all
other companies was set at the level for the company
with the highest individual margin, i.e. 10,44 %.

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Type of subsidy

Bombay Dyeing
N. W. Exports Limited
Nowrosjee Wadia & Sons
Limited

DEPB

Post-export

4,95 %

Brijmohan Purusottamdas

5,93 %

Divya

Jindal Worldwide

3,47 %

1,45 %

DFRC

EPCGS

EPZ/EOU

ITES

TOTAL

0,38 %

5,33 %

0,32 %

6,25 %

2,95 %

6,42 %

1,65 %

3,09 %

Texcellence

1,88 %

3,08 %

3,70 %

8,65 %

Mahalaxmi Exports

7,02 %

2,29 %

9,31 %

Pasupati

Prakash Cotton Mills

Vigneshwara

Cooperating companies not in
the sample

All others

8,44 %

4,46 %

8,59 %

2,00 %

8,59 %

10,44 %

4,46 %

7,67 %

10,44 %

(135)

In respect of a sampled company, i.e. Bombay Dyeing and Manufacturing Co. Ltd, it was established
that this company used licences obtained by two related companies: Nowrosjee Wadia & Sons
Limited & N. W. Exports Limited. The investigation revealed that the two related companies
exported products produced by Bombay Dyeing and Manufacturing Co. Ltd. The related companies
should therefore be subject to the subsidy margin established for Bombay Dyeing and Manufacturing
Co. Ltd.

(136) Within the Community, the product concerned is manufactured by:

D. COMMUNITY INDUSTRY

— producers on behalf of which the complaint was lodged; all producers which were selected in

the sample (the sampled Community producers) were also complainants,

— other Community producers which were not complainants and did not cooperate. One produ-
cing company opposed to the proceeding represented less than 1 % of the Community produc-
tion.

(137) The Commission has assessed whether all the above companies could be considered as Community
producers within the meaning of Article 9(1) of the basic Regulation. The output of all the above
companies constitutes the Community production.

(138) The Community industry is composed of 29 Community producers which cooperated with the
Commission, among which are also the five sampled Community producers. These producers
account for 45 % of the Community production of cotton-type bedlinen. They are therefore deemed
to constitute the Community industry within the meaning of Articles 9(1) and 10(8) of the basic
Regulation.

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1. Preliminary remarks

E. INJURY

(139)

In view of the fact that sampling had been used with regard to the Community industry, injury has
been assessed on the one hand, on the basis of information collected at the level of the entire Com-
munity industry, for trends concerning production, productivity, sales, market share, employment
and growth. On the other hand,
information collected at the level of the sampled Community
producers was analysed, as regards trends concerning prices and profitability, cash flow, ability to
raise capital and investments, stocks, capacity, utilisation of capacity, return on investment and
wages.

2. Community consumption

(140) Community consumption was established on the basis of production volumes of the Community
producers according to Eurocoton, minus exports based on Eurostat data, plus imports from India
and the other third countries, also based on Eurostat. Between 1999 and the IP, the apparent Com-
munity consumption increased steadily from 173 651 tonnes to 199 881 tonnes, i.e. by 15 %.

3. Imports from the country concerned

(a) Volume and market share

(141)

Imports of cotton-type bedlinen from India into the Community decreased in volume from 15 700
tonnes in 1999 to 14 300 tonnes in the IP, i.e. by 9 % over the period considered. After a slight
increase between 1999 and 2000, imports went down in 2001. The corresponding market share
decreased from 9,1 % in 1999 to 7,2 % in the IP.

(142) While it is true that imports from India lost market share throughout the period considered, the
level of these imports is substantially above the levels set out in Article 10(11) of the basic Regu-
lation. The significance of these imports is also illustrated by comparing them to the market share
of the Community industry. The market share held by the imports originating in India amounts to
more than one third of the Community industry's market share. It is also worth noting additionally
that in the first nine months of 2003 import volumes have increased by more than 11 % on a year-
on-year basis.

(b) Prices

(143) Average prices from India remained stable during 1999 and 2000 at around EUR 5,65/kg. In 2001
they rose to around EUR 5,80/kg and dropped subsequently in the IP to around EUR 5,50/kg, i.e.
by 5 %.

(c) Price undercutting

(144) For the purposes of analysing price undercutting, the weighted average sales prices per product type
of the Community industry to unrelated customers on the Community market were compared to
the corresponding weighted average export prices of the imports concerned. The comparison was
made after deduction of rebates and discounts. The prices of the Community industry were adjusted
to an ex-works basis. The prices of the imports concerned were determined on a cif basis with an
appropriate adjustment for the customs duties and post-importation costs.

(145) This comparison showed that during the IP the products concerned originating in India were sold in
the Community at prices which undercut the Community industry's prices, when expressed as a
percentage of the latter, by between 26 and 77 %. In more than 75 % of the cases, undercutting
margins amounted to between 60 and 70 %.

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4. Situation of the Community industry

(146)

It was analysed whether the Community industry was still in the process of recovering from the
effects of past subsidisation or dumping, but no evidence was found that this should be the case.

(147)

It was submitted that the Community industry did not suffer material injury as it was protected by
the presence of quotas. It is indeed true that during the IP there were quotas in force. Under interna-
tional law, these quotas have their legal basis in the WTO Agreement on Textiles and Clothing. They
will be phased out by 31 December 2004. It should be noted that these quotas have not been fully
used during the IP. The quantities which can be imported under the quotas correspond to substantial
shares of the Community market. Indeed, on the basis of consumption figures in the IP the annual
2002 quota corresponds in the case of India to a market share of around 12 %. It should also be
noted that the determination of the level of these textile quotas is the result of straightforward nego-
tiations which are outside the analytical framework provided for under the basic Regulation. Whilst
it cannot be excluded that quotas might have an effect on the situation of the Community industry,
the mere presence of quotas does not prevent the Community industry from suffering injury. The
analysis of the figures in the present case shows that the Community industry suffered material
injury during the IP despite the presence of the quotas. In fact, the situation of the Community
industry deteriorated even though the Indian exporters did not fully exploit their allocated quota
during the IP. The submission is therefore rejected.

(a) Data relating to the Community industry as a whole

Pr oduc ti on, e mployme nt a nd pr oduc ti v i ty

(148) The production volume of the Community industry increased slightly between 1999 and the IP,

from 37 700 tonnes to 39 500 tonnes, i.e. by 5 %.

(149) Employment remained basically stable around 5 500 employees. Therefore, productivity increased
from 6,8 tonnes/employee in 1999 to 7,2 tonnes/employee during the IP, i.e. by 6 % over the period
considered.

S a le s volu me a n d ma r ke t sh a r e

(150) Over the period considered, the sales volume of the Community industry rose by 4 %, from 36 200
tonnes in 1999 to 37 800 tonnes during the IP. It had increased to 38 300 tonnes in 2001, but
decreased in the IP. The turnover generated by these sales increased from EUR 410 million in 1999
to EUR 441 million in 2001 but subsequently decreased by 5 percentage points to EUR 420
million during the IP.

(151) Despite the fact that consumption in the Community market increased by 15 % during the same
period, the Community industry's market share actually declined from 20,8 % to 18,9 % during the
IP. The market share fluctuated around 20 % between 1999 and 2001 and decreased by 1,5 percen-
tage points between 2001 and the IP.

G r o w th

(152) While Community consumption grew by 15 % between 1999 and the IP, the sales volume of the
Community industry rose by only 4 %. On the other hand, the volume of total imports rose by
35 % over the same period, with the most significant increase from 120 000 tonnes in 2001 to
139 000 tonnes during the IP. While the market share of all imports increased by more than 10
percentage points, the market share of the Community industry dropped from 20,8 % to 18,9 %.
This means that the Community industry could not participate adequately in the growth of the
market between 1999 and the IP.

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(b) Data relating to the sampled Community producers

S toc ks, ca p a c i t y a nd c a p a c i t y u t i li sa ti o n

(153) As far as stocks are concerned, they fluctuate considerably because most of the production is made
in response to orders, thus reducing the possibility to produce purely for stocks. Whilst an increase
in stocks was observed at the sampled Community producers, it was considered that in this case
stocks were not a relevant indicator of injury due to the industry specific high fluctuations of stocks.

(154) The production capacity was difficult to establish in nearly all sampled Community producers
because the production process of the like product is individualised, requiring different combinations
of machinery usage. Therefore it is impossible to draw an overall conclusion from the capacity of
individual machines concerning the capacity relating to the like product. In addition, part of the
production process is subcontracted in some of the sampled Community producers.

(155) However, for those products that go through a printing process, the printing department was
considered to be the factor determining the capacity relating to the printed bedlinen in all sampled
Community producers.
the capacity utilisation in the printing department
decreased steadily from 90 to 82 %.

It was found that

(156)

It was submitted that the evolution of production capacity and capacity utilisation cannot be
regarded as supporting a finding of
In this respect, and as in previous investigations
concerning the same product, it is recognised that it was not possible to draw an overall conclusion
concerning the capacity of individual machines. Nevertheless, the analysis of the printing capacity
was one of the indications, albeit limited to a part of the like product only, which suggested that
there was injury.

injury.

P r i c e s

(157) Average prices per kg of the sampled producers increased gradually from EUR 13,3 to EUR 14,2
over the period considered. This should be seen in the light of the fact that this average price covers
both high-value and low-value items of the product concerned and that the Community industry
has been forced to shift to more sales of higher-value niche products as their sales in the high-
volume mass market were taken over by imports from low-price countries. On the other hand,
average sales prices per kg of the Community industry overall went up marginally from EUR 11,3
in 1999 to EUR 11,5 in 2001 but dropped subsequently to EUR 11,1 during the IP.

(158)

It was submitted that the development of prices cannot be regarded as supporting a finding of
injury. This allegation was only based on the fact that sales prices of the sampled companies slightly
increased, for which an explanation was, however, provided in recital 157. Furthermore, the price
development is only one factor to be analysed. In addition, total unit costs also increased and as the
Community industry increasingly moved to the production of high added-value niche products, this
commanded a higher price. An increasing average price does therefore not necessarily support a
finding of no injury. The submission is therefore rejected.

Inv e stme nts a nd abi li ty to r ai se c a pi tal

(159) Between 1999 and 2001, investments were reduced significantly from EUR 7 million to EUR 2,5
million. Between 2001 and the IP, investments remained rather stable and accounted during the IP
for only 41 % of the amount invested in 1999.

(160) There was no claim from the Community industry nor indication that the Community industry

encountered problems in raising capital for its activity.

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P r ofi ta bi l i ty , r e tu r n on i nv e stme nt a nd c a sh f lo w

(161) Over the period considered, the profitability of the sampled Community producers dropped signifi-
cantly from 7,7 % in 1999 to 4,4 % in the IP, i.e. by 42 %. The return on investment followed the
same trend, falling from 10,5 % in 1999 to 5,9 % during the IP, a reduction by 44 %.

(162)

It was submitted that an average profitability of over 5 % in the period considered cannot be consid-
ered to support a finding of injury. In this respect, injury has to be established mainly in relation to
the IP. During the IP, the profitability was only at 4,4 %. Moreover, profitability had reached 7,7 %
in 1999, a year in which the Community industry did not suffer the competition of subsidised
imports, and then decreased by 43 % over the period considered,
i.e. there was an important
decrease over the period considered, due to fierce competition from subsidised imports. As a result,
the profitability in the IP fell short of the profitability that could have been reached in the absence
of subsidised imports, i.e. 6,5 %.

(163)

It was submitted that the decrease in profitability of the sampled companies cannot be attributed to
subsidised imports, but to an increase in labour costs and decreased investments. Average labour
costs of the sample increased only by 4,2 % in the period considered, hence, this does not explain
the profitability decrease. Furthermore, a decrease in investments does not necessarily entail a
decrease in profitability. The submission is therefore rejected.

(164)

It was submitted that the decrease in the return on investment is a mere reflection of the decrease in
investment. However, the return on investment is defined as profits in relation to the value of total
assets. Therefore, the decrease in investments would contribute to a decrease in the value of total
assets and therefore to an increase in the return on investment. The submission is therefore
dismissed.

(165) The cash flow generated by the like product diminished considerably from EUR 16,8 million in
1999 to EUR 11,3 million during the IP. The most significant reduction occurred in 2000, when
the cash flow decreased by 27 %. Between 2000 and the IP, it fell by another 5 %.

(166)

It was submitted that the Commission considered cash flow as a non-significant indicator. In this
respect, it is to be noted that cash flow is indeed influenced by stock variations and therefore an
indicator with a limited relevance. Nevertheless, is should be noted that the negative development of
cash flow over the period considered is in line with other indicators, confirming the negative evolu-
tion of the Community industry, and should not be qualified as insignificant.

W a g e s

(167) Labour costs increased by 3,3 % over the period considered, from EUR 35,2 million in 1999 to
EUR 36,3 million during the IP. As the number of employees remained basically stable, average
labour costs also increased,
from EUR 29 100 to EUR 30 300. These increases are nominal
increases and are considerably below the increase in consumer prices of more than 7,8 % over the
period considered.

(168)

It was submitted that wage increases do not point to injury. It is noted, in this respect, that average
labour costs of the sampled companies have increased in nominal terms by only 4,2 % throughout
the period considered, which, taking the increase in consumer prices into account, means that they
decreased in real terms by around 3,6 %.

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M a g ni t u de of th e a mou nt o f c ou nt e r v a i l a ble su b si di e s

(169) Given the volume and the price of the subsidised imports, the impact of the actual margin of

subsidy, which is also significant, cannot be considered negligible.

R e lev a nc e of i ndi c a tor s

(170)

It was submitted that output, productivity and sales volume were increasing and employment was
stable, which does not confirm injury. It was also submitted that the analysis of stocks and the
ability to raise capital did not confirm injury and that it was therefore meaningless to comment this
factor. In this respect it should be noted that injury has to be established on the basis of an examina-
tion of numerous factors and that, according to Article 8(5) of the basic Regulation, any one or
more of these can necessarily give decisive guidance. The argument is not convincing, as no single
indicator is relevant on its own and other indicators show a negative trend. The argument is there-
fore rejected.

5. Conclusion on injury

(171) The examination of the abovementioned factors shows that between 1999 and the IP the situation
of the Community industry deteriorated. The profitability fell significantly over the period consid-
ered and the Community industry's market share decreased during the period considered by 9,1 %.
Several other injury indicators such as capacity utilisation, cash flow, return on investment and
investments also developed negatively. For the sampled Community producers investments were
significantly reduced and also the return on investment decreased considerably. Employment
remained basically stable. Some indicators showed a positive trend: over the period considered, turn-
over and sales volumes of the Community industry increased slightly. Productivity and wages
increased marginally. As regards average sales prices of the sampled producers, they showed an
upward trend over the period considered, which is, however, partly a result of a shift to more sales
of higher-value niche products. However, it should be noted that during the same period the Com-
munity consumption grew by 15 % whilst the Community industry's share declined by 9,1 %. More-
over, the average sales prices of the Community industry decreased over the period considered.

(172)

In the light of the foregoing it is concluded that the Community industry has suffered material injury
within the meaning of Article 8 of the basic Regulation.

F. CAUSATION

1. Introduction

(173)

In accordance with Article 8(6) of the basic Regulation, the Commission examined whether the
subsidised imports originating in India have caused injury to the Community industry to a degree
that enables it to be classified as material. Known factors other than the subsidised imports, which
could at the same time have injured the Community industry, were also examined to ensure that the
possible injury caused by these other factors was not attributed to the subsidised imports.

2. Effect of the subsidised imports

(174)

Imports of cotton-type bedlinen from India into the Community decreased overall in volume from
15 700 tonnes in 1999 to 14 300 tonnes, i.e. by 9 %, in the IP. After a slight increase between
1999 and 2000, imports went down in 2001 and remained stable in the IP. The corresponding
market share decreased from 9,1 % in 1999 to 7,2 % in the IP, which is still substantial.

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(175) Average prices from India dropped slightly over the period considered. First, they remained stable
during 1999 and 2000 at around EUR 5,65/kg. In 2001 they rose to around EUR 5,80/kg but then
dropped subsequently in the IP to around EUR 5,50/kg, i.e. by 5 %.

(176)

In the analysis of the effect of the subsidised imports, it was found that price is the main element of
competition. Indeed it is the buyers who determine themselves the quality and design of the product
which they intend to order. It appears from the analysis of the selling-buying process in this case
that the importers and traders, before passing an order to an exporting producer in India, specify all
the characteristics of the product (design, colour, quality, sizes, etc.) to be delivered, and thus
compare the different producers' offers mainly on the basis of price as all other differentiating
elements are predetermined in the call for offers, or subsequently result from the importer's own
efforts in respect of similar goods (e.g. branding). With respect to prices it was found that the prices
of subsidised imports were considerably below those of the Community industry as well as below
those of other third-country exporters, and even continued to decrease during the IP. Moreover, it
was also found that the Community industry had to withdraw largely from the low-priced market
segments, where imports from India are strong, this also underlining the causal link between the
subsidised Indian imports and injury suffered by the Community industry.

(177)

It was submitted that imports originating in India decreased in absolute and relative terms in a situa-
tion without duties, and that they represented a relatively small market share and did therefore not
cause injury.

(178)

Imports originating in India indeed decreased. Nevertheless, several factors play a role for causation:
first, during the IP these imports were subject to a customs duty of 10,2 % (until December 2001)
and 9,6 % (from January 2002), while imports originating in Pakistan, the largest supplier, were
exempt from that duty from January 2002. Second, as to the size of the market share, the decisive
question is not whether a market share is relatively small or not, but whether it is large enough to
be able to cause material injury. In this respect, it is noted that the imports were substantial and
made at low and subsidised prices undercutting those of the Community industry. It was also found
that there was a coincidence in time between these imports and the injury suffered by the Com-
munity industry. All these elements played an important role in the conclusion of this chapter, i.e.
that the imports have caused material injury.

(179) Given the weight of the imports from India in the Community market, both in terms of volume and
in terms of prices, these imports exerted a significant downward pressure on the Community
industry in terms of its sales volumes and prices. The lack of sales volume in the low-priced market
segments for the Community industry could not be compensated by sales of high-profit niche
products, thus resulting in notably reducing market share, investments, profitability and return on
investment of the Community industry.

(180) The market share held by the Indian importers during the IP is substantial and well above de minimis
levels. The moderate decrease in volume was not such as to lead to a suggestion that Indian expor-
ters were degraded to a peripheral status and on the verge of being eliminated from the Community
market. It is therefore concluded that the subsidised imports from India, taken in isolation, caused
material injury to the Community industry. Moreover, for illustration purposes only, it appears that
the imports from India have increased again by more than 8 % during the first six months of 2003
when compared to the first semester of 2002, indicating that the apparent downward trend is prob-
ably not of a lasting nature.

(181)

It was submitted that average subsidisation was 8 % and average undercutting was much higher,
while prices charged by the sampled producers increased.

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(182)

In this respect, it should be noted that the export prices did, in many instances, not include any
costs for the design and marketing of the bedlinen, as these services were supplied by the importer
in the Community. These costs cannot be reasonably estimated for the like product overall, but
taking into account any such costs would result in lower undercutting margins. Also, Community
industry prices relate in some instances to branded products, which command a higher price. In
addition, Article 8(6) of the basic Regulation specifies that the examination shall entail a demonstra-
tion that the volume and/or price levels of the subsidised imports are responsible for the impact on
the Community industry. Thus, it is not the undercutting which matters ultimately in this context
but the price level of the imports. Therefore, it cannot be concluded that the subsidised imports do
not cause material injury.

3. Effects of other factors

(a) Allegedly dumped imports originating in Pakistan

(183) Pakistan constantly increased its market share from 20,8 % in 1999 to 24,7 % in the IP, from
36 000 tonnes in 1999 to 49 400 tonnes during the IP. Given the fact that the average export prices
from Pakistan are in the same range as those from India, it must be assumed that Pakistani exports
have also caused injury to the Community industry. In this context, it is worth noting that parallel
to this anti-subsidy investigation, an anti-dumping investigation has been initiated against the same
product originating in Pakistan, which is currently ongoing and which is based on the allegation that
Pakistani exports increased their market share by dumping the product concerned into the Com-
munity and therefore caused injury to the Community industry. If this is confirmed by the ongoing
investigation, appropriate action will be taken in due course.

(184)

It is therefore concluded that imports originating in Pakistan are likely to have contributed to the
material injury suffered by the Community industry. However, whilst Pakistani imports may also
have caused injury, this is not to deny that Indian imports equally caused material injury by them-
selves.

(b) Imports originating in third countries other than India and Pakistan

(185)

Imports originating in third countries other than India and Pakistan increased from 51 400 tonnes
in 1999 to 75 300 tonnes during the IP. Their market share increased from 29,6 % in 1999 to
37,7 %. The largest part of imports in that group of countries originated in Turkey. Given the corpo-
rate links between Turkish and Community companies, there is a certain market integration in the
form of inter-company trade between Turkish exporting producers and Community operators that
suggests that the decision to import from that country is not only linked to the price. This is
confirmed by the average prices of the product concerned originating in Turkey during the IP, which
were higher by almost 45 % than those of India and by 34 % than those of Pakistan. It is therefore
unlikely that imports originating in Turkey broke the causal link between the subsidised imports
from India and the injury suffered by the Community industry.

(186) The market shares of the remaining countries individually are significantly lower and do not exceed
3,9 %, and it is thus unlikely that any material injury is to be attributed to those imports from those
countries.

(187) The average price of imports originating in countries other than India and Pakistan increased from
EUR 7,18/kg in 1999 to EUR 7,47/kg in 2001 and decreased slightly to EUR 7,40/kg during the
IP. Nevertheless, during the IP, these prices were around 34 % higher than the prices of imports
from India. Consequently, imports from other third countries did not exert a price pressure on the
Community industry to the extent that imports from India did. Also the market share of any indivi-
dual country in that group was below 4 %. It is therefore concluded that imports from other third
countries did not break the causal link between the subsidised imports from India and the injury
suffered by the Community industry.

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(c) Contraction of demand

(188)

It was claimed that the demand for bedlinen produced by the Community industry has diminished
in volume terms as it focused on the upper end of the market, where less sales volume is made.
However, as pointed out before, the total EU consumption of bedlinen did not decrease, but rather
increased over the period considered. Most of the Community producers have different product lines
for different market segments. The upmarket brands generate high margins but are only sold in very
small quantities. In order to maximise the capacity utilisation and to cover the fixed costs of produc-
tion, the Community industry needs sales of lower-priced market segment in big volumes as well.
There is no indication that demand has decreased in that market segment. This segment is on the
other hand increasingly taken over by low-priced imports, which cause injury to the Community
industry. Given the overall increase in consumption, which is not limited to a particular market
segment, the demand situation in the Community can therefore not be seen to break the causal link
between the subsidised imports from India and the injury suffered by the Community industry.

(d) Imports by the Community industry

(189)

It was submitted that the Community industry imported cotton-type bedlinen from India and
thereby contributed to the injury suffered. However, only one of the sampled Community producers
actually imported bedlinen from India during the IP and the sales of these imports generated only a
small part of total turnover by this producer (around 10 %). Therefore, imports by the Community
industry of the product concerned from India cannot be seen to break the causal link between the
subsidised imports from India and the material injury suffered by the Community industry as a
whole.

(e) Export performance by the Community industry

(190) Exports of the sampled Community producers represented only around 0,5 % of their total sales.
Given the negligible part of exports in total activity, this factor cannot have contributed to the injury
suffered.

(f) Productivity of the Community industry

(191) The development in productivity has been identified in the injury part of this Regulation. Since
productivity increased from 6,8 tonnes/employee in 1999 to 7,2 tonnes/employee in the IP, i.e. by
around 6 %, this factor cannot have contributed to the injury suffered.

4. CONCLUSION

(192) With a market share of 7,2 % in the IP, the subsidised imports originating in India were substantial
and have been made at low and falling prices during a period in which the Community industry
suffered material injury in terms of falling market shares, capacity utilisation, investments, profit-
ability, return on investment and cash flow.

(193)

Imports from Pakistan are likely to have also caused injury to the Community industry. However,
this fact does not suggest that the injury inflicted by imports from India becomes immaterial. The
remaining possible other injury causes, i.e. imports from countries other than India and Pakistan,
the demand situation, imports made by the Community industry as well as the export and produc-
tivity performance were analysed, but found not to break the causal link between the Indian imports
and the injury suffered by the Community industry. The substantial volume and the aggressively low
prices of the Indian exports taken in isolation are an independent cause of the material
injury
suffered by the Community industry. Therefore, none of the other potential injury causes are such
as to reverse the fact that there is a genuine and substantial causal link between the subsidised
imports and the material injury.

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(194) Based on the above analysis, which has properly distinguished and separated the effects of all known
factors on the situation of the Community industry from the injurious effects of the subsidised
imports, it is concluded that the imports from India have caused material injury to the Community
within the meaning of Article 8(6) of the basic Regulation.

G. COMMUNITY INTEREST

1. General remarks

(195)

It was examined whether, despite the conclusion on injurious subsidisation, compelling reasons
existed that could lead to the conclusion that it was not in the Community interest to adopt
measures in this particular case. For this purpose and in accordance with Article 31(1) of the basic
Regulation, the impact of possible measures on all parties involved in this proceeding and also the
consequences of not taking measures were considered.

2. Community industry

(196) The Community industry suffered material injury. It proved to be a viable industry that was able to
compete under fair market conditions. The injurious situation of the Community industry resulted
from its difficulty to compete with the low-priced, subsidised imports. The pressure of the subsidised
imports has also forced a number of Community producers to cease production of cotton-type
bedlinen.

(197)

It is considered that the imposition of measures will restore fair competition to the market. The
Community industry should then be able to increase the volume and prices of its sales, thereby
generating the necessary profit level to justify continued investment in its production facilities.

(198) Should measures not be imposed, the deterioration of the situation of the Community industry
would continue. It would not be able to invest in new production capacity and compete effectively
with imports from third countries. Some companies would have to cease production and lay off
their employees.

(199)

It is therefore concluded that the imposition of countervailing measures is in the interest of the
Community industry.

3. Importers and users

(200)

Importers and users mentioned in the complaint as well as all known associations were sent a ques-
tionnaire. The Commission received only one questionnaire reply from an unrelated importer of the
product concerned into the Community.

(201) Sales of the product concerned with origin in India constitute less than 20 % of the total turnover of
this company. The total profitability of the company is around 10 %. Given the fact that only little
information was available, it was not possible to analyse the likely effect of proposed measures on
importers and users as a whole. However, taking into account that only moderate duties are envi-
saged and many countries are not concerned by either anti-dumping duties or countervailing duties,
the impact of the imposition of countervailing duties can be considered as minor.

(202) The Commission received no questionnaire replies from users but some arguments were raised in a

submission by Ikea and by the Foreign Trade Association.

(203)

It was submitted that the Community industry is not in a position to satisfy the whole demand for
bedlinen in the Community. It has to be recalled that measures are not intended to prevent imports
into the Community but to ensure that they are not made at injurious subsidised prices. Imports
from various origins will continue to satisfy a significant part of the Community demand. As only
moderate countervailing duties are envisaged and many countries are not concerned by anti-
dumping duties or countervailing duties, no shortage of supply is expected.

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(204)

It was claimed that cheap imports of bedlinen are necessary for the final consumer as well as ‘institu-
tional’ users such as hotels, hospitals, etc., as products at the cheaper end of the range are not
produced by the Community producers. The investigation showed that the five sampled Community
producers still produce these products. There was no technical reason why the production of these
products in the Community could not be increased. In addition, only moderate countervailing duties
are envisaged and many countries are not concerned by anti-dumping duties or countervailing
duties, which means that alternative sources of supply will still be available.

4. Conclusion on Community interest

(205) On the basis of the above, it is concluded that there are no compelling reasons on the grounds of

Community interest why countervailing duties should not be imposed in the present case.

H. COUNTERVAILING MEASURES

1. Injury elimination level

(206)

In order to prevent further injury being caused by the subsidised imports, it is considered appro-
priate to adopt countervailing measures.

(207) For the purpose of determining the level of these duties, account was taken of the subsidy margins
found and the amount of duty necessary to eliminate the injury sustained by the Community
industry.

(208) Taking into account the average level of profitability obtained by the Community industry in the
years 1999 and 2000, it was found that a profit margin of 6,5 % of turnover could be regarded as
an appropriate minimum which the Community industry could have expected to obtain in the
absence of injurious subsidisation. The necessary price increase was then determined on the basis of
a comparison of the weighted average import price, as established for the price undercutting calcula-
tions, with the non-injurious price of products sold by the Community industry on the Community
market. The non-injurious price has been obtained by adjusting the sales price of the Community
industry by the actual loss/profit made during the IP and by adding the abovementioned profit
margin. Any difference resulting from this comparison was then expressed as a percentage of the
total cif import value.

2. Definitive measures

(209) As the injury elimination level was higher than the countervailing margins established, the definitive
measures should be based on the latter. Given that the level of the overall cooperation for India was
high (above 90 %), the residual subsidy margin for all other companies was set at the level for the
company with the highest individual margin, i.e. 10,4 %.

(210)

It was established that two of the companies in the sample, Texcellence Overseas and Jindal World-
wide, are related parties. The investigation revealed that these companies have common share-
holders. These two companies should therefore be considered as a single entity for duty collection
purposes, and hence, be submitted to the same countervailing duty. Export quantities of the product
concerned during the IP to the Community of both companies were used in order to ensure a
proper weighting. The weighted average countervailing duty for these two companies amounts to
7,8 %.

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L 12/27

(211) The following duties therefore apply:

Company

The Bombay Dyeing and Manufacturing Co., Mumbai,
N. W. Exports Limited, Mumbai
Nowrosjee Wadia & Sons Limited, Mumbai

Brijmohan Purusottamdas, Mumbai

Divya Textiles, Mumbai

Texcellence Overseas, Mumbai,
Jindal Worldwide Ltd, Ahmedabad

Mahalaxmi Exports, Ahmedabad

Pasupati Fabrics, New Delhi

Prakash Cotton Mills Pvt. Ltd, Mumbai

Vigneshwara Exports Ltd, Mumbai

Cooperating companies not in the sample

All other companies

Rate of duty

5,3 %

6,2 %

6,4 %

7,8 %

9,3 %

8,5 %

10,4 %

4,4 %

7,6 %

10,4 %

(212) The individual company countervailing duty rates specified in this Regulation were established on
the basis of the findings of the present investigation. Therefore, they reflect the situation found
during that investigation with respect to these companies. These duty rates (as opposed to the
country-wide duty applicable to ‘all other companies’) are thus exclusively applicable to imports of
products originating in the country concerned and produced by the companies and thus by the
specific legal entities mentioned. Imported products produced by any other company not specifically
mentioned in the operative part of this Regulation with its name and address, including entities
related to those specifically mentioned, cannot benefit from these rates and shall be subject to the
duty rate applicable to ‘all other companies’.

(213) Any claim requesting the application of these individual company countervailing duty rates (e.g.
following a change in the name of the entity or following the setting up of new production or sales
entities) should be addressed to the Commission forthwith with all relevant information, in particu-
lar any modification in the company's activities linked to production, domestic and export sales
associated with e.g. that name change or that change in the production and sales entities. If appro-
priate, this Regulation will then be amended accordingly by updating the list of companies bene-
fiting from individual duty rates as well as those specified in the Annex to the operative part of this
Regulation,

HAS ADOPTED THIS REGULATION:

Article 1

1.
A definitive countervailing duty is hereby imposed on imports of bedlinen of cotton fibres, pure or
mixed with man-made fibres or flax (flax not being the dominant fibre), bleached, dyed or printed origin-
ating in India, currently classifiable within CN codes ex 6302 21 00 (TARIC codes 6302 21 00 81 and
6302 21 00 89),
(TARIC code
6302 31 10 90), ex 6302 31 90 (TARIC code 6302 31 90 90) and ex 6302 32 90 (TARIC code
6302 32 90 19).

6302 22 90 19),

ex 6302 31 10

ex 6302 22 90

(TARIC code

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The rate of duty applicable to the net, free-at-Community-frontier price, before duty, for products

2.
produced by the following companies shall be as follows:

Company

Rate of duty (%)

TARIC additional code

The Bombay Dyeing and Manufacturing Co., Mumbai,
N. W. Exports Limited, Mumbai
Nowrosjee Wadia & Sons Limited, Mumbai

Brijmohan Purusottamdas, Mumbai

Divya Textiles, Mumbai

Texcellence Overseas, Mumbai,
Jindal Worldwide Ltd, Ahmedabad

Mahalaxmi Exports, Ahmedabad

Pasupati Fabrics, New Delhi

Prakash Cotton Mills Pvt. Ltd, Mumbai

Vigneshwara Exports Ltd, Mumbai

5,3 %
5,3 %
5,3 %

6,2 %

6,4 %

7,8 %
7,8 %

9,3 %

8,5 %

10,4 %

4,4 %

A488
A489
A490

A491

A492

A493
A494

A495

A496

8048

A497

The rate of duty applicable to the net, free-at-Community-frontier price, before duty, for products

3.
produced by the companies listed in the Annex, shall be 7,6 % (TARIC additional code A498).

4.
The rate of duty applicable to the net, free-at-Community-frontier price, before duty, for products
produced by the companies not specified in paragraphs 2 and 3, shall be 10,4 % (TARIC additional code
A999).

5.

Unless otherwise specified, the provisions in force concerning customs duties shall apply.

Article 2

Where any new exporting producer in India provides sufficient evidence to the Commission that

— it did not export to the Community the products described in Article 1(1) during the investigation

period (1 October 2001 to 30 September 2002) and

— it is not related to any of the exporters or producers in India which are subject to the anti-subsidy

measures imposed by this Regulation and

— it has actually exported to the Community the products concerned after the investigation period on
which the measures are based, or it has entered into an irrevocable contractual obligation to export a
significant quantity to the Community,

then the Council, acting by simple majority on a proposal submitted by the Commission after consulting
the Advisory Committee, may amend Article 1(3) by adding that new exporting producer to the list in the
Annex.

This Regulation shall enter into force on the day following that of its publication in the Official Journal of
the European Union.

Article 3

Done at Brussels, 13 January 2004.

For the Council

The President

B. COWEN

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L 12/29

Ajit Impex

Anglo French textiles

Anjal Garments

Anunay Fab. Pvt. Ltd

Aravali

Ashok Heryani Exports

Atul Impex Pvt. Ltd

Beepee Enterprise

Chemi Palace

Consultech Dynamics

Cotfab Exports

Country House

Creative Mobus Fabrics Limited

Deepak Traders

Eleganza Furnishings Pvt. Ltd

Emperor Trading Company

Estocorp (India) Pvt. Ltd

Exemplar International

Falcon Finstock Pvt. Ltd

Gauranga Homefashions

Good Shepherd Health Education & Dispensary

Heirloom Collections (P) Ltd

Hemlines Textile Exports Pvt. Ltd

Himalaya Overseas

Ibats

Indian Craft Creations

Indo Euro Textiles Pvt. Ltd

Intex Exports

Kanodia Fabrics (International)

Karthi Krishna Exports

Kaushalya Export

Kirti Overseas

La Sorogeeka Incorporated

Lalit & Company

Madhu Industries Ltd

Madhu International

Manubhai Vithaldas

ANNEX

Marwaha Exports

Milano International (India) Pvt. Ltd

Nandlal & Sons

Natural Collection

Pacific Exports

Pattex Exports

Petite Point

Pradip Exports

Prem Textiles

Punch Exporters

Radiant Expo Global Pvt. Ltd

Mumbai

Pondicherry

Ghaziabad

Ahmedabad

Jaipur

New Delhi

Dombivli

Mumbai

Mumbai

Mumbai

Mumbai

New Delhi

Radiant Exports

Mumbai

Mumbai

Mumbai

Tirupur

New Delhi

Hyderabad

Ahmedabad

Mumbai

Tamilnadu

New Delhi

Mumbai

New Delhi

New Delhi

New Delhi

New Delhi

Mumbai

Mumbai

Tirupur

Ahmedabad

Ahmedabad

New Delhi

Mumbai

Ahmedabad

Ahmedabad

Mumbai

Raghuvir Exim Limited

Ramesh Textiles

Redial Exim Pvt. Ltd

S. D. Entreprises

Samria Fabrics

Sanskrut Intertex Pvt. Ltd

Shades of India Crafts Pvt. Ltd

Shanker Kapda Niryat Pvt. Ltd

Shivani Exports

Shrijee Enterprises

Starline Exports

Stitchwell Garments

Sumangalam Exports Pvt. Ltd

Sunny Made-ups

Surendra Textile

Suresh & Co.

Syntex Corporation Pvt. Ltd

The Hindoostan Spinning & Weaving Mills Ltd

Trend Setters

Trend Setters K.F.T.Z.

Utkarsh Exim Pvt Ltd

V & K Associates

Visma International

VPMSK A Traders

V.S.N.C. Narasimha Chettiar Sons

New Delhi

Chennai

Mumbai

New Delhi

Ahmedabad

Mumbai

New Delhi

Ahmedabad

Indore

Mumbai

New Delhi

New Delhi

Ahmedabad

Indore

Mumbai

Mumbai

Indore

Ahmedabad

New Delhi

Baroda

Mumbai

Mumbai

Mumbai

Ahmedabad

Mumbai

Mumbai

Indore

Mumbai

Mumbai

Mumbai

Mumbai

Mumbai

Ahmedabad

Mumbai

Tamilnadu

Karur

Karur