Opinion ID: 549858
Heading Depth: 2
Heading Rank: 2

Heading: Denial of Price Adjustments for Physical Differences

Text: 59 The ITA denied Trommelen's request for adjustments to the FMV under 19 U.S.C. Sec. 1677b(a)(4) and 19 C.F.R. Sec. 353.16 based on acknowledged physical differences between the glue strengths found to be similar merchandise. Appellant urges that the ITA erroneously based its denial of price adjustments on the reasoning that price adjustments for physical differences must be made from cost of production information which it was impossible for appellant to supply. Since the glue making process is a continuous one which yields batches of various strengths, cost of production information on a per grade basis simply does not exist and therefore could not be supplied. On appeal, the government acknowledges, as the court recognized, that 19 C.F.R. Sec. 353.16 does not require price adjustments to be based only on cost of production information, and that a contrary interpretation would contravene that regulation. The regulation provides, in pertinent part: 60 [D]ue allowance shall be made for differences in the physical characteristics of the merchandise ... guided primarily by the differences in cost of production ... but, when appropriate, the effect of such differences upon the market value of the merchandise may also be considered. In the case of merchandise which does not lend itself to comparison with other merchandise for the purpose of this section, any method reasonably calculated to reflect the impact on cost or value of any differences in the merchandise under consideration may be used. [Emphasis added.] 61 19 C.F.R. Sec. 353.16. Per its express terms, the regulation expresses a preference for adjustments to be based on cost of production information, but the regulation specifically contemplates and authorizes adjustments based on other methods as well, including the effect of a physical characteristic on the market value of the merchandise. Thus, an interpretation of this regulation restricting price adjustments to differences in cost of production would render nugatory a considerable portion of the regulation's express terms. If, as U.H.F.C. suggests, the ITA's decision is premised on such an interpretation, it clearly cannot stand. See, e.g., Barber v. United States, 676 F.2d 651, 658, 230 Ct.Cl. 287, 298 (1982); Aparacor, Inc. v. United States, 571 F.2d 552, 557, 215 Ct.Cl. 596, 605 (1978). 62 According to the court, however, Trommelen's submission to ITA showing how price data could be used to make adjustments for differences in glue strength was deficient because it showed that the difference in prices was not dispositive of value, and by extension, physical difference. U.H.F.C. Co., 706 F.Supp. at 922. To support this statement, the court relied upon evidence showing that Trommelen's price data indicated that the same strength was sold at different prices in the home market and that Trommelen had indicated that there is in fact an inverse relationship between the strengths of glues and their cost of production. Id. The court thus concluded that: 63 Given the fact that Trommelen failed to provide the requested cost of production information and that the price information in question was not a reliable indicator of value, the ITA used other information, i.e., the best information available. ... On this basis the ITA declined to make an adjustment to foreign market value for physical differences in the merchandise, and the Court finds that this denial is supported by substantial evidence and is otherwise in accordance with law. Id. 64 It is clear that the court was of the view that the ITA's reason for denying price adjustments did not lie solely in the failure to provide cost of production information, but also rested on the ITA's determination that the alternative information actually submitted for adjusting differences was insufficient or unreliable. 65 Appellant argues that the latter rationale set out by the court to sustain the agency's denial of price adjustments represents an impermissible post hoc rationalization. The agency did not articulate this position until trial so that the court, per U.H.F.C., decided the alternative data was inadequate and not the agency. According to appellant, the agency's decision rested solely on the agency's unreasonable requirement that price adjustments in this case be calculated on the basis of differences in cost of production data. We agree. 66 On review, a court, including the Court of International Trade, is constrained to apply the applicable standard of review to the rationale put forth by the agency in support of its action. Citizens to Preserve Overton Park, Inc. v. Secretary of Transp., 401 U.S. 402, 413, 91 S.Ct. 814, 822, 28 L.Ed.2d 136 (1971). Post-hoc rationalizations of agency actions first advocated by counsel in court may not serve as the basis for sustaining the agency's determination. See, Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 245, 9 L.Ed.2d 207 (1962); Atcor, Inc. v. United States, 11 C.I.T. 148, 152, 658 F.Supp. 295, 299 (1987). 67 In its final determination, the agency stated that: 68 The department requested cost of production data ... so that we could make adjustments for physical differences in merchandise. The producer failed to provide adequate data, and as a result, we make [the] comparison ... (without adjustments for differences). 69 48 Fed.Reg. at 45584. Further, Eschem, Inc., another Dutch glue manufacturer involved here, submitted a lengthy correspondence explaining a method for calculating price adjustments based on the blending prices of individual glue strengths. The ITA's response leaves no doubt of ITA's view that no price adjustments could be made here without cost of production data: 70 Section 353.16 of the Commerce Regulations provides that adjustments for physical differences in merchandise must be based on the differences in the cost of production. 71 Whether this was due to a legally erroneous interpretation of the regulation by the staff at the time or simply bureaucratic rigidity is immaterial. The record consistently demonstrates that the only basis for ITA's decision to deny price adjustments was the failure of the manufacturers to supply cost of production information for individual grades which would establish that higher grades cost more to produce. 72 In any event, if the agency did imply somewhere in the record that the data actually submitted was inadequate, the agency's denial of price adjustments for that reason would be unsupportable. ITA did not establish that it was entitled to use the best information otherwise available by reason of the failure or refusal of the Dutch manufacturers to submit requested information. 10 73 Both the ITA and the court acknowledged that price is generally determined by glue strength, with higher bloomgram strength glues generally commanding higher prices. Thus, price differences for each bloomgram strength generally reflect the value attached to that physical difference. Moreover, there is an inverse relationship between glue strengths and cost of production. Further, the evidence showing that some glues of lesser strengths were sold at higher prices does not refute that the price information provided by Trommelen on each glue strength was indicative of the value of this difference in glue strength. 74 The inverse relationship between cost of production and glue strength reflects the realities of the animal hide and bone glue manufacturing process. As explained to us, this process resembles the pressing of olives or grapes in that the first pressing yields the highest quality and successive pressings yield lesser qualities compared to the first. But because it takes more pressings to obtain the lesser quality, in a sense the lesser costs more. No one would dispute, however, that the juice or oil obtained in the first pressing, being higher quality, has a greater value. So it is with the manufacture of animal hide and bone glues. In this situation as well, the relationship between the cost of production and grades of product is inverse and, thus, cost of production would tell nothing about the relationship between physical differences and the value of the glue. In addition, the strengths obtained vary with starting materials. Thus, cost of production can only be related to batches not individual grades. ITA did not dispute this fact but resorted to the best information rule simply because the manufacturers did not, even though they could not, supply the requested information for cost differences in production of different grades. 75 As we held in Olympic Adhesives, Inc., 899 F.2d at 1571: 76 The basic error we perceive arises from the ITA's overly sweeping view of the authority it is granted under section 1677e(b). In essence, the ITA interprets the phrase whenever a party ... refuses or is unable to produce information requested to cover, in the ITA's discretion, any inadequacy or insufficiency of a reply to a request for any type of information. Indeed, even where a reply is complete, the ITA may, as it did in this case, conclude that the information does not answer a question it wishes to resolve, and for that reason the party is deemed to refuse or be unable to supply information within the meaning of the statute. We cannot agree that the ITA's authorization under section 1677e(b) extends so far. 77 In this case as well, the ITA may not resort to the best information where the party's failure to give information is because the information does not and could not exist. 78 With respect to the evidence that glues of lesser strengths were sold in the same quantities for higher prices, we agree with U.H.F.C. that to require absolute consistency of prices would be absurd and out of step with commercial realities. Indeed, many variables go into the pricing equation, such as, the immediacy of a customer's need, the quantity ordered, the presence of a fixed-price contract, or the availability at the time of competitive products. Given the dynamics of the commercial marketplace, one would expect to find, as appears in this case, variations in the pricing of the same bloomgram strength and some sales of higher bloomgram strength glues at prices lower than prices of lesser strength glues. The government's reference to one instance where 300 bloomgram strength glue was sold during the review period for a lower price than an identical quantity of 210 bloomgram strength glue is comparable to finding one bad apple and concluding all in the bushel are spoiled. The record of home market sales during the review period indicates that the majority of sales of 230 bloomgram glue sold at prices between 3,65 and 3,85 dutch florins; the majority of sales of 300 strength glue at 4,25 and 4,45 florins; and the majority of sales of 400 strength glue at 5,75 florins. Thus, the record reveals, as the ITA and court acknowledged, that the value of any glue is directly related to a physical characteristic of that glue, namely the glue strength. In light of the relationship between price and physical difference, we find it necessary to remand to the court with instructions to direct the ITA to make price adjustments based on differences in physical characteristics between the merchandise sold in the home market and in the United States. 79