The methodology to be followed for determination of NIP are detailed in Annexure-III of the AD Rules. The applicable Generally Accepted Accounting Principles (“GAAP”), Accounting Standards and Cost Accounting Standards are also kept in mind while finalizing the NIP.

 

The NIP is required for initiation of investigation, which is based on the information provided in the application. However, subsequently during the course of investigation, the NIP workings are examined in detail after due verification before finalising the investigations.

 

PRE-INITIATION

 

An application seeking initiation of investigation is accompanied with complete information in the prescribed formats as per the Trade Notice No. 02/2018 dated February 1, 2018. This detailed information along with the following documents forms the basis for computation of NIP for the purpose of initiation of the investigation.

 

Documents / Information

Total Production of each of the applicant(s) along with its breakup in PUC & NPUC and split up of domestic sales and export sales for the PUC

Installed Capacity of PUC with supporting documents like the Pollution Control Board Certificate

The costing formats – NIP/ Capital Employed Calculations along with soft copy of all relevant excel working sheets

Audited financial statements and cost audit reports for the injury period including POI

In case of new units not having completed four years since the commencement of commercial production – The project report or any other similar document.

PCN – Methodology adopted in defining PCN and its working (If PCN has been suggested in the application)

Confirmation from the DI/consultants that the complete cost data for all the units of the DI manufacturing or selling PUC has been furnished in the application)

Confirmation from the company/consultants that no amount of expense disal- lowed under Annexure-III has been considered in the cost

computations

 

The Excel working sheets (along with applicable formulae)containing the following data for POI and the injury period are also required to be submitted:

 

Document

Details of Job work done during POI, if any

Details of Administration Overheads

Details of Selling & Distribution Overheads

Details of Other/Miscellaneous  Overheads

Details of Misc. Income

Details of HO Expenses and their allocation

Details  of  by-product/wastage/rework generated

The basis of major utility allocation done for PUC & Other Products

Details of revaluation/impairment of asset details, if any, during POI & previous years, if included in the books of accounts.

The explanation for the methodology adopted in segregating the

import data into PUC and NPUC.

 

The team is required to examine the adequacy and accuracy of evidence in terms of Rule 5 of Rules. The audited accounts must be furnished along with the application for initiation. In case POI is not the same as the financial year or the POI is too recent to have the audited accounts available, the Profit & Loss Account figures along with NFA figures and working Capital details for POI duly certified by the authorised officer of the company for the initiation purposes. This is subject to subsequent submission of duly audited/certified accounts within the stipulated period as per the initiation notification.

 

POST-INITIATION:

 

The methodology followed for computation of NIP is detailed in Annexure- III of the Rules which is being uniformly followed and has been held as legally valid by the Courts6. In addition to the certified formats/documents submitted at the time of initiation, the DI is required to submit the following documents, wherever applicable, for NIP workings:

 

Documents/  Supporting documents

Annual Audited Accounts (including Balance Sheet, Profit & Loss Accounts, and Annexed Schedules) for IIP. If the same is not audited for the POI at the time of filing application, the same may be certified from the Independent Practising Chartered Accountant and the authorised officer of the company.

Trial Balance for the POI

Cost Audit Reports for IIP, if applicable and not submitted earlier.

Cost Sheet(s) of captively consumed  product(s)/utilities

Consumption details of major raw materials including the bills of material for PUC

Supporting Document for Installed Capacity, Actual Production, Capacity Utilization

Details of Related Party Transaction(s) and their basis of pricing as per Accounting Standard 18

Details of all abnormal close downs, if any

Business Transfer Agreement/Details - if there is any major change in ownership during IIP and consequential change in the value of assets, if any.

Merger/Amalgamation details- if there is any merger/amalgamation and consequential change in the value of assets if any

Valuation Report - if there is a change in the value of assets

Details of major inputs, which are subject to any trade remedy measure

The complete break-up of Sales Real is at ions reconciled with the audited records of the company as a whole. Each major product to be separately indicated.

 

FORMATS

 

NIP determination requires detailed information in Format “A” to Format “L” notified vide Trade Notice No. 02/2018 dated 01.02.2018.

 

S.N	Format Number	Subject Description
1	A	Statement of Consumption of Raw Materials, Packing Materials, and Utilities
2	B	Statement of Raw Material Consumption
3	C	Allocation and Apportionment of Expenses
4	D	Statement of Consumption of Utilities
5	E	Statement of Sales Realisations
6	F	Certificate by the Chief Executive or a duly authorized representative of the Domestic Industry
7	G	Declaration by Legal Representative
8	H	Performance Parameters of Domestic Industry
9	I	PCN wise summarised Statement of Expenses
10	J	Related Party Transactions
11	K	Calculation of Capital Employed
12	L	Calculation of claimed NIP

 

It may be clarified here that the company can furnish details/clarifications in furtherance of the application already submitted to enable the proper processing. However, the DI cannot be allowed to revise the application in such a way that it will structurally alter the original application on which the initiation is based, as it will render the initiation invalid. The team is allowed, within its lawful mandate, to seek clarifications/ details from the applicant(s) during the course of the investigation but it should do so in writing as has been clearly instructed by the DG. No oral request should be made for seeking information.

 

A brief description of all Formats, regarding their significance with respect to examination, verification,and extraction of relevant data,is given below for the better understanding of the investigators:

 

Format-A (Statement of  Consumption  of  Raw  Materials,  Packing  Materials and Utilities): It shows the total quantity and value of each major raw material, packing material,utilities consumed in the production of PUC. It also indicates per unit consumption of all major raw materials/packing materials/utilities during the injury period along with weighted average rates of consumption during the IIP. The major points to be noted here are:

 

(a) The opening stock/closing stock shall be shown as “Zero” or “Nil”, wherever there is no stock;

 

(b) Opening and Closing Stock of raw materials ideally should also include the quantity and value of work-in-progress stock lying on shop floor. However, this information is sometimes not available with the DI especially when POI is different from the normal financial/ accounting year of the company. Therefore, there may be no alternative but to ignore the same based on assumptions that (i) quantity/amount involved may not be high; or (ii) there may not be substantial difference between opening stock and closing stock lying at production floor;

 

(c) The total value of actual consumption of raw material and utilities for PUC during POI and injury period as shown here should reconcile with the total raw material/ utility consumption in Format-C for PUC;

 

(d) Purchase rates of related party procurements should be confirmed based on arm’s length pricing. These rates may be compared with rates of same products procured from non-related parties. The comments of the Statutory Auditors and requirements of Indian Accounting Standard-18 should be seen from the Audited Annual Accounts regarding the arm’s length pricing;

 

(e) Records of relevant related companies/parties should also be seen to confirm that the purchase price of items purchased from such related parties during POI is comparable to the corresponding sale price charged by the said Related Parties from the non-related customers during the said period. In the case of utilities, the sale price is generally published and is reflected on the web site also. The comments of the Statutory Auditors are to be seen from the Audited Annual Accounts regarding the arm’s length pricing of the related party transactions, which are furnished by the applicant in Format-J.

 

(f) If the similar item is purchased from a related party as well as non-related party, the corresponding rates must be compared to understand the variations, if any in the rates. Similarly, if the inputs are captively consumed as well as purchased from non-related parties, the rates must be compared to arrive at the reasonability of the prices charged for captive consumption.

 

(g) The per unit rates of captive consumption of inputs, closing stock and consumption for PUC during the injury period including POI should be compared for the basis of pricing, and in case wide variations are seen, an explanation should be sought.

 

(h) Format-A is also required to be verified from Stores/Material Ledger and Utility Ledger/Register maintained by the company/unit. Some of the purchase invoices of various raw materials/utilities are also required to be collected and compared with the annual weighted average price reflected in Format A to ensure that the weighted average price does not vary widely from the purchase price as per sample invoice. If it varies widely, reasons of such variations may be ascertained.

 

(i) Sometimes, the procurement rates vary widely from day to day or month to month. The monthly consumption rate may need to be worked out in such a case with scope for monthly/quarterly NIP. This may indicate more accurate injury margins.

 

Format-B (Statement of Raw Material Consumption): It reflects  the  actual year wise per unit consumption of raw materials/inputs. It seeks to compare consumption per unit of production during the various years of injury period. Anywide variation in year to year figures must be examined. The year-wise per unit consumption of inputs is taken from Format A and multiplied by average rates (net of input tax, credit, GST, etc.) of respective inputs as prevailing during POI. The year wise normative costs so obtained are compared to find out the most efficient consumption of raw materials (optimum consumption) during the Injury period and POI. It may be clarified that optimization for raw materials (Format B) is to be done for each plant producing the PUC.

 

Format-C  (Allocation  and  Apportionment  of  expenses):   It  is  one  of the most critical formats for costing as it captures the details regarding allocation and apportionment of expenses. There is one format for one PUC for the entire company in any investigation. Different units are reflected by way of creating multiple columns in the same format. In other words, if a company has three units manufacturing the PUC, separate column shall be created in this Format for each such entity. This facilitates separate NIP for each of the units based on its own efficiency and performance. The expense heads are indicative and can be changed/ modified based on the uniqueness of any investigations. The General Ledger Codes are aimed to facilitate during the verification. It shows various elements of expense and income of the company grouped under major heads of accounts allocated to PUC (plant wise), common utilities, captive inputs,and Non-PUC on appropriate basis consistently followed by the company as per generally accepted accounting practices/accounting standards. It may be added that separate columns need to be added for each major utility and captively consumed product to ensure verification and availability of complete details. The following are the major points to be seen:

 

(a) The revenue and expenditure of the company as a whole as per audited accounts/certified records is reconciled with the fourth column of the format i.e., expenses for the company as a whole. The expenses are then allocated/ apportioned to various plants producing PUC, common utilities and non- PUC etc. There will preferably be a separate column for each major common utility. Major captive inputs/utilities should have separate columns to help verification of their costs. These common utilities and captive consumptions are then apportioned to PUC/Non-PUC through secondary allocation. The basis of allocation should be as direct as possible, and a reasonable one, which is consistently followed by the company.

 

(b) NIP is worked out for domestic production only. If a company has domestic sales and export sales and the cost is considerably different for both, it may be preferable to allocate costs to domestic and export sales of PUC separately. Income from the export activity shall not be considered for NIP workings.

 

(c) The basis of allocation should be clearly and specifically mentioned to ensure their reasonability.

 

Format-D (Statement of  Consumption  of  Utilities):  It  reflects  the  actual year wise per unit consumption of utilities and seeks to compare them with the normative consumption per unit of production during the injury period. The variations, if any, must be looked into. The average per unit consumption of utilities is taken from Format A and multiplied by average rates (net of input tax, credit, GST, etc.) of respective utility as prevailing during POI and shown in format A. The year-wise normative costs at prices prevailing during POI are aggregated separately and compared to find the most efficient consumption cost of utilities (optimum consumption) during the Injury period and POI. Such optimisation of utilities is to be done separately for each plant producing the PUC.

 

Format-E (Statement of Sales Realizations): It relates to the computation of per unit net sales realization and is not directly linked to the NIP workings. Domestic Sales and Exports Sales need to be segregated because anti-dumping investigations are with regard to domestic sales only. However, it must be ensured that none of the selling and distribution expenses as indicated in this format like Commission, Discounts and outward freight, etc. is allowed as cost constituent for NIP determination. Direct expenses given in the format should match with the expenses allocated to PUC in Format-C. The total amount of PUC sales should reconcile with gross sales of PUC as per Format C as well as the sales register/ record maintained by the company. Sales details should exclude sales returns. It may be noted that the Net Sales Realizations is at INR per unit (it should reconcile with NSR shown in Format H) may have to be worked out PCN wise, if PCNs have been suggested by the DI and subsequently notified for information of all interested parties. The following issues may merit consideration in this regard:

 

(a) Variation in sales prices due to volume or difference in packing i.e., net sales realizations may vary if a portion of sales is sold in bulk and another portion is sold in small containers. If so, the net sales realizations need to be also seen separately for each type of packing. If there are wide variations in the year to year sales realizations within the same type of packing, detailed reasons must be looked into.

 

(b) If PCNs have been constructed after the initiation and PCN wise details were not furnished at the petition stage, DI must be asked to furnish this format again with PCN wise details. After examination of producer/exporter’s response, it may emerge that some of the PCNs imported into the country, have not been actually produced by the DI during the POI. In such cases, NIP7 estimated/derived based on the nearest PCN produced by the DI and cost is then adjusted appropriately, on merits.

 

Format-F  (Certificate  by   Chief   Executive/Duly   Authorized  Representative of DI): Format-F is the certificate by the Chief Executive of the Company/Directors/Partners or the Proprietor of the Firm certifying that the information contained in the petition is true, complete and correct to the best of his knowledge and belief. It further certifies that the information is based on the records of the Company and that they have neither knowingly and/or willfully concealed or misrepresented any material information nor made any material false statements. Therefore, it is very necessary to ensure that the certificate given is as per the format only. An explanation to the Format states that if this certificate is signed by an Authorised Representative other than the Officers referred to above, a copy of the authorization from the Competent Officer or the Chief Executive of the Company/Directors/Partners or the Proprietor of the Firm or the Board of Directors is also attached. Sometimes the language is changed from the prescribed language. Therefore, the investigation team must ensure that all certificates are as per the prescribed formats only. A copy of Board Resolution for authorization of an officer may also be obtained, if necessary.

 

Format-G (Declaration by Legal Representative):  It is a declaration by  the legal representative of the company, if any, to handle the anti-dumping case on behalf of the DI. He helps the DI in the preparation of the Petition submits clarifications on behalf of DI on the issues raised by the Authority, if any attends Oral Hearing on behalf of the company etc. The Format casts a responsibility on the Legal Representative to do due diligence before filing the application in DGTR. Therefore, the Legal Representative inter alia certifies that in his capacity as an adviser, counsel, preparer or reviewer of the Petition, the information contained herein is true, complete and correct to the best of his knowledge and belief and that the petition is based on the records of the Company and that they have neither knowingly/wilfully concealed or misrepresented any material information nor made any material false statements. It further certifies that the Legal Consultant is not a party to any concealment, mis-declaration or misrepresentation by his clients. Therefore, it is very necessary to ensure that the certificate given is as per the format only.

 

Format-H (Performance Parameters of DI): It indicates the performance parameters of DI for PUC only. The information furnished in this Format forms the basis for injury analysis. Since these will be given by each constituent of DI separately, a consolidated statement also needs to be submitted indicating the status of DI as a whole.

 

(a) The relevant data required in Format-H are installed capacity, production quantity and capacity utilization percentage for the injury period including POI, which is taken into consideration for optimization of capacity utilization/ production while computing NIP. The information furnished in Format- H like installed capacity is required to be substantiated by documentary evidence such as declaration given to pollution control board, project report or any other declaration given to government bodies etc. indicating installed capacity. The production/supply quantity may be verified from applicable GST declaration. It is the duty of the investigation team to ensure that all the information is as per the audited/certified records of the company. Reasons for variations in year-wise productivity or number of employees must be looked into. Similarly, any change in number of employees without any corresponding change in the installed capacity or actual production must be looked into and clarified.

 

(b) It has been seen on a number of occasions that the installed capacity is restricted due to lower production fixed/allowed by the Pollution Control Board authorities8. Therefore, approval from Pollution Control Board must be insisted before initiation of any case and in no case should the final finding be issued without considering the approval granted by the Pollution Control Board.

 

(c) The Format also requires, to the extent available with the DI, the submission of available average industry norms for capacity utilization, average industry norms for productivity per day and average industry norms for inventory. These norms will help in understanding the efficiency of the company vis-a- vis industry norms. Inventory should be mentioned in terms of the number of days’ production and number of days’ sale. All these would form the basis for injury analysis based on the duly audited/certified information furnished by DI. Similar information is sought from the producer exporters in their Questionnaire format.

 

(d) In Format-H, the cost of sales, profits, etc. for domestic sales should be based on actual audited/certified costs of DI during POI without any optimization. Therefore, total costs must match with the audited/ certified records. However, selling price per unit of domestic sales should match with net sales realization excluding excise duty/GST, commission, rebates, discounts and all other direct expenses as given in Format-E.

 

Format-I (PCN wise summarized  statement  of  expenses):  This  information is furnished with respect to POI only. It furnishes PCN wise production quantity, sales quantity, total raw material cost, the total cost of utilities, total direct labor cost, other expenses,and total cost.

 

Format-J (Related Party  Transactions):  Format-J indicates the details  of related party transactions for production and sale of PUC or any of its inputs. The particulars in Format-J are Particulars (Nature of Transaction), Unit, Quantity, Rate per unit, Total Transfer Price, Basis of Pricing, Cost per Unit and whether the transaction is at Arm’s Length Price. If transaction is not at Arm’s Length Price or Comparable Arm’s Length Price (for details refer Format-A above), it shall be the duty of Investigation Team to ensure that NIP is worked out at arm’s length prices to ensure that NIP worked out is reasonable and not vitiated on account of related party transactions. Details may also be seen in Chapter 19 related to General Issues. It may be clarified that the related party transactions of both types; namely purchase and sale are to be reflected in this format. Sales of by-products, scrap, PUC etc. may also be relevant for the investigations.

 

Format-K (Calculation of Capital Employed): Format-K indicates the details regarding the calculation of capital employed, which forms the basis for computation of return. It contains two tables viz., one for the details regarding the Working Capital and the other one for Net Fixed Assets. The format requires that the details of Components of Working Capital/NFA including NPUC claimed, PUC claimed (plant wise) and basis of allocation between PUC and NPUC be furnished head wise for company as a whole. An additional information on the impact of revaluation of assets, if any, is also to be furnished in the NFA part. The above information is used for calculation of average capital employed, which will then be used for computation of return. It must be ensured that no return is allowed for facilities not deployed on the production of the subject goods. The figures should reconcile with the audited/certified records of the company. The following issues may merit consideration in this regard:

 

(a) Efforts should be made to identify the direct working capital for the PUC. Sometimes, it is seen that the figures for product wise working capital are not available with the companies and therefore, working capital is worked out for the company as a whole. This figure is then allocated to different products on the basis of turnover of the respective products (including captive consumption) or any other appropriate basis. It must be seen in all such cases that the allocation bases adopted are reasonable considering the credit period allowed for each product of the company. Further, the share of working capital is preferably allocated to all the activities of the company including the trading activity, if any. It may be noted here that trading activity of PUC is considered as NPUC only for all injury analysis. The current assets for determination of working capital do not include investments/ deposits outside the business. Similarly, huge cash/bank balance/FDR etc. should also be excluded on merits.

 

(b) Sometimes, it is seen that the amount of net working capital works out in a negative figure. This is more prevalent in the case of sick companies or other companies facing a liquidity crunch. The working capital is taken as zero in all such cases and return is allowed on NFA portion only. The terms of loans received or extended to the related parties must also be seen to ensure their reasonability.

 

(c) Efforts should be made to directly identify the assets used for the production of PUC. No impact of revaluation is to be considered for return purposes.

 

Sometimes, the same asset is used for the production of more than one products. The NFA is then allocated to different products on the production value or any other appropriate basis.

 

(d) The inventory of by-product, if any, must be examined and impact on cost/ working capital may also be analyzed.

 

Format L (Calculation of claimed NIP): Format L indicates the NIP claimed by the petitioner. Since NIP is required to be computed plant wise, value of each major head of expenses given in this format should match with the figure given in Format-C for PUC for the respective plant. This statement also gives optimum production which is obtained by multiplying the maximum capacity utilization percentage during POI and injury period with the installed capacity during the POI.

 

METHODOLOGY OF COMPUTATION

 

The team is required to determine NIP after due verification of the information submitted by the DI. The following must be taken into consideration while arriving at computation:

 

(a) It must be ensured that all information has been furnished in the prescribed formats duly signed or certified, wherever certified;

 

(b) The NIP workings should be based on Audited / Certified Balance Sheet & Profit & Loss Account statement;

 

(c) In case the POI is not the same as a financial year, then Profit & Loss Account statement/NFA/Working Capital details etc. should be duly authenticated by an independent Chartered Accountant. The Chartered Accountant must certify that the figures relate to the company/unit for the POI as per the books maintained by the Company as per the applicable Accounting Standards;

 

(d) The Propriety of all expenses charged to the cost of production to be examined to disallow all extraordinary or non-recurring expenses or prior period costs;

 

(e) The NIP has to be worked out separately for each of the constituents of the DI and a weighted average is then determined for the DI as a whole. Similarly, weighted average is also worked out in case of entities having multiple manufacturing facilities/units, where unit wise NIP is first determined and then weighted average needs to be worked out for computing NIP for the company as a whole on the basis of volume of domestic production of PUC.

 

(f) Installed capacity/Production to be confirmed by supporting documents including various returns submitted to the different government departments like the Pollution Control Board etc.;

 

(g) Optimisation of Capacity Utilisation to nullify injury, if any, caused to the DI by inefficient utilization of production capacities (Para 4(iii) of the Annexure- III). If there is capacity enhancement during the injury period, optimum production is determined in terms of highest capacity utilization percentage to determine optimum production in absolute number;

 

(h) Optimisation of Raw Material Cost and Utilities to nullify injury, if any, caused to the DI by inefficient utilization of raw materials or utilities (Para 4(i) and 4(ii) respectively of the Annexure-III);

 

(j) Raw Materials Cost (subject to optimization), Utility Cost (subject to optimization),and Consumables Cost is generally treated as a variable cost. However, if proper valid justification is submitted along with supporting documents, appropriate treatment can be considered in case of other heads of expenditure also.

 

(k) The year wise cost of sales figure should also be verified for the injury period to ensure fair analysis of the trends over the entire period;

 

(l) Sometimes, it is seen that the imports are in bulk quantities, whereas domestic sales are sold in small packing, the NIP for bulk and retail sale is generally worked out separately, since packing cost can be a significant component of cost. In other words, only the packing cost will vary based on the nature of packing, whereas all other costs will remain the same. The average cost is then worked out separately for packed quantity and bulk quantity for DI as a whole. Export quantities (not sold domestically) are generally not considered for weighted average workings;

 

(m) Wherever captive inputs are used and are transferred at cost price (as reconciled with format C) and return @ 22% is allowed after optimization to remove inefficiencies as per Annexure-III. Similarly, expenses not admissible under Annexure-III should also be removed;

 

(n) Wherever captive inputs are used and are valued at market value in determination of NIP, then no return on captive inputs be allowed.

 

(o) If captively generated power is supplied to the Grid and power is drawn from the Grid by the manufacturing units, complete details including the basis of pricing etc. must be obtained. This is necessary to ensure that no profit is allowed over and above the prescribed rate of return on the captive power generated. Alternatively, the arm’s length price of power may also be considered;

 

(p) Costs not relevant to PUC should be segregated and then disallowed;

 

(q) Expenses as specifically mentioned in Para (4)(vii) of the Annexure-III are not to be considered for NIP computations;

 

(r) Common expenses or overheads, which are not directly related to any specific product to be apportioned on areas on able or scientific basis;

 

(s) Depreciation on re-valued assets, if any, is to be identified and the impact of revaluation isto be excluded while arriving at the reasonable cost of production. The impact of revaluation of fixed assets shall not be considered in the calculation of capital employed;

 

(t) Depreciation for facilities not deployed on the production of the subject goods is to be excluded from NIP workings;

 

(u) The reasonableness and justification of various expenses/working capital requirements claimed for the period of investigation are to be examined and scrutinized;

 

(v) The average capital employed i.e. the sum of “net fixed assets”and “net working capital” shall be taken on the basis oft heaver age of the respective heads as on the beginning and at the end of the period of investigation;

 

(w) Reasonable Return @ 22% per annum (12 month period) on Average Capital Employed (“ROCE”) for PUCis to be allowed (no specific ROCE is provided under the act or rules, however, the standard Indian practice is to give 22% return per annum). The return amount includes the incidence of profit, interest cost and the impact of taxation. This rate of return is proportionately adjusted if the period of POI is different from 12 months. For example, if POI is 18 months, theoretically total return amount will be 33% (22%X18/12) of the average capital employed – For rationale and background of this refer Chapter 19- General Issues);

 

(x) In case, there are more than one constituent of DI, the weighted average NIP should be computed based on the NIP of each constituent of the DI. The weight shall be the domestic production i.e., production volume less export volume;

 

(y) Interest is allowed as an item of cost of sales. After deducting the interest, the balance amount of return is to be allowed as pre-tax profit to arrive at the non-injurious price;

 

(z) The ‘Raw Material cost per unit allowed’ in NIP as per Format-L for POI is the optimum raw material cost per unit as per Format-B and optimum utility cost per unit as per Format-D is allowed as the utility cost per unit in NIP;

 

(aa) Change in NIP at shop floor is considered as part of the Raw Material cost and adjusted in Format-A. Packing Material Cost is part of the raw material cost and is allowed accordingly. Since NIP is computed for the production during POI, any change in finished goods is ignored as it is not a part of the cost of production during POI. Hence, impact due to change in finished goods is not considered in the calculation of NIP;

 

(aa) Raw Materials, Utilities, Direct Labour, and consumables are generally considered as variable costs. However, if proper justification is given along with supporting documents, the investigation team may appropriately deal with other heads of expenditure also;

 

(bb) Any part of salary and wages which is paid as a share of profit should be disallowed as that is not an expense required for the production of PUC. All per unit costs of fixed costs are worked out based on optimum production only;

 

(cc) Other expenses such as salary and wages, depreciation, repair and maintenance, factory overhead, administrative overhead, financial expenses, and fixed selling expenses are considered fixed and treated in a similar manner. Similarly, ‘Other Income’ is treated as income and per unit impact based on the nature of income is reduced from the cost of production for NIP purposes. For example, if other income consists of scrap sale etc., then per unit income is worked out based on actual production. However, if it relates to interest earned on short-term deposits out of surplus cash/bank balance during the period, then per unit income may be worked out based on optimum production;

 

(dd) Sometimes, especially in case of those products where input cost or selling prices are highly volatile, NIP may need to be worked out on the monthly or quarterly basis. Since cost details may not be available month/quarter wise, only variable input cost is changed based on the prevailing weighted average cost price during that month/quarter. It may be seen that overall month/quarter wise weighted average NIP for the POI as a whole should reconcile with the overall NIP of the POI as a whole.

 

DISALLOWANCES

 

In addition to disallowances as specifically mentioned in Para (4)(vii) of the Annexure-III, the following expenses are also not allowed for NIP workings as per the practice:

 

(a) Commission/remuneration based on share in profits or turnover as paid to the CMD or Directors of the company9;

 

(b) Impact of revaluation of assets on transfer to/from subsidiary/ parent / joint venture / associate company10;

 

(c) CSR Expenses or expenses of this nature like local area development being part of profits;

 

(d) Expenses related to Branch Office/Sales Depot. However, no income from the branch office/sales depot shall be considered; and

 

(e) Expenses not related to domestic sales like export expenses.

 

BASIS OF ALLOCATION AND APPORTIONMENT

 

The basis of allocation adopted for allocation or apportionment of common expenses or joint expenses is very critical for the NIP computations. The basis of allocation should be as direct as possible and a reasonable one. The following issues may merit consideration:

 

(a) It needs to be ensured that the basis of allocation is appropriate and justified;

(b) If more than one products are coming out of any manufacturing process, where costs can’t be identified, it may be more prudent to allocate costs on the basis of:

 

- production value (sales value of the production) basis;

- any other reasonable basis. For example, if all the products emerging out of any such process have almost similar per unit value, production quantity method could also be adopted;

 

(c) If direct costs constitute a significant portion of overall costs, the common expenses/overheads not linked to any specific product can also be allocated in the ratio of product wise direct costs;

 

(d) Expenses in the nature of fixed selling expenses should preferably be allocated on the basis of turnover of each product of the company.

 

(e) If the entity has done some trading activity or job work during POI, a proportionate amount of overheads or share of other common expenses must be allocated to this activity. Similarly, if the corporate office deals with all organizations within a group, reasonable expenses must be allocated to all the constituents of the group including income/investments in group companies. The reasonability of the basis adopted for allocation must be verified by the investigation team.

 

CALCULATION OF RETURN

 

As already detailed in para above, the Authority as per established practice allows 22% return on average capital employed. Average Capital employed means average of opening and closing balances of Net Fixed Assets (NFA) and Working Capital (WC) for POI relating to PUC. Average NFA attributable to PUC is divided by total optimum production during POI to arrive at an average per unit NFA.

 

Similarly, average working capital allowed is calculated as a percentage of “total cost of sale” minus depreciation claimed by the petitioner and applied to the “cost of sales” minus depreciation per unit allowed to derive the notional working capital component per unit of production. Total per unit NFA and WC is the per unit average capital employed for the PUC. A return of 22% per annum on average capital employed per unit (as reduced by the amount of interest/finance cost per unit as per Format-L) is added to the cost of sales to get NIP. The rate of return is proportionately adjusted, where the period of POI is different from 12 months. The standard practice of 22% has been accepted11 by the Hon’ble CESTAT also.

 

CALCULATION OF NET FIXED ASSETS

 

If the petitioner company is a single product company and involved in manufacturing and selling of PUC only, the total net value of assets related to PUC as per Audited/ Certified Balance Sheet is taken as Net Fixed Assets. However, if it is a multi-product company and multi-activity company, the direct NFA allocated to the PUC and the common NFA apportioned to PUC on a reasonable basis are taken together as NFA for PUC. However, care needs to be taken that the assets not related to PUC either directly or indirectly are excluded. The average of opening and closing NFA so calculated is divided by optimum production to derive average NFA per unit.

 

In case, the PUC is a finished product of some other intermediates manufactured captively, and captive products are being transferred at cost, a proportionates hare of NFA associated in the production of such intermediate should also be added with the direct NFA of the PUC to arrive at total NFA for return purpose.

 

WORKING CAPITAL

 

Working Capital is the sum total of current assets minus current liabilities attributable to PUC. Current assets related to PUC are identified and taken into consideration. Similarly, current liabilities are also identified for PUC and taken into consideration. Current liabilities except for provisions, statutory liabilities like GST/ Excise Duty/VAT, dividend payable, income tax payable and other payables which do not have a link with production and interest-bearing loans such as Cash Credit loan are excluded. Current assets and Current Liabilities related to “Related Parties” must be examined to ensure reasonability.

 

In case of multi-product Company, where assets can’t be identified with any particular product, the total working capital of the company as a whole is generally allocated to the PUC on the basis of domestic sales turnover of the PUC as a percentage of total turnover of the company or any other reasonable basis. Sometimes overall working capital as a percentage of the overall cost of production is also applied to determine the working capital for PUC.

 

VALUATION/ PRICING OF CAPTIVE INPUTS

 

‘Captive Consumption’ means the consumption of goods manufactured by one division or unit of a company and consumed by same or another division or unit of the same organization for manufacturing of another product. In other words, intermediate products manufactured in the same company and used for the manufacture of PUC in the same company are called captive inputs.

 

The captive input can be transferred to the next process either at cost or at market value. While computing the costs of such captive inputs, principles prescribed under Annexure-III must be followed i.e., optimization needs to be done for such captive inputs as well before allowing the return. Similarly, expenses disallowed under Annexure-III should not be included.

 

If captive inputs are transferred at market rates, no return is allowed on assets used for the manufacture of captive inputs. Otherwise, proportionate NFA attributable to that input is apportioned to PUC for return purpose. Working Capital (WC) being allocated to different products / PUC on the turnover basis takes care of the portion of working capital allocable to captive input. If the DI accounts for the captively produced inputs at the cost of production, an additional return @ 22% on capital employed for assets utilized for producing such inputs is also allowed. In case the company transfers the captively produced inputs at market value consistently and shows it as such in the books of accounts, then such market value of captively produced inputs may be is adopted for determination of NIP.

 

It may be added here that the cost details need to be collected for all major captive inputs used in the production of PUC, irrespective of the basis of pricing.

 

When the petitioner insists to value the captively manufactured goods at a market price and doesn’t claim a return on capital employed for the captively manufactured product, the reasonability of market price in all such cases be preferably confirmed from the sale price of such goods to the independent buyers.

 

TREATMENT OF R&D  EXPENSES

 

R&D expenses form part of costs that benefit the future as well as current production. If products under anti-dumping are not very high tech, R&D costs will normally form a small portion of total costs in NIP workings based on the actual amount booked under the head during POI.

 

Para (4)(vii)(a) of Annexure-III provides that research and development expenses unless claimed and substantiated as relating to the product-specific research, shall not be considered while assessing non-injurious price. In other words, Annexure-III allows the DI to claim R&D costs incurred specifically for the PUC only in their NIP workings.

 

The investigation team should ask the DI during verification as to whether they, as a general rule, treat R&D expenses as recurring or non-recurring expenses. If the company treats R&D expenses as non-recurring, then it must clarify as to how they determine allocation period in compliance with applicable accounting standards/ cost accounting standards. Also, if the regular practice of the company is to treat R&D expenses as of non-recurring nature and allocate it over a period of time, Investigation Team may be required to verify the R&D expenses for PUC incurred prior to the POI. Normally, R&D expenses are treated as part of manufacturing costs. However, if the DI has been consistently including them in SG&A, the DI request may be considered. However, in cases where R&D expenses are associated with more than one product or model, including the product concerned, the share of R&D costs to PUC may be required to be allocated on a reasonable basis.

 

PCN WISE COMPUTATION

 

Wherever PCNs are prescribed, NIP is required to be worked out for each PCN for fair comparison with landed value of imported goods.

 

Direct costs or variable expenses such as raw materials cost, utility, and packing, etc. are generally allocated directly on an actual basis, if possible. Otherwise, these direct costs are allocated on the basis of standard consumption norms or standard costs. In other words, wherever PCN wise accounting record is not maintained by the units, it has to be estimated on the basis of information furnished for standard raw material costs from Bill of Material and utilities to be estimated on the basis of technical estimates. In all such cases it must be ensured that total standard costs are compared with actual costs and variations, if any,are apportioned in the ratio of standard raw material/ utility cost.

 

All indirect costs and return (since PCN wise NFA is not available) can be allocated to different PCNs in the ratio of total direct costs or any other appropriate basis to arrive at PCN wise NIP. It may be added that component-wise costs of all PCNs, if added, should match the total component-wise costs allowed in NIP workings. The veracity or the reasonability of standard norms also needs to be verified by the Investigation Team during verification and any wide variation in PCNs should be discussed with the technical persons during verification.

 

In a situation where export quantities include some of the PCNs, which have not been produced by the DI during the POI, then a Notional or Estimated NIP is to be computed for those PCNs. This notional NIP of PCN is computed based on the cost of the most similar PCN produced by the DI duly adjusted for the differences on merit. This notional NIP is subsequently used for determination of injury margin for that PCN.

 

JOINT PRODUCTS &  BY-PRODUCTS

 

This is applicable in the industries where more than one product of equal or differential importance is produced, either concurrently or during the production of the main product. Joint products are the products which are produced simultaneously, with the same raw material and process and have broadly equal commercial importance12 whereas, by-products have relatively minor or nominal commercial significance13.

 

Joint costing is used when a business has a production process from which final products are split off during a later stage of production. There is a separation point called as a split-off point, from where the products are separated and identified. At this stage, the products could either be sold directly or go for further processing, to convert into a finished product. The amount incurred up to the split- off point is termed as joint cost.

 

If the company has incurred any manufacturing costs prior to the split-off point, it must allocate costs to the final products in compliance with both generally accepted accounting principles/cost accounting principles. All costs incurred after the split-off point, which are linked to a specific product should be charged to that specific product. Beside the split-off point, there may also be one or more by- products.

 

The by-product is a secondary product whose total sale value is relatively minor in comparison with the sale value of the main product. However, relationships between joint products and by-products change over time as technology and markets change as under:

 

(a) By-products may become more and more important, eventually becoming joint products14;

(b) When the relative importance of individual products changes, the products need to be reclassified and the costing procedures need to be changed; and

(c) Physical unit method (if all products have broadly the same per unit value).

 

Most commonly used method for allocating joint costs is based on the market-based data such as using revenues as a basis for allocation. There are two methods that employ this approach:

 

(a) Sales value at the split-off method; and

(b) Net realizable value (NRV) method.

(c) Physical units method (if all products have same unit measurable and are equally desirable and valuable).

 

The aforesaid methods require adding up of all the production costs up to the split-off point, then determine the sales value/net realizable value of all joint products as at the same split-off point, and then assign the costs appropriately. The net realizable value method allocates joint costs on the basis of the final sale value less the separable costs. If there are any by-products, do not allocate any costs to them; instead, charge the proceeds from their sale against the cost of goods sold. However, based on the merits of the case, the investigation team may use another appropriate method also. Applicable cost accounting standard must be kept in mind in this regard.

 

WEIGHTED  AVERAGE NIP

 

As already stated above, the NIP is worked out plant wise for all the constituents of DI. Thereafter, weighted average NIP is computed based on the domestic production with respect to each plant after reducing export sales/captive consumption, if any, from the production during the POI of the respective plant. These weights are then used to compute the weighted average NIP of respective constituents of DI. Finally, one NIP is calculated for the DI as a whole and this NIP is used to determine injury margin.

 

Name of DI	Production during POI	Domestic Sales	Export Sales	Domestic production	NIP(Rs./Kg)
AAA	5400	5500	NA	5400	200.00
BBB	2500	1900	500	2000	250.00
CCC	8000	7200	1000	7000	225.00
DDD	2100	1800	300	1800	240.00

 

MATERIAL RETARDATION / NEW  UNITS

 

In the case of new units, data may not be available for all the four years. Therefore, the optimization of capacity shall be done based on the available data read with projections in the project report and the data from technology/capital equipment supplier. As regards optimization of inputs and utilities, apart from project report, actual monthly/quarterly/ half yearly data as appropriate may also be considered. Reports submitted with the long-term loans and suppliers may also be called for this purpose.

 

DISCLOSURE OF NIP TO THE RESPECTIVE   DI

 

Rule 16 of the Rules regarding disclosure of information provides that the designated authority shall, before giving its final findings, inform all interested parties of the essential facts under consideration which form the basis for its decision. Since the NIP workings are one of the essential facts based on data furnished by DI, the finally computed NIP needs to be disclosed to the respective constituents of DI. This provides them with an opportunity to submit their comments/views on the disallowances or the facts considered by the Authority in the determination of NIP. The detailed procedure for disclosure is explained in the relevant Chapter of this Manual. A broad format for disclosure is as under:

 

Name of the Unit:

PUC

POI:

 

	Particulars	Unit			Year 1		Year 2			Year 3
	Installed Capacity
	Production  (including captive)
	Capacity Utilisation	%
	Domestic Sales
	Captive Tfd
	Total Sales (MT)
	NIP for  Domestic production:
	Particulars*	Claimed					Allowed
		Rs.Lacs			Rs / Unit		Rs.Lacs			Rs /Unit
	Raw Materials
	Utilities
	Packing Materials
	Direct Labour
	Consumables and Spares
	Depreciation
	Repairs & Maintenance
	Works Overheads
	Administration  Overheads
	Selling & Distribution Overheads
	Financial Expenses
	Total Cost of Sales
	Return
	Non-Injurious Price - NIP
	*Cost heads are indicative and may be changed as per NIP workings
	Working of Return
	Particulars			Units			Claimed		Allowed Average
	Optimum Production - PUC			MT
	POI Opening Net Fixed Assets - PUC			Rs Lacs
	POI Closing Net Fixed Assets - PUC			Rs Lacs
PO Average Net Fixed Assets - PUC			Rs Lacs
Net Fixed Assets Per Unit			Rs/MT
POI Opening Working Capital			Rs Lacs
POI Closing Working Capital			Rs Lacs
POI Average Working Capital			Rs Lacs
Claimed Cost of Sales			Rs Lacs
Depreciation			Rs Lacs
COS excluding Dep.			Rs Lacs
WC % of COS excluding Dep.			%
Allowed
Cost of Sales			Rs/MT
Dep.			Rs/MT
COS excluding Dep.			Rs/MT
Allowed WC per unit			Rs/MT
Capital Employed			Rs/MT
Return @ 22%			Rs/MT
Less: Interest			Rs/MT
Return Allowed			Rs/MT

 

Note: Sample Format may be changed as per actual requirement.

 

Source: Manual Of Operating Practices For Trade Remedy Investigations