Jeopardy Under Annexure III: Best Utilization Of Production Capacities

TPM Consultants


TPM was founded in 1999 as the first firm dealing exclusively in the field of trade remedies. TPM has assisted domestic producers, in India and overseas, suffering due to cheap and unfair imports to avail the necessary protection under the umbrella of the WTO Agreements. TPM also assists exporters and importers facing trade remedial investigations in India or other countries. TPM has assisted exporters facing investigations in a number of jurisdictions such as China, Argentina, Brazil, Canada, Egypt, European Union, GCC, Indonesia, South Korea, Taiwan, Turkey, Ukraine and USA. TPM also provides services in the field of trade policy, non-tariff barriers, competition law, trade compliance, indirect taxation, trade monitoring and analysis. It also represents industries before the Government in matters involving customs policy.
In the calculation of non-injurious price for determination of injury margin, the DGTR is required to normalize any increase in fixed costs, arising out of inefficient utilization of capacities.
India International Law
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  • In the calculation of non-injurious price for determination of injury margin, the DGTR is required to normalize any increase in fixed costs, arising out of inefficient utilization of capacities.
  • However, in practice, fixed costs are normalized for any decline in capacity utilization, irrespective of whether there was an inefficiency in the utilization of capacities.
  • Even where the capacity utilization has declined as a result of the unfair imports, or there is an increase in capacities by the domestic industry, the fixed expenses are normalized for an assumed inefficient utilization of capacities.
  • In case of multi-product companies, where expenses are apportioned between various products; it is often seen that the decline in capacity utilization for a product would result in less expenses being apportioned to the product. Despite the same, the fixed expenses are further reduced, to again account for the decline in capacity utilization.
  • It is imperative that the calculation of non-injurious price be seen not merely as a mathematical exercise, but a logical analysis, based on facts and circumstances of the case.

India follows the lesser duty rule, which implies that the anti-dumping or antisubsidy duty levied would be lower of dumping margin / subsidy margin and the injury margin. Given the developing nature of the country, perhaps, the Indian industry is entitled to a remedy to the full extent of dumping, following the principle of "penalty to the extent of offence".

However, under the present law, for the purpose of determining injury margin, the DGTR calculates a notional fair selling price or non-injurious price following the provisions laid down under Annexure III of the Anti-Dumping Rules. Even though such provisions have not yet been introduced under the Countervailing Duty Rules, these are followed by the DGTR, as a practice, in countervailing duty investigations as well.

While the lesser duty rule and the provisions of Annexure-III have been a cause of concern for domestic producers on several accounts, one of the biggest concerns is the consideration of best utilization of production capacities leading to undue reduction in non-injurious price. The Rules require that, if there is an inefficiency in the utilization of production capacities, the DGTR shall consider the best utilization achieved over the injury period for determination of non-injurious price. Essentially, this implies that if the domestic industry has incurred a higher fixed cost per unit, on account of certain inefficiencies preventing it from optimally utilizing its capacities, the fixed cost should be normalized, and the non-injurious price should be determined on the basis of such normalized cost.

However, in effect, the DGTR considers that any decline in capacity utilization is an inefficiency of the domestic industry, the effect of which must be removed. The "best utilization" for the purposes of Annexure-III is considered to be the highest capacity utilization achieved during the injury period. Therefore, the DGTR considers the highest capacity utilization, determines optimal production based on such utilization rate, and calculates fixed cost per unit based on such optimal production. This often results in a very anomalous situation, where despite no inefficiencies, the expenses of the domestic industry are being "normalized".

Decline in capacity utilization as an effect of imports is not considered

As per the provisions of the Anti-Dumping Rules, a decline in capacity utilization of the domestic industry is a factor showing that the domestic industry faced injury as a result of dumped imports. However, even in a situation where the DGTR finds that the capacity utilization of the domestic industry has declined as a result of imports; the decline is deemed to be an "inefficiency" in the determination of non-injurious price. Consequently, the DGTR opts for best utilization of capacities for the determination of noninjurious price, to negate the effect of the low-capacity utilization arising out of imports. This results in a situation where expenses are being "normalized" for situations not arising out of inefficiencies, but as a result of the very lowpriced imports sought to be counteracted by the anti-dumping duty.

Decline in capacity utilization where the capacity of the producer increased

Another situation to be considered is where the capacity of the producer has increased over the period. In a situation where the capacity has increased and as a consequence, production has also increased, it would be quite usual to witness a decline in capacity utilization. For instance, consider a producer X, which had a capacity of 1,000 MT, and was producing 900 MT, implying a capacity utilization of 90%. Assume the producer increases its capacity to 2,000 MT, having regard to future demand. In view of the present demand, the production may increase only upto 1,200 MT, implying a capacity utilization of 60%. Here, the decline in capacity utilization from 90% to 60% is not a result of any "inefficiency", but an effect of increase in capacity. Nevertheless, the DGTR presumes that the fixed costs per unit have increased as a result of inefficiency in utilization of production capacity. Accordingly, in order to calculate the non-injurious price, the DGTR would determine what would be the fixed cost per unit, had the producer operated at 90% of the increased capacity utilization. This results in the expenses being artificially depressed, and as a result, so is the non-injurious price.

Situation in the case of multi-product organizations

An issue, which is visible in a large number of cases, is the lower allocation of expenses to a product due to decline in capacity utilization, and further normalization of those expenses. This is observed in most cases involving a multi-product company, where capacity utilization for the product has declined in the investigation period.

The same can be understood with an example. Assume a producer Y has two products, A and B. For this example, one can consider the total fixed expenses at ₹ 1,00,000. The capacity of the plant for product A is 1,000 MT and for B is 500. Assuming that before the dumping started, product A accounted for 800 MT of the production and sales of the company, and product B accounted for 200 MT. However, as dumping of product A began, its production and sales declined due to competition with the imported goods, and were only 600 MT, while the production and sales of product B increased to 400 MT. As a result, share of product A in total production and sales also declined from 80% to 60%. Further, the capacity utilization of the plant for product A came down from 80% to 60%.

In this situation, during the period prior to dumping, 80% of the fixed expenses, that is, ₹ 80,000, would have been allocated to product A, and balance to product B. Considering the production of 800 MT, the fixed cost per unit would have been ₹ 100 per MT.

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Originally Published February 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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