Council Regulation (EC) No 74/2004 of 13 January 2004 imposing a definitive countervailing duty on imports of cotton-type bedlinen originating in India

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 ([^E0001]), and in particular Article 15 thereof,

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

Whereas:PROCEDUREInitiation

• (1) 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 dominant fibre), bleached, dyed or printed (cotton-type bedlinen) originating in India ([^E0002]) and commenced an investigation.

• (2) 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 subsidisation of the said product and of material injury resulting therefrom, which was considered sufficient to justify the initiation of an anti-subsidy proceeding.

• (3) Prior to the initiation of the proceeding and in accordance with Article 10(9) of Regulation (EC) No 2026/97 (the basic Regulation), the Commission notified the Government of India (GOI) that it had received a properly documented complaint alleging that subsidised 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.

• (4) The Commission officially advised the exporting producers and importers known to be concerned as well as their associations, the representatives of the exporting country concerned, the complainant and the other Community 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.

• (5) 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 Commission by registered mail or the issuing of an acknowledgement 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 the acknowledgement of receipt by the Commission was Monday, 4 November 2002. Therefore, 4 November 2002 is to be considered as the lodging date of the complaint. The notice 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.

Sampling

SAMPLING OF EXPORTERS/PRODUCERS IN INDIA

General

• (6) 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.

• (7) In order to enable the Commission to select a sample, pursuant to Article 27(2) of the basic Regulation, exporters 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 Commission.

Preselection of the sample

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

• (9) 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.

Selection of the sample

• (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 producers (plus three related companies) were chosen to constitute the sample, in consultation with the representatives of the companies, of the professional association of exporters (Texprocil) and of the GOI. This sample represented 55 % of Indian exports of the product concerned to the Community.

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

Individual examination of the companies not selected in the sample

• (13) 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 question were informed of this fact accordingly.

SAMPLING OF COMMUNITY PRODUCERS

• (14) In view of the large number of Community producers supporting the complaint, and in accordance with Article 27 of the basic Regulation, 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 time available. For these purposes, the Commission requested companies to provide information concerning production and sales for the like product.

• (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 considered 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 investigation period and were therefore considered to be only partially cooperating.

Investigation

• (17) A number of exporting producers in the country concerned, as well as Community producers, Community 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 three related companies) in India and one unrelated importer in the Community.

• (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:

• —The Bombay Dyeing and Manufacturing Co., Mumbai

• —Brijmohan Purusottamdas, Mumbai

• —Divya Textiles, Mumbai

• —Jindal Worldwide Ltd, Ahmedabad (related to Texcellence 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.

Product concerned and Like ProductProduct 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 originating in India, currently classifiable within CN codes ex630221 00 (TARIC codes 6302210081, 6302210089), ex630222 90 (TARIC code 6302229019), ex630231 10 (TARIC code 6302311090), ex630231 90 (TARIC code 6302319090) and ex630232 90 (TARIC code 6302329019). 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.

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.

SUBSIDISATIONIntroduction

• (24) On the basis of the information contained in the complaint and the replies to the Commission's questionnaire, 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).

• (25) 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 notifications regarding the export and import policy. These are summarised in the ‘Export and Import Policy’ documents, 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 addition, the GOI also sets out the procedures governing India's foreign trade policy in the Handbook of Procedures — 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 Procedures is also updated on a regular basis.

• (26) 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.

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

Duty Entitlement Passbook (DEPB) SchemeLegal 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.

Eligibility

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

Practical implementation of DEPB on post-export basis

• (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 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 subsequent imports except 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.

• (33) DEPB licences are freely transferable and, as a consequence, 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.

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 irrespective 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.

• (36) 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 countervailable benefit can be said to have devolved on the exporter under the DEPB.

• (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).

• (38) However, in this case, the exporter is under no obligation 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.

• (39) 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 Regulation.

• (40) 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.

• (41) 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 Regulation, the DEPB on a post-export basis cannot be considered as a permitted drawback or substitution drawback scheme (Annex III) pursuant to Article 2(1)(a)(ii) of the basic Regulation.

• (42) 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.

• (43) Based on the above, it was concluded that the GOI, by issuing a freely transferable licence, provides the exporters 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 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.

Calculation of the subsidy amount for the DEPB post-export basis

• (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) 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.

• (46) The amount of subsidy has been allocated over total exports during the IP in accordance with Article 7 of the basic Regulation. In calculating the benefit, the fees necessarily incurred to obtain the subsidy have been deducted.

• (47) 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 was subject to special licences. In this case, for the purpose of calculating the ad valorem subsidy, it was considered appropriate to allocate the benefit of the DEPB (nominator), over the export turnover of the products eligible for DEPB (denominator).

• (48) 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.

• (49) 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, the tax subject to sales tax is the purchaser, not the seller. The seller merely collects the sales tax on behalf of the relevant authorities. Consequently, this claim was rejected.

• (50) 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, such as decisions concerning depreciation rates, the 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 contributed 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.

• It is therefore clear that the granting of DEPB credits and eventual later taxation thereof constitute two independent 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.

• 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 %.

Duty-Free Replenishment Certificate (DFRC)Legal basis

• (52) The legal basis for this scheme is contained in paragraphs 4.2.1 to 4.2.7 of the Export and Import Policy and paragraphs 4.31 to 4.36 of the Handbook of Procedures.

Eligibility

• (53) The DFRC is issued to a merchant-exporter or manufacturer-exporter for the imports of inputs used in the manufacture of goods without payment of applicable duties.

Practical implementation

• (54) DFRC is a post-export scheme, which allows replenishment, 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 specification 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.

Conclusion on the scheme

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

• (59) The certificates 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.

• (60) The GOI and Texprocil argued that the DFRC is a legitimate substitution drawback scheme, since the scheme provides for replenishment of inputs used in the exported product. Since the quantity, quality and technical 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 on Subsidies and Countervailing Measures (ASCM). 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.

• (61) 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).

• (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, including situations where the export of the latter 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 verification system or procedure is important because it enables the government of the exporting country to 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 question.

• (64) Under DFRC, which is a post-export scheme as mentioned in recital 54, there is a built-in obligation to import only inputs that were consumed in the production 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 substitution drawback scheme according to Annex III to the basic Regulation. The investigation established, however, that there was no system or procedure in place to 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.

• (65) 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 ([^E0003]).

• (66) Based on the above, the GOI, by issuing a certificate which is freely transferable, provides exporters with a financial contribution. In these circumstances, the certificates actually represent a direct grant from the GOI to the exporters concerned.

• (67) 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 available 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.

Calculation of the subsidy amount

• (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 charges in excess of those originally levied on the 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 were transferred (sold), it was therefore considered reasonable to calculate the benefit on the basis of the sales price of the certificate.

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

• (72) 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 negligible.

Export Promotion Capital Goods (EPCG) schemeLegal 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 force on 1 April 1997. Details of the schemes are contained in Chapter 5 of the 2002 to 2007 Export and Import Policy and Chapter 5 of the Handbook of Procedures.

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).

Practical implementation

• (75) 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. In order to meet the export obligation, 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.

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

• (77) 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.

• (78) 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 exemption for imported capital goods).

Conclusion on EPCG scheme

• (79) 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.

• (80) 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.

• (81) 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.

Calculation of the subsidy amount

• (82) The benefit to the companies 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 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 appropriate. The amount of subsidy was then allocated over total exports during the IP, in accordance with Article 7 of the basic Regulation.

• (83) 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 allocation of the subsidy amount (unpaid customs duties) attributable 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 contingent 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 total turnover is rejected.

• (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.

Advance Licence Scheme (ALS)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.

Eligibility

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

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 specified in the advance licences are items used in the production of the relevant finished products.

• (88) Advance licences can be issued for:

• (i)‘physical exports: Advance Licences may be issued for physical exports to a manufacturer exporter or merchant exporter tied to supporting manufacturer(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 indigenous 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 entitles 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.

• (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.

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 investigated 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 manufacturing 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, for the purposes of this investigation, 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.

Export Processing Zones (EPZs)/Export Oriented Units (EOUs)Legal basis

• (96) The EPZ/EOU scheme, which was introduced in 1965, is an instrument under the Export and Import Policy involving 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.

Eligibility

• (97) 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 companies 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.

Practical implementation

• (98) Companies requesting EOU status or located in an EPZ must apply to the competent authorities. Such application must include details for a period of the next five years, on, inter alia, planned production quantities, projected value of exports, import requirements and indigenous requirements. If the authorities accept the company's application, the terms and conditions 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.

• (99) EPZ/EOU businesses are entitled to the following benefits:

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

• (ii)exemption from excise duty on goods procured from indigenous sources;

• (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.

Conclusions on EPZ/EOU

• (102) 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 market. It was found that concessions related to the 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 sales tax paid on goods procured locally, were used by the company. Therefore, the Commission examined the countervailability of these concessions. In this regard, the EPZ/EOU scheme 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 performance within the meaning of Article 3(4)(a) of the basic Regulation, it is therefore deemed to be specific and thus countervailable.

• (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 credited 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 consequently 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 companies, entitled to reimbursement of central sales tax.

• (108) Texprocil also argued that central sales tax payable on inputs procured indigenously and used in the production of the export product is an indirect 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.

• (109) The illustrative list of export subsidies in Annex I to the basic Regulation stipulates under item (h): ‘The exemption, remission or deferral of prior-stage cumulative indirect taxes on goods or services used in the production of exported products in excess of the exemption, remission or deferral of like prior-stage cumulative indirect taxes on goods or services used in the production of like products when sold for domestic consumption; 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 production 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 in the production of export product shall be exempt.

• (ii)The only condition is that the prior-stage cumulative 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) In this respect, it should be noted that, for the purpose of the basic Regulation, ‘cumulative’ indirect taxes are multi-staged taxes levied, where there is no mechanism for subsequent crediting of the tax, if the goods or services subject to tax at one stage of production are used in a succeeding state of production.

• (112) 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. In other words, it 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.

• (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 provisions of Annex I(h) to the basic Regulation, the reimbursement 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 consumption 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 production 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 production 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. The fact that a particular State may grant certain 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. Therefore, the subsidy is deemed to be specific and thus countervailable.

Calculation of the subsidy amount

Exemption from import duties on raw materials

• (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.

Exemption from import duties on capital goods

• (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 %.

Reimbursement of central sales tax paid on goods procured locally

• (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 %.

Income Tax Exemption (ITES)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 exemptions 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.

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.

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.

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 performance 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 Exemption 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 Section 80HHC of the Income Tax Act, a specified percentage of export profits are exempt during the relevant 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) In respect of the arguments made, it was established 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 benefits 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 subsidies no longer confer any benefit on the exporters involved. Since the Income Tax Exemption under Section 80HHC clearly meets the criteria for the imposition of duties under Article 15 of the basic Regulation, any benefits from it should be included in the total amount of countervailing duty.

Calculation of the subsidy amount

• (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 calculated 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.

• (129) Although it was submitted that the subsidy benefit should be treated as nil, alternative methods were suggested for the purpose of the calculation of the subsidy margin, notably in relation to the applicable tax rates.

• (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 income (i.e. 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 appropriate to make the calculation of the amount of countervailable subsidies on the basis of a pro rata average of the two rates which applied in the IP, i.e. 60 %. Appropriate adjustments have accordingly been made to the amount of subsidy for the companies which availed of this scheme.

• (131) 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 independent 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 transactions, 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).

• (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.

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 %.

Type of subsidy	DEPB	DFRC	EPCGS	EPZ/EOU	ITES	TOTAL
Type of subsidy	Post-export	DFRC	EPCGS	EPZ/EOU	ITES	TOTAL
Bombay Dyeing N. W. Exports Limited Nowrosjee Wadia & Sons Limited	4,95 %		0,38 %			5,33 %
Brijmohan Purusottamdas	5,93 %				0,32 %	6,25 %
Divya	3,47 %				2,95 %	6,42 %
Jindal Worldwide	1,45 %				1,65 %	3,09 %
Texcellence	1,88 %	3,08 %			3,70 %	8,65 %
Mahalaxmi Exports	7,02 %				2,29 %	9,31 %
Pasupati				8,59 %		8,59 %
Prakash Cotton Mills	8,44 %		2,00 %			10,44 %
Vigneshwara	4,46 %					4,46 %
Cooperating companies not in the sample						7,67 %
All others						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.

COMMUNITY INDUSTRY

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

• —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 producing company opposed to the proceeding represented less than 1 % of the Community production.

• (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.

INJURYPreliminary remarks

• (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 Community 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.

Community consumption