Council Regulation (EC) No 713/2005 of 10 May 2005 imposing a definitive countervailing duty on imports of certain broad spectrum antibiotics originating in India

COUNCIL REGULATION (EC) No 713/2005

of 10 May 2005

imposing a definitive countervailing duty on imports of certain broad spectrum antibiotics 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]) (the basic Regulation), and in particular Articles 18 and 19 thereof,

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

Whereas:PROCEDUREPrevious investigation and existing measures

• (1) The Council, by Regulation (EC) No 2164/98 ([^E0002]), imposed a definitive countervailing duty on imports of certain broad spectrum antibiotics, namely amoxicillin trihydrate, ampicillin trihydrate and cefalexin not put up in measured doses or in forms or packings for retail sale (the product concerned) falling within CN codes ex294110 10, ex294110 20 and ex294190 00 originating in India. The measures took the form of an ad valorem duty ranging between 0 and 12 % imposed on imports from individually named exporters with a residual duty rate of 14,6 % imposed on imports from other exporters.

Request for a combined expiry and interim review

• (2) Following the publication of a notice of impending expiry ([^E0003]) of the definitive measures in force, the Commission received a request for the initiation of a combined expiry and interim review of Regulation (EC) No 2164/98 pursuant to Articles 18(2) and 19(2) of the basic Regulation, from related Community producers of the like product, Sandoz GmbH, Austria, and Sandoz Industrial Products SA, Spain, (the applicants). The applicants represent a major proportion, in this case over 40 %, of the total Community production of certain broad spectrum antibiotics.

• (3) The request was based on the grounds that the expiry of the measures would be likely to result in the continuation or recurrence of subsidisation and injury to the Community industry and that the level of the measures in force was allegedly inappropriate to counteract the subsidisation which was causing the injury.

• (4) Prior to the initiation of the combined expiry and interim review, and in accordance with Articles 22(1) and 10(9) of the basic Regulation, the Commission notified the Government of India (the GOI) that it had received a properly documented review request. The GOI was invited for consultations with the aim of clarifying the situation as regards the contents of the request and arriving at a mutually agreed solution. The GOI declined the Commission's invitation to have consultations.

Initiation of a combined expiry and interim review

• (5) The Commission examined the evidence submitted by the applicants and considered it sufficient to justify the initiation of a review in accordance with the provisions of Articles 18(2) and 19(2) of the basic Regulation. After consultation of the Advisory Committee, the Commission initiated, by a notice published in the Official Journal of the European Union ([^E0004]), a combined expiry and interim review of Council Regulation (EC) No 2164/98.

Investigation period

• (6) The investigation covered the period from 1 April 2002 to 31 March 2003 (the review investigation period or IP). The examination of trends in the context of injury covered the period from 1 January 1999 up to the end of the review investigation period (the period considered).

Parties concerned by the investigation

• (7) The Commission officially informed the applicants, other known Community producers, exporting producers, importers, upstream suppliers, users and the GOI of the initiation of the investigation. Interested parties had the opportunity to make their views known in writing and to request a hearing. The written and oral comments submitted by the parties were considered and, where appropriate, taken into account.

• (8) In view of the apparently large number of exporting producers of the product concerned in India which were named in the request, the use of sampling techniques for the investigation of subsidisation was envisaged in accordance with Article 27 of the basic Regulation.

• (9) However, only a limited number of exporting producers made themselves known and provided the information requested for sampling. Therefore, the use of sampling techniques was not considered necessary.

• (10) The Commission sent questionnaires to all parties known to be concerned who made themselves known within the deadlines set in the notice of initiation. Replies were received from five Community producers, seven exporting producers, one importer, two up-stream suppliers and the GOI.

• (11) The Commission sought and verified all information it deemed necessary for the determination of subsidisation and injury as well as to determine whether there is a likelihood of continuation or recurrence of subsidisation and injury and whether maintaining or amending the measures would not be against the Community interest. Verification visits were carried out at the premises of the following interested parties:

• 1.Community producers DSM Anti-Infectives BV, Delft (The Netherlands), which also replied to the Commission’s questionnaire on behalf of DSM Anti-Infectives Deretil SA, Almeria, (Spain) and DSM Anti-Infectives Chemferm SA, Santa Perpetua de Mogoda, (Spain). These three companies are hereafter jointly referred to as ‘DSM’. Sandoz GmbH (formerly Biochemie GmbH), Kundl (Austria), which also replied to the Commission's questionnaire on behalf of Sandoz Industrial Products SA (formerly Biochemie SA), Barcelona (Spain). Both companies are hereafter jointly referred to as ‘Sandoz’.

• 2.Government of India Ministry of Commerce, New Delhi.

• 3.Exporting producers in India KDL Biotech Ltd (formerly Kopran Ltd), Mumbai, Orchid Pharmaceuticals and Chemicals Ltd, Chennai, Nectar Lifesciences Ltd, Chandigarh, Nestor Pharmaceuticals Ltd, New Delhi, Ranbaxy Laboratories Ltd, New Delhi, Torrent Gujarat Biotech Ltd, Ahmedabad, Surya Pharmaceutical Ltd, Chandigarh.

Disclosure and comments on procedure

• (12) The GOI and the other interested parties were informed of the essential facts and considerations upon which it was intended to propose the continuation of measures. They were also given a reasonable time to comment. Certain parties presented their comments in writing. In addition, the GOI and three exporting producers presented their positions in post-disclosure hearings followed up by post-hearing submissions summarizing their positions. All submissions and comments were taken duly into consideration as set out below.

• (13) The GOI and one exporting producer pointed out during a post-disclosure hearing that the applicants did not produce one type of the like product, i.e. cefalexin, and claim that therefore in respect of this type the initiation of the investigation should be made void.

• (14) In response to this submission, it should be recalled that already in the original investigation it was established that all types of the product under investigation (see below under Section B) constitute one single category of product ([^E0005]). All types belong to the same category, i.e. bulk semisynthetic broad spectrum antibiotics, and have the same use, that of being incorporated into finished dosage forms which are effective in treating a variety of infectious diseases. Thus, since all types form one product for the purpose of this proceeding, which is produced by the applicants, this argument has to be refuted.

• (15) The GOI and one exporting producer contended that the non-confidential questionnaire replies of the Community producers were not sufficiently detailed and not filed in accordance with Article 29 of the basic Regulation. It was alleged, that a lack of information in the non-confidential questionnaire replies denied cooperating exporters an effective opportunity to defend their interests in relation to the injury and causal link analysis.

• (16) In this context, it should be noted that, as set out in section E, the Community industry in the present investigation consists of only two parties, i.e. Sandoz and DSM. In addition, one party produced only amoxicillin trihydrate and ampicillin trihydrate, whereas the other produced cefalexin as well. These particular circumstances with regard to the Community industry increased the confidential nature of certain data provided during the investigation. In any event, the file available for inspection by interested parties contains the non-confidential replies to the questionnaire of both cooperating Community producers, where confidential data have been provided in index form in order to permit a reasonable understanding of the substance of the information submitted in confidence. Therefore, the non-confidential questionnaire replies of the Community producers are still considered in line with the provisions of Article 29 of the basic Regulation. In addition, it is pertinent to note, that the indexed injury data as disclosed and set out in section F of this Regulation provided all interested parties with a sufficiently precise picture on the injury and causality situation, so as to be able to assess the analysis and defend their interests.

PRODUCT CONCERNED AND LIKE PRODUCTProduct concerned

• (17) The product covered by this review is the same product as the one concerned by Council Regulation (EC) No 2164/98, namely amoxicillin trihydrate, ampicillin trihydrate and cefalexin not put up in measured doses or in forms or packings for retail sale falling within CN codes ex294110 10, ex294110 20 and ex294190 00 originating in India (the product concerned).

Like product

• (18) During the post-disclosure hearing the GOI and one exporting producer have drawn attention to the fact that one Community producer mentioned certain differences in ‘stability, purity, assay, galenical properties etc.’ when comparing the product concerned and the like product. In addition, the only cooperating importer mentioned differences with regard to water solubility.

• (19) However, both the product concerned and the like product have to correspond to the same international pharmacopoeias with certain specifications. Thus, though not alike in all respects, they closely resemble each other as required by Article 1(5) of the basic Regulation.

• (20) Consequently, the investigation confirmed that the amoxicillin trihydrate, ampicillin trihydrate and cefalexin produced and sold in the Community by the Community producers had identical or closely resembling physical characteristics and uses to the product concerned and were thus a like product within the meaning of Article 1(5) of the basic Regulation.

SUBSIDIESIntroduction

• (21) On the basis of the information contained in the review request and the replies to the Commission's questionnaire, the following schemes, which allegedly involve the granting of subsidies, were investigated:

Nationwide schemes

• (a)Advance licence scheme,

• (b)Duty entitlement passbook scheme,

• (c)Special economic zones/Export oriented units scheme,

• (d)Export promotion capital goods scheme,

• (e)Income tax schemes, —Export income tax exemption scheme, —Income tax incentive for research and development,

• (f)Export credit scheme.

• (22) The schemes (a) to (d) specified above 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 ‘Export and Import Policy’ documents, which are issued by the Ministry of Commerce every five years and updated regularly. One Export and Import Policy document is relevant to the review investigation period of this case; i.e. the five-year plan relating to the period 1 April 2002 to 31 March 2007 (EXIM-policy 02-07). In addition, the GOI also sets out the procedures governing the EXIM-policy 02-07 in a ‘Handbook of Procedures – 1 April 2002 to 31 March 2007, Volume I’ (HOP I 02-07) ([^E0006]). The Handbook of Procedures is also updated on a regular basis.

• (23) The income tax schemes specified above under (e) are based on the Income Tax Act of 1961, which is amended yearly by the Finance Act.

• (24) The Export credit scheme specified above under (f) is based on sections 21 and 35A of the Banking Regulation Act 1949, which allow the Reserve Bank of India (RBI) to direct commercial banks in the field of export credits.

Regional Schemes

• (25) On the basis of the information contained in the review request and the replies to the Commission's questionnaire, the Commission also investigated a number of schemes which allegedly are granted by regional governments or authorities in certain Indian states.

• (a)State of Punjab, —Punjab industrial incentive scheme. —This scheme is based on the industrial policy and incentives code of the Government of Punjab.

• (b)State of Gujarat, —Gujarat industrial incentive scheme, —Refund of electricity duty. —The first scheme is based on Gujarat's industrial incentive policy whereas the second scheme is based on the Bombay Electricity Duty Act of 1958.

• (c)State of Maharashtra, —Package scheme of incentives of the Government of Maharashtra (the GOM). This scheme is based on resolutions of the GOM Industries, Energy and Labour Department.

• (26) One income tax scheme (income tax incentive for research and development) and three regional schemes (Punjab industrial incentives, Gujarat industrial incentives and Gujarat refund of electricity duty) were not mentioned in the review request. Therefore, in accordance with Articles 22(1) and 11(10) of the basic Regulation, the Commission notified the GOI about a possible extension of the scope of the investigation in order to include these schemes. The GOI was invited for consultations with the aim of clarifying the factual situation as regards the alleged schemes and arriving at a mutually agreed solution. Following these consultations, and in the absence of a mutually agreed solution in relation to these four schemes, the Commission included these schemes in the investigation of subsidisation.

General disclosure comments on subsidisation

• (27) Two exporting producers contended that the Advance licence scheme, the Income tax incentive scheme for research and development and the Export credit scheme should be excluded from the scope of the present investigation, because a review should only cover schemes originally investigated. In this case, these three schemes and the regional schemes investigated were not investigated during the original investigation.

• (28) However, the relevant provisions of the basic Regulation concerning interim and expiry reviews do not stipulate such a narrow approach in reviews. For example, an interim review could lead to an increase of measures, in line with Article 19(2) of the basic Regulation, if the existing ones were insufficient to counteract a countervailable subsidy. Article 19(4) of the basic Regulation further requires an examination to ‘consider whether the circumstances with regard to subsidisation (…) have changed significantly’. Thus, an interim review concerning subsidisation can lead per se to a complete re-evaluation of the subsidisation framework, not just the subsidy schemes originally investigated, which possibly could benefit the product concerned. In addition, an expiry review need not solely focus on schemes originally investigated. Article 18(2) of the basic Regulation refers to ‘continuation or recurrence of subsidisation’, that is to say, in general, and not to subsidy schemes originally investigated. Consequently, reviews are not limited to schemes originally investigated, but necessitate a determination of present and future subsidisation, including programs not originally investigated. In fact, it is only such an approach which leads to an adequate analysis of the factual situation concerning subsidisation during a given review investigation period. Otherwise, governments could effectively shield themselves from subsidy disciplines by simply renaming a scheme or making slight structural changes in it. This would frustrate the object and purpose of countervailing measures, which is to offset injurious subsidisation.

Nationwide schemesAdvance licence scheme (ALS)Legal basis

• (29) The detailed description of the scheme is contained in paragraphs 4.1.1 to 4.1.14 of the EXIM-policy 02-07 and chapters 4.1 to 4.30 of the HOP I 02-07.

Eligibility

• (30) The ALS consists of six subschemes, as described in more detail in recital 31. Those subschemes, inter alia, differ in the scope of eligibility. Manufacturer-exporters and merchant-exporters ‘tied to’ supporting manufacturers are eligible for the ALS physical exports and for the ALS for annual requirement. Manufacturer–exporters supplying the ultimate exporter are eligible for ALS for intermediate supplies. Main contractors which supply to the ‘deemed export’ categories mentioned in paragraph 8.2 of the EXIM-policy 02-07, such as suppliers of an export oriented unit (EOU), are eligible for ALS deemed export. Eventually, intermediate suppliers to manufacturer-exporters are eligible for ‘deemed export’ benefits under the subschemes advance release order (ARO) and back to back inland letter of credit.

Practical implementation

• (31) Advance licences can be issued for:

• (i) Physical exports : this is the main subscheme. It allows for duty free import of input materials for the production of a specific resultant export product. ‘Physical’ in this context means that the export product has to leave Indian territory. Import allowance and export obligation including the type of export product are specified in the licence.

• (ii) Annual requirement : such a licence is not linked to a specific export product, but to a wider product group (e.g. chemical and allied products). The licence holder can, up to a certain value threshold set by its past export performance, import duty free any input to be used in manufacturing any of the items falling under such a product group. It can choose to export any resultant product falling under the product group using such duty-exempt material.

• (iii) Intermediate supplies : this subscheme covers cases where two manufacturers intend to produce a single export product and divide the production process. The manufacturer-exporter produces the intermediate product. It can import duty free input materials and can obtain for this purpose an ALS for intermediate supplies. The ultimate exporter finalizes the production and is obliged to export the finished product.

• (iv) Deemed exports : this subscheme allows a main contractor to import inputs free of duty which are required in manufacturing goods to be sold as ‘deemed exports’ to the categories of customers mentioned in paragraph 8.2(b) to (f), (g), (i) and (j) of the EXIM policy 02-07. According to the GOI, deemed exports refer 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 an EOU or to a company situated in a special economic zone (SEZ).

• (v) ARO : The ALS 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 indigenous supplier upon delivery of the items specified therein. The endorsement of the ARO entitles the indigenous supplier to the benefits of deemed exports as set out in paragraph 8.3 of the EXIM-policy 02-07 (i.e. ALS for intermediate supplies/deemed export, deemed export drawback and refund of terminal excise duty). The ARO mechanism refunds taxes and duties to the supplier instead of refunding the same to the ultimate 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.

• (vi) Back to back inland letter of credit :

this subscheme again covers indigenous supplies to an ALS holder. The holder of an ALS can approach a bank for opening an inland letter of credit in favour of an indigenous supplier. The licence will be invalidated by the bank for direct import, only in respect of the value and volume of items being sourced indigenously instead of importation. The indigenous supplier will be entitled to deemed export benefits as set out in paragraph 8.3 of the EXIM-policy 02-07 (i.e. ALS for intermediate supplies/deemed export, deemed export drawback and refund of terminal excise duty).

It was established that during the review investigation period, the cooperating exporters only obtained concessions under four subschemes linked to the product concerned, i.e. (i) ALS physical exports, (ii) ALS for annual requirement, (iii) ALS for intermediate supplies as furnisher to an ultimate exporter and (iv) ALS deemed export as supplier to EOUs/units in SEZs. It is therefore not necessary to establish the countervailability of (v) the ARO scheme and (vi) the back to back inland letter of credit scheme.

• (32) For verification purposes by the Indian authorities, a licence holder is legally obliged to maintain ‘a true and proper account of licence-wise consumption and utilisation of imported goods’ in a specified format (chapter 4.30 and appendix 18 HOP I 02-07), i.e. an actual consumption register (appendix 18 register).

• (33) With regard to the subschemes (i), (iii) and (iv) listed above under recital 31, both the import allowance and the export (including deemed export) obligation are fixed in volume and value by the GOI and are documented on the licence. In addition, at the time of import and of export, the corresponding transactions are to be documented by government officials on the licence. The volume of imports allowed under this scheme is determined by the GOI on the basis of standard input-output norms (SIONs). SIONs exist for most products including the product concerned and are published in the HOP II 02-07.

• (34) In the case of the subscheme (ii) listed above under recital 31 (ALS for annual requirement), only the import allowance in value is documented on the licence. The licence holder is obliged to ‘maintain the nexus between imported inputs and the resultant product’ (paragraph 4.24A(c) HOP I 02-07).

• (35) Imported input materials are not transferable and have to be used to produce the resultant export product. The export obligation must be fulfilled within a prescribed time frame after issuance of the licence (18 months with two possible extensions of six months each). In case of an ALS for annual requirement, no extension of the time frame is allowed.

• (36) In the course of the review investigation it was established that the input materials imported according to the SIONs import allowance duty free under the various subschemes by the cooperating exporters exceeded the material they needed to produce the reference quantity of the resultant export product. Thus, the SIONs for the product concerned were not accurate. Furthermore, during the review investigation period, none of the cooperating exporters kept a correct actual consumption register based on real consumption. In four cases, such register was not kept at all despite a legal obligation to do so (see recital 32 above). In two cases, no actual consumption was registered by the companies. Neither the investigated exporters nor the GOI were able to demonstrate that the import duty exemption did not lead to an excess remission.

Disclosure comments

• (37) The GOI and five cooperating exporters submitted comments on the ALS. They claimed that the ALS operates as a permitted drawback or substitution drawback system, which allegedly resembles the EC inward processing system, with a verification system in conformity with the provisions of Annexes I, II and III of the basic Regulation in place to monitor the nexus between duty free imported inputs and the resultant export products. The GOI and two exporters further contended that only an excess remission of duties could be countervailed. With regard to a verification system, they insisted that an adequate verification system was in place. In this context they referred to a number of verification elements which were available to the GOI for such verification, including: SIONs, quantity information on import and export documents, a customs bond register of imports and exports under the ALS, a consumption register, a duty entitlement export certification book (DEEC book), redemption verification after fulfilment of importation and exportation, additional checks in the context of the Indian excise and customs duty administration, periodical audits and legal prosecutions in case of ‘diversion’. However, the GOI and one exporter admitted the SIONs ‘can lower that what is actually consumed’. In addition, no exporter provided sufficient evidence that it fulfilled its obligation to properly keep the actual consumption register mandated by the EXIM-policy. Further, two exporters claimed that the investigating authority should have calculated an excess remission itself. Finally, it has been claimed that the EC is bound by past precedents not to countervail the ALS. One exporter provided, after the post-disclosure hearing, a calculation of duties remitted in excess.

Conclusion

• (38) The exemption from import duties is a subsidy within the meaning of Article 2(1)(a)(ii) and Article 2(2) of the basic Regulation, i.e. a financial contribution of the GOI which conferred a benefit upon the investigated exporters.

• (39) In addition, ALS physical exports, ALS for annual requirement and ALS for intermediate supply are clearly contingent in law upon export performance, and therefore deemed to be specific and countervailable under Article 3(4)(a) of the basic Regulation. Without an export commitment a company cannot obtain benefits under these schemes.

• (40) ALS deemed export under the modalities of the present case is de facto contingent upon export performance. It was only used by one company to a minor extent and only when supplying EOUs or units in a SEZ, both categories mentioned in paragraph 8.2(b) of the EXIM-policy 02-07. This company stated that its customers eventually exported the product concerned. The objective of an EOU/SEZ is exportation as set out in paragraph 6.1 of the EXIM-policy 02-07. Thus, a domestic supplier obtains benefits under the ALS deemed export, because the GOI anticipates export earnings subsequently received by an exporter located in an EOU/SEZ. According to Article 3(4)(a) of the basic Regulation, a subsidy shall be considered as export contingent when the facts demonstrate that the granting of a subsidy, though not legally contingent upon export performance, is in fact tied to actual or anticipated export earnings.

• (41) None of the four subschemes used in the present case can be considered as permissible duty drawback systems or substitution drawback systems within the meaning of Article 2(1)(a)(ii) of the basic Regulation. This finding is confirmed after careful consideration of the disclosure submissions. They do not conform to the strict rules laid down in Annex I item (i), Annex II (definition and rules for drawback) and Annex III (definition and rules for substitution drawback) of the basic Regulation. The GOI did not effectively apply its verification system or procedure to confirm whether and in what amounts inputs were consumed in the production of the exported product (Annex II(II)(4) of the basic Regulation and, in the case of substitution drawback schemes, Annex III(II)(2) of the basic Regulation). The SIONs for the product concerned were not sufficiently precise. No disclosure comment has changed this finding. To the contrary, the GOI even admitted the SIONs were inaccurate. Thus, it is confirmed that the SIONs themselves cannot be considered a verification system of actual consumption, because the design of those overly generous standard norms does not enable the GOI to verify with sufficient precision what amount of inputs were consumed in the export production. Furthermore, an effective control done by the GOI based on a correctly kept actual consumption register (appendix 18 register), did not take place. In addition, the GOI did not carry out a further examination based on actual inputs involved, although this would normally need to be carried out in the absence of an effectively applied verification system (Annex II(II)(5) and Annex III(II)(3) to the basic Regulation), nor did it prove, that no excess remission took place. The alleged comparability of the ALS with the EC inward processing system is irrelevant since the EC system is not subject to the present investigation.

• (42) The other verification elements claimed upon disclosure either no longer exist (i.e. the DEEC-book was abolished by the EXIM policy 02-07) or are apparently, in the absence of an effective control of actual consumption registers, based on the overly generous SIONs, which is not sufficient (i.e. information on import export documents, customs bond register, redemption control of ALS). Auditing reports of the Indian authorities with regard to the exporting producers under investigation have not been provided.

• (43) Finally, since the ALS was never previously analysed on a basis of facts comparable with those established during the present investigation, in particular in view of the imprecision of the SIONs for the product concerned, no binding precedent not to countervail the scheme exists.

• (44) These four subschemes are therefore countervailable.

Calculation of the subsidy amount

• (45) In the absence of permitted duty drawback systems or substitution drawback systems, the countervailable benefit is the remission of total import duties normally due upon importation of inputs. Contrary to the disclosure submissions made by the GOI and two exporters, the basic Regulation does not only provide for the countervailing of an ‘excess’ remission of duties. According to Article 2(1)(a)(ii) and Annex I(i) of the basic Regulation only an excess remission of duties can be countervailed, provided the conditions of Annexes II and III of the basic Regulation are met. However, these conditions were not fulfilled in the present case. Thus, if an absence of an adequate monitoring process is established, the above exception for drawback schemes is not applicable and the normal rule of the countervailing of the amount of (revenue foregone) unpaid duties, rather than any purported excess remission, applies. As set out in Annexes II(II) and III(II) of the basic Regulation the burden is not upon the investigating authority to calculate such excess remission. To the contrary, according to Article 2(1)(a)(ii) of the basic Regulation it only has to establish sufficient evidence to refute the appropriateness of an alleged verification system. It should further be noted, that an additional examination by the Indian authorities in the absence of an effectively applied verification system needs to be done in a timely manner, i.e. normally before the on the spot verification in a countervailing duty investigation. The calculation of a duty remission in excess provided by one exporter after disclosure is neither timely nor done by the GOI. Therefore, it has to be disregarded.

• (46) The subsidy amounts for the exporters which used the ALS were calculated on the basis of import duties forgone (basic customs duty and special additional customs duty) on the material imported under the four subschemes used for the product concerned during the review investigation period as set out under recital 31 (numerator). In accordance with Article 7(1)(a) of the basic Regulation, fees necessarily incurred to obtain the subsidy were deducted from the subsidy amounts where justified claims were made. In accordance with Article 7(2) of the basic Regulation, these subsidy amounts have been allocated over the export turnover generated by the product concerned during the review investigation period as appropriate denumerator, because the subsidy is contingent upon export performance and was not granted by reference to the quantities manufactured, produced, exported or transported.

• (47) Six companies benefited from this scheme during the review investigation period and obtained subsidies of between 22,0 and 25,8 % (see table in recital 154).

Duty Entitlement Passbook Scheme (DEPBS)Legal Basis

• (48) The detailed description of the DEPBS is contained in paragraph 4.3 of the EXIM-policy 02-07 and in chapter 4 of the HOP I 02-07.

Eligibility

• (49) Any manufacturer-exporter or merchant-exporter is eligible for this scheme.

Practical implementation of the DEPBS

• (50) An eligible exporter can apply for DEPBS credits which are calculated as a percentage of the value of products exported under this scheme. Such DEPBS rates have been established by the Indian authorities for most products, including the product concerned. They are determined on the basis of SIONs, taking into account a presumed import content of inputs in the export product and the customs duty incidence on such presumed imports, regardless of whether import duties have actually been paid or not.

• (51) To be eligible for benefits under this scheme, a company must export. At the point in time of the export transaction, a declaration must be made by the exporter to the authorities in India indicating that the export is taking place under the DEPBS. In order for the goods to be exported, the Indian customs authorities issue, during the dispatch procedure, an export shipping bill. This document shows, inter alia, the amount of DEPBS credit which is to be granted for that export transaction. At this point in time, the exporter knows the benefit it will receive. Once the customs authorities issue an export shipping bill, the GOI has no discretion over the granting of a DEPBS credit. The relevant DEPBS rate to calculate the benefit is that which applied at the time the export declaration is made. Therefore, there is no possibility for a retroactive amendment to the level of the benefit.

• (52) It was also found that in accordance with Indian accounting standards, DEPBS credits can be booked on an accrual basis as income in the commercial accounts, upon fulfilment of the export obligation.

• (53) Such credits can be used for payment of customs duties on subsequent imports of any goods unrestrictedly importable, except capital goods. Goods imported against such credits can be sold on the domestic market (subject to sales tax) or used otherwise.

• (54) DEPBS credits are freely transferable and valid for a period of 12 months from the date of issue.

• (55) An application for DEPBS credits can cover up to 25 export transactions and, if electronically filed, an unlimited amount of export transactions. De facto, no strict deadlines to apply for DEPBS credits exist, because the time periods mentioned in chapter 4.47 HOP I 02-07 are always counted from the most recent export transaction included in a given DEPBS application.

Disclosure comments

• (56) Upon disclosure three exporters, which received benefits under this scheme, commented on the DEPBS analysis as set out above. They submitted that (i) contrary to the findings in recitals 53 and 59 materials imported under the DEPBS allegedly have to be used for export production and DEPBS credit can allegedly only be obtained if goods are exported which bear import duties on its input materials, (ii) the new calculation methodology for countervailable amounts (focus on the export transaction, see recitals 61 and 62) should not be used, because a benefit is allegedly only conferred upon usage of the credit and for the reason that the new approach discriminatorily departs from earlier EC precedence, (iii) DEBPS should only be countervailed to the extent that such credits were obtained for the product concerned and (iv) a DEPBS-rate reduction which took place in February 2004 should be taken into consideration.

Conclusions on the DEPBS

• (57) The DEPBS provides subsidies within the meaning of Article 2(1)(a)(ii) and Article 2(2) of the basic Regulation. A DEPBS credit is a financial contribution by the GOI, since the credit will eventually be used to offset import duties, thus decreasing the GOI’s duty revenue which would be otherwise due. In addition, the DEPBS credit confers a benefit upon the exporter, because it improves its liquidity.

• (58) Furthermore, the DEPBS is contingent in law upon export performance, and therefore deemed to be specific and countervailable under Article 3(4)(a) of the basic Regulation.

• (59) This scheme cannot be considered a permissible duty drawback system or substitution drawback system within the meaning of Article 2(1)(a)(ii) of the basic Regulation. It does not conform to the strict rules laid down in Annex I item (i), Annex II (definition and rules for drawback) and Annex III (definition and rules for substitution drawback) of the basic Regulation. An exporter is under no obligation to actually 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. Moreover, 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 item (i) of Annex I and Annexes II and III of the basic Regulation. Lastly, an exporter is eligible for the DEPBS benefits regardless of whether it imports any inputs at all. In order to obtain the benefit, it is sufficient for an exporter to simply 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 benefit from the DEPBS.

• (60) Neither the claim made by one exporter that materials imported under this scheme have to be used for export production nor the allegation that DEPBS credits can only be obtained under the condition that input material used bears an import duty burden, have been substantiated. In this context it should also be noted, that the GOI did at no point in time contest the factual description of the DEPBS as set out above. Therefore, those claims have to be rejected.

Calculation of the subsidy amount

• (61) In accordance with Articles 2(2) and 5 of the basic Regulation, the amount of countervailable subsidies was calculated in terms of the benefit conferred on the recipient, which is found to exist during the review investigation period. In this regard, it was considered that the benefit is conferred on the recipient at the point in time when an export transaction is made under this scheme. At this moment the GOI is liable to forego the customs duties, which constitutes a financial contribution within the meaning of Article 2(1)(a)(ii) of the basic Regulation. As stated in recital 51 above, once the customs authorities issue an export shipping bill which shows, inter alia, the amount of DEPBS credit which is to be granted for that export transaction, the GOI has no discretion as to whether or not to grant the subsidy and it has no discretion as to the amount of the subsidy. Also, as stated above in the same recital, any change of the DEPBS rates between the actual export and the issuance of a DEPBS licence has no retroactive effect on the level of the benefit granted. Furthermore, as stated in recital 52, companies can, in line with Indian accounting standards, book the DEPBS credits on an accrual basis as income at the stage of export transaction. Finally, by virtue of the fact that a company is aware that it will receive a subsidy under the DEPBS, and indeed benefits under other schemes, the company is already in a more advantageous competitive position, because it can reflect the subsidies through offering lower prices.

• (62) The rationale for imposing a countervailing duty, though, is to redress unfair trading practices based on illicit competitive advantage. In light of the above, it is considered appropriate to assess the benefit under the DEPBS as being the sum of the credits earned on all export transactions made under this scheme during the investigation period.

• (63) The comments on the disclosure have not led to a revision of this calculation approach. The new methodology has already been used in the recent past by the European Communities for example in the context of the graphite electrode system case ([^E0007]). In addition, the principles of legal certainty and legitimate expectations do not prevent such change of methodology. Firstly, the new approach does not result in a complete re-evaluation of the scheme, which, indeed, has always been countervailable. It only concerns the calculation of the subsidy amount in order to link it more closely to the factual situation during a given investigation period. Secondly, this approach is, inter alia, the consequence of facts established by the Commission in the course of recent investigations, e.g. the booking of DEPBS credits on an accrual basis according to Indian accounting standards and the de facto non-existence of application deadlines for such credits under the EXIM policy. Furthermore, the disclosure comments have confirmed that at the moment of the export transaction made under this scheme, an exporter has obtained an irrevocable entitlement for DEPBS credits. However, such moment is decisive in order to establish conferral of a benefit as set out under recital 61, not the subsequent usage, because an exporter already with such vested right is ‘better off’ in financial terms.

• (64) Contrary to the submission of some exporting producers, even DEPBS credit generated by exporting non-product concerned had to be considered when establishing the amount of countervailable DEPBS credit. Under the DEPBS no obligation exists which limits the use of the credits to import duty-free input material linked to a specific product. On the contrary, DEPBS credits are freely transferable, can even be sold and be used for imports of any unrestrictedly importable goods (the input materials of the product concerned belong to this category), except capital goods. Consequently, the product concerned can benefit from all DEPBS credits generated.

• (65) Furthermore, DEPBS rate reductions subsequent to the review investigation period cannot be considered, since Article 11(1) of the basic Regulation provides that information relating to a period subsequent to the IP shall not, normally, be taken into account. Besides, no guarantee exists that the GOI will not increase DEPBS rates in the future.

• (66) Where justified claims were made, fees necessarily incurred to obtain the subsidy were deducted from the credits so established to arrive at the subsidy amounts as numerator, Article 7(1)(a) of the basic Regulation. In accordance with Article 7(2) of the basic Regulation these subsidy amounts have been allocated over the total export turnover during the review investigation period as appropriate denumerator, because the subsidy is contingent upon export performance and it was not granted by reference to the quantities manufactured, produced, exported or transported. Five companies benefited from this scheme during the review investigation period and obtained subsidies of between 3,2 and 8,0 % (see table in recital 154).

Export Oriented Units Scheme (‘EOUS’)/Special Economic Zones Scheme (SEZS)Legal basis

• (67) The details of these schemes are contained in chapters 6 (EOUS) and 7 (SEZS) respectively of the EXIM-policy 02-07 and of the HOP I 02-07.

Eligibility

• (68) With the exception of pure trading companies, all enterprises which, in principle, undertake to export their entire production of goods or services may be set up under the SEZS or the EOUS. However, unlike services and agriculture, undertakings in the industrial sectors have to fulfil a minimum investment threshold in fixed assets (Indian rupees 10 million) to be eligible for the EOUS.

Practical implementation

• (69) The SEZS is the successor scheme of the former Export processing zones scheme (EPZS). SEZs are specifically delineated duty free enclaves and considered by the EXIM-policy 02-07 as foreign territory for the purpose of trade operations, duties and taxes. 14 SEZs already operate and another 13 SEZs have been approved by the Indian authorities for establishment.

• (70) EOUs on the other side, are geographically more flexible and can be established anywhere in India. This scheme is complementary to the SEZS.

• (71) An application for EOU or SEZ status 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. The agreement to be recognised as a company under SEZ/EOU is valid for a five-year period. The agreement may be renewed for further periods.

• (72) A crucial obligation of an EOU or an SEZ as set out in the EXIM-policy 02-07 is to achieve net foreign exchange (NFE) earnings, i.e. in a reference period (five years) the total value of exports has to be higher than the total value of imported goods.

• (73) EOU/SEZ units are entitled to the following concessions:

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

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

• (iii)reimbursement of central sales tax paid on goods procured locally;

• (iv)facility to sell a part of production on the domestic market on payment of applicable duties on the finished product as an exception to the general requirement to export the entire production;

• (v)exemption from income tax normally due on profits realised on export sales in accordance with Section 10A or Section 10B of the Income Tax Act, for a 10-year period after starting its operations, but no longer than up to 2010;

• (vi)possibility of 100 % foreign equity ownership.

• (74) Although the concessions under both schemes are largely comparable, some differences exist. For instance, only an EOU can obtain a 50 % reduction of duties payable upon domestic sales (DTA sales), whereas in an SEZ 100 % of the duties are payable on such sales. An EOU unit can sell up to 50 % of its turnover domestically at such reduced rate.

• (75) Units operating under these schemes are bonded under the surveillance of customs officials in accordance with Section 65 of the Customs Act.

• (76) They are legally obliged to maintain, in a specified format, a proper account of all imports, of the consumption and utilisation of all imported materials and of the exports made. These documents should be submitted periodically, as may be required, to the competent authorities (quarterly and annual progress reports).

• (77) However, ‘at no point in time (an EOU or a SEZ unit) shall be required to co-relate every import consignment with its exports, transfers to other units, sales in DTA or stocks’, paragraph 10.2 of appendix 14-I and paragraph 13.2 of appendix 14-II of the HOP I 02-07.

• (78) Domestic sales are dispatched and recorded on a self-certification basis. The dispatch process of export consignments of an EOU is supervised by a customs/excise official, who is permanently posted in the EOU. The company is obliged to reimburse the GOI for the salary of such permanent bond officer.

• (79) ‘All activities of SEZ units within the zone, unless otherwise specified, including export and re-import of goods shall be through self certification procedure’, as paragraph 29 of appendix 14-II of the HOP I 02-07 states. Thus, no routine examinations of the export consignments of an SEZ unit by customs authorities take place.

• (80) In the present case, the EOUS was used by one of the cooperating exporters. As the SEZS was not used, it is therefore not necessary to analyse the countervailability of this scheme. The cooperating exporter that used the EOUS utilised the scheme to import raw materials and capital goods free of import duties, to procure goods domestically free of excise duty plus obtain sales tax reimbursement and to sell part of its production on the domestic market. Thus, it availed of all benefits as described in recital 73 (i) to (iv). The exporter concerned also availed of benefits under the income tax exemption provisions of the EOUS. However, as the said income tax exemption falls under the more generally available income tax exemption scheme, the analysis thereof is set out in recitals 117 and 118.

Disclosure comments

• (81) Upon disclosure, one exporting producer submitted that the EOUS should, if at all, only be countervailed insofar as duties paid for domestic sales do not fully cover the amount of import duties exempted on input materials used for domestically sold production (excess remission). The exporter is of the opinion that with regard to the EOUS, which allegedly resembles the EC inward processing system, a verification system in conformity with the provisions of Annexes I, II and III of the basic Regulation is in place. To this end, it argued that a consignment-wise correlation of input materials and resultant export production is indeed not required by the Indian authorities (see recital 77), as it is not mandatory according to the basic Regulation or the WTO Agreement on Subsidies and Countervailing Measures (ASCM) for a proper verification system. In addition, the exporter referred to its company internal batch sheet system as providing nexus information between inputs and outputs. The exporter further pointed out that its domestic sales constituted less the 5 % of its sales during the IP. It also claimed that the periodical assessment of the monthly sales tax returns by the GOI is sufficient to meet the verification standards set by the basic Regulation.

• (82) Furthermore it contended, that (i) for calculation purposes not the amount of raw materials imported during the review investigation period as set out in recital 19 of the annual progress report of this EOU should be taken, but the amount of raw materials consumed during this period as set out in recital 20 of this report and (ii) the allocation period concerning duties saved upon importation of capital goods should be based on the company specific depreciation period and not on the basis of an average depreciation period for all cooperating exporting producers. In addition, it claimed that the interest added (commercial rate prevailing in India during the IP) should be reduced to the weighted average rate of founding of this EOU during the review investigation period.

Conclusions on the EOUS

• (83) The exemptions of an EOU from two types of import duties (basic customs duty and special additional customs duty) and the reimbursement of sales tax are financial contributions of the GOI within the meaning of Article 2(1)(a)(ii) of the basic Regulation. Government revenue which would be due in the absence of this scheme is forgone, thus, in addition, conferring a benefit upon the EOU in the meaning of Article 2(2) of the basic Regulation, because it saved liquidity by not having to pay duties normally due and by obtaining a sales tax reimbursement.

• (84) The exemption from excise duty and its import duty equivalent (additional customs duty), however, do not lead to revenue forgone which is otherwise due. Excise and additional customs duty, if paid, could be used as a credit for own future duty liabilities (the so-called Cenvat mechanism). Therefore, these duties are not definitive. By the means of ‘Cenvat’-credit only an added value bears a definitive duty, not the input materials.

• (85) Thus, only the exemption from basic customs duty, special additional customs duty and the sales tax reimbursement constitute subsidies in the meaning of Article 2 of the basic Regulation. They are contingent in law upon export performance, and therefore deemed to be specific and countervailable under Article 3(4)(a) of the basic Regulation. The export objective of an EOU as set out in paragraph 6.1 of the EXIM-policy 02-07 is a conditio sine qua non to obtain the incentives.

• (86) Furthermore, these subsidies cannot, contrary to the submission made by one exporter, be considered as permissible duty drawback systems or substitution drawback systems within the meaning of Article 2(1)(a)(ii) of the basic Regulation. They do not conform to the strict rules laid down in Annex I (items (h) and (i)), Annex II (definition and rules for drawback) and Annex III (definition and rules for substitution drawback) of the basic Regulation. The alleged comparability of the EOUS with the EC inward processing system is in this context irrelevant since the EC system is not subject to the present investigation.

• (87) In so far as the sales tax reimbursement and import duty exemption provisions are used for purchasing capital goods, they are already not in conformity with the rules for permitted drawback systems, because those goods are not consumed in the production process, as required by Annex I item (h) (sales tax reimbursement) and (i) (import duties remission). The exporter objected to this analysis and argued that since capital goods are necessary for production, they cannot be per se excluded from any permitted duty drawback. However, this reasoning is not reflected in the clear wording of Annex I item (h) and (i), capital goods are used for production not consumed in it. The argument is therefore rejected.

• (88) In addition, and also concerning the other benefits which are available under this scheme, despite careful consideration of the submissions made by the exporter, it was confirmed that the GOI has no effective verification system or procedure in place to confirm whether and in what amounts duty and or sales tax free procured inputs were consumed in the production of the exported product (Annex II(II)(4) of the basic Regulation and, in the case of substitution drawback schemes, Annex III(II)(2) of the basic Regulation).

• (89) An EOU is allowed to sell a significant amount of its production, up to 50 % of its annual turnover, on the domestic market. Therefore, no obligation in law exists to export the total amount of manufactured resultant products. Moreover, due to the self-certification procedure these domestic transactions take place without the supervision and control of a government official. Consequently, the bonded premises of an EOU are at least in part not subject to a physical control by the Indian authorities. This, however, increases the importance of further verification elements, notably control of the nexus between duty free inputs and resultant export products in order to qualify as a duty drawback verification system. It was considered that the EOU subject to the present investigation did not sell 50 % domestically but only around 5 % of its annual turnover during the IP. However, this has no impact on the more general assessment of the adequacy of the verification system in place.

• (90) Concerning further verification steps installed it should be recalled, as mentioned under recital 77 and confirmed by the submissions of the exporter, that an EOU is already de jure and at no point in time required to co-relate every import consignment with the destination of the corresponding resultant product. Only such consignment controls, however, would provide the Indian authorities with sufficient information about the final destination of inputs to check that the duty/sales tax exemptions do not exceed inputs for export production. Monthly tax returns for domestic sales on a self assessment basis, which are periodically assessed by the Indian authorities, do not suffice. Company internal systems, which are kept without a legal obligation under the EXIM policy, e.g. a batch sheets system, do not suffice to replace such key requirement for a duty drawback verification system either. In addition, a duty drawback verification system needs to be designed and enforced by a government and should not be left to the discretion of the management of each individual company concerned to set up an information system. Audit reports of the Indian authorities were requested both from the company and the GOI, but never made available, thus not substantiated. Consequently it is confirmed that, since an EOU is explicitly not required by the Indian EXIM policy to record the nexus between input materials and the resultant product, no effective control mechanism was set up by the GOI to determine which inputs were consumed in export production and in what amounts.

• (91) Also, the GOI neither carried out a further examination based on actual inputs involved, although this would normally need to be carried out in the absence of an effective verification system (Annex II(II)(5) and Annex III(II)(3) to the basic Regulation), nor did it prove that no excess remission took place. It should be recalled that such further examination in principle needs to be completed before the verification visit in such investigation is carried out, so that a verification, if considered appropriate, can take place to base findings on such further examination, Articles 11(8) and 26(1) of the basic Regulation.

Calculation of the subsidy amount

• (92) Accordingly, in the absence of a permitted duty drawback system or substitution drawback system, the countervailable benefit is the remission of total import duties (basic customs duty and special additional customs duty) normally due upon importation, as well as the sales tax reimbursement, both during the review investigation period.

• (93) The claim of the exporter to take only into consideration the amount of duties and sales taxes saved, which were linked to inputs consumed during the review investigation period, was rejected. Conferral of the benefit in the meaning of Article 2(2) of the basic Regulation takes already place upon duty or sales tax free procurement of the input materials, since at that stage the duties would normally be due.

Exemption from import duties (basic customs duty and special additional customs duty) and sales tax reimbursement on raw materials

• (94) The subsidy amount for the exporter which used the EOUS was calculated on the basis of import duties forgone (basic customs duty and special additional customs duty) on the materials imported for the production sector, i.e. bulk drugs and intermediates, and the sales tax reimbursed for this sector, both during the review investigation period. Fees necessarily incurred to obtain the subsidy were deducted in accordance with Article 7(1)(a) of the basic Regulation from this sum to arrive at the subsidy amount as numerator. In accordance with Article 7(2) of the basic Regulation this subsidy amount has been allocated over the export turnover generated by the bulk pharmaceutical sector (sector) during the review investigation period as appropriate denumerator, because the subsidy is contingent upon export performance and it was not granted by reference to the quantities manufactured, produced, exported or transported. The subsidy margin thus obtained was 29,6 %.

Exemption from import duties (basic customs duty and special additional customs duty) on capital goods

• (95) Unlike raw materials, capital goods are not physically incorporated into the finished goods. In accordance with Article 7(3) of the basic Regulation, the benefit to the investigated company has been calculated on the basis of the amount of unpaid customs duty on imported capital goods spread across a period which reflects the normal depreciation period of such capital goods in the industry of the product concerned. In order to determine such normal depreciation period a weighted average of the depreciation periods used by all cooperating exporters has been calculated. The claim of the EOU under investigation to use the company-specific depreciation period had to be rejected, because ‘normal’ is not synonymous for ‘individual’ but for a ‘representative average’. The amount so calculated which is then attributable to the review investigation period has been adjusted by adding interest during this period in order to reflect the value of the benefit over time and thereby establishing the full benefit of this scheme to the recipient. The amount of interest added was based on the commercial interest rate during the review investigation period in India. The claim of the exporter to use its lower average rate did not lead to a difference in outcome, i.e. the subsidy margin remained the same. Fees necessarily incurred to obtain the subsidy were deducted in accordance with Article 7(1)(a) of the basic Regulation from this sum to arrive at the subsidy amount as numerator. In accordance with Article 7(2) and (3) of the basic Regulation this subsidy amount has been allocated over the export turnover generated by the sector during the review investigation period as appropriate denumerator, because the subsidy is contingent upon export performance and it was not granted by reference to the quantities manufactured, produced, exported or transported. The subsidy margin thus obtained was 1,3 %.

• (96) Thus, the total subsidy margin under the EOUS for the company concerned amounts to 30,9 %.

Export promotion capital goods scheme (EPCGS)Legal basis

• (97) The detailed description of the EPCGS is contained in chapter 5 of the EXIM-policy 02-07 and in chapter 5 of the HOP I 02-07.

Eligibility

• (98) Manufacturer-exporters, merchant-exporters ‘tied to’ supporting manufacturers and service providers are eligible for this scheme.

Practical implementation

• (99) Under the condition of an export obligation, a company is allowed to import capital goods (new and, since April 2003, second-hand capital goods up to 10 years old) at a reduced rate of duty. To this end the GOI issues upon application and payment of a fee an EPCGS licence. Since April 2000 the scheme provides for a reduced import duty rate of 5 % applicable to all capital goods imported under the scheme. Until 31 March 2000, an effective duty rate of 11 % (including a 10 % surcharge) and, in case of high value imports, a zero duty rate were applicable. In order to meet the export obligation, the imported capital goods must be used to produce a certain amount of export goods during a certain period.

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

Disclosure comments

• (101) Upon disclosure the GOI and one exporting producer submitted that, (i) the depreciation period used for capital goods has allegedly not been adequately disclosed to interested parties and (ii) that it was not sufficiently set out why and to which extent interest has been added to arrive at the countervailable subsidy amount.

Conclusion on EPCG Scheme

• (102) The EPCGS provides subsidies within the meaning of Article 2(1)(a)(ii) and Article 2(2) of the basic Regulation. The duty reduction constitutes a financial contribution by the GOI, since this concession decreases the GOI’s duty revenue which would be otherwise due. In addition, the duty reduction confers a benefit upon the exporter, because the duties saved upon importation improve its liquidity.

• (103) Furthermore, the EPCGS is contingent in law upon export performance, since such licences can not be obtained without a commitment to export. Therefore it is deemed to be specific and countervailable under Article 3(4)(a) of the basic Regulation.

• (104) Eventually, this scheme can not be considered a permissible duty drawback system or substitution drawback system within the meaning of Article 2(1)(a)(ii) of the basic Regulation. Capital goods are not covered by the scope of such permissible systems, as set out in Annex I, item (i), of the basic Regulation, because they are not consumed in the production of the exported products.

Calculation of the subsidy amount

• (105) The subsidy amount was calculated, in accordance with Article 7(3) of the basic Regulation, on the basis of the unpaid customs duty on imported capital goods spread across a period which reflects the normal depreciation period of such capital goods in the antibiotics industry. In accordance with the established practice, the amount so calculated which is attributable to the review investigation period has been adjusted by adding interest during this period in order to reflect the full value of the benefit over time. The commercial interest rate during the review investigation period in India was considered appropriate for this purpose. Fees necessarily incurred to obtain the subsidy were deducted in accordance with Article 7(1)(a) of the basic Regulation from this sum to arrive at the subsidy amount as numerator. In accordance with Article 7(2) and 7(3) of the basic Regulation this subsidy amount has been allocated over the export turnover during the review investigation period as appropriate denumerator, because the subsidy is contingent upon export performance and it was not granted by reference to the quantities manufactured, produced, exported or transported. Four companies benefited from this scheme during the review investigation period. The subsidies obtained were negligible.

• (106) Since the EPCGS will not be countervailed in the case at hand, it is not necessary to respond to the corresponding disclosure comments.

Export Credit Scheme (ECS)Legal basis

• (107) The details of the scheme are set by in Master Circular IECD No 5/04.02.02/2002-03 (Export Credit in Foreign Currency) and Master Circular IECD No 4/04.02.02/2002-03 (Rupee Export Credit) of the Reserve Bank of India (RBI), which is addressed to all commercial banks in India.

Eligibility

• (108) Manufacturing exporters and merchant exporters are eligible for this scheme.

Practical implementation

• (109) Under this scheme, the RBI mandatorily sets maximum ceiling interest rates applicable to export credits, both in Indian rupees or in foreign currency, which commercial banks can charge an exporter ‘with a view to making credit available to exporters at internationally competitive rates’. The ECS consists of two subschemes, the Pre-shipment export credit scheme (packing credit), which covers credits provided to an exporter for financing the purchase, processing, manufacturing, packing and/or shipping of goods prior to export, and the Post-shipment export credit scheme, which provides for working capital loans with the purpose of financing export receivables. The RBI also directs the banks to provide a certain amount of their net bank credit towards export finance.

• (110) As a result of these RBI Master Circulars exporters can obtain export credits at preferential interest rates compared with the interest rates for ordinary commercial credits (cash credits), which are purely set under market conditions. In this respect the Master Circular on Rupee Export Credit notes that ‘ceiling rates of interest on credit extended to exporters as prescribed in this Circular are lower than the maximum lending rates normally charged to other borrowers and are, therefore, indicated as concessive in this sense.’ The difference in rates might decrease for companies with good credit ratings. In fact, high rating companies might be in a position to obtain export credits and cash credits at the same conditions.

Disclosure comments

• (111) Upon disclosure two exporters, which received benefits under this scheme, argued that the ECS is not a countervailable subsidy. To this end, they submitted that (i) a countervailable subsidy requires the transfer of public funds, (ii) the rates for ECS credits are set under market conditions, because different commercial banks offer significantly different interest rates and (iii) interest rates for cash credits are higher as compared with those for export credits, because export financing is less risky (self executing) and, in case of foreign currency export credits, due to allegedly lower inflation of freely convertible foreign currencies as compared with the Indian rupee currency, which it was claimed to have an impact of the interest rates.

• (112) Furthermore, one exporter claimed, and without providing any new calculation of the subsidy margin, that for calculation purposes rates of other banks, and not those banks identified during the verification visit as lending banks, should be used and in any event only the lowest rates both for export and cash credits taken for the comparison. Another exporter argued without providing any evidence that the loan amount should be reduced by 25 %, which allegedly represents own capital, although in the accounts identified as foreign capital.

Conclusion on the ECS