Trade Court Sends Back Bits, Upholds Parts of CVD Investigation on Moroccan Phosphate Fertilizers

Judge Timothy Stanceu remanded Commerce's exclusion of all of exporter OCP's selling, general and administrative (SG&A) expenses from the cost of production buildup as part of the CVD calculation for the provision of mining rights. The judge also sent back Commerce's profit calculation as part of the cost of production buildup for this subsidy program, along with the agency's specificity finding for the reduction of tax fines and penalties for OCP.

The investigation led to a 19.97% CVD rate for the sole respondent OCP based on six countervailable programs -- government loan guarantees, the provision of phosphate mining rights for less than adequate remuneration, tax incentives for export operations, reductions in tax fines and penalties for OCP, revenue exclusions for minimum tax contributions and customs duty exemptions for capital goods.

Initiation of the Investigation

OCP took to the trade court to argue that Commerce illegally started the CVD investigation, claiming the petition lacked proper industry support. The respondent argued that the agency failed to include all domestic manufacturers of nitrogen, phosphorus and potassium fertilizers, since these fertilizers are subject goods, along with "bulk blenders," or producers who don't make an individual granulated or compound fertilizer with a phosphate component but blend fertilizers instead.

Stanceu said the spat arose from the "structure of the scope language," which includes a paragraph on mixtures and blends, sweeping them into the scope language even though they aren't actual products that are imported to the U.S. The judge noted how the inclusion of these goods could be found illegal if only it was challenged -- something OCP didn't do. Instead, the court upheld Commerce's decision to start the investigation based on the scope language since it is "presumed to have been lawful."

Commerce claimed there was adequate industry support after identifying a single domestic-like product, deciding the petitioner provided sufficient information to establish all known producers of this product and finding that the petitioner, The Mosaic Co., was the only one to comment in support of or opposition to the petition. OCP didn't show otherwise, and even the wholesalers who commented only gave "boilerplate language" laying out their opposition in "generalized terms." OCP has the burden of proof to establish the record, the court said.

Addressing the exclusion of bulk blenders in Commerce's industry support declaration, Stanceu noted that Commerce ultimately held that the commingled goods of the bulk blenders are not in scope, seeing as the scope only covers chemically-bonded, granulated or compounded fertilizers. The problem here is the "uncontested scope language itself," but not with Commerce's conclusion that the bulk blenders don't produce the domestic-like product, the opinion said.

Provision of Mining Rights for LTAR

The Moroccan state gave OCP a monopoly to mine phosphate, leading Mosaic to include the provision of mining rights in its petition. In the investigation, Commerce used its tier three methodology for assessing whether the government price is in line with market principles. As part of this process, the agency constructed an estimated price for OCP's phosphate rock using a cost of production buildup, and also assessing OCP's production costs. This combined price was compared with a world benchmark price, taken from an average of various prices for phosphate rock across the globe.

OCP argued that Commerce improperly excluded the entire amount of the reported SG&A expenses from the COP buildup, arguing instead that Commerce should have included costs related to its corporate-level headquarters and support costs. The exporter argued that these costs are necessarily part of the company's mining activities.

Stanceu agreed, ruling that "excluding all SGA expenses from the COP buildup is an implied finding that OCP incurred zero SG&A expenses in the process of producing phosphate rock." The judge said the exclusion was "per se unreasonable." The government's claim that OCP could have segregated out its relevant expenses is "nonsensical" since the company couldn't put on the record segregated SGA cost data that didn't exist, the court noted.

The court then upheld Commerce's use of an overall profit rate over a surrogate profit rate, finding that OCP gave no "statute, regulation, or binding precedent" to support its point that a surrogate rate was proper. Commerce said it only uses a surrogate profit rate when such a rate is the only one on record, which was not the case here. However, Stanceu then sent back Commerce's methodology in crafting the profit rate. When calculating the rate, Commerce divided the firm's 2019 profit before tax by its operating expenses.

Stanceu said the agency erred by improperly adding HQ and support costs in the denominator -- a move that could've been avoided by adding the costs as part of the mining rights cost of production buildup. Since this point is being remanded to allow Commerce the chance to do just that, the agency must address this inconsistency here, the court said. The court said Commerce also must address its methodology insofar as the numerator is "not on the same basis" as the denominator, meaning there is no "apples-to-apples comparison internally."

World Price Benchmark

To set the world price benchmark for phosphate rock, Commerce averaged 13 world prices sold on a "free-on-board basis and comparable to the phosphate rock" made by OCP. The exporter challenged the inclusion of North African phosphate rock prices, which was made up of Moroccan and Tunisian prices. OCP said the benchmark included its own prices. The court, however, held that OCP hasn't shown that it was improper to use these prices, given that the North African numbers are made up of sales to Europe, India and Brazil and so has non-Moroccan prices.

Mosaic challenged the inclusion of two prices showing lower-quality Egyptian phosphate rock, arguing that they were not of comparable quality to the Moroccan product. The court disagreed, finding that the Egyptian rock has a similar chemical makeup and ruling that Mosaic's claim relies on evidence that Commerce could have regarded as having "little if any probativity on the issue presented."

The court also disagreed with Mosaic that Commerce erred in not adjusting the benchmark for international delivery charges. The court said the rule allowing for adjustments to account for these charges along with import duties and value-added taxes is "expressly limited to tier-one and tier-two analyses."

VAT Programs and Penalty Reduction

The judge also rejected Mosaic's claims against Commerce's decision to find that two tax programs -- VAT refunds and VAT exemptions for capital goods, machinery and equipment -- were not countervailable. Stanceu said both programs turn on Morocco's tax regime, which exempts exported goods from input VAT payments since the ultimate buyers are beyond the ordinary reach of taxing authorities. The court ruled that Mosaic's claims don't address this point in the Moroccan tax system nor Commerce's explanation that VAT exemptions received by OCP reduce the credits it accumulated, thereby leaving it with no additional credits granted.

However, the court did remand Commerce's specific decision related to the reduction of penalties. OCP claimed that Commerce erred in declaring that a government program allowing relief from tax fines and penalties is de facto specific, arguing that "the agency distorted the specificity analysis by making this program artificially seem more ‘limited’ than it was." Stanceu agreed, finding that the Moroccan government has the authority to assess fines and penalties against taxpayers that fail to comply with tax requirements.

OCP also alleged that Commerce illegally started looking into five new alleged subsidy programs in the middle of the investigation upon Mosaic's request. Stanceu said the exporter's analysis suffered from two "fatal flaws" in that the plain meaning of the statute expresses no limits on the means by which Commerce can discover a practice that appears to be a countervailiable subsidy, and that OCP isn't correct that the phrase "appears to be a countervailable subsidy" is an evidentiary standard that barred the agency from proceeding to investigate the subsidies.

(The Mosaic Co. v. United States, Slip Op. 23-134, CIT #21-00116, dated 09/14/23; Judge: Timothy Stanceu; Attorneys: David Ross of WilmerHale for plaintiff Mosaic; William Isasi of Covington & Burling for plaintiff and defendant-intervenor OCP; Ann Motto for defendant U.S. government)