Having regard to the Customs Tariff Act. 1975 and the Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997 thereof.

REGD. NO. D. L.-33004/99

The Gazette of India

EXTRAORDINARY

PART II~-Section 3~-Sub-Section (1)

PUBLISHED BY AUTHORITY

No. 71] NEW DELHI, TUESDAY, FEBRUARY 13, 2001/MAGHA 24,1922

335 GI/20012 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)l 3 4 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)l 5 A u A _L [PART D—SEC. 3(i)]7 8 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SBC1J^1 9 10 THE GAZETTE OF INDIA EXTRAORDINARY [PART II—SEC *)(I)| 11 ]2 THE GAZETTE OF INDIA : EXTRAORDINARY IPART II—SEC. 3(i)l 13 U THE GAZETTE OF INDIA EXTRAORDINARY [PART (1—She. 1(0] 15 16 THE GAZETTE OF INDIA EXTRAORDINARY [PART II—SFC. 3(i)] 17 435 G1/200 1—31S__ THE GAZETTE OF INDIA . EXTRAORDINARY [PART II—SEC. 3(i)] 19 30 THE GAZETTE OF INDIA EXTRAORDINARY |PART U—SEC 3(i)| 21 22 T HE G A Z E T TE OF I N D IA • E X T R A O R D I N A RY [ P A RT I I —S EC 3 ( 01 23 24 THE GAZETTE OF INDIA EXTRAORDINARY [PARI II—SE. 3 ( I )| 25 435 GI/2001— 426 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(I)1 27 28 THE GAZETTE OF INDIA: EXTRAORDINARY |PART II—SEC. 3(i)l 29 TO THE GAZETTE OF INDIA . EXTRAORDINARY [PARI JI—Spr 3d)] 31 32 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)]

OFFICE OF THE DIRECTOR GENERAL (SAFEGUARDS)

NOTIFICATION

New Delhi, the 15th December. 2000

Sub: Safeguard investigation concerning import of Methylene Chloride into India—Final Findings.

G.S.R. 94(E).—Having regard to the Customs Tariff Act. 1975 and the Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997 thereof.

A. PROCEDURE

1. The Notice of Initiation of safeguard investigation concerning imports of Methylene Chloride into India was issued on 17-07-2000 and was published in the Gazette of India. Extraordinary on 18-07-2000 A copy of the Notice was sent to all know n interested parties, namely :

Domestic Producers

(i) Gujarat Alkalies & Chemicals Limited (G ACL). Gujarat

(ii) Chemplast SanmarLimited, (CSL). Chennai

(in) SRF Limited, (SRF). New Delhi.

Importers & Users Industries

(i) C. J. Shah & Co.. Mumbai

(ii) Harcsh Kumar & Co., Mumbai

(in) Ranbaxy Laboratories Ltd., New Delhi.

(i\) Lupin Laboratories Ltd., Mumbai

(v) KopranLtd., Mumbai

(M) Dr. Reddy's Laboratories Ltd., Hyderabad

(MI ) Traxpo Trading Pvt. Ltd., Mumbai

(\ni) Aurobindo Pharma Ltd.. Hyderabad

(i\) Chemox Chemical Industries Ltd.. Bharuch, Gujarat33 (x) Indosol Drugs Pvt. Ltd., Ankleshwar, Gujarat (xi) Siris Ltd., Hyderabad (xii) Rallis. Mumbai (xiii) United Phosphorus Ltd., Mumbai (xiv) Cipla Ltd., Mumbai (xv) J.K.Drugs & Pharmaceuticals Ltd., New Delhi. (xvi) Max G.B.Ltd., Chandigarh

Exporters

(i) ICI Chemicals & Polymers Limited, U.K. (ii) Solvay A.G., Belgium (iii) Akzo Nobel NV, Netherlands (iv) Elf Atochem, S.A., France (Now known as Atofina) (v) Helm Ag., Germany (vi) Larouche Industries International L.I.I., Germany (Returned undelivered by Postal authorities)

(vii) DOW Chemical Company, USA (viii) ICC Chemical Corporation, USA (ix) Vinmar International Ltd., USA

Associations

(i) Verband der Chemischen Indutrie - VCL, Germany (ii) Chemical Safety Management Centre, Japan (iii) Chemical Manufacturers Association, USA (iv) European Chlorinated Solvent Association, Belgium

2. A copy of the notice alongwith the application and questionnaire was also sent to the governments of exporting countries through their High Commissions/Embassies in New Delhi namely Belgium, Brazil, Chinese Taipei, France, Germany, Hongkong, Hungary, Israel, Italy, Japan, the Netherlands, Russia, Spain. Switzerland, UK and USA.

3. Questionnaires were also sent on the same day to all known domestic producers, exporters and importers who were asked to submit their response by 28.08.2000.

4. The European Union/Delegation of European Commission in India also requested the Director General (Safeguard) to consider them as an interested party in the investigations. Their request as an

43oGI/200i— 5•y_ _ __ THE GAZETTE OF INDIA EXTRAORDINARY fP^RT IT—Shr. 3(i)1 interested party was taken on record and they were furnished all relevant documents.

A letter dated 23.10.2000 was received from SRF Ltd., New Delhi, one of the domestic producers of Methylene. Chloride extending support to the Applicants for imposition of safeguard duty. They have stated that they have a capacity to manufacture 10000 MT of Methylene Chloride per annum which they can fully utilise to meet local demand if prices are remunerative.

5. M/s. GACL and CSL requested extension of time to file their response to the questionnaire and accordingly they were permitted to file their response by 3rd September, 2000.

6. Replies to the Notice dated 17.07.2000 and to the questionnaire were received from the following parties:

Domestic Producers

(i) Gujarat Alkalies & Chemicals Limited, (GACL), Gujarat (ii) Chemplast Sanmar Limited, (CSL), Chennai

Exporters

(i) Atofina, France (ii) Helm Ag., Germany (iii) ICI Chemicals - Polymers Ltd., U.K.(through counsel) (iv) Solvay c , Belgium

Exporting Governments

(i) Chinese Taipei, (Taipei Economic and Cultural Centre, New

Delhi),

(ii) Embassy of the Republic of Hungary, New Delhi.

Importers & User Industries

(i) Ranbaxy Laboratories Ltd., New Delhi (ii) Indosol Drugs Ltd., Mumbai (iii) Aurobindo Pharma Ltd., Hyderabad (iv) Lupin Laboratories Ltd., Mumbai35 7. A team of officers did verification of the information considered necessary for the investigation and the outcome of the investigations was conveyed to the concerned parties who were visited and a copy of the investigation report was also placed in Public File.

8. A Public Hearing was given to all interested parties on 03.11.2000, notice for which was sent on 28.09.2000. During the Public Hearing the interested parties were requested to file their written submission of oral arguments made by them by 13.11.2000, collect replies filed by others on 14.11.2000 and to file rebuttals, if any, by 27.11.2000.

The following parties attended the Public Hearing:

(i) Gujarat Alkalies & Chemicals Limited, (GACL), Gujarat * (ii) Chemplast Sanmar Limited, (CSL), Chennai* (iii) SRF Ltd., New Delhi (iv) Atofina, France (v) ICI Chemicals - Polymers Ltd., U.K* (vi) Chinese Taipei, (Taipei Economic and Cultural Centre, New Delhi).

(vii) Ranbaxy Laboratories Ltd., New Delhi* (viii) Indosol Drugs Ltd., Mumbai (ix) Aurobindo Pharma Ltd., Hyderabad (x) Lupin Laboratories Ltd., Mumbai (xi) European Commission, New Delhi.

* (Represented through Counsel)

B. VIEWS OF DOMESTIC PRODUCERS

(i) Gujarat Alkalies and Chemicals Ltd. is a company promoted by Government of Gujarat through Gujarat Industrial Investment Corporation and are the largest producers of caustic-chlorine in the country. In addition to caustic-soda, the company is also manufacturing Sodium Cyanide, Chloromethanes, Hydrogen Peroxide, Potassium Hydroxide, Potassium Carbonate and Phosphoric Acid at its Baroda and Bharuch (Gujarat) plants. The company has a sales turnover of Rs.705 crore (1999-2000) and employs about 1400 employees. The company's accounts are audited by Comptroller & Auditor General.

(ii) Chemplast Sanmar Ltd. is the flagship company of the Sanmar Group of Companies. It is one of the largest group based in South India. Chemplast Sanmar Ltd. Commenced operations at Mettur near Salem in Tamil Nadu in May, 1967. Chemplast Sanmar Ltd. (CSL) manufactures PVC Resins, Chlorine, Chlorinated Solvents, Refrigerant Gases and Silicon Wafers. The turnover of the company is around Rs.400 crores per annum and has an employee strength of around 1200.

(iii) The import figures furnished by them in respect of Methylene Chloride have been arrived at on the basis of DGCIS data. For the year 1999-2000, the figures pertain to imports made at Kandla which have been extrapolated to arrive at a quantum of 13500 MT.

(iv) The imports to an extent became necessary till about 1996-97 due to demand and supply constraints. As CSL enhanced its capacity to produce Methylene Chloride by 7500 MT and SRF also commenced production of Methylene Chloride in the year 1997-98. It was anticipated that imports of Methylene Chloride would gradually decline, contrary to this imports have increased in absolute terms from 7390 MT in 1997-98 to 9269 MT in 1998-99 and from 9269 MT to 13500 in 1999-2000. Similarly imports were 42.25% of domestic production in the year 1997-98 which came down slightly to 40.96% of the domestic production in the year 1998-99 and increased to 59.02% of the domestic production in the year 1999- 2000. The imports of Methylene Chloride have doubled within the last three years which is close to 60% of the annual production of the domestic producers and has challenged the domestic pricing of the product.

(v) International price of Methylene Chloride have been steadily falling during last 5 years. The landed cost of Methylene Chloride into India during the last 2 years has fallen by 46%.

(vi) Production of Chloromethanes is a continuous process involving production of all three products namely; Methylene Chloride, Chloroform and Carbon Tetrachloride. GACL product mix ratios are 42:36:22 for the above named products respectively while Chemplast's are 45:30:25%. This is due to their individual plant process characteristics and the actual production figures tend to vary from these ratios.

(vii) There are stringent environmental regulations in Europe and USA controlling the use of one particular Chloromethane solvent, Methylene Chloride, which is primarily used as a paint stripper. The restrictions have been imposed on the use of Methylene Chloride by the Occupational Safety and Health Administration (OSHA) USA and by the European Union Environment Council regarding volatile organic compounds (VOC). Due to this reason, and to reduce their growing inventories, the European producers were diverting and exporting their production to the far eastern countries and South East Asian markets. However, due to the fall in the economies of the eastern countries, these surplus productions are being diverted to India, which has become a highly receptive market for these surplus products.

(viii) To keep up with the steady down ward trend of prices of Chloromethanes being landed at Indian ports, the Indian manufacturers have had to correspondingly reduce their prices to be able to sell their products in the market. The option of holding on to their inventories, even on a short term, basis is not available to this industry, since (a) the storage or shelf life of the liquid products like Choloromethanes is short and (b) the steady drop in international and CIF India prices. The prices have shown no occurrences of bouncing back to a sustainable level in the recent past based on which the decision to hold on to inventories on a short term basis can be based. Hence with every drop in CIF prices, domestic manufacturers have had to drop their own prices to a matching level on an immediate basis, to stay in the market. GACL had to reduce its Exwork price of Methylene Chloride from Rs.25968/PMT in April'98 to Rs.l 6944/PMT in March 2000. Similarly M/s. CSL had to reduce its Exwork price from Rs.26302/PMT in April'98 to Rs.l8283/PMT in March 2000 which has affected their profitability seriously.

(ix) The Indian economy has opened its door to liberal imports, by drastically reducing customs duties in the last 6/7 years, with a steep fall from 100% to 35%. This has incentivated export of the surplus products from Europe, by adding lower duties to reduced prices.

(x) The cost of production for the Indian manufacturers have been consistently increasing for reasons beyond their control. There have been substantial increases in the prices of Methyl Alcohol, Chlorine and power, apart from wages and salaries. In this situation, the market perspective for chemicals in general, both in India and internationally, has turned bleak lately. Prices of various chemicals38 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)l have shown consistently downward trends. For example, a major product of Gujarat Alkalies & Chemicals Ltd., viz. Caustic soda has seen a drastic reduction in its list price - from a high of Rs. 14,057 in 1996-97 to an effective realization of Rs.7500/- today. This has dangerously compressed the margins on the overall profitability of the company. Chloromethanes which was earlier a surplus generator has turned negative. Another major product of Chemplast, viz. Polyvinyl Chloride has seen a drop in prices from a high of Rs.2580/- to a low of Rs.1850/- in recent times. Within this overall scenario, the influx of large quantities of Chloromethane is playing havoc with the present operations of the Indian producers and seriously threatening even their medium term viability.

(xi) The pressure from the European and U.S. manufacturers is relentless. Even as the budget for 1999 presented a meagre relief of 5% increase in the custom tariff, as a result of rationalization, the exporters of Europe have brought down their already low prices by another US$15, thus practically nullifying the marginal rationalization. There is no hope of the relentless downward spiral of prices in Europe and U.S.A. ever stabilizing as indicated by this trend.

(xii) The imported Methylene Chloride is identical in all respects to the one manufactured by domestic industry and has the same usage characteristics. During the last several year they have been supplying Methylene Chloride to the domestic users, in particular Pharma and Drug majors who are extremely quality conscious and none raised any serious objection regarding the quality of the product.

(xiii) The relative market share of domestic producers has declined from 70% in 1997-98 to 60% in 1999-2000.

(xiv) GACL and CSL are in the process of de-bottlenecking their existing plants and capacity utilisation are being optimised. The total requirements of the Indian chloromethane consuming industry can easily be satisfied by the domestic industry.

(xv) Both the companies viz GACL & CSL are taking effective steps to bring down their cost of production and sales adopting aggressive marketing policy; commissioning a 90 MW power plant by GACL and a 30 MW power plant by CSL to reduce the cost of power.

In addition to the above, SRF Ltd., New Delhi have stated the following:

V) (i) Their Chloromethanes Plant was commissioned in 1995-96 and has been designed to co-produce Methylene Chloride, Chloroform and Carbon Tetrachloride. The maximum ratio of each of product produced depends on the Plant designed and the operating parameters. The ratio of each product is varied depending on the market conditions. They do not have any captive consumption of Methylene Chloride and their entire production is sold.

(ii) As per the guidelines issued by the Government of India, production of Carbon Tetrachloride has to be phased out. They have been de-bottlenecking their plant and shifting the ratio towards Methylene Chloride. As a sequel, tfiey have increased their ratio of Methylene Chloride production from 10% to 55% of the capacity of Chloromethanes in the last 5 years. Chloromethanes capacity was de- bottlenecked from 14500 MT per annum in 1997-98 to 18550 in 1998-99.

(iii) They have not exported Methylene Chloride in the last three years. They have not been able to utilise the 10000 MT capacity of Methylene Chloride due to unrelenting imports. Their weighted average price realisation (in tankers) per MT of Methylene Chloride which was Rs.25660/- in April 1998 - June 1998; Rs.27050/- in July 1998 - Sept. 1998 declined to Rs. 19020/- in Oct.-DeCEffiBer 1999 and further declined to Rs. 17180/- in January-March 2000.

C. VIEWS OF THE IMPORTERS/USER INDUSTRIES

(a) Indosol Drugs Ltd., Mumbai (b) Aurobindo Pharma Ltd., Hyderabad (c) Lupin Laboratories Ltd., Mumbai

They have stated mainly the following:

(i) They are large users of Methylene Chloride which is a major input for a number of bulk drugs manufactured by them for sale in domestic market and overseas. Domestically some of these products are used for combating common and widespread diseases. Having regard to the nature of the drugs, it is their constant effort to make sure that the drugs are within the reach of the general public. Accordingly cost effective manufacturing of these products is in4 ( ) _ __ THE GAZETTE OF INTD1A EXTRAORDINARY |PART U —S FC 3(i)| public interest to ensure that these products can be supplied at a reasonable cost to their consumers.

(ii) There has already been a steep increase in the cost of Methylene Chloride over the last six months by virtue of the increase in international and domestic prices and the devaluation of the Indian rupee. A further imposition of 52.57% imposition of safeguard duty would place a major burden on their cost structure which would ultimately result in increased cost for consumers for their products

(iii) The domestic industry despite operating more than their capacity have on several occasions have failed to fulfil their requirements for Methylene Chloride compelling them to rely on imports.

(d) Ranbaxy Laboratories Ltd., New Delhi.

(i) The foundation for the legal provision on safeguards can be traced to Article XIX of GATT, 1994 and to the Agreement on Safeguards. Para 1 of Article XIX enables a country to take emergency action if any product is being imported into its territory in such increased quantities in such a condition as to cause serious injury to the domestic producers of the like or directly competitive product. The increase should be as a result of unforeseen developments and because of the obligations, including tariff concessions, undertaken by a Member Country. Article XIX and the Agreement on Safeguards have to be kept in mind while interpreting the provisions of Section 8B and the Safeguard Rules. Thus, when Section 8B specifies that there must be an increase in the import of an Article "in such increased quantities", it is necessary to evaluate whether the increase is as a result of unforeseen developments and of the effect of obligations by India incurred under the GATT Agreement. Methylene Chloride falling under Heading No.2903.12 was not subject to any import restriction during the last five years. The increase in imports of Methylene Chloride was not at all due to the effect of obligations incurred by India, including the Tariff concessions. It was also not due to "unforeseen developments" as the increase was a direct consequence of the increase in demand that could not be catered to by the domestic industries. The demand could not be met by the domestic industry, inspite of their operations at over 100% capacity.

(ii) Unlike in an anti-dumping investigation where both volume and price of imports have to be considered, safeguard action is essentially a volume based action. The price of imports is a secondary factor. Once it has been established that the increased imports are due to market conditions and the inability of the domestic industry because of its capacity constraints to cater to the needs of the users, the question of serious injury to the domestic industry cannot exist.

(iii) The quantum of sales of the domestic industry has not shown any downward trend. The loss of the market share of 8% in 1999- 2000 is not an indicator of injury, much less serious injury, in view of the fact that the domestic industry has lost its share only because it was operating at more than 100% capacity and could not increase its hare proportionate to the increase in consumption and not because the increased imports have eaten its market share.

(iv) The safeguard duty sought by the domestic industry has been wrongly calculated. It has been calculated on the basis of the landed value on the lowest price at which Methylene Chloride had been imported in 1999-2000 which is not a correct methodology. The weighted average cif price from April 1999 to September 2000 has to be considered for determining the landed value. As a part of cyclical ups and downs, the price of Methylene Chloride fell for a short time in early 2000. They had imported Methylene Chloride at US$ 450 per MT and had contracted for import at the same or higher price. If tht safeguard duty imposed based on the lowest cif import of a stray consignment, it will result in windfall profit to the domestic indust • , Under Article XIX, safeguard action should only be to the extent jfid for such time as may be necessary to prevent or remedy the se ious injury. Keeping in view of the fact that there is no serious injun at all and the landed price is currently far in excess of fair sellin ^ price demanded by the domestic industry, there in no requirement to continue the investigation or to impose safeguard duty.

(v) In accordance with Rule 5(2)(b) of the Safeguard Outy Rules, an application for imposition safeguard duty should include p statement of the efforts being taken or planned to be taken or both t j make a positive adjustment to import competition. \n a safeguard action, the increased import is the factor and not the price. In fact the price is assumed to be "fair" as opposed to dumped or subsidised prices which are treated as ktunfair" prices. If Rs.l 1,990 is a fair price and Rs.23,734 is the fair expectation of the domestic indust.y, the42 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC, 3(i)l adjustment plan should indicate measures to bridge this gap. After taking into account the prevailing level of Customs Duty, duty protection sought is Rs.6317 per MT. In other words, the adjustment plan should show a cost reduction at least to the extent of Rs.6317 whereas the applicants adjustment plan not even accounts for 1/4¹¹¹ of this amount. In fact, no amount of effort on their part will bring about a reduction in their cost of production by about Rs.6000/- which is a must to meet the competition. This is one more reason as to why the present safeguard investigation should be terminated.

D. VIEWS OF THE EXPORTERS

(a) Atofina. France

(i) They oppose the imposition of the safeguard duty on imports of Methylene Chloride sought by the two Indian companies, Gujarat Alkalies and Chemicals Ltd. (GACL) and Chemplast Sanmar Ltd. (CSL).

(ii) They observe from the import figures that the market share of imported product during 1999-2000 is actually less than that of 1995- 96 and 1996-97. This hardly represents a targeting of the Indian market and it was merely a question of imports maintaining its regular historical market position.

(iii) They observe that the production of Methylene Chloride in India has increased by 47% from 1996-97 to 1999-2000. This large increase of production will indeed have contributed negatively to domestic pricing conditions.

(iv) The reference price of USD 275/T CIF Kandla is neither a price that is known to ATOFINA or has been used by ATOFINA for its business in India during the time of the study. Current market prices for Methylene Chloride exported from Europe (Source, ICIS-LOR report, 28th July 2000) are quoted as USD $ 370 - 430 FOB North Vest Europe. This would equate to a landed CIF Kandla price of LSD $ 400 - 450/T at present. This price, when converted a landed cot, is considerably higher that demanded by the Indian producers as a reisonable selling price. They had exported a quantity of 1727 MT of M?thylene Chloride during 1999-2000.

(v) The calculation made by the Indian producers for the landed cost of imported material has made no costing for the port charges, tiie rental of bulk storage at the port, surveying and analytical costs, product losses, or the cost of financing the import operation, or a margin for a distribution or trading company where the product is imported by such a company.

(b) M/s.ICIChlor-Chemicals

(i) Their product is primarily supplied for pharmaceutical and cosmetic manufacturing (65%) agro chemicals (25%); extraction medium in the food industry (5%); polyurethane foam Mousing, adhesive formulations, plastic processing, metal digressing etc. Very negligible quantities are supplied for the paint and varnish remover formulations.

(ii) They had exported the following quantities of Methylene Chloride to India during 1998-2000 viz

Year Bulk Drum Total

3118 48.86 2749

1054 1694 831

4172 6580 3580

1998 1999 2000 (Aug'2000)

(iii) The figures of imports mentioned by the domestic industry in their application are erroneous and they reserve their right to comment on this very crucial aspect of import quantities after actual import data is collected by DG(SG). The allegation that domestic sales in Europe are decreasing and therefore Methylene Chloride is finding its way to India is categorically denied.

(iv) The strongly believe that no injury is caused to the domestic industry due to imports of Methylene Chloride and any imposition of safeguard duties will provide undue protection to the domestic industry at the cost of die user industry which is predominantly the pharmaceutical and agrochemical sectors.

(v) The re-adjustment plan submitted by the Applicants does not deserve safeguard protection. The adjustment claimed by them have already been implemented or are part of ongoing improvements in the44 THE GAZETTE OF INDIA : EXTRAORDINARY (PART II—SEC. 3(i)] ordinary course of Plant maintenance and operation. The total benefit derived by the domestic industry by adjustment will be Rs.1800/- to Rs.2300/- as against a protection sought for Rs.6739/- which in itself is an evidence to show that the adjustment plan is wholly inadequate to address the alleged injury.

(vi) Methylene Chloride has not been imported in to India in the 'increased' quantities required under Section 8B of the Customs Tariff Act. The domestic industry has suffered no injury, let alone serious injury. In fact the plants are operating at capacities in excess of 100% by their own admission. The prices of Methylene Chloride being imported into India have drastically increased in the last few months. Prices move on account of the cost of raw materials and demand and supply globally. The period that shows the reduction in prices coincided with the lowest price of raw materials in recent memory. Coupled with the South East Asian crisis, the prices were reduced globally. Both these issues have now been addressed and prices have increased drastically in the past few months.

(c) Solvav SA. Belgium

(i) Their sales of Methylene Chloride to India are not likely to cause a serious injury either to the Indian market or to the Indian domestic producers of Methylene Chloride.

(ii) Their export prices to India were corresponding to export market prices in Asia/Pacific area and were greater than their prices in European domestic market during the same relevant period.

(d) Helm AG. Germany

They have not exported Methylene Chloride to India at least for the last 4 years (1996 to August 2000). They do not accept to be claimed as one of the major exporters disturbing the Indian market by selling at low prices.

E. VIEWS OF THE EXPORTING GOVERNMENTS

(a) Embassy of Republic of Hungary, New Delhi.

Based on the export statistics of Hungary there is no evidence that Methylene Chloride have been exported to India in the last 3 years.

(b) Taiwan

(i) Their exports of Methylene Chloride to India is very limited. There were only few exports of Methylene Chloride to India in 1995 and 1996. No exports of Methylene Chloride have been effected during January 1997 till May 2000.

(ii) Under the provisions of WTO Agreement on safeguards with regard to application of safeguard measures they reserve theirright to be consulted before any safeguard duty is imposed.

(c) European Commission. New Delhi

(i) India is entitled to take safeguard action under Article XIX GATT 1994, which reads 'Emergency Action on Imports of Particular Products', and the WTO Agreement on Safeguards. These provisions permit WTO countries to take safeguard action in emergency situations where only the use of exceptional measures may remedy the serious injury caused by increased imports of a given product to a domestic industry. Safeguard measures should thus only be applied where no other remedy appears appropriate. Otherwise, the application of safeguard measures risks creating serious trade disturbances, notably trade diversion, and may lead to a dangerous proliferation of trade restrictive measures world-wide. Safeguard measures should not and cannot be used as an instrument to shield the Indian industry from normal and fair import competition in circumstances where no emergency action appears to be warrants.

(ii) Safeguard measures may only apply to a product if such product is being imported in such increased quantities and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products. As a preliminary remark, the Commission notes that the Indian conclusion that prima facie imports of Methylene Chloride have threatened to cause serious injury to domestic producers of Methylene Chloride is not sufficiently substantiated. The scant information contained in the initiation notice and in the non-confidential version of the petition does not support such a conclusion, in particular having regard to the strict requirement of Article 4 (l)(b) of the WTO46 THE GAZETTE OF INDIA : EXTRAORDINARY |PART II—SEC. 3(i)| Safeguard Agreement, which states that 'A determination of the existence of a threat of serious injury shall be based on facts and not merely on allegations, conjecture or remote possibility.

(iii) The application of safeguard measures, given their emergency nature, requires the existence of a substantial sharp increase in imports. The Commission doubts that import data provided by Tndia justify any such conclusion., The figure for year 1999-2000 of 13,500 MT is an estimate provided by the petitioners and is not supported by any evidence or explanation. It is furthermore in contradiction with the figure provided by Kandla Port Trust, which is substantially lower (10,247 MT). Whatever the correct figure, the comparison with the import volumes back in 1996-97 i.e. 12,302 MT, certainly does not show a sharp increase of imports in absolute terms. The same applies if the percentage of imports relative to domestic production is taken into account (a fall from 79% in 1996-97 to 59% in 1999-2000), given that domestic production increased much more than imports in the same period. As regards the claim that prices of imports have been decreasing substantially in the period under consideration, the Commission notes that this reflects an overall world-wide trend which affects all producers of this commodity. In addition, the decreasing trend refers in particular to this product in form of bulk material. The Commission notes that around 25% of EC Exports to India are in drums, whose prices are much higher than bulk materials.

(iv) The WTO Agreement on Safeguards requires that imports cause or threaten to cause serious injury to the domestic industry. Serious injury is defined in the Agreement as 'a significant overall impairment in the position of a domestic industry'. The Notice of Initiation contains very little to prove that the injury was or would be serious. The conclusion of DG(SG) is based on two isolated considerations, that imports prices have declined in the period under consideration, following a world-wide trend and that the market share of domestic producers diminished by 10% between 1997-98 and 1999-2000. However, in the same context the investigating authority appears to have disregarded the fact the Indian market for these products increased substantially as also the capacity utilisation of the domestic producers during the said period.

(v) The imports on Methylene Chloride have not increased in such a manner and under such conditions so as to threaten to cause serious injury to the Indian producers. In fact, the Commission submits that47 all necessary conditions of substance and procedure for the application of safeguard measures required under Article XTX GATT 1994 and the WTO Agreement on Safeguards do not appear present in this case. The Commission also considers that the imposition of provisional safeguard measures, as requested by the petitioners would not be justified, since the conditions provided by Article 6 of the Safeguard Agreement are not met.

F. Findings

1. (i) 1 have carefully gone through the case records and the replies filed by the domestic producers, users/importers, exporters and exporting governments. Submissions made by various parties and the issues arising there from are dealt with at appropriate places in the findings below.

(ii) However, before discussing other issues, a preliminary issue concerning the information supplied by SRF needs to be addressed first. It has been claimed by some parties that there is no provision for including other domestic producers in the application and to accept information furnished by them after the initiation of investigation. In this regard they have also invited attention to the Safeguard Duty Rules concerning initiation of investigation, which requires the Director General to examine the accuracy and adequacy of evidence provided in the application and also the procedure prescribed in Rule 6 and 7 etc.

(iii) To consider this issue in its proper perspective, it will be necessary to consider the entire procedure of investigation as stipulated in the Safeguard Duty Rules. Rule 5 of the Safeguard Duty Rules (SGD Rules) which deals with initiation of investigation provides that:

"Except as provided in sub-rule (4) the Director General shall, on receipt of a written application by or on behalf of the domestic producers of like article or directly competitive article, initiate an investigation to determine the existence of 'serious injury' or 'threat of serious injury' to the domestic industry, caused by the¹ import of an article in such increased quantities, absolute or relative to domestic production."4X THE GAZETTE OF TNDIA : EXTRAORDINARY [PART II—SEC. 3(i)1 (iv) The term 'domestic industry' is defined under Section 8B of the Customs Tariff Act, 1975 as under:

"Domestic industry" means the producers (i) as a whole of the like article or a directly competitive article in India; or (ii) whose collective output of the like article or a directly competitive article in India constitutes a major share of the total production of the said article in India"

(v) Rule 5 also requires the Director General to examine the accuracy and adequacy of the evidence provided in the application. The principles that govern investigation are provided for in Rule 6.

(vi) The investigation is thus required to be initiated after examining the accuracy and adequacy of the information provided by or on behalf of the domestic industry in the application. It is not necessary that the application must be filed by all the domestic producers, or that the producers who have not initially joined the application can not let their position be known thereafter. The notice of initiation sets the investigation process on. One of the purposes of the Notice of Initiation is to put all interested parties on notice. Even the parties not identified in the application can respond and join the investigation after initiation thereof. There is, therefore, nothing wrong in SRF joining the investigation on 23rd October 2000 by extending their support to the domestic producers. The requirement of natural justice, however, is that response filed by them should neither give them any unfair advantage nor should cause prejudice to the interests of other parties. To ensure this SRF were specifically asked at the time of Public Hearing to submit their response to the Questionnaire by 13th November 2000 and comments thereon were allowed to be made by other parties by 27th November 2000. Besides, it has been ensured that only such information is relied upon in this investigation, which passes the test of scrutiny. Information furnished by SRF which does not meet with the above requirement or which could not be subject to verification, such as, their cost of production has not been considered in the present investigation. Keeping this in view, the findings below are made.

2. Product under Investigation

(i) The product under investigation is Methylene Chloride, a solvent belonging to the Chloromethane family of solvents. The other49 two products in the family are Chloroform and Carbon Tetrachloride. Methylene Chloride is a colourless volatile liquid with a chloroform like odour. Also known as Dichloro Methane, it has the chemical formula: CH2C12.

(ii) There are basically two routes for producing Chloromethanes, i.e. either using Methane or Methanol as the basic raw material. The Methane based process uses thermal chlorination of Methane. The reaction between Chlorine and Methane, the natural gas constituent, in the presence of light or a catalyst, is the most important process in the manufacture of Chloromethanes. Depending upon the adjustment of the process parameters, the predominant yield is methyl chloride, which is recycled by chlorination to obtain Methylene Chloride. Proportionately smaller amounts of Chloroform and Carbon Tetrachloride are obtained in the process. Methane is mixed with chlorine and the reactor fitted with arc lamps to above atmospheric pressure and with the residence times controlled so that the chlorine is used up completely. Secondary Chlorination take place at ambient temperature in a light catalyzed reactor, which converts Methylene Chloride to Chloroform, and in other reactors Chloroform is similarly converted to Carbon Tetrachloride.

(iii) In the Methanol route, methyl chloride is produced in the first stage of the reaction by hydro chlorination of methanol with hydrogen chloride. The second stage of the process involves either thermal chlorination or photo chlorination of methyl chloride to produce a mixture of all the four products; i.e. un-reacted methyl chloride, Methylene Chloride, Chloroform and Carbon Tetrachloride. The above products are subsequently separated and purified in the downstream towers.

(iv) GACL produces Methylene Chloride using Methane route while Chemplast and SRF both use Methanol route to produce Methylene Chloride.

(v) Methylene Chloride is used in the Photo films, bulk drugs and pharmaceutical industry. Methylene Chloride is also used in the manufacture of foam, resin casting, fumigants and agrochemicals.

(vi) Methylene Chloride is classified under heading 2903.12 of the First Schedule to the Customs Tariff Act, 1975 and under 29031200 of the Indian Trade Classification based on Harmonised Commodity

135GW2001—750 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)| Description and Coding System. The above classification, however, is indicated for the purpose of convenience and in no way restricts the scope of the coverage of the product under investigation.

(vii) There is no dispute about the domestically produced Methylene Chloride being a product alike the imported Methylene Chloride.

3. Domestic Industry:

(i) There are three domestic producers of Methylene Chloride namely (a) GACL (b) Chemplast and (c) SRF.

(ii) GACL have an installed capacity of 21120 MT per annum to produce Chloromethane with 8910 MT per annum to produce Methylene Chloride. The installed capacity of Chemplast to produce Methylene Chloride was 6000 MT per annum till 1996-97, which has been increased to 13500 MT per annum in 1997-98 out of a total Chloromethane capacity of 30,000 MT per annum. As regards SRF, which started manufacturing Methylene Chloride only in 1997-98, the applicants claimed the installed capacity of SRF to be 4800 MT per annum to produce Methylene Chloride, out of a total capacity of 21,000 MT per annum for the Chloromethane. In their letter dated November 9, 2000, however, SRF have stated their installed capacity of Chloromethane to be 18500 MT per annum and as per their design, they can produce upto 55% Methylene Chloride i.e. they have a capacity to produce 10,175 MT per annum of Methylene Chloride.

(iii) In 1999-2000, GACL, Chemplast and SRF accounted for a production of 8721 MT, 14151 MT and 3266 MT of Methylene Chloride respectively.

(iv) The application for imposition of safeguard duty on imports of Methylene Chloride was filed by GACL and Chemplast. SRF did not disclose its position at that time. Subsequently, however, SRF vide their letter dated 23.10.2000 have expressed their desire to support the applicants. At the time of Public Hearing on 07.11.2000, SRF were asked to file a reply to the Questionnaire for the domestic producers, which was submitted by them on 13.11.2000.

(v) It is accordingly considered that the request for imposition of safeguard duty on Methylene Chloride has been made by the domestic industry comprising of all the three domestic producers.

4. Increased Imports;

(i) Methylene Chloride is imported into India from Belgium, Brazil, P.R.China, Chinese Taipei, France, Germany, Hongkong, Hungary, Israel, Italy, Japan, the Netherlands, Russia, Spain, Switzerland, U.K. and U.S.A.

(ii) The import duty (basic customs duty + surcharge, if any) on Methylene Chloride was 65% advalorem in J994-95, which was brought down subsequently to 50% in 1995-96, 40% in 1996-97 and to 35% in 1997-98 before raising to 38.5% on 01.03.1999. The imports were allowed without any quantitative restrictions to enter into India from 1995-96 onwards.

(iii) The Cif prices of imported Methylene Chloride during the period 1997-1999 and the prices of Chlorine and Methanol during the same period weie as under:

Table-!

(Prices in US $ PMT)

It is seen from the above that while the prices of both the raw materials declined during the period from Ql of 97 to Q4 of 98, they showed an increasing trend thereafter. The prices of Chlorine increased substantially thereafter during each of the quarter upto Q4 of 1999 and the prices of Methanol also ruled higher as compared to Q4 98 prices. As against this the prices of Methylene Chloride kept with the trend of declining raw material prices during the period Ql of 1997 to Q4 of 1998 but did not rise thereafter keeping with the trend of rising raw material prices. Instead the CIF prices of Methylene Chloride kept on declining sharply from a level of US$ 521 PMT to US$ 317 PMT during the period Q4 of 1998 to Q4 of 1999.

(iv) The imports of Methylene Chloride into India were 10776 MT in 1995-96, 12032 MT in 1996-97, 7390 MT in 1997-98 and 9296 MT in 1998-99. As regards 1999-2000, the applicants claimed the imports52 THE GAZETTE OF INDIA EXTRAORDINARY [PART IT—SEC 3(I)1 to be 13500 MT on an estimated basis. They have submitted that the import figures for 1999-2000 were not available in Public Domain. According to them, out of the total imports of 9269 MT in 1998-99, 6760 MT were imported through Kandla Port, which accounted for 72.93% of the total imports of Methylene Chloride into the country. In 1999-2000, the imports of Methylene Chloride through Kandla, were 10247 MT. Assuming the same ratio of 73% of the total quantity of Methylene Chloride being imported through Kandla, the imports of Methylene Chloride in 1999-2000 worked out to about 14050 MT. The applicants, however, claimed the imports of Methylene Chloride into India as 13500 MT during 1999-2000.

(v) Various parties have questioned the quantum of imports of Methylene Chloride in 1999-2000 as estimated by the applicants. In this regard, it is observed that the Kandla Port Trust Authorities have confirmed imports, of 10247 MT of Methylene Chloride through Kandla Port in 1999-2000. Atofina have confirmed their imports for 1999-2000 as 1727 MT, and another 800-1000 MT of Methylene Chloride being imported in drums in 1999-2000. Atofina, therefore, have claimed the total imports to be 12774 MT instead of 13500 MT. The import figures were however, verified through the DGCIS and the Customs authorities. According to the reports received from them, the country wise imports during 1999-2000were as under:

____.

Quantity (MT) 40.248

Name of the Country Chinese Taipei P.R.China Denmark France

Germany Hongkong The Netherlands South Africa U.K.

20 124 5.5 l727(As confirmed by Atofina) 4730,896 20.124 1763.247 25.378 5238.477 100 13670.994

U.S.A. Total

On the basis of above data it is observed that total imports of Methylene Chloride in 1999-2000 were 13670.994 MT.

(vi) The Table below indicates the figures of domestic production and imports of Methylene Chloride for the period 1995-96 to 1999- 2000.

T"blc-3

It is observed from the data tabulated above that the imports which were 10776 MT in 1995-96 increased to 12302 MT in 1996-97, declined subsequently to 7390 MT in 1997-98 but increased thereafter to 9269 MT in 1998-99 and to 13671 MT in 1999-2000. The imports of Methylene Chloride in India thus increased from 10776 MT in 1995-96 to 13671 MT in 1999-2000. As compared to domestic production, however, the imports were about 66% in 1995-96, which decreased to 37% in 1998-99 but increased subsequently to 52.30% in 1999-2000.

(vii) It has been argued by various parties that imports of Methylene Chloride into India during 1995-96 to 1999-2000 can not be considered to meet with the requirement of increased imports as required under the law. In the context of increased imports it has also been argued that the increase in imports is to be considered keeping in mind the WTO Panel Report in the Argentina Footwear case. In this case, the Panel observed:

"We believe that in assessing whether an end-point-to- end-point increase in imports satisfies the increased imports requirement of Article 2.1. the sensitivity of the comparison to the specific years used as the end-points is important as it might confirm or reverse the apparent initial conclusion. If changing the starting-point and/or ending point of the investigation period by just one year means that the comparison shows a decline in imports rather than an increase, this necessarily signifies an intervening decrease in imports rather than an increase, thus calling in to question the conclusion that there are increased imports."54 THE GAZETTE OF INDIA . EXTRAORDINARY [PART II—SEC. 3(I)1 "If an increase in imports is in fact present this should be evident both in an end-point-to-end-point comparison and in analysis of the intervening trends over the period. That is the two analyses should be mutually reinforcing".

"The Agreement is clear that it is the data on import quantities, both in absolute terms and relative to the (quantity of) domestic production that are relevant in this context, in that the Agreement refers to imports "in such increased quantities" (emphasis added). Therefore, our evaluation will focus on the data on import quantities."

(viii) In regard to the requirement under the law, it is observed that Section 8B of the Customs Tariff Act, 1975 empowers the Government to impose safeguard duty on an article, if it is satisfied that the article is imported into India in such increased quantities and under such conditions so as to cause or threatening to cause serious injury to domestic industry. Further, the term 'increased quantity' has been defined under the Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997 to include increase in imports whether in absolute terms or relative to domestic production. In the present case, on an end-point-to-end-point basis, there is undoubtedly an increase in the imports in absolute terms, compared to any previous years. The increasing trend of imports, reversed only in 1997-98 when it declined from 12302 MT to 7390 MT. There was, however, a significant development during this period, which has an important bearing on the analysis of increased imports. This development is concerning the production capacity of the domestic producers, being 14910 MT till 1996-97 but increasing substantially in 1997-98 due to expansion of chloromethanes production capacity of Chemplast to 30000 MT per annum which resulted in enhancement of their Methylene Chloride capacity from 6000 MT per annum to 13500 MT per annum, and setting up of Methylene Chloride manufacturing facility by SRF in 1997-98 with a total Chloromethanes capacity of 14500 MT per annum. As a result of these developments, the domestic industry had a capacity to produce (22410 + 55% of 14500) 30,385 MT per annum of Methylene Chloride in 1997-98. The sharp decline in imports in 1997-98 appears to be a consequence of this development. In the present case, therefore, the import trend55 particularly for the period from 1997-98 to 1999-2000, reflects more realistically upon the current state of the domestic industry.

(ix) During the period 1997-98 to 1999-2000, the imports of Methylene Chloride into India increased from 7390 MT in 1997-98 to 9269 MT in 1998-99 and to 13671 MT in 1999-2000. The imports during this period, as compared to domestic production stood at 38.67%, 36.94% and 52.30% respectively. The imports of Methylene Chloride into India, thus increased both in absolute term as well as compared to domestic production.

(x) It has also been argued by some parties that it is necessary to evaluate whether the increase is as a result of unforeseen developments and of the effect of obligations incurred by India under the GATT, In the context of "as a result of unforeseen developments" attention has also been invited to the Hatters' Fur case in which this expression was interpreted by the Working Party as under:

"The term 'unforeseen development' should be interpreted to mean developments occurring after the negotiation of the relevant tariff concession which it would not be reasonable to expect that the negotiators of the country making the concession could and should have foreseen at the time when the concession was negotiated." In regard to the term "unforeseen developments" both in the Argentina Footwear case and in Korean Dairy Products case the Appellate Body observed that:

"To determine the meaning of the clause "as a result of unforeseen developments and of the effect of the obligations incurred by a Member under this Agreement, including tariff concessions"... in sub-paragraph (a) of Article XFX:1, we must examine these words in their ordinary meaning, in their context and in light of the object and purpose of Article XIX. We look first to the ordinary meaning of these words. As to the meaning of "unforeseen developments", we note that the dictionary definition of "unforeseen", particularly as it relates to the word "developments", is synonymous with Unexpected". "Unforeseeable", on the other hand, is defined in the dictionaries as meaning "unpredictable" or "incapable of being foreseen, foretold or anticipated" (emphasis added). Thus, it seems to us that the ordinary meaning of the phrase " as a result of unforeseen56 THE GAZETTE OF INDIA EXTRAORDINARY [PART II—SEC. 3(i)1 developments requires that the developments which led to a product being imported in such increased quantities and under such conditions as to cause or threaten to cause serious injury to domestic producers must have been "unexpected". With respect to the phrase "of the effect of the obligations incurred by a Member under this Agreement, including tariff concessions", we believe that this phrase simply means that it must be demonstrated, as a matter of fact, that the importing Member has incurred obligations under the GATT 1994, including tariff concessions (emphasis added). Here, we note that the Schedules annexed to the GATT 1994 are made an integral part of Part-I of that Agreement, pursuant to paragraph 7 of Article II of the GATT 1994. Therefore, any concession or commitment in a Member's Schedule is subject to the obligations in Article II of the GATT 1994."

The Appellate Body has thus distinguished between 'unforeseen' and 'unforeseeable'. They have held 'unforeseen developments' to be synonymous with 'unexpected developments'. The phrase ".. which it would not be reasonable to expect that the negotiators of the country making the concession could and should have foreseen at the time when the concession was negotiated", however, appears to set different standard which fall more in the realm of "unforeseeable", which the Appellate Body has distinguished from ""unforeseen".

(xi) As regards the developments that have resulted in increased imports, the applicants have mentioned that the general use of Methylene Chloride as a paint stripper, is now being restricted due to stringent European and American Environmental regulations. Consequently, the European producers have started looking at markets for their surplus production. They have also produced a copy of 'Final Rule' effective April 10, 1997 issued by the Occupational Safety and Health Administration (OSHA), USA in support of their contention. Besides, in the past, the surplus production was diverted to the South East Asian Markets, which due to set back in their economics started finding its way to other markets, including India. It has also been accepted by some parties that, "the period that shows reduction in prices coincided with the lowest price of raw materials in recent memory. Coupled with the South Asian Crisis, the prices were reduced globally." It has been argued by some parties that the petitioners allege that domestic sales are decreasing in Europe as a result of environmental regulations, however, proof is provided of57 OSHA Regulations, which pertains to the US. In this regard it is observed that while it is a matter of fact that OSHA Regulations pertain to the US, the applicants have produced a copy of E.C.S.A. (European Chlorinated Solvent Association) Bulletin of August 2000 giving details of European Solvent Sales in 1999. It clearly mentions that "the Western European market for virgin chlorinated solvents totaled 303,000 tonnes in 1999, a decrease of 1.6% compared to 1998, according to combined ECSA sales data and Eurostat-import figures." It further reports "the influence of the VOC or Solvent Emissions Directive largely explains decreasing Western European chlorinated solvent sales volume. It must be implemented in EU member-states by April-2001 when new installations will have to meet stringent emission limits. All new investments are already taking these limits into account"

The ECSA Bulletin also reveals that the Methylene Chloride sales which increased from 141 thousand MT in 1996 to 151 thousand MT in 1997, stabilized thereafter to 150 thousand MT in 1998 and 1999. From the above discussion, it is evident that use of Methylene Chloride has been regulated not only in the US but also in the Europe.

Besides, it is a matter of fact that while the domestic industry has been opened to face competition from global producers, it lacks provision of international competitive environment for the factors responsible for production at internationally competitive prices. It is common knowledge that power, fuel and financing could not be made available in India at prices compared to international levels. The increase in imports clearly is a result of all these unexpected developments.

(xii) As regard the obligations incurred by India in respect of Methylene Chloride it is appropriate to mention that Methylene Chloride is one of the products in respect of which India has, inter alia, incurred the obligation of both providing tariff concessions by including it in its Schedule of Concession and unrestricted importability i.e. allowing imports of Methylene Chloride without any quantitative restrictions.

(xiii) In view of the above analysis, it is observed that Methylene Chloride has been imported into India in increased quantities. The imports of Methylene Chloride have increased both in absolute terms as well as compared to domestic production, particularly during 435OI/2001—8 5 8•

T HE G A Z E T TE OF I N D IA E X T R A O R D I N A RY

| P A RI I I — S c r. 3 ( i )| 1997-98 to 1999-2000, which is the period that reflects more realistically on the current status of the domestic industry. The imports have increased as a result of unexpected developments and of the effect of obligations incurred by India.

5. Serious Injury:

(a) It has been argued by some parties that it is not adequate that imports must be increased, but the imports 'must also be made under such conditions so as to cause or threaten to cause serious injury. In this regard reliance has been placed upon the Panel Report in Argentina Footwear case which states:

"In our view, the phrase 'tinder such conditions" does not constitute a specific legal requirement for a price analysis separate and apart from the increased import, injury and causation analyses provided for in Article 4.2 We consider that Article 2.1 sets forth the fundamental legal requirements (i.e. the conditions) for application of a safeguard measure, and that Article 4.2 then further develops the operational aspects of these requirements. We believe that the phrase "under such conditions" would indicate the need to analyze the conditions of competition between the imported product and domestic like or directly competing products in the importing country's market."

(b) Clause 6(c) of Section 8B of the Customs Tariff Act, 1975, defines 'serious injury' to mean an injury causing significant overall impairment in the position of a domestic industry and Sub-clause (d) defines 'threat of serious injury' to mean a clear and imminent danger of serious injury. Further in determining whether increased imports have caused or threatening to cause serious injury to a domestic industry, the Annex to the Safeguard Duty Rules requires the Director General to evaluate all relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry, in particular, the rate and amount of increase in imports of the article concerned in absolute and relative terms, the share of the domestic market taken by increased imports, changes in the level of sales, production, productivity, capacity utilisation, profits and losses and employment. These factors are analysed below:

(I) Production: The production of Methylene Chloride by the domestic producers was 16340 MT in 1995-96. Except for a small sy decline in 1996-97 to 15588 MT, the domestic production increased thereafter to 19111 MT in 1997-98, 25091 MT in 1998-99 and to 26138 MT in 1999-2000. The domestic production in 1997-98 increased by 3523 MT or 22.6% over 1996-97. In 1998-99, the domestic production increased by 5980 MT or 31.3% over 1997-98. In 1999-2000, however, the domestic production increased by 1047 MT only i.e. by about 4.2% over 1998-99.

(II) Capacity Utilisation: The domestic industry had a capacity to produce 14910MT per annum of Methylene Chloride in 1995-96 and 1996-97. Chemplast, however, expanded their Chloromethanes capacity to 30,000 MT per annum and SRF also set up their Chloromethanes plant in 1997-98. As a result, the capacity of the domestic industry increased to 30,385 MT per annum in 1997-98. Owing to further improvement made by SRF, the capacity has increased to (22410 + 10175) 32585 MT per annum in 1998-99 and 1999-2000. During the years 1995-96 to 1999-2000, the total domestic production was 16340 MT, 15588 MT, 19111 MT, 25091 IVIT and 26138 MT respectively. The capacity utilisation of the domestic industry, therefore, was 109.6%, 104.5%, 62.9%, 77% and 80.2% respectively. The domestic industry, thus suffered a loss in capacity utilisation in the period 1997-98 to 1999-2000 as compared to 1995-97, but during 1997-98 to 1999-2000, it showed an improvement in capacity utilisation from 62.9% to 80.2%.

(III) Sales

(i) The Table below gives the figures of domestic sales of Methylene Chloride by the three domestic producers for the period from 1995-96 to 1999-2000.

Table-4

Domestic Sales in MT

From the data tabulated above, it is observed that the domestic sales of the domestic industry have increased from 15365 MT in 1995-96 to 24281 MT in 1999-2000.

(ii) The apparent domestic consumption during the period, however, was as given in Table below:

Table-5

Apparent Domestic Consumption (MT)

Year

Domestic Sales Imports Apparent Domestic

Consumption

15365 14619 18198 22967 24281

1995-96 1996-97 1997-98 1998-99 1999-2000

10776 12302 7390 9269 13671

26141 26921 25588 32236 37952

From the data tabulated above, it is observed that the apparent domestic consumption was on an average 26217 K4T per annum during the period 1995-96 to 1997-98, which increased substantially in 1998-99. As compared to the immediately preceding year 1997-98, the apparent domestic cqnsumption in 1998-99, increased by 6648 MT or by about 26%. The domestic sales also registered a similar growth of 26.2% over 1997-98. In 1999-2000, however, the apparent domestic consumption increased by 17.73% but the domestic sales increased only by 5.72%. The domestic sales thus did not grow keeping pace with the growth in apparent domestic consumption. Even the small growth of 5.72% in domestic sales was achieved only by drastically reducing the sale price by the domestic producers.

(iii) The net sales value in the case of GACL declined from Rs.30121 PMT in 1998-99 to Rs.20927 PMT in 1999-2000 or by about 30%. In the case of Chemplast, the net sales value declined from Rs.25117 PMT in 1998-99 to Rs.20344 PMT in 1999-2000 i.e. by about 19% and in the case of SRF, the net sales value declined from Rs.23120 PMT (sales in tankers) to Rs.l 8750 PMT respectively i.e. by about 19%. It is thus observed that the domestic producers could not keep their share in the apparent domestic consumption and the small growth which they achieved was as a result of decline in sales prices by about 19% to 30%.

(IV) Stocks

The closing stock of the three domestic producers was 289 MT in 1995-96 which increased to 376 MT in 1996-97 and to 515 MT in 1997-98 before declining to 196 MT in 1998-99. In 1999-2000, however, the closing stocks increased to the highest level of 580 MT.

(V) Employment

All the three domestic producers have reported no loss in employment.

(VI) Productivity

The domestic producers also have registered no loss of productivity i.e. production per employee on account of the fact that production has increased during the period from 1997-98 to 1999-200 and there is no loss of employment.

(VII) Profitability

The reduced sales realisation had its effect on the profitability of the three domestic producers as far as their Methylene Chloride operations were concerned. In the case of GACL, their profit on Methylene Chloride has fallen drastically in 1998-99 and turned into losses in the year 1999-2000, as verified from the sales realisation and cost of production data. Similarly, in the case of Chemplast also, profit in 1998-99 has turned into losses in 1999-2000. Thus both the applicant companies which were making profits on their Methylene Chloride operation have incurred losses in 1999-2000.

(c) From the above analysis, it is observed that while the domestic industry registered an improvement in production, capacity utilisation and productivity, they lost their market share, suffered lower sales realisations, profits turning into losses and building up of some stocks. Further, the domestic producers, in order to distribute the fixed costs and thus minimize the injury, had to operate at optimum levels which in no way appears to be a reflection of their improved performance. Some of the parties have argued that price is not an important factor in the injury analysis in safeguard cases. This is, however, not tenable. In fact, price at which the goods are sold in the domestic market is one of the most important factors having a bearing 4T)GI/2001—?

on the injury suffered by it. Section 8B of the Customs Tariff Act, 1975 which empowers the Central Govt. to impose safeguard duty stipulates that "if the Central Govt., after conducting such enquiry as it deems fit, is satisfied that any article is imported into India in such increased quantities and under such conditions so as to cause or threatening to cause serious injury to domestic industry, then it may, be notification in the Official Gazette, impose a safeguard duty on that article". It is amply clear from a plain reading of this Section that conditions under which the increased imports take place needs to be investigated for imposition of safeguard duty and, therefore, price at which imports entered into India needs surely to be looked into as price is one of the most important factor that needs consideration in taking a decision to source material. In determination of serious injury or threat thereof, the law requires an examination of change in level of sales, profitability etc. of the domestic producers. These factors undoubtedly depend upon the prices of competing products and in that context import prices do become relevant and require an examination, specially to assess their effect on the domestic situation.

In view of the above, the domestic producers of Methylene Chloride are under a threat of serious injury if the imports of Methylene Chloride are allowed unabated.

6. Cause of Iniurv:

(i) As regards the cause of injury, it is observed that the CIF import prices of Methylene Chloride have been declining during 1997-98 through 1999-2000. The CIF price which was 678 US$ PMT in the First Quarter of 1997, declined to 625 US$ PMT in the Second Quarter; 608 US$ PMT in the Third Quarter of 1997. In the last Quarter of 1997, the price increased to US$ 661 PMT but declined again to 612 US$ PMT in the First Quarter of 1998. The CIF import prices declined sharply thereafter from US$ 590 PMT in the Second Quarter of 1998 to US$ 518 PMT in the Third Quarter of 1998, US$ 465 PMT in the First Quarter of 1999, to US$ 386 PMT, US$ 331 PMT and US$ 317 PM f in the Second, Third and the last Quarter of 1999. In the First Quarter of 2000, the CIF import prices declined further to US $ 270 to 275. In terms of Rs. PMT the CIF prices declined from Rs. 14545 in the Second Quarter of 1999 to Rs. 13626 in the Fourth Quarter of 1999. At the same time the imports of Methylene Chloride into India kept on increasing. The imports of Methylene Chloride, which were 7390 MT in 1997-98 increased to63 9269 MT in 1998-99 and to 13671 MT in 1999-2000. The imports thus increased by about 25.3% in 1998-99 over 1997-98 and by about 47.5% in 1999-2000 over 1998-99, As compared to this increase in imports, the domestic production in 1998-99 increased by 32.4% over 1997-98 but in 1999-2000 the production increased by only 4.2%. The domestic producers tried to maintain their share in the apparent domestic consumption by reducing their sale prices. The net sales value in the case of GACL declined from Rs.30,121 PMT in 1998-99 to Rs.20,927 PMT. In the case of Chemplast, the net sales value declined from Rs.25117 PMT in 1998-99 to Rs.20344 PMT in 1999- 2000. In the case of SRF it declined from Rs.23120 PMT (tanker sales) in 1998-99 to Rs. 18750 PMT (tanker sale) in 1999-2000. In spite of this sharp decline in sales price, the domestic producers could not retain their market share. In 1999-2000, the apparent domestic consumption increased by 17.73% but the domestic producers could register a growth of only 5.72%. They lost a share of (117.73% X 22976 - 24281) 2769 MT in 1999-2000. The market share lost by them was gained by the imports, which increased by an additional (13671 - 9269x117.73%) 2759 MT.

(ii) The injury to the domestic producers of Methylene Chloride has thus been caused by the increased imports of Methylene Chloride. It has been argued by some parties that if the cause of injury to domestic producers was cheaper imports, it does not hold good any longer as the import prices of Methylene Chloride have shown substantial improvement currently, that is. in the later half of 2000. It has been submitted that the current CIF prices for Methylene Chloride are US$ 450 PMT and as per the applicants own submission the non injurious price was US$350 PMT.

(iii) In this, regard, it is observed that the current CIF prices of Methylene Chloride can not be the basis for arriving at a decision since this is post investigation price having no bearing on the prices prevailing during the period under consideration. The import prices may have increased due to various factors, which would also influence the domestic cost of production. It is neither practicable nor desirable to base the findings on post investigation prices.

(iv) Some parties have also argued in favour of a trigger price mechanism i.e. safeguard duty be imposed only on imports entering at a price lower than a reference price. This, suggestion, however, does not appear to be legally tenable in the context of safeguard(>4 _ ^ _ _ _ __ THE GAZETTE OF INDIA EXTRAORDINARY [PART II—SE<- 3(i)j investigation as that would give it a colour of a price based measure where the low priced imports, although not unfair, would get discriminated and charged to safeguard duty, whereas the higher priced imports would not attract safeguard duty. This does not appear to meet with the objectives of safeguard measures which encourages the domestic producers to make efforts to become competitive, rather than encouraging inefficiency for the domestic industry or for the exporters. The trigger price mechanism on the contrary penalises the efficient foreign producers, while encouraging the inefficient producers.

7. Adjustment Plan

(i) The applicants have submitted a restructuring plan indicating details of efforts being taken and planned to be taken to make a positive adjustment to improve their competitiveness. The applicants have stated that they have been regularly upgrading their technology and de-bottlenecking their manufacturing facilities with the objective of reducing the operative cost per unit of Methylene Chloride,

(ii) M/s. GACL had initially claimed that the reduction in the cost of Methylene Chloride per MT would be on following accounts:

(a) Savings on account of packaging (b) Substituting use of furnace oil with natural gas to achieve reduction in cost of steam, and

(c) Substituting Naptha with natural gas and wheeling of power to reduce the cost of production

(iii) It has specifically been stated by GACL in their application that the replacement of Naptha with natural gas will be achieved in the next 12 months and GACL will be in a position to reduce the cost of production of Methylene Chloride by about Rs.(confidential)PMT over a period of 3 years. Similarly, Chemplast had stated that by drawing power from captive generation they will achieve a saving of Rs.(confidential)PMT of Methylene Chloride. In their response to the questionnaire and written submissions made during the Public Hearing, GACL have stated that Chlorine and power cost are the major inputs for manufacture of Methylene Chloride. In order to cut down Chlorine cost they have tied up with M/s. Gujarat Sate Petroleum Corporation for supply of natural gas to enable them change over to natural gas from Naphtha as a feedstock for their to 90MW captive power plant being operated in Dahej. They have proposed wheeling the low cost power from Dahej to Baroda plant which will help them to reduce the power cost and as a sequel the cost of Chlorine and in turn cost of Methylene Chloride. They have also stated that reduction in power cost will reduce the cost of power consumed in the manufacture of Methylene Chloride. Besides, they have also stated that they are making efforts to reduce the packing cost and discussing with various financial institutions to bring down the cost of their borrowing which is expected to bring down the cost of Methylene Chloride further. Similarly, Chemplast have stated that they propose to operate their plant at lower molar ratio so as to maximize production of Methylene Chloride. They have stated this would result in a cost saving of Rs.(confidential)PMT and further they anticipate reduction in cost of Methylene Chloride to the extent of Rs.(confidential) by importing Methanol at Cochin instead of at Kandla. The domestic producers, therefore, requested for imposition of safeguard duty for a period of three years.

(iv) The adjustment plans furnished by the applicants have been examined. In view of the fact that most of the imported Methylene Chloride arrives in tankers, price comparison needs to be made for Methylene Chloride sold in bulk. The cost reduction efforts on account of packaging have, therefore, to be excluded. Besides, imposition of safeguard duty for three years needs to be considered in its right perspective. It is considered after due analysis of the restructuring plan, and keeping in view the possibility of implementation of the plans, protection for a shorter duration of one year alone should be adequate for the domestic producers to prevent occurrence of serious injury.

8. Public interest:

(i) Some of the parties have argued that imposition of safeguard duty would not serve any public interest. On the contrary imposition of safeguard duty would place a major cost burden on a number of end user industry, in particular, bulk drug manufacturers ,and would ultimately result in increased costs for consumers of their products. However, the applicants have stated that the impact of cost of Methylene Chloride would be negligible vis-a-vis the final formulated product price, to be paid for by the consuming public.

(ii) In this regard, it is observed that the expression 'public interest' does not cover in its ambit consumer interest alone. It is a much wider term, which covers in its ambit the general social welfare taking into account the larger community interest. While the imposition of safeguard duty may result in increased cost of imported Methylene Chloride in the hand of buyers and therefore, it may also affect the end products manufactured therefrom, it is important to keep in mind the objective of imposition of safeguard doty. The purpose of imposition of safeguard duty is to provide time to the domestic industry to make positive adjustment to meet with tihe new situation of competition offered by the increased imports. The imposition of safeguard duty, for the period and to the extent just adequate, would, therefore, not only minimise the adverse effect, if any, for the customers but also allow them a wider choice to source their requirements, and at competitive prices. The domestic producers who have set up plants with huge public investments provide employment to a large number of people and make valuable contribution to the national economy. Safeguard duty, which would enable the domestic producers to survive in the face of competition offered by the increased imports, will, therefore, also be in the long term interest of the buyers of Methylene Chloride as well as of the buyers of products manufactured therefrom. It is, therefore, considered that imposition of safeguard duty on Methylene Chloride will be in the public interest.

9. Provisional Safeguard Duty

In view of the fact that after completing the investigations final findings are being issued in this case, it is not considered necessary to record any preliminary findings for the purpose of imposition of provisional safeguard duty.

10. Share of Countries in Exports to India

On the basis of information as verified, in regard to imports of Methylene Chloride into India during the period 1999-2000, the share of various countries in India's imports were as under:

Table-6

Country/Territory

Chinese Taipei P.R.China Denmark France Germany Hongkong The Netherlands South Africa U.K. U.S.A. Total

%age share 0.29 0.15 0.04 12.63 34.60 0.15 12.90 0.18 38.33 0.73 100

Imports (MT) 40.248 20.124 5.5 1727 4730.896 20.124 1763.247 25.378 5238.477 100 13670.994

11. Conclusion and Recommendation

(i) In view of the findings above, it is concluded that increased imports of Methylene Chloride into India have threatened to cause serious injury to the domestic producers of Methylene Chloride and it will be in the Public interest to impose safeguard duty for a period of one year on imports of Methylene Chloride into India.

(ii) In arriving at the amount of safeguard duty that would be adequate to prevent serious injury to the domestic industry and to facilitate positive adjustment, weighted average cost of production (bulk) for GACL and CSL has been taken into account for the entire period 1999-2000, being more reflective of the true costs for the whole year. The domestic producers have claimed a certain amount of profit on the basis of expected return on capital employed etc. However, a lower profit (confidential) has been considered appropriate and allowed. Similarly the CIF import prices of Methylene Chloride have also been considered on weighted average basis for the last six months i.e. October 1999 - March 2000. Adjustment has been made in the CIF import price for landing charges. The extent of protection has also been considered on the basis of benefit likely to occur from the restructuring of the domestic industry, and only the minimum level of protection is being recommended that would facilitate the domestic industry to make a positive adjustment. Accordingly, it is recommended that safeguard duty be imposed on import of Methylene Chloride into India at the(>", . _ ^ _ _ _. THE G A Z E T TE OF [NDIA EXTRAORDINARY [PARI II—She l ( i )| rate specified below at advalorem basis for a period of one year as under being the minimum necessary for the protection of the domestic industry from the serious injury threatened to be caused by the increased imports of Methylene Chloride.

Existing

protection %

Level of total protection recommended %

Safeguard duty recommended % (2X0 (3) 11

(2) 38.5

(1) 38.5+ 11

[F No SG/INV/2/2()(X>l

R K GUPTA, Director General

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