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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, Gujarat

(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

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.

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.

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.

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 3^rd September, 2000.

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., Mumbai

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.

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)

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.

THE GAZETTE OF INDIA ; EXTRAORDINARY

[PART II—SEC, 3(i)l

(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

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

April'98

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 chemicals

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:

(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.

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 in

4 ( ) _ _ _

THE GAZETTE OF INTD1A EXTRAORDINARY

|PART U—SFC 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, the

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.

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

1998

1999

2000

(Aug'2000)

Bulk

3118

48.86

2749

Drum

1054

1694

831

Total

4172

6580

3580

(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 the

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.

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 WTO

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 that

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.

Findings

(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."

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 23^rd 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 27^th 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.

Product under Investigation

(i)

The product under investigation is Methylene Chloride, a

solvent belonging to the Chloromethane family of solvents. The other

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—7

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.

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.

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)

Year

Methylene

Chloride

Chlorine

Methanol

678

135.3

241

1997

CJ2

625

167.9

211

608

139.5

196

661

160.2

179

612

141.

118

1998

590

I 91.58

102

518

71.66

521.

28.4

465

39.03

386

63.56

124

331

139

124

317

209.2

105

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 imports

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:

____.

Name of the

Country

Chinese

Taipei

P.R.China

Denmark

France

Germany

Hongkong

The Netherlands

South Africa

U.K.

U.S.A.

Total

Quantity

(MT)

40.248

20 124

5.5

l727(As

confirmed

Atofina)

4730,896

20.124

1763.247

25.378

5238.477

100

13670.994

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

Year

1995-96

1996-97

1997-98

1998-99

1999-2000

Domestic

productloo (MT)

16340

15588

19111

25091

26138

Imports (MT)

10776

12302

7390

9269

13671

Imports M percentage

of domestic production

65.95

78.92

38.67

36.94

52.30

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."

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 trend

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

the word

"developments",

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 unforeseen

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 of

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 •

—

(

)

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.

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

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

Year

1995-96

1996-97

1997-98

1998-99

1999-2k

GACL

9273

9002

7459

8207

8152

Chemplast

6092

5617

9156

12355

12822

SRF

1583

2405

33071

Total

15365

14619

18198

22967

24281

"°

THE GAZETTE OF INDIA : EXTRAORDINARY

[PART II—SEC. 3(i)l

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

1995-96

1996-97

1997-98

1998-99

1999-2000

Domestic Sales

15365

14619

18198

22967

24281

Imports

10776

12302

7390

9269

13671

Apparent Domestic

Consumption

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—?

THE GAZETTE OF INDIA EXTRAORDINARY

[PART II—Sbc. 3(0]

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.

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 to

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

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.

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

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.

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.

6 6

THE GAZETTE OF INDIA : EXTRAORDINARY

[PART II—SEC. 3(i)j

(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.

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

Imports

(MT)

40.248

20.124

5.5

1727

4730.896

20.124

1763.247

25.378

5238.477

100

13670.994

%age

share

0.29

0.15

0.04

12.63

34.60

0.15

12.90

0.18

38.33

0.73

100

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 GAZETTE 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.

Level

total

protection

recommended %

(1)

38.5+ 11

Existing

protection

(2)

38.5

Safeguard

duty

recommended %

(2X0

(3)

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

R K GUPTA, Director General

Printed by the Manager, Govt ot India Prcbs King Road

Mavupun, New Delhi 111)064

and Published bv the Controller ol Publications, Delhi-110054