Introduction

The Union Budget 2021-2022 introduced several amendments to the trade remedial framework in India. One of the changes proposed to be made is the introduction of anti-absorption provisions in the legal framework governing anti-dumping and countervailing duty investigations. Though anti-absorption provisions have been in existence in jurisdictions like the United States and the European Commission, it is the first time that anti-absorption provisions are being introduced in the Indian legal framework.

Before discussing the relevant legislative changes that have been introduced vide Union Budget this year, it would be imperative to first introduce the notion of anti-absorption mechanism.

Purpose of anti-absorption provisions

When trade remedial measures such as anti-dumping duty (‘ADD’) or countervailing duty (‘CVD’) is imposed on imports of a particular product into a country by the government of the importing country, the purpose is to remove the impact of the unfair trade and create a level playing field between the dumped/subsidized imports and the domestically produced goods.

The level-playing field sought to be created by the imposition of ADD/CVD is effected when the importer clears the subject goods from customs after paying the ADD/CVD, apart from ordinary customs duties in force. Other things remaining the same, this leads to an increase in cost of imported goods as a result of ADD / CVD paid on such goods. This is intended to level the playing field between the domestically manufactured goods and the imported goods.

There may be a situation when in spite of imposition of ADD / CVD, the price of the imported goods in the Indian domestic market does not increase, thereby giving imported goods a competitive advantage over the domestically manufactured goods. One of the circumstances which may lead to this situation is when the exporters reduce their export price to the extent of ADD / CVD levied on the subject goods. Except when there is a valid reason for such reduced export price, such a practice is called ‘absorption’ of ADD / CVD by the exporter and leads to the same situation of unfair trade in the Indian domestic market.

For an easier understanding of absorption, reference may be made to the example below.

Figure 1: Import of goods without ADD

In the above example, the exporter has invoiced the goods to the importer at US$ 80 (dumped price) and with the addition of freight, insurance etc. and import duties, the said goods land in India at a price of US$ 100 (without any ADD). They are re-sold by the importer into the domestic market after adding a markup of US$ 20 to account for his profit margins and other selling costs.

Let us assume that the fair market price in India of the like goods produced by the domestic industry is US$140. The government, after investigation, imposes a duty of US$20 on this import to create a level playing field. After ADD, the following scenario emerges:

Figure 2: Import of goods with ADD

In figure 2, the goods are being imported after payment of ADD of US$ 20 making the landed value and re-sale price go up by the same amount. The price paid by the end-customer in the domestic market is US$ 140. Thus, the ADD of US$ 20 has created a level playing field and the users of subject goods in India will now have a fair choice between imports and domestic product which is also selling at US$140 in the local market.

Now, let us consider a situation where the exporter has reduced its export price in the following illustration:

Figure 3: Import of goods with ADD not passed on to the customer

In the above illustration, even though the importer is importing the goods after paying ADD of US$20, the goods are being resold to the customers in India at a price which is lower than the fair market price of the US$140 charged by the domestic industry in India. The exporter’s reduction of export price has commercially enabled the importer to resell the imported goods in the domestic market at the same price as in Figure 1 by not including ADD. As a result, the investigating authority’s objective of creating a level playing field by the imposition of ADD is negated.

Such a practice is called absorption and may be considered a form of unfair trade practice. In order to counter the same, the investigating authority would need to be empowered to investigate such practices and recommend/enforce the necessary countermeasures.

Relevant changes proposed in the Customs Tariff Act

Anti-absorption provisions have been sought to be introduced into the Indian legal framework by the proposed amendments to the Customs Tariff Act, 1975 by the Finance Bill, 2021. With regard to anti-dumping investigations, Financial Bill, 2021 has proposed to introduce a new sub-section (1B) to Section 9A of the Customs Tariff Act, 1975, which states:

Section 9A (1B)-‘Where the Central Government, on such inquiry as it may consider necessary, is of the opinion that absorption of anti-dumping duty imposed under sub-section (1) has taken place whereby the anti-dumping duty so imposed is rendered ineffective, it may modify such duty to counter the effect of such absorption, from such date, not earlier than the date of initiation of the inquiry, as the Central Government may, by notification in the Official Gazette, specify.

Explanation. –For the purposes of this sub-section, “absorption of anti-dumping duty” is said to have taken place, -

(a) if there is a decrease in the export price of an article without any commensurate change in the cost of production of such article or export price of such article to countries other than India or resale price in India of such article imported from the exporting country or territory; or

(b) under such other circumstances as may be provided by rules.’

With regard to anti-subsidy investigations, Financial Bill, 2021 has proposed to introduce a new sub-section (1B) to Section 9 of the Customs Tariff Act, 1975, which states:

Section 9 (1B)- ‘Where the Central Government, on such inquiry as it considers necessary, is of the opinion that absorption of Countervailing duty imposed under sub-section (1) has taken place whereby the Countervailing duty so imposed is rendered ineffective, it may modify such duty to counter the effect of such absorption, from such date, not earlier than the date of initiation of the inquiry, as the Central Government may, by notification in the Official Gazette, specify.

Explanation. –For the purposes of this sub-section, “absorption of countervailing duty” is said to have taken place, –

(a) if there is a decrease in the export price of an article without any commensurate change in the resale price in India of such article imported from the exporting country or territory; or

(b) under such other circumstances as may be provided by rules.’

Though the proposed anti-absorption provisions are largely similar for both ADD and CVD purposes, the statute proposes to have more exceptions in the case of ADD. In case of both ADD/CVD, absorption is said to have taken place if there is a decrease in the export price of an article without any commensurate change in the resale price in India of such article.

However, in the case of ADD, the proposed amendment identifies two additional exceptions when absorption cannot be said to have taken place. These are two legal situations when the reduction in export price is not because of absorption of ADD / CVD by the exporter, but for below reasons:

• When there has been a corresponding reduction in the cost of production of said goods; or
• Sales price to third countries from the subject country has also reduced correspondingly.

It may be noted that the above circumstances are not definitive. The proposed provisions also permit the anti-absorption rules to be made to define other circumstances of absorption.

It is also relevant to note the proposed amendments permit the Central Government to impose anti-absorption measures retrospectively. However, the retrospective imposition cannot be earlier than the date of initiation of the anti-absorption investigation.

Legal framework for anti-absorption investigations in the European Union

After the proposed provisions are enacted by the Parliament, the Directorate General of Trade Remedies (‘DGTR’) is expected to notify the rules to define the framework for the conduct of anti-absorption investigations. Since anti-absorption provisions are being introduced for the first time in India, the DGTR may look to develop the legal framework governing anti-absorption investigations based on the laws in other jurisdictions such as the United States and the European Union (‘EU’). For a better understanding of anti-absorption provisions, certain aspects in the EU’s anti-dumping framework are discussed below.

1. Initiation of anti-absorption investigations: Anti-absorption proceedings in the EU are governed by the provisions of Article 12 of the Basic EU anti-dumping regulation.[1] As per paragraph 1 (of Article 12), anti-absorption investigations may be initiated subsequent to an application filed by the domestic industry or any other party, or even suo moto by the investigating authority. Further, such investigations are in the nature of reviews. As per paragraph 1, the applicant will have to submit sufficient information to show that, after the original investigation period and prior to or following the imposition of measures, export prices have decreased or that there has been no movement, or insufficient movement, in the resale prices or subsequent selling prices of the imported product in the EU.
2. Participation of exporters and importers: As per paragraph 2 (of Article 12), in an anti-absorption investigation, producers/exporters from the subject country and importers in the EU are provided an opportunity to clarify whether the non-movement of domestic selling prices subsequent to imposition of ADD is due to reasons other than absorption. In order to determine whether the domestic prices have moved sufficiently, the investigating authority may compare the price levels of the subject goods charged during the period of investigation in the anti-absorption investigation with that charged during the period of investigation in the original investigation.[2]
3. Nature of anti-absorption measures: If it is determined that absorption of ADD and lack of movement of resale prices is due to reduction in export prices, then the paragraph 2 of Article 12 empowers the investigating authority to re-determine new dumping margins. The investigating authority also calculates a new injury margin. Based on the lesser duty rule, the investigating authority then revises the applicable rate of ADD with the objective to counter the absorption.

Conclusion

The proposed introduction of anti-absorption provisions in the ADD/CVD framework is a continuation of the measures taken by the Central Government in the previous Budget 2020-21 towards strengthening the protection available to the domestic industry. The proposed introduction of anti-absorption provisions tightens the mechanism for countering unfair trade practices and closes the loopholes for unscrupulous practice of reducing the export prices to nullify the effects of ADD/CVD in force.

It is relevant to note that the participation of the importer, related or unrelated, is very important, especially to understand the movement of domestic prices post the imposition of ADD/CVD.

[The author is an Associate in WTO & International Trade Practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

1. [1] Regulation (EU) 2016/1036 of the European Parliament and of the Council of 8 June 2016 on protection against dumped imports from countries not members of the European Union
2. [2] See Council Regulation (EC) No 236/2004 of 10 February 2004 amending Regulation (EC) No 1339/2002 imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of sulphanilic acid originating in the People's Republic of China and India