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Geneva, 16 January 2001

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A. Scope of Application…………………………………………….10

B. Requirements imposed by Public Notice No 60…………………10

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a) The measures are “requirements”……..14

b) Domestic parts and materials are “like” the imported goods……16

c) The measures “affect” the internal “use” of the productsconcerned…...……………………………………………………17

d) Imported goods are afforded “less favourable treatment”……….17

e) Precedent and the TRIMs Agreement confirm that the“indigenisation” requirements are inconsistent with Article III:4.17

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a) The “neutralisation” requirements are “measures”…………….. 19

b) The “neutralisation” requirements are not “duties, taxes or othercharges”………………………………………………………….20

c) The “neutralisation” requirements “restrict” imports……………20

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d) The TRIMs Agreement confirms that the “neutralisation”requirements are prohibited by Article XI:1……………………..20

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a) The measures are“requirements”…………………………………..20

b) Imported products are “like” domestic product………………….21

c) The “neutralisation” requirements “affect” the internal “purchase”of imported goods..………………………………………………21

d) The “neutralisation” requirements afford “less favourabletreatment” to imported products…………………………………21

e) The TRIMs Agreement confirms that the “neutralisation”requirements are inconsistent with Article III:4…………………21

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a) The CVA Requirement and the Ratio Requirement are “investmentmeasures”………………………………………………………..22

b) The “indigenisation” requirements and the “neutralisation”requirements are “related to trade in goods”…………………… 23

c) The “indigenisation” requirements and the “neutralisation”requirements fall within the Illustrative List of prohibitedTRIMs…………………………………………………………... 23

d) The “indigenisation” and “neutralisation” requirements have notbeen notified under Article 5.1 of the TRIMs Agreement……….23

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1. The European Communities (the “EC”) bring this complaint against the localcontent and export balancing requirements imposed by India upon the foreignmanufacturers of passenger cars established in its territory, which are contained inPublic Notice No 60 and the Memoranda of Understanding (the “MOUs”)concluded thereunder.

2. Public Notice No 60 requires foreign manufacturers of passenger vehicles to enterinto an MOU with the Government of India. The MOUs must stipulate � ��� ����that

– the signatory will reach a minimum level of “indigenisation”over a five-years period; and

– the signatory will achieve “broad neutralization of foreignexchange” over the entire period of the MOU.

3. The conclusion of MOUs is not compulsory. But it is a necessary condition to obtainimport licenses for passenger cars in CKD/SKD1 form, the importation of which iscurrently restricted on balance-of-payments (“BOP”) grounds. Moreover, once it issigned, the MOUs are binding upon the signatory and legally enforceable. India hasagreed to eliminate the BOP import restrictions on passenger cars no later than 1April 2001. But, according to the Indian authorities, the MOUs will remain validand enforceable after that date.

4. The “indigenisation” requirements are typical local content requirements. Theyafford less favourable treatment to imported parts and materials than to likedomestic goods with respect to their internal use in India and are, therefore,prohibited by Article III:4 of the General Agreement on Tariffs and Trade 1994 (the“GATT”).

5. The “neutralisation” requirements restrict the importation of passenger cars, and ofcomponents therefor, contrary to the prohibition contained in Article XI:1 of GATT.Furthermore, in so far as they apply also with respect to automotive productspurchased by the signatories within India, they are also inconsistent with ArticleIII:4 of GATT.

6. Both the “indigenisation” and “balancing” requirements are “trade relatedinvestment measures” within the meaning of the Agreement on Trade and RelatedInvestment Measures (the “TRIMs Agreement”). The “indigenisation” requirementsfall within Items 1(a) of the Illustrative List of prohibited TRIMs, whereas the“neutralization” requirements are caught by the terms of Items 1(b) and 2(a). Byimposing those requirements upon the signatories of the MOUs, India actsinconsistently with Article 2.1 of the TRIMs Agreement.

1 “CKD” means “completely knocked down”. “SKD” means “semi-knocked down”.

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7. The measures at issue have not been notified by India under Article 5.1 of theTRIMs Agreement. Indeed, since those measures were adopted by India well afterthe entry into force of the WTO Agreement, they could not have been notified underthat provision. Therefore, India’s measures cannot benefit from the transitionalderogation provided for in Article 5.2 of the TRIMs Agreement.

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8. On 6 October 1998, the EC requested consultations with India under Article 4 of theUnderstanding on Rules and Procedures Governing the Settlement of Disputes“DSU”), Article XXII:1 of GATT and Article 8 of the TRIMs Agreement(WT/DS143/1).

9. Consultations were held in Geneva on 2 December 1998. At their request, Japan andthe United States were joined to the consultations (WT/DS146/2 and WT/DS/146/3,respectively).

10. On 12 October 2000, the EC requested the establishment of a Panel pursuant toArticles 4.7 and 6 of the DSU, Article XXIII of GATT and Article 8 of the TRIMsAgreement, in accordance with the standard terms of reference provided for inArticle 7.1 of the DSU (WT/DS/146/4).

11. At its meeting of 17 November, the Dispute Settlement Body (“DSB”) agreed that,in accordance with Article 9.1 of the DSU, the Panel established on 27 July 2000 toexamine a complaint by the United States with respect to the same measures(WT/DS/175/4) should also examine the complaint by the EC (WT/DS146/5,WT/DS175/5).

12. The terms of reference of the Panel are:

“To examine, in the light of the covered agreements cited by theUnited States in WT/DS/175/4 and by the European Communitiesin WT/DS146/4, the matters referred to the DSB by the UnitedStates and the European Communities and to make such findingsas will assist the DSB in making the recommendations or in givingthe rulings provided for in those agreements.”

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13. India regulates the imports of goods by means of a Negative List contained in theExport-Import Policy (the “EXIM Policy)2. The Negative List3 consists of“prohibited”4 items, “restricted” items and “canalised”5 items.

14. “Restricted” items are permitted to be imported only against a specific importlicense issued by the Director General of Foreign Trade in India’s Ministry ofCommerce (“DGFT”)6. The grant of import licenses for “restricted” items is notautomatic7. Licenses are granted on a discretionary basis or, in some cases, subjectto the conditions set out in advance in a Public Notice.

15. Under the current EXIM Policy, passenger cars (HS8 87.03), and chassis (HS 87.06)and bodies (HS 87.07) therefor, are classified as “restricted” items in the NegativeList.

16. In contrast, parts and accessories for passenger cars (including � ��� ���� thosefalling within HS 87.08, 40.11, 40.12, 40.13, 70.07, 70.09, 90.29, and 94.01) are notincluded in the Negative List and can, therefore, be freely imported.

17. In accordance with Rule 2 a) of the General Rules for the Interpretation of the HSnomenclature9, the Indian customs authorities classify within HS 87.03 complete

2 The EXIM Policy is formulated and announced from time to time by the Indian Government on thebasis of the authority conferred by the Foreign Trade Development and Regulation Act, 1992(hereinafter the “FTDR”, Exhibit EC - 1) (cf. Section 5 of the FDTR). The policy currently in effect isthe Export and Import Policy 1 April 1997 – 31 March 2002 (Exhibit EC - 2).

3 Chapter 16 of the EXIM Policy. The Negative List is further specified in the “ITC (HS) Classificationsof Export and Import Items”, published and notified by the DGFT (cf. Section 4.1 of the EXIM Policy)(the relevant sections of the HS Classification are provided as Exhibit EC - 3).

4 Section 4.4 of the EXIM Policy (“Prohibited items in the Negative List of imports shall not beimported [ …]”).

5 Section 4.8 of the EXIM Policy (“Any goods, the import or export of which is canalised, may beimported by the canalising agency specified in the Negative Lists […]”).

6 Section 4.5 of the EXIM Policy (“Any goods, the export or import of which is restricted throughlicensing, may be exported or imported only in accordance with a license issued in this behalf”).

7 Section 4.7 of the EXIM Policy (“No person may claim a license as a right and the Director General ofForeign Trade or the licensing authority shall have the power to refuse to grant or renew a license inaccordance with provisions of the Act and the Rules made thereunder”).

8 The term “HS” refers to the Harmonized Commodity Description and Coding System evolved by theWorld Customs Organisation.

9 Rule 2 a) of the General Rules for the Interpretation of the HS reads as follows:

“Any reference in a heading to an article shall be taken to include a reference to thatarticle incomplete or unfinished, provided that, as presented, the incomplete or unfinished

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passenger cars that are presented unassembled (CKD” kits), as well as incompletepassenger cars, whether assembled or disassembled (“SKD” kits), provided that theyhave the “essential character” of a complete car10. According to the IndianGovernment, imports of parts and components are considered to have the “essentialcharacter” of a passenger car where, at least, all the following seven items areimported: engine, gear box, chassis, transmission assembly system, body/cab,suspension system and axles front and rear11.

18. The restrictions on imports of passenger cars, and of chassis and bodies therefor, aremaintained by India on BOP grounds12. On 24 July 1997 the EC requestedconsultations with respect to all the import restrictions maintained by India on BOPgrounds, including those on passenger cars, and chassis and bodies therefor13. As aresult of those consultations, the EC and India reached a mutually agreed solution on25 November 1997 (the “1997 Agreement”)14.

19. The 1997 Agreement stipulates that the import restrictions on passenger cars, and onchassis and bodies therefor, are to be eliminated no later than 31 March 2002. The1997 Agreement, nevertheless, has to a large extent been superseded by theagreement concluded between India and the United States on 24 December 200015

referred to here below.

article has the essential character of the complete or finished article. It shall also be takento include a reference to that Article complete or finished (or falling to be classified ascomplete or finished by virtue of this rule), presented unassembled or disassembled”

(Exhibit EC - 4).

10 India’s Replies to Questions posed by the EC, dated 9 May 1999 (hereinafter “EC Questions”), Replyto Question 1. a) (Exhibit EC - 5).

11 See Public Notice No 3/98 issued by the Delhi Customs House on 6 January 1998 (Exhibit EC - 6).

See also EC Questions, Reply to Question 1.b). It appears that, in practice, this criterion is notuniformly applied and that, sometimes, parts and components are classified into heading HS 87.03 ifthe importing manufacturer does not meet a certain “indigenisation” level. This issue has been thesubject of consultations between India and the EC (see WT/DS96/1), but is not covered by the presentpanel proceedings. The EC reserves its right to pursue further this matter, if necessary.

12 See India’s Notification under paragraph 9 of the Understanding on the Balance of Paymentsprovisions of the GATT 1994, dated 22 May 1997 (WT/BOP/N24) (Exhibit EC – 7).

13 WT/DS96/1 (Exhibit EC – 8). The United States (WT/DS90/1), Australia (WT/DS/91/1), Canada(WT/DS/92/1), New Zealand (WT/DS93/1) and Switzerland (WT/DS94/1) also requestedconsultations with respect to the same measures.

14 The agreement was notified under Article 3.6 DSU ( WT/DS96/8). India reached similar agreementswith Australia, Canada, New Zealand, Switzerland and Japan, but not with the United States.

15 Paragraph 3 of the 1997 Agreement provides that:

“India shall grant to the EC treatment no less favourable than that granted by India to anyother country with respect to the elimination or modification of import restrictions on theproducts in the Annex and those in Annex II of document WT/BOP/N/24, under anyform, either autonomously or pursuant to agreement or understanding with that country,

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20. On 22 July 1997 the United States requested consultations under the DSU withrespect to India’s BOP measures16. A Panel was established on 18 November199717. The Panel concluded that the restrictions applied by India, including thoseapplied to imports of passenger cars, and chassis and bodies therefor, violatedGATT Article XI:1 of GATT and were not justified by GATT Article XVIII:B18.The Appellate Body upheld those findings19.

21. On 24 December 1999 India and the United States agreed, pursuant to Article 21.3(b) of the DSU, that the reasonable period of time for complying with therecommendations and rulings of the DSB would expire on 1 April 200120.Accordingly, India is required to eliminate the current system of non-automaticlicenses for imports of passenger cars, and chassis and bodies therefor, no later than1 April 2001.

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22. On the basis of the authority conferred by Article 4.11 of the EXIM Policy21 theDGFT issued on 12 December 1997 the Public Notice No 6022. According to theIndian Government, Public Notice No 60 is “binding and legally enforceable”23 andeffective from the date of issuance24.

including pursuant to the settlement of any outstanding dispute under the WTOUnderstanding on Rules and Procedures Governing the Settlement of Disputes”.

16 WT/DS/90/1.

17 WT/DS/90/8 and WT/DS/90/9.

18 Panel Report on ��������� � � ������� ��� ������ �� �� ���!�"������ ����#���$ ���� �� ��� ����%���� �, WT/DS/90/R, adopted 22 September 1999 (hereinafter “������&'%��� �� ���� ��� ���”),at para. 6.1. The report addresses the compatibility with GATT Article XI:1 of the licenses required forthe importation of “restricted” items at paras. 5.125 � �����

19 Report of the Appellate Body in ���� �� &'%� �� �� � ��� ��� ���, WT/DS90/R, adopted on 22September 1999.

20 WT/DS90/15 (Exhibit EC - 9).

21 Section 4.11 of the EXIM Policy (“The Director General of Foreign Trade may, in any case or class ofcases, specify the procedure to be followed by an exporter or importer or by any licensing, competentor other authority for the purpose of implementing the provisions of the Act, the Rules and Ordersmade thereunder under this Policy. Such procedures shall be included in the Handbook (Vol. 1),Handbook (Vol.2) and ITC (HS) Classifications of Export and Import items and published by means ofa Public Notice. Such procedures may, in like manner, be amended from time to time”).

22 Exhibit EC – 12.

23 Replies by India to questions posed by Japan within the Committee on Trade-Related and Investmentmeasures, document G/TRIMS/W/12 (hereinafter “Japan’s Questions”) (Exhibit EC -10), Reply toQuestion 2.

24 Japan’s Questions, Reply to Question 1.

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23. Public Notice No 60 has no termination date25. Nevertheless, according to the IndianGovernment, “once the quantitative restrictions which cover autos and auto parts inthe phase out plan are removed, the Public Notice 60 shall cease to operate”26. Thus,the EC assumes that, in accordance with the 1999 Agreement between India and theUnites States, Public Notice No 60 shall “cease to operate” no later than 1 April2001.

A. Scope of Application

24. Public Notice No 60 is applicable only with respect to passenger cars27.

25. By its own terms, Public Notice No 60 applies only to joint ventures between Indianand foreign investors28. Nevertheless, the Indian Government has indicated thatcompanies wholly owned by Indians are subject to the same requirements29.

26. Public Notice No 60 applies to both “existing” (i.e. those established before 12December 1997) and “new” joint ventures30.

B. Requirements imposed by Public Notice No 60

27. Public Notice No 60 requires joint venture manufacturers to enter into an MOU withthe DGFT as a necessary condition to obtain import licenses for automobiles inCKD/SKD form31, the importation of which is restricted pursuant to the EXIMPolicy.

28. The MOUs must be “based on” four “parameters” 32 specified in Public Notice No60 and follow the standard format included in an appendix thereto33. The four“parameters” are the following:

25 India’s Replies to questions from the US dated 10 May 1999 (hereinafter, “US Questions”), Reply toQuestion 10.

26 Ibid.

27 Public Notice No 60, para. 7. See also EC Questions, Reply to Question 5.

28 Public Notice No 60, at paras. 1 and 2.

29 US Questions. In response to Question 3, India stated that “Indian companies importing CKD/SKDkits are also being subjected to the same requirements of indigenisation as well as foreign exchangeneutralisation”. See also India’s Reply to Question 16.

30 Public Notice No 60, at para. 2.

31 Ibid., paras. 2 and 4.

32 Ibid., para. 3

33 Ibid., para. 8

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– the signatory of the MOU must establish “actual productionfacilities for the manufacture of cars and not for mere assemblyof imported kits/components”34;

– the foreign partner must invest a minimum of US $ 50 millionwithin the first three years of the start of operations. (Thisrequirement, nevertheless, applies only to new joint ventureswith a majority of foreign equity)35;

– the signatory must achieve a minimum level of “indigenisation”over a five-years period36; and

– the signatory must achieve “broad neutralization of foreignexchange” over the entire period of the MOU37.

29. The EC complaint is concerned with the last two requirements, which are describedin further detail here below

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30. The MOU signatories must achieve a level of indigenisation of 50 % in the thirdyear from the first import or earlier, and of 70 % no later than the fifth year38.

31. The Indian Government has confirmed that “indigenisation” means “localcontent”39. The EC understands that in practice the percentage of indigenisation iscomputed in accordance with the following formula:

(CIF value of imported parts and materials assembled into the passengercar / ex works value of the passenger car) x 100

32. The EC further understands that the numerator includes not only the value of theparts and materials imported directly by the MOU signatory but also the value of anyimported parts and materials purchased in India by the joint ventures from localvendors.

33. Public Notice No 60 does not prescribe whether the percentage of indigenisation isto be measured on a model, category or manufacturer basis. It appears that, in

34 Ibid., para. 3 (i).

35 Ibid., para. 3 (ii).

36 Ibid., para. 3 (iii).

37 Ibid., para. 3 (iv).

38 Ibid., para (iii).

39 US Questions, Reply to Question 6.

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practice, the Indian authorities may allow the manufacturers to meet the requirementon any of those basis40.

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34. The requirement to achieve “broad neutralization of foreign exchange” translatesinto the obligation to balance the CIF value of imports of “CKD/SKDkits/Components” and the FOB value of “cars and auto components” over the entireperiod of duration of the MOU41.

35. The MOU signatories are not required to start exporting until the third year from thecommencement of production42. But the value of imports made during the first twoyears must be balanced in subsequent years43.

36. Public Notice No 60 further specifies that from the fourth year onwards “the valueof imports of CKD/SKD may be regulated with reference to the export obligationfulfilled in the previous years as per the MOU”. The precise meaning of thisprovision, however, remains unclear44.

37. The wording of Public Notice No 60 suggests that the balancing obligation extendsnot only to imports of “CKD/SKD kits” but also to imports of “components”. Thatinterpretation has been corroborated to the EC by some signatories of MOUs.During the consultations, however, India asserted that “the signatories have toneutralise only the value of imported CKD/SKD kits and not of those componentswhich are freely imported”45.

38. It is also unclear whether the balancing requirement applies to imported kits andcomponents purchased by the signatories within India, or only to those which theyimport themselves. Before the TRIMs Committee India explained that “[b]roadneutralisation of foreign exchange … includes the purchases in India of the importedcomponents or CKD/SKD kits”46. Yet, during the consultations, India answered to aquestion from the United States that “the signatories of the MOU have to neutraliseonly the value of CKD/SKD imported by them …”47.

40 Ibid�

41 Public Notice No 60, para 3 (iv). See also Japan’s Questions, Reply to Question 23.

42 Ibid.

43 Ibid.

44 See Japan’s Questions, Reply to Question 24, and US Questions, Reply to Questions 7 and 8.

45 EC Questions, Reply to Question 8. See also US Questions, Reply to Questions 7 and 8.

46 Japan’s Questions, Reply to Question 23.

47 US Questions, Reply to Questions 7 and 8.

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39. The Indian Government has refused to disclose the MOUs as well as the identity ofthe MOU signatories, by invoking confidentiality grounds48. Nevertheless, it hasindicated that all MOUs signed so far are “in tune” 49 with Public Notice No 60.

40. The information made available to the EC by some signatories confirms that,although the MOUs may occasionally depart from the standard format, all of themreproduce, with minor variations, the terms of the “indigenisation” and “foreignexchange neutralization” requirements as set out in Public Notice No 60.

41. According to the Indian Government, the MOUs are “binding” upon the signatoriesand “enforceable” under the FTDR Act50. The enforcement mechanisms providedfor in the FDTR Act include the cancellation or suspension of the Importer-ExporterCode Number51 and of the import or export licenses52, the imposition of fines53 andthe confiscation of the imported or exported goods54.

42. The Indian Government has further indicated that, “the obligation under the MOUsalready entered shall continue to be valid even after the termination of Public Noticeas they shall continue to be enforceable under the FT (DR) Act”55.

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43. The indigenisation” requirements are inconsistent with GATT Article III:4 in thatthey provide less favourable treatment to imported parts and materials than to likedomestic goods with respect to their internal use in the production of passenger cars.

48 Japan’s Questions, Reply to Question 7; EC Questions, Reply to Question 4 (a); and US Questions,Reply to Question 2.

49 Japan’s Questions, Reply to Question 8.

50 US Questions, Replies to Questions 2 and 10.

51 Section 8 of the FTDR Act. Section 7 of the FTDR Act stipulates that “No person shall make anyimport or export except under an Importer-Exporter Code Number ….”.

52 Section 9 of the FTDR Act.

53 Section 11 of the FTDR Act.

54 Ibid.

55 US Questions, Reply to Question 10.

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44. Article III:4 of GATT provides in relevant part that

“The products of the territory of any contracting party importedinto the territory of any other contracting party shall be accordedtreatment no less favourable than that accorded to like products ofnational origin in respect of laws, regulations and requirementsaffecting their internal sale, offering for sale, purchase,transportation, distribution or use […].”

45. Accordingly, in order to rule on this claim the Panel will need to address thefollowing issues:

– first, whether the measures at issue are “laws, regulations orrequirements”;

– second, whether domestic products are “like” imported products;

– third, whether the measures “affect” the “internal use” of theproducts concerned; and

– fourth, whether the measures afford “less favourable treatment” toimported products than to domestic products.

a) The measures in dispute are “requirements”

46. By now it is firmly established that Government action needs not be compulsory inorder to qualify as a “requirement” for the purposes of GATT Article III:4.

47. In (������)��" the Panel held that the legally enforceable undertakings given bysome foreign investors to the Canadian Government constituted “requirements”,even though the submission of such undertakings was voluntary56.

56 The Panel reasoned as follows:

"The Panel first examined whether the purchase undertakings are to be considered ’laws,regulations or requirements’ within the meaning of Article III:4. As both parties hadagreed that the Foreign Investment Review Act and the Foreign Investment ReviewRegulations –whilst providing for the possibility of written undertakings- did not maketheir submission obligatory, the question remained whether the undertakings given inindividual cases are to be considered ‘requirements’ within the meaning of Article III:4.In this respect the Panel noted that Section 9(c) of the Act refers to ‘any writtenundertakings […] relating to the proposed or actual investment given by any party theretoconditional upon the allowance of the investment’ and that section 21 of the Act statesthat 'where a person who has given a written undertaking…fails or refuses to comply withthe undertaking' a court order may be made ‘directing that person to comply with theundertaking’. The Panel further noted that written purchase undertakings –leaving asidethe manner in which they may have been arrived at (voluntary submission,encouragement, negotiation, etc)- once they were accepted, became part of the conditionsunder which the investment proposals were approved, in which case compliance could belegally enforced. The Panel therefore found that the word ‘requirements’ as used inArticle III:4 could be considered a proper description of existing undertakings."

15

48. Similarly, in **(���%�� ����(�� �� � the Panel concluded that the conditionsaccepted by a firm in order to obtain an “advantage” granted by the EC authoritiesalso constituted “requirements”57. Subsequent cases have clarified that the“advantage” may consist of a benefit in respect of a border measure58.

49. More recently, in (������"� ��� the Panel went even further by holding that the“letters of undertaking” submitted by certain firms at the request of the CanadianGovernment were “requirements”, even though they were neither legally enforceablenor a condition to obtain an advantage 59.

Panel Report on (���� �� "���� �� ��� �!� ��� )������ ���� �� � �����+� "� , adopted on 7February 1984, BISD 39S/140 (hereinafter “(������)��"”), at para. 4.5.

57 Panel Report on **(��������� ������� �� ���!�%�� ����(�� �� �, BISD 37S/132, adopted on16 May 1990, (hereinafter “**(,�%�� ������� �� ��), at para. 5.21:

"…. Article III:4 refers to 'all laws, regulations or requirements affecting the internal sale,offering for sale, purchase, transportation, distribution or use'. The Panel considered thatthe comprehensive coverage of 'all laws, regulations or requirements �!!�� �� (emphasisadded) the internal sale, etc.’ of imported products suggests that not only requirementswhich an enterprise is legally bound to carry out, such as those examined by the FIRAPanel (BISD 30S/140, 158), but also those which an enterprise voluntarily accepts inorder to obtain an advantage from the government constitute 'requirements' within themeaning of that provision."

The same interpretation underlies the Report on � �����-�������� �������� ��� �� ��"������ ����.������/, adopted on 23 October 1958, BISD 7S/60 (hereinafter “� �����"������ �����.������/”),where the Panel concluded that an Italian law providing especial credit terms to farmers for thepurchase of agricultural machinery conditional upon the purchase by the farmers of Italian machinerywas contrary to Article III:4 of GATT.

58 See e.g. Panel Report on *(� �� ������� !��� ��� �� �� � ��#� 0���� �� -�� ���� ��� �!� &����,WT/DS27/R/USA, adopted 25 September 1997 (hereinafter “*(� �� &����”), at paras. 7.179 and7.180, where the Panel found that a requirement to purchase domestic bananas in order to obtain theright to import bananas at a lower duty rate under a tariff quota was a requirement “affecting” theinternal purchase of a product within the meaning of GATT Article III:4 On appeal, this finding wasupheld by the Appellate Body, WT/DS 27/AB/R, at paras. 208-211.

Similarly, in ��������"� ��, the Panel concluded that the granting of a duty exemption conditionalupon compliance with a local content requirement was inconsistent with GATT Article III:4 andviolated Article 2 of the TRIMs Agreement. In reaching this conclusion, the Panel rejected Indonesia’sattempted defence that the measure was a “border” measure not covered by GATT Article III:4:

“We do not consider that the matter before us in connection with Indonesia’s obligationsunder the TRIMs Agreement is the customs duty relief as such but rather the internalregulations, i.e. the provisions on purchase and use of domestic products, compliancewith which is necessary in order to obtain an advantage, which advantage here is thecustoms duty relief. The lower duty rates are clearly ‘advantages’ in the meaning of thechapeau of the Illustrative List to the TRIMs Agreement and as such, we find that theIndonesian measures fall within the scope of the Item 1 of the Illustrative List of theTRIMs.”

Panel Report on ���������.���������!!�� ��� ���"� ��� ������� �/, WT/DS54/R, WT/DS55/R,WT/DS59/R, WT/DS64/R, adopted 23 July 1998 (hereinafter, “������,�"� ��”) at para. 14.89.

59 The Panel cited the following circumstances in order to conclude that the “letters of undertaking” were“requirements”:

16

50. Public Notice No 60 does not impose upon the joint-ventures a legal obligation toconclude an MOU with the Indian Government. Nonetheless, the conclusion of anMOU is a necessary condition for obtaining an advantage: the grant of importlicenses for CKD and SKD kits. Moreover, once it is signed, the MOU is bindingupon the signatory and legally enforceable under the FTDR.

51. The EC submits that, in light of the precedents cited above, either of those twofeatures in and by itself is more than sufficient to reach the conclusion that PublicNotice No 60 and the MOUs concluded thereunder constitute “requirements” withinthe meaning of Article III:4.

b) Domestic parts and materials are “like” the imported goods

52. The distinctions operated by the “indigenisation” requirements are based exclusivelyon the origin of the products: whereas parts and materials of Indian origin contributeto satisfy the “indigenisation” percentage, imported parts and materials do not.

53. Clearly, however, the mere fact of having Indian origin is not, as such, apt to conferupon parts and materials any characteristic, property or quality which makes them,by definition, “unlike” any imported good60.

c) The measures “affect” the internal “use” of the products concerned

54. The term “affect” has been given a broad scope of application. According to thePanel report in � �����"������ �����.������/,

“(i) in making the undertakings contained in the Letters, the companies acted at therequest of the Government of Canada; (ii) the anticipated conclusion of the Auto Pactwas a key factor in the decision of the companies to submit these undertakings; (iii) thecompanies accepted responsibility ���,1,��� the Government of Canada with respect tothe implementation of the undertakings contained in the Letters, which they described as‘obligations’ and in respect of which they undertook to provide information to theGovernment of Canada and indicated their understanding that the Government of Canadawould conduct yearly audits; and (iv) at least until model year 1996, the Government ofCanada gathered information on an annual basis concerning the implementation of theconditions provided for in the Letters.”

Panel Report on (���� �� (�� ��� .�������� �!!�� ��� ��� "� ��� ���� ��� �/, WT/DS139/R,WT/DS142/R, adopted on 19 June 2000, (hereinafter “(������"� ���), at para. 10.122.

60 In ���������"� ��, the Panel noted, at para 14.113, that an

“… origin-based distinction in respect of internal taxes suffices in itself to violate Article III:2,without the need to demonstrate the existence of actually traded like products”.

See also the Panel Report on (������"� ��, at para. 10.174 and the Panel Report on "��� ����.�������� �!!�� ��� ��� *$ �� � �!� &�����2���� �� ��� �� �� � �!� )������ 3�� ���, WT/DS155/R,distributed 19 December 2000, at para.11.169.

17

“The selection of the word ‘affecting’ would imply […] that thedrafters of the Article intended to cover in [Article III:4] not onlythe laws and regulations which directly governed the conditions ofsale and purchase but also any laws or regulations which mightadversely modify the conditions of competition between thedomestic and imported products on the internal market

55. In the present case, the “indigenisation” requirements “affect” directly the “internaluse” of parts and materials because, in order to satisfy the “indigenisation”percentage, the signatories must incorporate into the vehicles that they manufacturea certain amount of domestic parts and materials.61

d) Imported goods are afforded “less favourable treatment”

56. Finally, it is self-evident that, by requiring the use of a minimum amount ofdomestic parts and materials, the MOUs preclude the signatories from using anequivalent amount of imported parts and materials and, therefore, afford “lessfavourable treatment” to imported products.

e) Precedent and the TRIMs Agreement confirm that the “indigenisation”requirements are inconsistent with Article III:4

57. Local content requirements constitute a clear-cut violation of the national treatmentrequirements imposed by GATT Article III:4, which has already been condemned byGATT/WTO panels in several occasions.

• in (���� �� )��", the panel found that the undertakings given to theCanadian Government by some foreign investors to, � ��� ����, purchasegoods of Canadian origin in specified amounts or proportions was contraryto Article III:462;

• similarly, in **(,� %�� �� �� (�� �� �, the panel concluded that, bymaking the suspension of anti-circumvention proceedings conditional uponan undertaking to limit the use of Japanese parts and materials, the EC actedinconsistently with Article III:463;

• in� ������� �� "� ��, the panel found that the grant of certain tax andimport duty benefits to a so-called “National Car” manufacturer conditional

61 Panel Report on � ����� "������ ����� .������/, para. 12. The Appellate Body confirmed thatinterpretation of the term “affect” in *(���&����, WT/DS27/AB/R, para 220. See also the Report ofthe Appellate Body in 4����� �� .�������� �!!�� ��� �� �� �� �!� )����#� (������ �� )��5�� &��!,WT/DS161/AB/R, WT/DS169/AB/R, at paras. 130 � �����

62 Panel Report on (������)��", paras. 5.4-5.12.

63 Panel Report on **(��%�� ����(�� �� �, paras. 1.19-5.21.

18

upon meeting a certain local content percentage was in violation of ArticleIII:464;

• finally, in (������"� ��, the panel held that the grant of a customs dutyexemption to certain manufacturers of motor vehicles subject to compliancewith certain “Canadian Value Added” requirements was inconsistent withArticle III:465.

58. The TRIMs Agreement has confirmed beyond doubt that local content requirementsare inconsistent with Article III:4 of GATT. Item 1.a) of the Illustrative List ofTRIMs, includes among the TRIMs that are inconsistent with Article III:4 thosewhich require

“a) the […] use by an enterprise of products of domestic origin[…], whether specified in terms of […] value of products, or interms of a proportion of […] value of its local production”

59. The “indigenisation” requirements at issue in this dispute fall squarely within theterms of Item 1(a) of the Illustrative List and are, therefore, inconsistent with GATTArticle III:4.

*� �#$7�$+-2&'4-'%�82$9+'2$1$�-42$'�(%�4'4-$�-:'-#6����2-'(&$��;�

60. The “neutralisation” requirements stipulated in the MOUs are inconsistent withGATT Article XI:1 in that they restrict imports of passenger cars, and ofcomponents therefor, by the signatories of the MOUs.

61. The EC recalls, nevertheless, that the 1997 Agreement between India and the EC (assupplemented by the 1999 Agreement between India and the United States) allowsIndia to maintain import restrictions on passenger cars, and on chassis and bodiestherefor (but not on imports of parts and components therefor) until 1 April 2001.

62. Therefore, the EC makes this claim only in so far as:

– the MOUs require the “neutralization” of imports of “components” otherthan chassis and bodies; and

– the MOUs will remain binding and enforceable after 1 April 2001, bothwith respect to passenger cars and components therefor.

63. Article XI:1 reads as follows in pertinent part:

“No prohibitions or restrictions other than duties, taxes or othercharges, whether made effective through quotas, import or exportlicenses or other measures, shall be instituted or maintained by any[Member] on the importation of any product of the territory of any

64 Panel Report on ���������"� ��, para. 14.83 � �����

65 Panel Report on (������"� ��, para. 10.58 � �����

19

other [Member] or on the exportation or sale for export of anyproduct of the territory of any other [Member]”

64. As noted by the Panel report in 6� �� �� 0������� ���, the wording of ArticleXI:1 is “comprehensive”: it applies to “all measures instituted or maintained by a[Member] prohibiting or restricting the importation […] other than measures thattake the form of duties, taxes or charges”66.

65. The test for compliance with Article XI:1 is thus three-fold:

– first, is the action concerned a Government “measure”?

– second, is the measure different from a “duty, tax or other charge”? and

– third, does the measure “restrict” imports?

66. In the present case, the answer to the above three questions is clearly in theaffirmative.

a) The “neutralisation” requirements are “measures”

67. The term “measure” has been given a broad definition, indeed even broader than thatof “requirements” in Article III:467

68. In 6� ����0������� ��� the Panel found that non-mandatory Government actionin the form of “administrative guidance” was a “measure” subject to Article XI:1because it created sufficient incentives or disincentives for private parties to act68.

69. In 6� ����%�� ���� ����)������%� �� the Panel�went even further by holdingthat, in certain circumstances, even purely hortatory wording in a statement of policycould qualify as a “measure”69.

66 Panel Report on 6� �� �� ����� �� 0���,���� ���, adopted on 4 May 1988, BISD 35S/116(hereinafter, “6� ����0���,���� ���”), para. 104.

67 See the Panel Report on 6� �� �� .�������� �!!�� ��� (������� %�� ���� ���� )���� �� %� ��,WT/DS44/R, adopted on 29 April 1998, (hereinafter “6� ����%�� ���� ����)������%� ��”) at para.10.51, where the Panel stated that

“Given that the scope of the term requirement would seem to be narrower than that ofmeasure, the broad reading given to the word requirement by the Canada – FIRA andEEC – Parts and Components panel supports an even broader reading of the wordmeasure in Article XXIII: 1 b).”

68 Panel Report on 6� �� �� 0���,���� ���, at pp 154-155. See also the Panel report on 6� �� ���� ��� �������� �� ���!�(�� ���"������ �����%���� �, adopted on 22 March 1988, BISD 35 S/163,242.

69 Panel Report on 6� ��,�%�� ���� ����)������%� ��, at para. 10.49.

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70. As shown earlier, Public Notice No 60 and the MOUs are “requirements” in thesense of Article III:4. For the same reasons, and ��!�� ����, they are also “measures”in the sense of Article XI:1

b) The “neutralisation” requirements are not “duties, taxes or other charges”

71. The “neutralisation” requirements do not involve any payment or transfer of moneyby or on the account of the signatories of MOUs and, therefore, cannot becharacterised as “duties, taxes or other charges”.

c) The “neutralisation” requirements “restrict” imports

72. The “neutralisation” requirements “restrict” imports because they place a maximumlimit on the value of the imports which the signatories are authorised to make equalto the value of their exports. In practice, there are limits to the amount of exportswhich a signatory may be able or willing to make (related both to its manufacturingcapacity in India and to the demand for its products in foreign markets). Thus, bylimiting the amount of a signatory’s imports to that of its exports, the neutralisationrequirements “restrict” the amount of imports.

d) The TRIMs agreement confirms that the “neutralisation” requirements areprohibited by Article XI:1

73. The “neutralisation” requirements are a typical example of “trade-balancing”requirement of the type listed in Item 2(a) of the Illustrative List of TRIMs as beinginconsistent with GATT Article XI:1:

0� �#$7�$+-2&'4-'%�82$9+'2$1$�-42$'�(%�4'4-$�-:'-#�2-'(&$���;�

74. As explained in the factual part, the signatories of the MOUs seem to be required to“neutralise” not only the value of the imports which they make themselves, but alsothe value of any imported kits and components which they purchase within Indiafrom local vendors. To that extent, the “neutralisation” requirements are inconsistentnot only with Article XI:1, but also with Article III:4 in that they provide lessfavourable treatment to imported kits and components with respect to their internalpurchase than to like domestic products.

a) The measures are “requirements”

75. As demonstrated above, the Public Notice No 60 and the MOUs are “requirements”within the meaning of Article III:4.

21

b) Imported products are “like” domestic product

76. The distinction operated by the neutralisation requirements is based exclusively onthe origin of the products: on the one hand, imported kits and components purchasedwithin India must be neutralised with exports; on the other hand, domestic kits andcomponents need not be neutralised.

c) The “neutralisation” requirements “affect” the internal “purchase” of importedgoods

77. The neutralisation requirements “affect” directly the internal purchase of importedkits and components, because they subject the purchase of those products withinIndia to the condition that their value must be neutralised with exports.

d) The “neutralisation” requirements afford “less favourable treatment” to importedproducts

78. The neutralisation requirements afford “less favourable treatment” to importedproducts because the internal purchase of domestic products is not subject to anysimilar requirement. All other circumstances being equal, this creates an incentivefor the signatories of MOUs to purchase local inputs, thereby modifying adverselythe competitive opportunities of imported products in relation to like domesticproducts.

e) The TRIMs Agreement confirms that the “neutralisation” requirements areinconsistent with Article III:4.

79. Item 1(b) of the Illustrative List of Prohibited TRIMs confirms that the“neutralisation” requirements, to the extent that they apply to products imported byother parties, is inconsistent with GATT Article III:4.

�� �#$������52$$1$�-

80. Article 2.1 of the TRIMs Agreement provides that:

“Without prejudice to other rights and obligations under GATT1994, no Member shall apply any TRIM that is inconsistent withthe provisions of Articles III or XI of GATT.”

81. The TRIMs Agreement does not define the notion of TRIM. Nevertheless, theAnnex to that Agreement contains what Article 2.2 describes as:

22

“An illustrative list of TRIMs that are inconsistent with theobligation of national treatment provided for in paragraph 4 ofArticle III of GATT 1994 and the obligation of general eliminationof quantitative restrictions provided for in paragraph 1 of ArticleXI of GATT 1994 …”

82. The wording of Article 2.2 indicates that any measure which falls within the Listconstitutes ����� a TRIM inconsistent with Article 2.1, without it being necessaryfor the complainant to demonstrate in each particular case that the measureconcerned is an “investment measure” and is “related to trade in goods”70.

83. The “indigenisation” requirements and the “neutralisation” requirements are both“investment measures” and “related to trade in goods” and, consequently, constituteTRIMs within the meaning of Article 1 of the TRIMs Agreement. Since, as shownabove, those requirements are inconsistent with GATT Articles III:4 and XI:1, itfollows that they also infringe Article 2.1 of the TRIMs Agreement.

84. Furthermore, the “indigenisation” requirements fall within Items 1(a) of theIllustrative List, whereas the “neutralisation” requirements are caught by Items 1(b)and 2(a).

a) The CVA Requirement and the Ratio Requirement are “investment measures”

85. The term “investment measure” has been interpreted in ���������"� ��, where thepanel found that the grant of tax and duty incentives upon compliance with certainlocal content requirements was an “investment measure”.

86. The Panel reasoned as follows:

“[T]hose measures are aimed at encouraging the development of alocal manufacturing capability for finished motor vehicles andparts and components in Indonesia. Inherent to this objective isthat these measures necessarily have a significant impact oninvestment in these sectors. For this reason, we consider that thesemeasures fall within any reasonable interpretation of the term‘investment measures’.”71

87. ����������� ���stands for the proposition that the characterisation of a measure asan “investment measure” must be based on the purpose of the measure, as discernedfrom the measure’s structure and objectives, rather than on the measure’s actualeffects on investment.

88. The measures in dispute have a similar structure and pursue the same objective asthe measures at issue in ���������"� ��#�namely�to encourage the development ofa local automotive industry. That objective is further evidenced by the other two

70 This issue was left undecided by the Panel Report on ���������"� ��, at paras. 14.64-14.72.

71 Ibid., at para 14.80.

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“parameters” laid down in Public Notice No 60, ���� “the establishment of actualproduction facilities for manufacture of cars and not for mere assembly” and theminimum US$ 50 million investment requirement.

89. Inherent in the objective of developing a local automotive industry is that India’smeasures, like Indonesia’s, have a “significant impact on investment” and, therefore,constitute “investment measures” for the purposes of the TRIMs Agreement.

b) The “indigenisation” requirements and the “neutralisation” requirements are “relatedto trade in goods”

90. The “indigenisation” requirements are “related to trade in goods” because theyfavour the use of domestic inputs over imported inputs.

91. In turn, the “neutralisation” requirements are “related to trade in goods” becausethey restrict imports, as well as the internal purchase of imported goods.

c) The “indigenisation” requirements and the “neutralisation” requirements fall withinthe Illustrative List of prohibited TRIMs

92. The “indigenisation” requirements fall within Item 1(a) of the Illustrative List,which includes among the TRIMs that are inconsistent with Article III:4 those whichrequire:

“the […] use by an enterprise of products of domestic origin […],whether specified in terms […] of […] value of products, or interms of a proportion of […] value of its local production”

93. To the extent that they require the neutralisation of imported goods purchased by thesignatories within India, the “neutralisation” requirements fall within Item 1(b),which covers those measures that require:

“that an enterprise’s purchases […] of imported products belimited to an amount related to the […] value of local products thatit exports”

94. Finally, to the extent that they require neutralisation of imports made directly by thesignatories, the “neutralisation” requirements are caught by the terms of Item 2(a)which cover those measures which restrict

“the importation by an enterprise of products used in or related toits local production, […] to an amount related to the […] value oflocal production that it exports.”

d) The “indigenisation” and “neutralisation” requirements have not been notified underArticle 5.1 of the TRIMs Agreement

24

95. The measures in dispute have not been notified by India under Article 5.1 of theTRIMs Agreement72. Indeed, since all these measures were introduced by India wellafter the entry into force of the WTO Agreement, they could never have been validlynotified under that provision.

96. Therefore, India’s measures cannot benefit from the five-years transitionalderogation provided for in Article 5.2 with respect to prohibited TRIMs dulynotified by developing countries.

97. The EC further recalls that, in any event, this derogation expired as of 1 January2000, without prejudice to the possibility under Article 5.3 that a further period maybe granted for those measures previously notified under Article 5.1.

�� �#$='%&-'%�4%3-#$6�����-#$����4�52$$1$�-2$�%-&&%:$�,)-#$�// �52$$1$�-,$-:$$�-#$�������'

98. The measures in dispute are not allowed by the 1997 Agreement73:

– in the first place, the 1997Agreement only allows India to maintainrestrictions on imports and not on the internal purchase or use ofalready imported products;

– second, the 1997 Agreement only authorises India to maintainrestrictions with respect to passenger cars (including in CKD or SKDform), and chassis and bodies therefor, but not with respect to other“components” for passenger cars; and

– third, the 1997 Agreement, read in conjunction with the 1999Agreement, requires India to eliminate all the import restrictions onpassenger cars, and chassis and bodies therefor, no later than 1 April2001.Yet, according to India’s own explanations, the MOUs willnevertheless remain valid and legally enforceable after that date.

72 India has confirmed that the TRIMs notified in G/TRIMS/N/1/IND/1/Add.1 do not cover the measuresat issue in this dispute. See India’s replies to questions posed by the US within the TRIMs Committee ,G/TRIMS/W/16 (Exhibit EC -13).

73 The EC recalls that, in any event, the 1997 Agreement between the EC and India is not a “coveredagreement” within the meaning of Articles 1 and 2 DSU Therefore, India cannot invoke thatAgreement in order to justify the violation of its obligations under the GATT and the TRIMsAgreement. See the Report of the Appellate Body on *(� � ,�.�������� "!!�� ��� ��� �� �� � ��� �!(�� ��� %��� �/� %���� �, WT/DS69/AB/R, adopted on 23 July 1998, at paras. 79-80, where theAppellate Body concluded that a bilateral agreement concluded by Brazil and the EC under ArticleXXVIII of GATT was not a “covered agreement”. See also the Panel Report on 4�������.�������"!!�� ����� �� ���!�)����#�(��������)��5��&��!, WT/DS161/R, WT/DS169/R, at para. 539, wherethe Panel emphasised that it had examined the provisions of the “Records-of-Understanding”concluded by Korea with some other Members “not with a view to ‘enforcing’ the contents of thesebilateral agreements, but strictly for the purposes of interpreting an ambiguous WTO provision, i.e.Note 6 to Korea’s schedule”.

25

�� ����������

99. For the above reasons, the EC requests the Panel to find that

– the “indigenisation” requirements are inconsistent with Article III:4 of the GATTand with Article 2.1 of the TRIMs Agreement; and

– the “neutralisation” requirements are inconsistent with Articles III:4 and XI:1 ofthe GATT and with Article 2.1 of the TRIMs Agreement.

26

�'4-%3�>#','-4

�>#','-���� The Foreign Trade (Development and Regulation Act,1992

�>#','-���* Export and Import Policy 1997-2002

�>#','-���0 ITC (HS) Classifications of Export and Import Items(Excerpt)

�>#','-��?� Rule 2 a) of the General Rules for the Interpretation of theHarmonized System

�>#','-��?� India’s replies to EC questions dated 26 February 1999

�>#','-��?� Public Notice No 3/98 issued by the Delhi Customs Houseon 6 January 1998

�>#','-��? India’s Notification under Article 9 of the of theUnderstanding on the BOP provisions of the GATT 1994dated 19 May 1997

�>#','-��?< Mutually Agreed Solution reached by the India and the ECin the dispute WT/DS96(the “1997 Agreement”)

�>#','-��?/ Agreement between India and the USA under Article 21.3(b) of the DSU in the dispute WT/DS90 (the “1999Agreement”)

�>#','-��?�. Replies by India to questions posed by Japan within theCommittee on Trade-Related and Investment measuresdated 10 September 1998

�>#','-��?�� India’s Replies to questions from the USA dated 10 May1999

�>#','-��?�* Public Notice No 60

�>#','-��?�0 See India’s replies to questions posed by the USA withinthe TRIMs Committee dated 11 September 1998