WORLD TRADE
ORGANIZATIONWT/DS146/R
WT/DS175/R
21 December 2001
(01-6327)
Original:  English
INDIA – MEASURES AFFECTING THE
AUTOMOTIVE SECTOR
Report of the Panel
The report of the Panel on India – Measures Affecting the Automotive Sector  is being circulated to all
Members, pursuant to the DSU.  The report is being circulated as an unrestricted document from
21 December 2001 pursuant to the Procedures for the Circulation and Derestriction of WTODocuments (WT/L/160/Rev.1).  Members are reminded that in accordance with the DSU only parties
to the dispute may appeal a panel report.  An appeal  shall be limited to issues of law covered in the
Panel Report and legal interpretations developed by the Panel.  There shall be no ex parte
communications with the Panel or Appellate Body concerning matters under consideration by the
Panel or Appellate Body.
Note by the Secretariat:   This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within
60 days after the date of its circulation unless a party to the dispute decides to appeal or the DSB decides by
consensus not to adopt the report.  If the Panel Report is appealed to the Appellate Body, it shall not be
considered for adoption by the DSB until after the completion of the appeal.  Information on the current statusof the Panel Report is available from the WTO Secretariat.WT/DS146/R
WT/DS175/R
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TABLE OF CONTENTS
Page
I. INTRO DUCTION ................................................................................................................. ...1
II. FACTUAL ASPECTS ............................................................................................................. .2
A. T HE LICENSING REGIME ..............................................................................................................2
B. P UBLIC NOTICE NO. 60 AND THE MOU S....................................................................................3
III. PARTIES' REQUESTS FOR FINDINGS AND RECO MMENDATIONS ........................3
A. US C LAIMS AND REQUESTS FOR FINDINGS ................................................................................3
B. EC C LAIMS AND REQUESTS FOR FINDINGS ................................................................................4
C. I NDIA 'S REQUESTS FOR FINDINGS ...............................................................................................5
IV. ARGUMENTS OF THE PART IES ........................................................................................6
A. F ACTUAL ARGUMENTS ...............................................................................................................6
1. The licensing regime ......................................................................................................... ........6
2. Public Notice No. 60 and the MOUs........................................................................................8
(a) The "indigenization" requirement (paragraph 3 (iii) of Public Notice No. 60) and
paragraph III(IV) of the MOU).................................................................................................. .9
(b) The "trade balancing" requirement (paragraph 3 (iv) of Public Notice No. 60 and
paragraph III (vi) of the MOU)................................................................................................. 10
B. H AS THE MATTER BEEN SETTLED AND ADJUDICATED ? ..........................................................14
1. Has the matter been settled?................................................................................................. .16
2. Has the matter already been adjudicated?...........................................................................23
(a) India – Quantitative Restrictions ..............................................................................................23
(i) The notion of  res judicata .................................................................................................. .......28
(b) The provisions are an inherent part of th e licensing scheme that must be eliminated..............29
(i) The notion of ab usive splitting............................................................................................. .....32
C. A RE THE MEASURES WITHIN THE TERMS OF REFERENCE OF THE PANEL ?...............................36
1. Do the measures applied after 1 April 2001 fall outside the terms of reference? .............36
(a) The method of enforcement be fore and after 1 April 2001 ......................................................39
D. C LAIMS UNDER GATT 1994 AND TRIM S................................................................................53
1. Articl e III:4................................................................................................................ ..............53
(a) The indigeniza tion requirement .............................................................................................. ..54
(b) The trade balanc ing requirement ............................................................................................. .58
2. Article XI:1................................................................................................................. .............61
(i) The indigenization requirement .............................................................................................. ..61
(ii) The trade balanc ing requirement............................................................................................ ..61
(a) Are the measures justified by Article XVIII:B of the GATT and Articles 3 and 4 of
the TRIMs Ag reemen t?........................................................................................................... ..70WT/DS146/R
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(i) Procedural requirements of the balance of payments provisions.............................................73
(ii) Substantive Requirements of the balance of payments provisions............................................74
(iii) The burden of proof ....................................................................................................... ...........77
(iv) Relevance of the India – Quantitative Restrictions  case...........................................................81
3. TRIMs Agreement .............................................................................................................. ....83
V. ARGUMENTS OF THE THIRD PART IES ........................................................................88
1. The Agreements regarding the Indian measures must be respected and enforced ..........88
2. The measures that India may take by 1 April 2001 are not, and as a matter of
logic cannot be, properly  before the Panel. ..........................................................................89
3. Prospective measures......................................................................................................... .....90
VI. INTERIM  REVI EW.............................................................................................................. .91
A. C OMMENTS ON THE DESCRIPTIVE PART ....................................................................................91
1. Comments by the United States.............................................................................................91
2. Comments by India............................................................................................................ .....91
3. Comments by the European Communities...........................................................................92
B. C OMMENTS ON THE FINDINGS AND CONCLUSIONS ...................................................................92
1. Comments by the United States.............................................................................................92
2. Comments by the European Communities...........................................................................93
3. Comments by India............................................................................................................ .....94
(a) General comment in respect of India's procedural rights in the proceedings ...........................94
(b) India's argument that the matters addressed in the Recommendations section should
be left to a co mpliance panel. ................................................................................................. ..96
(c) India's argument that the Panel could not "properly" conclude that the violation is still
in exis tence ................................................................................................................... ............98
(d) India's argument that the Panel inappropri ately prescribes a "ret rospective" remedy ..............99
VII. FINDINGS................................................................................................................... ..........100
A. C LARIFICATION OF THE CLAIMS IN THE COURSE OF THE PROCEEDINGS AND REQUESTS
FOR PRELIMINARY RULINGS ....................................................................................................101
B. C LARIFICATION OF THE MEASURES WITHIN THE TERMS OF REFERENCE OF THIS PANEL ........104
1. Measures identified in the complainants' requests for establishment of a panel............104
2. Evolution of the measures in the course of the proceedings .............................................106
3. Measures not within ou r terms of reference.......................................................................108
C. THE PANEL 'S COMPETENCE TO CONSIDER  THE MATTER BEFORE IT .........................................109
1. Are any of the United States' claims barred by the principle of res judicata? ................110
(a) Arguments of the parties and scope of India's invocation of the doctrine of
res judicata .............................................................................................................................11 0
(b) Role of India's import licensing syst em in the United States' claims......................................111WT/DS146/R
WT/DS175/R
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(c) General approach to the res judicata  arguments.....................................................................112
(i) The matter before this Panel................................................................................................ ...116
(ii) The matter ruled on by the India – Quantitative Restrictions panel.......................................117
(iii) Comparison between the matter ruled on by the India – QR s panel and the matter
before this Panel .............................................................................................................. .......119
A comparison of the measures expressly considered ............................................................................ 120
A comparison of the express claims ...................................................................................................... 121
Are the matters the same? ..................................................................................................................... 122
Conclusion..................................................................................................................... ........................ 124
1. Has any part of the matter before this  Panel been settled through a mutually
agreed solu tion? ............................................................................................................... .....125
(a) The mutually agreed solution in the India – Quantitative Restrictions  dispute with the
EC ............................................................................................................................. .............125
(b) Relevance of mutually agreed solu tions in subseque nt proceedings ......................................126
(c) The scope of the mutually agreed solution between the European Communities and
India .......................................................................................................................... ..............127
(d) Conclu sion .................................................................................................................. ............131
2. Measures to be eliminated in the cour se of implementing the results of the
India - Quantitative Restrictions  dispute and abusive splitting of a dispute.....................132
(a) Abusive sp littin g........................................................................................................... ..........132
(b) Unnecessary litigation...................................................................................................... .......133
3. Conclusion ................................................................................................................... ..........134
D. O RDER OF EXAMINATION OF THE CLAIMS ...............................................................................134
E. C ONSISTENCY OF THE INDIGENIZATION CONDITION WITH THE GATT 1994..........................137
1. Claims under Article III:4 of GATT 1994..........................................................................138
(a) Like pr oducts ............................................................................................................... ...........139
(b) "Laws, regulations or requirements".......................................................................................14 0
(i) The notion of "requirement" within  the meaning of Article III:4 ...........................................140
(ii) The indigenization conditi on as a "requirement" ...................................................................142
(c) … affecting the internal sale, offering for sale, purchase (… ) of the pr oducts.......................143
(d) Whether imported products are acco rded less favourab le treatment ......................................144
(e) Conclu sion .................................................................................................................. ............145
2. Claim under Article XI....................................................................................................... ..146
F. GATT CLAIMS CONCERNING THE TRADE BALANCING CONDITION .........................................146
1. Factual aspects of  the measure ............................................................................................146
2. Order of analysis of the claims ............................................................................................14 7
3. Relationship between Articles III and XI ...........................................................................148
4. Claims under Article XI:1.................................................................................................... 149WT/DS146/R
WT/DS175/R
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(a) Scope of the European  Communities'  claim ...........................................................................149
(i) The scope of the trade  balancing ob ligation...........................................................................150
(ii) The continued enforceability of  the MOUs after 1 April 2001 ...............................................151
(b) Arguments of  the parties.................................................................................................... .....152
(c) Scope of Article XI:1....................................................................................................... .......153
(i) The notion of "measures" within  the meaning of Article XI:1 ................................................153
(ii) "Restriction on importation" within the meaning of Article XI:1 and  "border
measures"...................................................................................................................... ..........154
(d) The trade balancing condition as a "restriction … on importation"........................................156
(i) The notion of "restric tion … on importation".........................................................................156
(ii) Analysis of the trad e balancing c ondition ..............................................................................159
5. Balance-of-payments defense...............................................................................................160
6. Claims under Article III:4................................................................................................... .162
(a) Purchases of restricted imported kits  and components on the domestic market.....................162
(i) Like pr oducts............................................................................................................... ............163
(ii) Laws, regulations or requirements .........................................................................................1 63
(iii) affecting intern al sale, use, …........................................................................................... ......164
(iv) Whether the measure affords less favo urable treatment to imported products ......................165
7. Ruling on the consistency of Public Notice No. 60 with the GATT 1994 .........................165
(a) Consistency of Public Notice No. 60 with Article III:4 of GATT 1994.................................165
(b) Consistency of Public Notice No. 60 with Article XI:1 of the GATT 1994 in so far as
it contains the trade ba lancing cond ition ................................................................................166
G. C LAIMS UNDER THE TRIM S AGREEMENT ..............................................................................167
VIII. CONCLUSIONS AND RECOMMENDAT IONS..............................................................167
A. C ONCLUSIONS .........................................................................................................................167
B. C ONSEQUENCES OF EVENTS HAVING TAKEN PLACE IN THE COURSE OF THE
PROCEEDINGS ..........................................................................................................................168
1. Presentation of the issue: arguments of the parties ...........................................................168
2. Approach of the Panel ........................................................................................................ ..170
3. Analysis..................................................................................................................... .............173
(a) Indigenizatio n provisions................................................................................................... .....174
(i) The cessation of the application of Public Notice No. 60 and the MOUs as private
contracts...................................................................................................................... ............174
(ii) Achievement of the required levels of indigenization by MOU signatories............................176
(b) Trade balancing provisions.................................................................................................. ...177
(i) Accrued obligations as independent from imports .................................................................177WT/DS146/R
WT/DS175/R
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(ii) Cessation of the application of Public Notice No. 60 and the MOUs as private
contracts...................................................................................................................... ............178
C. R ECOMMENDATIONS ...............................................................................................................179
TABLE 1........................................................................................................................ .....................180
TABLE 2........................................................................................................................ .....................182WT/DS146/R
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I. INTRODUCTION
1.1 In a communication dated 12 October 1998 (WT/DS146/1), the European Communities
requested consultations with India pursuant to Article 4 of the Understanding on Rules and
Procedures Governing the Settlement of Disputes (DSU), Article XXII:1 of the General Agreement
on Tariffs and Trade 1994 (GATT 1994) and Article 8 of the Agreement on Trade-Related InvestmentMeasures (TRIMs Agreement), concerning certain measures affecting the automotive sector. On 21
and 22 October 1998, Japan and the United States, respectively, lodged requests to join in the
consultations.
1 The European Communities and India held consultations in Geneva on 2 December
1998. The United States and Japan participated in the consultations under DSU Article 4:11.
1.2 In a communication dated 2 June 1999 (WT/DS175/1), the United States requested
consultations with India pursuant to Articles 1 and 4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes (DSU), Article XXII:1 of the General Agreement on Tariffs andTrade 1994 (GATT 1994) and Article 8 of the Agreem ent on Trade-Related Investment Measures (to
the extent it incorporates by reference Article XXII of the GATT 1994) regarding certain measures
affecting trade and investment in the motor vehicle sector. The United States and India held such
consultations, in which Japan and the European Communities joined, on 20 July 1999.  The
consultations provided some helpful clarifications but failed to settle the dispute.
1.3 On 15 May 2000, the United States (WT/DS175/4) requested the Dispute Settlement Body to
establish a panel with standard terms of reference as set out in Article 7.1 of the DSU. The Panel was
established on 27 July 2000.  On 12 October 2000, the European Communities (WT/DS146/4) also
requested the DSB to establish a panel pursuant to Article 4.7 and 6 of the DSU.
1.4 At its meeting of 17 November 2000, the DSB agreed that, in accordance with Article 9.1 of
the DSU, the Panel established on 27 July 2000 to examine the complaint by the United States should
also examine the complaint by the European Co mmunities contained in WT/DS146/4 and agreed that
the Panel should have standard terms of reference.  The terms of reference of the Panel were therefore
as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the United States in WT/DSB/175/4 and by the European Communities in
WT/DS146/4, the matters referred to the DSB by the United States and the European
Communities in those documents and to make such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements."
1.5 On 24 November, in accordance with Article 8.7 of the DSU, the Director-General composed
the Panel as follows:
Chairman: Mr. John Weekes
Members: Ms. Gloria Peña
Mr. Jeffrey Waincymer
1.6 Japan and Korea reserved their third party rights in the dispute.
                                                     
1 WT/DS146/2 and WT/DS146/3.WT/DS146/R
WT/DS175/R
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1.7 The Panel met with the Parties on 21 and 22 March 2001 and 17 and 18 May 2001.   The
Panel held a third-party session on 22 March.  Korea presented its submission.  Japan did not make a
submission.
II. FACTUAL ASPECTS
A. THE LICENSING REGIME
2.1 For many years, India applied import restrictions for balance of payment reasons.  On
24 July 1997 the European Communities requested consultations with respect to all the import
restrictions maintained by India on balance-of-payment grounds, including those on passenger cars,
and chassis and bodies therefore.2 As a result of those consultations, the European Communities and
India reached a mutually agreed solution on 25 November 1997 (the "1997 Agreement").3 The 1997
Agreement stipulated that the import restrictions on passenger cars, and on chassis and bodies
therefor, were to be eliminated no later than 31 March 2003. The 1997 Agreement, nevertheless, hadto a large extent been superseded by the agreement concluded between India and the United States on
24 December 1999
4 referred to below.
2.2 On 22 July 1997 the United States requested consultations under the DSU with respect to
quantitative restrictions maintained by India for balance-of-payments reasons on 2,714 agricultural
and industrial product tariff lines.5  A panel was established on 18 November 1997.6  The panel
concluded that the restrictions applied by India, violated GATT Article XI:1 of GATT and were not
justified by GATT Article XVIII:B.7  The Appellate Body upheld those findings.8
2.3 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 comply ing with the recommendations and rulings of the
DSB would expire on 1 April 2001.9  Accordingly, India was required to eliminate the current system
of non-automatic licenses for imports of passenger cars, and chassis and bodies therefor, no later than
1 April 2001. At the time when the United States (15 May 2000) and the European Communities
(12 October 200) submitted their requests for the establishment of this panel, India applied
discretionary import licensing to 715 tariff line items, including cars imported in the form of
completely and semi-knocked down ("CKD/SKD") kits. The import licensing scheme for carsimported in the form of CKD/SKD kits was abolished on 1 April 2001 in accordance with the
                                                     
2 WT/DS96/1. The United States (WT/DS90/1), Australia (WT/DS91/1), Canada (WT/DS92/1),
New Zealand (WT/DS93/1) and Switzerland (WT/DS94/1) al so requested consultations with respect to the same
measures.
3 The Agreement was notified under Article 3.6 DSU ( WT/DS96/8). India reached similar Agreements
with Australia, Canada, New Zealand, Switzerland and Japan, but not with the United States.
4 Paragraph 3 of the 1997 Agreement provides that:
"India shall grant to the EC treatment no less favourable than that granted by India to any other country
with respect to the elimination or modification of import restrictions on the products in the Annex and those in
Annex II of document WT/BOP/N/24, under any form, either autonomously or pursuant to agreement or
understanding with that country, including pursuant to the settlement of any outstanding dispute under the WTOUnderstanding on Rules and Procedures Governing the Settlement of Disputes".
5 WT/DS90/1.
6 WT/DS90/8 and WT/DS90/9.
7 Panel Report on India – Quantitative Restrictions on Imports  of Agricultural, Textile and Industrial
Products , (hereinafter " India – Quantitative Restrictions "), WT/DS/90/R, adopted 22 September 1999, at
para. 6.1. The report addresses the compatibility with GATT Article XI:1 of the licenses required for theimportation of "restricted" items at paras. 5.125 et seq.
8 Report of the Appellate Body in India – Quantitative Restrictions,  WT/DS90/AB/R, adopted on
22 September 1999.
9 WT/DS90/15.WT/DS146/R
WT/DS175/R
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agreements reached with the European Communities and the United States under Articles 3.6 and
21.3(b) of the Dispute Settle ment Understanding ("DSU").
B. PUBLIC NOTICE NO. 60 AND THE MOU S
2.4 On 12 December 1997, the Ministry of Commerce adopted Public Notice No. 60, the auto
components licensing policy, issued under the Foreign Trade (Development and Regulation) Act of1992 (the "FTDR Act").
2.5 The Notice, effective from the date of issue, requires any passenger car manufacturer wishing
to import SKD/CKD kits to sign a Memorandum of Understanding (MOU) with the Director General
of Foreign Trade  ("DGFT") (see Annex Tables 1 and 2). A car manufacturer that does not sign an
MOU or does not perform the obligations assumed under an MOU may therefore be denied a license
for the importation of SKD/CKD kits. Subparagraphs 3(i) through (iv) of Public Notice No. 60 set out
four requirements which an MOU must impose on the manufacturing company:
(i) Establishment of actual production facilities for manufacture of cars, and not
for mere assembly.
(ii) A minimum of foreign equity of US$50 million to be brought in by the
foreign partner within the first three years of the start of operations, if the
firm is a joint venture that involves majority foreign equity ownership.
10
(iii) Indigenization (i.e. local content) of components up to a minimum level of
50% in the third year or earlier from the date of first import consignment of
CKD/SKD kits/components, and 70% in the fifth year or earlier.
(iv) broad trade balancing of foreign exchange over the entire period of the MOU,
in terms of balancing between the actual CIF value of imports of CKD/SKDkits/components and the FOB value of exports of cars and auto components
over that period.  While a firm that signs an MOU has an export obligation
equivalent to the total CIF value of the imports made by the firm over the
period of the MOU, there is a two-year moratorium during which the firm
does not need to fulfill that commitment.  The period of export obligationtherefore begins from the third year of commencement of production.
However, imports made during the moratorium count towards the firm's total
export obligation under the MOU.
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A. US C
LAIMS AND REQUESTS FOR FINDINGS
3.1 The United States  contended that the local content and trade balancing requirements in
Public Notice No. 60 and the MOUs, together with the Indian domestic legislation under which they
had come into force, were inconsistent with the obligations of India under the General Agreement on
Tariffs and Trade 1994 ("GATT 1994") and the Agreement on Trade-Related Investment Measures
("TRIMs Agreement"). The United States requested the Panel to find that the measures at issue in this
                                                     
10Paragraph 3(ii) also provides that this condition applies to new joint venture companies only.  In
response to a question from Japan, India stated that "this condition has been imposed on new joint venturecompanies because the existing companies have already invested more than their minimum stipulation."  Replies
by India to Questions Posed by Japan , G/TRIMS/W/15, circulated 30 October 1998, response to Question 18.WT/DS146/R
WT/DS175/R
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dispute, the indigenization and the trade balancing requirements, imposed by Public Notice No. 60
and the MOUs, were inconsistent with Article III:4 and XI:1 of GATT 1994 and Articles 2.1. and 2.2
of the TRIMs Agreement.11 The United States requested this Panel to make findings to this effect, and
to recommend that India bring all such measures into conformity with its obligations.
3.2 The United States considered it would be appropriate for the Panel to rule on Public Notice
No. 60 given that the requirements were still in place through the MOUs.  The United States said it
was not requesting the Panel to make findings on Public Notice No. 60 that were separate from its
findings on the MOUs executed thereunder.  The United States was, however, requesting that the
Panel's findings encompass both Public Notice No. 60 and the individual MOUs. A comprehensive
ruling by the Panel would apply to both Public Notice No. 60 (the source of the WTO-inconsistent
requirements) and the MOUs (by which individual companies were bound to those WTO-inconsistent
requirements), especially since Public Notice No. 60 was, as all the parties to this dispute agreed, inforce at the time this Panel was established.  However, the Panel need not analyze Public Notice
No. 60 separately from the MOUs in order to make its findings.
12
B. EC C LAIMS AND REQUESTS FOR FINDINGS
3.3 The European Communities said that its comp laint was directed primarily against the
indigenization and balancing requirements contained in the MOUs concluded under Public NoticeNo. 60.
13
• The European Communities claimed that the indigenization requirement violated
Article III:4. It had not claimed that this  requirement violates also Article XI:1.
• The European Communities claimed that the balancing requirement was inconsistent
with both Article XI:1 and Article III:4 because the signatories were required to
balance the value of the automotive products which they import themselves, as wellas the value of any imported automotive products which they purchase from vendors
within India
14.
• To the extent that the balancing requirement s required the signatories to balance the
value of the imported products which they purchase within India they were
inconsistent with Article III:4.
• To the extent that the balancing requirement s required the signatories to balance the
value of the automotive products which they imported themselves, they restricted the
importation of such products, thereby violating Article XI:1.
3.4 It also requested the Panel to make an express factual finding regarding the product scope of
the trade balancing requirement.
3.5 The European Communities reiterated its request to  the Panel to find that the trade balancing
and indigenization requirements contained in Public Notice No. 60 and in the MOUs concluded
thereunder were inconsistent with Articles III:4 and XI:1 of the GATT and Article 2.1 of the TRIMs
                                                     
11 See also Questions 1 and 17 of the Panel.
12 See also US response to Question 72 of the Panel.
13 The EC's complaint did not extent to the M OUs "as a whole".  More precisely, the European
Communities did not challenge the other two requirements imposed by the MOUs (i.e. the minimum foreignequity requirement and the manufacturing requirement).
14 See EC First Submission, at paras. 32 and 74.WT/DS146/R
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Page 5
Agreement as of the date of establishment of this Panel and had remained so after 1 April 2001.
Furthermore, the European Communities requested the Panel to find that, at the time when the Panel
was established, Public Notice No. 60 was inconsistent with Article XI:1 and III:4 of GATT and
Article 2.1 of the TRIMs Agreement.  It clarified that the measures applied after 1 April 2001
continued to be inconsistent with the GATT and the TRIMs Agreement because they were the sameas the measures applied before that date.
15
C. INDIA 'S REQUESTS FOR FINDINGS
3.6 As to the claim that Public Notice No. 60 and the trade balancing provisions of the MOUs are
inconsistent with Articles III and XI of the GATT,  India requested the Panel to make the following
findings and recommendations:
3.7 If the Panel were to conclude that the matter before it is the operation of Public Notice No. 60
and the trade balancing provisions of the MOUs under India's former licensing regime, it should rejectthe complaints as inadmissible because this matter ha d already been satisfactorily resolved and settled
as a result of the previous invocations of the DSU by the complainants. Specifically, India requested
the Panel to find that:
• the matter raised by the European Communities had already been settled through a mutually
agreed solution jointly notified by the European Communities and India to the DSB in
accordance with Article 3.6 of the DSU,
• the matter raised by the United States had already been adjudicated by the DSB in the
proceedings on India - Quantitative Restrictions on Imports of Agricultural, Textile and
Industrial Products  (hereinafter " India – Quantitative Restrictions ") (WT/DS90), and
• the re-invocation of the DSU in respect of the matters raised by the European Communities
and the United States was inadmissible.
3.8 If the Panel were to conclude that the matter before it was the operation of Public Notice
No. 60 and the trade balancing provisions under India's former licensing regime and were to regard
the complaints as admissible, it should examine India's invocation of Article XVIII:B of the GATT
and, in accordance with the precedent set by the Panel in India – Quantitative Restrictions , consult
with experts under Article 13 of the DSU, including the IMF.
16
3.9 If the Panel were to conclude that the operation of Public Notice No. 60 and the trade
balancing provisions under India's former licensing regime was inconsistent with the GATT, it should
- following the practice of previous panels17 - note that the licensing regime had been abolished on
1 April 2001, that the Public Notice and the trade balancing provisions no longer applied since1 April 2001 and that it was therefore not necessary for the Panel to recommend to the DSB in
accordance with Article 19:1 of the DSU that it request India to bring these measures into conformity
with the GATT.
3.10 If the Panel were to conclude that the matter before it is the operation of Public Notice No. 60
and the trade balancing provisions of the MOUs outside India's former import licensing regime, the
                                                     
15 See Question 87 of the Panel.
16 See the Panel Report on India – Quantitative Restrictions, WT/DS90/R, paras 5.11 through 5.13.
17See the Panel Report on Indonesia – Certain Measures Affecting the Automobile Industry ,
(hereinafter " Indonesia – Autos "), WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23 July 1998,
para. 14.9 and the reports cited therein (DSR 1998:VI, 2201).WT/DS146/R
WT/DS175/R
Page 6
Panel should reject the complainants' claims as factually baseless. Specifically, it should find that, in
the absence of an import licensing regime, Public  Notice No. 60 is not operational because it merely
states how the former restrictions were to be administered and the trade balancing provisions do not
entail any export obligation and hence do not restrict imports or favour domestic over imported
products because they do not apply to freely importable products.
3.11 As to the claim that the indigenization provisions set out in the MOUs are inconsistent with
Article III of the GATT, India requested the Panel to find that the Government of India had, since the
abolition of the import licensing regime the discretion whether or not to apply its contractual rights
under the MOUs and that this raised new legal issues not covered by the Panel's terms-of-reference. If
the Panel were to rule that the indigenization requir ements in the MOUs are inconsistent with Article
III:4, it should find that, according to the evidence submitted by the parties, there remained as of May
2001 only one company that was still bound by the indigenization requirement with respect to one carmodel.  India therefore requested the Panel to limit any recommendation under Article 19:1 of the
DSU to the indigenization requirement that remains to be performed by that particular company with
respect to that model.
3.12 As to the claims related to the TRIMs Agreemen t, India requested the Panel to find that the
provisions on trade balancing and indigenization set out in Public Notice No. 60 and the MOUs are
trade measures and not investment measures and therefore do not fall within the framework of the
TRIMs Agreement.
IV. ARGUMENTS OF THE PARTIES
A. FACTUAL ARGUMENTS
1. The licensing regime
4.1 The European Communities  noted that, at the time the Panel was established, India
regulated the imports of goods by means of a Negati ve List contained in the Export-Import Policy (the
"EXIM Policy)18. The Negative List19 consisted of "prohibited"20 items, "restricted" items and
"canalised"21 items. "Restricted" items were permitted to be imported only against a specific import
license issued by the Director General of Foreign Trade in India's Ministry of Commerce ("DGFT"22).
The granting of import licenses for "restricted" items was not automatic23. Licenses were granted on a
discretionary basis or, in some cases, subject to the conditions set out in advance in a Public Notice.
                                                     
18 The EXIM Policy is formulated and announced from time to time by the Indian Government on the
basis of the authority conferred by the Foreign Trade Development and Regulation Act, 1992 (hereinafter the"FTDR" Act) (cf. Section  5 of the FDTR). The policy currently in effect is the Export and Import Policy 1 April1997 – 31 March 2002.
19 Chapter 16 of the EXIM Policy. The Negative List is further specified in the "ITC (HS)
Classifications of Export and Import Items", published and notified by the DGFT (cf. Section 4.1 of the EXIMPolicy).
20 Section 4.4 of the EXIM Policy ("Prohibited items in the Negative List of imports shall not be
imported [ …]").
21 Section 4.8 of the EXIM Policy ("Any goods, the import or export of which is canalised, may be
imported by the canalising agency specified in the Negative Lists […]").
22 Section 4.5 of the EXIM Policy ("Any goods, the export or import of which is restricted through
licensing, may be exported or imported only in accordance with a license issued in this behalf").
23 Section 4.7 of the EXIM Policy ("No person may claim a license as a right and the Director General
of Foreign Trade or the licensing authority shall have the power to refuse to grant or renew a license in
accordance with provisions of the Act and the Rules made thereunder").WT/DS146/R
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4.2 Under the EXIM Policy 1997-2002, passenger cars (HS24 87.03), and chassis (HS 87.06) and
bodies (HS 87.07) therefor, were classified as "restricted" items in the Negative List.  In contrast,
parts and accessories for passenger cars (including inter alia  those falling within HS 87.08, 40.11,
40.12, 40.13, 70.07, 70.09, 90.29, and 94.01) were not included in the Negative List and could,
therefore, be freely imported.
4.3 In accordance with Rule 2(a) of the General Rules for the Interpretation of the HS
nomenclature25, the Indian customs authorities classify within HS 87.03 complete passenger cars that
are presented unassembled ("CKD" kits), as well as incomplete passenger cars, whether assembled or
disassembled ("SKD" kits), provided that they have the "essential character" of a complete car26.
According to the Indian Government, imports of parts and components were considered to have the
"essential character" of a passenger car where, at least, all the following seven items were imported:
engine, gear box, chassis, transmission assembly system, body/cab, suspension system and axles front
and rear27.
4.4 The United States  stated that India applied licensing requirements both to finished vehicles
as such and to SKD/CKD kits/components for such vehicles.  Consequently, when Public Notice
No. 60 was issued, no one was permitted to import finished motor vehicles, or kits and components in
SKD/CKD form for such vehicles, into India without a license. At the time Public Notice No. 60 wasissued, 90 tariff line items in Chapter 87 ("vehicles other than railway or tramway rolling-stock, and
parts and accessories thereof") of India's tariff schedule were "restricted" and therefore subject to
import licensing requirements.
28  At the time the panel was established, these import licensing
requirements still applied to approximately 75 tariff line items in Chapter 87.
4.5 India  clarified that some tariff lines covering cars in the form of CKD/SKD kits that were
identified as restricted for "AUTO/BOP-XVIII-B" reasons in India's notification to the BOPs
Committee (WT/BOP/N/24) required licenses under the MOUs.  All tariff lines covering components
for cars that were identified in the notification as restricted, including for "BOP-XVIII :B" reasons,
also required licenses under the MOUs. Apart from CKD/SKD kits of cars, chassis with engines
mounted for passenger motor cars and bodies (initial equipment and replacement parts) were alsounder Restricted Category requiring an import licence.  As per Chapter 87, parts and accessories of
motor vehicles like bumpers, safety seat belts, mounted brake linings, gear boxes, drive-axles, non
driving axles, road wheels, suspension shock absorbers, radiators, silencers and exhaust pipes,
clutches, steering wheels, steering columns and steering boxes, etc. were under free category.
29
                                                     
24 The term "HS" refers to the Harmonized Commodity Description and Coding System evolved by the
World Customs Organisation.
25 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 that article incomplete
or unfinished, provided that, as presented, the incomplete  or unfinished article has the essential character of the
complete or finished article. It shall also be taken to include a reference to that Article complete or finished (orfalling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled"
26 India's responses to Questions by the EC (hereinafter "EC Questions"), dated 9 May 1999, Response
to Question 1(a) .
27 See Public Notice No. 3/98 issued by the Delhi Customs House on 6 January 1998.
28E.g, tariff heading 870321.01 ("Other vehicles, with spark-ignition internal combustion reciprocating
piston engine; Of a cylinder capacity not exceeding 1, 000 cc; Motor car, new, assembled") is classified as
"Restricted:  Not permitted to be imported except against a licence or in accordance with a Public Notice issuedin this behalf."
29 It should be noted that any part/component of a car  e.g., gear box, radiator, silencer, etc. which were
under free category could be imported without any licence as long as these were imported individually.WT/DS146/R
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2. Public Notice No. 60 and the MOUs
4.6 India  explained that Public Notice No. 60 clarified policies first adopted in 1995.  The
revision of the MOU scheme in 1997 was designed to render the existing policies more uniform and
transparent.  The parameters applied in 1995 were individually negotiated with each car manufacturer
wishing to import CKD/SKD kits.  As from 1997, the parameters followed a common format; theproduct coverage was the same.
30 Public Notice No. 60 improved upon the 1995 MOUs by removing
the discretionary element from licensing, by stipulating uniform commitments for all MOU
signatories, and by making the granting of licen ses "automatic" upon fulfilment of the conditions
stipulated therein.31
4.7 India went on to explain that Public Notice No. 60 was adopted to ensure the uniform and
transparent administration of these restrictions. It declared that only car manufacturers that had signed
an MOU with provisions on foreign equity, assembly operations, indigenization and trade balancingwould obtain a license and that a license could be denied if the MOU provisions were not observed.
32
India explained that only the car manufacturers that wished to import SKD/CKD kits were required tosign an MOU. This requirement did not apply to any manufacturer that did not wish to import such
kits. By accepting the commitments set out in the MOUs, a car manufacturer obtained a significant
economic advantage, namely the quota rents associated with the importation of SKD/CKD kits withinthe framework of India's restrictive licensing scheme.  The quota rents enjoyed by the manufacturers,
on the one hand, and the commitments to take actions to mitigate the adverse balance-of-payments
impact of their imports, on the other hand, constituted a balanced whole.
4.8 The European Communities pointed out that Public Notice No. 60 had no termination date.
33
Nevertheless, according to the Indian Government, "once the quantitative restrictions which cover
autos and auto parts in the phase out plan are removed, the Public Notice. 60 shall cease to operate".34
By its own terms, Public Notice No. 60 applied onl y to joint ventures between Indian and foreign
investors.35  Nevertheless, the Indian Government had indicated that companies wholly owned by
Indians are subject to the same requirements.36 Public Notice No. 60 applied to both "existing" (i.e.
those established before 12 December 1997) and "new" joint ventures.37
4.9 The United States  noted that Paragraph 4 of Public Notice No. 60 provided that the MOU
scheme was to be enforced through the import licensing mechanism.  Paragraph 5 provided for MOU
signatories to submit annual reports and for Indian officials to conduct an annual review of
signatories' progress towards meeting their MOU obligations. The United States noted that
Paragraph 8 of Public Notice No. 60 required MOUs to be signed in a standard format, which wasappended to the Notice.
38  The MOU was to be signed by the Government of India acting through the
                                                                                                                                                                    
However, in case, these parts/components formed a part of a CKD/SKD  kit of a car itself was under restricted
category and required a licence for its import into the country prior to 31.3.2001.
30 Response to Question 43 of the Panel.
31 Response to Question 45 of the Panel.
32 In practice, the Director-General of Foreign Trade never denied a license to a signatory for failing to
meet the indigenization or trade balancing requirements. (Panel Question 51).
33 India's responses to Questions from the United States dated 10 May 1999 (hereinafter "US
Questions"), response to Question 10.
34 Ibid.
35 Public Notice No. 60, at paras. 1 and 2.
36 US Questions.  In response to Question 3, India stated  that  "Indian companies importing CKD/SKD
kits are also being subjected to the same requirements  of indigenization as well as foreign exchange trade
balancing".  See also India's response to Question 16.
37 Public Notice No. 60, at para. 2.
38  See Table 2.WT/DS146/R
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Director General of Foreign Trade and by the managing director of the manufacturing company on its
behalf. Paragraph III of the standard MOU format reconfirmed each of the requirements of Public
Notice No. 60.  The requirement to establish actual manufacturing facilities, and not mere assembly
facilities, appeared in MOU paragraph III, clause (iii); the US$50 million equity requirement appeared
in MOU paragraph III, clause (ii); the indigenization obligation appeared in MOU paragraph III,clause (iv); and the trade balancing obligation appeared in MOU paragraph III, clause (vi). All or
virtually all companies manufacturing automobiles in India had signed an MOU in accordance with
the standard format, and it was easy to see why.  Because companies were not granted an import
license for CKD/SKD kits until an MOU was signed, India's policy effectively prohibited any
company from importing CKD/SKD kits and components unless it abided by the terms and conditions
of Public Notice No. 60 and the MOU.
(a) The "indigenization" requirement (paragraph 3 (iii) of Public Notice No. 60) and
paragraph III(IV) of the MOU)
4.10 The European Communities  described its understanding of the "indigenization" requirement
as follows: the MOU signatories must achieve a level of indigenization of 50% in the third year from
the first import or earlier, and of 70% no later than the fifth year.
39  The Indian Government had
confirmed that "indigenization" meant "local content"40.  The European Communities understood that
in practice the percentage of indigenization was computed in accordance with the following formula:
(CIF value of imported parts and materials assembled into the
passenger car / ex works value of the passenger car) x 100
4.11 The European Communities further understood that the numerator included not only the value
of the parts and materials imported directly by th e MOU signatory but also the value of any imported
parts and materials purchased in India by the joint ventures from local vendors.  Public Notice No. 60
did not prescribe whether the percentage of indigenization was to be measured on a model, category
or manufacturer basis. It appeared that, in practice, the Indian authorities might allow the
manufacturers to meet the requirement on any of those bases.41
4.12 The United States  noted that once an MOU signing firm had reached an indigenization level
of 70%, there would be no need for further import licenses.  By implication, licenses would be
withheld if the targets were not met.  India had confirmed that the MOU limited the importation of
SKD/CKD kits/components when a firm failed to meet the indigenization requirement. The standard
MOU format also imposed other requirements on the manufacturing firm (e.g.,, it required the firm to
state its intended level of indigenization year by year).  Significantly, the MOU also required that thefirm "shall aggressively pursue and achieve as soon as possible the development of the local supply
base and increased local content".  This requirement highlighted the intentions that underlay the MOU
scheme:  to induce manufacturing firms to abandon imported goods and to favor domestic goods
instead. With respect to automotive components, th e Secretariat's report for the Indian Trade Policy
Review noted that the value of their production rose from Rs33.6 million in 1990/91 to Rs67.5 billion
by 1994/95 and Rs91 billion in 1995/96.  Indian authorit ies estimated the level of indigenization in the
automobile components sector at around 90%.  This high level of indigenization was due in part to anumber of previous requirements that companies investing in the automobile sector in India must
agree to increase the level of indigenization in their units within a certain period of time.  Public
Notice No. 60 and the MOUs continued in this tradition of nurturing the domestic auto parts and
components industry.  Indeed, that was the very reason that Indian officials gave for the adoption of
                                                     
39 Ibid., para (iii).
40 US Questions, response to Question 6.
41 Ibid.WT/DS146/R
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Public Notice No. 60:  "The objective of the new policy is to encourage local production of
auto-components and thus, bring in modern technology and develop this key segment, explain
ministry officials"42.
4.13 India  pointed out that the signatories of the MOUs were required to reach a level of 70 per
cent of indigenization. An MOU was effectively terminated on the date of the achievement of anindigenization level of 70 per cent, except for the export obligations that accrued before that date. In
this regard, it was pertinent to note that, according to the WTO Secretariat report prepared for the
1998 Trade Policy Review of India, the level of indigenization in the automobile components sector
was estimated to be around 90 per cent.
43  Moreover, according to as yet unverified reports received
from car manufacturers in the autumn of 2000, most of the signatories had almost reached the 70 per
cent threshold. By 1 April 2001, there might consequently no longer be any signatory bound by an
indigenization requirement.  India was examining this situation. India was committed to resolving it ina manner that did not entail any inconsistencies with its WTO obligations. In late April and early May
of 2001, officials of the Ministry of Commerce and Industry met with the most important car
manufacturers from the EC, Japan and the United States to verify their performance under the MOU.
Subsequent to these meetings, these signatories co nfirmed in writing that they had all achieved or
exceeded the 70 per cent threshold. The only exception was General Motors India, which hadachieved only a 60 per cent level of indigenization in respect of one of its car models. However, this
company wrote in a letter dated 4 May 2001 to the Commerce Secretary:
Localisation for any player is imperative in order to be competitive in the market.
Keeping this in mind, we have . . crossed 70% location in the case of Astra much
before the target date as envisaged in the MOU. . .In the case of Corsa, althoughlaunched only about a year back, we had already localised 60.31 % and intend to
cross 70 % localisation during this fiscal year . . .
4.14 The results of the survey clearly confirmed that car manufacturers had had no difficulty
meeting the 70 per cent threshold and that, except in respect of one recently launched car model, all
surveyed manufacturers reached the threshold in the meantime. Indeed, the survey showed that
indigenization was part of the manufacturers drive towards greater competitiveness.
(b) The "trade balancing" requirement (paragraph 3 (iv) of Public Notice No. 60 and
paragraph III (vi) of the MOU)
4.15 The European Communities  understood that the requirement to achieve "broad trade
balancing of foreign exchange" translated into the obligation to balance the CIF value of imports of"CKD/SKD kits/Components" and the FOB value of e xports of "cars and auto components" over the
entire period of duration of the MOU.
44 The MOU signatories were not required to start exporting
until the third year from the commencement of production.45 But the value of imports made during the
first two years must be balanced in subsequent years.46 Public Notice No. 60 further specified that
from the fourth year onwards "the value of imports of CKD/SKD may be regulated with reference to
the export obligation fulfilled in the previous years as per the MOU". The precise meaning of this
provision, however, remained unclear.47 The wording of Public Notice No. 60 suggested that the
                                                     
42 "Car Makers Have to Sign New MOUs in Accordance with New Automobile Policy", Business
Standard , December 11, 1997.
43 Trade Policy Review, India: Report by the Secretariat (WT/TPR/S/33), 5 March 1998, para. 109.
44 Public Notice No. 60, para 3 (iv).  See also Japan's Questions, response to Question 23.
45 Ibid.
46 Ibid.
47 See Japan's Questions, response to Question 24,  and US Questions, response to Questions 7 and 8.WT/DS146/R
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balancing obligation extended not only to imports of "CKD/SKD kits" but also to imports of
"components". That interpretation had been corroborated to the European Communities by some
signatories of MOUs. During the consultations, however, India asserted that "the signatories have to
neutralise only the value of imported CKD/SKD kits and not of those components which are freely
imported".48 It was also unclear whether the balancing requirement applied to imported kits and
components purchased by the signatories within India, or only to those which they import themselves.
Before the TRIMs Committee India explained that "[b]road trade balancing of foreign exchange …
includes the purchases in India of the imported components or CKD/SKD kits"49. Yet, during the
consultations, India answered to a question from the United States that "the signatories of the MOU
have to neutralise only the value of CKD/SKD imported by them ….50
4.16 The United States  added that Public Notice No. 60 also made clear that the trade balancing
obligation remained in place independently of the indigenization obligation:  "However, they
[i.e. firms that have achieved 70% indigenization] will discharge the export obligation corresponding
to the import made by them till that time."  India had confirmed that a company's imports could be
limited under this provision if it had not met its export obligations. India did not intend to terminate
the requirements of Public Notice No. 60 or the MOUs on 1 April 2001.  India had told the United
States directly that the MOUs remained effective even after 1 April 2001.  Moreover, Indian officialshad told the press that automobile manufacturers who had entered into MOUs in the past would have
to honour their commitments in terms of exports, localisation level, and minimum capital invested in
the venture.  India's Director-General of Foreig n Trade himself had confirmed India's intentions.
According to published reports, in response to "domestic auto-ancillary units, who felt threatened by
the removal of QRs [and] have appealed to th e government to protect their interests", the
Director-General had "hinted that manufacturers using a large percentage of local components are
likely to benefit from several incentives to be announced as part of the new policy".  He added that
"under all circumstances, the auto industry will have to fulfill the outstanding export commitments
even after quantitative restrictions are removed".
51
4.17 India  explained that imports of cars in the form  of CKD/SKD kits and of components subject
to import restrictions were taken into account for calculating the value of imports for trade balancing
purposes.52 This included purchases in India of imported components or CKD/SKD kits.53 That is, if
an MOU signatory purchased a component that was subject to import restrictions in India from either
a trading company or another MOU signatory that had imported such a component on the basis of an
import license, the value of such components would be taken into account for purposes of the tradebalancing requirement.  In every case, the license clearly specified that it was subject to the trade
balancing requirement.  Components that were not subject to import restrictions under the EXIM
Policy 1997-2002 were not taken into account for purposes of the trade balancing requirement.
4.18 India considered that it should ensure that all car manufacturers that had accepted MOUs
were treated equally. It was therefore not the intention of the Government of India to release the car
manufacturers from the commitments they had assumed under the MOUs as a result of imports of
                                                     
48 EC Questions, response to Question 8. See also US Questions, response to Questions 7 and 8.
49 Japan's Questions, response to Question 23.
50 US Questions, response to Questions 7 and  8.
51 "India's New Automobiles Policy Will Protect Domestic Industry Using Tariffs, Officials Say," BNA
Daily Report for Executives , 22 August 2000.
52 The following tariff lines in Chapter 87 that were notified as restricted for AUTO/BOP reasons cover
cars in the form of CKD/SKD kits:  870321.04; 870322.04; 870323.04; 870331.04; 870332.04; and 870333.03.The tariff lines covering components for cars that were identified as restricted for BOP-XVIII-B reasons such as
870600.01, 870600.09, 870710.01 and 870710.02 would also have been subject to MOU signatory licenseprivileges.
53WT/G/TRIMS/W/15, p. 9, 30 October 1998.WT/DS146/R
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SKD/CKD kits prior to 1 April 2001. India intended to require the signatories of the MOUs to
continue to perform after 1 April 2001 those provisions  of the MOUs that were consistent with India's
WTO obligations.  India was also of the view that to require the signatories of the MOUs to perform
the obligations they had assumed as a result of imports of SKD/CKD kits prior to 1 April 2001 wa s
perfectly consistent with India's obligations under WTO law. The trade balancing requirement did notremain in place after 1 April, 2001.  As a result of the abolition of the import licensing regime, there
remained only a WTO-consistent obligation to discharge export obligations that accrued as a result of
imports prior to 1 April 2001. As from 1 April 2001, the signatories of the MOUs would continue to
be required to discharge the export obligations corresponding to the imports made by them before  that
date.  They would thus be required to discharge the export obligations they had already assumed but
would no longer incur any new export obligations as  a result of the further importation of SKD/CKD
kits.  From 1 April 2001, the right to import SKD/CKD kits would consequently no longer in any way
depend on, or vary with, the level of exports achieved.  For this reason, the export requirements would
no longer create any incentive to purchase local products. Since 1 April 2001, the import restrictions
for SKD/CKD kits and car components had been abolished and no licenses referring to the trade
balancing requirement had been issued. The signatories of the MOUs had therefore no longer incurred
any new export obligations as a result of the importation of SKD/CKD kits or components.
4.19 The European Communities  noted that India had declared that, as from 1 April 2001,
The signatories of the MOUs will be required to discharge the export obligations they
have already assumed but will no longer incur any new export obligations as a result
of the further importation of SKD/CKD kits. Since 1 April 2001, the right to import
SKD/CKD kits will consequently no longer in any way depend on, or vary with, thelevel of exports achieved.
54
4.20 The interpretation of the obligations imposed by the balancing requirements after 1 April
2001 made by India in the reply to Panel Question 33 could not be reconciled with the wording of
paragraph 3(iv) of Public Notice No. 60 and paragraph III(iv) of the MOUs. The European
Communities's interpretation of those two provisions had been confirmed by India's answer toQuestion 50(c),   when India explained that
Under paragraph 3(iv) of Public Notice 60 and paragraph III (iv) of the MOUs, the
MOU signatory goes "outside the ambit of the MOU" and will not require any import
licenses once it achieves a 70% indigenization level. However the MOU signatory
will be required to achieve trade balancing of the foreign exchange obligation
incurred on imports made up to that date.55
In the European Communities's view, the wording of the MOUs did not support the interpretation that
the signatories were not required to balance the imports of CKD/SKD/components made after 1 April
2001. Even if it were correct that the parties agreed in the MOUs that imports of components not
subject to licensing at that time would not be covered by the balancing requirements, it would not
follow necessarily that the elimination of the import licensing as of 1 April 2001 entailed
automatically the elimination of all the balancing requirements agreed in the MOUs. As regarded the
different issue of whether imports of "CKD/SKD kits/components" made after 1 April 2001 had to be
balanced, the European Communities had shown that the MOUs contained no provision stipulating
that the balancing requirements would cease to apply in respect of any product which ceased to be
subject to import licensing. The European Commun ities understood that in the MOUs the signatories
assumed the commitment to export an amount equivale nt to the value of imports estimated for the
                                                     
54 India's response to Question 33.
55 India's response to Question 50 (c). [Underlining added].WT/DS146/R
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entire duration of the MOU. Those estimates included imports of "CKD/SKD kits/components" to be
made after 1 April 2001, since at the time when the MOUs were concluded it was not anticipated that
the import licensing would have to be eliminated as of that date.56
4.21 Paragraph III(vi) of the standard format for MOU attached to Public Notice No. 60 stipulated
in relevant part that
"… the party shall achieve broad trade balancing of foreign exchange over the entire
period  of the MOU in terms of balancing between the actual CIF value of imports of
CKD/SKD Kits/components and the FOB va lue of export of cars and auto
components over the said period."57
4.22 Thus, the signatories must neutralise all the imports made "over the entire period of the
MOU", and not just those made before 1 April 2001. Paragraph 3(iii) of Public Notice No. 60 furtherprovided that
"… as and when the time firms achieve 70% indigenization, they would go outside
the ambit of the MOU automatically. However, they will discharge the export
obligation corresponding to the imports made by them till that time."
4.23 This indicated clearly that the signatories must balance all the imports made until they
achieved an indigenization level of 70%. Thus, any signatory which, as of 1 April 2001, had not
achieved that threshold would be required to balance imports made after that date.  In other words, the
signatories were required to balance all the imports made by them until they achieved a 70%
indigenization level. Since some signatories had not achieved that level as of 1 April 2001 (and had
not achieved it yet), the imports made by those signatories after 1 April 2001 must still be balancedwith exports, contrary to India's contention. India recognised expressly that, after 1 April 2001, the
signatories continued to be required to meet the same indigenization commitments.
58  Nevertheless, it
argued once again that
… according to as yet unverified reports received from the car manufacturers in the
autumn of last year, most of the signatories have almost reached the 70 per centthreshold. At present, there may consequently no longer be any signatory bound by
the indigenization requirements.
59
4.24 This was mere speculation, which could neither form the basis for an informed panel decision
nor give satisfaction to the complainants. The Eu ropean Communities encouraged India to verify,
once and for all, the reports in question, instead of complaining about the supposed"inappropriateness"
60 of bringing this dispute. India had also stated that the balancing requirements
applied not only with respect to imports of CKD/SKD kits but also of those "components" which were
subject to discretionary import licensing until 1 April 2001.61 The European Communities would note,
nevertheless, that the relevant provisions of Public Notice No. 60 and of the MOUs referred to all
"components", without any further qualification. Should the Panel accept India's explanations
regarding the product scope of the balancing requi rements, the European Communities would reiterate
its request that the Panel make an express factual finding to that effect in its report.
                                                     
56 EC's response to Questions 93 and 94 of the Panel.
57 Emphasis added.
58 India's response  to Question 33, at p. 3,  para. 2.
59 India's response to Question 33, p. 4 in fine  and p. 5,  para. 1.
60 Ibid., at p. 5, para. 2.
61 India's response to Questions 47-49.WT/DS146/R
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4.25 The United States  continued to see some difficulties with India's position. First,
paragraph III, clause (vi) of the MOU required MOU signatories to balance their imports of SKD and
CKD kits and components "over the entire period of the MOU". India had said that it did not apply a
balancing obligation to kits and components importable without a license – but India did not address
the phrase "over the entire period of the MOU", even when the Panel expressly asked it to do so.62
India had yet to explain how this phrase functioned under its domestic law, and how India ensured
that a car manufacturer whose MOU was still in force was not accruing further export obligations for
current imports.  Second, even if it were true that no new or additional export obligations were
accruing after 1 April 2001, the United States disagreed with India's contention that the level of an
MOU signatory's imports was not restricted by the le vel of its exports. It was still doubtful whether an
MOU signatory was permitted to import CKD/SKD kits in excess of the signatory's accrued but not
yet discharged  export obligations.
4.26 India  confirmed that, in respect of freely im portable products, the MOU signatory did not
assume any export obligations that might limit its right to import or create an incentive to purchase
domestic components. The European Communities and the United States interpreted the trade
balancing provisions in the MOUs differently. Their reading of the MOUs was that they entitled the
Government of India to require the signatory to offset through exports the foreign exchangeexpenditures for all imports of CKD/SKD kits and components whether subject to licensing or not.
63
This was not, and had in practice never been, the interpretation of the Government of India. TheGovernment of India had never requested any of the MOU signatories to apply the trade balancing
requirement to freely importable car components and had ceased applying the requirement in respect
of all imports of cars and car components after 1 April 2001. This practice confirmed that the tradebalancing requirement in the MOUs had always been  understood by the Government of India to apply
only to imports subject to licensing. India could not be required to  prove the negative. India could not ,
therefore , be asked to prove that it had not required trade balancing in respect of freely importable
products.  It was consequently for the complainants to demonstrate that the Government of India had
requested MOU signatories to apply the trade bala ncing requirements in respect of freely importable
products.  The MOUs had now been in place since 1996 and car companies had during this period
imported freely importable components.  If the complainants were correct, they should be able to
indicate at least one instance in which the Government of India had required trade balancing for freely
importable components. So far, they had failed to do so and had therefore not met their burden of
presenting a prima facie  case of violation.64
B. HAS THE MATTER BEEN SETTLED AND ADJUDICATED ?
4.27 India  considered that the matter that the complainan ts had presented to the Panel in their first
submissions concerned the application of the discretionary licensing system which had already been
the subject of complaints brought by each of the complainants under the DSU. Both complaints
concerned the application of India's discretionary licensing system to automobiles imported in the
form of semi-knocked down or completely knocked down components or kits (SKD/CKD kits).  This
licensing system had already been the subject of complaints brought by each of the complainantsunder the Dispute Settlement Understanding (DSU ). India noted that the European Communities
65 and
the United States66, together with other developed country Members,67 brought complaints in July
                                                     
62 India's response to Question 50(a) of the Panel.
63 Responses to the Questions of the Panel to the European Communities after the First Meeting with
the Parties, paras. 10-14. US response to Panel Questions, paras. 31-33.
64 India's response to Question 111 of the Panel.
65 WT/DS96/1.
66 WT/DS90/1.WT/DS146/R
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1997 under the DSU against all of India's import rest rictions notified under Article XVIII:B, including
cars. Basing themselves on a determination by the International Monetary Fund that India's foreign
exchange reserves were adequate, the European Communities and the United States claimed that
India's import restrictions were no longer justified by Article XVIII:B.
4.28 According to Article 21.3(b) of the DSU, the recommendations and rulings of the DSB must
be implemented within a reasonable period of time, the length of which may be determined by
agreement between the parties to the dispute.  India and the United States agreed that India would
remove its restrictions in stages and that the reasonable period of time would expire on 1 April 2001.68
India must therefore bring its import restrictions , including those applied to SKD/CKD kits, into
conformity with its WTO obligations by that date.  According to the mutually agreed solution with the
European Communities, India must accord to the EC  treatment no less favourable than that accorded
to any other country in respect of the elimination of the restrictions.69  As a consequence, the
implementation period effectively ended on 1 April 2001, both under the solution agreed with the
European Communities under Article 3.6 of the DSU and under the agreement reached with the
United States pursuant to Article 21.3(b) of the DSU.
4.29 In the complaint brought by the European Communities, a mutually agreed solution was
found which was notified to the Dispute Settlement Body (DSB).  In the co mplaint brought by the
United States, the DSB issued rulings on the basis of panel and Appellate Body findings.  Under
Articles 3.6 and 21.3(b) of the DSU, India agreed with both the European Communities and the
United States to bring the licensing system into conformity with its WTO obligations as of 1 April
2001.  This commitment covered also the application of India's discretionary licensing system to
SKD/CKD kits.  In India's view, the matter raised by the European Communities and the UnitedStates in the case before this Panel had therefore already been settled and adjudicated in accordance
with the DSU.
4.30 India considered that the dispute with the European Communities had been settled through an
exchange of letters notified to the DSB on 7 April 1998 as a mutually agreed solution under Article
3.6 of the DSU.  The exchange of letters stipulated  that the import restrictions applied to specified
products would be phased out in stages by 31 March 2003.  It further stipulated that, as long as India
complied with its phase-out commitments , "the European Communities will refrain from action under
GATT Article XXII or Article XXIII" as regards the restrictions notified by India under Article
XVIII:B.70 The joint notification of this settlement to the DSB also made clear that the European
Communities and India had reached a mutually agreed solution with respect to the whole of the
dispute on which the European Communities had requested consultations.  India had fully complied
with every aspect of the mutually agreed solution notified in accordance with Article 3.6 of the DSU.
Notwithstanding the fact that India had fully co mplied with the notified solution, the European
Communities had re-invoked the DSU with respect to the application of the discretionary licensing to
one of the items notified under Article XVIII:B.
                                                                                                                                                                    
67 Australia (WT/DS91/1), Canada (WT/DS92/1), New Zealand (WT/DS93/1) and Switzerland
(WT/DS94/1).
68 WT/DS90/15.
69 Paragraph 3 of the mutually agreed solution  provides that: "India shall grant to the EC treatment no
less favourable than that granted by India to any other country with respect to the elimination or modification ofimport restrictions on the products 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, including pursuant tothe settlement of any outstanding dispute under the WTO Understanding on Rules and Procedures Governingthe Settlement of Disputes".
70 WT/DS96/8, p. 2.WT/DS146/R
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4.31 It was not clear from the submission what precisely the scope of measure at issue was. The
complainants referred to the import licensing regime, Public Notice No. 60 and the MOUs. They
acknowledged that the import licensing regime applied to CKD/SKD kits would not be applied after
1 April 2001. They also seemed to acknowledge th at Public Notice No. 60, which implemented that
licensing regime, would no longer be operational after that date. Their concern seemed to relateprimarily to measures India might take after 1 April in respect of the MOUs outside the framework of
the import licensing regime and Public Notice No. 60 . India asked the Panel to request the
complainants to clarify whether in their view the measure at issue in this proceeding was the
enforcement of MOUs through the import licensing regime and Notice No. 60 or whether it was
limited to the enforcement of MOUs outside the licensing regime and Notice No. 60. If the
complainants were to respond that their complaints  related to the enforcement of MOUs through the
import licensing regime and Public Notice No. 60, India would ask the Panel to issue a preliminary
ruling to the effect that both complaints were inadmissible because the DSU cannot be invoked in
respect of the same matter twice.  In this context,  India requested the Panel to ask the complainants to
clarify whether or not, in their view, India must ce ase the application of its import licensing regime to
CKD/SKD kits after 1 April 2001 as a result of the agreements that India concluded with the
complainants under Article 3.6 and 21:3(b) of the DSU. In particular, India asked the panel to requestthe United States to answer the following questions: Would the United States consider itself entitled
to suspend concessions in accordance with Article 22 of the DSU if India were to maintain its
licensing regime for CKD/SKD kits and Public Notice No. 60 after 1 April 2001 contrary to the
findings of the panel on India - Quantitative Restrictions .  If so, what additional rights did the United
States expect to obtain from the present proceeding? If not, should India await the results of thepresent proceeding before acting on this matter?
1. Has the matter been settled?
4.32 From the start, the European Communities  had made it clear that the measures in dispute
were not allowed by the 1997 Agreement
71: in the first place, the 1997Agreement only allowed India
to maintain restrictions on imports and not on the internal purchase or use of already importedproducts;  second, the 1997 Agreement only authorised India to maintain restrictions with respect to
passenger cars (including in CKD or SKD form), 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
1999 Agreement, required India to eliminate all the import restrictions on passenger cars, and chassis
and bodies therefor, no later than 1 April 2001. Yet, according to India's own explanations, the MOUswould nevertheless remain valid and legally enforceable after that date.
4.33 India  responded to the European Communities' arguments as follows: first, the European
Communities argued that the mutually agreed soluti on "only allows India to maintain restrictions on
imports and not on the internal purchase or use of already imported products".  This argument could
not be reconciled with the fact that the European Communities was asking the Panel to find that the
                                                     
71 The European Communities recalled that, in any event, the 1997 Agreement between the European
Communities and India was not a "covered agreement" within the meaning of Articles 1 and 2 DSU Therefore,India could not invoke that Agreement in order to justify the violation of its obligations under the GATT and theTRIMs Agreement. See the Report of the Appellate Body on European Communities – Measures Affecting the
Importation of Certain Poultry Products , WT/DS69/AB/R, adopted on 23 July 1998, paras. 79-80
(DSR 1998:V, 2031), where the Appellate Body concluded that a bilateral agreement concluded by Brazil and
the European Communities under Article XXVIII of GATT was not a "covered agreement".  See also the PanelReport on Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef , (hereinafter " Korea –
Various Measures on Beef "), WT/DS161/R, WT/DS169/R, para. 539, where the Panel emphasised that it had
examined the provisions of the "Records-of-Understanding" concluded by Korea with some other Members "notwith a view to 'enforcing' the contents of these bilateral agreements, but strictly for the purposes of interpreting
an ambiguous WTO provision, i.e. Note 6 to Korea's schedule".WT/DS146/R
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measures at issue constituted import restrictions and that the alleged restrictions on the internal
purchase and use of imported products were part and parcel of the import restrictions that India must
in any case eliminate as a result of the mutually  agreed solution.  Second, the European Communities
had argued that the mutually agreed solution "onl y authorises India to maintain restrictions with
respect to passenger cars (including in CKD or SKD form), and chassis and bodies therefor, but notwith respect to other "components" for passenger cars ".  In fact India confined its import restrictions
to CKD/SKD kits. Therefore, India was in full  compliance with the mutually agreed solution.
Moreover, as noted above, the joint notification made to the DSB confirmed that the mutually agreed
solution resolved the whole of the dispute on which the European Communities had requested
consultations.  Third, the European Communities had argued that the mutually agreed solution "was
not a ‘covered agreement' within the meaning of Articles 1 and 2 of the DSU;  therefore, India could
not invoke that Agreement in order to justify the violation of its obligations under the GATT and theTRIMs Agreement.  In India's view, it was however completely irrelevant that the mutually agreed
solution was not a covered agreement within the meaning of Article 1 of the DSU and that it could
therefore not provide an exemption from the obligations under the GATT and the TRIMs Agreement.
The issue was whether the DSU could be invoked again in respect of a matter formally raised under
the DSU and settled through a mutually agreed solution notified under the DSU.  This issue wasrelated to the European Communities's procedural rights under the DSU, not India's substantive
obligations under a covered agreement.
4.34 India went on to say that, under the DSU, mutually agreed solutions were clearly a formally
recognised procedure for reaching settlement.  The following paragraphs of Article 3 of the DSU left
no doubt in that respect:
"3. The prompt settlement of situations in which a Member considers that any
benefits accruing to it directly or indirectly under the covered agreements are being
impaired by measures taken by another Member is essential to the effective
functioning of the WTO and the maintenance of a proper balance between the rights
and obligations of Members.
6. Mutually agreed solutions to matters formally raised under the consultation
and dispute settlement provisions of the covered agreements shall be notified to the
DSB and the relevant Councils and Committees, where any Member may raise any
point relating thereto.
7. …..The aim of the dispute settlement mechanism is to secure a positive
solution to a dispute. A solution mutually acceptable to the parties to a dispute and
consistent with the covered agreements is clearly to be preferred.
10. …..if a dispute arises, all Members will engage in these procedures in good
faith in an effort to resolve the dispute. . . "
The above provisions made clear that mutually agreed solutions notified under Article 3.6 of the DSU
were a formal part of the dispute settlement process set out in the DSU.  In fact, they declared them to
be the preferred  method of resolving disputes.  These provisions must be given effect and their
objectives must be realised.  This meant a mutually agreed solution to a matter formally raised under a
covered agreement and jointly notified to the DSB as  such by the disputant parties in accordance with
Article 3.6 of the DSU must be regarded as a fo rmal settlement of the dispute that made the
re-submission of the same dispute inadmissible.
4.35 India wondered if the European Communities took the view that it could bring its complaint
notwithstanding  the solution agreed with India under Article 3.6 of the DSU or whether that solutionWT/DS146/R
WT/DS175/R
Page 18
did not cover the matter  raised before this Panel. If the Eu ropean Communities agreed that a mutually
agreed solution to a matter formally raised under a covered agreement and jointly notified to the DSB
as such by the disputant parties in accordance with Article 3.6 of the DSU must be regarded as a
formal settlement of the dispute that made the re-submission of the same dispute inadmissible then
India wished to know from the European Commun ities which measures taken by India were not
covered by the mutually agreed solution.  If the European Communities took the view that it had the
right to re-invoke the DSU in respect of a matter even if it had formally agreed under Article 3.6 of
the DSU not to do so, India wondered if the Europe an Communities could explain why India, or any
other Member of the WTO for that matter, would ever want to negotiate a mutually agreed solution
with the European Communities again and how this approach could be reconciled with the objectives
of the DSU.
4.36  In response, the European Communities  argued that the 1997 Agreement did not preclude
the European Communities from pursuing this dispute and India's defence was wrong already as a
matter of fact. The 1997 Agreement dealt with different measures and different claims. At any rate,
the European Communities considered that, even if the matter in dispute were the same, that would
still not render the European Communities's comp laint inadmissible. The 1997 Agreement settled a
dispute concerning the system of discretionary impor t licenses applied by India with respect to a large
number of products, including passenger cars, on alleged BOP grounds. In essence, the European
Communities claimed that those measures were inconsistent with Article XI:1 of GATT and could not
be justified under Article XVIII: B.  Public Notice No. 60 and the MOUs were not the subject of that
dispute and were not covered by the 1997 Agreement. Indeed, Public Notice No. 60 and the MOUs
had not even been adopted by India when the 1997 Agreement was concluded.  The "1997Agreement" had authorised India to apply discretionary licensing with respect to imports of passenger
cars until 1 April 2001; it did not authorise India to apply the balancing or indigenization
requirements contained in the MOUs either before or after that date. Nevertheless, to the extent that
the balancing requirement obligated the manufacturers to balance the value of the imports of
passenger cars, its effects did not go beyond the potential restrictive effects on imports of passengercars which could have resulted from the application of the discretionary licensing for those products
permitted by the 1997 Agreement until 1 April 2001. For the above reason, the European
Communities did not consider it necessary to challenge the application of the balancing requirement
before 1 April 2001, in so far as imports of passenger cars were concerned. This was not because, as a
matter of law, the 1997 Agreement allowed the application of that measure before 1 April 2001, butrather because the elimination of the balancing re quirements in respect of import of passenger cars
before 1 April 2001 would have provided no effective relief to the European Communities, since in
any event India could have continued to restrict the importation of passenger cars through
discretionary licensing.
4.37 The scope of the matter settled by the 1997 Agreement was defined in the request for
consultations submitted by the European Communities on 18 July 1997
72 and in the 1997 Agreement
itself. Neither of those documents referred to the balancing and indigenization requirements.Moreover, those requirements were never discussed during the consultations or during the
negotiations leading to the 1997 Agreement. Acco rding to the European Communities, there was,
therefore, no basis for India's contention that th e 1997 Agreement covered also those measures. The
request for consultations of 18 July 1997 had made no reference to the balancing or the indigenization
requirements.  It described the measures in dispute as
"[the] quantitative restrictions maintained by India on importation of a large number
of agricultural, textile and industrial products. The restrictions include those notified
to the WTO in document WTO/BOP/N/24 of 22 May 1997."
                                                     
72 WT/DS96/1.WT/DS146/R
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Document WTO/BOP/N/24 contained a notification made by India under paragraph 9 of the
Understanding on the Balance-of-Pay ments Provisions of the GATT 1994  (the Understanding).
Annex I, Part B of document WTO/ BOP/N/24 listed the import restrictions applied by India on BOP
grounds as of the date of the notification. It described the import regime applicable to passenger cars
falling within HS 870673 as "AUTO/BOP-XVIII:B", which means that
"Imports of passenger cars and automotive vehicles are permitted without a license on
fulfilment of conditions specified in a Public Notice issued in this behalf, and
restrictions on import through NAL are otherwise maintained."74
As of 18 July 1997, when the European Communities made its request for consultations, no suchPublic Notice had been issued. Therefore, the conditions to be imposed by India were unknown to the
European Communities. The import regime of chassis (HS 87.06) and bodies (HS 87.07) wasdescribed in document WTO/BOP/N/24 as "BOP -XVIII:B", which meant that imports were
"regulated though NAL"
75  (i.e. through non-automatic licenses).  There had been no mention in
document WTO/BOP/N/24 that the importation of ch assis or bodies was subject to balancing
requirements or that their internal use or purchase was restricted through the application of
indigenization or balancing requirements. Most parts and accessories for the assembly of passengercars were not listed in Annex I, Part B
76 .  There had been no indication in document WTO/BOP/N/24
that the importation of these products or their internal use or purchase was restricted for BOP reasons
through the application of balancing or indige nization requirements or in any other manner. As
regarded the claims submitted by the European Co mmunities, the request for consultations mentioned
the following provisions: Articles XI, XIII, XVII and XVIII of GATT 1994; Article 4.2 of theAgreement on Agriculture; Articles 1 and 3 of the Agreement on Import Licensing Procedures; and
Articles 2, 3 and 5 of the Agreement on the Application of Sanitary and Phytosanitary measures.
77
Thus, the request for consultations had not raised  any claims under Article III:4 of GATT or under
Article 2 of the TRIMs Agreement, contrary to what  could have been expected if the request had been
meant to cover also the balancing and indigenization requirements.  Like the request for consultations,the 1997 Agreement made no reference to the balancing or to the indigenization requirements.  The
introductory paragraph of the 1997 Agreement specified that it was a settlement of
"… the difference regarding the quantitative restrictions maintained by India on
import of industrial, agricultural and textile products, as notified by India to the WTOby Annex I, Part B (Notification on Quantitative Restrictions Maintained on Imports
Under the Export and Import Policy (as on 1 April 1997) of document
WT/BOP/N/24."
As explained above, Annex I, Part B of document WT/BOP/N/24 had not mentioned anywhere the
balancing or indigenization requirements. Although that document referred to the conditions specified
in a Public Notice (not adopted when the 1997 Agreement was concluded), the European
Communities could not be assumed to have settled in advance all possible claims with respect towhatever conditions India might see fit to include subsequently in that Public Notice. It would be
unreasonable to interpret the 1997 Agreement as giving a blank check to India.
                                                     
73 With the exception of ITC 870310.00 (snow and golf cars) and 870390.00 (a residual category
covering "other passenger cars" not included in the preceding positions).
74 See the Coding Diagram included at the end of document WTO/BOP/N/24.
75 Ibid.
76 See e.g., HS 87.08, 40.11, 40.12, 40.13, 70.07, 70.09, 90.29 and 94.01 in document WTO/BOP/N/24.
77 The claims under the SPS Agreement reflect the fact that the request for consultations covered also
the imports restrictions contained in Annex I, Part A of Document WTO/BOP/N/24, which were applied by
India on alleged sanitary grounds. This part of the dispute is not covered by the 1997 Agreement.WT/DS146/R
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4.38 The 1997 Agreement had not settled the matter currently in dispute and, at any rate, was not a
covered agreement enforceable by this Panel. Consequently, the 1997 Agreement did not preclude the
European Communities from bringing this dispute.  Even if the 1997 Agreement had settled the
matter in dispute in the present case, that would still not preclude the European Communities frombringing this dispute. The 1997 Agreement was not a "covered agreement" in the sense of Article 1.1
of the DSU. Therefore, the rights and obligations of the parties under the 1997 Agreement were not
enforceable under the DSU. The 1997 Agreement only allowed India to restrict the importation of
passenger cars until 1 April 2001, in derogation of Article XI:1 of GATT.  Public Notice No. 60 and
the MOUs went beyond this in a number of respects:
• first, the indigenization requirements provided less favourable treatment to
imported components and materials than to like domestic products with
respect to their purchase and use for the assembly of passenger cars, contraryto Article III:4 of GATT and Article 2.1 of the TRIMs Agreement;
• second, the balancing requirements provided less favourable treatment to the
internal use and purchase of imported CKD/SKD kits and components for theassembly of passenger cars, contrary to Article III:4 of GATT and Article 2.1
of the TRIMs Agreement; and
• third, the MOUs had been concluded for a period of time that extended
beyond 1 April 2001 (in principle, five years). As a result, the restrictions on
imports of passenger cars imposed by the balancing and indigenization
requirements would be maintained beyond that date in violation of
Article XI:1 of GATT and Article 2.1 of the TRIMs Agreement.
4.39 The manufacturers acceded to sign the MOUs in  order to obtain import licenses for passenger
cars. But this did not mean that the MOUs were part of the licensing system temporarily authorised by
the 1997 Agreement. The MOUs constituted separate measures and imposed additional trade
restrictions that were not permitted by the 1997 Agreement. In addition, the balancing requirements
appeared to require the manufacturers to balance not  only the imports of passenger cars in CKD/SKD
form but also of components, in violation of Article XI:1 and Article 2.1 of the TRIMs Agreement.
The trade restrictive effects of the balancing and indigenization requirements went beyond thoseresulting from the application of the discretionary import licensing for passenger cars that India was
authorised to maintain pursuant to the 1997 Agreement until 1 April 2001. In particular, India would
have infringed the 1997 Agreement by continuing to apply the balancing and indigenization
requirements beyond 1 April 2001. That violation w ould have arisen, and would have been open to
challenge by the European Communities, from the moment that India concluded the MOUs, since theMOUs stipulated a period of duration for the balancing and indigenization requirements that went
beyond 1 April 2001.
78
4.40 In the 1997 Agreement, the European Communities had expressly reserved its right to resort
to dispute settlement in the event that India di d not comply with the terms of that agreement.
Therefore, even if the matter in dispute in this case had been settled by the 1997 Agreement(quod non ), the European Communities would not be precluded by the terms of the 1997 Agreement
from pursuing the present dispute with respect to those aspects of Public Notice No. 60 and the MOUs
which were incompatible with that agreement.  Furthermore, the European Communities recalled that
the 1997 Agreement was not a "covered agreement" in the sense of Article 1.1 of the DSU. India did
                                                     
78 See EC's response to Question 18.WT/DS146/R
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not dispute this. Therefore, this Panel could not rule on whether the measures in dispute were
consistent with the 1997 Agreement. By the same token, this Panel could not rule on India's defence
that the EC's complaint was "inadmissible" because it was a violation of the EC's obligation under the
1997 Agreement not to take dispute settlement action against India.  India's defence essentially
amounted to saying that the obligations imposed by the 1997 Agreement upon the EuropeanCommunities were enforceable under the DSU, but those imposed upon India were not. India could
not have it both ways: either the 1997 Agreement was a "covered agreement" enforceable by this
Panel, or it was not. As recalled by India, the DSU encouraged Members to seek mutually agreed
solutions. Nevertheless, the DSU did not attach to such solutions the legal effects alleged by India. It
was nowhere stipulated in the DSU that where Members had notified a mutually agreed solution they
could no longer request a Panel with respect to the same matter. This was only logical, given that the
DSU provided no mechanisms to enforce mutually agreed solutions. Thus, if a complaining Member
considered that the other party had failed to comp ly with a mutually agreed solution it did not have
the option of requesting a "compliance" Panel under Article 21.5 of the DSU. Nor could the
complaining Member request the establishment of a new Panel under Article 6.1 of the DSU to rule
that the other party had violated the mutually agreed solution. The only remedy available to the
complaining Member was to resume the original di spute settlement proceedings at the point where
they were left. If that course of action were also barred to the complaining Member, the defending
Member would enjoy complete impunity to viol ate the mutually agreed solution. Without the
assurance that they could revert to dispute settlement under the DSU in the event that the other party
failed to comply with a mutual ly agreed solution, no complaining Member would ever agree to any
such solution. Thus, it was India's interpretation, and not the European Communities', that woulddefeat the DSU's objective to encourage mutually agreed solutions.
4.41 India  expressed surprise that it was the considered position of the European Communities and
its Member States that a WTO Member could request the establishment of a panel on a matter on
which it had reached a settlement notified under Article 3.6 of the DSU even if the respondent had
faithfully implemented the settlement. The Euro pean Communities claimed that this followed from
the fact that the DSU provided for no mechanism to enforce the agreed solution. Of course, it did. If
the solution was not faithfully implemented, the complaining Member could re-invoke the DSU to
claim its rights under the WTO provisions that were not implemented. It was therefore simply
incorrect to claim that the "defending Member wo uld enjoy complete impunity to violate the mutually
agreed solution". India believed that the European Communities was presenting arguments in thisproceeding that – if accepted – would frustrate the objectives of the DSU, which explicitly favoured
settlement over adjudication. Endorsing the EC's approach would seriously curtail the policy options
of the European Communities and the other WTO Members under the DSU. India invited the
European Communities and its Member States to reconsider their position on this important point in
the light of their broader interests.
4.42 The European Communities  noted that India's position had evolved during the course of the
proceedings. At first, India had seemed to argue that, where a matter had been settled, the originalcomplaint could not be re-submitted under any circumstances. Subsequently, India contended that a
complaint could be re-submitted, if the Member co mplained against had infringed the settlement.
Thus, on India's interpretation, the European Communities would have to show in this case, first, that
India had violated the settlement and, second, that India had violated the WTO Agreement.  In the
view of the European Communities, India's more recent position was more reasonable. But, like theprevious one, it had no basis whatsoever in the DSU. Moreover, India's new position could not be
reconciled with the principle that it had asserted  earlier, whereby a matter which had been settled
could not be re-litigated again. If this were correct, the only remedy available to the complaining
Member in the event of violation of the settlement would be to request a panel to find that violation,
and not a violation of the WTO Agreement.  As already explained by the European Communities,mutually agreed solutions were not "covered agr eements" within the meaning of Article 1.1 of theWT/DS146/R
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DSU. Therefore, the rights arising from a mutually agreed solution could not be enforced through the
DSU. That meant that a complaining Member could not ask the establishment of a panel to find that
the other party had violated the mutually agreed so lution. It meant also that the Member complained
against could not invoke the existence of a mutually agreed solution as a defence before a panel
established to find a violation of the WTO Agreement.  India's interpretation would create anunacceptable imbalance between the two parties to a settlement. Whereas panels could not enforce the
rights of the complaining Member under the settlement (which can go beyond its rights under the
WTO Agreement), they would be required to enforce the rights of the Member complained against
(i.e. the correlative obligation of the complaining Member not to re-invoke the DSU).
4.43 The European Communities noted that India had asked why a Member complained against
would agree to a settlement, if the other party was not prevented from re-invoking the DSU. The
European Communities could ask why a complaining Member would agree to a settlement given thatits rights under the settlement, even on India's interpretation, were not enforceable under the DSU.
The answer was the same in both cases: the parties to an agreement might consider that enforceability
was not indispensable, where it was in both parties'  interest to comply with the agreement. India made
the error of assuming that a settlement did not confer to the complaining Member any advantages and,
therefore, that the complaining Member paid no price for re-invoking the DSU.  India made much ofthe fact that the mutually agreed solutions was notified to the WTO. That notification, however, was
made only for transparency purposes and did not confer any legal effects to the settlement. The
notification allowed other Members to verify that settlements were consistent with the WTO
Agreement
79, and in particular that any concessions negotiated with the complaining Member falling
within the scope of the different MFN obligations provided in the covered agreements were dulyextended to all Members.  The European Communitie s continued that the status of mutually agreed
solutions under the DSU could be usefully contrasted with that of the arbitration awards issued under
Article 25 of the DSU. Article 25.4 of the DSU pr ovided that Articles 21 and 22 of the DSU should
apply mutatis mutandis  to arbitration awards. No similar provision was made with respect to mutually
agreed solutions. This proved the drafters' intent ion to maintain a clear distinction between those
solutions which involved the adjudication of the parties' right under the WTO Agreement (panel
reports and arbitration awards) and those which did not involve such adjudication.  De lege ferenda , a
case could perhaps be made that mutually agreed solutions should be made enforceable under the
DSU. Indeed, some Members had already made propos als to that effect. As the law stood, however,
mutually agreed solutions were not enforceable under the DSU. The Panel should reject India'srequest to re-write the DSU in order to make settle ments partially enforceable (only the rights of the
party complained against!) on the basis of vague and unsubstantiated legal principles. As recalled
pertinently by the Panel in India – Patent Protection ,
"the Panel is required to base its findings on the language of the DSU. [It] simply
cannot make a ruling ex aequo et bono to address a systemic concern divorced from
explicit language of the DSU".
80  
4.44 In conclusion, the European Communities noted that India had taken the position that, in
order to bring a dispute with respect to a matter settled by mutually agreed solution, the complaining
Member must establish first that the other party had infringed that solution.81  Should the Panel agree
with that view, and should the Panel conclude further that the 1997 Agreement settled the matter in
dispute in this case, the European Communities submitted that the measures at issue would be
incompatible with the 1997 Agreement for the reasons stated above.
                                                     
79 Cf. Article 3.5 of the DSU.
80 India – Patents (EC) , para. 7.23 (DSR 2998:VI, 2661).
81 See EC's response to Question 24 of the Panel.WT/DS146/R
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2. Has the matter already been adjudicated?
(a) India – Quantitative Restrictions
4.45 India  also argued that the dispute with the United States had been resolved by rulings adopted
by the DSB on 22 September 1999 on the basis of the findings set out in the reports of the Panel and
the WTO Appellate Body in the proceedings India - Quantitative Restrictions .  The Panel, endorsed
by the Appellate Body, had recommended that the DSB request India to bring the measures at issue
into conformity with its obligations under the WTO Agreement.82  The Panel had specifically
identified discretionary import licensing applied to all the products notified under Article XVIII:B,
including SKD/CKD kits, as one of the measures at issue.83 The dispute with the United States
concerned all of the restrictions notified by India under Article XVIII:B, including those applied
under the discretionary licensing scheme administered by the Ministry of Commerce. The panel
declared this regime, to the extent that it was applied to the notified import restrictions, "a measure atissue" in the proceedings and found it to be inconsistent with Article XI:1 of the GATT.
84  The panel,
endorsed by the Appellate Body, found that India no longer had any balance-of-payments justification
for the "measures at issue" and that they were therefore not justified by Article XVIII:B of the GATT.
Consequently, it recommended that the DSB request India to bring the measures at issue into
conformity with its obligations under the WTO Agr eement. The United States had thus obtained a
ruling that the discretionary licensing scheme administered by the Ministry of Commerce was
inconsistent with Article XI of the GATT.  The United States was now requesting the present Panel to
rule that also the application of this licensing scheme to imports of CKD/SKD kits was inconsistent
with Article XI.  However, the DSB ruling covered the operation and application of the discretionary
licensing system in respect of all products that were notified under Article XVIII:B, including the
products of which CKD/SKD kits were composed.  The United States was thus requesting the present
Panel to rule on a matter that had already been adju dicated by the DSB. If the Panel found that the
inconsistency of India's licensing scheme with Article XI:1 of the GATT was not a settled and
adjudicated matter, then India's invocation of Article XVIII:B of the GATT could also not be
considered to be a settled and adjudicated matter. The Panel could not declare, with regard to the same
matter, the complainant's claim of inconsistency to be a new issue and the respondent's defense to be
settled and adjudicated.  The two sides of the issue would have to receive the same treatment.
Consequently, if the Panel were to decide to examine the consistency of the licensing scheme for
SKD/CKD kits with Article XI, it would also have to examine its justification under Article XVIII:B.
Before the Panel on India - Quantitative Restrictions , India had argued, inter alia , that:
• panels must exercise judicial restraint when examining measures subject to the
jurisdiction of the Committee on Balance-of-Payments Restrictions,
• panels could not transfer the determination of the adequacy of foreign exchange
reserves to the International Monetary Fund, and
• the provisions of the DSU on the implementation of DSB recommendations could not
replace the mechanism for the phase-out of balance-of-payments measures set out in
paragraph 13 of the Understanding on the Balance-of-Payments Provisions of the
GATT 1994.85
                                                     
82 India  – Quantitative Restrictions  (WT/DS90/R), para. 6.2.
83Ibid.,  WT/DS90/R, paras. 6.1 and 5.117.
84Ibid. , WT/DS90/R, para. 6.1.
85 See Section III.D of the Panel Report on India  – Quantitative Restrictions  (WT/DS90/R).WT/DS146/R
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All of these matters would have to be re-examined by this Panel if the inconsistency of India's
licensing scheme with Article XI:1 of the GATT were not found to be a settled and adjudicated
matter. Depending on the Panel's rulings on these issues, India's external financial positions in May
and October 2000 would have to be examined, possibly with the advice of the International Monetary
Fund, because they would be different from the Indi a' s external financial position in November 1997
which the earlier panel examined.86  This panel correctly found that "the determination of whether
balance-of-payments measures are justified is tied to a Member's reserve situation as of a certain
date".87
4.46 The United States  responded that India had completely misconstrued the nature of its
complaint.  The measures at issue were not India's import licensing system; instead, the measures
challenged were the indigenization and trade balancing requirements of Public Notice No. 60 and theMOUs. India could not avoid the complaint by defending measures that were not the subject of the
case.  Contrary to India's assertion, the rulings in the India – Quantitative Restrictions  dispute did not
adjudicate the matter that the United States had brought before this Panel.  Second, India was inviting
the Panel to analyze legal issues that were not presented by the facts of this case and therefore were
not necessary to the resolution of this dispute; the Panel should decline that invitation.  Third, becausethe measures and claims at issue in this dispute were different from those at issue in India –
Quantitative Restrictions , this Panel's rulings would apply to discrimination and import restrictions
that the India  – Quantitative Restrictions  panel could not and had not addressed.   The United States
argued that the India – Quantitative Restrictions  dispute did not overlap this one; for that reason
alone, the Panel should conclude that India's arguments lacked merit. India had argued that themeasures at issue in this case had already been the subject of a ruling by the Dispute Settlement Body,
and for that reason could not be examined by this Panel.  The premise for this argument, of course,
was that the measures at issue in this case were India's import licenses, and that premise was
incorrect.  It was also worth pointing out that the terms of reference of the India – Quantitative
Restrictions  Panel were established on 18 November 1997.
88  Public Notice No. 60, on the other hand,
was issued on 12 December 1997.  Therefore, even under India's logic, these measures could not have
been a part of the India – Quantitative Restrictions  dispute. In the United States' view, the India –
Quantitative Restrictions  panel did not examine the measures that had been referred to this panel;
consequently, the DSB recommendations and rulings in that dispute would not have required India to
bring these measures into compliance.  The United States had asked India whether they shared this
view, or whether, since these measures remained in force after the end of the reasonable period of
time for compliance in that dispute, India believed instead that the United States was entitled to
request authorization to suspend concessions in accordance with Article 22 of the DSU on the basis of
the India – Quantitative Restrictions  ruling.89
4.47 In response to the Panel's Question 5, the United States had detailed the differences between
the India – Quantitative Restrictions  dispute and this one. In sum:  in India – Quantitative
Restrictions , the United States challenged the existence of India's non-automatic import licensing
system as such, and not the application of specific criteria for licensing the importation of specific
tariff line items.  For example, the United States had noted in that case that "all that the United States
knew was that the Indian licensing authority generally refused to grant import licences for ‘restricted'
items when it was considered prejudicial to the state's interest to do so."90 India had the same view of
the case:  "which implied that the scope of this proceeding did not include the administration of theimport restrictions….India concluded that the United States invoked the dispute settlement procedures
                                                     
86 WT/DS90/R, para. 5.156.
87 Ibid., para. 5.162.
88 Ibid ., para. 1.2.
89 See Questions 4 and 5 of the United States to India.
90 WT/DS90/R, op.cit , para. 3.20.WT/DS146/R
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only with respect to the justification of the import restrictions and not in respect of matters arising
from their application.  India, therefore, reserved its position on the allegations of the United States
with respect to the application of India's import restrictions, in terms of both their factual basis and
their legal implications."91  Furthermore, the India – Quantitative Restrictions  panel's findings
confirmed that the panel too had that view:  "we note that it is agreed that India's licensing system forgoods in the Negative List of Imports is a discretionary import licensing system, in that licences are
not granted in all cases, but rather on unspecified  ‘merits'.  We noted also that India conceded this
measure  is an import restriction under Article XI:1."
92  By contrast, the dispute before this Panel did
not concern India's non-automatic licensing regime.  It concerned instead different measures (those
specified in the U.S. panel request, particularly Public Notice No. 60 and the MOUs) and different
requirements (the indigenization requirement and the trade balancing requirement) that India imposed
on car manufacturers and on automotive parts and components.  Furthermore, this dispute raiseddifferent legal issues: first, did those requirements as such (apart from import licensing) impose
prohibitions or restrictions on imports in violation of GATT Article XI:1?  In the United States' view,
those requirements did impose such import restrictions, but the particular restrictions at issue here
(limitations correlated to projected and achieved export values and to the degree of local content)
were different from the very existence of non-automatic licensing that was at issue in the India –
Quantitative Restrictions  dispute.  Second, did those requirements as such (apart from import
licensing) impose discrimination against imported goods in violation of GATT Article III:4?  The US
view was that these requirements treated imported goods less favorably than like domestic goods -
and that was a claim that even India realized was not and could not have been a part of the India –
 Quantitative Restrictions  dispute.  The United States added that those measures and requirements
came into force after the import licensing regime was put in place, and, as India had acknowledged,
would remain in force after the import licensing regime expired.  Moreover, those requirements
existed because car manufacturers had undertaken to comply with them in order to obtain relief from
the measures at issue in the India – Quantitative Restrictions  dispute, but that point only confirmed
that the measures at issue here were different from the ones India – Quantitative Restrictions
considered.  Furthermore, India's argumentation mi xed up two quite separate concepts.  On the one
hand, India's licensing regime acted as a total ban on imports.  So-called "restricted" items ordinarily
could not be imported at all.  That was the basis of the United States' complaint in the  India –
Quantitative Restrictions  dispute.  The present dispute, on the other hand, did not contest that import
ban; instead, this dispute challenged the conditions  that India attached to goods imported despite the
ban.  Simply put, the India – Quantitative Restrictions  dispute was about India's efforts to keep goods
out of India.  This dispute was about what India did when goods actually got in.
4.48 In the view of the United States, this dispute was a logical successor to the India –
Quantitative Restrictions  case.  After finally achieving access for their products into India by peeling
away the import ban that India had been applying through its licensing regime, WTO Members were
naturally concerned about the treatment their products would receive after importation - hence their
desire to ensure national treatment for those products.   And, Members were concerned about thedurability of that access. They therefore wanted to ensure that India did not impede that access
through an entirely new layer of barriers - such as, in this case, the independent import restrictions and
prohibitions contained in Public Notice No. 60 and the MOUs.
4.49 The measures in this dispute were different, and the legal claims in this dispute were different.
Consequently, in the terminology of DSU Arti cle 7.1, the "matters" in the two disputes were
different,
93 and therefore this dispute was not even addressed, let alone "adjudicated" (to use India's
                                                     
91 Ibid. , para. 3.41.
92 Ibid. , paras. 5.130 (footnotes omitted) (emphasis added).
93 "The ' matter  referred to the DSB', therefore, consists of two elements:  the specific measures  at issue
and the legal basis of the complaint  (or the claims )."  Report of the Appellate Body in Guatemala –WT/DS146/R
WT/DS175/R
Page 26
terms), by that prior panel. Therefore, the Panel should decline to undertake to clarify a legal issue
that was neither presented by the facts before it nor necessary to the resolution of this dispute.  The
United States noted that in its responses to the Panel's question 36, India seemed to have accepted the
distinction between its import licensing regime and the requirements at issue in this case:
The complainants thus appear to accept that a Member cannot resort to DSU twice
with respect to the same matter but that th eir claims are different from that those that
were the subject of the prior DSU proceedings.  They asserted in particular that
Public Notice No. 60 and the MOUs impose requirements and restrictions within the
meaning of Articles III:4 and XI:1 of the GATT and the corresponding provisions of
the TRIMs Agreement even in the absence of the discretionary licensing scheme that
India was obliged to eliminate as a result of the prior proceedings. India therefore
assumed that the issue before the Panel was no longer the scope of the principle ofres judicata but rather the question of whether Public Notice No. 60 and the MOUs
impose requirements and restrictions even in the absence of the licensing scheme for
CKD/SKD kits.
According to the United States, the legal consequences of the rulings in the India - Quantitative
Restrictions  report entailed the elimination of the licensing requirements for a large number of goods,
including SKD/CKD kits.  The legal consequences of a ruling in favor of the United States in this
dispute would entail the elimination of separate import restrictions imposed by Public Notice No. 60
and the MOUs.  Without such a ruling in this dispute, those separate import restrictions would
continue to apply to car manufacturers as long as the MOUs remained in place.
4.50 Of course, India's import licenses for SKD and CKD kits did play a role in this dispute.  In the
context of this case, those licenses were, first and foremost, an "advantage" given to MOU signatories,
as that term was used in the European Economic Community – Regulation on Imports of Parts and
Components  (hereinafter " EEC – Parts and Components ") report.  Companies willing to sign an
MOU obtained an advantage not given to others - namely, the right to import SKD and CKD kitsdespite their "restricted" status.  However, just as in the EEC – Parts and Components  dispute, and in
the Canada – FIRA  dispute before it, it was not the "advantage" that was the subject of the complaint,
but rather the conditions attached to the "advantage".  In Canada – FIRA , for example, the
"advantage" was authorization to invest - which, as India pointed out, was at the time not a subject of
GATT disciplines at all.  But that advantage was conditioned on local purchase undertakings, whichin turn were examined by the Canada – FIRA Panel and were found to be contrary to GATT's national
treatment disciplines.  This case was no different:  it was not the "advantage" - the import licenses -
that this panel needed to examine, but rather the conditions attached to those licenses.  Those
conditions included undertakings by MOU signatories to comply with indigenization and trade
balancing requirements, and for the reasons already given, those conditions were inconsistent with
India's WTO obligations.  The United States  considered that India's confusion about the role that
import licenses played in this case should not deter the Panel from that conclusion.  Elsewhere, theUnited States had discussed how the indigenization requirement damaged the competitive position of
all automotive parts and components imported into India.  That point alone should by itself put to rest
India's assertion that this dispute concerned its import licenses.  After all, India licensed the import of
kits; the discrimination at issue in this dispute affected all automotive parts and components .  Public
Notice No. 60 and the MOUs were harming the export interests of all car part manufacturers aroundthe world - not just the interests of manufacturers  of the SKD and CKD kits to which India's import
licensing regime applied.
                                                                                                                                                                    
Anti-Dumping Investigation Regarding Portland Cement from Mexico , (hereinafter " Guatemala – Cement I "),
WT/DS60/AB/R, adopted on 25 November 1998, para. 72.WT/DS146/R
WT/DS175/R
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4.51 The European Communities  pointed out that although the balancing and indigenization
requirements were applied in conjunction with the discretionary import licenses at issue in
India - Quantitative Restrictions until 1 April 2001, they were legally distinct and separate measures,
as evidenced by the following:
• Public Notice No. 60 had not been issued when the United States requested the
establishment of the panel in India – QRs;
• nothing in the EXIM Policy or in document  WTO/BOP/N/24 required  India to apply
the balancing and indigenization requirements;94
• contrary to India's assertions, the balancing and indigenization requirements were not
an "inherent part" of the discretionary import licensing scheme. It was perfectly
possible to operate a discretionary import licensing scheme without applying any ofthose requirements.  Most products subject to discretionary import licensing under the
EXIM Policy were not subject to balancing and indigenization requirements;
• by the same token, the balancing and indigenization requirements could be applied
and enforced in the absence of discretionary import licensing; and
• the balancing and indigenization requirements contained in the MOUs had remained
binding and enforceable after the elimination of the import licenses, even though noadditional action to achieve that effect had been taken by the Indian authorities after
1 April 2001.
4.52 Moreover, as conceded by India, the legal basis for the United States complaint in this case
was also different, to the extent that it included also claims under Articles III:4 of GATT and Article 2
of the TRIMs Agreement.
4.53 In the course of the panel proceedings, India  conceded that its argument that no WTO
Member might resort to the DSU on the same matter twice was no longer relevant because the
European Communities and the United States had made it clear that their case did not rest on the
application of the discretionary licensing system. India assumed that the Panel would examine the
operation of PN 60 and the MOUs as such, that is independently of the discretionary licensing system
Specifically, India assumed that the panel would examine whether the trade balancing and
indigenization provisions set out in PN 60 and the MOUs would have been inconsistent with
Article III:4 and XI:1 even if India had not applied import licensing restrictions for cars imported inthe form of CKD/SKD kits and for car components at the time when the request for the establishment
of the panel was submitted. 
95 (See also III.C)
                                                     
94 Cf.  Report of the Appellate Body on United States – Import Measures on Certain Products from the
European Communities , (hereinafter " US – Certain EC Products ") WT/DS165/AB/R, para. 60 et seq .  Although
this report concerns the different issue of whether a measure taken after the consultations was within panel'sterm of reference, it may offer guidance for the application of the res judicata principle in this case. The
Appellate Body concluded that, although "related" to the 3 March Measure, the 19 April Measure was outside
the terms of reference of the panel because it was a "separate and legally distinct measure". In reaching thatconclusion, the Appellate Body considered as particul arly significant that nothing in the 3 March Measure
required the United States to take the 19 April Measure ( ibid., para. 76). Likewise, the import licenses
challenged in India – Quantitative Restrictions  did not require India to impose the balancing and indigenization
requirements at issue in this dispute.
95 See also India's response to Question 102 of the Panel.WT/DS146/R
WT/DS175/R
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4.54 The European Communities  countered that the method of enforcement of the MOUs was
not a constituent element to the violations claimed by the European Communities. The balancing and
indigenization requirements were as such inconsistent with the GATT and the TRIMs Agreement,
regardless of the method used to enforce them. The European Communities saw no merit in the
hypothetical and speculative analysis proposed by India.
(i) The notion of res judicata
4.55 India  made reference to the principle of " res judicata ", quoting:
Interest republicae ut sit finis litigium , is an old maxim deeply fixed in the law of
fundamentals; that it concerns the state that there be an end to litigation.  This maxim
has wide application; it . . .is obviously based on common sense and sound policy.
For if matters which have been solemnly decided are drawn again to controversy; if
facts, once solemnly affirmed, are to again denied whenever the affirmant sees hisopportunity, there can never be an end to litigation and confusion.
96
For these very basic and fundamental reasons, all legal systems had developed principles to ensurethat matters, once settled, could not be litigated again.  India submitted that there were no legal
procedures, national or international, under which a complainant would be entitled to do what the
European Communities was doing in the present case, namely litigate a matter after having formallyconsented to a settlement of the matter. The Appe llate Body had frequently resolved interpretative
issues under the DSU by reference to generally applied principles of law.  Thus, it ruled on the
distribution of the burden of proof between the parties to a DSU proceeding on the basis of "a
generally-accepted canon of evidence in civil law, common law and, in fact most jurisdictions"
97   The
Panel should do the same in the present case.  Acco rding to Article 3.4 of the DSU, the ". . . rulings
made by the DSB shall be aimed at achieving a satisfactory settlement of the matter", and, according
to Article 3.7 of the DSU, "the aim of the dispute settlement mechanism is to secure a positive
solution to a dispute".  The generally applied principle of res judicata  must therefore be considered to
constitute an inherent part of the WTO dispute set tlement process.  To quote Henry M. Herman again:
The slightest reflection will show that if some point were not established at which
judicial proceedings must stop, no one could ever feel secure in the enjoyment of his
life, liberty and property; while unjust, obstinate and quarrelsome persons, especially
such as are possessed of wealth or power, would have society at their mercy, and
soon convert it into one vast scene of litigation, disturbance and ill will.98
In fact, the principle of res judicata  was firmly established in international law. In the case of the
International Court of Justice (ICJ), the scope of this principle is defined in Articles 59 and 60 of its
Statute. Article 59 provided as follows:  "The decision of the Court has no binding force except
between the parties and in respect of that particular case."  Article 60 provided as follows:  "The
judgment is final and without appeal .." .The ICJ made clear that the principle of res judicata  applied
also outside the scope of Articles 59 and 60.  Thus, in the advisory opinion of the ICJ on the  Effects of
Awards of Compensation made by the United Nations Administrative Tribunal case, the Court ruled
that a judgment rendered by a judicial tribunal su ch as the Administrative Tribunal of the United
                                                     
96 Henry M. Herman, Commentaries on the Law of Estoppel and Res Judicata , F.D. Linn & Company,
Jersey City, N. J. (1886), Vol. I, page 8.
97 United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from India ,
(hereinafter " US – Wool Shirts and Blouses "),  (WT/DS33/AB/R), para. 4.6 (DSR 1997:I, 323).
98 Henry M. Herman,  Commentaries on the Law of Estoppel and Res Judicata, F.D. Linn & Company,
Jersey City, N.J. (1886), Vol. I, page 8.WT/DS146/R
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Nations would be res judicata between the parties based on general principles of law.99  This appeared
to be also the view of the Appellate Body.  It not ed in a discussion of the status of panel reports
adopted by the CONTRACTING PARTIES to the GATT 1947 that "the generally-accepted view
under GATT 1947 was that the conclusions and recommendations in an adopted panel report bound
the parties to the dispute in that particular case.100  The parties' and the Panel's efforts would lead to a
ruling on a measure that would no longer exist when the Panel issued its report. The waste of
resources that a failure to apply the res judicata  principle would entail in the present case would
therefore be enormous.
(b) The provisions are an inherent part of the licensing scheme that must be eliminated
4.56 India  presented the argument that the provisions on which the European Communities and
the United States were basing their claims were an "inherent" part of the licensing scheme. Indianoted that the European Communities and the United States claimed that the granting of import
licences subject to indigenization and trade balancing was not only inconsistent with Article XI of the
GATT but also with Article III:4 of the GATT and Article 2 of the TRIMs Agreement.  Claims related
to these provisions were not specifically mentioned in the mutually agreed solution negotiated with
the European Communities nor in the DSB rulings obtained by the United States.  However, thealleged violations of Article III:4 of the GATT and Article 2 of the TRIMs Agreement were an
inherent part of the licensing scheme that India wa s obliged to eliminate as a result of the ruling on
Article XI.  By eliminating the licensing scheme, India would necessarily also eliminate those aspects
of that scheme that the European Communities and the United States considered to be inconsistent
with those provisions.  India considered that it would be completely pointless to go through a whole
new dispute settlement proceeding for the sole purpose of adding two further legal grounds why the
scheme must be eliminated.  In India's view, if th e issue of the consistency of India's licensing scheme
under Article III:4 of the GATT and Article 2 of the TRIMs Agreement had been raised before the
panel on India – Quantitative Restrictions , the panel would probably have exercised judicial economy
and declared a ruling on that issue unnecessary to resolve the dispute.  India noted that Article 3:10 ofthe DSU provided that "if a dispute arises, all Members will engage in these procedures in good faith
in an effort to resolve the dispute" and suggest ed that the Panel ask the complainants how they
reconciled their approach with the principle of good faith set out in Article 3:10 of the DSU.
4.57 In this connection it was important to keep in mind that Article III:4 of the GATT could be
violated only through "laws, regulations and requirements", and Article 2 of the TRIMs Agreementonly through "measures" adopted by a Member.  The MOUs, as such, and the conduct of firms under
those MOUs, by itself, were therefore not covered by these provisions of the GATT and the TRIMs
Agreement.  The only "requirement" and "measure" that the Indian government {currently} imposed
in respect of the MOUs were set out in paragraphs 2 and 4 of the Notice, which provided in relevant
part:
... import of components for motor vehicle in ckd/skd form, which is restricted for
import under the current Export-Import Policy, shall be allowed for importationagainst a license and such a license will be issued only to joint venture automobile
manufacturing companies on the basis of an MOU to be signed by these companies ...
                                                     
99 ICJ Reports (1954).
100 Japan – Taxes on Alcoholic Beverages , (hereinafter " Japan – Alcoholic Beverages II "),
(WT/DS8/R, WT/DS10/R, WT/DS11/R), adopted 1 November 1996, as modified by the Appellate Body
Report, para. 5.3 (DSR 1996:I, 125).WT/DS146/R
WT/DS175/R
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The MOU Scheme would be enforced through the import licensing mechanism and
MOU signing firms would be granted import licenses by DGFT based on above
parameters.
4.58 The MOUs were thus at the time when the requests for the establishment of a panel were
submitted enforced exclusively through the denial of import licenses for CKD/SKD kits.  Theapplication of discretionary import licensing for CKD/SKD kits was consequently the only
governmental measure related to the MOUs that was {currently} in place.
4.59 It followed from the above that, once the discretionary licensing system for CKD/SKD kits
was eliminated, the only governmental measure currently in place in respect of the MOUs would be
eliminated, and as a result also the factual basis on which the EC's and the US's claims of violation of
Article III:4 of the GATT and Article 2 of the TR IMs Agreement rested. A separate legal finding of
inconsistency with Article III:4 of the GATT and Article 2 of the TRIMs Agreement was for these
reasons completely unnecessary. The new and different measures that India might take in the future in
respect of the MOUs, including their enforcement through the courts, were not before the Panel.
4.60 The European Communities  responded that, although recognising that Public Notice No. 60
and the MOUs were not even mentioned in the 1997 Agreement
101, India contended that they "were
an inherent part of the licensing scheme that India was obliged to eliminate as a result of [the 1997Agreement]"
102.  Until 1 April 2001 the balancing and indigenization requirements had been applied
in conjunction with  the licensing scheme for passenger cars, but this did not make them an inherent
part of that scheme. The term "inherent" meant "exi sting in someone or something as a natural and
inseparable quality, characteristic or right"103. The balancing and indigenization requirements (those at
issue in this dispute and, more generally, all similar requirements) were clearly distinct and separablefrom and, therefore, not "inherent" in discretionary import licensing:  it was perfectly possible to
operate a discretionary import licensing scheme without applying any balancing or local content
requirements in conjunction therewith.  Most products subject to discretionary import licensing under
the EXIM Policy before 1 April 2001 were not subject to balancing and indigenization requirements;
likewise, balancing and local content requirements could be operated in the absence of discretionaryimport licensing. That the balancing and indigenization requirements were not an "inherent part" of
the import licensing scheme was further confirmed by the fact that the MOUs had remained binding
and enforceable after the elimination of that scheme, even though no additional measure to achieve
that effect had been taken by the Indian authorities either before or after 1 April 2001.  Furthermore,
assuming that the balancing and indigenization requirements were in fact an "inherent part" of thelicensing scheme, they should have been eliminated automatically as of 1 April 2001.
4.61 The United States  noted that India, despite acknowledging that the scope of " res judicata "
was not an issue in this dispute once the United States claims were properly understood, nevertheless
insisted that Public Notice No. 60 and the MOUs were "an inherent part of the licensing scheme" that
India had now eliminated.
104  India also maintained that it "fails to understand what interest protected
by the DSU the European Communities and the United States are pursuing by requesting rulings on
the specific conditions attached to the grant of licenses for SKD/CKD kits when they have alreadyobtained an agreement and a DSB ruling according to which the whole licensing scheme for such kits
must be eliminated on 1 April 2001 and the scheme was in fact eliminated on that date."
105 For the
United States too, there was nothing "inherent" about the indigenization and trade balancing
                                                     
101 India's response to Question 37 of the Panel.
102 Ibid.
103 Webster's New World Dictionary, Third College Edition.
104 India's response to Question 37 of the Panel.
105 Response to Question 38.WT/DS146/R
WT/DS175/R
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requirements.  Import licensing of the kind that India had maintained until 1 April 2001, could have
easily been administered without imposing export requirements or requiring discrimination in favor of
domestic goods.  India had given the Panel no reason to believe otherwise.  In any case, India had
effectively confirmed this point by saying that "it would in any case have been totally impracticable
for India to notify these details [i.e.  the details of the licensing regime India applied to each restriction
notified under Article XVIII:B] for 2,700 items and for the Committee on Balance-of-Payments
Restriction to examine them."  The fact that those details varied by item made clear that no one set of
administrative details was inherent in the restrictions themselves.  Moreover, the indigenization and
trade balancing requirements were continuing in force even though the import licensing regime had
been eliminated, as India had acknowledged.  This too demonstrated that they were independent of,
and not inherent in, that licensing regime. The fact that those requirements were continuing also
answered India's second point.  What the United States sought was a ruling whose legal consequenceswould entail the elimination of separate import restrictions imposed by Public Notice No. 60 and the
MOUs, as well as the elimination of the less favorable treatment that Public Notice No. 60 and the
MOUs accorded to impor ted automotive parts and components than to like domestic parts and
components.  By contrast, the legal consequences of the rulings in the India -  Quantitative
Restrictions  report entailed the elimination of the import licensing requirement for a large number of
goods, including SKD/CKD kits, a different matter entirely.  Eliminating the latter would not
eliminate the former.
4.62 In reply to a Panel question, the United States added that it had not been able to envision any
situation in which a panel could have settled an issue on which it did not expressly make findings.
Under DSU Article 11, the function of a panel was to  "make such other findings as will assist the
DSB in making the recommendations or in givi ng the rulings provided for in the covered
agreements."  The DSU did not give any legal status to findings that a panel does not make.
Furthermore, GATT and WTO dispute settlement panels were authorized to exercise judicial
economy and not to make a finding on a particular legal issue if the finding was not necessary to
enable the Dispute Settlement Body to make sufficiently precise recommendations and rulings toallow for prompt compliance in order to ensure the effective resolution of the dispute.  It was difficult
to see how a finding that a panel chose not to make for reasons of judicial economy could settle the
issue that would have been the subject of the finding if the panel had made it.  It was equally difficult
to see how a finding that a panel did not make without  citing judicial economy could settle the issue
that would have been the subject of the finding if the panel had made it.
4.63 India  pointed out that the Appellate Body had ruled on the question of judicial economy in
United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India (hereinafter
"US – Wool Shirts and Blouses ") as follows:
106
... the basic aim of dispute settlement in the WTO is to settle disputes.  This basic aim
is affirmed elsewhere in the DSU .  Article 3.4, for example, stipulates:
Recommendations or rulings made by the DSB shall be aimed at
achieving a satisfactory settlement of the matter in accordance withthe rights and obligations under this Understanding and under the
covered agreements.
... Article 3.2 of the DSU  states that the Members of the WTO "recognize" that the
dispute settlement system "serves to preserve the rights and obligations of Members
under the covered agreements, and to clarify the existing provisions of those
agreements  in accordance with customary rules of interpretation of public
                                                     
106 WT/DS33/AB/R, page 18 (DSR 1997:I, 323).WT/DS146/R
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international law" (emphasis added).  Given the explicit aim of dispute settlement that
permeates the DSU , we do not consider that Article 3.2 of the DSU  is meant to
encourage either panels or the Appellate Body to "make law" by clarifying existing
provisions of the WTO Agreement  outside the context of resolving a particular
dispute.  A panel need only address those claims, which must be addressed in order to
resolve the matter in issue in the dispute.107
4.64 The ruling of the Appellate Body referred to the range of claims an individual panel should
address.  However, there was no reason why the principle that "a panel need only address those claims
which must be addressed in order to resolve the matte r in issue in the dispute" should not also apply
when a panel was requested to rule on a matter already resolved or settled as a result of a prior
invocation of the DSU. In the view of India, the Appellate Body ruling made clear that the matters
"resolved" by a panel report were not only the matters on which the panel specifically ruled upon. Thewhole notion of judicial economy rested on the idea that a ruling on one matter could resolve another
matter on which no ruling was made.  For instance, if a panel ruled that a Member must eliminate its
import licensing scheme, it had at the same time resolved all issues related to the administration of
that scheme even if had not made rulings on the administration of the scheme.
108
(i) The notion of abusive splitting
4.65 India  considered that there was no legal system in which a complainant was permitted to do
what the European Communities and the United States were doing in the present case, namely,
challenge without good cause one legal aspect of a situation in one proceeding and then another legal
aspect of the same situation in a new proceeding.  All legal systems imposed limits to such an abusive
"splitting" of a subject matter into separate proceedings. Here again, India wished to invite the Panelto draw on generally applied principles of law and the objectives of the DSU.  If an abusive splitting
of legal challenges under the DSU were permitted, WTO Members would be deprived of their right to
"a satisfactory settlement of the matter", to which they were entitled in accordance with Article 3.4 of
the DSU.  The principle of the prohibition of abusive splitting must therefore be considered to be an
inherent part of the DSU procedures.  India drew  the Panel's attention to the importance that the
Appellate Body had attached to the concept of good faith.  In United States – Tax Treatment for
"Foreign Sales Corporations " (hereinafter " US – FSC "), the Appellate Body described the concept of
good faith as a "pervasive principle" of general international law that guides the way in which
Members should interpret their rights and obligations.
109  I n  United States – Import Prohibition of
Certain Shrimp and Shrimp Products  (hereinafter " US – Shrimp "), the Appellate Body explained as
follows the way in which good faith constrains WTO Members' exercise of their rights under WTO
law:
This principle [of good faith], at once a general principle of law and a general
principle of international law, controls the exercise of rights by states.  One
application of this general principle, the application widely known as the doctrine of
abus de droit , prohibits the abusive exercise of a state's rights and enjoins that
whenever the assertion of a right "impinges on the field covered by [a] treatyobligation, it must be exercised bona fide, that is to say, reasonably." An abusive
exercise by a Member of its own treaty right thus results in a breach of the treaty
                                                     
107 The "matter in issue" is the "matter referred to the DSB" pursuant to Article 7 of the DSU .
108 India's responses to Questions 104 (b) and 108 of the Panel.
109 US – FSC , WT/DS108/AB/R, adopted on 20 March 2000, as modified by the Appellate Body
Report, para. 166.WT/DS146/R
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rights of the other Members and, as well, a violation of the treaty obligation of the
Member so acting.110
4.66 The Appellate Body quoted an author who wrote:
A reasonable and bona fide exercise of a right in such a case is one which is
appropriate and necessary for the purpose of the right ( i.e. in furtherance of the
interests which the right is intended to protect).  It should at the same time be fair and
equitable as between the parties  and not one which is calculated to procure for one of
them an unfair advantage in the light of the obligation assumed.  A reasonable
exercise of the right is regarded as compatible with the obligation.  But the exercise
of the right in such a manner as to prejudice the interests of the other contracting
party arising out of the treaty is unreasonable and is considered as inconsistent with
the bona fide execution of the treaty obligation, and a breach of the treaty.111
India submitted that the European Communities' and the United States' exercise of their procedural
rights under the DSU in the present case was abusive and did not meet the standards set by the
Appellate Body. India urged the Panel to make the ru lings necessary to protect India in this case, and
other Members in future cases, against the use of the DSU procedures for the purpose of coercing
developing countries into making concessions in policy areas not covered by WTO law.
4.67 The European Communities  noted that India had invoked the existence of principles in all
legal systems whereby "matters, once settled, cannot be litigated again" , but had offered no evidence
of the existence of such principles, except a quotation from a Henry M. Herman dated 1886
concerning the maxim " Interest republicae ut sit finis litigium ". That maxim meant simply that "there
must be an end to litigation" (a platitude with  which anybody would agree) and did not address
specifically the issue in dispute.  The European Communities agreed that where a matter had already
been adjudicated in a panel report adopted by the Dispute Settlement Body, the complaining Member
was bound by that report and could not request the establishment of another panel with respect to the
same matter.112  Nevertheless, the European Communities believed that panels should apply the
principle of res judicata with great circumspection, especially where the complainant had been
successful in the first dispute, as in the instant case. In those circumstances, the risk of unnecessary re-
litigation should be of less concern than that of incurring in a denial of justice by depriving a Member
of its right to a panel under the DSU.  The application of the res judicata  principle was subject to
strict requirements. There must be complete identity between the parties and between the "matters" indispute. The identity of the "matter" required that both the measures in dispute and the claims
submitted in connection with those measures be the same. It is not sufficient, therefore, that the
matters be merely similar or related. In the present case, both the measures and the claims were
different. Therefore, the conditions for considering that the matter in dispute was res judicata  were
clearly not met.  As acknowledged by India
113, the Panel Report on India – Quantitative Restrictions
was not binding upon the European Communities. Therefore, that report would not have the effect of
res judicata  vis-à-vis the European Communities even if this Panel were to conclude that the matter
brought by the United States in these proceedings had already been adjudicated in that panel report.  It
                                                     
110 US – Shrimp , WT/DS58/AB/R, adopted on 6 November 1998, para. 158 and fn. 156 (internal
footnote revised).
111 This quote in the Appellate Body report as explained in fn. 156 of US – Shrimp , comes from
B. Cheng, General Principles of Law as applied by International Courts and Tribunals  (Stevens and Sons, Ltd.,
1953), Chapter 4, p.125.
112 See the Report of the Appellate Body on Japan –Alcoholic Beverages II , WT/DS8/AB/R,
WT/DS10/AB/R, WT/DS11/AB/R, adopted on 1 November 1996, p. 24 (DSR 1996:I, 97).
113 India's response to Question 42.WT/DS146/R
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was still unclear to the European Communities which were the "general principles of law" invoked by
India.  India had mentioned a "principle of the proh ibition of abusive splitting".  Later, India no longer
referred to that principle, but instead to the "principle of good faith set out in Article 3:10 of the
DSU". There was no reason why a complaining Member  would ever wish to request a new panel with
respect to a measure that had already been found to be inconsistent by another panel. Such situationmight arise only as a result of an error on the part of the complaining Member regarding the scope of
the earlier panel's findings, and not of bad faith. The United States would derive no advantage from
"splitting" the dispute. Rather, the opposite was true. If India's view that the balancing and
indigenization requirements were covered by the rulings of the panel on India – QR s were correct, the
United States could have asked directly for a compliance panel under Article 21.5 of the DSU. That
the United States had asked instead for the establishment of this panel evidence, if anything, the good
faith of the United States. In contrast, India's decision to continue to apply the balancing and theindigenization requirements after 1 April 2001, notwithstanding its position that they were an inherent
part of the measure that was found to be inconsistent with Article XI:1 of the GATT by the Panel on
India – Quantitative Restrictions , was  difficult  to reconcile with the requirements of Article 3.10 of
the DSU. (Not to speak of India's totally unsupported invocation of Article XVIII:B.)
114
4.68 The United States  hoped that India would clarify what it meant by its use of the term res
judicata,  because while India referred to this "principle", India nowhere defined it.  It was therefore
not entirely clear what India had in mind when it used the term.  Generally speaking, however, a
principle of res judicata , if applicable, would presumably relate to the effect of a previously adopted
panel report on a subsequent dispute involving the same matter between the same parties.  India
sought to support its "principle of res judicata " by reference to a decision of the International Court of
Justice (ICJ) and a statement of the Appellate Body in the Japan – Taxes on Alcoholic Beverages
(hereinafter " Japan – Alcoholic Beverages II ") dispute.  But neither of those cases provided any help
for India's position.  In Japan – Taxes , the Appellate Body rejected  a claim that prior GATT panel
decisions constituted binding precedent.115  As for the ICJ's advisory opinion in Effects of Awards of
Compensation Made by the United Nations Administrative Tribunal , while that opinion mentioned
res judicata  it did not define what it meant by that term.  In any event, the question posed to the ICJ in
that case was "Having regard to the Statute of th e United Nations Administrative Tribunal and to any
other relevant instruments and to the relevant records, has the General Assembly the right on any
grounds to refuse to give effect to an award of co mpensation made by that Tribunal in favour of a
staff member of the United Nations whose contract of service has been terminated without hisassent?
116  ( i.e. was the General Assembly required to pay the award rendered by the tribunal?)  The
decision therefore did not address the question whether a tribunal hearing a subsequent dispute was in
any sense bound by a previous tribunal decision, and therefore it is inapposite to India's contentions
here.
4.69 The United States noted that India, despite acknowledging that the scope of " res judicata "
was not an issue in this dispute once the US claims were properly understood, nevertheless insisted
that Public Notice No. 60 and the MOUs were "an inherent part of the licensing scheme" that Indiahad now eliminated.
117  India also maintained that it "fails to understand what interest protected by the
DSU the European Communities and the United States are pursuing by requesting rulings on the
specific conditions attached to the grant of licenses for SKD/CKD kits when they have already
obtained an agreement and a DSB ruling according to which the whole licensing scheme for such kits
                                                     
114 Question 21 of the Panel.
115 Report of the Appellate Body in Japan - Alcoholic Beverages II , WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R, adopted on 1 November 1996, Part E (DSR 1996:I, 97).
116 (1954) I.C.J. Rep. 50.
117 India's response to Question 37 of the Panel.WT/DS146/R
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must be eliminated on 1 April 2001 and the scheme was in fact eliminated on that date."118  Even if
the Panel were inclined to pursue the legal issue that India had raised, it would have to conclude that
India's analysis was without basis in the text of th e WTO Agreement.  India gave no citation at all for
its so-called "principle of abusive splitting"; its one textual reference - namely, to the phrase
"satisfactory settlement of the matter" in DSU Article 3.4 - did not support its position, for thestraightforward reason that the "matter" at issue in this dispute was different from the "matter" at issue
in the India – Quantitative Restrictions  dispute.  The measures were different; the claims were
different.  India's removal of the import licensing at issue in the earlier case would not end the
discrimination against foreign goods or the additional import barriers that Public Notice No. 60 and
the MOUs imposed.  These separate violations were the ones that this Panel must address; the
previous panel did not, and could not, address them.
4.70 India's "good faith" argument was equally unavailing.  India referred to the provision in DSU
Article 3.10 that "if a dispute arises, all Members will engage in these procedures in good faith in an
effort to resolve the dispute."  The Appellate Body's construction and application of that phrase,
however, did not help India's position.  In its report in the FSC dispute, the Appellate Body said:
By good faith compliance, complaining Members accord to the responding Members
the full measure of protection and opportunity to defend, contemplated by the letterand spirit of the procedural rules.  The same principle of good faith requires that
responding Members seasonably and promptly  bring claimed procedural deficiencies
to the attention of the complaining Member, and to the DSB or the Panel, so that
corrections, if needed, can be made to resolve disputes.  The procedural rules of WTO
dispute settlement are designed to promote, not the development of litigationtechniques, but simply the fair, prompt and effective resolution of trade disputes.
119
The Appellate Body was considering purely a question of timing - whether or not an objection to aconsultation request had been timely raised.  In a subsequent case the Appellate Body considered the
application of Article 3.10 to another question of timing - whether or not a Member had asked for
clarification of a panel request in a timely manner.
120  Nothing about Article 3.10 or the Appellate
Body's construction of that provision had anything to do with "res judicata", "splitting", or the binding
nature in a subsequent dispute of a ruling in an earlier one.
4.71 In effect, India was inviting this Panel to embark on an examination of "principles" that were
not anchored in the text of the DSU.  Previous panels had rejected similar attempts by India to obtainprocedural rulings that were not based on the langua ge of the DSU; as the United States had pointed
out in its answers to the Panel's questions, the EC – Mailbox  Panel properly concluded that a panel
proceeding was not the appropriate forum to address systemic issues.  The Panel explained that it was
required to base its findings on the language of the DSU and could not make a ruling ex aequo et bono
divorced from explicit language in the DSU.
121  In this case, not only had India failed to ground its
argumentation in the text of the WTO Agreement, it had also not made any effort to deal with other
DSU provisions that lead to the opposite conclusion.  For example, India's position was at odds withDSU Article 3.7, which the Appellate Body noted in the Bananas  report "suggests ... that a Member is
                                                     
118 Id., response to Question 38.
119 Report of the Appellate Body in US – FSC , WT/DS108/AB/R, adopted on 20 March 2000,
para. 166.
120 Report of the Appellate Body in Thailand  – Anti-Dumping Duties on Angles, Shapes and Sections of
Iron or Non-Alloy Steel and H-Beams from Poland,  WT/DS122/AB/R, adopted on 5 April 2001, para. 97.
121 Panel Report on India  – Patents (EC) , WT/DS79/R, adopted on 22 September 1998,
paras. 7.22-7.23 (DSR 1998:VI, 2661).WT/DS146/R
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expected to be largely self-regulating in deciding whether any such action would be ‘fruitful'.122 For
similar reasons, India's position was also at odds with DSU Articles 3.3 and 7.1:  Much like
Article 3.7, DSU Article 3.3 emphasized the importance of resolving the claims that a complaining
Member "considers" to be impairing its benefits under the WTO Agreement,123 and DSU Article 7.1
allowed the complaining Member to define the measures challenged and the legal claims advanced.Furthermore, India's position was at odds with DS U Article 3.2, which, if India is correct, would be
ignored in this case because violations of Article XI:1 and III:4 would go unaddressed.
124  The same
considerations apply here as applied in EC – Mailbox :  the text of the DSU required the Panel to
examine the matter that the United States had placed before it.  Nothing in the language of the DSU
supported the argument that India had made.
4.72 The United States noted that in its responses to the Panel's questions, India seemed to have
accepted the distinction between its import licensing regime and the requirements at issue in this case.Moreover, as India noted, the issue before the Panel was not the scope of res judicata  (or any of the
other "principles" that India invoked in aid of its argument) –regardless of the precise meaning of
India's "principles", this case did not involve the reprise of a dispute that had already been
adjudicated, nor the "splitting" of a single matter in two. In light of this common ground on the issues
before the Panel, the Panel should not tarry over India's assertions earlier in this dispute that itsposition was justified by a  " principle of res judicata " or a "principle of abusive splitting"; or a
principle of "good faith"  There was no need for the Panel to consider whether such principles existed
under the WTO Agreement, and if so what their scope might be -- those were legal issues that were
neither presented by the facts before the Panel nor necessary to the resolution of this dispute.
C. A
RE THE MEASURES WITHIN THE TERMS OF REFERENCE OF THE PANEL ?
1. Do the measures applied after 1 April 2001 fall outside the terms of reference?
4.73 India  said that it was not clear whether the measures on which the European Communities
and the United States were requesting rulings were those that India was applying at the time when the
requests for the establishment of a panel were submitted to the DSB or the measures that India might
be applying as from 1 April 2001. It requested the Panel to request the complainants to clarify thisissue.  If the complainants were to respond that th ey considered India's future measures to be part of
the present proceedings, India would request the Panel to issue a preliminary ruling to the effect that
these measures fell outside of its mandate.
4.74 India argued that, under the DSU, Members may not bring complaints on proposed
measures
125 nor may they request advisory rulings on potential future issues.  This followed from
Article 7.1 of the DSU, according to which the mandate of a panel was to examine "the matter"
referred to the DSB in the document containing the request for establishment of the panel.  According
to Article 6.2 of the DSU, the panel request must identify (a) "the specific measures at issue" and (b)
the "legal basis of the complaint".  The Appellate B ody clarified that the requirement to identify the
                                                     
122 Report of the Appellate Body in European Communities – Regime for the Importation, Sale and
Distribution of Bananas , (hereinafter " EC – Bananas III ") WT/DS27/AB/R, adopted on 25 September 1997,
para. 135 (DSR 1997:II, 591).
123 Article 3.3 provides that "the prompt settlement of situations  in which a Member considers  that any
benefits accruing to it directly or indirectly under the covered agreements are being impaired by measures taken
by another Member is essential to the effective functioning of the WTO and the maintenance of a proper balancebetween the rights and obligations of Members" (emphasis added).
124 DSU Article 3.2 provides that "recommendations and rulings of the DSB cannot add to or diminish
the rights and obligations provided in the covered agreements."
125 This contrasts with the dispute settlement provisions of the North American Free Trade Agreement,
which permit complaints on "any actual or proposed  measure" (Article 2006:1).WT/DS146/R
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legal basis of the complaint meant that the legal clai ms in respect of the measures identified must be
specified in the request for the establishment of the panel.126  The reference of the DSU to "the matter"
in the document requesting the establishment of the panel thus consisted of  (a) the specific measures
identified as the "measures at issue" and (b) the legal claims made in respect of those measures.  It
logically followed from this that both the measures at issue before a panel and the legal issues towhich they gave rise must have existed at the time of the request for the establishment of a panel.
4.75 The Panel on India – Quantitative Restrictions had noted that:
... practice, both prior to the WTO and since its entry into force, limits the claims
which panels address to those raised in the request for establishment of the panel,
which is typically the basis of the panel's terms of reference (as is the case here).
127  
In our opinion, this has consequences for the determination of the facts that can be
taken into account by the Panel, since the complainant obviously bases the claimscontained in its request for establishment of the panel on a given set of facts existing
when it presents its request to the DSB. . . .  it would seem consistent with such a
request and logical in the light of the constraints imposed by the Panel's terms of
reference to limit our examination of the fa cts to those existing on the date the Panel
was established.
128
In India's view, it followed from the above that the mandate of the present Panel was to examine the
measures that existed at the time the panel requests were submitted by the European Communities and
the United States and the legal claims that could be made in respect of those measures at that time.
The relevant date for the United States was 15 May 2000 and 12 October 2000 for the European
Communities.129  It was thus clear that the measures which India would apply as from 1 April 2001 to
comply with the mutually agreed solution negoti ated with the European Communities and the DSB
ruling sought by the United States fell outside the Panel's terms of reference.
4.76 Although the European Communities and the United States alleged that India was currently
violating its obligations under the GATT and the TRIMs Agreement, many of their arguments relatedto measures that India might take after 1 April 2001 and legal issues that might  consequently arise at
that time. It was unclear  whether the legal arguments of the claimants related to the factual situation
before or after the elimination of the discretionary licensing regime for SKD/CKD kits.
4.77 The European Communities claimed that the "trade balancing" requirements stipulated in the
MOUs were inconsistent with GATT Article XI:1 in that they restricted imports of passenger cars,and of components therefor, by the signatories of the MOUs. The European Communities had
recognised that the solution it reached with India under Article 3.6 of the DSU and the United States'
agreement with India under Article 21.3 (b) of the DSU allowed India to maintain import restrictions
on passenger cars until 1 April 2001.  Therefore, the European Communities explained, it made its
claim of violation of Article XI only in so far as : the MOUs require the "trade balancing" of imports
                                                     
126 See India – Patent Protection for Pharmaceutical and Agricultural Chemical Products , (hereinafter
"India – Patents (US) ") (WT/DS50/AB/R), adopted on 16 January 1998, para. 89 (DSR 1998:I, 9).
127 Appellate Body Report on EC – Bananas III , (WT/DS27/AB/R), adopted on 25 September 1997,
para. 143 (DSR 1997:II, 591), and Appellate Body Report on India – Patents (US) , (WT/DS50/AB/R), adopted
on 16 January 1998, paras. 87-89.
128 See India – Quantitative Restrictions, (WT/DS90/R), paras. 5.160-5.161.
129 WT/DS146/4. In US – Certain EC Products , the Appellate Body found that a measure which did not
exist at the time when the consultations required under Articles 4 and 6 of the DSU were held could not bedeemed to be a measure falling within the panel's terms of reference (WT/DS165/AB/R, para. 70). This ruling
suggested that the measures at issue in a panel proceeding must have existed even at the time of consultations.WT/DS146/R
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of "components" other than chassis and bodies130;  and the MOUs will remain binding and enforceable
after 1 April 2001, both with respect to passenger cars and components therefor.  In India's view, this
made it clear that the EC's complaint was really directed against measures which India  might  take to
enforce the MOUs, but that were not yet in place, and legal issues that had therefore not yet arisen.
4.78 The United States' argumentation was equally contradictory. Thus, the United States
"applauds the efforts that India is undertaking" in eliminating the licensing restrictions.  However, the
United States expressed regret that this would not resolve the dispute because "India intends to
maintain and continue enforcing the requirements of Public Notice No. 60 and the MOUs after itsimport licensing regime ends".  The United States explained that the dispute concerned
discriminatory, trade-restricting conditions that India exacted from investors in the motor vehicle
manufacturing sector - and that it intends to continue to exact. Citing press reports of statements by
Indian policy makers, the United States claimed that "India does not intend to terminate the
requirements" of Public Notice No. 60 or the MOUs when it eliminates the balance-of-payments
restrictions on imports of SKD/CKD kits and components on 1 April 2001.
4.79 The prospective nature of the United States' complaint had become particularly evident when
it argued that India might deny import licenses under the general enforcement and confiscation
provisions of the FTDR Act even after 1 April 2001.  It claimed that:
These additional import-restricting provisions will evidently not disappear when India
eliminates its balance-of-payments licenses on 1 April 2001, but will instead,
apparently, become the instruments through which India carries out the import
restrictions in Public Notice No. 60 and the MOUs (and thus prevents SKD/CKD
kits/components from being brought into India to compete with domestic parts andcomponents).
131
The United States thus recognised that India would eliminate the import restrictions at issue on1 April 2001, but nevertheless argued that India would "apparently" re-introduce new restrictions
under the general enforcement provisions of the FTDR Act.  It was on the basis of this alleged
possibility of a future measure covered by Article XI of the GATT that it was asking the Panel to rulethat India was acting inconsistently with this provision.
4.80 The above made clear that both the European Communities and the United States were
satisfied with the way in which India had so far implemented the mutually agreed solution and the
DSB rulings.  Their complaints related to measures that India might  in their view adopt as from 1
April 2001 and legal issues that might  arise in this connection.  However, for the reasons explained
above, these complaints – should events substantiate them – should appropriately be made in a dispute
settlement proceeding initiated after 1 April 2001.  India concluded that the European Communities
and the United States had brought their complaints to the DSU before the end of the agreed
implementation period, and thus prematurely, because they claimed to have reason to believe that
India might  not bring the application of its licensing system for automotive parts and components into
conformity with its WTO obligations as from 1 April 2001.  India would demonstrate that thisconcern was unjustified.  In any event, according to established WTO jurisprudence the Panel's terms
of reference did not extend to measures that had not yet been adopted and claims on legal issues that
had not yet arisen.  For these reasons, India would request the Panel to reject both complaints as
inadmissible.
                                                     
130 India wished to point out that the MOUs did not require the trade balancing of imports of
components except when such imports were in the form of SKD/CKD kits.
131 Underlining added.WT/DS146/R
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(a) The method of enforcement before and after 1 April 2001
4.81 India  stated that  both Public Notice No. 60 and the MOUs themselves clearly and explicitly
stipulated that the MOUs were to be enforced through the import licensing mechanism. They both
contained the following clause:
The MOU Scheme would be enforced through the import licensing mechanism and
MOU signing firms would be granted import licenses by DGFT based on above
parameters.132
4.82 As long as India maintained its import licensing regime for SKD/CKD kits, the only possible
legal consequence of the non-observation of the terms of a MOU was therefore the denial of an import
license for such kits. An enforcement of the MOUs by other means would at that time have been
contrary to the policy set out in Public Notice No. 60.  Moreover, even if the Government of India had
decided to enforce the MOUs through the courts, the automobile manufacturer concerned could haveinvoked the clause in the MOU according to which the licensing mechanism would be the exclusive
mechanism of enforcement.  If the European Comm unities and the United States were to state that
their complaints related to the enforcement of the MOUs outside the licensing regime and Notice
No. 60, India requested the Panel to ask them to clarify which enforcement measure India had taken
outside the licensing regime and Notice No. 60 at the time when the panel requests were submitted
was at issue in this proceeding.  Specifically, the complainants should be asked to clarify what
measure that India took outside the framework of the licensing regime and Notice No. 60 at that time
constituted a "requirement" and "restriction" within the meaning of Articles III and XI of the GATT
and the corresponding provisions of the TRIMs Agreement. In this context, India wished to emphasise
that the MOUs were, prior to 1 April 2001, enforced exclusively through the denial of import licensesfor CKD/SKD kits. The application of discretionary import licensing for CKD/SKD kits was
consequently the only governmental measure related to the MOUs that was in place at that time. India
was particularly interested in learning from the complainants how, in the absence of any import
licensing regime for CKD/SKD kits, the MOUs could entail any restriction on the importation of such
kits within the meaning of Article XI of the GATT .   India continued by pointing out that compliance
with the commitments made by car manufacturers under the MOUs was, under the regime applied by
India prior to 1 April 2001, secured exclusively through the denial of import licenses for SKD/CKD
kits.  This method of securing compliance could of course no longer be applied when the restrictive
licensing for such imports was abolished as from 1 April 2001.  From then on, the MOUs  would, if
necessary, be enforced through the courts since they were binding contracts under Indian civil law.This method of enforcement would not entail any denial of import license s. The MOUs potentially
might now be enforced under the provisions of the Foreign Trade (Development and Regulation) Act,
1992 (the "FTDR Act") and the Foreign Trade (Regulation) Rules, 1993.  However, none of the
potential methods of enforcement would entail any import restrictions.
4.83 It followed from the above that the enforcement of the MOUs as contracts outside the import
licensing scheme for SKD/CKD kits could not have arisen at the time when the European
Communities submitted its request for the establishment of the Panel. The Panel would therefore beruling on a prospective matter – that is, a legal situation which did not exist at the time of its
establishment – if it were to examine the legal effects of MOUs after the abolition of the licensing
regime.  This prospective matter was outside its terms of reference. A panel may not rule: if the
respondent were to do this or were to do that, then it would be  acting inconsistently with this or that
provision. Or: because the respondent has done this or that during the course of the proceedings, therespondent acted inconsistently with this or that provision.  It must base its ruling on inconsistencies
                                                     
132 See para. 4 of  Public Notice No. 50 and para. V of the standard format for MOUs annexed to the
Notice.WT/DS146/R
WT/DS175/R
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that had already occurred at the time of the request for its establishment.  After 1 April 2001, any
measures that India might take to secure co mpliance with remaining obligations under the MOUs
would no longer entail any limitation of the right of the signatories to import SKD/CKD kits.  The
enforcement of the MOUs after the abolition of the import licensing system  would therefore be fully
consistent with India's WTO obligations.
4.84 The Panel needed to take into account that th e issue was the applicability of provisions of
contracts to which the Government of India was a party. The Government of India had repeatedly
stated, that the trade balancing provisions in Public Notice No. 60 and in the MOUs did not apply to
freely importable products . This was, of course, also the position of the Government of India as the
holder of contractual rights  under the  MOUs. The Panel should for this reason accept the position of
the Government of India on the applicability of the MOUs.133  India wished to stress that the measures
outlined above were those actively being considered at the present time, but that no final decision onthis matter had as yet been taken.  None of the measures to secure compliance with remaining
obligations under the MOUs described above had thus far been adopted and none of the legal issues
discussed above has therefore arisen as yet.  Moreover, as far as the indigenization requirement under
the MOUs was concerned, it was presently not clear whether there was any need to take any action at
all.
4.85 The United States responded that India's argument that the United States was challenging
measures that India would take in the future was based on flawed premises.  First, the United States
was actually challenging measures that India had already taken – namely, the imposition of local
content and trade balancing obligations on MOU si gnatories.  And, while India said that import
licensing would end on 1 April India had acknowledg ed that nothing about the MOUs would change
after that date:  they remained "binding" and "will, if necessary, be enforced".  These measures were
no different from the binding and enforceable purchase undertakings that the Canada – FIRA  Panel
found inconsistent with the GATT.
4.86 The distinction that India tried to draw be tween the situation before 1 April 2001, and the
situation after 1 April 2001, was contradicted by India's acknowledgement that the MOUs wouldremain in force even after 1 April 2001, and by  India's further acknowledgement that the trade
balancing and indigenization requirements in the MOUs remained binding and enforceable after that
date.
134  In fact, in addition to reconfirming that these requirements remained enforceable in Indian
courts, India's answers to the Panel's questions also confirmed that they were enforceable through
monetary penalties levied under Section 11 of the FT(DR) Act.135
                                                     
133 India would like to note in this connection that the Panel on United States – Sections 301-310 of the
Trade Act of 1974  (hereinafter " US – Section 301 Trade Act ") based its interpretation of some of the most
controversial provisions of United States trade law, inter alia , " on representations and statements by the
representatives of the United States . . . solemnly made , in a deliberative manner, for the record, repeated in
writing and confirmed in the Panel's second hearing." (WT/DS152/R, para. 7.122, adopted on 27 January 2000)Since the assurances given by United States regarding the content of its domestic law  were accepted as decisive
by a WTO panel, the United States should accept by the same token the position stated by the Government ofIndia on the applicability of the MOUs.
134  The position was less clear with respect to Public Notice No. 60; as far as the United States could
tell, this notice had not been rescinded and thus remained in force.  India had said only that "Public NoticeNo. 60 is no longer operational because the licensing sche me it was to administer no longer exists." India's
response to Question 33 of the Panel.
135 "As pointed out above, after the abolition of import licensing for CKD/SKD kits on 1 April 2001,
MOUs potentially can  be enforced as contracts through the domestic courts. The companies may also be liable
to monetary penalties under Section 11 of the FTDR Act."  India's response to Question 52(d) of the Panel.WT/DS146/R
WT/DS175/R
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4.87 Those acknowledgements necessarily meant that the trade balancing and indigenization
requirements were legally independent of the licensing requirements that India previously imposed on
imports of SKD/CKD kits and components.  As the United States had made clear, it was not the
licensing requirements but the indigenization and trade balancing requirements that were the subject
of the US complaint in this dispute.  Because the indigenization and trade balancing requirements didnot change on 1 April 2001 (or on any other date), and because those requirements were independent
of India's now-eliminated licensing regime, India's elimination of import licensing was not relevant to
– and certainly did not resolve – this dispute.  In its answers to the Panel's questions, India appeared to
have finally recognized this point.  India said, "there are requirements set out in the MOUs that apply
also in the absence of any import restriction on SKD/CKD kits."
136  The United States agreed:  and it
was those MOU requirements – and their inconsistencies with India's WTO obligations –  that were
the subject of this dispute. However, India regret tably persisted in arguing that the situation after
1 April 2001 (i.e. after elimination of the import licensing regime) was somehow different from the
situation before that date.  According to India, enforcement of the MOUs "could not have arisen at the
time when the European Communities [or, presumably , the United States] submitted its request for
the establishment of the Panel.  The Panel would therefore be ruling on a prospective matter – that is,
a legal situation which did not exist at the time of its establishment – if it were to examine the legaleffects of MOUs after the abolition of the licensing regime.  This prospective matter was outside its
terms of reference."
137
4.88 India's argument relied on several misunderstandings.  First, the US complaint was not
directed at any particular method or means of enforcing the MOUs and Public Notice No. 60. The US
complaint was instead directed to the indigenizati on and trade balancing requirements as such, and
these requirements had not changed.  These requirements had imposed the same obligations on car
manufacturers since the date that the MOUs were signed, and it was the US position that those
obligations were themselves inconsistent with India's WTO commitments.  What mattered was that
those obligations were binding and enforceable; wh at means India chose or would choose to enforce
them was simply not relevant to the US legal claims in this dispute.138  The text of the GATT 1994
made this point clear.  Article III:4 of the GATT 1994 was addressed to "... laws, regulations and
requirements ... ."  The indigenization and trade balancing requirements were indisputably
"requirements"; and they remained "requirements" regardless of what methods India used to enforce
them.139  India's position – that the Panel should focus not on the requirements that the measures
imposed but should look instead at changes in th e means of enforcement – was simply not consistent
with the GATT text.  The situation was no different for Article XI:1:  the scope of that article had
always been interpreted to be broad, and it used the term " measures," the meaning of which was at
least as broad as the term "requirement".140
                                                     
136 India's response to Question 33 of the Panel.
137 Ibid.
138 Thus, even if it were true that before 1 April 2001, "as long as India maintained its import licensing
regime for SKD/CKD kits, the only possible legal consequence of the non-observation of the terms of a MOU
was therefore the denial of an import license for such kits" and that a manufacturer could have resisted court
enforcement of the MOUs on that basis (Indian Panel Answers, response to question 33), the fact remained thatthe enforceability as such of the requirements in the MOUs had not changed.
139 Furthermore, Public Notice No. 60 was certainly also a "regulation".
140 Cf. also  Panel Report on Japan – Measures Affecting Consumer Photographic Film and Paper ,
(hereinafter " Japan – Film ") WT/DS44/R, adopted on 29 April 1998, para. 10.51:  "Given that the scope of the
term requirement  would seem to be narrower than that of measure , the broad reading given to the word
requirement  by the Canada - Administration of the Foreign Investment Review Act ( hereinafter  "Canada –
FIRA ") and European Economic Community – Regulation on Imports of Parts and Components  (hereinafter
"EEC – Parts and Components ") panels supports an even broader reading of the word measure  in
Article XXIII:1(b)."WT/DS146/R
WT/DS175/R
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4.89 India's position was also inconsistent with the conclusions reached by the Canada – FIRA
Panel.  That panel had found as follows:
The Panel further noted that written purchase undertakings – leaving aside the
manner in which they may have been arrived at (voluntary submission,
encouragement, negotiation, etc.) – once they were accepted, became part of theconditions under which the investment proposals were approved, in which case
compliance could be legally enforced.  The Panel therefore found that the word
"requirements" as used in Article III:4 c ould be considered a proper description of
existing undertakings.
141
It was the enforceability of the undertakings – not the specific means of enforcement – that led theCanada – FIRA   panel to conclude that the undertakings were "requirements" within the meaning of
GATT Article III:4.  Notably, none of the undertakings examined in the Canada – FIRA  dispute had
ever actually been enforced by the Canadian Government; performance of unfulfilled undertakings
had always been either postponed or waived, or the undertakings had been replaced by revised
undertakings.
142  This fact did not change the Panel's legal conclusion that the undertakings imposed
"requirements" that were inconsistent with the GATT.
4.90 India was also wrong to say that the situation after 1  April 2001, was outside the Panel's
terms of reference.  This Panel's terms of reference were:
To examine, in the light of the relevant provisions of the covered agreements cited by
the United States in WT/DS/175/4 and by the European Communities in
WT/DS146/4, the matters referred to the DSB by the United States and the EuropeanCommunities in those documents and to make such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements.
143
The "matters referred to the DSB by the United  States" in document WT/DS175/4 included "Public
Notice No. 60 ((PN)/97-02) of the Indian Ministry of Commerce, published in the Gazette of India
Extraordinary, effective 12 December 1997; ... memoranda of understanding signed by the
Government of India with manufacturing firms in th e motor vehicle sector pursuant to Public Notice
No. 60 ... ."  India's admission that "there are requirements set out in the MOUs that apply also in the
absence of any import restriction on SKD/CKD kits " made clear that those requirements fell within
the terms of reference of this panel.  Furthermore,  India's focus on the elimination of import licensing
misapprehended the limited relevance of import licensing to this dispute.  India used those licenses to
induce car manufacturers in India to accept the indigenization and trade balancing requirements.  Car
manufacturers had to sign an MOU in order to receive those licenses and to import CKD/SKD kits.
As a matter of factual background, therefore, it was relevant that import licensing existed in 1997 and
1998, when the MOUs were signed.  With respect to the legal claims of the United States, the import
licenses constituted an "advantage" that MOU signatories received in exchange for binding
themselves to the indigenization and trade balancing requirements.144  T h e  Canada – FIRA  panel
                                                     
141 Panel Report on Canada - FIRA , adopted on 7 February 1984, BISD 30S/140, para. 5.4.
142 Ibid. , para. 2.11.
143 India – Measures Affecting the Automotive Sector :  Constitution of the Panel Established at the
Requests of the United States and the European Co mmunities:  Note by the Secretariat, WT/DS146/5,
WT/DS175/5, 30 November 2000, para. 2.  These are standard terms of reference drawn up in accordance withDSU Article 7.1.
144 See, e.g., the Panel Report on EEC - Parts and Components , adopted on 16 May 1990,
BISD 37S/132, para. 5.21 (those requirements  "which an enterprise voluntarily accepts in order to obtain an
advantage from the government constitute ‘requirements'  within the meaning of" GATT Article III:4).  And, inWT/DS146/R
WT/DS175/R
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considered an analogous situation:  permission to establish an investment in Canada was conditioned
on compliance after investment with various GATT-inconsistent undertakings.  In this dispute, access
to the import licenses played the same role as the pe rmission to invest played in that one:  as the
one-time "advantage" provided by the government to induce companies to accept on-going
WTO-inconsistent requirements.
4.91 In a related point, India also asserted that Public Notice No. 60 was no longer "operational"145
As a matter of fact, the status of Public Notice No. 60 was not at all clear.  To the best of the United
States' knowledge, Public Notice No. 60 had not been rescinded.  India had not explained what it
meant for an Indian regulation not to be rescinded and yet not be "operational".  In any event, even if
Public Notice No. 60 were no longer in force, it  remained in force for several months after the
establishment of this Panel (27 July 2000, for the US complaint) and the fixing of the Panel's terms ofreference on that date; the Panel could and should make findings concerning it.  As the United States
explained in answering the Panel's question 7, past GATT and WTO panels had ruled on measures
that were discontinued during the panel's examination.
146  It would be particularly appropriate for the
Panel to rule on Public Notice No. 60 in this case,  given that the requirements of Public Notice No. 60
were still in place through the MOUs, which all parties agreed remained in effect, binding andenforceable.  The Panel would thus achieve no economy by omitting Public Notice No. 60 from its
findings; to the contrary, as long as there was uncertainty over the status of Public Notice No. 60, such
a ruling could help ensure clear implementa tion of the DSB's rulings and recommendations.
147 The
United States added that the MOUs were directly binding on individual signatories because, according
to India, they were contracts enforceable under Indian domestic law.  However, the indigenization andtrade balancing requirements had originally been established by Public Notice No. 60.  In fact, the
terms of the MOUs were mandated by Public Noti ce No. 60, paragraph 8 of which provides that "a
standard format for MOU is enclosed as appendix to this Public Notice and MOU is required to be
signed as per this format ."  Consequently, a comprehensive ruling by the Panel would apply to both
Public Notice No. 60 (the source of the WTO-inconsistent requirements) and the MOUs (by whichindividual companies were bound to those WTO-inconsistent requirements), especially since Public
Notice No. 60 was, as all the parties this dispute agreed, in force at the time this Panel was
established.
4.92 In summary:  as long as the MOUs remained in force, the WTO-inconsistent indigenization
and trade balancing requirements remained in force.  Second, as India had confirmed, the MOUs, andtherefore also those two requirements, were binding and enforceable independently of the import
licensing requirements, and would remain so even after the import licensing requirements were
removed.  Therefore, the date of 1 April 2001, had no relevance to the legal issues before this Panel
                                                                                                                                                                    
the terms of the chapeaux to paragraphs 1 and 2 of the TRIMs Agreement Illustrative List, undertaking to
comply with those two requirements was "necessary to obtain an advantage" –  namely, the right to receiveimport licenses.
145 India's response to Question 33 of the Panel.
146 Such cases include:  the Panel Report on Argentina - Measures Affecting Imports of Footwear,
Textiles, Apparel and Other Items , (hereinafter " Argentina – Textiles and Apparel ") WT/DS56/R, adopted as
modified by the Appellate Body on other issues on 22 April 1998, para. 6.12 (DSR 1998:III, 1033); the Reportof the Appellate Body in US – Wool Shirts and Blouses , WT/DS33/AB/R,  adopted on 23 May 1997, page 1
(DSR 1997:I, 323);  and the Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R,
WT/DS64/R, adopted on 25 September 1997, para. 14.9 (DSR 1998:VI, 2201).
147 As the Appellate Body has explained, "A panel has to address those claims on which a finding is
necessary in order to enable the DSB to make sufficient ly precise recommendations and rulings so as to allow
for prompt compliance by a Member with those recommendations and rulings ‘in order to ensure effectiveresolution of disputes to the benefit of all Members.'"  Report of the Appellate Body in Australia – Measures
Affecting Importation of Salmon , (hereinafter " Australia – Salmon "), WT/DS18/AB/R, adopted on 6 November
1998, para. 223 (quoting DSU Article 21.1).WT/DS146/R
WT/DS175/R
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and provided India no defense to the US claims. For the United States, what was relevant to the
present dispute was that, both before and after 1 April 2001, those car manufacturers who signed
MOUs before 1 April had been and would continue to be subject to the indigenization and trade
balancing requirements.   Both after and before 1 April 2001, compliance with these requirements had
been necessary in order to comply with Indian law.   Because those requirements were legally binding
on MOU signatories and enforceable against them, they were measures that this Panel must rule
upon.148
4.93 The European Communities  noted that India contended that the EC's complaint did not
relate to measures that were in place when the panel request was submitted, but rather to the measures
which India might take to enforce the MOUs  as from 1 April 2001.  Therefore, according to India, the
measures in dispute would fall outside the terms of reference of this Panel.  The European
Communities contended  that any measures taken after 1 April 2001 would be outside the terms of
reference of this Panel to the extent that they changed the essence of the measures in dispute.149. It
was common ground that the MOUs signed before the date of establishment of this Panel had
remained in place after 1 April 2001 and continued to be binding upon the signatories. The only
change was that the balancing and indigenization requirements had ceased to be enforceable though
the denial of licenses. Nevertheless, those requirements had remained enforceable though othermeans.  India's answers to the Panel's questions confirmed that:
• the MOUs had not been eliminated as of 1 April 2001, despite India's claims that they
were  an "inherent part" of the import licensing scheme for passenger  cars
eliminated on that date;
• after 1 April 2001, the signatories continued to be required to meet the commitments
imposed by the MOUs
150;
• after 1 April 2001, the MOUs were enforceable as contracts through the domestic
courts151;
• in addition, the MOUs were also enforceable under the FD(TR) Act152, in particular
through the imposition of monetary penalties153;
• India had taken no action in order to achieve the effect that the MOUs remained
legally binding and enforceable after 1 April 2001154, either before or after that date.
4.94 The method of enforcement of the MOUs was not a constituent element of the violations
claimed by the European Communities. The European Communities did not claim that the balancing
and indigenization requirements were inconsistent with the GATT and the TRIMs Agreement becausethey were enforced through the denial of licenses. Those requirements were always inconsistent with
the GATT and the TRIMs Agreement, irrespective of the precise method used to enforce them.
Therefore, the change which occurred as of 1 April 2001 did not give rise to a new "legal situation"
155.
                                                     
148 Question 12 of the Panel.
149 Cf. the Report of the Appellate Body on Brazil – Export Financing Programme for Aircraft ,
(hereinafter " Brazil – Aircraft "), WT/DS46/AB/R, adopted on 20 August 1999, at paras. 130 et seq.
150 India's response to Question  33, para. 5.
151 India's response to Question 52 (d).
152 India's response to Question 52 (a).
153 Ibid.
154 India's response to Question 56.
155 India's response to Question 33, at p. 4, para. 4.WT/DS146/R
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It did not transform the MOUs into different measures and it did not bring them outside the scope of
the terms of reference of the Panel, contrary  to India's   contentions.  Any genuinely  new  measures
taken   by India  after  10 October 2000 would be outside the terms of reference of this Panel. For the
reasons explained elsewhere, a mere change of the method of enforcement of the balancing and
indigenization requirements after that date would not transform those requirements into new measuresbeyond the terms of reference of this Panel.
156  The EC's claims were addressed against the balancing
and indigenization requirements as such, and not against the method used by India in order to enforce
those requirements. Even if it were true that, as India argued now, before 1 April 2001 the MOUs
could be enforced exclusively through the denial of import licenses,  the use of a different means of
enforcement as from 1 April 2001 would not change the obligations imposed by the balancing and
indigenization requirements and would not transform them into different measures falling outside the
terms of reference of this Panel.157  The measures applied by India after 1 April 2001 were the same as
those that were the subject of the panel request submitted by the European Communities on
12 October 2000. The balancing and indigenization requirements continued to impose the same
obligations upon the signatories of the MOUs. The only change occurring on 1 April 2001 concerned
the method of enforcement of those obligations. That change, however, was without relevance for this
dispute. The EC's complaint was not directed against any of the specific methods available to theIndian authorities in order to enforce the balanc ing and indigenization requirements, but against the
requirements themselves.
4.95 The European Communities agreed with India that the DSU did not allow a Member to
launch a dispute settlement proceeding on "the-WTO consistency of implementation measures before
those implementation measures are taken"
158. But that situation was not present here. The European
Communities was quite simply not challenging any "implementation measures". As explained
[repeatedly], the EC's complaint was not directed against the specific enforcement actions which India
might  be required to take in order to enforce the MOUs. In other words, the European Communities
did not challenge the imposition of fines pursuant to the FT(DR) Act or the bringing of actions before
the civil courts for breach of contract. Instead, the EC's complaint was addressed against the MOUs assuch, regardless of the method used to enfo rce them.  Contrary to India's assertion
159, the EC's
complaint was not addressed against the enforcement measures which India might take after 1 April
2001. [The panel request and the EC's First Submission to the Panel made it perfectly clear that] the
EC's complaint was directed against Public Notice No. 60 and the MOUs as such.   Public Notice
No. 60 and the MOUs were adopted by India well before the European Communities submitted its
panel request and were unquestionably within the terms of reference of this Panel.   The European
Communities did not contest that Public Notice No. 60 ceased to be effective as of 1 April 2001. Yet,
by now it was a well established practice that Panels should rule on all the measures within their terms
of reference, even if they were discontinued during the proceedings.160 The European Communities
saw no reason why this Panel should depart from that practice. The European Communities, therefore,
reiterated its request to the Panel to find that, at the time when this Panel was established, Public
Notice No. 60 was inconsistent with Articles XI:1 and III:4 of the GATT and Article 2.1 of theTRIMs Agreement. India's defence was premised on the mistaken assumption that the MOUs were
not " measures", and that only the specific actions that India might take in order to enforce them could
be subject to dispute settlement. That assumption was manifestly wrong, and so was India's defence.
The MOUs were acts of the Indian Government. Moreover, they were binding upon the signatories
                                                     
156 EC's response to Question 18 of the Panel.
157 Cf. the Report of the Appellate Body on Brazil – Aircraft , WT/DS46/AB/R, adopted on
20 August 1999, paras. 130 et seq.
158 India's response to Question 37 of the Panel.
159 Ibid.
160 See e.g., the Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS64/R, adopted
on 23 July 1998, para. 14.9 and the reports cited therein (DSR 1998:VI, 2201).WT/DS146/R
WT/DS175/R
Page 46
and legally enforceable. In the light of well established case law, that was more than sufficient to
conclude that they were, as such, "measures" in the sense of GATT Article XI:1 as well as
"requirements" in the sense of GATT Article III:4.  Since the MOUs were "measures" and "
requirements" on their own, they could be the subject of dispute settlement from the moment of their
conclusion and for as long as they remained enforceable, regardless of whether the Indian authoritiesneeded to take any specific actions to enforce them.  Indeed, it was very likely that, after 1 April 2001,
India would not have to take any enforcement actions at all, because, just as they had done until now,
the signatories would comply with the terms of the MOUs in order to avoid the imposition by the
Indian authorities of the penalties provided for in the FDTR or to be sued by the Indian Government
before a civil court.
4.96 The European Communities argued that until 1 April 2001, the Indian authorities had had the
possibility to enforce the MOUs by denying import licenses for passenger cars in SKD/CKD form tothe signatories who failed to comply with the in digenization and balancing requirements set out in
their MOUs. But this was just one of the various enforcement mechanisms available to the Indian
authorities. The European Communities noted that the Indian Government had indicated that "the
obligation under the MOUs already entered shall continue to be valid even after the termination of
Public Notice as they shall continue to be enforceable under the FT (DR) Act
161. The enforcement
mechanisms provided for in the FDTR Act included the cancellation or suspension of the Importer-
Exporter Code Number162 and of the import or export licenses163, the imposition of fines164 and the
confiscation of the imported or exported goods165.  The terms of the MOU can be enforced in Indian
courts as it is a legal contract between the Government of India and the joint venture car
manufacturer.166  During the consultations, India had said that the MOUs were enforceable under the
Foreign Trade (Development and Regulation) Act of 1992 (the "FTDR Act"), and would remain so
after 1 April 2001. Thus, according to India,
"… the obligation under the MOUs already entered shall continue to be valid even
after the termination of Public Notice No. 60 as they shall continue to be enforceable
under the FT(DR) Act."167
and
"The conditions mentioned on the MOUs signed by different joint venture automobile
companies are enforceable as per the provisions of the Foreign Trade (Development
& Regulation) Act, 1992."168
Yet, at the first meeting with the Panel, India seemed  to take the position that the MOUs were not, and
indeed would have never been, enforceable under the FT(DR) Act. (India explained away the above
statements as being made by technicians without legal expertise!). The European Communities noted
that the Panel has asked several questions to India in order to clarify this issue.169   D u r i n g  t h e
                                                     
161 US Questions, TRIMs Committee, Response to Question 10.
162 Section 8 of the FTDR Act. Section 7 of the FTDR  Act stipulates that "No person shall make any
import or export except under an Importer-Exporter Code Number ….".
163 Section 9 of the FTDR Act.
164 Section 11 of the FTDR Act.
165 Ibid.
166 India's responses to Questions by the United States, 13 July 2000, responses to Supplemental
Question 4.
167 India's responses to Questions by the United States, 20 May 1999, response to Question 10.
168 India's responses to Supplemental Questions by the United States, 30 July 1999, response to
Question 3.
169 Cf. Questions 52 (a) and (b) of the Panel.WT/DS146/R
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consultations, India had also confirmed that the M OUs were binding contracts under India's civil law
which could be enforced  through the courts:
"The terms of the MOU already entered into can be enforced even after 2001 in the
Indian courts as it is a legal contract between the Government of India and the jointventure car manufacturer."
170
It must be emphasised that, even on India's interpretation, the enforceability of the MOUs as contractsafter 1 April 2001 was not the result of any action taken by the Indian Government after the
establishment of this Panel. India appeared to admit that the MOUs had been binding contracts from
the moment of their signature.
171   Nevertheless, it argued that before 1 April 2001 they could not be
enforced through the courts, because of the clause contained in paragraph V of the standard format for
MOUs. Following the elimination of the discretio nary import licensing on 1 April 2001, the inhibitory
effect of that clause would have ceased and the MOUs would have become enforceable through the
courts automatically.  In spite of the above, India now contended that, before 1 April 2001, the MOUs
could be enforced exclusively through the denial of import licenses for CKD/SKD kit. According to
India, this would result from paragraph V of the standard format for MOU, which provided that:
The MOU scheme would be enforced through the import licensing mechanism and
MOU signing firms would be granted import licenses based on the progress made in
respect of the parameter mentioned at para.  III above.
The European Communities considered that the wo rding of the above clause did not exclude the
possibility for the Indian authorities to enforce the MOUs through other methods generally available
under Indian law. Indeed, if the interpretation of paragraph V now made by India were correct, it
would mean that, as from 1 April 2001, the MOUs would have become unenforceable, since any
attempt by the Indian authorities to enforce them as contracts through the courts would amount to a
breach of paragraph V. The European Communities doubted that it was in the interest of India to
maintain that interpretation.  At any rate, whether or not the MOUs were enforceable exclusivelythrough the denial of import licenses prior to 1 April 2001 was ultimately irrelevant. As explained, a
mere change in the method used to enforce the balancing and indigenization requirements was
without consequences for the legal characterisation of those requirements and did not transform them
into new measures falling outside the terms of reference of this Panel.
4.97 The European Communities agreed with India that the Panel "must base its ruling on
inconsistencies that had already occurred at the time of the request for [the establishment of the
Panel]". However, the continued existence and enforceability of the MOUs after 1 April 2001 did not
result from any additional measure taken by the Indian Government after that request, but exclusively
from the terms of the MOUs concluded by the Indian Government before that date. Thus, the
inconsistencies claimed by the European Communities existed from the moment of the conclusion of
the MOUs.  For the same reason, India's argument that the European Communities was requesting thePanel to rule on a "prospective matter" was also without merit. The European Communities was not
asking the Panel to rule that India would infringe the GATT and the TRIMs Agreement if "India were
to do this or were to do that" in order to en force the MOUs. The European Communities claimed that
already the existence of binding and enforceable MOUs was as such inconsistent with the GATT and
the TRIMs Agreement, regardless of whether any specific enforcement action needed to be taken.  Itwas well established in GATT/WTO law that manda tory measures could be challenged without
                                                     
170 India's responses to Supplemental Questions by the United States, 30 July 1999, response to
Question 4 .
171 See India's responses to Supplemental Questions by the United States, 30 July 1999, response to
Question 4.WT/DS146/R
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having to wait until they were actually enforced.172  Indeed, to hold the opposite, as India appeared to
be suggesting, would mean that the MOUs could only be challenged in the WTO if and when the
signatories failed to observe their terms.
4.98 The United States  recalled that India had advised it as early as May of 1999 – some twelve
months before it requested this Panel, and almost two years before India abolished import licensingfor SKD and CKD kits – that the requirements of the MOUs could be enforced through the provisions
of the FT(DR) Act and through Indian civil courts.  India reconfirmed the point in July 2000.  As the
United States mentioned at the outset  it was led to pursue this complaint precisely because India had
told it about these additional means of enfo rcement, and because the trade balancing and
indigenization requirements in the MOUs would not come to an end at the same time as the import
licensing regime. Despite all of India's discussion of 1 April 2001, nothing of substance had actually
changed with the MOUs:  The requirements were still in place; they were still binding andenforceable; companies faced the prospects of an action against them in court, or enforcement under
the FT(DR) Act, if they did not comply; and India – though it said it could waive compliance with the
requirements if it so chose – had in fact not yet chosen to do so.
4.99 India disagreed with the assertions by the European Communities and the United States that
the precise nature of the method used to enforce the balancing and the indigenization requirementswas without relevance for the legal characterisation of those requirements. At issue was not merely a
change in the method of enforcement of the MOUs. There was a substantial difference between a
requirement that had to be fulfilled to obtain an import license under the Indian trade laws and a
requirement that must be met under a private la w contract with the Government of India. The
Government of India was bound by its trade law. Once the restrictions on imports of cars had beenimposed under the EXIM policy and conditions for the grant of import licenses were set out in Public
Notice No. 60, the Government had no option but to act in accordance with that policy and that
Notice. However, under the law of contract in India, it was always open to the Government of India,
like any other party to a contract, to determine whether it would enforce or waive its rights under the
MOUs.
173 With the removal of the restrictions on imports of cars in the form of SKD/CKD kits, the
Government of India therefore acquired discretion with respect to the application of the indigenization
requirements that it did not previously have.174 This created a new legal situation which did not exist
when the requests for the establishment of a panel were submitted and could therefore not be
examined by the panel.  India was entitled to the presumption that it would exercise its discretion
under the MOUs in a WTO-consistent manner. If the European Communities and the United Stateswere to consider any future action in respect of  the contractual indigenization requirements to be
WTO-inconsistent, they had the right to invoke th e DSU in respect of that matter.  However, they
could not ask this Panel to rule on that possible future action. India wished to recall in this context
that, under the consistent jurisprudence of GATT and WTO panels, discretionary legislation as
such could not be challenged, only the application of such legislation in a specific case. The practice
of GATT panels was summed up in the report of the panel on United States - Measures Affecting the
Importation, Internal Sale and Use of Tobacco  as follows:
                                                     
172 See e.g., the Panel Report on United States – Taxes on Petroleum and Certain Imported Substances ,
adopted on 17 June 1987, BISD 34S/136, 160, para. 5.2.2 (the objective of Article XI:1 "could not be attained if
contracting parties could not challenge existing legislation mandating actions at variance with the GeneralAgreement until the administrative acts implementing it had actually been applied to their trade.").
173 The only limitation on actions by the Government of India in the realm of contract was the right to
equality contained in Article 14 of the Constitution of India, which would require the Government to follow auniform policy with respect to all contracts that fall in the same class or category.
174 See also India's response to Question 127 of the Panel.WT/DS146/R
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… panels had consistently ruled that legislation which mandated action inconsistent
with the General Agreement could be challenged as such, whereas legislation which
merely gave the discretion to the  executive authority  of a contracting party to act
inconsistently with the General Agreement co uld not be challenged as such;  only the
actual application of such legislation inconsistent with the General Agreement couldbe subject to challenge.
175
If WTO Members must be presumed to apply their discretionary legislation WTO-consistently, theymust also be presumed to exercise their discretion in exercising their private contractual rights WTO-
consistently.  Subsidiarily, India pointed out that there was no reason why the discretion that the
executive branch of a WTO Member had under its trade law and the discretion it had under its civil
law should be treated differently. In both instances, it was only fair if other Members were required to
await the application of the domestic law before resorting to the WTO dispute settlement procedures.India noted that the United States had vigorously defended this principle when its domestic law was
challenged by other WTO Members - most recently in the WTO proceedings on Sections 301-310
176
of the Trade Act of 1974 and on the Anti-dumping Act of 1916.177 The United States had in particular
rejected the idea that the WTO obligations in respect of domestic discretionary law should be
"interpreted by reference to a new-found obligation to avoid uncertainty and to ensure ‘security andpredictability'."
178 India was entitled to the presumption that it would exercise its discretion under the
MOUs in a WTO-consistent manner just as the United  States was deemed entitled to the presumption
that it would apply its trade laws WTO-consistently.  However, these were matters that this Panel
need not resolve because they arose only after th e requests for the establishment of a panel had been
submitted.
4.100  India said that the MOUs were merely "private contractual arrangements" between the Indian
Government and car manufacturers, and that because of the elimination of import licensing, India now
had discretion to waive its rights to enforce the indigenization requirement.  As a consequence, India
argued the requirement was a "discretionary" measure that could not be challenged.  In the view of theUnited States , India's argument was mistaken, however, fo r the fundamental reason that at no time
had the indigenization and trade balancing requirements ceased to be binding and enforceable on
MOU signatories.  The fact that India's enforcement options might have changed did not mean the
requirements themselves had changed.  Moreover, the fact that India had the option of revoking these
requirements did not change their mandatory nature.  The situation here was no different than that ofany WTO-inconsistent measure:  a WTO Member generally had the power to withdraw such a
measure, but that did not render the measure discretionary.  For example, mandatory legislation could
typically be repealed; but that fact did not mean that legislation was inherently discretionary.  To
support its argument, India invoked the "consistent jurisprudence of GATT and WTO panels" that
"discretionary legislation as such cannot be challenged".  India misconstrued that jurisprudence,
however. For example, India cited the Appellate Body report in the US – 1916 Act  dispute, but that
report did not support India's position.  In that ca se, the Appellate Body drew particular attention to
the reasoning in one paragraph of the GATT 1947 United States – Measures Affecting Alcoholic and
                                                     
175 BISD 41S/131, para. 118. See also the jurisprudence cited in this report and the Report of the
Appellate Body in United States – Anti–Dumping Act of 1916,  (hereinafter " US – 1916 Act "),
(WT/DS136/AB/R, WT/DS162/AB/R), adopted on 26 September 2000, paras. 84-102.
176 Panel Report on US – Section 301 Trade Act, (WT/DS152/R), adopted on 27 January 2000,
paras. 4.301-4.317.
177 Report of the Appellate Body in US – 1916 Act,  (WT/DS136/AB/R, WT/DS162/AB/R), adopted on
26 September 2000, para. 13.
178 Panel Report on  US – Section 301 Trade Act (WT/DS152/R), adopted on 27 January 2000,
para. 4.301.WT/DS146/R
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Malt Beverages  Panel Report (hereinafter " US – Malt Beverages ").179  In that paragraph, the
US - Malt Beverages Panel reasoned as follows:
In respect of the United States contention that the Massachusetts measure was not
being enforced and that the Rhode Island measure was only nominally enforced, the
Panel recalled its discussion of mandatory versus discretionary laws in the previoussection.  The Panel noted that the price affirmation measures in both Massachusetts
and Rhode Island are mandatory legislation.  Even if Massachusetts may not currently
be using its police powers to enforce this mandatory legislation, the measure
continues to be mandatory legislation which may influence the decisions of economic
operators.  Hence, a non-enforcement of a mandatory law in respect of imported
products does not ensure that imported beer and wine are not treated less favourably
than like domestic products to which the law does not apply.  Similarly, thecontention that Rhode Island only "nominally" enforces its mandatory legislation
a fortiori  does not immunize this measure from Article III:4.  The mandatory laws in
these two states by their terms treat imported beer and wine less favourably than the
like domestic products.  Accordingly, the Panel found that the mandatory price
affirmation laws in Massachusetts and Rhode Island are inconsistent withArticle III:4, irrespective of the extent to which they are being enforced.
180
Thus, even if India were actually not enforcing thes e requirements, the situation in this dispute would
be the same as in US - Malt Beverages .  As India had said, a car manufacturer that signed an MOU
was legally obligated, under the contract law of India, to achieve 70% local content and to discharge
its export obligations.  The manufacturer could not do otherwise without breaching those contractualobligations; those obligations were mandatory.  And, as in the US - Malt Beverages  dispute, the fact
that India might eventually decide not to enfo rce those obligations did not make them any less
mandatory.  This panel, like the US - Malt Beverages  panel before it, should conclude that these
requirements were inconsistent with India's WTO obligations. As a practical matter, if the Panel
accepted India's argument, India's measures could never be examined unless manufacturers werewilling to violate their contracts and expose themselves to the risk of enforcement by the Indian
authorities – hardly a satisfactory outcome for them or for those WTO Members whose trade interests
were undermined by these requirements.
4.101  A similar issue had also arisen in Canada – FIRA .  That panel considered but rejected an
argument that contractual undertakings like the MOUs  in this case should be considered as private
contractual obligations of particular foreign investors vis-à-vis the government.  In particular, that
panel concluded that such contractual obligations should not adversely affect the rights which GATT
contracting parties possess under Article III:4.
181  In fact, many of the undertakings had actually been
waived by the Government182 but that did not change the Panel's legal conclusion that the
undertakings were inconsistent with the GATT.  The United States did not doubt that India could
revoke the MOU requirements if it wished to do so.  Of course, it had in fact not done so.
Regrettably, India had reiterated that MOU signator ies were still "bound" by those obligations. India's
insistence on that point showed how far from "discretionary" the requirements of the MOUs really
were and underscored the contradictory nature of India's arguments.  If India actually took the
welcome step of permanently rescinding the MOU requirements, it would indeed be changing the
                                                     
179 Report of the Appellate Body in US –1916 Act , WT/DS136/AB/R, WT/DS162/AB/R, adopted on
26 September 2000, para. 91, fn. 50.
180 Panel Report on  United States – Measures Aff ecting Alcoholic and Malt Beverages , (hereinafter
"US – Malt Beverages ") adopted on 19 June 1992, BISD 39S/206, para. 5.60.
181 Panel Report on Canada – FIRA , adopted on 7 February 1984, BISD 30S/140, para. 5.6.
182 Ibid. , para. 2.11.WT/DS146/R
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MOU signatories' mandatory obligations.  But the fact that India could in principle take that step did
not change the legal analysis:  the requirements themselves were binding and enforceable, and thus
they were not discretionary.  And, India's refusal actua lly to take this step – as opposed to stating that
it had the power to do so – reinforced the need for Panel findings that would confirm India's
obligation to do so.
4.102  The European Communities said that  Panels were not bound by a Member's interpretation
of its domestic law.183 Rather, Panels must treat the domestic law of a Member as a fact, the
establishment of which was subject to the ordinary rules on the burden of proof.184 India could not ask
this Panel to accept its interpretation of the MOUs  simply because India was a party to the MOUs.
Rather, India must prove that the MOUs actually sa id what India pretended now that they said. India
made a similar argument in India – Patents (US) . The Appellate Body rejected it in categorical terms.
According to the Appellate Body, India's position amounted
"… to say that only India can asses whether Indian law is consistent with India's
obligations under the WTO Agreement.  This clearly cannot be so."185
India's reliance on US – Section 301 Trade Act186 was inapposite. That case did not stand for the
proposition that Panels were bound to accept whatever views were expressed by a Member with
respect to the interpretation of its domestic legislation.  In US – Section 301 Trade Act , the Panel
found that the relevant statutory language (as interpreted by the Panel, and not by the United States)
left a margin of discretion to the US Government. The Panel then relied upon the Statement of
Administrative Action made to the US Congress at the time of the approval of the results of the
Uruguay Round, and upon the statements made by the United States to the Panel to the effect that it
would exercise that margin of discretion consistent ly with its WTO obligations in order to conclude
that the measures in dispute were not inconsistent with the WTO Agreement.187
4.103  This case concerned an entirely different situ ation. The MOUs left no margin of discretion to
the Indian Government for making the interpretation which it had presented to the Panel. The MOUs
required to balance all the imports made by the signatories until they achieved a 70% indigenizationlevel. This left no scope for India's interpretation. The Panel could not accept an interpretation which
was at odds with the plain meaning of the MOUs simply because it had been put forward by India.
4.104  India argued that, since 1 April 2001, the indigenization requirements had become
"discretionary legislation" not subject to dispute settlement  because, from that date, the MOUs were
enforceable only as contracts and, under Indian contract law, the Indian Government was free todecide whether or not to enforce them. This argu ment reflected an erroneous understanding of the
notion of "discretionary legislation", was refuted by well established precedent and, moreover, would
lead to a manifestly absurd and unacceptable result.  In WTO law the term "discretionary legislation"
was used to designate legislation which allowed, but did not mandate, the executive branch of the
Government to take measures that were inconsistent with the WTO Agreement. In the present case,
the European Communities did not claim that the MOUs were inconsistent with the GATT because
they «allow» the Indian Government to take other, GATT inconsistent measures. Rather, theEuropean Communities claimed that the MOUs as such were GATT inconsistent, regardless of the
measures that might be taken subsequently by the Indian Government in order to enforce them.  There
                                                     
183 Panel Report on US – Section 301 Trade Act , WT/DS152/R, adopted on 27 January 2000, para. 7.19
184 Ibid., para. 7.18.
185 Report of the Appellate Body in India – Patents (US) , WT/DS50/AB/R, adopted on 16 January
1998, at para. 66.
186 Panel Report on US – Section 301 Trade Act , WT/DS152/R, adopted on 27 January 2000.
187 Ibid., para. 7.117.WT/DS146/R
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was a fundamental difference between the «discretionary legislation » considered in previous cases
and the MOUs. "Discretionary legislation" did not, as such, impose any legal obligations upon the
economic operators. The obligations for the operators arose exclusively from the measures taken
subsequently by the executive branch on the basis of the authority granted by the "discretionary
legislation". In contrast, the MOUs imposed binding obligations upon the signatories, which theymust fulfil in order to avoid the risk of sanctions. The measures which the Indian Government might
take pursuant to the MOUs would not create any new legal obligations for the operators, but served
merely to enforce those obligations already imposed  by the MOUs. Previous cases confirmed that the
discretion to enforce or not to enforce a measure did not transform such measure into "discretionary
legislation" immune to dispute settlement action.  In US – 1916 Act  the Appellate Body ruled that the
discretion enjoyed by the US Department of Justice in order to initiate or not to initiate criminal
proceedings was not
discretion of such nature or of such breadth as to transform the 1916 Act into
discretionary legislation, as this term has been understood for purposes of
distinguishing between mandatory and discretionary legislation
188.
By the same token, the discretion enjoyed by India's Government to bring or not an action before a
civil court in order to enforce the MOUs did  not transform the MOUs into discretionary legislation.
4.105  Further confirmation was provided by US – Malt Beverages .189  In that case the Panel found
that the measures at issue were inconsistent with Article III:4, even though they were not being
enforced in practice. The Panel reasoned that although the responsible authorities
may not be currently using its police powers … the measures continue to be
mandatory legislation which may influence the decisions of economic operators.190
Furthermore, by now it was well established that a measure might be inconsistent with Article III:4even if it was not legally enforceable. Thus, for example, in Canada – Autos , the Panel held that
certain value added requirements contained in the "Letters of Undertaking" submitted to the Canadian
Government by some car manufacturers were inconsistent with Article III:4, even though the Letterswere not enforceable through sanctions in the case of non-compliance
191. If non-enforceable local
content requirements were inconsistent with Article III:4, then enforceable ones must be a fortiori
inconsistent with that provision, even if the authorities had discretion not to enforce them. Moreover,
India's interpretation would lead to an absurd  result. On India's interpretation, the European
Communities could not challenge the MOUs unless and until India brought an action against asignatory before an Indian civil court for breach of  contract. Yet the Indian authorities would not have
to take any such action unless the signatories failed to comply with the MOUs. Thus, India's
interpretation would have the paradoxical result that the MOUs could be subject to WTO dispute
settlement if they were not complied with (i.e. if they are ineffective), but not if they are complied
with by the signatories (i.e. if they were effective in discriminating against imported products).
Ultimately, India's interpretation would lead Members to encourage their economic operators to
disobey the domestic laws of other Members which they considered to be WTO inconsistent, as a pre-requisite for being able to challenge those la ws in the WTO. The European Communities was
                                                     
188 Report of the Appellate Body in US – 1916 Act , WT/DS136/AB/R, WT/DS162/AB/R, adopted on
26 September 2000, at para. 91.
189 Panel Report on US – Malt Beverages , BISD 39S/206.
190 Ibid., para 5.60.
191 Panel Report on Canada – Certain Measures Affecting the Automotive Industry , (hereinafter
"Canada – Autos "), WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as modified by the Appellate Body
Report, para. 10.120 et seq .WT/DS146/R
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convinced that no Member, including India, could regard this as a desirable development of WTO
law.
D. CLAIMS UNDER GATT 1994 AND TRIM S
1. Article III:4
4.106  The United States  claimed that the indigenization and trade balancing obligations were
"regulations" or "requirements" that "affect"  the sale, use or purchase of automobile parts and
components but that accord "less favourable treatment" to foreign products than to "like" domestic
products.
• "Regulations" or "requirements" :   First, the ordinary meaning of "regulation"
included its use as a generic term for governmental measures that implement statutesand other domestic legal provisions.  Public Notice No. 60 was such a measure.
Second, Public Notice No. 60 fell within the ordinary meaning of the term"regulation" because it regulated the conduct of manufacturing firms (they must meet
local content and trade balancing targets) and the conduct of the Indian import
licensing authorities (they may issue licenses for CKD/SKD components and kits if
those targets are met).  Third, Public Notice No. 60 and the MOUs both imposed
"requirements" on firms manufacturing cars in India.  A firm that signed an MOUwas required to achieve 50% local content during the first three years of the MOU,
and 70% before the end of the fifth year.  That firm was also required to export cars
and auto components with an FOB value at least equal to the CIF value of their
importations of CKD/SKD kits and components. Previous panels had considered
similar situations.  The Canada – FIRA  panel
192 recognized that the term
"requirements" properly described legally enforceable undertakings given to the
Government of Canada by individual companies.  In this case, as in Canada – FIRA ,
the local content and trade balancing comm itments in the MOUs were part of the
conditions under which signatories can receive import licenses.  India had confirmed
that those conditions were meant to be enforced. The analysis was not affected by thefact that firms could in theory choose not to sign an MOU.  Any firm that did so
would forfeit the right to import CKD/SKD components and kits.  Accepting and
complying with the terms of an MOU were requirements that a firm must fulfill to
take advantage of the opportunity to import SKD/CKD kits and components.  The
term "requirement" encompassed such preconditions to obtaining an advantage fromthe government.  Previous panels addressing this issue had reached the same
conclusion.  For instance, the EEC - Parts and Components  Panel recognized that
requirements that an enterprise voluntarily accepts to gain government-provided
advantages are nonetheless "requirements".
• "Affecting" :  Ever since the Italian Discrimination Agai nst Imported Agricultural
Machinery  report (hereinafter " Italy – Agricultural Machinery "), panels had
recognized that the term "affecting" in Article III:4 had a broad meaning, whichextended not only to laws and regulations which directly govern the conditions of sale
or purchase but also to any laws or regulations which might adversely modify the
conditions of competition between the domestic and imported products on the internal
market.  The measures at issue here "affect" the sale, etc., of domestic and imported
goods, because they required manufacturers in India to increase their purchases anduse of Indian-made automotive parts and components at the expense of like foreign
                                                     
192 Panel Report on Canada –FIRA , adopted on 7 February 1984, BISD 30S/140.WT/DS146/R
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parts and components.  A company manufacturing cars in India could not import
SKD/CKD kits and components unless it used a decreasing percentage of imported
goods in its production – no more than 50% in the first three years, no more than 30%
by the fifth year.  Moreover, the more a car manufacturer bought or used imported
kits and components, the more it had an obligation to allocate a portion of its outputto export, regardless of its business preferences.  Both of these requirements made it
less attractive for a manufacturer to purchase or use imported parts and components.
• "Like" :  Imported automotive parts and components were "like" automotive parts and
components made in India.  Domestic and imported components to be used in
manufacturing a particular car share the same physical characteristics and commercial
uses.  Thus, while a clutch and a shock absorber differed from each other, a domestic
clutch and an imported clutch to be incorporated in a particular car were "like" eachother, just as a domestic shock absorber and an imported shock absorber to be
incorporated into a particular car were "like" each other.
• "Less Favourable Treatment" :  The indigenization obligation and the trade balancing
obligation accorded a competitive advantage to Indian goods and thus accord "less
favorable treatment" to imported automotive components and kits as described inparas 4.107  and 4.110 and 4.111.
(a) The indigenization requirement
4.107  Manufacturers could meet the indigenization obligation only by purchasing and using Indian
parts and components instead of imported ones.  By the end of the third year, their production offinished vehicles could consist of 50%, 60%, or more Indian-origin parts; but that same production
could include no more than 50% foreign-origin parts and components.  By the end of the fifth year,
Indian parts and components could comprise 70%, 80%, or more of a firm's production; but now that
same firm's production could include no more than 30% imported parts and components.  The
indigenization requirement gave Indian goods a cl ear advantage:  their imported counterparts will
simply not be permitted to compete for the percentage of production that India expressly reserved for
domestic goods. Such local content requirements had been systematically condemned.  For instance,
the Canada – FIRA  panel recognized that undertakings that excluded the possibility of purchasing
available imported products clearly treated such imported products less favorably than domestic
products, and that such requirements were therefore not consistent with Article III:4.
193 The
indigenization requirement did not disadvantage just kits and components imported in SKD/CKD
form.  The requirement discriminates against any imported part or component, from any non-Indian
origin, that an Indian firm might use in manufactu ring a motor vehicle.  Any such foreign component,
no matter how small or how separate from other parts, counts against a manufacturer trying to reach
the mandated local content percentage.  The indigenization requirement therefore accords imported
parts and components treatment less favorable than it accords to like domestic items.
4.108  The European Communities  claimed that the indigenization" requirements were inconsistent
with GATT Article III:4 in that they provided less favourable treatment to imported parts and
materials than to like domestic goods with respect to their internal use in the production of passenger
cars. Article III:4 of  GATT provided in relevant part that
"The products of the territory of any cont racting party imported into the territory of
any other contracting party shall be accorded treatment no less favourable than that
                                                     
193 Canada – FIRA  , para. 5.8.  To the same effect is the Panel Report on EEC - Parts and Components ,
para. 5.21.WT/DS146/R
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accorded to like products of national origin in respect of laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use […]."
4.109  Accordingly, in order to rule on this claim the Panel would need to address the following
issues:
- first, whether the measures at issue were "laws, regulations
or requirements";
- second, whether domestic products were "like"  imported
products;
- third, whether the measures "affect" the "internal use" of the
products concerned; and
- fourth, whether the measures afforded "less favourable
treatment" to imported products than to domestic products.
• The measures in dispute were "requirements":  By now it was firmly established that
Government action need not be compulsory in order to qualify as a "requirement" forthe purposes of GATT Article III:4.  In Canada – FIRA  the Panel held that the legally
enforceable undertakings given by some foreign investors to the Canadian
Government constituted "requirements" , even though the submission of such
undertakings was voluntary.
194  Similarly, in EEC – Parts and Components  the Panel
concluded that  the conditions accepted by a firm in order to obtain an "advantage"
granted by the EC authorities also constituted "requirements".195 Subsequent cases
                                                     
194 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 had agreed that the Foreign Investment
Review Act and the Foreign Investment Review Regulations –whilst providing for the possibility of writtenundertakings- did not make their submission obligatory, the question remained whether the undertakings givenin individual 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 written undertakings […] relating to the proposed oractual investment given by any party thereto conditional upon the allowance of the investment' and that section
21 of the Act states that 'where a person who has given a written undertaking…fails or refuses to comply with
the undertaking' a court order may be made ‘directing that person to comply with the undertaking'. The Panelfurther noted that written purchase undertakings –leaving aside the manner in which they may have been arrivedat (voluntary submission, encouragement, negotiation, etc)- once they were accepted, became part of theconditions under which the investment proposals were approved, in which case compliance could be legallyenforced. The Panel therefore found that the word ‘require ments' as used in Article III:4 could be considered a
proper description of existing undertakings."
Panel Report on Canada – FIRA , adopted on 7 February 1984, BISD 30S/140, at para. 5.4.
195 Panel Report on EEC – Parts and Components , BISD 37S/132, adopted on 16 May 1990, 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 that the comprehensive coverage of  'all
laws, regulations or requirements affecting  (emphasis added) the internal sale, etc.' of imported products
suggests that not only requirements which an enterprise is legally bound to carry out, such as those examined bythe Canada – FIRA Panel (BISD 30S/140), but also those which an  enterprise voluntarily accepts in order to
obtain an advantage from the government constitute 'req uirements' within the meaning of that provision."
The same interpretation underlies the Report on Italian Discrimination against Imported Agricultural
Machinery , (hereinafter " Italy – Agricultural Machinery "), adopted on 23 October 1958, BISD 7S/60, where theWT/DS146/R
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had clarified that the "advantage" might consist of a benefit in respect of a border
measure.196  More recently, in Canada – Autos  the Panel went even further by
holding that the "letters of undertaking" submitted by certain firms at the request of
the Canadian Government were "requirements", even though they were neither
legally enforceable nor a condition to obtain an advantage.197  Public Notice No. 60
did not impose upon the joint-ventures a legal obligation to conclude an  MOU with
the Indian Government. Nonetheless, the conclusion of an MOU was a necessary
condition for obtaining an advantage: the grant of import licenses for CKD and SKD
kits. Moreover, once it was signed, the MOU is binding upon the signatory and
legally enforceable under the FTDR. The European Communities submitted that, in
light of the precedents cited above, either of those two features in and by itself was
more than sufficient to reach the conclusion that Public Notice No. 60 and the MOUsconcluded thereunder constituted "requirements" within the meaning of Article III:4.
• Domestic parts and materials are "like" the imported goods: The distinctions
operated by the "indigenization" requirements were based exclusively on the origin of
the products: whereas parts and materials of Indian origin contributed to satisfy the
"indigenization" percentage, imported parts and materials did not.  Clearly, however,
the mere fact of having Indian origin was not, as such, apt to confer upon parts andmaterials any characteristic, property or quality which made them, by definition,"unlike" any imported good.
198
                                                                                                                                                                    
Panel concluded that an Italian law providing especial credit terms to farmers for the purchase of agricultural
machinery conditional upon the purchase by the farmers of Italian machinery was contrary to Article III:4 ofGATT.
196 See e.g., Panel Report on  EC – Bananas III , WT/DS27/R/USA, adopted 25 September 1997, as
modified by the Appellate Body Report, at paras. 7.179 and 7.180, DSR 1997:II, 943, where the Panel foundthat a requirement to purchase domestic bananas in order to obtain the right to import bananas at a lower dutyrate under a tariff quota was a requirement "affecting" the internal purchase of a product within the meaning ofGATT Article III:4.  On appeal, this finding was upheld by the Appellate Body, WT/DS27/AB/R, at paras.208-211.
Similarly, in Indonesia – Autos , the Panel concluded that the granting of a duty exemption conditional
upon compliance with a local content requirement was inconsistent with GATT Article III:4 and violatedArticle 2 of the TRIMs Agreement. In reaching this conclusion, the Panel rejected Indonesia's attempted defencethat 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 obligations under the
TRIMs Agreement is the customs duty relief as such but rather the internal regulations, i.e. the provisions on
purchase and use of domestic products, compliance with which is necessary in order to obtain an advantage,
which advantage here is the customs duty relief. The lower duty rates are clearly ‘advantages' in the meaning ofthe chapeau of the Illustrative List to the TRIMs Agreement and as such, we find that the Indonesian measuresfall within the scope of the Item 1 of the Illustrative List of the TRIMs."
Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted on
23 July 1998, at para. 14.89 (DSR 1998:VI, 2201).
197 The Panel cited the following circumstances in order to conclude that the "letters of undertaking"
were "requirements":
"(i) in making the undertakings contained in the Letters, the companies acted at the request of the
Government of Canada;  (ii)  the anticipated conclusion of  the Auto Pact was a key factor in the decision of the
companies to submit these undertakings; (iii) the companies accepted responsibility vis-à-vis  the Government of
Canada with respect to the implementation of the undertakings contained in the Letters, which they described as
‘obligations' and in respect of which they undertook to provide information to the Government of Canada andindicated their understanding that the Government of Cana da would conduct yearly audits; and (iv) at least until
model year 1996, the Government of Canada gathered information on an annual basis concerning theimplementation of the conditions provided for in the Letters. "
Panel Report on Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, para. 10.122.
198 In Indonesia – Autos , the Panel noted, para 14.113, that anWT/DS146/R
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• The measures "affect" the  internal "use" of the products concerned : The term
"affect" has been given a broad scope of application. According to the Panel Report
in Italy – Agricultural Machinery ,
"The selection of the word ‘affecting' would imply […] that
the drafters of the Article intended to cover in [Article III:4]
not only the laws and regulations which directly governed
the conditions of sale and purchase but also any laws or
regulations which might adversely modify the conditions of
competition between the domestic and imported products on
the internal market
In the present case, the "indigenization" requirements "affect" directly the "internal
use" of parts and materials because, in order to satisfy the "indigenization"
percentage, the signatories must incorporate into the vehicles that they manufactured
a certain amount of domestic parts and materials.199
• Imported goods are afforded "l ess favourable treatment": Finally, it was self-evident
that, by requiring the use of a minimum amount of domestic parts and materials, the
MOUs preclude the signatories from using an equivalent amount of imported parts
and materials and, therefore, afford "less favourable treatment" to imported products.
• Precedent and the TRIMs Agreement confirmed that the "indigenization"
requirements were inconsistent with Article III:4 :  Local content requirements
constituted a clear-cut violation of the national treatment requirements imposed byGATT Article III:4, which had already be en condemned by GATT/WTO panels in
several occasions.
• in Canada – FIRA , the panel found that the undertakings given to the
Canadian Government by some foreign investors to, inter alia , purchase
goods of Canadian origin in specified amounts or proportions was contrary toArticle III:4
200;
• similarly, in EEC- Parts and Components , the panel concluded that, by
making the suspension of anti-circumvention proceedings conditional uponan undertaking to limit the use of Japanese parts and materials, the European
Communities acted inconsistently with Article III:4
201;
                                                                                                                                                                    
"… origin-based distinction  in respect of internal taxes suffices in itself to violate Article III:2, without
the need to demonstrate the existen ce of actually traded like products".
See also the Panel Report on Canada – Autos , para. 10.174, and the Panel Report on Argentina –
Measures Affecting the Export of Bovine Hides and the Import of Finished Leather , (hereinafter " Argentina –
Hides and Leather ") WT/DS155/R, adopted on 16 February 2001, para.11.169.
199 Panel Report on Italy – Agricultural Machinery , para. 12.  The Appellate Body confirmed that
interpretation of the term "affect" in EC – Bananas III , WT/DS27/AB/R, para 220 (DSR 1997:II, 591).  See also
the Report of the Appellate Body in Korea – Various Measures on Beef , WT/DS161/AB/R, WT/DS169/AB/R,
adopted on 10 January 2001, paras. 130 et seq.
200 Panel Report on Canada – FIRA , paras. 5.4-5.12, BISD 30S/140..
201 Panel Report on EEC – Parts and Components , paras. 5.19-5.21, BISD 37S/132.WT/DS146/R
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• in Indonesia – Autos , the panel found that the grant of certain tax and import
duty benefits to a so-called "National Car" manufacturer conditional uponmeeting a certain local content percentage was in violation of Article III:4
202;
• finally, in Canada – Autos , the panel held that the grant of a customs duty
exemption to certain manufacturers of motor vehicles subject to compliance
with certain "Canadian Value Added" requirements was inconsistent withArticle III:4
203.
The TRIMs Agreement had confirmed beyond doubt that local content requirements
were inconsistent with Article III:4 of GA TT. Item 1(a) of the Illustrative List of
TRIMs, included among the TRIMs that were 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 in terms of a proportion of  […] value of its local
production"
The "indigenization" requirements at issue in this dispute fell squarely within the
terms of Item 1(a) of the Illustrative List and were, therefore, inconsistent with GATT
Article III:4.
(b) The trade balancing requirement
4.110  In the view of the United States , the trade balancing requirement also modified conditions of
competition in favour of Indian goods, but its discrimination affected those kits and components that
were imported in SKD or CKD form.  All imported SKD/CKD kits/components carried with them an
obligation to export from India goods (components or finished vehicles) in a value equal to the value
of the imported goods.  Moreover, this obligati on attached not only to SKD/CKD kits/components
that the manufacturer itself imported, but also to those SKD/CKD kits or components that themanufacturer purchased within India but were im ported by someone else.  Domestic goods, on the
other hand, were free of this obligation.
4.111  Consequently, if a manufacturer built a car with components imported in SKD/CKD form, the
manufacturer must either export that car or, if it wished to sell that car on the Indian market, the
manufacturer must export some other finished vehi cle or auto components whose value equalled that
of the SKD/CKD importation.  If, instead, the manufacturer built that same car without using
components imported in SKD/CKD form, the manufacturer was free to sell the car in whatever
market it chose; and, if the manufacturer chose the domestic market, it did not have any export
obligation to discharge. Moreover, because the requirement attached to goods purchased within India,
a number of other forms of discrimination arose as well.  For example, a manufacturer seeking to
meet its export obligation through the export of finished vehicles would purchase domestic
components rather than imported kits -- because purchasing an imported kit would only furtherincrease the manufacturer's export obligation, while purchasing the like domestic kit would not.
Similarly, a manufacturer that needed to reduce an  excess inventory of SKD/ CKD kits or components
would, all other things being equal, find a readier market for domestically produced kits than imported
                                                     
202 Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R,  adopted
on 23 July 1998, para. 14.83 et seq. (DSR 1998:VI, 2201) .
203 Panel Report on Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as
modified by the Appellate Body Report, para. 10.58 et seq.WT/DS146/R
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ones, because the imported ones carried with them the additional burden of the trade balancing
requirement and the domestic ones did not.  In short, the trade balancing requirement added a burden
to imported goods -- an interference with the dist ribution and other commercial choices of their user
or purchaser -- that did not apply to like domestic goods.  That additional burden was a disincentive to
the use of imported SKD/CKD kits and components, and the trade balancing requirement thereforeaccorded less favorable treatment to them. A similar situation had been considered in EEC - Measures
on Animal Feed Proteins  (hereinafter " EEC – Animal Feed Proteins ").  Both disputes involved a
measure that imposed a burden on those who used imported goods but not on those who used like
domestic goods (the obligation to buy milk powder from intervention agencies in that case, the
obligation to export finished vehicles or auto parts in this one).  As the EEC – Animal Feed Proteins
recognized, such a measure was inconsistent with Article III:4.
204
4.112  According to the European Communities , the signatories of the MOUs seemed to be
required to "neutralise" not only the value of the imports which they made themselves, but also the
value of any imported kits and components which they purchased within India from local vendors. To
that extent, the "trade balancing" requirements were inconsistent not only with Article XI:1, but also
with Article III:4 in that they provided less fa vourable treatment to imported kits and components
with respect to their internal purchase than to like domestic products.  (see supra  para. 4.38)
• The measures were "requirements": As demonstrated above (paragraph 4.109), the
Public Notice No. 60 and the MOUs were "requirements" within the meaning of
Article III:4.
• Imported products were "like" domestic product: The distinction operated by the
trade balancing requirements was based exclusively on the origin of the products: on
the one hand, imported kits and components purchased within India must be
neutralised with exports; on the other hand, domestic kits and components need not
be neutralised.
• The "trade balancing" requirements "affect" the internal  "purchase" of imported
goods: The trade balancing requirements "affect" directly the internal purchase of
imported kits and components, because they subject the purchase of those products
within India to the condition that their value must be neutralised with exports.
• The "trade balancing" requirements afforded "less favourable treatment " to
imported products: The trade balancing requirements afford "less favourable
treatment" to imported products because the internal purchase of domestic products isnot subject to any similar requirement. All other circumstances being equal, this
creates an incentive for the signatories of MOUs to purchase local inputs, thereby
modifying adversely the competitive opportunities of imported products in relation to
like domestic products.
• The TRIMs Agreement confirmed that the "trade balancing" requirements were
inconsistent with Article III:4: Item 1(b) of the Illustrative List of Prohibited TRIMs
confirmed that the "trade balancing" requirements, to the extent that they apply to
products imported by other parties, was inconsistent with GATT Article III:4.
                                                     
204 See also response to Question 10 of the Panel.WT/DS146/R
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4.113  India  argued that, in the absence of import licensing, Public Notice No. 60 and the trade
balancing provisions of the MOUs were consistent with Article III:4.  Public Notice No. 60 merely set
out criteria for the automatic grant of import licenses for SKD/CKD kits and did not apply in the
absence of any requirement to obtain such a license. The European Communities and the United
States claimed that the trade balancing provisions set out in the MOUs were inconsistent withArticle XI:1 of the GATT because they subjected the right to import SKD/CKD kits and components
to the fulfilment of an export obligation. They further claimed that the trade balancing requirements
were inconsistent with Article III:4 of the GATT because they accorded the signatory an advantage,
namely the relief from an export obligation, on the condition that it purchased or used domestic
components. India planned to demonstrate that th e trade balancing provisio ns set out in the MOUs
required the signatory to offset through exports only the foreign exchange expenditures for imports
that had been subject to import licensing. In the absence of any requirement to obtain an importlicense for SKD/CKD kits and components, no export obligations accrued. The MOUs therefore did
not limit in this situation the signatory's right to import SKD/CKD kits and components. Since no
export obligations accrued when products not subject to licensing were imported, the signatory could
also no longer acquire the advantage of reduced export obligations by purchasing or using domestic
components.
4.114  The EC's claim that Public Notice No. 60 and the trade balancing provisions of the MOUs as
such, that is independently of the discretionary licensing system for CKD/SKD kits, violated
Articles III and XI of the GATT had no merit. The European Communities failed to explain how
Public Notice No. 60, as such, restricted imports or favoured the purchase of domestic products over
imported products. Public Notice No. 60 merely set out how the import restrictions on cars imposeduntil 1 April 2001 under the Export-Import Policy were to be administered.  This was clear from
paragraph 2 of this Notice which read in relevant part: " . . .import of components for motor vehicles
in CKD/SKD  form, which is restricted for import under the current Export-Import Policy, shall be
allowed for importation against a license and such a license will be issued . . .on the basis of an
MOU".  Public Notice No. 60 was no longer operational because the licensing scheme it was toadminister no longer existed. It was therefore not clear to India how the European Communities could
claim that the Public Notice as such could violate WTO law in the absence of import restrictions on
cars.
4.115  The United States  noted that India had not actually attempted to defend the indigenization
requirement.  India had just said that car manufacturers might already be in compliance with it.  If so,why was India continuing to insist that it needed to  be able to enforce the requirement in its courts?
Would such compliance mean anything other than th at manufacturers were reluctant to test India's
willingness to enforce the requirement?  India also had not said what would happen to a manufacturer
that slipped below the required percentage in the future.  In any case, compliance by manufacturers
with a WTO-inconsistent measure did not transform that measure into one that was compatible with
India's WTO obligations.  As India was well aware,  GATT Articles III and XI protected conditions of
competition, not trade flows; no demonstration of trade effects was necessary to establish a breach ofthose obligations. The United States added that the only response that India had advanced did not
have merit.  India claimed that export requirements as such were not prohibited by the GATT; India
cited the Canada – FIRA  panel report in support of its position.  India overlooked, however, that the
U.S. claims were directed at a discriminatory  export obligation.  Not all like products were subject to
the export requirement; the requirement applied only to imported goods.  An internal regulation thatwas otherwise consistent with the WTO Agreement became inconsistent if, like the trade balancing
requirement in this case, it applied to imported products but not to like domestic ones.  There was
nothing to the contrary in the Canada – FIRA  report; that dispute did not involve export requirements
applied exclusively to imported goods.WT/DS146/R
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2. Article XI:1
4.116  The United States  claimed that the indigenization and trade balancing requirements were
"prohibitions or restrictions … on … importation", as those terms are used in Article XI:1. Panels had
recognized that the scope of Article XI:1 was co mprehensive: it extended not only to outright
prohibitions but also to discretionary or non-automatic import licensing and to conditionalsuspensions of an import prohibition. Moreover, the scope of the word "restriction" itself was broad,
as seen in its ordinary meaning, which was "a limitation on action, a limiting condition or regulation".
(i) The indigenization requirement
4.117  The United States claimed that the indigenization requirement was a straightforward
restriction or prohibition on imports.  Failure to meet the 50% local content quota by the third year, or
the 70% quota by the fifth year, led to the denial of the right to import parts and components in
SKD/CKD form.  Public Notice No. 60 was clear a bout this, and India had confirmed that the MOU
was itself designed to limit imports of SKD/CKD kits/components when a firm failed to meet the
indigenization requirement.  Paragraph 3(iii) of Public Notice No. 60, and paragraph III, clause (iv) of
the MOU, required that MOU signatories achieve specified levels of indigenization in order to be able
to import SKD/CKD kits/components.  Moreover, it was India  that had said that the MOUs as such
were intended to limit the importation of SKD/CKD kits/components when a firm failed to meet theindigenization requirement:  "As all the companies have achieved the desired level of indigenization
during the last two years (since issuance of Public Notice No. 60) the need to invoke MOUs to impose
limitation on them  has not arisen.205 The indigenization requirement did not merely restrict the amount
of kits that a manufacturer might import into India, it actually prohibited such imports outright. Any
manufacturer that failed to achieve the local content targets in the MOU was forbidden fromimporting CKD/SKD kits.  Thus, to the extent that the MOUs themselves prevented signatories from
importing SKD/CKD kits if they did not meet the indigenization targets, the indigenization
requirement was as such inconsistent with Article XI:1 of the GATT 1994 and with Article 2.1 of the
TRIMs Agreement.
(ii) The trade balancing requirement
4.118  The trade balancing requirement was likewise a continuing restriction on imports of
SKD/CKD kits and components.  Starting in the fourth year the MOU imposed a quantitative
limitation on imports -- and the quantity was correlated to the degree of compliance with the trade
balancing requirement.  The Government of India had also confirmed that denial of an import license
was effectively mandatory if the trade balancing obligation was not met.  Paragraph 3(iv) of PublicNotice No. 60 provides that "From 4th year [i.e. of the MOU] onwards the value of import of
CKD/SKD may be regulated with reference to the extent of export obligation fulfilled in the previous
years as per the MOU."  Paragraph III, clause (vi) of the MOU contained an identical provision.  India
had confirmed, that the MOUs were binding and enforceable.
206  In addition, the first sentence of
Paragraph III, clause (vi) provided that "the party [i.e. the MOU signatory] shall achieve a broad trade
balancing of foreign exchange over the entire period of the MOU  in terms of balancing between the
actual CIF value of imports of CKD/SKD kits/compone nts and the FOB value of exports of cars and
                                                     
205 India's responses to Questions by the United States, 13 July 2000, response to Question 5,
(underlining in original, other emphasis added).
206 See also India's Replies to Questions Posed by Japan , G/TRIMS/W/15, circulated 30 October 1998,
response to Question 24; Exhibit US-5:  "CKD/SKD kits imports would be allowed with reference to the extentof export obligation fulfilled in the previous year.  ...  Th ere is hardly any discretion involved in determining the
extent of import of CKD/SKD kits except by way of considering any genuine problems the company may have
faced in achieving the export levels."WT/DS146/R
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auto components over the said period."  The first sentence of paragraph 3(iv) of Public Notice No. 60
was an essentially identical provision.  These provisions clearly stated that the trade balancing
obligation extended over the entire period of the MOU.  As India had confirmed, however, the MOUs
and their requirements continued to remain in force even beyond the elimination of import licensing
for SKD/CKD kits and components.  Furthermore, the trade balancing requirement restricted importsbecause it placed a maximum limit on the value of an MOU signatory's imports that was equal to the
value of the signatory's exports (which, pursuant to paragraph III, clause (vi), the MOU signatory is
required to specify).  In practical terms, there were limits to the amount of exports which a car
manufacturer might be able or willing to make (whether related to its manufacturing capacity or to the
demand for its products outside India). Thus, by limiting the amount of a manufacturer's imports to
that of its exports, the trade balancing requirement restricted the amount of imports. India asserted
means of restricting importations by MOU signatories other than just license denials.  Amanufacturer's failure to comply with an MOU obligation could lead to loss of import privileges or to
confiscation of the goods concerned pursuant to various provisions of the FTDR Act and the rules
made thereunder.  It appeared that after 1 April 2001, these additional provisions would be the
instruments through which India carried out Public Notice No. 60 and the MOUs (and thus prevented
SKD/CKD kits/components from being brought into  India to compete with domestic parts and
components). For all of these reasons, the trade balancing requirement in Public Notice No. 60 and the
MOUs imposed import restrictions as such, and was therefore inconsistent with Article XI:1 of the
GATT 1994 and with Article 2.1 of the TRIMs Agreement.
4.119  The European Communities  also argued that the "trade balancing" requirements, stipulated
in the MOUs, were inconsistent with GATT Article XI:1 in that they restricted imports of passengercars, and of components therefor, by the signatories of the MOUs. The European Communities
recalled, nevertheless, that the 1997 Agreement between India and the European Communities (as
supplemented by the 1999 Agreement between India and the United States) allowed India to maintain
import restrictions on passenger cars, and on chassis a nd bodies therefor (but not on imports of parts
and components therefor) until 1 April  2001. Therefore,  the European Communities made this claimonly in so far as: the MOUs requi red the "trade balancing" of imports of "components" other than
chassis and bodies;  and the MOUs would remain binding and enforceable after 1 April 2001, both
with respect to passenger cars and components therefor . Article XI:1 read as follows in pertinent part:
"No prohibitions or restrictions other than duties, taxes or other charges, whether
made effective through quotas, import or export licenses or other measures, shall beinstituted or maintained by any [Member] on the importation of any product of the
territory of any other [Member] or on the e xportation or sale for export of any product
of the territory of any other [Member]"
As noted by the Panel Report in Japan – Trade in Semi-conductors  (hereinafter " Japan –
Semi-conductors "), the wording of Article XI:1 was "comprehensive":  it applied to "all measures
instituted or maintained by a [Member] prohibiting or restricting the importation […] other than
measures that take the form of duties, taxes or charges"
207. The test for compliance with Article XI:1
was thus three-fold: first, was the action concerned a Government "measure" second, was the measure
different from a "duty, tax or other charge"? and third, did the measure "restrict" imports? In the
present case, the answer to the above three questions was clearly in the affirmative. The "trade
balancing" requirements were "measures". The term "measure" had been given a broad definition,
indeed even broader than that of "requirements" in Article III:4.208 In Japan – Semi-conductors  the
                                                     
207 Japan – Semi-conductors , adopted on 4 May 1988, BISD 35S/116, para. 104.
208 See the Panel Report on Japan – Photographic Film and Paper , (hereinafter " Japan – Film ")
WT/DS44/R, adopted on 29 April 1998, para. 10.51 (DSR 1998:IV, 1179), where the Panel stated thatWT/DS146/R
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Panel found that non-mandatory Government action in the form of "administrative guidance" was a
"measure" subject to Article XI:1 because it created sufficient incentives or disincentives for private
parties to act.209  In Japan –Film the Panel  went even further by holding that, in certain circumstances,
even purely hortatory wording in a statement of policy could qualify as a "measure".210 As shown
above, Public Notice No. 60 and the MOUs were "requirements" in the sense of Article III:4. For thesame reasons, and a fortiori , they were also "measures" in the sense of Article XI:1.  The "trade
balancing" requirements were not "duties, taxes or other charges" The "trade balancing" requirements
did not involve any payment or transfer of money by or on the account of the signatories of MOUs
and, therefore, could not be characterised as "duties, taxes or other charges". The "trade balancing"
requirements "restricted" imports.  The "trade balancing" requirements "restricted" imports because
they placed a maximum limit on the value of the imports which the signatories were authorised to
make equal to the value of their exports. In practice, there were limits to the amount of exports whicha signatory might be able or willing to make (related both to its manufacturing capacity in India and to
the demand for its products in foreign markets). Thus, by limiting the amount of a signatory's imports
to that of its exports, the trade balancing requirements "restricted" the amount of imports.
211
4.120  India  asserted that, with respect to manufacturing and equity requirements, the law of the
WTO did not regulate foreign direct investments as such212 and therefore did not prevent India from
imposing on foreign investors the obligation to manufacture (rather than merely assemble)
automobiles and to make an equity investment of a specified amount.  Article XI:1 of the GATT and
Article 2 of the TRIMs Agreement merely prohibited the imposition of such requirements as a
condition for the grant of an import license.213  However, after 1 April 2001, the requirement to
manufacture (rather than merely assemble) automobiles, and to secure an equity investment of a
specified amount, would have to be performed completely independently of any right to import.  It
would apply equally to all signatories of MOUs, whether they imported SKD/CKD kits or not. With
respect to export requirements,  the GATT panel which examined Canada's Foreign Investment
Review Act in 1984 correctly found that "there is no provision in the General Agreement whichforbids requirements to sell goods in foreign markets in preference to the domestic market.
214  There
was also no such requirement in the TRIMs Agreement.   Article XI of the GATT and Article 2 of the
TRIMs Agreement merely prohibited export requirements that were imposed as a condition for the
grant of an import license and export requirements that vary with the level of local purchases.215
Nowhere in WTO law were export requirements prohibited as such. As from 1 April 2001, the
signatories of the MOUs would continue to be required to discharge the export obligations
corresponding to the imports made by them  before  that date.  They would thus be required to
discharge the export obligations they have already assumed but will no longer incur any new export
                                                                                                                                                                    
"Given that the scope of the term requirement would seem to be narrower than that of measure, the
broad reading given to the word requirement by the (Canada – FIRA) (EEC – Parts and Components)  panel
supports an even broader reading of the word measure in Article XXIII: 1 b)."
209 Panel Report on Japan – Semi-conductors , BISD 35S/116, at pp. 154-155.  See also the Panel
Report on Japan – Restrictions on Imports of Certain Agricultural Products , (hereinafter " Japan – Agricultural
Products I ") adopted on 22 March 1988, BISD 35S/163, 242.
210 Panel Report on Japan –Film , WT/DS44/R, para. 10.49 (DSR 1998:IV, 1179).
211 See also US response to Question 82 of the Panel.
212 See the finding of the GATT Panel on Canada – FIRA , which noted that "the General Agreement
does not prevent Canada from exercising its sovereign right to regulate foreign direct investments"
(BISD 30S/157).
213 See paragraph 2(a) of the Annex to the TRIMS Agreement.
214 Canada – FIRA  (BISD 30S/140).
215 See paragraph 2(a) of the Annex to the TRIMS Agreement. Article 3.1 (a) of the Agreement on
Subsidies and Countervailing Duties prohibits export requ irements that are tied to subsidies. However, this
prohibition does not apply to India (see Article 27.2 (a) and Annex VII of the Agreement on Subsidies and
Countervailing Duties).WT/DS146/R
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obligations as a result of the fu rther importation of SKD/CKD kits .  From 1 April 2001, the right to
import SKD/CKD kits would consequently no longer in any way depend on, or vary with, the level of
exports achieved.  For this reason, the export requirements would no longer create any incentive to
purchase local products.  As a result, the export requirements would have to be performed completely
independently of any imports or local purchases and would consequently be entirely consistent withboth the GATT and the TRIMs Agreement.
4.121  India  argued that, in the absence of import licensing, Public Notice No. 60 and the trade
balancing provisions of the MOUs were consistent  with Article XI:1.  As from 1 April 2001, India
would - consistently with its undertakings towards the European Communities and the United States -
no longer make the importation of SKD/CKD kits subject to the signing of an MOU.  The right to
import SKD/CKD kits would therefore no longer be subject to any conditions that could be deemed to
constitute a restriction on the importation of a product within the meaning of Article XI of the GATT.The import liberalisation would thus benefit all car manufacturers, including those who had signed an
MOU. Subsequently, India informed the Panel that, since 1 April 2001, the import restrictions for
SKD/CKD kits and car components had been abolished and no licenses referring to the trade
balancing requirement had been issued. Since then, the signatories of the MOUs had therefore no
longer incurred any new export obligations as a result of the importation of SKD/CKD kits orcomponents.
4.122  According to India, the European Communities and the United States claimed that the
provisions of Public Notice No. 60, as such, restricted imports and  favoured the purchase or use of
domestic products over imported products and were therefore inconsistent with Article III:4 and XI:1
of the GATT. However, Public Notice No. 60 mere ly set out how the import restrictions on cars
imposed until 1 April 2001 under the Export-Import Policy were to be administered.  This was clear
from paragraph 2 of this Notice which read in relevant part:
... import of components for motor vehicles in CKD/SKD  form, which is restricted
for import under the current Export-Import Policy, shall be allowed for importation
against a license and such a license will be issued . . .on the basis of an MOU.
4.123  After 1 April 2001, Public Notice No. 60 was no longer applicable because the import
restrictions it was to administer no longer existed. In the absence of an import restriction on cars, this
Notice could not be implemented and served no purpose. It was therefore not clear to India how the
European Communities and the United States could claim that the Public Notice as such was capable
of violating WTO law. India had requested both the European Communities and the United States to
indicate which provision of the Public Notice No. 60  restricted imports or favoured domestic products
in the absence of any licensing requirement for CKD/SKD kits and hence any requirement to sign an
MOU. Neither the European Communities nor the United States had given a precise answer to this
question. India requested the Panel to find that, in the absence of any requirement to obtain an import
license for SKD/CKD kits and components, Public Notice No. 60 did not restrict imports
inconsistently with Article XI:1 of the GATT.216 The United States claimed that Public Notice No. 60
"still remains in effect" because no public notice rescinding it   has   been  issued.217  India  submitted
a  copy of Notification  No. 2 (RE-2001)/1997-2002  dated 31 March 2001 issued by the Ministry of
Commerce, which showed that India had removed the restrictions on imports of cars in the form of
CKD/SKD kits and automobile components that were covered by Public Notice No. 60. In the
absence of these restrictions, Public Notice No. 60 no longer applied. A new public notice rescinding
Public Notice No. 60 was consequently not required to ensure the consistency of Public Notice No. 60with Articles III:4 and XI:1 of the GATT.
                                                     
216 See also India's response to Question 103 of the Panel.
217 US response to Questions 2(b) of the Panel.WT/DS146/R
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4.124  The United States  identified that India denied that Article XI:1 applied to these requirements,
but India had misinterpreted that provision.  Indi a also denied that Public Notice No. 60 and the
MOUs themselves imposed restrict ions on imports; however, not only could that assertion not be
reconciled with the actual language of the measures, but it did not appear even to be consistent with
India's own statements. The United States had explained that the trade balancing  requirement
restricted imports because it limited the value of an MOU signatory's imports to the value of the
signatory's exports (which, pursuant to paragraph III, clause (vi), the MOU signatory was required to
specify at the time of signing).  There were obviously limitations on the amount of exports which a
car manufacturer might be able or willing to make.  Thus, by limiting the amount of a manufacturer's
imports to that of its exports, the trade balancing requirement itself restricted imports.  India appeared
not to accept that such a requirement was inconsistent with Article XI:1 of the GATT:  India asserted
that "Article XI of the GATT and Article 2 of the TRIMs Agreement merely prohibit exportrequirements that are imposed as a condition for the grant of an import license and export
requirements that vary with the level of local pu rchases".  This assertion was simply incorrect, as
paragraph 2 of the TRIMs Agreement Illustrative List showed:
TRIMs that are inconsistent with the obligation of general elimination of quantitative
restrictions provided for in paragraph 1 of Article XI of GATT 1994 include thosewhich are ... enforceable under domestic law ... or compliance with which is
necessary to obtain an advantage, and which restrict the importation by an enterprise
of products used in ... its local production ... to an amount related to the ... value of
local production that it exports ... .
It was clear that the MOUs restricted importation to an amount related to the value of locally
produced goods that a manufacturer exports, and it was clear that the MOU 's were "enforceable";
India had confirmed both points.
218  The trade balancing requirement thus fell within the scope of this
paragraph, and consequently it was "inconsistent with the obligation of general elimination of
quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994".  The Panel should
explicitly reject India's assertion and should make an explicit finding that the trade balancingrequirement was inconsistent with India's obligations under Article XI:1 of the GATT.
4.125  India  contended that the MOU provisions on trad e balancing did not apply in the absence of
any requirement to obtain an import license. The United States claimed that the trade balancing
provisions set out in the MOUs restricted imports inconsistently with Article XI:1 of the GATT forthe following reasons:
The trade balancing requirement restricts imports because it places a maximum limit
on the value of an MOU signatory's imports that is equal to the value of the
signatory's exports (which, pursuant to paragraph III, clause (vi), the MOU signatory
is required to specify).  In practical terms, there are limits to the amount of exports
which a car manufacturer may be able or willing to make (whether related to its
manufacturing capacity or to the demand for its products outside India). Thus, bylimiting the amount of a manufacturer's imports to that of its exports, the trade
balancing requirement restricts the amount of imports.
219
                                                     
218 Replies by India to Questions Posed by Japan , G/TRIMS/W/15, circulated 30 October 1998,
response to Question 24; Exhibit US-5:  "CKD/SKD kits imports would be allowed with reference to the extentof export obligation fulfilled in the previous year."  As discussed above, the MOUs were also "necessary toobtain an advantage".
219 US response to Question 11 of the Panel.WT/DS146/R
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The European Communities' and the United States' assertions were based on the incorrect assumption
that the trade balancing requirement applied to all imports, irrespective of whether an import license
was required or not.  In fact, however, the trade balancing provisions did not apply, and had in
practice never been applied, in respect of imports for which no license was required.  (see IV A).
Paragraph III (iv) of the MOUs declared that the MOU signatory shall discharge the export obligationcorresponding to the imports made before the import licensing requirement ceased to apply. The
signatories of the MOUs were therefore bound to discharge the export obligations they had already
assumed before the abolition of the import restrictions on SKD/CKD kits on 1 April 2001.  However,
this residual export obligation would have to be performed completely independently of the level of
imports or local purchases. Nowhere in WTO law were export requirements as such prohibited. The
requirement to discharge the accrued export obligations would consequently be entirely consistent
with both the GATT and the TRIMs  Agreement.  India noted that, so far, neither the European
Communities nor the United States had presented any arguments challenging this position.
4.126  The issue was whether the trade balancing provisions in the MOUs gave rise to export
obligations in respect of imports for which no import license was required. Contrary to the assertions
of the United States, this issue was totally unrelated to the question of the duration of the MOU, thepoint in time at which the MOU signatory reached the 70 percent indigenization target and the
enforceability of the MOUs.  It was, of course, correct when the United States claimed that the MOU
provisions "impose a trade balancing obligation on imports made over the full duration of the MOU"
and require the trade balancing of the foreign exchange obligation incurred on imports made up to the
date on which it achieves the 70 per cent indigenization target and that the MOUs are enforceable.However, it did not follow from these facts that th e trade balancing requirement in the MOUs applied
to imports for which no license was needed and that  this requirement therefore continued to apply
even after the import licensing regime was eliminated.  The evidence presented by India demonstrated
that, in respect of freely importable products, the MOU signatories had never assumed, and still did
not assume, any export obligations that might limit th eir right to import or create an incentive for
them to purchase domestic components. The provisions of the MOU regulating the point in time at
which the signatory moved out of the ambit of the MOU and the enforceability of the MOUs did not
change this fact. The conclusion that "the signatories are required to balance all the imports made by
them until they achieve a 70% indigenization level" simply does not follow from the fact that the
indigenization requirement ceased when the 70 per cent target had been reached.  The fact that thetrade balancing requirement must be performed onl y until a 70 per cent indigenization did not change
the fact the trade balancing requirement only arose  in respect of imports for which a license was
required.  It followed that, in the absence of a discretionary licensing system, the right to import
SKD/CKD kits and components by MOU signatorie s did not depend on, or vary with, the level of
exports or of purchases of domestic products. It was therefore plainly incorrect to claim that the trade
balancing requirements in the MOUs as such restricted imports
220 and favoured the purchase or use of
                                                     
220 There was a further, systemic reason why the Panel should reject the claim that the MOUs violate
Article XI:1.  The GATT made a clear distinction between measures discriminating against imports that were
applied at the point and time of importation, which were covered by Articles II and XI, and those that were
applied to imported products, which were covered by Article  III. Article XI:1 applied to "restrictions . . . on the
importation of any product". The dictionary meaning of "importation" was "the act of importing".  The scope ofapplication of Article XI:1 was therefore limited to act s affecting the process of entering products into the
custom territory. By contrast, Article III:4 of the GATT ap plied to requirements applied to products that had
already been imported into the customs territory.  The exceptions applicable to Article XI:1 were wider than
those applicable to Article III:4 (see for instance Article XI:2 of the GATT and Article 5 of the Agreement onSafeguards). A failure to maintain the distinction between measures applied at the border and internal measureswould therefore broaden the scope of the exceptions to Article XI:1 in a manner not contemplated by thedrafters of the GATT. Obviously, the provisions of the MOUs on trade balancing did not affect the process ofentering products into India's customs territory and coul d also for this reason not constitute restrictions on
importation within the meaning of Article XI:1. India invited the European Communities and the United StatesWT/DS146/R
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domestic products over imported products. In re spect of freely importable products, the MOU
signatory did not assume any export obligations that might limit its right to import or create an
incentive to purchase domestic components.
4.127  The United States  understood that India had confirmed that the MOUs were measures
independent of Public Notice No. 60.  India also asserted, however, that any import restrictionsimposed by the MOUs were eliminated when India eliminated its import licensing regime. The Panel
should reject this additional argument as well.  The first difficulty with India's argument came from
the first sentence of Paragraph III, clause (vi) of the MOU.  That sentence provided that "the party
[i.e. the MOU signatory] shall achieve a broad trade balancing of foreign exchange over the entire
period of the MOU   in terms of balancing between the actual CIF value of imports of CKD/SKD
kits/components and the FOB value of exports of cars and auto components over the said period."
This provision imposed a trade balancing obligation on imports made over the full duration of theMOU; the trade balancing requirement in the MOU was thus independent of the elimination of the
import licensing regime.
221 India had effectively confirmed this point in its answer to the Panel's
questions.  India said that "under paragraph 3(iv) of Public Notice 60 and paragraph III(iv) of the
MOUs, the MOU signatory goes ‘outside the ambit of the MOU' and will not require any import
licenses once it achieves a 70% indigenization level.  However, the MOU signatory will be requiredto achieve trade balancing of the foreign exchange obligation incurred on imports made up to that
date" .
222  Consequently, under the terms of the MOU, the export balancing requirement continued to
attach to all imports made until the 70% indigenization level was reached – whenever that date
arrived.223   While India said elsewhere that no further export obligations would accrue with respect to
imports made after 1 April 2001, that statement se emed impossible to reconcile with India's own
description of the m eaning of the MOUs.
4.128  The second difficulty with India's assertion that the MOUs imposed no separate import
restriction arose from India's acknowledgment that they remained enforceable under Section 11 of the
FT(DR) Act.224 India said first that "failure to meet an export obligation after 1 April 2001 would not
be an import or export prohibited by Section 11(1 ) of the FT(DR) Act."  India added, however, that
"the companies may also be liable to monetary penalties under Section 11 of the FTDR Act" and that
after 1 April 2001, "MOU signatories would be treated as licensees in respect of the licences that they
have utilized up to 31 March 2001."225 Section 11 of the FT(DR) Act contained only one provision
imposing monetary penalties:  Section 11(2), which provided that
... where any person makes or abets or attempts to make any export or import in
contravention of any provision of this Act or any rules or orders made thereunder or
the export and import policy, he shall be liable to a penalty not exceeding one
thousand rupees or five times the value of the good in respect of which any
contravention is made or attempted to be made, whichever is more.
                                                                                                                                                                    
to reconsider their argument that the MOUs as such violated Article XI:1 in the light of its broader systemic
implications.
221 In fact, the trade balancing requirement imposed restrictions above and beyond those imposed by
India's import licensing regime even when that regime was in force, because the requirement limited the amount
of licenses that an MOU signatory could use.
222 India's response to Question 50 of the Panel (emphasis added).
223 Furthermore, according to India, at least some manu facturers have not yet reached that level; India's
response to Question 33 of the Panel.
224 Question 52(d) of the Panel.
225 In the same Response India also confirmed once again that after 1 April 2001, "MOUs potentially
can be enforced as contracts through the domestic courts".WT/DS146/R
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It appeared, therefore, that the imposition of monetary penalties under Section 11 – as contemplated
by India for companies that fail to abide by the provisions of the MOU – depended on the making of
some export or import in contravention of Indian la w.  India had also said, however, that failure to
meet an export obligation was not an export or import prohibited by Section 11(1).  It was not at all
clear how these two statements could be harmonized.  One possible reconciliation of the provisions ofSection 11 and India's statements was that while failing to export the mandated amount would not be
a prohibited export or import (which was logical, since a failure  to export hardly seemed like a
prohibited  export, let alone an import of any kind), a car manufacturer's imports  in future years in
excess of the amount of export obligation discharged would be a prohibited import to which a
monetary penalty under Section 11(2) applied.  For this reason as well, the export balancing
requirement thus continued to impose an import restriction even after 1 April, 2001, and was
inconsistent with GATT Article XI:1.
4.129  The European Communities noted that India contended that, in the absence of the import
licenses on passenger cars, the MOUs could not restrict imports inconsistently with Article XI:1.
Specifically, India argued that
… the MOUs as such do not in any way limit the right to import SKD/CKD kits or
any other product.  The non-observation of the terms of the MOUs also no longer
leads to the automatic denial of an import license. Article XI of the GATT deals with
‘restrictions . . . on . . . importation', that is with measures  applied at the border in
connection with the entry of products into the customs territory.  The MOUs as such
do not maintain or institute any such measure and can therefore not possibly violateArticle XI.
226
That interpretation of Article XI was unduly narrow and found no support in the wording of thatprovision or in the GATT/WTO jurisprudence. As noted by the panel in Japan – Semi –Conductors
227,
the wording of Article XI:1 was "comprehensive". It applied to "all measures instituted or maintained
by a [Member] prohibiting or restricting the importation, exportation or sale for export  other thanmeasures that take the form of duties, taxes or charges"
228. Import restrictions were most commonly
enforced at the border, since that was the easiest and most effective way of restricting imports.
However, the scope of Article XI:1 was by no means limited to such restrictions. An agreement
between the Government and the main importers of  a product whereby the latter agreed to limit the
value of their imports gave rise to an obvious restriction on the importation of that product. Thatrestriction was clearly within the scope of Article XI:1, regardless of whether the agreement was
enforced by means of measures taken at the border which prevented the actual entry of the goods or
through other, less direct means, such as imposing fines on the signatories who import in excess of the
agreed quantity or suing them for breach of contract. India's narrow interpretation of the scope of
Article XI:1 was refuted by Japan – Semi –Conductors . In that case, the Panel concluded that:
The requests not to export semi-conductors … addressed to Japanese producers and
exporters of semi-conductors, combined with the statutory requirement for the
exporters to submit information on export prices and the systematic monitoring of
company and product-specific costs and export prices by the Government, backed up
with the use of supply and demand forecasts to impress on manufacturers the need to
align their production to appropriate levels, constituted a coherent system of
                                                     
226 India's response to Question 33 of the Panel, at p. 3, para. 1 [footnotes omitted].
227 Panel Report on Japan – Semi-conductors , adopted on 4 May 1988, BISD 35S/116.
228 Ibid. at para. 104.WT/DS146/R
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restricting the sale for export of monitored semi-conductors … inconsistent with
Article XI:1.229
None of the above measures were applied by Japan "at the border ". Moreover, unlike the MOUs, themeasures condemned in Japan – Semi –conductors  were not even legally binding and enforceable. At
any rate, India's argument that the MOUs as such could not be inconsistent with Article XI:1 becausethey were not border measures would not dispose of the EC's claims to the effect that both the
balancing requirement and the indigenization requirements were inconsistent with Article III:4 of the
GATT. More specifically, and contrary to India's assertions
 , import balancing requirements were not
inconsistent with Article XI:1 only if they were en forced through the denial of import licenses. By its
own terms, Article XI:1 prohibited import restrictions, whether made effective through import
licenses or through any "other measures". As illustrated by Canada – FIRA , the obligations contained
in legally binding contracts between the Govern ment and individual firms could constitute a
"requirement" prohibited by Article III:4.230  Likewise, a binding contract between the Government
and a firm whereby the latter agreed to limit its im ports fell clearly within the scope of Article XI:1.
(Indeed, the European Communities recalled that  for a Government action to be contrary to
Article XI:1, it did not even have to be legally enforceable231 ).
4.130  India  argued that since Article XI of the GATT dealt with 'restrictions ... on ... importation',
that is with measures  applied at the border in connection with the entry of products into the customs
territory, the MOUs as such did not maintain or institute any such measure and could therefore not
possibly violate Article XI.232  The European Communities had also failed to explain how the MOUs
as such restricted imports. A failure to sign or observe the terms of an MOU could lead to a denial ofan import license for SKD/CKD kits only as long as an import license for such kits was required.
However, the MOUs as such did not in any way limit the right to import SKD/CKD kits or any other
product.  The non-observation of the terms of the MOUs also no longer led to the automatic denial of
an import license.
233   Article XI of the GATT dealt with "restrictions ...on ... importation", that is with
measures  applied at the border in connection with the entry of products into the customs territory.
The MOUs as such did not maintain or institute any such measure and could therefore not possibly
violate Article XI. India considered th at the EC's argument that India's:
... interpretation of Article XI is unduly narrow and finds no support in the wording of
that provision or in the GATT/WTO jurisprudence. As noted by the panel in Japan –
Semi-Conductors234, the wording of Article XI:1 is "comprehensive". It applies to "all
measures instituted or maintained by a [Member] prohibiting or restricting the
importation, exportation or sale for export  other than measures that take the form of
duties, taxes or charges"235.
Import restrictions are most commonly enforced at the border, since that is the easiest
and most effective way of restricting imports. However, the scope of Article XI:1 is
by no means limited to such restrictions.
                                                     
229 Ibid. at para. 132.
230 Panel Report on Canada – FIRA , adopted on 7 February 1984, BISD 30S/140, at para. 5.4.
231 See the Panel Report on Japan –Semi-conductors , BISD 35S/116, pp. 154-155; and the Panel
Report on Japan – Agricultural Products I , BISD 35S/163.  The same is true with respect to Article III:4. See
the Panel Report on Canada  – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as modified by
the Appellate Body Report, at para. 10.122 and the Panel Report on Japan – Film , WT/DS44/R, adopted on
22 April 1998, para. 10.49 (DSR 1998:IV, 1179).
232 India's response to Question 33, p. 3.
233 See the response to Question 52(b).
234 Panel Report on Japan – Semi-conductors , adopted on 4 May 1988, BISD 35S/116.
235 Ibid., para. 104.WT/DS146/R
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was based on a misunderstanding of GATT law. The GATT made a clear distinction between
measures that were applied in connection with or at the point or time of importation ("border
measures"), which were covered mainly by Articles II and XI, and those that were applied internally
to imported products, which were covered mainly by Article III. Article XI:1 applied to "restrictions
... on the importation of any product". The dictionary meaning of "importation" was "the act ofimporting".  The scope of application of Article XI:1 was therefore limited to acts affecting the
process of entering products into the custom territ ory. By contrast, Article III:4 of the GATT applied
to requirements that were applied internally. Obviously, the provisions of the MOUs on trade
balancing were not applied in connection with or at the point or time of importation and could for that
reason alone not constitute restrictions on importation within the meaning of Article XI:1. The
European Communities overlooked that, as far as measures affecting exports  were concerned, the
GATT did not distinguish between internal measures and border measures.  Article XI:1 prohibited
both restrictions "on the exportation  or the sale for export ".  As to measures affecting exports, the
drafters of the GATT had to extend the scope of Article XI to internal measures because the national
treatment provisions of Article III did not cover measures favouring sales in the domestic market over
sales for export.  The panel report on Japan - Semi-conductors  dealt with measures affecting exports.
That panel did not have to distinguish between internal measures and border measures affectingexports because both were treated equally under Article XI.  In fact, it made no ruling on this point at
all.  It merely found that the GATT jurisprudence on minimum import prices could be extended to
minimum export prices. Its remark on the comprehensive nature of Article XI:1 provided the reason
for this finding.
236 The panel report on Japan - Semi-conductors therefore did not lend any support to
the EC's position. India considered that the European Communities might wish to reconsider thebroader implications of its argumentation. The exceptions applicable to Article XI:1 were wider than
those applicable to Article III:4 (see for instance , Articles XI:2, XII and XVIII:B of the GATT and
Article 5 of the Agreement on Safeguards). A failure to maintain the distinction between measures
applied at the border and internal measures would therefore broaden the scope of the exceptions to
Article XI:1 in a manner not contemplated by the drafters of the GATT.
4.131  The United States  replied that India still appeared to deny that Article XI:1 applied to the
export balancing requirement. India advanced a very limited interpretation of Article XI:1; India said
that "Article XI of the GATT and Article 2 of the TRIMs Agreement merely prohibited export
requirements that were imposed as a condition for the grant of an import license and exportrequirements that vary with the level of local purcha ses.  Now, India said that the scope of application
of XI:1 was limited to measures "affecting the process of entering products into the customs
territory". Neither of these formulations was correct.  It was the text of the WTO Agreement that
defined the scope of Article XI:1.  And, the TRIMs Agreement Illustrative List made clear that any
requirement which restricted importation to an amount related to the value of locally produced goods
that a manufacturer exports – such as the one in paragraph III, clause (vi) of the MOUs – was
inconsistent with GATT Article XI:1. The United States considered that the Panel should reject
India's proposed reformulations of Article XI:1 and should find that the trade balancing requirement
was inconsistent with India's obligations under that Article.
(a) Are the measures justified by Article XVIII:B of the GATT and Articles 3 and 4 of the
TRIMs Agreement?
4.132  India  argued that it maintained the restrictive import licensing regime under which the Notice
and the MOU scheme operated for balance-of-payments reasons.  This licensing regime, although
inconsistent with the general prohibition of quantitative restrictions set out in Article XI of the GATT,
was justified under Article XVIII:B of the GATT, according to which the developing country
Members of the WTO could impose import restrictions to safeguard their external financial position
                                                     
236 BISD 35S/153, paras 104-105.WT/DS146/R
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and to ensure a level of reserves adequate for the implementation of their programme of economic
development.  As stipulated in Article XVIII:B, India had notified its restrictions to the WTO.237
India had not yet disinvoked Article XVIII:B of the GATT.  India noted that Article 3 of the
Agreement on Trade-Related Investment Measures ("TRIMs Agreement") provided that all
exceptions under the GATT should apply to the provisions of the TRIMs Agreement. Furthermore,under Article 4 of the TRIMs Agreement, in the case of developing country Members such as India,
Article XVIII:B of the GATT constituted not only an exception from Article XI of the GATT but also
from the obligations set out in Article 2 of the TRIMs Agreement.
4.133  India stated that the restrictions on the impor tation of SKD/CKD kits were imposed in order
to safeguard  India's external financial position.
238 When it notified the BOPs Committee on
27 May 1997 that it was maintaining a system of non-automatic licensing for import of cars in the
form of CKD/SKD kits, it had been entering into MOUs with manufacturers that wished to importCKD/SKD kits since 1995. Any differences between the discretionary licensing scheme for import of
cars in the form of CKD/SKD kits applied under the MOUs entered into since 1995 and that applied
after 1997 were not legally significant from the standpoint of Article XI of the GATT or of the claim
that they were justified under Article XVIII:B.
239
4.134  Prior to the establishment of the Panel, India had stated that "the main purpose of the MOU
Policy is the management of balance-of-payments even while following an open door policy toward
foreign investment which should not lead to a net outflow of foreign exchange" 240 The United States
said it was not certain what India meant by that statement.  For example, it was not clear how opening
the door towards foreign investment might be relate d to a net outflow of foreign exchange.  To the
extent that India was concerned about capital outflows, the United States recalled that India hadnotified the WTO of a separate dividend balancing requirement, which required foreign-owned
investments in several industries (including portions of the motor vehicle sector) to earn through
exports the foreign exchange necessary to repatriate earnings to their foreign parents. India's assertion
was also inconsistent with statements made when Public Notice No. 60 was adopted; at that time,
Indian officials described a different purpose for the MOUs:  "The objective of the new policy was toencourage local production of auto-components and thus, bring in modern technology and develop
this key segment, explain ministry officials."
241
4.135  The European Communities  added that this statement had been made by India more than
three months after the European Communities requested consultations with respect to the MOUs. The
obvious purpose of the MOU policy was to promote the establishment and consolidation of a local
automotive industry in India.
4.136  For the United States , India did not have a defense under Article XVIII:B for the measures at
issue in this dispute.  First, India had not complied with the procedural prerequisites for justifying
these measures under the balance-of-payments provisions of the GATT  Second, on 12 December
1997, when Public Notice No. 60 was adopted, Indi a no longer had a balance-of-payments problem
justifying the use of the balance-of-payments prov isions of the GATT.  The International Monetary
Fund (IMF) had reached that conclusion several months earlier, in January of 1997242, and the
                                                     
237 WT/BOP/N/24.
238 Question 63 of the Panel.
239 Question 64 of the Panel.
240 Questions from Japan, Committee on TRIMs.
241 "Car Makers Have to Sign New MOUs in Accordance with New Automobile Policy", Business
Standard , 11 December 1997.
242 Panel Report on India – Quantitative Restrictions , WT/DS90/R, adopted on 22 September 1999,
para. 3.225.WT/DS146/R
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India - Quantitative Restrictions  panel reached the conclusion that India had no valid
balance-of-payments justification as of November  18, 1997 - less than a month before Public Notice
No. 60 was issued.243  Third, India had in any case not met its burden of proof with respect to this
issue.
4.137  In elaborating on the first of these three points , the United States considered that nowhere did
India actually say that the indigenization and trade balancing requirements were justified by the
balance-of-payments provisions.  Instead, India had simply said that if the Panel attempted to examine
the US complaint, the Panel would be obliged to embark on the complicated task of re-examining
India's balance-of-payments situation.  The Panel should not let itself be distracted by India's
suggestion, because the balance-of-payments provisions of the WTO Agreements provided no
defence to the violations at issue in this case. In the first place, India was prohibited from raising those
provisions as a defence to the complaint because it had never notified the measures at issue to theBOPs Committee and had never asserted a balance-of-payments justification for them.  Article
XVIII:12(a) of the GATT 1994 and paragraph 6 of the Uruguay Round Understanding on the
Balance-of-Payments Provisions of the GATT 1994 made clear that such notification was required.
However, India had never brought the indigenization or trade balancing requirements before the
Committee. India could not both say that it would have been impractical for the indigenization and
trade balancing requirements to be notified to and examined by the BOPs Committee, and yet also say
that the India – Quantitative Restrictions  panel ruled on these details without either knowing about
them or examining them.
244
4.138  In the second place, even if these measures had been taken for balance-of-payments reasons
(and India's failure to notify them reinforced the fact that they were not), these measures dated fromlate 1997.  Pursuant to paragraphs 2 and 3 of the Understanding, even if India had wanted to take new
measures for balance-of-payments purposes, India w ould have been required to give preference to
price-based measures.  Public Notice No. 60, however, imposed quantitative restrictions and local
content requirements, not tariff surcharges.  Third, the balance-of-payments provisions in any case
could not justify a violation of the national treatment obligations of the GATT. Article XVIII: 9 madeclear that the balance-of-payments provisions could be used to "control the general level of imports" -
not to deny national treatment to foreign goods.  Once a foreign good had been imported, the foreign
exchange for that import had been expended; there was no balance-of-payments justification for
permitting discrimination against that imported good.  For all of these reasons, the Panel should reject
India's balance-of-payments arguments.
4.139  India  responded to the US argument that first, the measures at issue were not new to the
extent that they represented only the conditions that India applied in the context of non-automatic
licensing of imports of cars in the form of CKD/ SKD kits.  Second, the conditions in Public Notice
No. 60 and the MOUs based on it were basically the same as those contained in 1995 MOUs.  Third,
they did not involve either a raising of the general level of restrictions or a substantial intensification
of the restrictions applied by India to imports of cars in the form of CKD/SKD kits; if anything, they
represented a relaxation of the restrictions.  Fourth, Members did not have to notify the details of thelicensing regime they applied to each of the restrictions notified under Article XVIII: B to benefit
from the legal cover provided by this provision. In practice, the notifications under GATT's balance-
of-payments provisions did not contain such details and Members were not expected to consult on
them in the BOPs Committee.  It would in any case have been totally impracticable for India to notify
these details for 2,700 items and for the BOPs Committee to examine them.   Finally, as from 1 April2001, India no longer applied any balance-of-payments measures and therefore no longer invoked the
balance-of-payments provisions of the GATT. The poi nts made by the United States, expressed before
                                                     
243 Ibid. , paras. 5.160-5.161 and 5.236.
244 US response to Question 74 of the Panel.WT/DS146/R
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1 April 2001, were therefore no longer relevant.245 The Panel asked us to confirm whether India was
relying on Article XVIII:B of the GATT as a defence.  The answer was that if the United States and
the European Communities insisted on re-opening the issue of the WTO-consistency of measures
which the earlier panel has already ruled upon, India also reserved its right to take up the defence that
the measures were justified under  Article XVIII:B of the GATT 1994. The United States argued thatIndia could not invoke Article XVIII:B because India did not notify Public Notice No. 60 under
Article XVIII:B of the GATT. However, Public No tice No. 60, as such, did not establish an import
restriction for SKD/CKD kits that would have required notification under Article XVIII:B. The
relevant import restriction was imposed under the Export-Import Policy. Public Notice No. 60 merely
set out how this import restriction was to be administered.  This was clear from paragraph 2 of this
Notice which read in relevant part: " ...import of components for motor vehicle in CKD/SKD form,
which is restricted for import under the current Export-Import Policy, shall be allowed for importationagainst a license and such a license will be issued ... on the basis of an MOU …"  Under Article
XVIII:B, Members must notify the restrictions they are applying, not the import licensing schemes
they use to administer those restrictions. India had explained again and again to its trading partners
that Public Notice No. 60 implemented the import restrictions on SKD/CKD kits, which were notified
under Article XVIII:B, and would cease to be operati onal once these restrictions were eliminated.  It
was simply not logical to tear the procedures for implementation of the import restriction on imports
of CKD and SKD kits in the Public Notice out of the context of the import restriction and declare
those implementing procedures in the Notice themselves to be restrictions that would have required
notification under Article XVIII:B.  For this reason, it was also incorrect to claim that the Public
Notice No. 60 was a new measure in respect of which India was required to give preference to price-based measures pursuant to paragraphs 2 and 3 of the Understanding on the balance-of-payments
provisions of the GATT.
(i) Procedural requirements of the balance of payments provisions
4.140  The United States  said that India had not met the procedural prerequisites for justifying these
measures under the balance-of-payments provisio n of the GATT.  GATT Article XVIII:B and the
Understanding on the Balance-of-Payments Provisions of the GATT 1994 (the Understanding)
established procedural prerequisites to any invocation of the balance-of-payments provisions of the
GATT.
246  These prerequisites also applied to the TRIMs Agreement, Article 4 of which permitted
developing country Members to deviate tem porarily from the provisions of Article 2 to the extent and
in such a manner as GATT Article XVIII and the Understanding permit  These prerequisites included
a requirement to consult with the BOPs Committee (the Committee) concerning any new measures
immediately after applying them (or, where prior consultation was practicable, as it almost certainly
was in this case, before doing so)247. In the view of the United States, if a Member changed an import
licensing scheme that the Member justified for balance-of-payments reasons, the Member was
required to notify the changes to the WTO.  Significant changes must be notified within 30 days.
These points flowed from paragraph 9 of the Understanding on the Balance-of-Payments Provisions
of the GATT 1994 (the Understanding), which provides that "a Member shall notify to the GeneralCouncil the introduction of or any changes in the application of restrictive import measures taken for
balance-of-payments purposes, as well as any modifications in time-schedules for the removal of such
measures as announced under paragraph 1.  Significant changes shall be notified to the General
Council prior to or not later than 30 days after their announcement."  Paragraph 9 of the
Understanding also obligated Members applying restrictions for balance-of-payments purposes to
                                                     
245 Question 65 of the Panel.
246 Pursuant to GATT Article XVIII:9, a Member's right to maintain balance-of-payments measures is
made subject to the provisions of Articles XVIII:10 to 12.
247 Article XVIII:12(a).  Pursuant to paragraph 6 of the Understanding, consultations are to be held
within four months after the institution or intensification of restrictions.WT/DS146/R
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furnish to the WTO, on a yearly basis, a consolidated notification that included all changes in relevant
laws, regulations, policy statements or public notices. India did not undertake such consultations;
indeed, it did not even notify the measures challenged in this dispute to the Committee, despite the
requirement that it do so within 30 days if they were significant or in India's annual notification if
not.248  Because India had not complied with those requirements, it could not now assert a
balance-of-payments justification for those measures, and for that reason as well the Panel should
reject any such assertion.
4.141  A panel might consider but should reject an Article XVIII:B defense concerning measures
that the defending Member had not notified to the BOPs Committee (the Committee).  In the
India - Quantitative Restrictions  dispute, the Appellate Body found that panels had the competence to
review the justification of measures purportedly taken for balance-of-payments purposes, and
therefore a panel was empowered to consider such a defense.  It would rarely if ever be appropriate,however, for a panel to sustain such a defense if the defending Member had not complied with the
procedural requirements of Article XVIII:B and the Understanding.  In this case, Public Notice No. 60
had entered into effect over three years ago, and India's Article XVIII:B arguments should not be
accepted.
4.142  The European Communities  also considered that a new notification was required.
Paragraph 9 of the Understanding provided in relevant part that
"A Member shall notify the General Council the introduction of or any changes in the
application of  restrictive measures taken for balance-of-payments purposes …
Significant changes shall be notified to the General Council prior to or no later than
30 days after their announcement".
Nor, in its view, could a Panel consider an Article XVIII:B defence concerning measures not
specifically notified to the Committee.  Paragraph 9 of Article XVIII:B authorised a Member to take
BOP measures "subject to paragraphs 10 to 12". Paragraph 12 (a) of Article XVIII:B provided that
any party applying new restrictions must consult with the Committee immediately. Paragraph 6 of the
Understanding specified that consultations must take place within four months.
249
4.143  India  recalled that according to Article XVIII:12(a) of the GATT, a new consultation was
required if the Member applied new restrictions or raised "the general  level of its existing restrictions
by a substantial  intensification of the measures" applied under Article XVIII:B.  India's notification
covered restrictions applied in the form of non-automatic licensing on imports of cars, including carsimported as CKD/SKD kits. The changes in 1997 did not entail a substantial intensification of this
measure. On the contrary, the changes in 1997 had the effect of relaxing the restriction on the
importation of SKD/CKD kits.  India was theref ore not required to re-notify and hold new
consultations on the changes introduced through Public Notice No. 60 in order to benefit from the
legal cover of Article XVIII:B. It was furthermore neither required nor customary to notify under
Article XVIII:B the details as to the administration of the restrictions. If the Panel were to create such
a requirement, the consequences would be administratively unmanageable.
(ii) Substantive Requirements of the balance of payments provisions
4.144  The United States  argued that India did not meet the substantive requirements of the balance-
of-payments provisions of the GATT.  Even if India were able to overcome the legal objections
described [in the foregoing paragraphs], India could not meet the substantive requirements of
                                                     
248 Understanding, para. 9.
249 Question 30 of the Panel.WT/DS146/R
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Article XVIII:B.  The first substantive difficulty with India's assertion of a balance-of-payments
justification for these measures arose from the fact that India adopted Public Notice No. 60 on
12 December 1997.  Under GATT Article XVIII:9, a Member might institute balance-of-payments
measures "provided that the import restrictions inst ituted, maintained or intensified shall not exceed
those necessary:  (a) to forestall the threat of, or to stop, a serious decline in its monetary reserves, or(b) in the case of a contracting party with inadequate monetary reserves, to achieve a reasonable rate
of increase in its reserves."
4.145  However, the Panel in India – Quantitative Restrictions  found that, as of 18 November 1997
(only 24 days before Public Notice No. 60 was is sued) India's balance-of-payments situation met none
of the requirements in Article XVIII:9.  The Panel found that:
Overall, we are of the view that the quality and weight of evidence is strongly in
favour of the proposition that India's reserves are not inadequate. In particular, thisposition is supported by the IMF, the Reserve Bank of India and three of the four
methods suggested by India. Accordingly, we find that India's reserves were not
inadequate as of 18 November 1997.
250
[...]
We find that as of the date of establishment of this Panel [18 November 1997], there
was not a serious decline or a threat of a serious decline in India's monetary reserves,
as those terms are used in Article XVIII:9(a).251
[...]
We find that as of the date of establishment of this Panel, India's monetary reserves of
US$25.1 billion were not inadequate as that term is used in Article XVIII:9(b) andthat India was therefore not entitled to implement balance-of-payments measures to
achieve a reasonable rate of growth in its reserves.
252
4.146  It strained all credulity to suggest that 24 days after 18 November 1997, India's foreign
reserve situation had changed so dramatically as to justify new balance-of-payments measures.
Certainly India had provided no facts to suggest that such a change occurred.  And, as theUnited States explained in its answers to the Panel's questions, this Panel could and should be guided
by those factual and legal findings of the India – Quantitative Restrictions  panel.
253  Even if – despite
the foregoing points – these measures could permissibly have been introduced under GATT
Article XVIII:B in December of 1997, India would still be required to explain the basis on which it
was maintaining them on 15 May and 27 July 2000, the dates on which the United States requestedthis Panel and on which this Panel was established.
254  Article XVIII:11 made clear that a Member
                                                     
250 Panel Report on India – Quantitative Restrictions , para. 5.176.  This finding is a predicate for the
Panel's ultimate finding under Article XVIII:9(b).
251 Panel Report on India – Quantitative Restrictions , para. 5.180.
252 Panel Report on India – Quantitative Restrictions , para. 5.183.
253 US response to Panel Questions, paras. 48-50.
254 Throughout its submissions, India said that the relevant date for a balance-of-payments analysis was
the date on which a panel request is submitted.  The India – Quantitative Restrictions  panel concluded instead
that the relevant date was the date of panel establishment, and it made its findings as of that date (18 November1997).  Panel Report on India – Quantitative Restrictions , WT/DS90/R, adopted 22 September 1999,
paras. 5.160-5.161.  In this dispute, it made no differ ence which date was chosen:  as described below India's
currency reserves on either date were more than adequate and not seriously declining, and consequently India
lacked a balance-of-payments justification for its measures on both dates.WT/DS146/R
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applying balance-of-payments measures "shall progressively relax any restrictions applied under this
Section as conditions improve, maintaining them only to the extent necessary  under the terms of
paragraph 9 of this Article and shall eliminate them when conditions no longer justify such
maintenance ."  In fact, however, India did not have balance-of-payments difficulties at all in the
spring of 2000, and therefore, under Article XVIII:11 it lacked any basis for maintaining them.
4.147  Without prejudice to the United States' position that India had failed to advance evidence
required to sustain its burden to put forward at least a prima facie  defense, the United States provided
materials from the Reserve Bank of India that demonstrated that India did not face
balance-of-payments difficulties that would justify maintenance of the measures at issue in this
dispute at the time when this Panel was requested and established.  In its Annual Report for
1999-2000, which was published in August 2000, the Reserve Bank provided information about
India's currency reserves over the preceding decade. In December of 1998, those reserves had risen toUS$30.1 billion (as compared to US$25.1 billion in November of 1997, the date as of which the
India – Quantitative Restrictions  panel made its rulings).  In December of 1999, the reserves had risen
to US$34.9 billion.  According to the Reserve Bank's Weekly Statistical Supplement, on 12 May
2000, India's reserves stood at US$37.6 billion.  On 28 July 2000, India's reserves stood at
US$36.2 billion.  In other words, between Novemb er of 1997 and the end of July 2000, India's
reserves increased by more than 44%.
4.148  Furthermore, the Reserve Bank provided the following analysis of India's external position:
The movements in India's foreign exchange reserves, in recent years, have kept pace
with the requirements on the trade as well as the capital accounts.  As a matter of
policy, foreign exchange reserves are kept at a level that is adequate to cover theliquidity needs in the event of both cyclical and unanticipated shocks.  Particularly
after the South-East Asian currency crises, there has been a growing opinion that the
central banks need to hold reserves far in excess of the levels that were considered
desirable going by the conventional indicators.  The import cover of reserves
improved to about 8.2 months as at end-March 2000 as against 6.5 months as atend-March 1997 while the ratio of short-term debt to reserves declined to 10.6 per
cent as at end-March 2000 from 25.5 per cent as at end-March 1997.  Even in relation
to a broader measure of external liabilities, foreign exchange reserves provide
adequate cover.  For instance, short-term  debt and cumulative portfolio investment
inflows taken together were only 59.3 per cent of reserves as at end-March 2000.These ratios remain, by and large, unchanged even if unencumbered reserves (gross
reserves net of forward liabilities) are taken into account, given the relatively small
size of forward liabilities in the Indian co ntext.  The strength of the foreign exchange
reserves has also been a positive factor in facilitating flow of portfolio investment by
FIIs and in reducing the ‘risk premia' on foreign borrowings and Global Depository
Receipts (GDR) / American Depository Receipts (ADR) issued by the Indian
corporates.  It is, however, important to note that unanticipated domestic or externaldevelopments, including undue volatility in asset prices in equity/bond markets, can
create disproportionate pressures in the foreign exchange market in emerging
economies.
255
The Reserve Bank's confidence in the strength of India's currency reserve position - as gauged notonly by measures such as the total amount of reserves, but also by measures such as import cover,ratio of reserves to short-term debt, and ratio of reserves to short-term debt plus cumulative portfolio
                                                     
255 Annual Report, para. 6.31.  Exhibit US-27 includes the paragraphs of the Annual Report devoted to
India's foreign exchange reserves, paras. 6.24-6.31.WT/DS146/R
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investment inflows, among others - confirmed what the growth and absolute size of India's foreign
currency reserves themselves make clear:   that India was not facing inadequate reserves, seriously
declining reserves or the threat of a serious decline in the spring of 2000.
4.149  Finally, there would be several other substantive difficulties with any Indian assertion of a
balance-of-payments justification for these measures .  First, Article XVIII:B authorized developing
country Members only to "control the general level of imports".256  India had not explained, however,
how an inconsistency with national treatment "controls the general level of imports."  As the United
States had noted, once an item has been imported, the foreign exchange for that import has been
expended; there was no balance-of-payments justification for permitting discrimination against that
imported good257 Furthermore, India had also not explained how its introduction of these measures in
late 1997 would be consistent with the requirement in  paragraphs 2 and 3 of the Understanding to give
preference to price-based measures.  The indigenization and trade balancing requirements were not
import surcharges, import deposit requirements or other measures with an impact on the price of
imported goods.  India, however, had not provided the justification for these measures that the
Understanding would require, and India therefore could not maintain them as balance-of-payments
measures.
4.150  In summary, India had not provided any argumentation that would overcome the serious legal
difficulties with any assertion of a balance-of-payments justification for the indigenization and trade
balancing requirements.  Nor had India provided any evidence that -- even if those legal objections
could be overcome - its foreign currency reserve position met the requirements of Article XVIII:B
either at the time those measures were introduced or at the time this Panel was requested andestablished.  To the contrary, the evidence of India's own central bank proved the opposite.  India's
assertion of a balance-of-payments justification for these measures should be rejected.
(iii) The burden of proof
4.151  The United States  went on to state that India had not met its burden of proof on the balance-
of-payments defense; it could not surmount the proce dural obstacles to any such defense; and India's
external financial position had at all relevant times been so strong that it could not meet the
substantive requirements for invoking Article XVIII:B.  The Appellate Body had provided guidance
on the allocation of burden of proof in several reports.  Particularly relevant were its conclusions in
the US – Wool Shirts and Blouses  report:
In addressing this issue, we find it difficult, indeed, to see how any system of judicial
settlement could work if it incorporated the proposition that the mere assertion of a
claim might amount to proof.  It is, thus, hardly surprising that various international
tribunals, including the International Court of Justice, have generally and consistently
accepted and applied the rule that the party who asserts a fact, whether the claimant
or the respondent, is responsible for providing proof thereof .  Also, it is a
generally-accepted canon of evidence in civil law, common law and, in fact, most
jurisdictions, that the burden of proof rests upon the party, whether complaining ordefending, who asserts the affirmative of a particular claim or defence.  If that party
adduces evidence sufficient to raise a presumption that what is claimed is true, the
                                                     
256 GATT Article XVIII:9 and Understanding, para. 4.
257 India did not respond to the Panel's invitation to address this point.  India's response to Question 65
of the Panel.WT/DS146/R
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burden then shifts to the other party , who will fail unless it adduces sufficient
evidence to rebut the presumption.258
In this case, India had provided no evidence whatsoever about its balance-of-payments situation.  Tothe extent that India was asserting that its balance-of-payments position provided a legal justification
for the measures at issue, it was responsible for providing proof of that assertion.  It had done nothingof the sort.  Having adduced no evidence of any kind on the point, India obviously had not adduced
evidence sufficient to raise a presumption that it had a balance-of-payments problem justifying the
measures in question.  For that reason alone, any balance-of-payments defense must fail.
4.152  The European Communities  pointed out that Article XVIII:B was an exception to other
GATT provisions. Accordingly, it was for India to prove that the strict requirements of Article XVIII
were met in this case. India had provided no evidence or argument whatsoever in support of itsinvocation of Article XVIII:B.  The evidence pr ovided by the European Communities showed that
India's BOP situation had been even more buoyant when the European Communities requested the
establishment of this Panel than in November 1997, the date considered by the panel in
India - Quantitative Restrictions . In addition, India had not complied with the procedural
requirements imposed by Article XVIII:B and by the Understanding. In view of that, the Panel shoulddismiss India's attempted defence outright. In particular, the European Communities considered that it
would be totally unwarranted to request the advice of the IMF. To do so would serve only to reward
India's delaying tactics. For these reasons, the Panel need not address the arguments outlined by India
in paragraph 42 of its First Submission (see para. 4.45 above).  These arguments had already been
rejected by the Panel and the Appellate Body in India – Quantitative Restrictions  . There was no
reason for the Panel to depart from that precedent in this dispute.
4.153  India  recalled that the Appellate Body Report on US –Woven Wool Shirts and Blouses , stated
that:
the burden of proof rests upon the party, whether complaining or defending, who
asserts the affirmative of a particular claim or defence. If that party adduces evidencesufficient to raise a presumption that what is claimed is true, the burden then shifts to
the other party, who will fail unless it adduces sufficient evidence to rebut the
presumption.
259
4.154  Furthermore, the Appellate Body, in its report on European Communities – Measures
concerning Meat and Meat Products (Hormones)  (hereinafter " EC – Hormones "), stated that:
The general rule in a dispute settlement proceeding requiring a complaining party to
establish a prima facie  case of inconsistency of a provision […] before the burden of
showing consistency with that provision is taken by the defending party is not
avoided by simply describing the same provision as an exception. 260 (emphasis in
original)
In the India – Quantitative Restrictions  case, the Panel concluded from this jurisprudence:
This implies that the United States has to prove any of its claims in relation to the
alleged violation of Article XI:1 and XVIII:11. Similarly, India has to support its
                                                     
258 Report of the Appellate Body in US - Wool Shirts and Blouses , WT/DS33/AB/R, adopted on 23
May 1997, page 14 (footnotes omitted) (emphasis added) (DSR 1997:I, 323).
259 WT/DS33/AB/R, p. 16.
260 WT/DS26/AB/R-WT/DS48/AB/R, para. 104 (DSR 1998:I, 135).WT/DS146/R
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assertion that its measures are justified under Article XVIII:B. We also view the rules
stated by the Appellate Body as requiring that the United States as the complainant
cannot limit itself to stating its claim.  It must present a prima facie  case that the
Indian balance-of-payments measures are not justified by reference to Articles XI:1
and XVIII:11 of GATT 1994.261 Should the United States do so, India would have to
respond in order to rebut the claim. 262
In India's view, it was thus for the United States and the European Communities to submit aprima facie  case that the restrictions notified by India under Article XVIII:B were inconsistent with
that provision.  It was only after they had done so that India was required to present a rebuttal. The
complainants would have had to show in particular that India's reserves were sufficient to:  safeguard
its external financial position, and ensure a level of reserves adequate for the implementation of its
programme of economic development
263  and that India therefore violated Article XVIII:B
4.155  India noted that, in fact, the panel in India – Quantitative Restrictions  found (para. 5.119) that
the United States had to make a prima facie  case that India's import restrictions were not justified
under Article XVIII:11.  India recalled the conclusions of the Appellate Body on the burden of proof
in the case of safeguard actions by the United States against imports of shirts and blouses from India:
India has argued that it is "customary GATT practice" that the party invoking a
provision which is identified as an exception must offer proof that the conditions set
out in that provision are met.  We acknowledge that several GATT 1947 and WTO
panels have required such proof of a party invoking a defence, such as those found in
Article XX264 or Article XI:2(c)(i)265, to a claim of violation of a GATT obligation,
such as those found in Articles I:1, II:1, III or XI:1.  Articles XX and XI:(2)(c)(i) are
limited exceptions from obligations under certain other provisions of the GATT 1994,
not positive rules establishing obligations in themselves.  They are in the nature of
affirmative defences.  It is only reasonable that the burden of establishing such a
defence should rest on the party asserting it.266
The transitional safeguard mechanism provided in Article 6 of the ATC is a
fundamental part of the rights and ob ligations of WTO Members concerning non-
                                                     
261 Report of the Appellate Body in  Australia – Salmon , adopted on 6 November 1998,
WT/DS18/AB/R, paras. 257-259.
262 WT/DS90/R, para. 5.119.
263 See Article XVIII:9 of the GATT.
264 Canada – FIRA , adopted on 7 February 1984, BISD 30S/140, para. 5.20;  United States – Section
337 of the Tariff Act of 1930 , adopted 7 November 1989, BISD 36S/345, para. 5.27;  US – Malt Beverages ,
adopted on 19 June 1992, BISD 39S/206, paras. 5.43 and 5.52;  and Panel Report, United States – Standards for
Reformulated and Conventional Gasoline , as modified by the Appellate Body Report, adopted on 20 May 1996,
WT/DS2/9, para. 6.20.
265 Japan – Agricultural Products I , adopted on 22 March 1988, BISD 35S/163, para. 5.1.3.7;  EEC –
Restrictions on Imports of Dessert Apples, Complaint by Chile,  (hereinafter "EEC – Apples (Chile) "), adopted
on 22 June 1989, BISD 36S/93, para. 12:3;  and Canada - Import Restrictions on Ice Cream and Yoghurt ,
adopted on 5 December 1989,  BISD 36S/68, para. 59.
266 Furthermore, there were a few cases that were similar in that the defending party invoked, as a
defence, certain provisions and the panel explicitly required the defending party to demonstrate the applicabilityof the provision it was asserting.  See, for example, United States – Customs User Fee , adopted on 2 February
1988, BISD 35S/245, para. 98, concerning Article II:2 of the GATT 1947;  Canada – Import, Distribution and
Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies , adopted on 22 March 1988, BISD 35S/37,
para 4.34, concerning Article XXIV:12 of the GATT 1947;  and US – Malt Beverages , adopted on 19 June
1992, BISD 39S/206, para. 5.44, concerning the Protocol of Provisional Application.WT/DS146/R
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integrated textile and clothing products covered by the ATC during the transitional
period.  Consequently, a party claiming a violation of a provision of the WTO
Agreement  by another Member must assert and prove its claim.  In this case, India
claimed a violation by the United States of Article 6 of the ATC.  We agree with the
Panel that it, therefore, was up to India to put forward evidence and legal argumentsufficient to demonstrate that the transitional safeguard action by the United States
was inconsistent with the obligations assumed by the United States under Articles 2
and 6 of the ATC.  India did so in this case.  And, with India having done so, the onus
then shifted to the United States to bring forward evidence and argument to disprove
the claim.  This, the United States was not able to do and, therefore, the Panel found
that the transitional safeguard action by the United States "violated the provisions of
Articles 2 and 6 of the ATC".
267
In our view, the Panel did not err on this issue in this case.
The Appellate Body found that Article 6 of the ATC established not merely a limited exception but
positive rules and that India therefore had to bear the burden of proving that the United States applied
Article 6 inconsistently.  What was true for the safeguard provisions of Article 6 of the ATC must also
be true for balance-of-payments provisions of Article XVIII:B of the GATT. Just as Article 6 of theATC was a fundamental part of the rights and obligations of WTO Members under the ATC,
Article XVIII:B was a fundamental part of the righ ts and obligations of developing countries under
the GATT. There could not be one distribution of the burden of proof for a safeguard provision that
had been used extensively by the United States and another for a safeguard provision applicable to
developing countries.  It was consequently up to the European Communities and the United States topresent a prima facie  case of violation of Article XVIII:B and, once they had done so, for India to
rebut this case. The Appellate Body ruled that "a prima facie  case is one which, in the absence of
effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of the
complaining party presenting the prima facie  case".
268 The scant and anecdotal information provided
so far by the complainants would not permit the Panel to rule as a matter of law that India's reserveswere adequate for the implementation of its programme of economic development.  In fact, they had
not even attempted to assess India's reserves in the light of its development programme. As to India's
external financial position, the European Communities and the United States had merely cited
statements that the Reserve Bank of India made without any reference to the requirements of
Article XVIII:B.  As to the relationship between India's reserves and India's programme of economicdevelopment, the complainants submitted no evidence at all. The evidence submitted by the
complainants so far could not possibly be the basis of a ruling that India was violating Article
XVIII:B.  According to the consistent GATT and WTO practice,
269 the Panel would have to examine
India's balance-of-payments situation on 15 May 2000 and 12 October 2000, the dates on which the
complainants submitted their panel requests.  India' s balance-of-payments situation at the time of the
adoption of Public Notice No. 60 was totally irrelevant. The findings of the panel on
India - Quantitative Restrictions  did not provide any evidence in respect of India's balance-of-
payments situation on 15 May 2000 and 12 October 2000 and could therefore not possibly guide the
present Panel.
4.156  With respect to the role of the IMF, India wished to note that the position of the European
Communities and the United States was inconsistent with the position that the United States took in
                                                     
267 WT/DS33/R, para. 8.1.
268 Report of the Appellate Body in EC – Hormones,  WT/DS26/AB/R, WT/DS48/AB/R, adopted on
13 February 1998, para. 104 (DSR 1998:I, 135).
269 See Panel Report on India – Quantitative Restrictions,  WT/DS90/R, adopted on 22 September 1999,
as upheld by the Appellate Body Report, paras. 5.160-5.161.WT/DS146/R
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the proceeding of the panel on India – Quantitative Restrictions.  The United States then asserted  that
Article XV:2 expressly allocated to the IMF the authority for making certain specific determinations
within the scope of its particular expertise.  Allocation of that authority to the IMF had been  the
intent of the drafters of Article XV:2, and that intent was carried out in the practice of the
CONTRACTING PARTIES. Since Article XV:2 required the WTO  to consult the IMF, in all cases
where the WTO is called on to consider matters concerning monetary reserves, balance of payments
or foreign exchange arrangements, the Panel must also do so . . . Although Article XV:2 did not
mention panels, per se , an interpretation of WTO would include panels.270  The position of the United
States had been supported by the jurisprudence of  the Appellate Body. A lthough the Appellate Body
had found in Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items
(hereinafter " Argentina – Textiles and Apparel ") that the dispute did not involve "problems
concerning monetary reserves, balance of payments or foreign exchange arrangements",  it did findwith respect to panel proceedings that Article XV:2 " requires  the WTO to consult with the IMF when
dealing with 'problems concerning monetary rese rves, balance of payments or foreign exchange
arrangements".
271  Also in the India – Quantitative Restrictions  case the Appellate Body noted with
approval the decision of the panel to submit questions to the IMF on India's balance-of-payments
situation on the basis of Article 13 of the DSU and Article XV:2 of the GATT.272  It followed from
the above that the Panel would have to consult the IMF in accordance with Article XV:2 of the GATT
if it were to find that Public Notice No. 60 and the MOUs would have restricted imports in May and
October 2000 even in the absence of any requirement to obtain a licence for imports of cars and
components and an examination of India's Article XVIII:B invocation would therefore become
necessary.
(iv) Relevance of the India – Quantitative Restrictions  case
4.157  With respect to deciding what account to take of the findings and conclusions reached by the
panel in the India – Quantitative Restrictions  dispute when considering the justification under
Article XVIII:B of the measures at issue in this dispute, the United States considered that this Panel
should be guided by conclusions reached by the panel in the India – Patents (EC) dispute.  That panel
considered the extent to which it was bound by the findings of a previous panel on the same measure
and found as follows:
It can thus be concluded that panels are not bound  by previous decisions of panels or
the Appellate Body even if the subject-matter is the same.  In examining dispute
WT/DS79 we are not legally bound by the conclusions of the Panel in disputeWT/DS50 as modified by th e Appellate Body report.  However, in the course of
"normal dispute settlement procedures" required under Article 10.4 of the DSU, we
will take into account the conclusions and reasoning in the Panel and Appellate Body
reports in WT/DS50.  Moreover, in our examination, we believe that we should give
significant weight to both Article 3.2 of the DSU, which stresses the role of the WTO
dispute settlement system in providing security and predictability to the multilateral
trading system, and to the need to avoid inconsistent rulings (which concern has been
referred to by both parties).273
4.158  Therefore, if the Panel decided to consider the balance-of-payments justification of the
measures at issue in this dispute, the Panel should bear in mind that both the panel and the Appellate
                                                     
270 Ibid., paras. 3.305 and 3.311.
271 Report of the Appellate Body in Argentina – Textiles and Apparel , WT/DS56/AB/R, adopted on
22 April 1998, para. 84 (DSR 1998:III, 1003).
272 WT/DS90/AB/R, para. 149.
273 WT/DS79/R, para. 7.30 (DSR 1998:VI, 2661).WT/DS146/R
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Body thoroughly analyzed the legal issues in the India - Quantitative Restrictions  case.  Furthermore,
this Panel should bear in mind that the India – Quantitative Restrictions  panel made a factual finding,
after extensive factual submissions, on India's bala nce-of-payments situation as of 18 November 1997
- less than thirty days before the adoption of Public Notice No. 60.  It would be neither necessary nor
appropriate for this Panel to repeat that work.  The Panel should of course consider the arguments ofthe parties, but it should be guided by the panel's and the Appellate Body's factual findings and recent
interpretation of the provisions at issue in that case.
4.159  Moreover, the India – Quantitative Restrictions  panel decided that, having regard to both
DSU Article 13 and GATT Article XV:2, it would consult with the IMF.  After giving both parties an
opportunity to comment on a draft, the Panel sent the IMF a letter asking several questions about
India's balance-of-payments situation as of 18 No vember 1997.  The IMF's replies confirmed that, as
of 18 November 1997, India's reserves were neither declining seriously nor threatened with serious
decline; that India's level of foreign currency reserves was adequate; and that India's quantitative
restrictions were not needed for balance-of-payments adjustment and should be removed over a
relatively short period of time.  The IMF also presented additional data for the period ending June
1998; the IMF indicated that this later data corroborated its views.
274 It would be entirely unnecessary
to ask the IMF once again for an opinion that it had already given.
4.160  It was obvious to the European Communities  that this Panel could not rely on the factual
finding of the panel in India – Quantitative Restrictions  to the effect that, as of the date of the
establishment of that panel, India was not entitled to implement BOP measures. Rather, this Panel
would have to make its own factual findings ba sed on India's BOP situation as of the date of
establishment of the panel.  On the other hand, as confirmed by the Appellate Body in Japan – Taxes
on Alcoholic Beverages275, the Panel must take into account the findings reached by the panel (and the
Appellate Body) in India - Quantitative Restrictions  with respect to issues of legal interpretation of
Article XVIII:B, (and in particular with respect to those raised by India at paragraph 4.80).
4.161  India  contended that as the United States had submitted its request for the establishment of a
panel on 15 May 2000 and the European Communities on 12 October 2000. India's external financialpositions on these dates would have to be examined because they would be different from India's
external financial position in November 1997  which  the earlier panel examined. The panel on
India - Quantitative Restrictions correctly found that "the determination of whether balance-of-
payments measures are justified is tied to a Member's reserve situation as of a certain date".
276  The
present Panel therefore  could not rely on the assessment of India's balance-of-payment situation by
the panel on India – Quantitative Restrictions .
4.162  The European Communities  contended that Article XVIII:B was an exception to other
GATT provisions. Accordingly, it was for India to prove that the strict requirements of Article
XVIII:B were met in this case.  So far, however, India had submitted no relevant evidence to this
Panel.  The European Communities recalled that the Panel on India – Quantitative Restrictions
concluded that, as of November 1997, India's rese rve position did not justify India's invocation of
Article XVIII:B.  India had not claimed, let alon e proved that, since November 1997, India's BOP
situation had deteriorated to the point where resort to Article XVIII:B of GATT would have become
justified.  Indeed, any claims to that effect would be untenable. India's reserve position as of
12 October 2000, as well as its current position, seemed to be, if anything, even more buoyant than in
                                                     
274 Panel Report on India – Quantitative Restrictions , WT/DS90/R, adopted on 22  September 1999, as
upheld by the Appellate Body Report, paras. 3.360, 3.361, 3.367, and 3.368.
275 Report of the Appellate Body in Japan – Alcoholic Beverages II , WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R, adopted on 1 November 1996, at p. 24 (DSR 1996:I, 97).
276 WT/DS90/R, para. 5.157.WT/DS146/R
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November 1997. (As evidence of this, the European Communities is providing to the Panel a copy of
the relevant excerpts of the "Economic Survey 2000-2001" published by India's Ministry of Finance).
3. TRIMs Agreement
4.163  The United States  claimed that the indigenization and trade balancing requirements fell
squarely within the scope of Paragraphs 1(a), 1(b) and 2(a) of the Illustrative List, and for that reasonthey violated Articles 2.1 and 2.2 of the TRIMs Agreement.  Separately, they also violated Article 2.1
of the TRIMs Agreement because they were inconsistent with GATT Articles III:4 and XI:1.
Paragraph 1(a) :  First, firms manufacturing passenger cars in India were
"enterprises"; because the ordinary meaning of "enterprise" included "a business firm,
a company".  Second, India had affirmed that indigenization meant "local content"
and "use of local materials alone".  Thus, the indigenization obligation required
"enterprises" manufacturing automobiles to "use" local parts and components (andeffectively also to "purchase" such local parts and components if they themselves did
not import them).  The indigenization requirement therefore fell within the terms of
Paragraph 1(a).
Paragraph 1(b) :  First, the measures made clear that an MOU signatory's imports of
CKD/SKD kits/components "may be regulated  with reference to the export obligation
fulfilled in the previous years as per the MOU."  Second, the export obligation itself
was expressed in terms of value -- namely, an FOB value equal to the CIF value of
imported CKD/SKD kits and components.  Thus, a firm manufacturing cars in India
could only import and use a maximum am ount of SKD/CKD components that was
related to the value of its exports in previous years.  If a firm wished to use a greateramount, it must purchase and use such components from an Indian source instead.
The trade balancing obligation therefore fell within the terms of Paragraph 1(b).
Paragraph 2(a) :  Import licenses for SKD/CKD kits/components were not given to
companies that do not sign and comply with an MOU.  Because compliance was a
condition to importation of SKD/CKD kits/components used by such companies intheir motor vehicle production in India, those requirements "restrict" importation
"generally" of "products used in ... local production".  For that reason alone the
measures fell within the scope of Paragraph 2(a). The trade balancing obligation also
fell within the scope of Paragraph 2(a) for a second reason.  Beginning in the fourth
year, CKD/SKD kits imports were allowed with reference to the extent of exportobligation fulfilled in the previous year.  The trade balancing obligation thus imposed
a "restriction" on a firm's imports that was "related to the ... value of local production
that it [the firm] exports", as provided in Paragraph 2(a).
Illustrative list chapeaux :  As required by the chapeaux to Paragraphs 1 and 2, the
measures at issue either were "mandatory or enforceable under domestic law or under
administrative rulings" or were measures "compliance with which is necessary to
obtain an advantage."  First, India has confirmed that the measures could be"enforced" at least under the provisions of the FTDR Act, through the import
licensing mechanism, and under Indian contract law.  Second, manufacturers must
comply with the indigenization and trade balancing obligations to be permitted to
import SKD/CKD kits/components.  This permission constituted an "advantage"
because components in SKD/CKD form were "restricted" under the Exim Policy andnot generally importable into India.WT/DS146/R
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Non-illustrative  list violations   of   Article 2.1 :  As shown elsewhere, Public Notice
No. 60 and the MOUs were inconsistent with Articles III:4 and XI:1 of the GATT
1994.  Therefore, the measures were inconsistent with Article 2.1 of the TRIMs
Agreement even if they discriminated against imported goods, or prohibited or
restricted the importation of foreign goods, in ways that were not described in theprovisions of the Illustrative List.  For example, the trade balancing requirement
violated Article III:4 because it obligated users and purchasers of imported
SKD/CKD parts and components (but not users/purchasers of like domestic goods) to
export an equal value of automobiles or automotive components.  Even if this form of
discrimination was not encompassed in the Illustrative List it was inconsistent with
GATT Article III; and for that reason it was also inconsistent with Article 2.1 of the
TRIMs Agreement.
4.164  Whether or not the TRIMs Agreement required a separate analysis of whether a measure was
a "trade-related investment measure", the measures in this case definitely were such measures.
"Investment measure" :  First, Public Notice No. 60 and the MOUs required a
minimum foreign equity of US$50 million dollars and thus were designed to increase
the amount of foreign investment.  Second, these measures steered foreign investmentin the Indian motor vehicle manufacturing sector towards establishment of actual
production facilities for "manufacture" of cars and away from "mere assembly" of
imported kits/components.  Third, these measures were also aimed at encouraging
investment in and the development of the Indian parts and components industry
generally (from whom India plainly wants automobile companies to purchase thecomponents and parts that they need to engage in "manufacture").  The MOU made
that clear when it provided that the signatory "shall aggressively pursue and achieve
as soon as possible the development of the local supply base ... ."  Moreover, Indian
officials announcing Public Notice No. 60 said that the policy objective was "to
encourage local production of auto-components and thus, bring in modern technologyand develop this key segment".  The indigenization and trade balancing requirements
furthered that domestic investment objective both by favoring local automotive parts
and components and by restricting the entry into India of foreign components.
"Trade-related" :  The measures favoured domestic goods over like imported goods,
and they restricted or prohibited importation of certain foreign goods.  As past panelshad recognized, local content requirements were trade-related by definition.
Quantitative import restrictions and prohibitions (the elimination of which was a
cornerstone of the GATT 1994) were no less so.
4.165  Under Article 5.2 of the TRIMs Agreement, all WTO Members benefitted from a transition
period to eliminate trade-related investment measures inconsistent with Article 2.  Those transition
provisions, however, did not apply to this case, for three reasons.  First, India introduced these
measures in December of 1997, nearly three years after the entry into force of the WTO Agreement,but the transition provisions did not apply to measures adopted less than 180 days before the date of
entry into force of the WTO Agreement.  Second, the only measures to which the transition provisions
applied were those that were notified in accordance with the provisions of Article 5.1.  While India
did notify a dividend balancing requirement in various sectors, India did not notify local content or
trade balancing requirements.  Third, India's transition period had in any case ended.  Pursuant toArticle 5.2, India had five years from the entry into force of the WTO Agreement to eliminate all its
inconsistent measures.  That five-year period had expired on 1 January 2000.WT/DS146/R
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4.166  The European Communities  pointed out that Article 2.1 of the TRIMs Agreement provided
that:
"Without prejudice to other rights and obligations under GATT 1994, no Member
shall apply any TRIM that is inconsistent with the provisions of Articles III or XI of
GATT."
The TRIMs Agreement did not define the noti on of TRIM. Nevertheless, the Annex to that
Agreement contained what Article 2.2 describes as:
"An illustrative list of TRIMs that are inconsistent with the obligation of national
treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation
of general elimination of quantitative restrictions provided for in paragraph 1 of
Article XI of GATT 1994 …"
The wording of Article 2.2 indicated that any measure which fell within the List constituted per se  a
TRIM inconsistent with Article 2.1, without it bein g necessary for the complainant to demonstrate in
each particular case that the measure concerned was an "investment measure" and  was "related to
trade in goods".277 The "indigenization" requirements and the "trade balancing" requirements were
both "investment measures" and "related to trade in goods" and, consequently, constituted TRIMswithin the meaning of Article 1 of the TRIMs Agreement. Since those requirements were inconsistent
with GATT Articles III:4 and XI:1, it followed th at they also infringed Article 2.1 of the TRIMs
Agreement. Furthermore, the "indigenization" requirements fall within Items 1(a) of the Illustrative
List, whereas the "trade balancing" requirements are caught by Items 1(b) and 2(a).
• The requirements are "investment measures": The term "investment measure" had
been interpreted in Indonesia – Autos , where the panel found that the grant of tax and
duty incentives upon compliance with certain local content requirements was an
"investment measure".  The Panel reasoned as follows:
"[T]hose measures are aimed at encouraging the
development of a local manufacturing capability for finished
motor vehicles and parts and components in Indonesia.
Inherent to this objective is that these measures necessarily
have a significant impact on investment in these sectors. For
this reason, we consider that these measures fall within anyreasonable interpretation of the term ‘investment
measures'."
278
Indonesia – Autos stood for the proposition that the characterisation of a measure as
an "investment measure" must be based on the purpose of the measure, as discerned
from the measure's structure and objectives, rather than on the measure's actual
effects on investment.  The measures in dispute had a similar structure and pursue the
same objective as the measures at issue in  Indonesia – Autos, namely  to encourage
the development of a local automotive industry. That objective is further evidenced
by the other two "parameters" laid dow n in Public Notice No. 60, i.e. "the
establishment of actual production facilities for manufacture of cars and not for mere
assembly" and the minimum US$50 million investment requirement. Inherent in the
                                                     
277 This issue was left undecided by the Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R, adopted on 23 July 1998, paras. 14.64-14.72 (DSR 1998:VI, 2201).
278 Ibid., para. 14.80.WT/DS146/R
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objective of developing a local automotive industry was that India's measures, like
Indonesia's, had a "significant impact on investment" and, therefore, constituted
"investment measures" for the purposes of the TRIMs Agreement.
• The "indigenization" requirements and the "trade balancing" requirements were
"related to trade in goods": The "indigenization" requirements were "related to trade
in goods" because they favoured the use of domestic inputs over imported inputs. In
turn, the "trade balancing" requirements were "related to trade in goods" because they
restricted imports, as well as the internal purchase of imported goods.
• The "indigenization" requirements and the "trade balancing"  requirements fell
within the Illustrative List of prohibited TRIMs : The "indigenization" requirements
fell within Item 1(a) of the Illustrative List, which included among the TRIMs that
were inconsistent with Article III:4 those which required:
"the […] use by an enterprise of products of domestic origin
[…], whether specified in terms […] of […] value of
products, or in terms of a proportion of […] value of its local
production"
To the extent that they required the trade balancing of imported goods purchased by
the signatories within India, the "trade balancing" requirements fell within Item 1(b),
which covered those measures that require:
"that an enterprise's purchases […] of imported products be
limited to an amount related to the […] value of local
products that it exports"
Finally, to the extent that they required trade balancing of imports made directly by
the signatories, the "trade balancing" requirements were caught by the terms of
Item 2(a) which covered those measures which restricted
"the importation by an enterprise of products used in or
related to its local product ion, […] to an amount related to
the […] value of local production that it exports."
4.167  The "indigenization" and "trade balancing" requirements had not been notified under
Article 5.1 of the TRIMs Agreement: The measures in dispute had not been notified by India under
Article 5.1 of the TRIMs Agreement.279 Indeed, since all these measures were introduced by India
well after the entry into force of the WTO Agreement, they could never have been validly notified
under that provision. Therefore, India's measures could not benefit from the five-years transitional
derogation provided for in Article 5.2 with respect to prohibited TRIMs duly notified by developing
countries. The European Communities further recalled that, in any event, this derogation expired as of
1 January 2000, without prejudice to the possibility under Article 5.3 that a further period may begranted for those measures previously notified under Article 5.1.
4.168  India  responded that, according to Article 2:1 of the TRIMs Agreement, "no Member shall
apply any TRIM that is inconsistent with the provisions of Article III or XI of GATT 1994 ". An
                                                     
279 India had confirmed that the TRIMs notified in G/TRIMS/N/1/IND/1/Add.1 do not cover the
measures at issue in this dispute. See India's Replies to Questions posed by the United States in the TRIMs
Committee, G/TRIMS/W/16.WT/DS146/R
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inconsistency with the TRIMs Agreement could therefore arise only if there was an inconsistency
with the GATT. Having demonstrated that the measures which the Panel was competent to rule upon
were not inconsistent with Article III or XI of the GATT, India had therefore also demonstrated that
these measures were consistent with the TRIMs Agreement. India considered that Public Notice
No. 60 and the MOUs contained provisions that might possibly be regarded as "investment measures"within the meaning of Article 1 of the TRIMs Agr eement because they imposed requirements relating
to the investments that automobile manufacturers must make, e.g., the provisions relating to minimum
foreign equity and the prohibition of mere assembly operations. However, these requirements were
not at issue in these proceedings. In any case, they were no longer imposed as conditions for the grant
of an import license and could therefore no longer be regarded as "related to trade" within the
meaning of Article 1 of the TRIMs Agreement. The provisions of Public Notice No. 60 and the
MOUs that were at issue in the present proceedings are clearly trade measures and not investment
measures. As long as India applied its discretionary licensing system to SKD/CKD kits and car
components, the trade balancing and indigenization provisions might have affected the decisions of
car manufacturers as buyers of kits and components but they did not constrain the decisions of car
manufacturers as investors .  The purpose of the provisions was to minimise the foreign exchange
expenditures of car manufacturers, not to regulate their investments. For these reasons, the tradebalancing and indigenization provisions do not fall within the framework of the TRIMs Agreement.
4.169  The United States considered that India's suggestion that because the trade balancing and
indigenization requirements were "trade measures", they were not "investment measures" and
therefore were not within the scope of the TRIMs Agreement was a contention that should not be
adopted by the Panel.  The dichotomy that India tried to draw between "trade" and "investment"measures could not be sustained.   Presumably an y measure disciplined by GATT Article III:4 could
be considered a "trade measure"; on India's logic, however, no such measure would be an "investment
measure" – and therefore no measure disciplined by Article III:4 could ever fall within the scope of
the TRIMs Agreement.  India's hard-and-fast division between "trade" and "investment" measures
was a manifestly impossible interpretation of the Agreement. Furthermore, India's position was notconsistent with the conclusions of the Panel in Indonesia – Autos , which found as follows:
On the basis of our reading of these measures applied by Indonesia under the 1993
and the 1996 car programmes, which have investment objectives and investment
features and which refer to investment programmes, we find that these measures are
aimed at encouraging the development of a local manufacturing capability forfinished motor vehicles and parts and components in Indonesia.  Inherent to this
objective is that these measures necessarily have a significant impact on investment
in these sectors.  For this reason, we consider that these measures fall within any
reasonable interpretation of the term "investment measures".
280
The measures in question in this dispute were like those in Indonesia – Autos :  they were aimed at
encouraging local manufacturing capability, and they had a significant impact on investments (foreign
and domestic) in that sector.  As that panel said, the measures in this dispute "fall within anyreasonable interpretation of the term ‘investment measures'."  India's only basis for its assertion
appeared to be that the measures in question were "trade measures".  But even if India was correct that
these were "trade measures", there was no reason to think that they were not also "investment
measures" (and therefore a fortiori  "trade-related investment measures").  India certainly offered no
                                                     
280 Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted
on 23 July 1998, para. 14.80 (DSR 1998:VI, 2201).  The panel emphasized that its characterization of themeasures as "investment measures" was based on an examination of the manner in which the measures at issuein that case related to investment, and that there might be other measures that qualified as investment measures
within the meaning of the TRIMs Agreement because they relate to investment in a different manner.WT/DS146/R
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reason to believe that a measure could only be one or the other, and there was no support for that
position in the text of the TRIMs Agreement.281 The indigenization and trade balancing requirements
were precisely the sort of trade-distorting measures applied to foreign investment that the TRIMs
Agreement was intended to address. India's assertion that these measures were not "investment
measures" should be rejected. India also made a second argument – namely, that the trade balancingand indigenization requirements affected the car manufacturers as "buyers of kits" but not as
"investors".  However, India gave the Panel no textual or other basis for adopting that distinction as
the basis of deciding whether a measure was an " investment measure" either.  Even if one were to
accept India's proposal, however, India was mistaken ab out the effect of the indigenization and trade
balancing requirements.  For example, these measures imposed additional costs on car manufacturers
that lowered the return on their investment in India.  Moreover, car manufacturers in India had to be
structured to meet the indigenization and trade balancing requirements; these requirements thereforenecessarily affected their investment planning. Furthermore, India had not responded to the other
reasons the United States had presented for considering these measures as "investment measures".
For instance, these measures were clearly intended to encourage investment in the Indian parts and
components manufacturing industry.  Indian officials had made that point publicly when they
introduced Public Notice No. 60.  Furthermore, the MOUs required signatories to "aggressivelypursue and achieve as soon as possible the development of the local supply base".
4.170  In short, the United States believed that the Panel should reject India's argument that the
indigenization and trade balancing requirements were outside the scope of the TRIMs Agreement.
And, given that they were inconsistent with Articles III:4 and XI:1 of the GATT for reasons alreadydiscussed, the Panel should further conclude that these measures were also inconsistent with Article 2
of the TRIMs Agreement.
V. ARGUMENTS OF THE THIRD PARTIES
Korea's submission to the Panel was as follows:
1. The Agreements regarding the Indian measures must be respected and enforced
5.1 This Panel should consider  the years of negotiations and dispute settlement proceedings
between India and the European Communities and India and the United States that preceded this
dispute.  With both the European Communities and the United States, India made due efforts to
resolve the issues in a manner that met the concerns of the United States and the EuropeanCommunities and provided India with the time and flexibility to restructure its automotive regime.
5.2 The United States concedes that the first proceeding regarding its claims ended with an
agreement between the United States and India that the reasonable period of time for implementation
"shall finally expire on 1 April 2001. Yet the United States seeks to readjudicate those same claims
(and to challenge "measures" which do not yet exist).  India correctly notes the subtle shift of focus by
the United States in this proceeding. The earlier proceeding regarded, among other things, India's
discretionary licensing scheme; this proceeding regards the application of the very same licensingscheme.  Thus, the "distinction" upon which the United States relies does not  appear to be a
meaningful  distinction.  As India accurately notes, the DSB ruling covers both the text and the
operation and application of the discretionary licensing system for all products notified under
Article XVIII:B of the General Agreement on Tariffs and Trade (GATT 1994), including CKD and
                                                     
281 Cf. Panel Report on EC – Bananas III , WT/DS27/R/USA, adopted on 25 September 1997, as
modified by the Appellate Body Report, para. 7.185 (DSR 1997:II, 943) ("the TRIMs Agreement does not addto or subtract from those GATT obligations, although it clarifies that Article III:4 may cover investment-related
matters" ).WT/DS146/R
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SKD kits.  Therefore, the United States should have waited until the reasonable period had expired.
Then, if the United States still believed that India had not fully implemented the recommendations
and rulings of the DSB, it could have sought recourse under Article 21.5 of the DSU or requested
consultations for the establishment of a new panel.
5.3 The above analysis of the US action applies also to the EC action.  The European
Communities and India reached a mutually agreed solution of the India – Quantitative Restrictions
(WT/DS96) dispute that they notified under DSU Article 3.6.282 As the European Communities
concedes, the solution (as supplemented by the agreement on reasonable period of time between the
United States and India) requires India to conform its Regime to its WTO commitments by
1 April 2001.283  For its part, the European Communities agreed to "refrain from action under GATT
Article XXII or Article XXIII as regards those restri ctions during the phasing-out period," i.e. for the
Regime, until 1 April 2001.284  Thus, the solution reached in the earlier, broader dispute (WT/DS96)
applied to the Regime – the subject matter of this dispute.  India has complied with the agreed-upon
schedule and the 1 April 2001 deadline has yet to pass.  Yet, the European Communities nonetheless
has brought this proceeding and asked the Panel to address measures covered by the mutually agreed
solution.  The EC claim that the subject matter of  the current dispute is not within the scope of
WT/DS96 is based primarily on three assertions.  Korea notes in paragraphs 30-37 of India's FirstSubmission where India rebuts the EC assertions.  As  a review of India's presentation indicates, the
subject of this dispute – the Regime –seems to be covered by the mutually agreed solution.  The EC's
action raises a systemic question for the WTO dispute settlement system enshrined in the DSU.  A
review of the DSU indicates that the preferred goal in every dispute settlement proceeding is a
mutually agreed solution:
... The aim of the dispute settlement mechanism is to secure a positive solution to a
dispute.  A solution mutually acceptable to the parties to a dispute and consistent with
the covered agreements is clearly to be preferred.285
The EC action seems to  undermine this goal by removing any incentive to agree to a solution.
5.4 In the cases of both the US action and the EC action against India, fundamental values are at
stake.  Where two Members reach an agreement (as here) and formalize the agreement by notifying it
to the WTO (as here), the agreement must be respected by both Members.  Any other resolution will
undermine the entire dispute settlement mechanism.  Members must be able to rely on agreementsthey reach with other Members.  This is a fortiori the case when, as here, the dispute is between a
developing and a developed Member of the WTO.
2. The measures that India may take by 1 April 2001 are not, and as a matter of logic
cannot be, properly before the Panel.
5.5 The Panel should not consider any arguments regarding measures that India might propose.
First, DSU Article 6.2 indicates that a complainant must "identify the specific measures at issue."
Here, the European Communities and the United States could not possibly have identified post–
1 April measures as "the specific measures at issue," because the measures do not yet exist.  This is
confirmed by a review of the panel requests.286  Second, under DSU Article 7.1, the Panel's terms of
                                                     
282 See WT/DS96/8, 6 May 1998. (Exhibit EC-8).
283 EC's First Submission, India – Measures Affecting the Automotive Sector , WT/DS146, WT/DS175,
16 January 2001, para. 61.
284 WT/DS96/8, 6 May 1998, p. 2.
285 DSU, Article 3.7 (emphasis added).
286 See WT/DS146/4, 13 October 2000; WT/DS175/4, 18 May 2000.WT/DS146/R
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reference, which set the scope of the proceeding, generally are based (and, in this proceeding, are
based) on the "specific measures" identified in the panel request(s).  Here, not having been
specifically identified in the panel requests, measures that may or may not compose the post – 1 April
Regime are not part of the Panel's terms of reference and, thus, are not properly before the Panel.
Third, a panel cannot possibly examine a measure not in existence when the panel is established.Once the panel is established and its terms of reference are set, all subsequent occurrences are not
subject to review.  This is because the scope of the panel's authority is defined when the panel is
established.
287  In sum, all arguments by the United States and the European Communities regarding
steps India may take after the date of each complaining party's panel request to comply with its
mutually agreed solution with the European Communities and its agreement with the United States
pursuant to DSU Article 21.3 have no subject matter (i.e. there is no actual measure to attack) and are
untimely.  If they wish, the United States and the European Communities may request consultationsfor a new panel  or pursue a DSU Article 21.5 proceeding with India after 1 April 2001.  But they
cannot circumvent the procedures of the DSU and the terms of the understanding and the agreement
with India by challenging in the current proceeding measures that do not yet exist.
3. Prospective measures
5.6 As demonstrated above, the post – 1 April Regime is not within the scope of this proceeding.
However, as an aside, Korea wishes to note that the post-1 April Regime described by India appears
problematic.  As India states, the exclusivity enjoyed by the manufacturers, on the one hand, and the
commitments to mitigate the adverse impact of th e imports on the balance of payment, on the other
hand, constitute a "balanced whole." India has indicated that it does not intend to release the car
manufacturers from the commitments they assumed under the memoranda of understanding (MOUs)in order to import SKD/CKD kits prior to 1 April 2001. But, India also has indicated that, from
1 April 2001, it no longer will make the importation of SKD/CKD kits subject to the signing of an
MOU.  The right to import SKD/CKD kits therefore no longer will be conditioned.
5.7 Thus, under India's plan, starting from 1 April 2001, companies already committed to the
MOUs would be put in a situation where the MOU ob ligations are left, but most of the MOU benefits
have been removed.  The exclusivity granted under the MOUs has been the primary benefit given to
MOU enterprises – abolishing the exclusive right to import SKD/CKD kits while maintaining
obligations under the MOUs would compromise the "balanced whole" for the MOU enterprises.  As a
result, the continued enforcement of the MOU requirements would undermine the conditions of
competition by disadvantaging companies that already have committed to India's market, incomparison with new entrants not subject to the MOU requirements.
5.8 India submits that MOU companies should not complain about the modified regime because
they already have obtained a comparable advantage.  India further asserts that the MOU requirements
imposed after 1 April 2001 are merely a pure "obligation to manufacture" or "requirements to sell
goods in foreign markets in preference to the domestic market" and, thus, are consistent with the
WTO agreements.
288
5.9 Korea reminds India that the MOU companies undertook these  obligations in exchange for
the exclusive right to import for the duration of th e MOU period.  For India to remove this right but
maintain the MOU obligations would be unfair to the MOU companies.  India's continuation of the
MOU requirements cannot be separated from the existing Regime and interpreted as merely an
                                                     
287 See India — Quantitative Restrictions , WT/DS90/R, adopted on 22  September 1999, as upheld by
the Appellate Body Report, paras. 5.160-5.161 (a panel may examine only those facts existing on the date thepanel was established).
288 India's First Submission, paras. 10-12.WT/DS146/R
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imposition of a new "obligation to manufacture" or "requirements to sell goods in foreign markets in
preference to the domestic market."  Rather, it is a continuation  of the commitments made by the
MOU companies as a reward of obtaining the exclusive right to import SKD/CKD kits prior to
1 April 2001.  In other words, the post-1 April Regi me sketched by India would establish not merely
an "obligation to manufacture" or a "requirements to sell goods in foreign markets in preference to thedomestic market" – it would establish an obligation and requirement, compliance with which is
necessary to obtain an advantage (which was already exhausted) .  This, of course, would be
inconsistent with India's obligations under the TRIMs Agreement and under GATT 1994.
5.10 Moreover, no provision of the WTO agreements justifies imposing disadvantages on the basis
of having provided advantages in the past.  If such an "cross-temporal balancing" were allowed, the
basic nature – the "immediacy and unconditionality" – of the MFN obligation
289 would be
compromised.  Korea invites India to consider the above points as it decides how to alter the Regime.
VI. INTERIM REVIEW
6.1 The interim report of the Panel was issued to the parties on 12 October 2001.  The parties
submitted their comments on 26 October 2001. India expressed its request for a meeting in
conditional terms, indicating that it requested a meetin g "if the Panel were to decide to make in its
final report any findings on whether the violations ceased to exist as a result of events that occurredduring the panel proceedings".
6.2 In the view of the Panel, the purpose of an interim review meeting is not to provide the parties
with an opportunity to introduce new legal issues an d evidence or to enter into a debate with the
Panel.  In the view of the panel, the purpose of th e interim review stage is to consider specific and
particular aspects of the interim report as requested by the parties.  In this instance, the Panel did notfeel that it would have been appropriate to make a decision to hold a meeting on the basis of the
outcome  of the interim review process, of which the meeting is a part. In addition, the Panel was of
the view that it would not have been in accordance with requirements of due process for the Panel to
pronounce on any changes it may make to its findings and recommendations as suggested by India
before hearing the views of the other parties on the issues raised by India.  Consequently, the Panel
decided to hold the meeting on the basis of India's request in order to allow the parties to exchange
views on the specific and particular aspects of the interim report on which a review has been
requested, without prejudice to the outcome of this interim review process.
6.3 An interim review meeting was held on 19 November 2001.
A. C
OMMENTS ON THE DESCRIPTIVE PART
1. Comments by the United States
6.4 All of the comments made by the United States on the draft descriptive were accepted by the
Panel.  A number of points, not heretofore reflected in the descriptive part, were incorporated.
2. Comments by India
6.5 India suggested that the descriptive part of the report be restructured, in order to address the
preliminary procedural issues first, and that subtitles be phrased either in terms of questions, claims or
arguments but not a mix of all three.  The Panel considered this acceptable and the descriptive part ofthe report was accordingly restructured and subtitles adjusted in accordance with India's suggestion.
                                                     
289 See GATT 1994 Article I:1; General Agreement on Trade in Services, Article II.1.WT/DS146/R
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6.6 At the end of the factual section (II.A), India wished to add that "Since the removal of these
restrictions, importers of cars no longer have to sign an MOU to obtain an import license and the
signatories of the MOUs, including those with accr ued export obligations, are now free to import any
amount of cars and components". The United States  objected, by letter, dated 13 August 2001, as it
considered that this issue was actually a subject of debate during the proceedings and should not beincluded in the factual section.  The Panel agreed with the United States that this point was clarified
by India during the panel proceedings.  The section of the report titled Factual Aspects (II) records all
relevant and undisputed facts available to the Panel.  Since, in this case, many of the facts required
clarification, the report contains a first section under Arguments of the Parties, Factual Arguments
(IV.A).
6.7 India also requested that its requests to the Panel be summarized  in a more coherent fashion.
The Panel accepted the redraft to I ndia's requests for findings (III.C).
6.8 In section IV.B, concerned with whether the matter had been settled and adjudicated, India
wished a redraft of a concluding paragraph regard ing its argument. Since the additions suggested by
India were a compilation and not found as a whole in the written evidence, the Panel has included
similar language found in India's second submission. (para. 4.53)
6.9 In response to comments made by the United States, India submitted additional comments on
20 August.  However, many of the comments made by India had either (a) been reflected elsewhere in
the report, (b) could not be found reflected in the written evidence or (c) inferred the Panel's use of
editorial license to a less than comfortable degree.
3. Comments by the European Communities
6.10 The European Communities informed the panel that it had no comments on the draft
descriptive part of the report.
B. C
OMMENTS ON THE FINDINGS AND CONCLUSIONS
1. Comments by the United States
6.11 The United States made only a limited number of comments on the Panel's findings.
6.12 It suggested clarification of the language in paragraph 7.86 concerning the reference to the
panel India – Quantitative Restrictions .  The Panel found this clarification helpful and revised the
paragraph accordingly.  The United States also suggested clarifying paragraph 7.190 by expressly
indicating that the reference to contract law concerned "Indian" contract law.  The Panel agreed with
this suggestion and adapted the paragraph accordingly.
6.13 The United States commented on a portion of paragraph 7.287 which, in its view, was
questionable because it read it to assume a certain assignment of burden of proof to parties
participating in domestic proceedings concerning safeguards, anti-dumping or countervailing
determinations.  While it had not been the intention of the Panel, in that paragraph, to draw any such
conclusions or inferences, the Panel accepted to revise the paragraph in order to avoid any
misunderstanding on this issue.
6.14 In paragraph 7.211, which describes one of the factual elements of the trade balancing
obligation, the United States suggested adding a reference to the fact that the complainants hadspecifically claimed its existence, in order to make clear that the complainants presented a prima facie
case on this point.  The Panel added the reference suggested, because it found it to be factually correctWT/DS146/R
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and a useful addition to the description of the facts of the case.  However, the Panel wishes to stress
that, in its view, the mere statement that the complainants asserted the existence of a certain fact or
measure, as in this instance, in no way amounts to the demonstration of a prima facie  case of violation
in relation to the said measure.  The addition of th is reference to the complainants' factual assertion
therefore cannot be read to constitute in itself an  assertion by the Panel that the complainants had
presented a prima facie  case on this issue.  The legal analysis of the relevant claims is conducted at a
later stage.
6.15 The United States requested a reflection, in footnote 464 of the fact that the meaning of the
notion of moving "out of the ambit of the MOU" had been disputed and suggested that the notion
should either not be reflected in its current form or clarified in light of the parties' disagreements on its
meaning. The Panel did not find it necessary, for the purposes of reaching its conclusions and
recommendations, to make an express finding on the meaning of the notion. However, the footnotewas clarified to reflect the differences of view between the parties as to its interpretation.
2. Comments by the European Communities
6.16 The European Communities commented on certain pa ragraphs where they felt that its position
had not been adequately reflected, and pointed to two instances in which it questioned the
appropriateness of the Panel's statements on specific issues.
6.17 The European Communities requested a rectification in the description of their claims in
paragraph 7.21.  The Panel rectified this paragraph accordingly, because it agreed that the rectification
requested provided a more accurate description of the claims developed by the European
Communities before the Panel.
6.18 In footnote 405, the Panel added the relevant reference to the European Communities'
argument as requested by it.
6.19 The European Communities argued that the Panel confused, in certain paragraphs (7.213,
7.229, and 8.13) two distinct arguments it had presen ted, namely (1) an argument concerning the
scope of the trade balancing requirement, and (2) an argument concerning the duration of the trade
balancing obligation beyond 1 April 2001.  The Panel accepted the changes suggested by theEuropean Communities and revised paragraph 7.213 of the report to reflect the European
Communities' two arguments.  In paragraph 7.229, the Panel deleted the last sentence and added the
European Communities' second argument in paragraph 7.235.  The Panel then addressed the European
Communities' second argument in paragraphs 7.278 and 8.57.
6.20 The European Communities noted that paragraphs 7.230 and 7.232, which contain an analysis
of the scope of the trade balancing obligation, do not fully reflect the indication provided by the
European Communities that it did not have the relevant information at its disposal, or the fact that
India had not presented supporting evidence for its own assertions.  For the sake of clarity and
completeness, the Panel added further indications of the elements before it, as submitted by all parties.
However, this did not lead to any alteration of its general conclusion on the issue at stake.
6.21 The European Communities suggested that footnote 364, which elaborates on some of the
systemic issues which might come into play in assessing the role of mutually agreed solutions underthe DSU in subsequent disputes, was not necessary to the Panel's analysis and thus inappropriately
made.  The Panel is certainly fully aware that its role is not to engage in general systemic discussions
divorced from what is necessary to the resolution of the dispute at hand.  However, this footnote plays
a specific role in the Panel's reasoning, in explaining why the Panel is not convinced by the European
Communities' argument relating to the fact that a mutually agreed solution is not a "coveredWT/DS146/R
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agreement" under the DSU as a sufficient reason for dismissing its potential relevance in subsequent
proceedings.  The Panel has therefore decided to maintain the essential substance of this footnote,
while clarifying its language in order to explain why it is instrumental to its reasoning.
6.22 The European Communities found that a specific assertion by the Panel on the potential
impact of its rulings in these proceedings in subsequent "inter-party" determinations concerning thetrade balancing conditions was beyond its jurisdiction to assess.  The Panel modified this part of
paragraph 7.234 in order to clarify that the objective of the disputed statement was merely to assert
that it was not this Panel's mandate or objective to make or prejudge, beyond its mandate under the
DSU, any future determinations which might be made on the scope of obligations on individual
manufacturers in other contexts.
3. Comments by India
6.23 India's comments concentrated exclusively on the Recommendations section of the report.  In
its view, the entire analysis conducted by the Panel under this section was inappropriate, and it
suggested the deletion of the entire analysis conducted in paragraphs 8.6 to 8.26, where the Panel
assessed, in light of the events argued by India to have occurred in the course of the proceedings,
whether it could appropriately make recommendations under Article 19.1 of the DSU that India bring
its measures into conformity with its obligations under the GATT 1994.
6.24 India suggested instead that the Panel, following its finding that India's measures were in
violation of its obligations under GATT articles III and XI, simply make a recommendation as per
Article 19.1 that India "bring its measures into conf ormity with the agreements ", and "note that India
claimed that it has taken measures to bring its measures into conformity with its obligations under the
GATT 1994", and that since this assertion is being ch allenged by the complainants, it should be left to
a compliance panel to assess whether that is the case.
6.25 The United States and the European Communities responded in detail to India's comments
during the interim review meeting, and their arguments will be also reflected in this section.  In light
of all the parties' comments, and for the reasons explained below, the Panel decided to maintain a
detailed analysis of the implications of the events which took place in the course of the proceedings,in particular as of 1 April 2001, but it modified its analysis in order to clarify further its approach in
this section.  Since India's comments affect the whole analysis under the Recommendations section,
rather than merely individual paragraphs, the Panel will address here successively the legal arguments
at stake rather than proceeding with a paragraph by paragraph analysis.
6.26 India raises three principal arguments in support of its position, and also raised more
generally a concern of due process to the effect that the Panel's analysis of the post-April situation
was entirely unexpected and that, had India realized that the Panel would engage in such an analysis,
it would have presented relevant evidence.  This procedural issue is addressed first.
(a) General comment in respect of India's procedural rights in the proceedings
6.27 India argues that "the Panel embarked on a completely unprecedented approach not foreseen
in the DSU without giving any prior indication to that effect.  Neither the complainants nor India
could therefore have possibly expected the Panel to make the rulings set out in the RecommendationsSection.  It is irreconcilable with the most basic principles of procedural justice for a tribunal to make
a ruling on issues which the disputant parties could not reasonably expect any rulings and on which
they could therefore not provide all the evidence available to them."
290  In particular, India argues that
                                                     
290 Comments on Interim Report by India, para. 15.WT/DS146/R
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if the parties to the dispute could have anticipated that the Panel would determine whether the
measures at issue have remained in violation, they would no doubt have exchanged further evidence
and arguments on this point.  India argues in this context that the Panel's analysis is factually
incomplete and, inter alia , that it "saw no reason to inform the Panel of the fact that Public Notice
No. 60 no longer exists because this was not relevant to any of the issues that the Panel had beenrequested to address".
6.28 The Panel disagrees with India's assertion that it was unpredictable to it that the Panel would
address the issue of whether the measures remained in violation after 1 April 2001, or more generally
the impact of events having occurred after the reque sts for establishment of this Panel, including the
effect of the removal of the import licensing regime as of 1 April 2001, on the claims presented to it.
6.29 In reality, it was clear in these proceedings from the very first exchange of submissions that
the elimination of India's import licensing regime in the course of the proceedings, as described byIndia itself, was an important part of the issues in  discussion throughout the proceedings.  The issue of
the effects of this event was brought to the Panel's attention from the beginning of the proceedings, in
the context of various arguments.
6.30 In its first submission, India divided its legal arguments in two sections, one of which related
exclusively to the measures to be applied by India after 1 April 2001.  Clearly, India argued
principally that the Panel should have refrained in the first instance from examining these measures as
they stood as of the date of its establishment, that is, in the context of the import licensing regime, and
India also argued that the Panel should have foun d any measures India may apply as of 1 April 2001
to be outside its terms of reference. The Panel recalls that it concluded, however, that it was
competent to examine the measures as they existed at the time of its establishment and that it would,indeed, not be considering any subsequent measures that India might take for the enforcement of the
existing measures before it.  Nonetheless, India also presented extensive arguments and evidence
concerning the situation after 1 April 2001 beyond these jurisdictional arguments.  India expressly
argued, as part of its legal argumentation in response to the claims, that the measures that it would be
applying as from 1 April would be consistent with its obligations under the GATT and the TRIMsAgreement.  Indeed, the very first section of India's legal argument in its first submission is entirely
devoted to this issue.
291
6.31 Indeed, as reflected in Section II of this repo rt (which was inserted using India's very own
words), India's latest articulation of its requests for findings to the Panel prior to the issuance of the
interim report, clearly suggests that it anticipated that these events were of potential relevance indetermining the type of recommendations to be made under Article 19.1 of the DSU and requested the
Panel to take them into account, were it to de cide to examine the measures as they existed and
operated under India's import licensing regime.  It stated that:
If the Panel were to conclude that the operation of Public Notice No. 60 and the trade
balancing provisions under India's former licensing regime was inconsistent with the
GATT, it should – following the practice of other panels – note that the licensing
regime had been abolished on 1 April 2001 and that it was therefore not necessary for
the Panel to recommend to the DSB in accordance with Article 19:1 of the DSU that
it request India to bring these measures into conformity with the GATT. (emphasis
added)
6.32 In addition, India presented arguments in the course of the proceedings to the effect that only
one manufacturer had yet to achieve the required level of indigenization and, as it highlights itself in
                                                     
291 See First submission of India, paras. 10 and following.WT/DS146/R
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its interim comments, requested the Panel to "limit any recommendation under Article 19.1 of the
DSU to the indigenization requirement that remains to be performed by that particular company with
respect to that model"292, thereby inviting a consideration of events having taken place in the course of
the proceedings in the Panel's Recommendations under Article 19.1.
6.33 It is therefore clear, in the Panel's view, not only that India could reasonably have expected
that the Panel would or could address the impact of the events which occurred in the course of the
proceedings, but that it could also reasonably anticipate that the consideration of these issues might be
specifically relevant to the Panel's recommendations  under Article 19.1 of the DSU, as reflected in its
own requests for findings.
6.34 It is worth noting in this respect also that the complainants, in addition to disagreeing with
India's assertion that it was not provided with a full opportunity to present arguments on the events at
issue, also do not deny that they themselves had the opportunity to respond to these arguments.Indeed, as will be noted below, the expression of their requests for findings to the Panel reflects this.
6.35 Paragraphs 8.4 to 8.30 of the Recommendations Section of the Report have been developed in
order to present more fully the arguments of the parties to clarify further the issue before the Panel in
the circumstances of this case.
6.36 Finally, with regard to India's allegation that it was not provided with adequate opportunity to
present evidence and arguments in relation to the elem ents of relevance to the Panel's analysis in its
recommendations section, the Panel notes that the only new piece of evidence presented by India was
evidence of repeal of Public Notice No. 60, which it had previously stated was not a necessary action
for it to take.
293
(b) India's argument that the matters addressed in the Recommendations section should be left to
a compliance panel.
6.37 India argues that the analysis conducted by the Panel under its Recommendations section
should have been left to a compliance panel.  In this argument, India draws a distinction between a
panel's obligation under Article 19.1 of the DSU to recommend that a violating measure be brought
into conformity and the distinct question of whether and how the respondent has complied with thisobligation, which is a matter for a compliance panel under Article 21.5.
6.38 India argues that Article 21.5 "does not distinguish between measures taken during the panel
proceeding" and those taken after the completion of its work.  In the view of India, a disagreement on
this issue, even occurring before the end of the initial panel proceedings, should be left to a
compliance panel, and the role of the initial panel should only be to take into account the situation
existing as of the request for establishment of the panel and record the parties' disagreement as to
subsequent evolutions.
6.39 The Panel first wishes to clarify the scope of the issue at stake here: contrary to India's
assertion, the Panel did not aim to analyse, under its Recommendations Section, any measures which
it had previously found to be outside its terms of reference: the analysis relates not to any new
measure which India might have taken in the course of the proceedings.  Its exclusive objective was to
examine the status of those measures which the Panel had identified to be covered by its terms of
reference in order to determine the nature and extent of the Recommendations it should make to the
DSB in relation to those measures.
                                                     
292 See Comments on the Interim Report by India, para. 16.
293 See First Submission of India, para. 14.WT/DS146/R
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6.40 The issue at stake here therefore relates exclusively to the extent to which it was appropriate
for this Panel to seek to address any evolutions of  the matter squarely within its terms of reference
which might have occurred in the course of the proceedings and the form in which it may address
them.
6.41 In the particular circumstances of this case, and for the reasons further elaborated in
paragraphs 8.31 to 8.63, the Panel found that the most appropriate way to discharge its mandate under
the DSU was to conduct an analysis of the issues presented to it regarding evolutions having arguably
affected the matter before it in the course of the proceedings in the context of its section on
Recommendations.
6.42 However, the Panel wishes to answer here the systemic argument raised by India that the
matter it addresses in this section should have been left to a compliance panel and that "Article 21.5
does not distinguish between measures taken during the panel proceeding and those taken after thepanel's work is completed", and that the issue of "how" a violating Member might bring its measures
into conformity was not within the competence of this Panel under Article 19.1.
6.43 In response to India's arguments concerning the competence of an Article 21.5 panel on the
matters addressed by this Panel in its Recommendations section, both complainants noted that a 21.5
compliance panel in any case only comes into play  following recommendations by the DSB to bring
certain measures into conformity with the relevant Agreements.
294  The role of a compliance panel is
precisely to address "disagreement as to the existence or consistency with a covered agreement of
measures taken to comply with the recommendations and rulings" of a previous panel.  The Panel
notes, in this regard, that the Appellate Body in US – Shrimp (21.5)  stated that Article 21.5 of the
DSU involves "in principle, not the original measures, but a new and different measure that was notbefore the original panel".
6.44 The Panel agrees that, reading the terms of Article 21.5 in their ordinary meaning in
accordance with the customary rules of interpretation reflected in Article 31 of the Vienna
Convention, the formal conditions of a compliance panel are in any case manifestly not met, since no
ruling or recommendation had yet been made, let alone adopted in this instance.  Furthermore, thePanel in this instance is no way attempting to pre-empt, in its analysis, what a compliance panel might
be led to examine in the future. The definition of a compliance panel's role actually assists in
distinguishing it from the analysis conducted by this Panel: as previously noted, the sole aim of the
analysis conducted in the Panel's recommendations section is to determine whether it was still
appropriate to make a recommendation notwithstanding India's assertion that the legal situation hadfundamentally changed and that there was nothing left to bring into compliance.  In concluding that
such a recommendation was appropriate, the Panel did not attempt to indicate how India was to bring
the relevant measures into compliance, or to prejudge on any future developments which may later
occur following such recommendations, which might, if need be, be referred to a compliance panel.
6.45 The Panel also notes that India disputes the reference made to the Appellate Body's report on
US – Certain EC Products , to the effect that where a panel has found a measure no longer to exist, it
is logically inconsistent for it to make a recommendation that that measure be brought into conformitywith the concerned Member's obligations under th e covered Agreements.   In India's view, this
reference is inappropriate because it concerned a case where both parties agreed that the measure had
ceased to apply, which is not the case here.  In response to India's arguments, both complainants
argued that the facts of that case did not suggest, as argued by India, that the parties were simply in
agreement on discontinuation of the measure.  Indeed, the Panel notes that there were some disputed
                                                     
294 See Oral Statement by the European Communities at the interim review meeting, para. 3, and Oral
Statement by the United States at the interim review meeting, para. 11.WT/DS146/R
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factual contentions in that case concerning the definition of the measure at issue, which were
addressed explicitly by the panel and the Appell ate Body. These suggest that the Appellate Body's
observation concerning the appropriateness of the recommendation foreseen in Article 19.1 of the
DSU was not a mere suggestion that the panel should have simply "endorsed" an agreement of the
parties on the cessation of the measures.  It also suggests that, contrary to India's suggestion, theagreement of the parties on the fact that the measure has ceased to apply was not the primary source
of the Appellate Body's conclusion.
6.46 More significantly perhaps, the Panel notes also  that the Appellate Body's motivation in that
case does not rely on the alleged fact that the parties had agreed that the measure no longer existed
but rather on the fact that " the Panel has found
" that the measure no longer exists.  That panel was
therefore not considered by the Appellate Body to be simply "endorsing" a fact agreed on by the
parties, but rather had made its own finding as to  the continued existence of the measure at issue.
Accordingly, the Panel has not modified its reference to this report of the Appellate Body.
(c) India's argument that the Panel could not "properly" conclude that the violation is still in
existence
6.47 While India does not contest that there can be no sense in making a recommendation to bring
into conformity a measure of which a panel is properly of the view that the violation has ceased toexist, it challenges that the Panel can, in this instance, properly have any view on the matter.  One of
India's arguments in this respect is that the Panel cannot reach this conclusion because the facts are indispute.  The Panel will merely note in this respect that it is the essence of any litigation process to
reach conclusions, where appropriate, on disputed issues.  What is more pertinent is whether there
was a proper legal basis for the Panel's analysis.
6.48 India argues in this respect that the terms of reference of a panel are limited to the matter
referred to it by the DSB, which excludes, in the view  of India, any matters arising in the course of the
proceedings.  At this point, the Panel merely wishes to recall its earlier observation that it did not
examine any new measures adopted subsequent to the requests for its establishment, having found that
such measures were not within its terms of reference and indeed, had not been the object of anyclaims by the complainants.  The Panel's Recommendations section concerns exclusively those
measures that  were in existence at the time of both complainants' requests for establishment of panels,
and which were within its terms of reference.  The detailed reasons which led the Panel, in the
circumstances of this case, to consider events subs equent to the Panel's establishment in the context of
its recommendations are reflected in paragraphs 8.31 to 8.63 of the revised Recommendations section.
6.49 India also argues that neither the United States nor the European Communities asked the
Panel to make any of the rulings set out in the Recommendations section of the Report.  However, as
will be also further reflected in the revised Recommendations section, both complainants, either
spontaneously or in reaction to India's arguments and the Panel's questions, had clarified the nature of
the findings they were requesting, and this included a request for findings that the measures were
inconsistent and a recommendation that they be br ought into conformity with India's obligations.
While it is true that both complainants argued that the changes subsequent to 1 April 2001 did notaffect the nature of their legal claims, they both co nsequently also argued that the measures should be
found to have remained inconsistent with the same provisions.
6.50 While they did not necessarily request that such findings be made separately in the context of
the Recommendations section as was done by the Panel
295, the complainants certainly envisaged that
the Panel may be led to consider the continued existence of violating measures, since they were
                                                     
295 See Oral Statement of the United States at the interim review meeting, para. 22.WT/DS146/R
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arguing that these measures continued to be in violation and expected the Panel to make a finding to
that effect.  The fact that the complainants may not have requested the Panel's assessment of this
matter in a particular form does not alter the Panel's general obligation, under Article 11 of the DSU,
to make an objective assessment of the matter before it and to assess how best to fulfil its mandate in
this regard within the limits of its terms of refe rence. This matter included, in this instance, the
measures and claims identified in the requests for establishment of a panel, and the Panel was
required, under its terms of reference, to make such findings as will assist the DSB in making
recommendations or in giving the rulings provided for in the relevant agreements concerning this
matter.  For these reasons, and those further elaborated in paragraphs 8.15 and following, the Panel
disagrees with India that its Recommendations sect ion was outside the scope of what was submitted to
it under its terms of reference.
6.51 India also argued that the Panel's recommendations were based on incomplete evidence, in
particular because it did not, in India's view, take account of the arguments produced by India
concerning the levels of indigenization reached by individual MOU signatories.   The Panel notes that
it had in fact reflected India's statement in this regard in paragraph 8.22 of its original
recommendations.   However, this had not altered the Panel's general legal conclusion on the matter.
The relevant paragraphs have been expanded to further clarify the Panel's analysis in this respect andreflect the parties' most recent exchanges on this matter (see paragraphs 8.46 to 8.49).
6.52 The Panel notes also that India produced new evidence to the effect that Public Notice No. 60
has been repealed, indicating that it previously had no reason to suspect that this could be relevant to
the Panel's analysis and therefore did not produce it before.  The Panel cannot agree with India's
argument for not producing this piece of evidence earl ier, namely that it did not suspect that the issue
would be of any relevance to the Panel's analysis.  In fact, as noted earlier, both India and the
complainants addressed this issue expressly in the course of the proceedings, and India had devoted a
section of one of its earlier submissions to the argu ment that Public Notice No. 60 did not need to be
repealed.
6.53 Leaving aside the issue that this last argument raises as to the actual relevance of the new
piece of evidence produced, even in India's own view, the Panel considered whether it was
appropriate to accept it at this late stage of the proceedings.  The complainants had diverging views on
the matter, since the European Communities expressed no opposition while the United States thought
it inadmissible.
296
6.54 Certainly, the Panel can only regret that a piece of evidence concerning a matter which was,
in its view, clearly within the purview of matters discussed in the proceedings, was produced at such a
late stage in the proceedings. In the interest of completeness, and in keeping with its general approach
in its recommendations, the Panel nonetheless decided to accept to consider the new evidence, in light
also of the fact that this evidence only sought to confirm the official status of the measure as it had
already been argued and discussed during the proceedings.  It therefore did not bring into the debates
any fundamentally new issue that would have required extensive additional discussion among the
parties.  This new evidence is taken into account in paragraphs 8.35 and following and 8.60 andfollowing.
(d) India's argument that the Panel inappropriately prescribes a "retrospective" remedy
6.55 India challenges the Panel's analysis of "residual" export obligations as having accrued in
relation to past imports and its conclusion that they are therefore not of a different nature from any of
the previously accrued export obligations, even if no import licenses are currently being generated.  In
                                                     
296 See ibid, para. 19.WT/DS146/R
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India's view, this implies that the Panel is requesting it to "remove the consequences of a past illegal
act" and thus providing a retrospective remedy not foreseen by the DSU, whose remedies are limited
to "the cessation of the illegal act".
6.56 While India's systemic concern that the DSU generally does not aim at providing
"retrospective" remedies may be valid, this is not, in the Panel's view, what the Panel has done here.
6.57  The Panel has not sought, in its analysis, to determine the nature or modalities of remedies to
be provided by India, beyond determining whether  there was still a need to make a recommendation
to the DSB in order to remedy an identified viola tion.  What the Panel has sought to address in this
section is what remains as of today  of a measure found to be illegal.  The Panel has said nothing of
any past fulfilment of export obligations or of any need to compensate manufacturers for any such
past executions  of illegal obligations.
6.58 To the extent that this issue is even one of remedy, it is one of prospective remedy, not
retrospective as argued by India.  Indeed, the Panel's analysis corresponds to what India itself
identifies as the correct interpretation of remedies under the WTO: the "cessation of an illegal act", for
the future. By contrast, the implementation of the rulings in the Australia – Automotive Leather II
case referred to by India in its interim comments297, involved repayment of subsidies already paid
over past years, which is clearly "retrospective".
6.59 Overall, including for the reasons above, the Panel was not convinced by India's arguments
that it inappropriately performed the role of a co mpliance panel, or made rulings on issues not within
its terms of reference, or provided any retrospective remedy in its Recommendations Section.
However, the Panel is fully aware that the approach it has chosen to adopt here as a result of the
particular circumstances of the case is not one that will necessarily be appropriate in other cases.  Inrevising the Section in light of the parties' comments, the Panel was mindful to fully explain the
purpose of its analysis and the specific circumstances which led it to adopt this approach in order to
fulfill its mandate under the DSU, and to adapt as appropriate its whole analysis with a view to
clarifying its exact nature and scope.
6.60 The Panel notes in this respect the concern expressed by the United States that while it was
understandable in the circumstances of this case that the Panel chose to introduce this analysis, in
particular in light of India's arguments, this should not be seen to suggest that there is a general
obligation for panels to systematically "reassess", at the time of their recommendations, the existence
of previously established violations. As is explained in detail in the revised Recommendations section,
the Panel agrees that the approach it has chosen to follow here does not, indeed, imply such a generalobligation.  However, in conclusion, the Panel must point out to parties that the way in which they
plead a case and develop their arguments cannot but have repercussions on the reasoning and
conclusions of the Panel;  if it were otherwise, th e Panel would be derelict in its duty under Article 11
of the DSU to make an objective assessment of the matter before it.
VII. FINDINGS
7.1 This dispute is based on the facts described in Section II above.  The parties' claims and
requests for findings are summarized in Section III of our Report.
298
                                                     
297 See Comments on the Interim Report by India, para. 28.
298 As will be apparent from the following section, some of the facts of the case were a subject of
debate.WT/DS146/R
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7.2 In this case, the United States and European Communities successively requested the
establishment of panels concerning certain matters.  The DSB decided, in accordance with Article 9 of
the DSU, to entrust a single panel with the examination of both complaints.299
7.3 Both the United States and European Communities allege violations of Articles III:4 and XI:1
of GATT and of Article 2 of the TRIMs Agreement in relation to certain Indian measures affectingthe automotive industry.  Although these claims related to the same measures, they partly differed in
their specific details.  As a consequence, the Pane l has sought to carefully reflect these differences in
its report.  It has also been mindful to organize its examination and present its findings to the DSB in
such a manner as to in no way impair the rights which the parties to the dispute would have enjoyed
had separate panels examined the complaints.  Th is is in conformity with the requirements of
Article 9.2 of the DSU.  Neither party having reques ted the submission of separate reports as foreseen
in Article 9.2 of the DSU, this report addresses both the United States and the European Communitiescomplaints in a single report.
7.4 India has raised defenses relating to the exact nature of the matter before the Panel and the
extent of its jurisdiction.  These jurisdictional arguments, which condition the Panel's ability to
proceed further with the analysis of the claims, are addressed first.  Before doing so, this Report
begins with an examination of preliminary issues th at arose in the course of the proceedings relating
to the clarification of the claims.  The Report then clarifies the measures within the Panel's terms of
reference.  This will assist the Panel in subsequently addressing the detail of India's procedural
arguments.
A. C
LARIFICATION OF THE CLAIMS IN THE COURSE OF THE PROCEEDINGS AND REQUESTS FOR
PRELIMINARY RULINGS
7.5 During the first meeting with the parties, Indi a requested the Panel to ask the complainants a
number of questions in order to clarify the claims.  India indicated that, depending on the
complainants' answers to these questions, it would seek preliminary rulings from the Panel concerning
the precise scope of the complaints.  These requests for clarification and the Panel's approach to them
will be detailed in this section.
7.6 At the first meeting,
(1) India requested the Panel to ask the complainants whether the measures on which
they were requesting rulings were those that India was applying at the time when the
requests for the establishment of a panel were submitted to the DSB or conversely,
whether the measures were those that India might be applying as from 1 April 2001.It advised that "[i]f the complainants were to respond that they consider India's future
measures to be part of the present proceedings, [India] would request the Panel to
issue a preliminary ruling to the effect that these measures fall outside of its
mandate".
300
(2) India also requested the Panel to ask the complainants to clarify whether in their
view, the measures at issue in this proceeding involved the enforcement of MOUsthrough the import licensing regime and PN60, or conversely, whether the claims
were limited to the enforcement of MOUs outside the licensing regime and PN60. It
advised that "[i]f the complainants were to respond that their complaints relate to the
enforcement of the MOUs through the import licensing regime and Notice N° 60,
                                                     
299 See paragraphs 1.3 and 1.4 of this Report for details.
300 See Statement of India at the First substantive meeting, para. 8.WT/DS146/R
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India would ask the Panel to issue a preliminary ruling to the effect that both
complaints are inadmissible because the DSU cannot be invoked in respect of the
same matter twice."301
7.7 In response to this request, the Panel invited the parties to ask each other any questions that
they felt might be useful. It indicated its own intention to ask the parties a range of questions,
including questions relating to the preliminary issues raised by India. The Panel indicated that, if
necessary, it would revert to the issue of preliminary rulings depending upon the parties' responses to
these questions.  This approach was in line with the "conditional" character of India's request for
preliminary rulings. In the view of the Panel, it was also appropriate to seek further clarifications on
the nature of the matter before it. 302
7.8 In light of the complainants' responses to questions, India indicated in its second submission
that:
"the European Communities and the United States appear[ed] to accept the validity of
[India's] arguments because they made two matters clear.  First, the European
Communities and the United States clarified that their complaints are not directed
against the application of discretionary licensing system to cars and components butagainst Public Notice No. 60 and the MOUs as such.  Second, the European
Communities and the United States clarified that their complaints relate to the
measures applied by India at the time when they submitted their requests for the
establishment to the DSB, and not to any measures that India may take in the future.
With these clarifications as to the scope of the rulings requested from this Panel, twocentral arguments that India had advanced in its First Submission are no longer
relevant.  India's argument that no WTO Member may resort to the DSU on the same
matter twice is no longer relevant because the European Communities and the United
States have made clear that their case does not rest on the application of the
discretionary licensing system that had been the subject of their prior complaints.India's argument that the Panel is not competent to rule on measures that India may
take after 1 April 2001 is also no longer relevant."
7.9 At that stage therefore, India did not pursue its initial request for a preliminary ruling, and the
Panel did not revert to it.
7.10 However, India made other comments at the same stage that led the Panel to believe that there
was still some confusion between the parties as to the exact scope of the claims and that India's
comments above were conditional. In particular, India indicated two paragraphs below the above
quotation that it would:
                                                     
301 Ibid.
302 We recall in this respect the observation made by the panel in Canada – Measures Affecting the
Export of Civilian Aircraft , (hereinafter " Canada – Aircraft "), WT/DS70/R, that "in our view, there is no
requirement in the DSU for panels to rule on preliminary issues prior to the parties' first written submissions.
Nor is there any established practice to this effect , for there are numerous panel reports where rulings on
preliminary issues have been reserved until the final re port.  Furthermore, there may be cases where the panel
wishes to seek further clarification from the parties before providing a preliminary ruling." para 9.15.  In thiscase, the request for a preliminary ruling came at a later stage in the proceedings, and was by its own termsconditional upon further clarifications.   In the view of the Panel, these clarifications helped in identifying thematter sufficiently to make it possible, to proceed without a preliminary ruling while taking care to ensure full
respect for due process requirements for all parties.WT/DS146/R
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"assume throughout this submission that the Panel will examine the operation of
Public Notice No. 60 and the MOUs as such, that is independently of the application
of the discretionary licensing system.  Specifically, India will assume that the Panel
will examine whether the trade balancing and indigenization provisions set out in
Public Notice No. 60 and the MOUs would have been inconsistent with Articles III:4and XI:1 of the GATT even if India had not applied any import licensing restrictions
for cars imported in the form of CKD/SK D kits and for car components at the time
when the requests for the establishment of a panel were submitted .  If the Panel does
not share this understanding of the scope of the complaints, India would appreciate it
if the Panel were to alert India to that effect before the next meeting and give it the
opportunity to make a supplementary written submission." (emphasis in original)
303
7.11 The Panel did not consider it appropriate to simply endorse or reject India's reading of the
claims before it as suggested. Rather, it believed it was appropriate, and in conformity with the
requirements of due process, to ensure that the co mplainants were given an opportunity to clarify the
claims further in order to ensure India a full opportunity to respond comprehensively to the claims as
presented.
7.12 In a letter sent to the parties prior to the second meeting, the Panel therefore declined to make
the interpretation of the claims before it as suggested  by India. Instead, it invited the parties, including
India, to present all the arguments that they felt may be of relevance in the course of the second
meeting so as to allow the Panel to make an objec tive assessment of the matter before it, as required
by Article 11 of the DSU.304
7.13 The Panel then put a number of additional questions to the parties after the second meeting.
These included questions to India concerning its understanding of the claims following exchanges
between the parties in the course of the second meeting. The Panel wished to further ensure that India
was in a position to present the arguments and defenses it wished to rely on, in light of the
                                                     
303 Second Submission of India, para. 4.
304 The Panel addressed the following message to the parties prior to the second meeting:
"The Panel wishes to respond to a point raised in the Indian submission, in order to ensure thatall parties are in a position to prepare themselves adequately for the second substantivemeeting.
In paragraph 4 of its second submission, India indicates that "[i]n light of the
clarifications provided by the complainants, India will assume throughout this submission that
the Panel will examine the operation of Public Notice No. 60 and the MOUs as such, that isindependently of the application of the discretionary licensing system.  Specifically, India willassume that the Panel will examine whether the trade balancing and indigenization provisionsset out in Public Notice No. 60 and the MOUs would have been inconsistent withArticles III:4 and Article XI:1 of the GATT even if India had not applied any import
restrictions for cars imported in the form of SKD/CKD kits and for car components at the time
when the requests for the establishment of a panel were submitted".  India then invites thePanel to alert India before the meeting if it does not share its understanding of the scope of thecomplaint and give it the opportunity to make a supplementary written submission.
The Panel does not intend to put forward or endorse, at this stage in the proceedings,
any interpretation of the "scope of the complain ts", unless the parties were to reach a common
understanding in this matter. In this light, we would strongly urge all parties to present to the
Panel, during the second meeting, the full range of arguments which they feel are or may be ofrelevance to the resolution of the dispute, so as to enable the Panel to make an objectiveassessment of the matter before it in accordance with the terms of Article 11 of the DSU.  Inparticular, India is not constrained in bringing forward arguments in defense in response to the
claims submitted."WT/DS146/R
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complainants' latest clarifications.  In the Pane l's view, this procedure adequately preserved the
interests of all parties, including India's opportunities to respond fully to the claims presented.
7.14 In light of the evolving factual circumstances and successive clarifications in the course of the
proceedings, the Panel sought to give the parties adequate opportunity at each stage to pursue the
possibility of reaching a mutually satisfactory solution, as required by the final sentence of Article 11of the DSU.  The Panel thus drew the parties' attention to this provision at each of its formal meetings
with them and when so requested, afforded them a dditional time to present their submissions to the
Panel.
B. C
LARIFICATION OF THE MEASURES WITHIN THE TERMS OF REFERENCE OF THIS PANEL
7.15 India has raised a number of arguments relating to the competence of this Panel to examine
the claims before it.  Some of these arguments relate to the identification of the measures properly
within the Panel's terms of reference.  Since these terms of reference determine a panel'sjurisdiction
305, the Panel will start its analysis with a clarification of the measures articulated within
those terms. In this context, it addresses India's arguments relating specifically to the ambit of the
measures under review.
7.16 This initial clarification of the measures before the Panel will also assist in addressing, in the
next section of the Report, India's other argument s relating to the Panel's competence to examine the
matter before it.
1. Measures identified in the complainants' requests for establishment of a panel
7.17 This Panel was established with standard terms of reference in accordance with Article 7 of
the DSU. The measures and claims within those terms of reference are therefore those that have been
identified in the complainants' requests for establishment of a panel.
7.18 The United States' request for establishment of a panel indicated:
"The United States considers that certain Indian measures affecting trade and
investment in the motor vehicle sector are inconsistent with India's obligations under
the WTO Agreement.  The measures in question require manufacturing firms in the
motor vehicle sector to achieve specified levels of purchase or use of domesticcontent; to achieve a neutralization of foreign exchange and to balance the value of
certain imports with the value of exports of cars and components over a stated
period; and to limit imports to a value based on previous exports.   These
requirements are enforceable under Indian law and rulings (including under the
Foreign Trade (Development and Regulation) Act 1992).  In addition, manufacturingfirms in the motor vehicle sector must comply with these requirements in order to
obtain certain Indian import licenses.  The United States believes that the Indian
measures in question are therefore inconsistent with India's obligations under
Article III:4 and XI:1 of the General Agreement on Tariffs and Trade 1994 (GATT
1994) and Articles 2.1 and 2.2 of the Ag reement on Trade-Related Investment
Measures.
The measures in question are Public Notice No. 60 ((PN)/97-02) of the Indian
Ministry of Commerce, published in the Gazette of India Extraordinary, effective
                                                     
305 See Report of the Appellate Body in India – Patents  "The jurisdiction of a panel is established by
that panel's terms of reference, which are governed by Article 7 of the DSU", WT/DS50/AB/R, para 92.WT/DS146/R
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12 December 1997; the Foreign Trade (Development and Regulation) Act 1992;  the
Export and Import Policy, 1997-2002;  memoranda of understanding signed by the
Government of India with manufacturing firms in the motor vehicle sector pursuant
to Public Notice No. 60;  as well as amendments thereto, other legislative and
administrative provisions implemented thereby or consolidated therein, andimplementing measures or associated administrative actions taken thereunder."
(emphases added)
306
7.19 The European Communities indicated in its request for establishment of a panel:
"The measures concerned are contained in:
- Public Notice No. 60 (PN 97-02) of the Indian Ministry of Commerce,
effective 12 December 1997;  and
- the Memorandums of Understanding (MOUs) entered into by certain
manufacturers of automobiles with the Government of India pursuant to
Public Notice No. 60.
The above measures require manufacturers of automobiles to sign an MoU as a
condition for obtaining licenses for importing automotive products that are currently
subject to import restrictions. According to the Indian authorities, the MOUs are"binding" and "enforceable" instruments, which shall remain valid after the date when
those restrictions are eliminated. The MOUs require (i) to establish "actual production
facilities" in India; (ii) to make a minimum investment; (iii) to achieve a certain level
of "indigenisation"; and (iv) to export a certain amount of automotive products.
The European Communities considers that the requirements imposed by the above
measures are in violation of Articles III:4 and XI:1 of GATT and of Article 2.1 of the
TRIMs Agreement."
7.20 Both requests thus included express reference to Public Notice No. 60 and the MOUs signed
thereunder and to the specific conditions provided for under those measures. As will be detailed
below, the complainants explained in their submissi ons that they were specifically challenging two of
these conditions, namely, the "indigenization" and "trade balancing " conditions.
7.21 The United States requested the Panel to find that the indigenization and the trade balancing
requirements imposed by Public Notice No. 60 and the MOUs, were inconsistent with Article III:4
and XI:1 of GATT 1994 and Articles 2.1 and 2.2 of the TRIMs Agreement and to request India to
bring these measures into conformity with its obligations.
307  The European Communities, similarly,
requested the Panel to find that the trade balancing requirements contained in Public Notice No. 60
and in the MOUs concluded thereunder were inconsistent with Articles III and XI of the GATT 1994
and Article 2 of the TRIMs Agreement and that the indigenization requirements contained in these
measures are inconsistent with Articles III and XI of the GATT 1994 and with Article 2 of the TRIMs
Agreement.308
                                                     
306 WT/DS175/4.
307 See para. 3.1 above.
308 Both complainants also referred in their requests to related measures, concerning which they did not
make distinct claims in the course of the proceedings.WT/DS146/R
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7.22 It is not disputed that Public Notice No. 60 was in existence and in operation at the time of
both requests for establishment of a panel.  It is also not disputed that most major car manufacturers
had already, at that time, entered into MOUs as foreseen in Public Notice No. 60, which included,
inter alia , the two conditions specifically referred to by the complainants. These measures as they
existed at the time of the complainants' requests for establishment of this Panel are thus expresslycontained in the Panel's terms of reference and are consequently within its jurisdiction in accordance
with the terms of Articles 6.2 and 7 of the DSU.
309
2. Evolution of the measures in the course of the proceedings
7.23 India indicated in the course of the proceedings that import licensing requirements were to be
removed on the products at issue in this dispute as of 1 April 2001, in order to comply with the
implementation obligations agreed with the United States and the European Communities in prior
disputes concerning quantitative restrictions maintained by India for balance-of-payments purposes.310
Nevertheless, India also explained that the provisi ons of existing MOUs would continue to apply, to
the degree that they were operative as of 1 April 2001.
7.24 India advised that the implications of these changes would be that as of 1 April 2001, no new
MOUs would be required under Public Notice No. 60 and imports of previously restricted kits and
components could be made freely as from that da te.  However, signatories of existing MOUs under
Public Notice No. 60 would continue to be required to discharge outstanding obligations under the
MOUs they had entered into.  In particular, they would continue to be required to meet the
indigenization condition foreseen in Public Notice No. 60 and their MOU and to discharge export
obligations accrued in relation to previously restricted imports under the "trade balancing" condition.
7.25 In India's view, the events of 1 April 2001 modify the legal situation before the Panel.  It
argues in particular that any measures which India might apply as of 1 April 2001 would fall outside
the terms of reference of this Panel.311  It also argues that the measures before the Panel "as applied
after 1 April 2001" (i.e. the remaining obligations under the MOUs), will in any case be consistent
with the GATT and TRIMs Agreements.312
7.26 A WTO panel is generally competent to consider measures in existence at the time of its
establishment. This power is not necessarily adversely affected simply because a measure under
review may have been subsequently removed or rendered less effective.  Panels in the past have
examined discontinued measures where there was no agreement of the parties to discontinue the
proceedings.313
                                                     
309 This observation on the basis of the terms of reference is without prejudice to the examination, in
the next section of this report, of India's further challenges to the Panel's competence to examine the case ondistinct grounds.
310 India – Quantitative Restrictions (complaint by the United States) (WT/DS90), and India -
Quantitative Restrictions on Imports of Agri cultural, Textile and Industrial Products ( complaint by the
European Communities) (WT/DS96).   The agreed period for implementation of the DSB recommendations inthe case concerning the United States is contained in document WT/DS90/15, circulated on 17 January 2000(US Exhibit – 9).  The mutually agreed solution reached  between India and the European Communities in their
dispute is contained in document WT/DS96/8, circulated on 6 May 1998 (European Communities Exhibit – 8).
311 See paras. 4.73 to 4.80 above for a more complete description of India's arguments.
312 See for example paras. 4.113 and 4.121 above.
313 See for instance the Panel Report on US – Wool Shirts and Blouses , WT/DS33/R, adopted on
23 May 1997, as upheld by the Appellate Body Report, para. 6.2 (DSR 1997:I, 343), where the measure waswithdrawn following the issuance of the interim report, and the panel nonetheless issued a complete report.  See
also the Panel Report on Indonesia – Autos  where the panel proceeded with its examination of the claims despiteWT/DS146/R
WT/DS175/R
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7.27 In any event, the complainants dispute India's contentions about the ramifications of the
events of 1 April 2001.The complainants have clearly indicated that they are requesting the Panel to
find that the measures were inconsistent with the cited provisions as of the date of this Panel's
establishment and that they have remained  so subsequently. 314   The complainants consider that the
events of 1 April 2001 have no effect on their legal claims, because these do not rest on the continuedexistence of import licensing after 1 April 2001.
7.28 While India has indicated that Public Notice No. 60 has ceased to apply as of 1 April 2001, it
is not disputed that the MOUs signed in accordance with its terms did not ipso facto  cease to exist at
the same time. India has in particular confirmed that "it is not the intention of India to release the car
manufacturers from the commitments they have assumed under the MOUs as a result of imports of
SKD/CKD kits prior to 1 April 2001"
315 and that signatories were still required to fulfill the
indigenization condition, although India indicated in the later stages of the proceedings that as amatter of fact, all but one of the signatories had achieved the required level of indigenization.
Therefore, while the framework governmental measure which initially led to the signature of the
MOUs may have ceased to "operate", the MOUs themselves have remained in existence.  Indeed, the
practical implications of this dispute rest primarily on their continued  existence after 1 April 2001.
7.29 In light of the foregoing, the Panel is of the view that it is not prevented by subsequent events
which impacted upon the measures before it, from examining these measures as they stood at the date
of establishment of the Panel.
7.30 However, the Panel also recognizes that it ma y need to consider whether these developments
affect the continued relevance in the post-April 2001 period, of any findings and conclusions it might
make as to the consistency of the measures as at the date of its establishment.  Article 19.1 requires apanel that has made a finding that a measure is in violation of a covered Agreement, to recommend
that the Member concerned bring the measure into  compliance with that Agreement. The Panel's
ability to make meaningful recommendations to the DSB under Article 19.1 of the DSU may be
affected if any changes in the measures had occurred which would affect the continued existence of
any violations that might be identified as at the date of establishment. However, the Panel does notbelieve that these issues relate to its initial competence to examine the measures as they stood as of
that date, but rather, to the nature and scope of any recommendations it might make. It will therefore
address these aspects more fully at a later stage in the context of its conclusions and
recommendations.
316
                                                                                                                                                                    
a notification in the course of the proceedings by the respondent that the programme in issue had expired: "(…)
In any event, taking into account our terms of reference,  and noting that any revocation of  a challenged measure
could be relevant to the implementation stage of the dispute settlement process, we consider that is appropriatefor us to make findings in respect of the National Car Programme.  In this connection, we note that in previous
GATT/WTO cases, where a measure included in the terms of reference was otherwise terminated or amended
after the commencement of the panel proceedings, panels have nevertheless made findings in respect of such ameasures" (WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, para. 14.9, DSR 1998:VI, 2201).  Asmentioned by that panel, there have also been such inst ances of continued proceedings despite expiry or partial
disappearance of the measures at issue under the GATT: see for instance EEC –Apples I (Chile)  (BISD 27S/98)
paras 2.2 and 2.4;  United States – Prohibition of Imports of Tuna and Tuna Products from Canada
(BISD 29S/91), paras. 2.8, 4.2 and 4.3, where despite some evolution in the measures in the course of theproceedings and encouragement from the Panel to reach a mutually agreed solution, there was no agreement
among the parties that such a solution had been found and the panel issued a complete report.
314 See paras. 3.1, 3.5 and 4.92 to 4.94 above.
315 First Submission, para. 11
316 See Section VIII:B below.WT/DS146/R
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3. Measures not within our terms of reference
7.31 India has also raised a distinct argument to the effect that any future measures which India
may take after 1 April cannot be within the terms of reference of this Panel.  This argument requires a
separate analysis.
7.32 India indicated in its First Submission that it was unclear from the complainants' submissions
whether they were challenging measures that India was applying as of the date of their requests for
establishment of a panel, or measures that India "might" take in the future.
7.33 India argued that a valid complaint required that "both the measures at issue before a panel
and the legal issues to which they give rise must have existed at the time of the request for
establishment of a panel". It indicated that "the measures which India will apply as from 1 April 2001
to comply with the mutually agreed solution nego tiated with the European Communities and the DSB
ruling sought by the United States fall outside the Panel's terms of reference".  India highlighted that"[a]lthough the European Communities and the United States allege that India is currently violating its
obligations under the GATT and the TRIMs Agreement, many of their arguments relate to measures
India might  take after 1 April 2001 and legal issues that might  consequently arise at that time."
317
India argued that any future enforcement measures which India might take after 1 April to enforce the
MOUs are not within the terms of reference of this Panel, because "[u]nder the DSU, Members maynot bring complaints on proposed measures nor may they request advisory rulings on potential future
issues".
318 It also argued that "… these complaints - should events substantiate them – should
appropriately be made in a dispute settlement proceeding initiated after 1 April 2001."319
7.34 The Panel agrees with India's contention that hypothetical future measures which it could, but
might not take, including any future action that Indi a might take for the enforcement of Public Notice
No. 60 or the MOUs, would not fall within the scope of this Panel's terms of reference.
7.35 The complainants subsequently clarified that they were not seeking rulings on any measures
which India might take after 1 April 2001 for the future enforcement of the conditions being
challenged. Their claims concerned the measures that India was applying at the date of establishment
of the Panel and would continue to apply subsequently.320
                                                     
317 First Submission, para. 20 (emphases in original).
318 First Submission, para. 17. In India's view,
"although the European Communities and the United States allege that India is currentlyviolating its obligations under the GATT and the TRIMs Agreement, many of their argumentsrelate to measures that India might take after 1 April 2001 and legal issues that mightconsequently arise at that time.  Both subm issions often leave the reader confused as to
whether the legal arguments relate to the factual situation before or after the elimination of the
discretionary licensing regime for SKD/CKD kits."
319 First Submission, para 26.
320 The European Communities thus explained that it was
"not asking the Panel to rule that India would infringe the GATT and the TRIMs Agreement if'India were to do this or do that' in order to enforce the MOUs.  The European Communities
claims that already the existence of binding and enforceable MOUs is as such inconsistent
with the GATT and the TRIMs Agreement, regardless of whether any specific action needs tobe taken. (…) 'Finally, the European Communities agrees with India that the Panel 'must baseits rulings on inconsistencies that had already occurred at the time of the request for the[establishment of the Panel].  However, the continued existence and enforceability of theMOUs after 1 April 2001 does not result from any additional measure taken by the Indian
Government after that request, but exclusively from the terms of the MOUs concluded by theWT/DS146/R
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7.36 Further to the complainants' clarifications, India indicated in its second submission that
"(…) the European Communities and the United States clarified that their complaints
relate to the measures applied by India at the time when they submitted their requests
for the establishment to the DSB, and not to  any measures that India may take in the
future.  With these clarifications as to the scope of the rulings requested from thisPanel, two central arguments that India had advanced in its First Submission are no
longer relevant.  India's argument that  no WTO Member may resort to the DSU on
the same matter twice is no longer relevant because the European Communities and
the United States have made clear that their case does not rest on the application of
the discretionary licensing system that had been the subject of their prior complaints.
India's argument that the Panel is not competent to rule on measures that India may
take after 1 April 2001 is also no longer relevant. "(emphasis added).
321
7.37 The Panel will thus not be considering any future measures which India might take after
1 April 2001.
C. THE PANEL 'S COMPETENCE TO CONSIDER  THE MATTER BEFORE IT
7.38 The Panel recalls its conclusion that both comp lainants have specifically identified two
conditions under Public Notice No. 60 and the MOUs signed thereunder in their requests forestablishment of a panel in this case: the "indigenization" and "trade balancing" conditions. It is
against these particular conditions that their claims are directed. The Panel has also concluded that
these measures are expressly within the Panel's terms of reference and thus within its jurisdiction in
accordance with the terms of Articles 6.2 and 7 of the DSU.  As explained in paragraph 7.32, the
claims should be considered as of the date of establishment of the Panel, as was requested by bothcomplainants and as was recognized to be appropriate by India.
 322
7.39 India has not disputed that Public Notice No. 60 and the MOUs, including the trade balancing
and indigenization conditions thereunder, are properly within the Panel's terms of reference.
However, it has raised a number of additional arguments to those addressed above, to the effect that
this Panel still cannot validly examine these claims. The Panel's observations as to its express terms ofreference were without prejudice to the consideration of these arguments of India.
7.40 India has expressly raised three distinct challenges in this respect:
(a) India argued that certain claims have already been decided on between it and the
United States through the rulings adopted by the DSB in the India – Quantitative
                                                                                                                                                                    
Indian Government before that date.  Thus, the inconsistencies claimed by the European
Communities existed from the moment of the conclusion of the MOUs."
The United States, for its part, clarified that:"the US complaint is not directed at any pa rticular method or means of enforcing the MOUs
and Public Notice No. 60.  The US complaint is  instead directed to the indigenization and
trade balancing requirements as such, and these requirements have not changed.  These
requirements have imposed the same obligations on car manufacturers since the date that the
MOUs were signed, and it is the US position that those obligations are themselves inconsistentwith India's WTO commitments.  What matters is that those obligations are binding andenforceable; what means India chose or will choose to enforce them is simply not relevant tothe US legal claims in this dispute."
321 Second Submission, para. 2.
322 First Submission, para. 19.WT/DS146/R
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Restrictions dispute, and that the principle of  res judicata applies to prevent the re-
litigation of these claims;
(b) It also asserts that these claims have already been resolved between India and the
European Communities through the notification of a mutually agreed solution(hereafter "MAS"), and that the terms of the MAS bind the European Communities
and this Panel;
(c) India also argued in its First Submission that the claimants may not raise new legal
claims with respect to a measure that must be  eliminated in any case as a result of the
abovementioned DSB ruling and MAS. It supports this proposition in two ways, by
alluding to a suggested principle of "abusive splitting" in the context of different legalclaims brought at different stages in relation to the same measures, and by separately
arguing that it would be needless to consider new grounds to determine the validity of
measures that are to be brought into compliance in any event.
7.41 The Panel addresses each of these arguments in turn in order to ascertain its competence to
examine the claims before proceeding further.
1. Are any of the United States' claims barred by the principle of res judicata?
7.42 In India's view, the United States' initial submission suggested that it was attempting to obtain
a new ruling on a matter which had already been decided on between India and the United States
through the recommendations of the DSB in their India – Quantitative Restrictions  dispute, namely,
the inconsistency of India's discretionary import licensing system under its Export Import Policy of
1997-2002 (hereafter "EXIM Policy") with Article XI of GATT 1994.
7.43 India's reliance on the principle of  res judicata evolved in the course of the proceedings. This
has coincided with its evolving view as to the nature and ambit of the United States claims as they
were further clarified. India's reliance on the principle was conditional upon the way the claims wereclarified and upon the way the Panel would choose to view the measures before it. The Panel must
therefore first clarify whether the conditions on which India considered res judicata  to be raised as a
defense are met, to determine whether there is a n eed to proceed further with the examination of this
argument.
(a) Arguments of the parties and scope of India's invocation of the doctrine of res judicata
7.44 As noted above, India argued in its First Submission that the matter before the Panel was
res judicata with respect to at least some of the United States claims. India argued that  res judicata  is
a firmly established principle in international law which must be considered to constitute an inherent
part of the WTO dispute settlement process.
323 In India's view, the principle prevents the re-
submission of the same dispute between the same parties to a new panel. It considered that the United
States had already obtained a ruling that "the discretionary licensing scheme administered by the
Ministry of Commerce is inconsistent with Article XI" in the India – Quantitative Restrictions  ruling.
In India's view, that ruling also covers the "operation and application of the discretionary licensing
system in respect of all products that were notified under Article XVIII:B", including the products of
which CKD/SKD kits are composed.
7.45 The United States, on the contrary, considered that India has not demonstrated the relevance
of the principle of  res judicata to WTO dispute settlement. It argued that in any case, the measures
                                                     
323 See First Submission, para. 40.WT/DS146/R
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and claims in this dispute are different from those at issue in India – Quantitative Restrictions .
Consequently, it asserted that the India – Quantitative Restrictions  panel could not and did not
address the matter brought before this Panel and that this Panel should not engage in an analysis oflegal notions not called for by the circumstances of the case.
7.46 In its second written submission, India considered that through their clarifications, the
claimants had confirmed that their assertion was essentially that the measures as identified in the
terms of reference, namely, conditions contained in Public Notice No. 60 and the MOUs executed
under Public Notice No. 60, impose requirements and restrictions within the meaning of Articles III:4and XI:1 of the GATT and the corresponding prov isions of the TRIMs Agreement independently of
the application of the discretionary licensing scheme that India was obliged to eliminate as a result of
the prior proceedings. Based on that perception of the claims, it indicated that it "assumed that the
issue before the Panel is no longer the scope of the principle of  res judicata but rather, the question of
whether Public Notice No. 60 and the MOUs impose requirements and restrictions even in theabsence of the licensing scheme for CKD/SKD kits"
324 and confirmed in its second submission that its
argument on res judicata  was no longer relevant to the case.325
7.47 Nevertheless, India also indicated in its second submission that in its view, the Panel was
required to examine whether the measures would have been inconsistent with the covered Agreements
"even if" there had been no import licensing.326  It later confirmed that if the Panel were to examine
these measures "in the presence" of import licensing, then India was continuing to argue that the
matter had been adjudicated upon already and could not be examined by the Panel.327 Thus by that
stage, it seemed that India's invocation of the doctrine of res judicata  was conditional, depending on
whether the claimant was calling for its claims to be considered "in the presence of" import licensingor as "if there had been no import licensing in place" at the date of the Panel's establishment.
7.48 In order to determine whether the Panel needs to examine India's res judicata  argument, it
therefore needs to give further attention to the clarif ications made by the United States as to the exact
role of the import licensing system in its claims and determine whether the existence of import
licensing at the time of establishment of the Panel is  a factor to be taken into account in the Panel's
analysis.
(b) Role of India's import licensing system in the United States' claims
7.49 Further questions between the parties and from the Panel sought to resolve this issue.
Paragraphs 7.78 to 7.80 below outline the clarification of the claims between the parties in order toaccurately identify the matter before this Panel in the context of a res judicata  analysis. For present
purposes, it merely needs to be noted that those clarifications confirmed that the United States was
asking for a ruling on the identified conditions in the context of India's discretionary licensing regime.
7.50 In response to a question by India, the United States indicated that it would not be a correct
reflection of the facts for the Panel to assume in its legal analysis that there was no import licensing in
place at the time of establishment of the Panel. It further clarified the role of import licensing in its
claims as follows : "the limited relevance of these licenses is that India used them to induce  car
manufacturers in India to accept the indigenization and trade balancing requirements (…) What is
                                                     
324 See response to Question 36 of the Panel.
325 See Second Submission para. 2.
326 See Second Submission para. 4.
327 See response to Question 109 of the Panel, where India indicated that "[t]he principle of res judicata
would only be relevant if the Panel were to decide to examine the operation of Public Notice No. 60 and thetrade balancing provisions in the MOUs under the licensing scheme  that India was obliged to eliminate as a
result of the complainants prior invocations of the DSU (emphasis added)".WT/DS146/R
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relevant, therefore, is that import licensing existed in 1997 and 1998, when the MOUs were signed.
(…)".328  The United States thus confirmed that it was asking the Panel to rule on the conditions in
Public Notice No. 60 and the MOUs in the context of  that licensing regime, i.e. neither a ruling on the
licensing regime per se  nor a ruling "in abstraction" of the undisputed fact that import licensing
existed for these products at the time of establishment of the Panel.329
7.51 In the Panel's view, the normal role of a panel under the DSU does not contemplate
consideration of measures in isolation from their circumstances. To do so would be to rule on a
hypothetical abstraction divorced from the circumstances of the particular matter that is within thePanel's terms of reference.  In this case, import licensing was part of the factual circumstances present
at the time of establishment of this Panel. The Panel is required to take this fact into account in order
to make the objective assessment of the matter required by Article 11 of the DSU.
7.52 The Panel therefore agrees that the United States' articulation correctly reflects the way it
should approach the examination of the matter before it. The Panel is requested and required toexamine these measures as they existed as of the date of establishment of the Panel in their actual
context, which includes the existence of import licensing.  The Panel therefore concludes that it is
necessary to address India's  res judicata argument.
7.53 While the Panel has concluded that the presence of import licensing is something that must be
taken into account as a factual matter, the extent to which this will be relevant to its deliberations willdepend upon the nature of the claims. In turn, this will impact upon the Panel's analysis of the
relationship between this dispute and the India – Quantitative Restrictions dispute.
(c) General approach to the res judicata  arguments
7.54 As a preliminary matter, the Panel first no tes that the conclusions reached in the India –
Quantitative Restrictions  dispute - namely that the discretionary import licensing system applied by
India to certain restricted products under the EXIM policy was inconsistent with Article XI - were not
disputed in these proceedings. The issue before this Panel is rather whether the scope  of the India –
Quantitative Restrictions  dispute and the rulings adopted in it can be such as to preclude any further
litigation concerning the claims and measures in these  proceedings between the same parties.
7.55 This issue has two aspects. It first raises a general question as to the applicability of the
doctrine of  res judicata in the WTO. Secondly, it raises a specific question as to whether the facts in
this dispute and in the India – Quantitative Restrictions  dispute are such as to satisfy the requirements
of the doctrine, if it were applicable to WTO dispute settlement.
7.56 India refers to a number of general provisions in the DSU highlighting the objective of
settlement of disputes through the DSU, in support of its contention that  res judicata  may apply. India
has referred to the jurisprudence of the International Court of Justice and to two specific provisions of
the Court's statute concerning the status of its own decisions.  India has also invoked res judicata  as a
general principle of law applicable in WTO dispute settlement.
330  The United States, however, does
                                                     
328 See response to Question 9(a) of the Panel, para. 27.
329 The European Communities, although not directly concerned by the res judicata  issue, confirmed a
similar understanding of how the Panel was being asked to assess the claims.
330 In its responses to the second set of questions from the Panel, India also suggests that the
res judicata principle is "but one facet of  the broader princi ple of judicial economy".  It suggests that the
Appellate Body's rulings to the effect that a panel need only address those claims which must be addressed inorder to resolve the matter at issue should also apply when a panel is being asked to rule on a matter alreadyresolved in prior proceedings (see response to Question 104 (b) from the Panel).  The Panel is not convinced,
however, that the application of the principle of res judicata  could appropriately be reduced or equated to theWT/DS146/R
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not believe that India has demonstrated the relevance of this doctrine to WTO dispute settlement or
that it is necessary or desirable for the Panel to consider this systemic issue.
7.57 The general question as to the applicability of the doctrine of res judicata  to WTO dispute
settlement is of systemic importance.  It does not appear to have been explicitly considered in WTO
dispute settlement.331  A general principle of res judicata  has also not been otherwise referred to or
endorsed by any WTO panel or by the Appellate Body, although it is certainly true that certain widely
recognized principles of international law have  been found to be applicable in WTO dispute
settlement, particularly concerning fundamental procedural matters.332
7.58 The text of the DSU does not directly address this issue. More generally, the DSU does not
contain any express provision concerning the status of adopted panel or Appellate Body reports, or
concerning their potential impact in separate proceedings under the DSU concerning the same
matter.333  Nevertheless, when considering the status of  adopted panel reports, the Appellate Body has
indicated that they are binding on the parties "with respect to that particular dispute".334  T h i s
statement was not directly addressed at the notion of res judicata , but rather, appears to have been
made primarily in the context of determining the status of adopted reports per se  and their relevance
to subsequent panels as a matter of precedent. It is thus not necessarily determinative of the status of
the doctrine of res judicata  in the WTO as a bar to re-litigation of the same issues, although it may be
open to debate whether this could form the basis, or a basis, for the application of the principle of
res judicata .
                                                                                                                                                                    
guidance given to panels to address, within the matter in their jurisdiction, only those issues which are necessary
to the resolution of the dispute at issue.  The issue of res judicata  involves an argument of quite a distinct nature
concerning the very competence of the adjudicatory body to address the issue submitted to it at all.  The exercise
by panels of judicial economy as recalled by India is a totally different concept allowing panels to address the
matter properly within their jurisdiction in the most efficient way to achieve the objectives of WTO disputesettlement.
331 The doctrine does not appear to have been direc tly raised as a defense in any dispute to date,
although it has been referred to by India before the panel in India – Patents (EC ), WT/DS79/R.
332 See for instance US – Shrimp , Report of the Appellate Body, WT/DS58/AB/R, para. 158, on the
principle of good faith as a general principle of law and general principle of international law, orIndonesia - Autos , Panel Report, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, para. 14.28 concerning
the "presumption against conflict" in international law.
333 Two adopted panel reports under the WTO have considered claims in situations involving the
establishment of "successive" panels concerning the same matter. However, this was in circumstances where the
complainants were distinct or where the first panel was not pursued, so that in either case  res judicata would not
be directly relevant, in the first case for lack of identity of parties, and in the second instance for lack of a priordecision on the same issue between the parties.
The first of these cases was India – Patents (EC) , where the second panel, established shortly after a
first report had been circulated concerning the same me asures, but at the request of a different complainant,
found that it was competent to examine in full the claims, taking account of the reasoning and conclusions of the
previous panel.   In another case, Australia – Subsidies Provided to Producers and Exporters of Automotive
Leather  (hereinafter " Australia – Automotive Leather II" ), a second panel was established at the request of the
same complainant, in circumstances where the composition of the panel established a short time before was notpursued and the first proceedings never led to any further developments.  The responding party havingchallenged the validity of the establishment of the second panel in these circumstances, the panel found that
Australia was asking this panel to read into the DSU an implicit prohibition on multiple panels between the
same parties regarding the same matter that does not exist in the text of the DSU, noting that this was not a casewhere a complainant was actively pursuing two procedures with respect to the same matter, since the first panelwas never composed and then never began its work.  (Cf. Panel Report, WT/DS126/R, adopted on 16 June1999, para. 9.14).
334 Japan – Alcoholic Beverages II , Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R, p. 14, DSR 1996:I, 97.WT/DS146/R
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7.59 In the absence of any clear guidance, many important interpretative issues would thus need to
be considered in determining whether the doctrine of  res judicata applies in WTO dispute settlement
in circumstances where the facts would support such an assertion. However, the potential relevance of
the notion of  res judicata to this case would only arise if its commonly understood conditions of
application were met on the facts.
7.60 The Panel recalls in this regard that its mandate under the DSU requires it only to address
those issues which need to be addressed in order to resolve the dispute.  Thus the Panel finds it
appropriate, in this instance, to first consider wh ether the factual circumstances for the application of
res judicata  could be met in the circumstances of this case.  If the basis of this dispute is sufficiently
similar to that of India – Quantitative Restrictions so as to come within accepted notions of the
doctrine, the Panel would need to rule on its applicability as a doctrine. Conversely, if the Panel were
to find, as a matter of fact, that the matter ruled on by the India – Quantitative Restrictions  panel is
distinct from that submitted to it in this dispute, it would not be necessary to make a general ruling on
the role of  res judicata in WTO dispute settlement.
7.61 To conduct such an analysis, the Panel must at least identify a benchmark by which disputes
might be seen as distinct or similar for the purposes of rejecting or applying res judicata .
7.62 In international jurisdictions where it is applicable, the doctrine is generally understood to
mean that an issue that has been decided on in a final adjudication, that is, after exhaustion of any
available appeal rights, must be considered as a settled matter between the parties to the dispute.
Consequently the issue previously resolved cannot be re-opened in subsequent proceedings. 335  This
doctrine has found application in the jurisprudence of the International Court of Justice, whose Statute
contains express provisions concerning the binding and final character of its judgments.336
                                                     
335 While there may be variations in the exact understanding of the doctrine depending on the
jurisdiction concerned or commentators' interpretation of its scope, it can be noted that res judicata  is broadly
understood to encompass three elements: a final decision, on a given issue, between the same parties. Black's
Law Dictionary defines res judicata  as  follows:
"A matter adjudged; a thing judicially acted upon or decided; a thing or matter settled byjudgment.  Rule that a final judgment rendered by a court of competent jurisdiction on themerits is conclusive as to the rights of the parties and their privies, and, as to them, constitutesan absolute bar to a subsequent action involvin g the same claim, demand or cause of action.
(…) And to be applicable, requires identity in thing sued for as well as identity of cause of
action, of persons and parties to action, and of quality in persons for or against whom claim is
made. The sum and substance of the whole rule is that a matter once judicially decided isfinally decided (…)".
336 In the context of the International Court of Justice, two provisions of its Statute, Articles 59 and 60,
as referred to by India, are frequently cited as the source of the principle of res judicata  concerning its own
decisions, although some divergences appear to emerge am ong commentators as to the exact role of either of the
two provisions or even the need to consider them as th e source of this principle since it is arguably a general
principle of law in any case (see Collier and Lowe, The Settlement of Disputes in International Law. Institutions
and Procedures , Oxford University Press, p. 177).
In the words of Sir Gerald Fitzmaurice,
"A judgment of the [International] Court [of Justice] has, internationally, the authority of res
judicata, and this covers all matters which are actually the subject of decision in the judgment.
Thus in the Haya de la Torre  case, the Court (I.C.J., 1951, 77 ) referred to
'… questions which the Judgment of November 20th, 1950, had already
decided with the authority of res judicata '
(…) Unless, however, the point is duly covered by the previous decision, there is no resjudicata, and therefore nothing (on that particular score) to prevent it being raised in later
proceedings.  Thus, again in the Haya  case, the Court said (ibid, 80):WT/DS146/R
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7.63 In this instance, while the United States was of the view that India had not demonstrated the
relevance of this principle to WTO dispute settlement, the submissions did not display any
fundamentally different view of either party as to the nature of the concept.337 On the other hand,  the
parties have generally provided limited guidance as  to how they would expect a panel to assess the
similarity of two cases to determine the relevance of  res judicata in the context of WTO dispute
settlement.
7.64 Because the policy underlying  res judicata is to bring litigation of a particular nature to an
end at an appropriate stage, the key to its application should be to compare what has already been
ruled on to what is being brought before the adjudicating body in the subsequent proceedings. Both
India and the United States have used a comparison between the "matter" ruled on in the
India - Quantitative Restrictions  case and the "matter" brought before this Panel in identifying the
similarities or dissimilarities between the two disputes for the purposes of assessing whether theissues before this Panel can be considered to be res judicata .
338
7.65 In the context of WTO dispute settlement, the notion of "matter", as referred to in Article 7.1
of the DSU, determines the scope of what is submitted, and what can be ruled upon, by a panel.  As
confirmed by the Appellate Body in the Guatemala – Cement  case, the matter referred to the DSB
consists of two elements:  the specific measures at issue and the legal basis of the complaint (or theclaims). This appears to the Panel to be the most appropriate minimal benchmark by which to assess
whether the conditions of  res judicata could conceivably be met, if such a notion was of relevance.
339
7.66 The Panel therefore considers that for  res judicata to have any possible role in WTO dispute
settlement, there should, at the very least, be in essence identity between the matter previously ruled
on and that submitted to the subsequent panel.  This requires identity between both the measures andthe claims pertaining to them. There is also, for the purposes of res judicata , a requirement of identity
of parties which is clearly met with regard to the United States in this instance.
                                                                                                                                                                    
' As mentioned above, the question of the surrender of the refugee was not
decided by the judgment of November 20th.  This question is new; it was
raised by Peru in its Note to Colombia of November 28th, 1950, and was
submitted to the Court by the Application of Colombia of December 13th,
1950.  There is consequently no res judicata  upon the question of
surrender.'"
(in The Law and Procedure of the International Court of Justice , Sir Gerald Fitzmaurice, Volume Two,
Cambridge, Grotius Publications Limited, 1986, pp. 584-585).
337 The United States thus indicated that "[g]enerally speaking, a principle of res judicata , if applicable,
would presumably relate to the effect of a previously adopted panel report on a subsequent dispute involving thesame matter between the same parties".
338 The European Communities, which is not directly concerned by this issue of res judicata , has also
used this benchmark in explaining the contours of the notion and its relevance to this case.
339 This might only be a minimal benchmark.  Where respondents have made allegations as to a lack of
specificity of the matter articulated in panel requests, some cases have upheld very general claims. The morebroadly claims are stated in two distinct cases, the more it might superficially appear that the issues are similar.Nevertheless, the policy behind such considerations in cases challenging specificity under Article 6.2 of theDSU differs from the policy behind the  res judicata concept. Thus to finally determine the applicability of the
res judicata concept to the facts of a particul ar case, a tribunal may need to identify a more detailed articulation
of the claims in each case and might even need to integrate this with a consideration of which arguments wereaddressed in each dispute. Whether this is so or not, it remains the case that if even the "matters" are not thesame, the doctrine could not apply. The Panel will therefore proceed with an examination of the scope of eachdispute through a comparison between the matter before this Panel and the matter ruled on by theIndia - Quantitative Restrictions  panel. If they are the same, the Panel would then need to consider this
subsidiary question of whether further refinement of the notion is necessary.WT/DS146/R
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(i) The matter before this Panel
7.67 While the measures at issue and the legal basis of the complaint are identified in the United
States request for establishment of a panel, it was perhaps not fully apparent from its terms what the
precise role of India's discretionary import licensing scheme was intended to be in the matter
submitted to the Panel.340 The Panel has already resolved that this dispute cannot be conducted on a
hypothetical basis as if the licensing scheme did not exist. The Panel believes it is appropriate, in
considering the potential application of res judicata , to consider in more detail the subsequent
elaboration by the United States of its claims, in order to clarify the exact scope of the complaint
identified in our terms of reference.341
7.68 In its First Submission, the United States explained that :
"The present dispute (…) concerns not the import licenses themselves; maintaining
them beyond April 1 would in any case be  inconsistent with India's existing
obligation to remove them.  Instead, this dispute concerns discriminatory, trade-
restricting conditions that India exacts from investors in the motor vehicle
manufacturing sector and that it intends to continue to exact.
The United States contends that the local content and trade balancing requirements in
Public Notice No. 60 and the MOUs, together with the Indian domestic legislationunder which they have come into force, are inconsistent with the obligations of India
under the General Agreement on Tariffs and Trade 1994 ("GATT 1994") and the
Agreement on Trade-Related Investment Measures ("TRIMs Agreement").  The
United States respectfully requests this Panel to make findings to this effect, and to
recommend that India bring all such measures into conformity with its obligations."
7.69 This explanation made it clear that the United States did not seek to challenge the import
licensing regime or its application to the products at issue, as such.  Nevertheless, it referred in a
number of its arguments to the import licensing system and to the possible denial of import licenses as
a consequence of failing to comply with the requirements at issue.
342  In view of these arguments of
the United States and India's assertions as to the nature of this claim, the Panel sought furtherclarification as to the scope of this dispute and the exact extent to which the claimants saw the
licensing scheme as relevant to these proceedings, but still distinct from the issues considered in
India – Quantitative Restrictions .
7.70 Subsequent exchanges of submissions, as well as answers to questions from the Panel, further
confirmed that the United States in this case was not seeking a ruling from this Panel on theconsistency with the WTO agreements of the import licensing regime per se . Instead, its claims
related to the "indigenization and trade balancing requirements" in Public Notice No. 60 and in the
                                                     
340 Thus it was not necessarily clear on the face of the document that the measures were alleged to be in
violation per se , or because they were enforceable, or because failure to comply would lead to the refusal of
import licences. The use of the term "therefore" after such statements in the sentence which articulates theprovisions in dispute does not make clear whether these are distinct claims or whether each feature is anecessary element of the alleged violation.
341 In the view of the Panel, such recourse to subseq uent clarifications of the claims is appropriate in
order to determine exactly the scope of the matter that the complainant intended to refer to the Panel.  This iswith the clear understanding that the full scope of the matter referred to the panel is determined by its terms ofreference, and that subsequent elaborations can only  serve to clarify the meaning of a matter already within such
terms of reference.  See, in this respect the Report of the Appellate Body in Guatemala – Cement I .
342 See for example paragraph 101 of the First US Submission, which refers to the possible denial of
import licenses as a source of restriction on importation.WT/DS146/R
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MOUs.343  It has requested the Panel to find that these requirements "are inconsistent with
Article III:4 and XI:1 of the GATT 1994 and Articles 2.1 and 2.2 of the TRIMs Agreement."
Nevertheless, as noted above, the United States considered that the Panel must address these measures
in the context of the discretionary licensing scheme that applied at the time of the Panel's
establishment, and that this licensing scheme constituted an advantage used to induce themanufacturers to sign the MOUs.  It contended that the measures at issue in these proceedings were in
violation of those provisions, independently of the violation of the licensing scheme per se and
requests the Panel to recommend that India bring these measures into conformity with its obligations
under the GATT 1994 and the TRIMs Agreement.
344
(ii) The matter ruled on by the India – Quantitative Restrictions panel
7.71 The Panel is mindful that in seeking to consider the ambit of the India – Quantitative
Restrictions case, it is only analysing the nature and scope of that case and its resultant rulings and
recommendations to consider the relevance of India's jurisdictional arguments.  This analysis is
without prejudice to any determination an Article 21.5 compliance panel in the context of the
India - Quantitative Restrictions  case might make as to the scope of that case and its rulings and their
potential impact on India's subsequent behaviour.
7.72 A consideration of the matter resolved before the India – Quantitative Restrictions  panel
should also begin with an examination of its terms of reference, which in turn, incorporate the United
States request for establishment of a panel in that case. That request provided that:
                                                     
343 The United States thus further clarified that  "[t]he measures at issue in this dispute are those set
forth in the US panel request: (…).  The US claims relate to the indigenization requirement and the tradebalancing requirement found in these measures" and that the limited relevance of the licenses is that India usedthem to induce manufacturers to sign the MOUs and they  constitute the advantage gained in signing the MOUs.
In its Second Submission, the United States further indicated:
"it is not the licensing requirements but the indigenization and trade balancing requirements that are the
subject of the US complaint in this dispute.  Because the indigenization and trade balancing requirements didnot change on April 1, 2001 (or on any other date), and because those requirements are independent of India'snow-eliminated licensing regime, India's elimination of import licensing is not relevant to – and certainly doesnot resolve – this dispute."
344 In its final set of responses to the Panel's questions, India argued that while it was legitimate for
complainants to narrow the focus of their claims in the course of the proceedings, they cannot legitimately
successively narrow or broaden them at will as India alleges they did here (see response to Question 102 of thePanel). This is a distinct argument from the  res judicata claim and is distinct from any assertion that the claim as
finally relied upon is outside the terms of reference.
The Panel agrees with India that parties in a dispute should avoid successive shifts or modifications in
the presentation of their arguments. In some circumstances this could jeopardise the ability of the other parties
to present their arguments in sufficient time and prejudice the fulfilment of requirements of due process. In this
case we believe that the successive exchanges between the United States and India constituted a clarification ofthe United States claim rather than a shifting back and fo rth as alleged, although the Panel notes that the United
States' articulation of the relevance of the licensing scheme to its claims in its first written submission was at thevery least confusing (as reflected for instance in paragraphs 101 and 103 of that submission).
However, we also recall that it is normal for claims to be clarified in the course of proceedings.  While
the clarification process might have been more lengthy in  this case than would normally be expected, we also
find that the United States has sought to clarify its claims in good faith in a manner that enabled India toproperly understand the nature of the claims before this Panel. These claims remain within the Panel's terms ofreference. The Panel also feels that India's ability to defend itself was not jeopardised, in particular because at allstages of the proceedings it was accorded ample opport unity to develop its arguments in light of the
complainants' clarifications.WT/DS146/R
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"quantitative restrictions maintained by India, including, but not limited to, the more
than 2700 agricultural and industrial product tariff lines notified to the WTO in
Annex I, Part B of WT/BOP/N/24 dated 22 May 1997, appear to be inconsistent with
India's obligations under Articles XI:1  and XVIII:11 of GATT 1994 and Article 4.2
of the Agreement on Agriculture.  Furthermore, the import licensing procedures andpractices of the Government of India are inconsistent with fundamental WTO
requirements as provided in Article XIII of GATT 1994 and Article 3 of the
Agreement on Import Licensing Procedures.
The quantitative restrictions referred to above include all import prohibitions, bans,
restrictions, import licenses, special import licenses and the prohibition of non-
commercial (sample) quantities as well as the procedures to implement and
administer these measures".
345
7.73 The factual section of the India – Quantitative Restrictions  panel report indicates that "(a)t the
time the panel was established, India maintained quantitative restrictions on imports of products
falling in 2,714 tariff lines at the eight-digit level of HS96 for which it claimed balance-of-payments
justification.  These restrictions had been notified to the BOPs Committee in May 1997 in the course
of consultations being held with India.  The restrictions that are within the scope of the dispute appearin Annex 1, Part B of WT/BOP/N/24".
7.74 During the India – Quantitative Restrictions  proceedings, the United States requested the
panel to find that "the quantitative restrictions at issue violate Article XI:1 and XVIII:11 of the GATT
1994 and Article 4.2 of the Agriculture Agreement".  The United States identified four specific
measures that it asked the panel to rule upon.
7.75 The panel then articulated the measures at issue in that case as follows:
"India regulates the importation of goods found in a 'Negative List of Imports',
contained in Chapter 15 of India's Export and Import Policy 1997-2002.  The United
States identifies four measures which are implemented under India's Export and
Import Policy and which it claims constitute quantitative restrictions within themeaning of Article XI:1: (a) discretionary import licensing; (b) canalization of
imports through government agencies; (c) the Special Import Licensing (SIL) system;
(d) the 'Actual User' condition on import licensing.  (…) To the extent that India
applies these four measures as balance-of-payments restrictions on the products
specified in Annex I, Part B of WT/BOP/N/24, we refer to these measures as the'measures at issue' in this dispute."
346
7.76 The measures which the panel ruled on were therefore those specific measures, to the extent
that India applied them as balance-of-payments restrictions on the products specified in Annex 1
part B of its notification WT/BOP/N/24.347 In stating its conclusions, the panel referred to the
"measures at issue", as described in this paragraph.348
                                                     
345 WT/DS90/8.
346 Panel Report on India – Quantitative Restrictions , WT/DS90/R, adopted on 22 September 1999, as
upheld by the Appellate Body Report, para. 5.122.
347 Annex 1, Part B of India's notification contains a reference to a number of items under the HS
heading "8703", at the 8 digit level, which relate to automotive vehicles.  These are marked as restricted on
grounds of "AUTO/BOP-XVIII-B", and under the QR symbol "NAL", "AL/NAL" or "SIL/NAL".   Thereference "AUTO/BOP-XVIII-B" is explained in a note as follows:  "When imports of passenger cars and
automotive vehicles are permitted without a license on fulfilment of conditions specified in a Public NoticeWT/DS146/R
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7.77 The report further explains that imports of goods are regulated in the EXIM policy through
the Negative List and explains the general rules applicable to the issuance of import licenses by the
DGFT.  In this context, none of the specific crite ria for various products are mentioned, other than the
"Actual user" condition, which required that only the "actual users" of the product could obtain an
import license.  With regard to the "Special Import Licensing" (SIL), which applied to a limitednumber of goods identified with the symbol SIL in the notification, it is explained that these licenses
were granted on the basis of export performance criteria.
7.78 The panel went on to analyse the four measures it  had identified in the light of Article XI of
GATT 1994.  In respect of India's import licensing system for products on the "Negative List of
Imports", the panel considered the United States claim that "imports of these products into India are
subject to an arbitrary, non-transparent and discretionary import licensing system, under which
licenses are granted "on merit" and only to a category of operators called "actual users".  The panelnoted that it was agreed that India's licensing system  for goods in the Negative List of Imports is a
discretionary import licensing system, in that licenses are not granted in all cases, but rather on
unspecified "merits".  The panel concluded that this licensing system, to the extent that it applied to
the products specified in WT/BOP/N/24, Annex 1, Part  B, operated as a restriction on imports within
the meaning of Article XI:1.
7.79 The Actual User condition and SIL, having been identified as distinct and specific measures
in the request, were examined separately and were the basis of distinct findings of violation of
Article XI.
(iii) Comparison between the matter ruled on by the India – QR s panel and the matter before this
Panel
7.80 As noted above, the notion of "matter" in the context of the DSU encompasses both the
specific measures at issue and the claims, that is, the legal basis on which the complaint is made with
respect to those measures.  If the application of  res judicata at the very least requires that the same
matter which has already been adjudicated on be the object of a new complaint, then it seems to
                                                                                                                                                                    
issued in this behalf, and restrictions on imports through NAL are otherwise maintained".  "SIL/AUTO/BOP" is
defined as "when imports of passenger cars and automotive vehicles are permitted without a license onfulfilment of conditions specified in a Public Notice issued in this behalf, and imports are otherwise permittedagainst Special Import Licenses."  See also re sponses to Questions 48 and 49 of the Panel.
 In response to a question by this Panel, India confirmed that the following tariff lines in Chapter 87
notified as restricted for Auto/BOP reasons cover cars in the form of CKD/SKD kits: 870321.04, 870322.04,
870323.04, 870331.04, 870332.04, 870333.03 (sic). In addition a number of tariff lines covering componentsrestricted for balance-of-payments reasons as considered in India – Quantitative Restrictions were also subject
to the MOU privileges (870600.01, 870600.09, 870710.01 and 870710.02).  All of these tariff lines wereidentified in India's BOP notification as restricted under "AUTO/BOP" grounds and subject to non-automaticlicensing ("NAL").
348 With regard to the legal basis for import restrictions and import licensing, the descriptive part of the
report notes the following factual aspects. "Indian domestic legislation governing import licensing can be foundin: (i) section 11 of the Customs Act 1962, (ii) the Foreign Trade (Development and Regulation) Act, 1992, (iii)the rules and orders promulgated under the Foreign Trade (Development and Regulation) Act, 1992, and (iv) theExport and Import Policy 1997-2002."  It is further explained that the Customs Act and the FT(DR) Act foresee
the possibility for the Indian Government to regulate imports through rules and orders.    It is further explained
that the FTDR Act authorizes the Central Government to formulate and announce by notification in the OfficialGazette the export and import policy, which is done on a five yearly basis, the current EXIM being the 1997-2002 policy, which "includes, inter alia , the Negative List of Imports ("Negative List") found in Chapter 15 of
the Export and Import Policy.  The list sets forth various prescribed procedures or conditions for imports, andthe eligibility requirements including export performance that must be met to qualify for Special Import
Licenses".WT/DS146/R
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require as a minimum, that both the measures and the legal basis of the claims be essentially the same.
The Panel will consider both aspects in turn, although  there may be some artificiality in separating the
analysis. This is because it may be difficult to know how to describe and characterise the measures
without understanding the nature of the claims and vice versa.  For this reason the Panel will first
analyse each separately and then consider them together in drawing its conclusions.
7.81 India, in its second submission, seemed to concede that if the complaint concerned the
consistency with the WTO Agreements of these specific conditions under Public Notice No. 60 and
the MOUs rather than the consistency of the app lication of discretionary import licensing to the
products at issue per se , then its res judicata  argument was no longer relevant.  Nonetheless, it later
indicated that any examination of these conditions as they operated in the presence of  import licensing
was also covered by res judicata .  This suggests that India considers that even if the application of the
discretionary import licensing system to restricted kits and components is not the direct object of thisclaim, res judicata  would apply to preclude the litigation of this claim concerning any administration
or application measure of the import licensing regime considered in the India – Quantitative
Restrictions ruling.  This seems to imply that even an "indirect" coverage of these measures would, in
the view of India, make them res judicata .
7.82 The Panel would only need to rule on the role of indirect coverage in the doctrine of
res judicata if the facts supported India's contention. The Panel will therefore consider this factual
question also. The Panel will first compare the measures submitted to it with those expressly ruled on
in the context of the India – Quantitative Restrictions  dispute, before comparing the express claims in
both disputes. The Panel will then assess overall whether the matters ruled on in India – Quantitative
Restrictions  can be considered to include, directly or indirectly, the matter it is requested to rule on in
these proceedings.
A comparison of the measures expressly considered
7.83 The Panel has determined that the specific measures in dispute before it are the indigenization
and trade balancing conditions contained in Public Notice No. 60 and the MOUs entered into under it.
Although the products at issue in this case fell within  the scope of restricted items within the meaning
of the EXIM policy at issue in the India – Quantitative Restrictions  case, it is clear from an analysis
of the terms of reference and panel report in India – Quantitative Restrictions  that these  specific
conditions were not expressly considered by that panel.
7.84 In any event, neither Public Notice No. 60 nor the MOUs signed thereunder could have been
expressly within the terms of reference of the India – Quantitative Restrictions  panel, since they were
only adopted after its establishment.
349 It would only have been possible to expressly refer to
measures that preceded Public Notice No. 60 in respect of these products.  India has explained that
prior to the existence of Public Notice No. 60, a number of MOUs had been signed with automotive
manufacturers that called for some indications of indigenization and export intent.350 These, however,
were also not expressly referred to or considered by the India – Quantitative Restrictions  panel.
7.85 In fact that panel never evaluated, or made any ruling on, any element of the administration of
the discretionary licensing system, other than an Actual User condition provided for in the EXIMpolicy. This was specifically iden tified by the complainant in the India – Quantitative Restrictions
case and was the object of a distinct ruling of violation of Article XI.  The parties' arguments in that
case further document that none of the specific criteria or conditions for the granting of non-automatic
                                                     
349 The India – Quantitative Restrictions  panel was established on 18 November 1997.  Public Notice
No. 60 was adopted on 12 December 1997.
350 See India's First Submission, para. 4 and its responses to Questions 43 and 110 of the Panel.WT/DS146/R
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licenses were otherwise considered or directly ruled on. By contrast, the "Special Import Licensing"
system, or "SIL", was analyzed in light of its export obligation component.
7.86 The Panel therefore concludes that the measures before it were not expressly considered by
the India – Quantitative Restrictions panel. Nor did it expressly consider the earlier MOUs applicable
to restricted kits and components at the time of establishment of that panel.  The panel based itsfinding of violation in relation to the discretionary import licensing on the more general observation
that licenses were granted on the basis of "unspecified 'merits'".  India's BOPs notification, which
served as the basis for the definition of the measures before that panel, included some general
indication of the type of measure that could apply to specific products, but not in any detail, including
for the products at issue in this proceeding.  However, the India – Quantitative Restrictions  panel,
more generally, did not consider directly any of the specific application measures or criteria relating
to specific product categories subjected to discretionary non-automatic import licensing.
A comparison of the express claims
7.87 India does not appear to argue that  res judicata applies to the claims under Articles III:4 of
GATT and 2 of the TRIMs Agreement.
351  These claims could not constitute the "same" claims as
those examined by the previous panel, which did not address either of these provisions.  The issue
therefore only arises with respect to the claims based on Article XI of GATT.
7.88 Leaving aside the references to provisions other than Article XI:1, in a minimal sense at least,
the legal bases for the claims have some superficial similarity: a violation of Article XI:1 is claimed in
both cases.  Nevertheless, to argue that the claims are the same merely because the same provision is
in issue would be a strained usage of the notion of cl aim, at least in the context of an analysis of the
potential application of res judicata.
7.89 The Panel believes that in considering the factual potential for a  res judicata defense, it must
go beyond a mere identification of the provision claimed to have been violated.352  It must at the very
least accurately identify the precise legal basis for the claimed violation in relation to the measure at
issue.
7.90 As was noted above, the consistency with Article XI:1 of the trade balancing and
indigenization conditions was not expressly examined by the India – Quantitative Restrictions  panel.
They were not expressly examined in any context. The India – Quantitative Restrictions  panel
addressed the claim that India's discretionary licensing system under the EXIM policy was
                                                     
351 In its First Submission, India argued exclusively in its section on res judicata  in relation to a
possible "re-examination" of claims under Article XI (see for instance paragraphs 41 and 43). On the other hand,it made distinct arguments in a subsequent section concerning the reasons why this Panel should not, in its view,be examining the claims based on other legal bases invoked by the complainants in this case (see paragraphs 45
to 49).   Despite a specific question from the Panel at a later stage inviting India to clarify whether it was only
invoking the principle of res judicata  in respect of violations of Article XI or was also invoking it with respect
to claims of violation of Article III:4 of GATT 1994 or the TRIMS Agreement, it declined to answer this pointexpressly (see response to Question 109 of the Panel).
352 The Panel is mindful of the fact that in the context of procedural challenges as to the specificity of
claims, the Appellate Body has indicated that a mere identification of the provision of the covered Agreement at
issue may be sufficient for the purposes of identifying the matter within the meaning of Article 6.2 of the DSU.This was in the context of determining whether the nature of the claim was sufficiently identified to put thedefendant on notice of the challenge faced.  Even in this context the jurisprudence makes it clear that thisassessment should be made on a case by case basis.  This Panel is comparing the claims in the cases for adifferent reason and should look to see if there has prev iously been a final determination of a specific issue that
is now before it.WT/DS146/R
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inconsistent with Article XI.  The United States in this case is claiming, inter alia , that the trade
balancing and indigenization conditions subsequently introduced through Public Notice No. 60, in and
of themselves, are distinctly in violation of Article XI.  In the Panel's view, this is a distinct question.
While the India – Quantitative Restrictions  panel considered whether it was consistent with the terms
of Article XI for a member to apply discretionary or non-automatic licensing to certain products, thispanel is being asked to consider whether two specific obligations are consistent with the same
provision.  The Panel concludes that the India – Quantitative Restrictions  panel did not rule on the
specific claims before this Panel.
Are the matters the same?
7.91 The Panel has identified that neither the specific measures in this case, nor any comparable
measures in existence at the time of that panel's establishment, were expressly considered in the
India – Quantitative Restrictions  case.  The ruling on India's discretionary import licensing scheme in
that case was in the context of a very broad-ranging challenge relating to measures taken by India on
products covering over 2,700 tariff lines in the context of India's general EXIM policy, which
included quantitative restrictions instituted for balance-of-payments purposes. The ruling on
discretionary import licensing was accordingly broad-ranging and sought to address the existence of
discretionary licensing rather than any of the speci fic conditions foreseen for the granting of any
individual licenses.   Where specific conditions were  identified within the policy itself, such as the
Actual User condition, or the export requirements under the "Special Import Licenses" (SIL), these
were specifically addressed.  Under the ruling concerning discretionary import licensing, no specific
conditions were even identified, and certainly, the consistency of specific "trade balancing" and
"indigenization" conditions was never considered.
7.92 As was noted above, India, in its second submissi on, considered that even if the application of
the discretionary import licensing system to restricted kits and components was not the direct object
of the claim, any examination of these conditions as they operated in the presence of  import licensing
was also covered by res judicata .
7.93 In India's view, such claims would be covered because the India – Quantitative Restrictions
ruling "covers the operation and application of the discretionary licensing system in respect of all
products that were notified under Article XVIII:B".
353  In India's view, the specific measures now
referred to this Panel are an "inherent part" of the licensing scheme that India is required to eliminate
as a result of the previous ruling.354 The Panel previously noted that it would look to see if the facts
supported this contention.
7.94 It might be expected that a ruling that a particular broad-ranging scheme is in violation of
provisions of the covered Agreements and must be brought into conformity may have implications for
a number of administrative features of the system. This is not determinative however. In the context
of a res judicata analysis, the question to determine is whether a particular issue was ruled on and
decided upon, and not merely whether the implementation of a previous ruling may have practical
implications for particular measures in the later dispute.
7.95 Furthermore, it cannot be assumed that all measures related to the application or
administration of such a broad system would necessari ly be so closely connected to it that they could
not form the object of a discrete challenge. This is illustrated by the fact that the "Actual user"
condition for import was discretely challenged and ruled on in the India – Quantitative Restrictions
dispute.
                                                     
353 First Submission, para 39.
354 See response to Question 37 of the Panel.WT/DS146/R
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7.96 In this regard, it is notable that the specific measures challenged before us were not even in
existence at the time of establishment of the previous panel.  These measures could thus hardly be
argued to be in themselves "inherent" in the licensing scheme as considered by the
India - Quantitative Restrictions  panel. Although another MOU scheme preceded that foreseen in
Public Notice No. 60, that scheme itself was not envisaged in the India - Quantitative Restrictions
panel.
7.97 Furthermore, the 1997 scheme of which Public Notice No. 60 and its ensuing MOUs were
part, was a new and legally distinct measure taken at Cabinet level that introduced a new auto
licensing policy.  This replaced an ad-hoc voluntary scheme. Public Notice No. 60 established a very
significant, more permanent and binding regime. Companies had to have been prepared to invest
US$50 million and undertake a range of other binding contractual commitments. These commitments
included the two elements of indigenization and trade balancing which are the subject of this dispute.These were long-term contracts. The two schemes thus seem to imply significant commercial
differences for the companies concerned and the Indian government.
355 While the policy change may
have been motivated by issues of transparency and objectivity as argued by India, the Panel finds that
it does significantly more than that.
7.98 Had the United States sought to challenge in these proceedings the mere existence or
application of discretionary import licensing to the specific products at issue here, such a request may
indeed have merely duplicated one part of the broader ruling of the India – Quantitative Restrictions
panel. In this instance, however, the challenge before this Panel is different and concerns discrete
measures which in themselves constitute an "Auto Licensing Policy".  This Panel is being asked to
rule on conditions which are specific to this policy, and the legal issue to consider here, i.e. whetherthe trade balancing and indigenization conditions are compatible with certain provisions of the
covered Agreements, was neither expressly nor implicitly asked of, or addressed by, the
India - Quantitative Restrictions  panel.
7.99 In this instance, the most that can be said in aid of India's argument is that the existence of the
import licensing scheme is a significant element of the factual context of the case, since the provisionsof the MOUs were entered into with a view to obtaining the right to import some of the products
restricted under India's EXIM policy and subject to import licensing.  In a broad sense, the MOUs and
the conditions foreseen in Public Notice No. 60 contributed to the continued application of one part of
the discretionary licensing system examined by the India – Quantitative Restrictions  dispute.
However, this does not mean that the specific terms and conditions of the MOUs in themselves cannotbe of such a nature as to be inconsistent with the same or other provisions of the Agreements, beyond
the import restriction generated by the import licensing itself.
7.100  Complex measures or sets of measures may involve different aspects, which generate distinct
violations of the WTO Agreements. This has been recognized through the acknowledgement in
dispute settlement proceedings that different aspects of a single measure may be covered by different
WTO Agreements.  In this respect, the Panel also notes the comment by the Korea – Measures
                                                     
355 On the basis of the facts available to the Panel, it seems that there may have been other significant
differences between both schemes.  There was also evid ence presented that no one had been denied a license
under the 1995 regime. Even if the same were true for the 1997 scheme, that would have depended upon a
corporations agreement to the investment and other commitments. In addition, as is evident in this dispute,
under the 1997 regime, India maintains that the MOUs continue to have a life even after discretionary importlicensing has been removed. This would not have been likely with the 1995 regime if the earlier MOUs involvedvoluntary projections leading to annual licenses. If the projections were not met in one year under the earlierscheme, they would more likely than not, have simply  been taken into account in  the discretionary decision
about the following years licence. If the licensing regime ceased at that stage, it is not shown on balance that any
other repercussions would have been likely to ensue.WT/DS146/R
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Affecting Imports of Fresh, Chilled and Frozen Beef panel (hereinafter " Korea – Various Measures on
Beef"), that "where a discretionary licensing system is implemented in conjunction with other
restrictions, such as in the present dispute, the manner in which the discretionary licensing system is
operated may create additional restrictions independent of those imposed by the principal
restriction".356  The converse must also be possible. This led to the finding in India – Quantitative
Restrictions  as to the Actual User condition.
7.101  The question put to this Panel relates to aspects of Public Notice No. 60 and the MOUs that
are specific to the auto policy expressed in Public Notice No. 60, and which are not, in the Panel's
view, "inherent" components of the import licensing system. To put it differently, knowing that the
discretionary import licensing system is inconsistent with Article XI does not necessarily answer the
question of whether indigenization and trade balancing obligations constitute restrictions on imports
within the terms of Article XI.  Indeed, the terms of India's BOPs notification suggest that with regardto these products, measures existed not only for balance-of-payments purposes but also for the
purposes of an "auto policy".
357  It is some specific aspects of that policy that this panel is being asked
to review.  Whether they needed to be altered as a result of the ruling in India – Quantitative
Restrictions  is not a matter for this Panel's determination.
Conclusion7.102  In view of the foregoing, the Panel concludes that the matter before it concerns
new claims never brought before the original panel,
concerning  specific conditions  applicable to automotive manufacturers wishing to import
restricted kits and components
(1) never envisaged by the India - Quantitative Restrictions  panel, and
                                                     
356 WT/DS161/R, para. 782.  Another illustration of the diverse legal consequences which a complex
licensing scheme can have is to be found in the EC – Bananas  III case.  In that case, an issue arose as to whether
the EC's procedures and requirements concerning the allocation of import licenses among operators who
fulfilled the requirements in the European Communities fell within the scope of Article III:4.  The European
Communities having appealed the Panel's finding that these measures fell within the scope of Article III, the
Appellate Body found as follows:
"At issue in this appeal is not whether any import licensing requirement, as such, is within the scope of
Article III:4, but whether the European Comm unities procedures and requirements for the distribution  of import
licences for imported bananas among eligible operators within  the European Communities are within the scope
of this provision.  The European Communities licensing procedures and requirements include the operatorcategory rules, under which 30 per cent of the import licences for third-country and non-traditional ACP
bananas are allocated to operators that market European Communities or traditional ACP bananas, and the
activity function rules, under which Category A and B licences are distributed among operators on the basis oftheir economic activities as importers, customs clearers or ripeners.  These rules go far beyond the mere import
licence requirements needed to administer the tariff quota for third-country and non-traditional ACP bananas or
Lomé Convention requirements for the importation of bananas.  These rules are intended, among other things, to
cross-subsidize distributors of European Communitie s (and ACP) bananas and to ensure that European
Communities banana ripeners obtain a share of the quota rent s.  As such, these rules affect "the internal sale,
offering for sale, purchase, ..." within the meaning of Article III:4, and therefore fall within the scope of this
provision.  Therefore, we agree with the conclusion of the Panel on this point."
357 The terms of India's notification to the BOPs Committee, in referring to "AUTO/BOP" as the
grounds for restrictions for the products at issue, sugg ested that measures existed concerning these products both
in the context of quantitative restrictions for balance-of-payments purposes and in specific "Auto" purposes.WT/DS146/R
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(2) contained in legally distinct measures, adopted subsequent to the initiation of the
India – Quantitative Restrictions  panel, which constitute, in their own terms a "new
auto licensing policy".
7.103  On the basis of the foregoing, the Panel further concludes that the matter referred to it in these
proceedings is not the same as the matter adjudicated upon by the India – Quantitative Restrictions
dispute, to the extent that it relates to violations  resulting from the trade balancing and indigenization
provisions in the MOUs under Public Notice No. 60, and not from the discretionary import licensing
as such. For this reason the Panel considers that the doctrine of  res judicata could not apply to the
facts in this dispute. The Panel does not seek to rule on whether the doctrine could potentially apply to
WTO dispute settlement.
7.104  India has also asked that, in the event the Panel rules that the United States claim is not barred
by res judicata , it rule that India's balance-of-payments defense in this dispute is also not barred.
Given that an analysis of a balance-of-payments defense considers the evidence in existence at the
date of a particular panel's establishment,358 such defense cannot be precluded by another panel's
consideration of economic factors on a wholly distinct date. Thus, regardless of the relevance of the
res judicata doctrine to WTO dispute settlement, India is not prevented from raising a balance-of-
payments defense in this case simply as a result of the panel in India – Quantitative Restrictions
having held that the defense was not made out in that dispute.
1. Has any part of the matter before this Pa nel been settled through a mutually agreed
solution?
7.105  India has argued that with regard to the EC claim, the mutually agreed solution concluded in
1997 in settlement of their dispute on India's quantitative restrictions, (hereafter the "MAS"), prevents
the European Communities from bringing this dispute to this Panel.359
7.106  This argument by India, if successful, would lead to the same result as a successful
res judicata argument, in that it aims at excluding from the scope of these proceedings issues alleged
to have already been resolved. Nevertheless, its legal basis is quite distinct.  Here it is necessary toconsider the terms of the agreement and the express provisions of the DSU dealing with such
agreements.
(a) The mutually agreed solution in the India – Quantitative Restrictions  dispute with the EC
7.107  The MAS reached with the European Communiti es was notified to the DSB in accordance
with Article 3.6 of the DSU.  This agreement, which was in the form of an exchange of letters,provides for three stages for the phasing out of import restrictions maintained on a number of products
as notified by India to the Committee on Balance-of-Payments Restrictions (hereafter "BOP
Committee").  It provided that
"the European Communities will refrain from action under GATT Article XXII or
Article XXIII as regards those restrictions during the phasing-out period (…) as long
as India complies with its obligations [under their agreement]."
360
                                                     
358 See Panel Report on India – Quantitative Restrictions , WT/DS90/R, adopted on 22 September 1999,
as upheld by the Appellate Body Report, para. 5.159.
359 India's First Submission, para. 29, citing WT/DS96/8.
360 WT/DS96/8, p. 2 (EC exhibit EC-8).WT/DS146/R
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7.108  The phasing out period ended on 1 April 2001, a point in time after the European
Communities made its panel request in this matter.
7.109  In its First Submission, the European Communities argued that, not being a "covered
Agreement" under the DSU, the MAS cannot be invoked by India "in order to justify the violation of
its obligations under the GATT and the TRIMs Agreement".361  India argued that the issue is not
whether the MAS is a covered agreement.  The issue is whether the DSU may be invoked again in
respect of a matter formally raised under the DSU and settled through a mutually agreed solution
notified under the DSU.  It asserts that this issue is related to the EC's procedural rights under the
DSU, not India's substantive obligations under a covered agreement.362
7.110  India further argues that a mutually agreed solution to a matter formally raised under a
covered agreement and jointly notified to the DSB as  such "must be regarded as a formal settlement
of the dispute that makes the re-submission of the same dispute inadmissible".363
7.111  In addition to arguing that the agreed solution is not a covered agreement, the European
Communities has also argued that the MAS did not settle this dispute, since both the measures and the
claims are different.  In particular, the European Communities stresses that the MOUs and Public
Notice No. 60 were introduced after the negotiation of the MAS and are not an "inherent part" of the
licensing scheme, which could have been administered in many different ways.
7.112  Like the issue of  res judicata concerning the India – Quantitative Restrictions  ruling, the
issue before the Panel involves two questions: the firs t, and more general question, is that of the legal
effect of a previously agreed and notified solution under Article 3.6 of the DSU in relation to
subsequent proceedings concerning the same matter.  The second question is, to the extent that such
agreements may have legal implications for a panel's jurisdiction, whether the facts support itsapplication in this case. The Panel will consider each question in turn.
(b) Relevance of mutually agreed solutions in subsequent proceedings
7.113  The status of mutually agreed solutions under the DSU and their impact in subsequent dispute
settlement proceedings is not expressly indicated in the DSU and has not been previously addressed in
WTO dispute settlement proceedings. As was the case with the issue of  res judicata, the Panel is thus
unaided by any jurisprudence. Unlike that issue, however, such agreements are expressly referred to
and supported by the DSU. It is certainly reasonable to assume, particularly on the basis of Article 3
of the DSU, as cited by India, that these agreed solutions are intended to reflect a settlement of the
dispute in question, which both parties expect will bring a final conclusion to the relevant
proceedings.
7.114  This does not necessarily resolve the issue of what can be done if, despite the agreed solution,
a subsequent disagreement emerges relating to the scope of the solution or to compliance with it.  This
is not an issue expressly addressed in the DSU, nor has it been previously examined by another panel
established under the DSU.
7.115  Without clear guidance in the DSU, this question raises an important systemic issue.
364  On
the one hand, the Panel recognizes that the right for any WTO Member to bring a dispute to the DSB
                                                     
361 EC First Submission, para. 98 (in footnote 73).
362 India's First Submission, para. 33.
363 Ibid, para. 35.
364 In the absence of any express mechanism fore seen in the DSU for the consideration of such
agreements, there would be a need to determine whether such a power can be implied from various provisions ofWT/DS146/R
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is one of the fundamental tenets of the DSU, and that it could not be lightly assumed in what
particular circumstances the drafters of the DSU might have intended such right to be foregone.  On
the other hand, it may also be the case that it could not be lightly assumed that those drafters intended
mutually agreed solutions, expressly promoted by the DSU, to have no meaningful legal effect in
subsequent proceedings.  There may be significant differences between the provisions of mutuallyagreed solutions from case to case, which may also make it difficult to draw general conclusions as to
the relevance of such solutions to subsequent proceedings other than on a case by case basis.
7.116  At the very least, the Panel sees merit in India's argument that the issue in this respect is not
solely whether the mutually agreed solution is a covered agreement, but rather, what effects it may
have on the exercise of procedural rights under the DSU in subsequent proceedings. As was the case
with the question of res judicata , this systemic legal question of the effect of a mutually agreed
solution in subsequent proceedings concerning the same matter only needs to be answered if the factssupport the argument that the matter before us is covered by the MAS.  In light of the European
Communities' argument that the matter referred to this Panel has not been settled by the MAS, the
Panel will proceed first with an analysis of whethe r the MAS can be considered to relate to the same
matter. If that is the case, the Panel must then rule on the legal effect of such agreements. If it is not
the case, there is no need for it to do so.
(c) The scope of the mutually agreed solution between the European Communities and India
7.117  To determine the coverage of the MAS the Panel needs to consider its provisions and also the
ambit of the previous dispute to which it was addressed. In that dispute, the European Communities
called for formal consultations but did not proceed to a panel request. Thus the Panel needs to
consider the terms of the consultation request as well as the terms of the MAS. Ultimately it is theterms of the MAS that are the only possible source of any restriction on our jurisdiction, since it is the
scope of the matter that has been resolved throug h this solution that is at stake in the current
determination. The consultation request may merely aid in an understanding of those terms. Because
an MAS does not involve a specific adjudicatory ruling that would allow a precise identification of
the matter actually "decided on", the Panel must rely on the articulation within the solution of thescope of what the parties intended to settle.
 365
7.118  As the MAS is not a covered agreement, it is not expressly subject to the DSU requirement to
utilise customary rules of interpretation of international law. Nevertheless, since this is an agreement
among States, the Panel finds it appropriate to address the terms of this agreement in accordance with
the customary rules of interpretation of international law.  It will therefore consider the ordinary
                                                                                                                                                                    
the DSU.  Alternatively, there may be an argument that a general principle such as estoppel  may apply to WTO
dispute settlement. These possibilities suggest that the issue cannot necessarily be resolved simply through anacknowledgement that an MAS is not a covered agreement as was argued by the EC. That argument simply is
another way of noting that the DSU does not expressly gi ve a panel a mandate to co nsider whether a "violation"
of such an agreement might exist as a distinct basis for a dispute under the DSU. It does not necessarily provethat a panel may not in some circumstances need to consider the terms of such agreed solutions in order to fulfillits duties under the DSU. Here the Panel notes that disputes concerning the application of the DSU itself can bethe object of proceedings under the DSU.  This might possibly include disputes concerning mutually agreed
solutions, since these are expressly referred to in the DSU.
365 In this analysis, the Panel again adopts the notion of "matter", as referred to in the DSU, as a
minimal benchmark by which to assess the respective scopes of the MAS and the matter brought before it.  Thenature of the comparison, however, varies mutatis mutandis  in considering an MAS rather than a ruling argued
to be res judicata .  In this instance, what should be the basis for the comparison is the scope of the MAS, as
defined essentially by the parties themselves, rather than any legal issues actually ruled on in previous
proceedings.WT/DS146/R
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meaning of the terms of the MAS in light of their context and taking into account their object and
purpose.
7.119  The EC's initial request for consultations in the dispute which gave rise to the MAS with India
(WT/DS96) identified the following measures:
"quantitative restrictions maintained by India on importation of a large number of
agricultural, textile and industrial products.  The restrictions include those notified to
the WTO in document WT/BOP/N/24 of 22 Ma y.  Annex 1 of this document lists
more than 3,000 quantitative restrictions maintained as per 1 April 1997."366
These measures were alleged to be inconsistent with, inter alia , Articles XI, XIII, XVII and XVIII of
GATT 1994.
7.120  The MAS reached by exchange of letters on 12 November 1997 was notified in accordance
with Article 3.6 of the DSU, and circulated on 6 May 1998.367  This agreement begins with the
following provisions:
"Desiring to reach a satisfactory settlement of the difference regarding quantitative
restrictions maintained by India on import of industrial, agricultural and textile
products, as notified by India to the WTO by Annex 1, Part B (Notification onQuantitative Restrictions Maintained on Imports Under the Export and Import Policy
(as on 1 April 1997)) of document WT/BOP/N/24 of 22 May, and for which the
European Communities requested consultations with India under GATT Article XXII
on 18 July 1997, India, on the understanding that nothing in this Agreement
prejudices the respective rights and obligations of the European Communities andIndia under the WTO Agreement and that the European Communities will refrain
from action under GATT Article XXII or Article XXIII as regards those restrictions
during the phasing-out period as defined below, as long as India complies with its
obligations under this exchange of letters , agrees as follows:
1. India will eliminate all quantitative restrictions on imports
maintained by reference to GATT Article XVIII and notified to the
WTO in Annex I, Part B of document WT/BOP/N/24 of 22 May, in
accordance with the time schedules contained in Annex III of that
document, as modified by the attached Annex.  The modifications in
the attached Annex concern the duration of each of the three phasesof the period for the elimination of quantitative restrictions on
imports imposed by India for balance-of-payments purposes and the
shifting of certain products from Phase II to Phase I or Phase III to
Phase I or II.  This is without prejudice to India's rights and
obligations under the WTO Agreement."  (emphasis added)
7.121  The scope of the solution is identified in this initial part of the MAS as relating to
"quantitative restrictions maintained by India on import of industrial, agricultural and textile products,as notified by India to the WTO by Annex 1, Part B (Notification on Quantitative Restrictions
Maintained on Imports Under the Export and Import Policy (as on 1 April 1997)) of document
WT/BOP/N/24 of 22 May, and for which the European Communities requested consultations with
India under GATT Article XXII on 18 July 1997". These are thus in essence the same measures as
                                                     
366 WT/DS96/1.
367 WT/DS96/8.WT/DS146/R
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were brought to the panel on India – Quantitative Restrictions  by the United States at approximately
the same period.368
7.122  The MAS further provides a timetable for "the elimination of quantitative restrictions
imposed by India and notified to the WTO in Annex I, Part B of document WT/BOP/N/24 over three
phases".  While the period for elimination of the restrictions foreseen for the products at issue in theinstant proceedings extended beyond 1 April 2001, an MFN clause in the solution allowed the
European Communities to benefit from the more favourable solution subsequently reached with the
United States. This meant that the date of 1 April 2001 was the relevant date for elimination of the
quantitative restrictions maintained by India on kits and components as contemplated in the MAS
with the EC.
369
7.123  India refers, in its argument, to the final part of the above introductory paragraph, and more
particularly, to the European Communities' commitment not to initiate proceedings underArticles XXII or XXIII of GATT "as long as it complied with its phase-out obligations".
7.124  In considering that argument, the Panel notes that both the consultation request and the MAS
refer exclusively to the "quantitative restrictions" maintained by India on a number of products as
notified to the BOP Committee.  The European Communities promise is merely to "refrain from
action … with regard to those measures."  There is no express reference in the MAS to any suchpromise with regard to supplementary or subsidiary measures. Indigenization and trade balancing are
not mentioned. Where the MAS is concerned, there is no direct or indirect reference in the definition
of the scope of the solution to any specific criteria, Public Notices or other instruments used for the
administration of these restrictions, nor to any specific criteria applied in conjunction with the
restrictions maintained.
7.125  As in the case of the dispute between the United States and India, the Panel also notes that the
specific measures before it could not have been ex pressly dealt with in the consultations or the MAS
as negotiated. This is because Public Notice No. 60 was adopted exactly one month after the exchange
of letters which sealed the MAS, albeit several months before its notification to the DSB.
370
7.126  The Panel also notes that there is no express reference in the MAS to the indigenization or
trade balancing elements of the MOUs which were utilised prior to the 1997 changes. Thus those
changes cannot be seen to be a mere continuation of similar measures expressly covered.
7.127  The Panel again considers that a claim that contractual conditions as to indigenization and
trade balancing in and of themselves constitute a violation of Article XI, is different from a claim that
a general quantitative restrictions regime is itself in violation of that Article. The MAS only expresslyprecluded resort to formal dispute settlement in respect of the quantitative restrictions, although it did
address other provisions as well. Indeed, India's argument in relation to the MAS only refers to the
European Communities' promise relating to the obligation to "phase-out" these restrictions.  The
phase-out obligation is contained in paragraph 1 of the MAS. This leads us to a preliminary
conclusion that the ordinary meaning of the European Communities' promise in the MAS concerning
the phase-out of the quantitative restrictions referred to, does not expressly preclude the initiation of a
                                                     
368 The panel on India – Quantitative Restrictions  was established on 18 November 1997, while the
mutually agreed solution between India and the European Communities, although only notified in May 1998,was reached on 12 November 1997.
369 See MAS paragraph 3, in WT/DS96/8.
370 As previously noted, the MAS was reached on 12 November 1997. Public Notice No. 60 was
adopted on 12 December 1997.WT/DS146/R
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dispute aimed at questioning the validity per se  of subsequently introduced specific conditions
employed in the administration of a part of India's then applicable quantitative restrictions.
7.128  The MAS also contains additional provisions that  address the relations of the parties in the
course of the implementation period.  The Panel feels that it must consider these as part of the context
of the provisions of the MAS principally raised by India, in order to ensure a complete interpretationof the scope of the MAS.  These are as follows:
"Without prejudice to the rights and oblig ations of the European Communities and
India under the WTO Agreement, India will  refrain during the phase-out period from
making more restrictive the import arrangements for the products in the attached
Annex and in Annex III of document WT/BOP/N/24.
During the transition period India will operate the SIL and the NAL arrangements in
a transparent and non-discriminatory manner so as to ensure that they do nothave trade-restrictive or distortive effects additional to those caused by the
restrictions themselves.  This is without prejudice to India's rights and obligations
under the Agreement on Import Licensing Procedures.  India will notify licensing
procedures, and changes in these procedures, in accordance with Article 5 of the
Agreement on Import Licensing Procedures.
(…)
This agreement shall be reviewed annually by India and the EC.  For the purposes of
this review, India will provide information on the implementation of the phasing-out
schedule.  In this framework, there will be an opportunity for India and the European
Communities to discuss the implementation of the time schedules and for theEuropean Communities to raise questions regarding the functioning of licensing
procedures during the phasing-out period."
7.129  These clauses suggest that the parties contemplated that modifications might be made to the
arrangements the subject of the MAS. They imply that during the phase-out period, if India met the
interim phase-out targets it would only be in breach of the MAS if such modifications were "morerestrictive" or caused "additional distortive effects."
7.130  The express promise to refrain from bringing a challenge against the quantitative restrictions
refers to the condition of India complying with it s obligations under the agreement.  This could be
argued to include the obligations as to changes in the licensing "arrangements".  These clauses
however do not address the separate question of whether a change which raises a distinct claim can beseparately challenged.  The plain meaning of the European Communities' promise with respect to
"those restrictions" is thus not, in the view of th e Panel, affected by these clauses.. This is the
interpretation that the Panel adopts.
371
                                                     
371 If the Panel were wrong in that view, the next question would be whether the facts support the
application of those provisions in a way which preclud es the European Communities' express DSU rights to
bring an action where it deems it appropriate.  Those clauses refer to modifications and alterations. It is not in
dispute that some changes were made.  For the same reasons as articulated with respect to the  res judicata issue,
the Panel believes that the changes were significant and were more than merely measures that made existingprovisions more transparent and objective. That conclusion does not however lead to the conclusion that theyare necessarily more restrictive or distortive. Nor is it clear what evidentiary elements would be appropriate to
rely on in considering whether the 1997 changes are more restrictive or distortive. Nevertheless, as India seeks
to rely on the MAS as a defense, it would have been fo r it to address this issue and provide a prima facie caseWT/DS146/R
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7.131  In addition, the Panel also notes that the claims invoked in the request for consultations in the
earlier dispute, which formed the basis of the subsequent agreed solution, referred to a number of
provisions of the GATT, including Article XI, but not to any inconsistency with Article III. In
addition, while other covered Agreements were identified, the TRIMs Agreement was not one of
those.  From these observations, the Panel cannot conclude that the scope of the agreed solution withregard to the measures actually covered, encompasses any claims of violation of either Article III or
the TRIMs Agreement.
7.132  The Panel now turns to consider whether it can be successfully argued that the matter raised
before it by the European Communities is indirectly  or by implication precluded from further dispute
by reason of the terms of the MAS. As in the case of the  res judicata analysis, the Panel
acknowledges that such a broad-ranging dispute as that which gave rise to the MAS could not be
reasonably expected to have such a solution list every single measure which may have some bearingon the application of the quantitative restrictions at issue.  The Panel again acknowledges that
compliance by India with the terms of the MAS w ould no doubt have had implications for many such
administrative elements. Again, that does not determine whether those elements are covered by the
promise not to resort to dispute settlement. In much the same way as it held that the specific trade
balancing and indigenization requirements were not implicitly covered by the India – Quantitative
Restrictions  panel ruling, the Panel concludes on balance that the mutually agreed solution concerning
India's quantitative restrictions for balance-of-payments purposes does not indirectly encompass the
specific conditions before it.
7.133  The Panel considers that the reference to "those restrictions" in the introductory paragraph of
the MAS is, as far as discretionary import licensing is concerned, a reference to the licensing schemeper se  and not to future elements of it that are argued to violate provisions of the covered agreements
in and of themselves.  Thus, the Panel does not consider that the plain meaning of the promise relating
to challenges to quantitative restrictions, impliedly deals with the two conditions now in dispute. Nor
does it consider that it should be interpreted to cover distinct challenges to all administrative features.
The Panel does not read in the terms of the MAS an all-encompassing promise barring litigation ofany subsequent administrative aspect of the measures expressed to come within the covered solution.
The Panel would therefore not interpret a promise by the European Communities to "refrain from
action … as regards those restrictions" as impliedly applying to the measures in dispute before it.
This plain meaning and contextual interpretation is su fficiently clear but in any event does not, in the
Panel's view frustrate the object and purpose of the MAS, which from its terms is to bring to an endthe particular dispute it dealt with: i.e. the European Communities' concerns with a broad range of
quantitative restrictions taken by India for balance-of-payments purposes.
(d) Conclusion
7.134  In view of the foregoing, the Panel concludes that the terms of the mutually agreed solution
notified by the European Communities and India do not preclude it from examining the matter
brought before it by the European Communities.  In view of that factual finding the Panel does not
intend to rule on the legal question as to whether a notified mutually agreed solution can ever operateas a bar to a panel's express mandate from the DSB.
7.135  The European Communities also argues, as a subsid iary matter, that if the Panel were to find
that the issues raised in this dispute are covered by the MAS, then these measures violate that
agreement for a further reason, since they are alleged to continue beyond 1 April 2001.  Having found
                                                                                                                                                                    
and convince us that these changes alter the plain meaning of clause 1 of the MAS.  The Panel does not find that
they have done so.WT/DS146/R
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that the Panel's competence is not precluded by the MAS in any event, it does not need to consider
this argument further.
2. Measures to be eliminated in the course  of implementing the results of the
India - Quantitative Restrictions  dispute and abusive splitting of a dispute
7.136  India invokes further arguments in support of its  contention that the Panel should not consider
the claims referred to it, because the MOUs are an inherent part of the import licensing scheme which
India is required to eliminate as of 1 April 2001 as a result of the ruling of the India - Quantitative
Restrictions  dispute and of its mutually agreed solution with the EC.
7.137  India argues that it would be pointless for this Panel to "add" new grounds of violations
concerning them. This argument relates to the Article III of GATT and TRIMs allegations not dealt
with or referred to in either India – Quantitative Restrictions  or the MAS.  India also argues that a
complainant may not abusively "split" a dispute into successive actions instead of raising all the issuesrelating to a single matter in one proceeding.
7.138  The Panel has already concluded that the matter before it is different to the matter before the
India-QR panel and the matter dealt with in the MAS. Thus this is not, in the Panel's view, a case of a
new claim being expressly directed against a distinct measure previously addressed under another
provision. The remaining underlying assumption in both of these arguments appears to be that allissues relating to measures which may need to be eliminated as a result of a specific proceeding
should all have been dealt with at once and a separate dispute should not be engaged in where the
issues at stake are arguably already disposed of through the outcome of the initial disputes.
(a) Abusive splitting
7.139  India argues that it should not be possible to "split" a dispute into separate successive cases.
Although India seems to invoke an autonomous "principle" of  prohibition of "abusive splitting" of
disputes, it has not explained any source for this specific principle.  Rather, its argument appears to
rest essentially on the basis that this would be an abusive exercise of the right to bring complaints
before the DSB.
7.140  Such a principle could be sought to be argued to fit within general principles of due process or
some equitable principle such as good faith or abuse of rights. While such notions might be of
relevance to WTO dispute settlement in some circumstances, the Panel is not convinced that the
conditions which might justify such a decision are present in this instance. This is not a case where it
is alleged that a complainant knowing all the facts about a measure, chooses to deliberately burden a
respondent with a range of separate actions dealing with distinct WTO provisions. Here it is not indispute that new measures were introduced in 1997. These measures themselves contain a range of
provisions specific to the auto sector and constitute a distinct "auto licensing policy". These measures
may have significantly affected the legal and commercial implications of the indigenization and trade
balancing undertakings made by signatories to earlier MOUs.
7.141  In such circumstances, the Panel recalls the terms of Article 3.7 of the DSU, according to
which "Before bringing a case, a Member shall exercise its judgment as to whether action under these
procedures would be fruitful". The DSU thus en trusts Members with the responsibility of being
essentially self-regulating in deciding to bring a case to the attention of the DSB.  In this instance, as
noted above, the specific measures brought before this Panel, although they have some relation with
the matter ruled on in QRs are in themselves distinct measures concerning a specific industrial sector.
In addition, while India disputes the significance a nd overall distortive effects brought about by the
1997 changes, it has never presented any evidence that the complainants were acting in bad faith orWT/DS146/R
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contrary to the spirit of Article 3.7 in coming to a different view about the 1997 measures.
Consequently the Panel does not find any evidence to support an allegation of abusive splitting, even
if such a principle could ever allow a panel to make a discretionary determination not to pursue its
express mandate.
7.142  In view of the above factual finding the Panel does not rule on whether such a power could in
theory exist.
(b) Unnecessary litigation
7.143  This argument seems to rely on the notion that matters which have not been expressly ruled
on, (in this case, in India's view, the claims based on provisions other than Article XI of GATT),
should not be re-considered on the basis that it would be, in its view, "pointless" to examine these
additional claims in relation to measures which are required to be eliminated in any case.
7.144  The assumption seems to be that if full compli ance with previous rulings incidentally requires
the elimination of part or all of the measures consid ered in the subsequent dispute, then these distinct
claims should not be examined by the second panel.
7.145  The argument seems to assume a certain interpretation of what is required in terms of
implementation of the previous panel ruling.  As outlined below, however, this Panel takes the view
that this assessment is not for it to perform.  Therefore, the question of whether the measures beforethe India -  Quantitative Restrictions panel need to be brought into compliance to a degree which
would make the issues before this Panel without practical significance, is not one which can be part of
this Panel's mandate.
7.146  In any event the Panel does not believe that the facts support an assertion that the new claims
can have no practical significance. This argument by India relates to claimed violations that the Panelhas concluded were not ruled on by the India – Quantitative Restrictions  panel.  Even if the proper
implementation of the rulings in that case may involv e the elimination of measures in a way that will
incidentally dispose of other violations also, this cannot be presumed in all instances.  For example, if
Public Notice No. 60 and the MOUs were to involve violations of Article III, it cannot be presumed
that these violations would necessarily disappear with the disappearance of the import licensingscheme in implementation of the India – Quantitative Restrictions  rulings.  There may be many ways
for India to implement the results of the India - Quantitative Restrictions  ruling in order to eliminate
the import restrictions maintained for balance-of-payments purposes on different products, and
depending on the structure of the specific measures at stake, this may or may not entail the
elimination of other violations of the Agreements.
7.147  In concluding its consideration of these argu ments relating to measures that India may be
"required to eliminate" as a result of the India - Quantitative Restrictions  disputes, the Panel wishes to
stress that it does not intend, in these proceedings, to draw any conclusions on what the
implementation of the rulings adopted in the Quantitative Restrictions case with the United States and
of the MAS with the European Communities may or may not require.  This would be a matter for a
compliance panel to establish, if so requested.  This Panel's mandate, however, is quite distinct from
that of a compliance panel under Article 21.5.
7.148  It was never argued that the measures as they existed at the dates of request for establishment
of the Panel were taken in order to comply with the rulings and recommendations of the DSB in the
India – Quantitative Restrictions  dispute.  On the contrary, at the time of their adoption, they
supported and contributed to the continued application of the import licensing scheme which IndiaWT/DS146/R
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was subsequently required to bring into conformity with the WTO Agreements under the India –
Quantitative Restrictions  case.
7.149  Nor do subsequent events alter this distinction between this Panel's jurisdiction and any
possible compliance panel's jurisdiction. It is true that, in the parties' own description of the facts, the
evolution of the measures in the course of these proceedings is directly linked to actions taken with aview to implementing the India – Quantitative Restrictions  rulings. Nevertheless, the Panel does not
see this question as affecting its jurisdiction to consider the measures as they existed as of the date of
its establishment.  A compliance panel might, at most, if so requested, consider these measures as of
the date for compliance with the India – Quantitative Restrictions  rulings.  Any potential for overlap
between views expressed under this Panel's mandate and views which might be expressed by a
hypothetical compliance panel under India – Quantitative Restrictions  may be a systemic issue of
significance, but it is not for this Panel to resolve.
 372  The potential ambit of a compliance panel's
findings does not in any way diminish this Panel's obligation to comply with its express mandate from
the DSB to consider the measures before it.
3. Conclusion
7.150  In examining each of India's arguments, the Panel has given careful consideration to the
concerns expressed by India concerning the possible reopening of the same disputes between the sameparties.  It is apparent to the Panel that the meas ures before it have operated in direct relation to the
discretionary import licensing system which India has committed itself to eliminate in accordance
with the recommendations of the DSB and its agreed solution with the European Communities.
Nonetheless, the Panel is of the view that this dispute raises distinct legal issues from those resolved
through the India – Quantitative Restrictions  disputes, and that it must consider these issues. In view
of the foregoing analysis, the Panel rejects each of India's arguments to the effect that it does not have
jurisdiction or should exercise some discretion not to consider the matter before it. The Panel now
turns to a consideration of the substantive issues.
D. O
RDER OF EXAMINATION OF THE CLAIMS
7.151  Both complainants have made claims that the measures in issue are in violation of both GATT
1994 and the TRIMs Agreement (Article 2).  The Panel first wishes to consider whether it is desirable
to consider these claims in any particular order.
7.152  A number of factors should be considered in that regard. The Panel recalls the Appellate
Body's comment in European Communities – Regime for the Importation, Sale and Distribution of
Bananas  (hereafter " EC – Bananas III ") suggesting that a panel would normally be expected to
examine the more specific agreement before th e more general, where two Agreements apply
simultaneously.373 The Panel also recalls that it is permitted to apply judicial economy in considering
                                                     
372 Nor is there any reason to presume that any pane l subsequently examining an issue considered by a
previous panel would not take the outcome of such ruling into consideration, to the extent relevant.
373 See Report of the Appellate Body in EC – Bananas III , WT/DS27/AB/R, adopted on 25 September
1997, para. 204 (DSR 1997:II, 591):  "Although Article X:3(a) of the GATT 1994 and Article 1.3 of theLicensing Agreement both apply, the Panel, in our view, should have applied the Licensing Agreement first,since this Agreement deals specifically, and in detail, wi th the administration of import licensing procedures.  If
the Panel had done so, then there would have been no need for it to address the alleged inconsistency with
Article X:3(a) of the GATT 1994".WT/DS146/R
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matters before it, so that "a panel need only address those claims which must be addressed in order to
resolve the matter in issue in the dispute".374
7.153  The Panel has also taken into account the fact that two complaints are effectively being
addressed in this report, the scopes of which are not in all respects identical. In considering these
questions of order and judicial economy, the Panel ha s been mindful of its obligations under Article 9
of the DSU in preserving the rights of all parties where multiple complaints are involved.
7.154  Where the order of analysis of claims is concerned, it is important to consider if a particular
order is compelled by principles of valid interpretative methodology, which, if not followed, might
constitute an error of law.375
7.155  In circumstances other than where a proper application of one provision might be hindered
without prior consideration of other issues, the adoption by a panel of a particular order of
examination of discrete claims would rarely lead to any errors of law.  A panel would always berequired to consider, inter alia, contextual aspects of interpretation of each of the relevant provisions
in accordance with customary rules of interpretation, and to take account of the principle of
effectiveness in such interpretation, whichever agreem ent it chooses to examine first. Here the Panel
notes the comments of the Appellate Body in US – FSC concerning the United States' argument that
the Panel erred by failing to begin its examination of the European Communities' claim underArticle 3.1(a) of the SCM Agreement  with footnote 59 of that Agreement.  In the Appellate Body's
view,
"it was not a legal error for the Panel to begin its examination of whether the FSC
measure involves export subsidies  by examining the general definition of a " subsidy "
that is applicable to export s ubsidies  in Article 3.1(a).  In any event, whether the
examination begins with the general definition of a "subsidy" in Article 1.1 or with
footnote 59, we believe that the outcome of the European Communities' claim under
Article 3.1(a) would be the same. The appropriate meaning of both provisions can be
established and can be given effect, irrespective of whether the examination of the
claim of the European Communities under Article 3.1(a) begins with Article 1.1 orwith footnote 59.
376
7.156  In this case, the Panel is dealing with separate claims to the effect that a particular factual
situation falls foul of both GATT 1994 provisions and provisions of the TRIMs Agreement. Previous
                                                     
374 Report of the Appellate Body in US – Wool Shirts and Blouses , WT/DS33/AB/R, adopted on
23 May 1997, p.19 (DSR 1997:I, 323).  The Appellate Body noted more generally in that paragraph that
"[n]othing in [Article 11 of the  DSU] or in previous GATT practice requires  a panel to examine all  legal claims
made by the complaining party.  Previous GATT 1947 and WTO panels have frequently addressed only those
issues that such panels considered necessary for the resolution of the matter between the parties, and havedeclined to decide other issues.  (…) Given the explicit aim of dispute settlement that permeates the DSU, we donot consider that Article 3.2 of the DSU is meant to en courage either panels or the Appellate Body to "make
law" by clarifying existing provisions of the WTO Agreement  outside the context of resolving a particular
dispute.   A panel need only address those claims which must be addressed in order to resolve the matter in issuein the dispute".
375 An example of a situation where a proper order of examination of different elements of a certain
provision can be identified would be Article XX of GATT 1994, as highlighted by the Report of the AppellateBody in US – Shrimp , WT/DS58/AB/R, adopted on 6 November 1998, para. 120.
376 Report of the Appellate Body in US – FSC , WT/DS108/AB/R, adopted on 20 March 2000, para. 89.WT/DS146/R
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panels confronted with concurrent claims concerning these two agreements have had diverse
approaches to the choice of order of analysis of such claims.377
7.157  As a general matter, even if there was some gu iding principle to the effect that a specific
covered Agreement might appropriately be examined before a general one where both may apply to
the same measure, it might be difficult to characterize the TRIMs Agreement as necessarily more"specific" than the relevant GATT provisions.  Although the TRIMS Agreement "has an autonomous
legal existence", independent from the relevant GATT provisions, as noted by the Indonesia – Autos
panel,
378 the substance of its obligations refers directly to Articles III and XI of the GATT, and
clarifies their meaning, inter alia , through an Illustrative list. On one view, it simply provides
additional guidance as to the identification of certa in measures considered to be inconsistent with
Articles III:4 and XI:1 of the GATT 1994.  On th e other hand, the TRIMs Agreement also introduces
rights and obligations that are specific to it, through its notification mechanism and related provisions.An interpretative question also arises in relation to the TRIMs Agreement as to whether a complainant
must separately prove that the measure in issue is a "trade-related investment measure". For either of
these reasons, the TRIMs Agreement might be arguab ly more specific in that it provides additional
rules concerning the specific measures it covers.
 379 The Panel is therefore not convinced that, as a
general matter, the TRIMs Agreement could inherently be characterized as more specific than therelevant GATT provisions.
7.158  In some circumstances, there may be a practical significance in determining a particular order
of examination of claims based on the TRIMS and GATT 1994.
380 One example might be where the
                                                     
377 One panel decided to examine claims under Article III:4 and Article 2.1 of the TRIMs Agreement
together, but having found a violation of Article III:4,  did not consider it necessary to make a finding on
Article 2.1 of the TRIMS Agreement (See Panel Report on EC – Bananas , WT/DS27/R, para. 7.168).
Another panel decided to examine first the claims under the TRIMs Agreement, "since the TRIMs
Agreement is more specific than Article III:4 as far as the claims under consideration are concerned".  In doing
this, the panel was seeking to follow the approach endorsed by the Appellate Body in EC – Bananas III  and
referred to above that claims on the more specific agreement should be examined before the more general (See
Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted on 23 July
1998, para. 14.63, DSR 1998:VI, 2201).
A third and subsequent panel, however, was "not persuaded that the TRIMS Agreement can be
properly characterized as more specific than Article III:4 in respect of the claims raised by the complainants inthe present case".  That panel chose to examine first the claims under the GATT 1994, following the parties'order of presentation  (See Panel Report on  Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June
2000, as modified by the Appellate Body Report, para. 10.63.)
378 Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R,
para. 14.63 (DSR 1998:VI, 2201).
379 To say, for instance, that the TRIMs Agreement is more specific because it contains a specific
criterion of the presence or absence of a trade-related investment measure depends upon whether that is adistinct criterion and whether the lack of such a cr iterion in Articles III and XI of GATT 1994 makes these
provisions more general as opposed to merely having a broader range of coverage on the same criteria. The only
practical difference and potential advantage in looking at the TRIMs agreement first in this instance seems to be
the possible utilization of the Illustrative List, to the extent that it would be relevant to the claims at issue andmay facilitate the identification of a violation of Articles III:4 or XI:1 of GATT 1994.
380 Determining order of analysis is different to the question of resolution of conflict between
provisions. The latter entails the use of conflict resolution rules or interpretative techniques. The Panel notes that
both GATT 1994 and the TRIMs Agreement are part of Annex 1A of the WTO Agreement. A generalinterpretative note to Annex 1A provides that "[i]n the event of a conflict between a provision of the GeneralAgreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A (…) the provision ofthe other agreement shall prevail to the extent of the conflict."  No conflict has been alleged to exist in thisinstance, in the absence of any issue relating to any TRIMs which would have been notified under the TRIMs
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temporary cover offered to notified TRIMs would be  of relevance. In this instance, India has not
claimed to have notified the measures at issue under the TRIMs Agreement. This issue therefore does
not arise here. Indeed, in response to a question from the Panel, India has indicated that "the TRIMs
Agreement (…) no longer entails rights and obligations in respect of India that are different from
those under the GATT", and has encouraged the Panel to refrain from examining the TRIMsAgreement.
381   For the purposes of this case, therefore, there appears to be, in that respect, no
particular reason to start our examination on any particular order. Nor does it find that the end result
would be affected by either determination of order of analysis.
7.159  Both complainants have also addressed their claims under GATT 1994 prior to their claims
under the TRIMS Agreement.  Their responses to specific questions from the Panel on the proper
order of examination of their claims suggest th at both would be in agreement with an approach
leading to an examination of the GATT 1994 claims first.382
7.160  In these circumstances, the Panel does not see that there is anything improper in either
addressing the GATT claims or the TRIMs claims first.
7.161  The order selected for examination of the claims may also have an impact on the potential to
apply judicial economy.  It seems that an examination of the GATT provisions in this case would be
likely to make it unnecessary to address the TRIMs claims, but not vice-versa.  If a violation of theGATT claims was found, it would be justifiable to refrain from examining the TRIMs claims under
the principle of judicial economy. Even if no violation was found under the GATT claims, that also
seems an efficient starting point since it would be difficult to imagine that if no violation has been
found of Articles III or XI, a viol ation could be found of Article 2 of the TRIMs Agreement, which
refers to the same provisions.  Conversely, if no violation of the TRIMs Agreement were found, thiswould not necessarily preclude the existence of a violation of GATT Articles III:4 or XI:1 because the
scope of the GATT provisions is arguably broader if India's argument was accepted that there is a
need to prove that a measure is an investment measure and its assertion that this is not the case with
the measures before this Panel.
7.162  For all of these reasons the Panel will therefore examine the GATT claims first.
7.163  Violations of Articles III and XI have been alleged with regard to two of the conditions
foreseen under Public Notice No. 60 and in the MOUs, namely "indigenization" and "trade
balancing".  The Panel will address claims relating to these two conditions in turn.
E. C
ONSISTENCY OF THE INDIGENIZATION CONDITION WITH THE GATT 1994
7.164  Paragraph 3 (iii) of Public Notice No. 60 provides that the MOUs shall be based  on a number
of parameters, including:
"Indigenization of components up to a minimum level of 50% in the third year or
earlier from the date of clearance of first import consignment of CKD/SKD
kits/components and 70% in the 5th year or earlier.  Once the MOU signing firm has
reached an indigenization level of 70%, there will be no need for further import
licences from DGFT. Consequently, as and when the firms achieve 70%
indigenization, they would go outside the ambit of the MOU automatically.
                                                     
381 Response to Question 128 of the Panel.
382 See the response of the EC to Question 99 of the Panel, and the response of the US to Question 84
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However, they will discharge the export obligation corresponding to the imports
made by them till that time."
7.165  The standard MOU annexed to Public Notice No. 60 reflects this obligation by requiring:
"that the party shall achieve indigenization of components up to a minimum level of
50% in the third year or earlier from the date of clearance of first import consignmentof CKD/SKD kits and 70% in the fifth year of earlier. Once the party has reached an
indigenization level of 70% there will be no need for further import licence from
DGTF. However, the party shall discharge the export obligation corresponding to the
imports made by them till that time.
That the party intends to achieve the following levels of indigenization of their
product, year-wise:
Year Percentage (%) of indigenization
The party shall aggressively pursue and achieve as soon as possible the development
of the local supply base and increased local content, since the same will allow a
higher level of indigenization."
7.166  It is not disputed that MOUs have been signed with most major car manufacturers in India in
accordance with these terms, including the "indigenization" condition.
7.167  The European Communities and United States claim that this obligation is inconsistent with
Article III:4 of the GATT 1994.  The United States also claims that the measure is inconsistent with
Article XI:1 of GATT 1994.
7.168  The Panel does not believe that it is required as a matter of proper interpretation to consider
one of these claims prior to the other as they are distinct Articles and the proper application of onedoes not require a prior determination of the other.  The Panel will consider first the claims
concerning an alleged violation of Article III:4, since this claim is common to both complainants. This
would provide the greatest opportunity to at least consider the application of the judicial economy
principle, since any finding which might be first made on the basis of Article XI, would not have
addressed the claim of the European Communities.
1. Claims under Article III:4 of GATT 1994
7.169  In accordance with the terms of Article 3.2 of the DSU, the Panel is required to clarify the
existing provisions of the covered agreements in accordance with customary rules of interpretation of
public international law.  As has been recalled by the Appellate Body, these rules are embodied in
particular in Articles 31 and 32 of the Vienna Convention on the Law of Treaties.  Accordingly, thisPanel is required to interpret the text of the ag reements by way of reference to the "the ordinary
meaning of the terms of the treaty in their cont ext and in the light of its object and purpose".
7.170  Article III:1 provides in relevant part that:
"[t]he contracting parties recognize that internal taxes and other internal charges, and
laws, regulations and requirements affecting the internal sale, offering for sale,
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to imported or domestic products so as to afford protection to domestic
production".383
7.171  Article III:4 provides in relevant part:
"The products of the territory of any cont racting party imported into the territory of
any other contracting party shall be accorded treatment no less favourable than thataccorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use."
7.172  To determine whether the Indian measure is consistent with Article III:4, it is necessary to
examine whether (1) imported products and domestic products are like products; (2) the measures
constitute a "law, regulation or requirement"; (3) they affect the internal sale, offering for sale,
purchase, transportation, distribution or use; and (4) imported products are accorded less favourabletreatment than the treatment accorded to like domestic products.
384
(a) Like products
7.173  This claim deals with the treatment of certain specified imported automotive parts and
components and their domestic equivalent.
7.174  The Panel notes that the only factor of distinction under the "indigenization" condition
between products which contribute to fulfilment of the condition and products which do not, is the
origin of the product as either imported or domestic. India has not disputed the likeness of the relevant
automotive parts and components of domestic or foreign origin for the purposes of Article III:4 of the
GATT 1994.  Origin being the sole criterion distinguishing the products, it is correct to treat such
products as like products within the meaning of Article III:4.
7.175  The panel in Canada - Autos reached the same conclusion in similar conditions.385 More
recently, the compliance panel in US – FSC  (Article 21.5) noted that :
"the distinction made between imported and domestic products in the Act's foreign
Articles/labour limitation concerning the limitation on fair market value attributable
to 'articles' is solely and explicitly based on origin.  We do not believe that the merefact that a good has US origin renders it "unlike" an imported good."
386
                                                     
383 The Appellate Body has recently clarified the contex tual role of Article III:1 in the interpretation of
Article III:4:
"the "general principle" set forth in Article III:1 "informs" the rest of Article III and acts "as a
guide to understanding and interpreting the specific obligations contained" in the otherparagraphs of Article III, including paragraph 4.  Thus, in our view, Article III:1 has particularcontextual significance in interpreting Article III:4, as it sets forth the "general principle"pursued by that provision."  Report of the Appellate Body on European Communities –
Measures Affecting Asbestos and Asbestos-Containing Products , WT/DS135/AB/R, adopted
on 5 April 2001, para. 93.
384 Report of the Appellate Body in Korea – Various Measures on Beef , WT/DS161/AB/R,
WT/DS169/AB/R, adopted on 10 January 2001, para. 133.
385 Panel Report on Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as
modified by the Appellate Body Report, para. 10.74 ,
386 WT/DS108/RW circulated on 20 August 2001.WT/DS146/R
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7.176  The Panel therefore concludes that automotive parts and components of domestic and foreign
origin are like products within the meaning of Article III:4 of GATT 1994.
(b) "Laws, regulations or requirements"
7.177  While the Panel is at this stage considering the indigenization condition, it does not arise in a
vacuum.  It emanates from Public Notice No. 60 and the MOUs entered thereunder. The Panel thusneeds to look at these measures as identified in  our terms of reference to consider whether they
constitute "laws, regulations or requirements".
7.178  Public Notice No. 60 and the MOUs operate together, so that in combination, the obligations
actually accrue: the proper application of Public Notice No. 60 required MOUs to be signed by an
entity that wished to obtain licenses. The legal obligations on individual firms therefore resulted from
the combination of both instruments: the MOUs were signed in accordance with Public Notice No. 60,
and once signed, they embodied for the manufacturers the obligations foreseen in the Public NoticeNo. 60.
7.179  The Panel has therefore chosen to examine these legal instruments together as the combined
foundation for the indigenization obligation.  If be tween the two instrument s, it is appropriate to
conclude that the indigenization condition is an element of certain "laws, regulations or
requirements", then this should be enough for this part of the Article III analysis. The situation may bedifferent at the stage of considering any recommendations and rulings. The provision calling for the
conditions being challenged in this dispute is contained in Public Notice No. 60 itself.  This might
mean that this measure in itself might be in viola tion to the extent that it requires action inconsistent
with GATT obligations. The European Communities has asked for a separate ruling in that regard.
The US has not. The European Communities request will be considered separately at a later stage. Inthe meantime, because both instruments contain th e indigenization and trade balancing conditions at
issue, and in light of the close relationship betw een Public Notice No. 60 and the signature of the
MOUs, the Panel will first complete its analysis of the two conditions in issue taking both instruments
into account.
7.180  The United States argues that the measures constitute "at least 'regulations' or 'requirements',
as those terms in Article III:4 are ordinarily understood".
387  The European Communities considers the
measures to be "requirements" within the meaning of Article III:4.388  Thus both complainants
consider that Public Notice No. 60 and the MOUs  at least impose "requirements" under Article III:4.
The Panel turns to a consideration of this term.
(i) The notion of "requirement" within the meaning of Article III:4
7.181  An ordinary meaning of the term "requirement", as articulated in the New Shorter Oxford
Dictionary, is "Something called for or demanded; a condition which must be complied with".  The
Canada – FIRA panel further suggested that there must be a distinction between "regulations" and
"requirements" and that requirements could not be assumed to mean the same, i.e. "mandatory rules
applying across the board".
7.182  The European Communities argues that "it is fi rmly established that Government action need
not be compulsory in order to qualify as a "requirement" for the purposes of GATT Article III:4".  Itacknowledges that "Public Notice No. 60 does not impose upon the joint-ventures a legal obligation to
conclude an MOU with the Indian Government.  Nonetheless, the conclusion of an MOU is a
                                                     
387 First Submission, para 62.
388 First Submission, para 46.WT/DS146/R
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necessary condition for obtaining an advantage: the grant of licenses for SKD and CKD kits.
Moreover, once it is signed, the MOU is binding upon the signatory and legally enforceable under the
FTDR."  The United States argues similarly that once the MOUs are entered into, the commitments in
them become part of the conditions under which the MOU signatories are permitted to receive import
licenses. These conditions are to be enforced through the import licensing scheme and also as a legalcontract between the Government of India and the manufacturer.
389  The United States argues that the
fact that the firms could have chosen not to sign such contracts does not affect the analysis: "the term
"requirement", in its ordinary meaning, encompasses such preconditions to obtaining a benefit from
the Government".390
7.183  In previous instances, the term "require ment" has been interpreted to encompass
commitments entered into on a voluntary basis by individual firms as a condition to obtaining an
advantage.391  Under GATT 1947, in EEC – Parts and Components , the panel noted that:
"Article III :4 refers to 'all laws, regula tions or requirements affecting the internal
sale, offering for sale, purchase, transportation or use'.  The Panel considered that the
comprehensive coverage of 'all laws, regulations or requirements affecting' (emphasis
added) the imported sale, etc. of imported products suggests that not onlyrequirements which an enterprise is legally bound to carry out, such as thoseexamined by the 'FIRA panel' (BISD 30S/140, 158), but also those which an
enterprise voluntarily accepts in order to obtain an advantage from the government
constitute 'requirements' within the meaning of that provision."
392
7.184  GATT jurisprudence thus suggests two distinct situations which would satisfy the term
"requirement" in Article III:4:
(i) obligations which an enterprise is "legally bound to carry out";
(ii) those which an enterprise voluntarily accepts in order to obtain an advantage
from the government
7.185  This interpretation was confirmed in the panel report on Canada – Autos ) under the WTO. In
that instance, "letters of undertaking" submitted by certain firms at the request of the CanadianGovernment were considered to be "requirements".  That panel stated in particular that:
                                                     
389 First Submission, para. 67.
390 First Submission, para 68.
391 See Canada – FIRA :  "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 had agreed
that the FIRA and the FIR Regulations – whilst providing for the possibility of written undertakings – did not
make their submission obligatory, the question remained whether the undertakings given in individual cases are
to be considered "requirements" within the meaning of Ar ticle III :4.  In this respect the Panel noted that Section
9(c) of the Act refers to "any written undertakings … relating to the proposed or actual investment given by anyparty thereto conditional upon the allowance of the investment" and that Section 21 of the Act states that "wherea person who has given a written undertaking … fails or refuses to comply with such undertaking" a court order
may be made "directing that person to comply with the undertaking". The Panel further noted that written
purchase undertakings – leaving aside the manner in which they may have been arrived at (voluntarysubmission, encouragement, negotiation, etc.) once they were accepted, became part of the conditions underwhich the investment proposals were approved, in which case compliance could be legally enforced.  The Paneltherefore found that the word "requirement" as used in Article III :4 could be consid ered a proper description of
existing undertakings."
392 Panel Report on EEC – Parts and Components , para .5.21, BISD 37S/132.WT/DS146/R
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"We note that it has not been contested in this dispute that, as stated by previous
GATT and WTO panel and appellate body reports, Article III:4 applies not only to
mandatory measures but also to conditions that an enterprise accepts in order to
receive an advantage, including in cases where the advantage is in the form of a
benefit with respect to the conditions of importation of a product.  The fact thatcompliance with the CVA requirements is not mandatory but a condition which must
be met in order to obtain an advantage consisting of the right to import certain
products duty-free therefore does not prec lude application of Article III:4."
393
7.186  This Panel supports and adopts that interpretation.
(ii) The indigenization condition as a "requirement"
7.187  The Panel recalls that the indigenization condition is contained in two distinct instruments:
Public Notice No. 60 and the MOUs signed by manufacturers under the terms of Public NoticeNo. 60.  The Panel will consider both of these instruments in determining whether the indigenization
condition can be considered to constitute a "requirement within the meaning of Article III:4.
7.188  Public Notice No. 60, a governmental measure adopted under the authority of the EXIM
policy, clearly requires that an MOU must be signed in order to gain the right to apply for an import
license: import licenses will only be granted to manufacturers who sign an MOU containing certainconditions, including indigenization and trade balancin g.  Under Public Notice No. 60, the signing of
an MOU is therefore in itself a condition to obtaining a license.   In other words, acceptance of the
indigenization condition was necessary under Public Notice No. 60 in order to obtain the right to
import the restricted items addressed in Public Notice No. 60.  Thus, the indigenization condition, as
contained in Public Notice No. 60, constitutes a condition to the granting of an advantage, namely, inthis instance, the right to import the restricted kits and components.  It therefore constitutes a
requirement within the meaning of Article III:4.
394
7.189  The MOUs themselves also contain the same conditions, including the indigenization
condition, whose acceptance as legal obligations by the signatories was necessary in order to obtain
the right to import the restricted kits and components under license.  They were thus entered into inorder to gain an advantage, consisting in the right to import these products. In and of itself, this leads
to the conclusion that they constitute "requirements" as per the interpretation from Canada –Autos
that this Panel has endorsed.
7.190  In addition, manufacturers are expected to comply with the terms of the MOUs they have
signed.  Once signed, the MOUs became binding and enforceable, first under Public Notice No. 60itself, and also under the FTDR Act and under general principles of contract law.  Prior to 1 April
2001, failure to comply with these conditions could lead to the denial of an import license. The MOUs
have thus been binding and enforceable since their signature. A binding enforceable condition seems
to fall squarely within the ordinary meaning of the word "requirement", in particular as "a condition
which must be complied with".
395
                                                     
393 Panel Report on Canada – Autos,  WT/DS139/R,  WT/DS142/R, adopted on 19 June 2000, as
modified by the Appellate Body Report, para. 10.73.
394 We recall in this regard that in the context of this analysis, it is not the WTO-consistency or
inconsistency of the advantage granted that is at stak e.  In other words, the fact that these products were
restricted and subject to import licensing is not what is at  stake in this determination.  In this regard, previous
jurisprudence has clarified that the advantage to be gained might be of very diverse natures.
395 New Oxford English Dictionary, as cited above.WT/DS146/R
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7.191  The enforceability of the measure in itself, independently of the means actually used or not to
enforce it, is a sufficient basis for a measure to constitute a requirement under Article III:4.  As far as
a manufacturer having entered into an MOU is concerned, the commitments have existed since they
were entered into and would affect its commercial behaviour. This further supports the conclusion that
the "indigenization" condition as contained in the MOUs themselves also constitutes a "requirement"within the meaning of Article III:4.
7.192  The Panel is supported in this view by the jurisprudence
396 and by the fact that the TRIMs
agreement expressly refers to mere enforceability in the context of the introductory paragraph of the
Illustrative List, Item 1. Where the jurisprudence is concerned, the Panel recalls that the panel in
US - Malt Beverages  found the mandatory price affirmation laws in Massachusetts and Rhode Island
inconsistent with Article III:4 because they accorded imported beer and wine less favourable
treatment than the like domestic products even though the States concerned might  not have beenusing their police powers to enforce the legislation.  The panel noted that this did not change the fact
that the measures were mandatory legislation that may influence the decision of economic operators.
7.193  Therefore, the Panel finds that the indigenization condition, as contained in Public Notice
No. 60 and in the MOUs signed thereunder, constitutes a "requirement" within the meaning of
Article III:4.
7.194  India has confirmed that the MOUs have remained binding and enforceable since then, even
though the means through which enforcement might be pursued may have changed and may currently
not have been decided on. India has argued that there is a fundamental difference between a
requirement that has to be fulfilled to obtain an import license under the Indian trade laws and a
requirement under private contract law with the Go vernment of India, which the Government is free
to enforce or not.  In the view of India, the MOUs have become, since 1 April 2001, private
contractual obligations that amount to discretionary legislation, and thus cannot be challenged as such
under WTO dispute settlement.
397  This argument relates to an alleged distinction between the
situation pre- and post-April 2001.  The Panel recalls in this respect its earlier conclusion that it would
address arguments relating to any changes in the measures after 1 April 2001 when considering whatrecommendations may appropriately be made to the DSB.
(c) … affecting the internal sale, offering for sale, purchase (…) of the products
7.195  Having determined that the indigenization condition is a "requirement", the Panel next
examines whether the Indian measures affect the internal sale, offering for sale, purchase or use of the
imported products within the meaning of Article III:4.
                                                     
396 The Canada – FIRA panel, in considering an argument by Canada that the undertakings were
"private contractual" arrangements, found that:
"The Panel carefully examined the Canadian view that the purchase undertakings should be
considered as private contractual obligations of particular foreign investors vis-à-vis the
Canadian government.  The Panel recognized that investors might have an economicadvantage in assuming purchase undertakings, taking into account the other conditions underwhich the investment was permitted.  The Panel felt, however, that even if this was so, private
contractual obligations entered into by investors should not adversely affect the rights which
contracting parties, including contracting par ties not involved in the dispute, possess under
Article III :4 of the General Agreement and which they can exercise on behalf of theirexporters.  This applies in particular to the rights deriving from the national treatmentprinciple, which – as stated in Article III :1 – is aimed at preventing the use of internalmeasures 'so as to afford protection to domestic production'." (paras 5.4 to 5.6).
397 Second Submission, para. 30.WT/DS146/R
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7.196  Under GATT and WTO jurisprudence, the term "affecting" has consistently been defined
broadly.  In particular, it has been well established that it "implies a measure that has "an effect on"
and this indicates a broad scope of application".398  This term therefore goes beyond laws and
regulations which directly govern the conditions of sale or purchase to cover also any laws or
regulations which might adversely modify the conditions of competition between domestic andimported products.
7.197  The Indian measure at issue requires the MOU signatories to commit to achieving a level of
indigenization of components up to a minimum level of 50% in the third year or earlier and 70% in
the fifth year or earlier, in order to obtain import licenses.  To meet the indigenization requirement,
car manufacturers must purchase Indian parts and components rather than imported goods.  This
provides an incentive to purchase local products. Such a requirement  "modifies the conditions of
competition between the domestic and imported products" and therefore affects the internal sale,offering for sale, purchase and use of imported part s and components in the Indian market within the
meaning of Article III:4 of the GATT 1994.
7.198  The Panel also notes that the indigenization requirement affects not only SKD and CKD kits,
but also any imported parts or components. This is because indigenization is required over all
automotive parts and components. Any required components that are sourced from imports would notcount towards fulfilling the level of indigenization requirement that increases over a period of time.
(d) Whether imported products are accorded less favourable treatment
7.199  Finally, it is necessary to determine whether the measure is such as to accord less favourable
treatment to the imported goods. In determining whether imported products are treated less favourably
than domestic products, the Panel is obliged to examine whether the Indian measure modifies theconditions of competition in the Indian market to the detriment of imported products.  The Appellate
Body stated in Korea—Beef that "[a]ccording treatment 'no less favourable' means…according
conditions of competition no less favourable to the imported product than to the like domestic
product."
399
7.200  In Japan—Alcoholic Beverages , the Appellate Body stated:
"The broad and fundamental purpose of Article III is to avoid protectionism in the
application of internal tax and regulatory measures.  More specifically, the purpose of
Article III "is to ensure that internal measures ‘not be applied to imported or domestic
products so as to afford protection to domestic production'".400  T o w a r d  t h i s  e n d ,
Article III obliges Members of the WTO to provide equality of competitive
conditions for imported products in relation to domestic products.401  "[T]he intention
of the drafters of the Agreement was clearly to treat the imported products in the
same way as the like domestic products once they had been cleared through customs.
Otherwise indirect protection could be given".
                                                     
398 See Italy – Agricultural Machinery , BISD 7S/60, para. 12.  See also the Panel Report on Canada –
Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as modified by the Appellate Body Report,
para. 10.80.
399 Report of the Appellate Body in Korea – Various Measures on Beef , WT/DS161/AB/R,
WT/DS169/AB/R, adopted on 10 January 2001, para. 135.
400United States - Section 337 of the Tariff Act of 1930, BISD 36S/345, para. 5.10.
401United States - Taxes on Petroleum and Certain Imported Substances , BISD 34S/136, para. 5.1.9;
Japan - Customs Duties, Taxes and Labelling Practi ces on Imported Wines and Alcoholic Beverages ,
BISD 34S/83, para. 5.5(b).WT/DS146/R
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7.201  As noted previously, the very nature of the indigenization requirement generates an incentive
to purchase and use domestic products and hence creates a disincentive to use like imported products.
This requirement is more than likely to have some effect on manufacturers' choices as to the origin of
parts and components to be used in manufacturing automotive vehicles, since they need to take into
account the requirement to use a certain proportion of products of domestic origin. Car manufacturersare required to purchase a certain amount of parts and components that are of Indian origin for the
simple reason that this is the only way to meet the indigenization requirement. This amount increases
over a period of time and hence so too does the disincentive to the use of imported components. Car
manufacturers are thus not free to choose to purchase imported parts and components over domestic
parts and components in excess of a certain proportion. In these circumstances, imported products
cannot compete on an equal footing with Indian-origin parts and components because the
indigenization requirement explicitly sets out the percentage of domestic parts and components thatmust be used.
 402
7.202  Such a requirement clearly modifies the condit ions of competition of domestic and imported
parts and components in the Indian market in favour of domestic products.  The Panel therefore finds
that the indigenization requirement foreseen in Public Notice No. 60 and incorporated in the MOUs
signed thereunder, by requiring manufacturers to use specified percentages of parts and componentsof domestic origin is a requirement affecting the internal sale of like imported products, and which
affords these imported products less favourable treatment than that accorded to like products of
national origin.
7.203  The Panel also recalls in particular the conclusions of the Panel on Canada – Autos, in
examining a "Canadian Value Added" requirement (CVA) that "the CVA requirements accord lessfavourable treatment within the meaning of Article III:4 to imported parts, materials and non-
permanent equipment than to like domestic products because, by conferring an advantage upon the
use of domestic products but not upon the use of imported products, they adversely affect the equality
of competitive conditions of imported products in relation to like domestic products".
403
(e) Conclusion
7.204  The Panel thus finds the "indigenization" condition, as contained in Public Notice No. 60 and
in the MOUs entered into thereunder, is in violation of Article III:4 of GATT 1994 as at the date of its
establishment.
7.205  This conclusion is consistent with the fact that the TRIMs Agreement Illustrative List
identifies measures which require "the purchase or use by an enterprise of products of domestic originor from any domestic source, whether specified in terms of particular products, in terms of volume or
value of products, or in terms of a proportion of volume or value of its local production" as being
TRIMs inconsistent with Article III:4 of GATT 1994.  In this instance, MOU signatory manufacturers
are required to use a certain proportion of products of domestic origin in their local production.
                                                     
402 A GATT panel on EEC  – Parts and Components  made a finding of violation of Article III:4
involving relatively similar circumstances:  "The Panel noted that the EEC made the grant of an advantage ,
namely the suspension of proceedings under the anti-circumvention provision, dependent on undertakings to
limit the use of parts or materials of Japanese origin without imposing similar limitations on the use of likeproducts of EEC or other origins  hence dependent on undertakings to accord treatment to imported products
less favourable than that accorded to like products of national origin in respect of their internal use".
403 Panel Report on Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as
modified by the Appellate Body Report, para. 10.85.WT/DS146/R
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2. Claim under Article XI
7.206  The United States has claimed that the indigenization requirement is also inconsistent with
Article XI:1 of GATT 1994.  The Panel has found this requirement to be in violation of Article III:4
of the GATT 1994.
7.207  The Panel recalls that, under the terms of Article 11 of the DSU, it is only required to address
"those issues which must be addressed in order to resolve the matter in issue in the dispute".404  This
implies that if a particular measure is found to be in violation of a particular provision, the Panel does
not necessarily need to go on to consider whether the same measure is also inconsistent with another
provision of the GATT.
7.208  In this instance, the Panel has found the indigenization condition in its entirety to be
inconsistent with Article III:4.  In these circumstances, the Panel does not see any need to address in
addition whether the same condition is also inconsistent with Article XI:1 of the GATT. It thereforeexercises judicial economy with respect to that claim.
F. GATT 
CLAIMS CONCERNING THE TRADE BALANCING CONDITION
1. Factual aspects of the measure
7.209  Subparagraphs 3(i) through (iv) of Public Notice No. 60 set out four obligations which an
MOU imposes on a manufacturing company that is a signatory.  Subparagraph 3(iv) contains the"trade balancing" obligation.
7.210  MOU signatories must achieve "broad trade balancing of foreign exchange over the entire
period of the MOU", in terms of balancing between the actual CIF value of imports of CKD/SKD
kits/components and the FOB value of exports of cars and auto components over that period.  Other
parts of the MOU indicate the time-frame for that obligation. While a signatory has a trade balancingobligation over the period of the MOU, there is a two-year moratorium during which the firm does not
need to fulfill that commitment.  The period of execution of the export obligation therefore begins
from the third year of commencement of production.  However, imports made during the moratorium
count towards the firm's total export obligation under the MOU.
7.211  Two other aspects of the alleged administration of this measure are of particular relevance to
the Panel's deliberations and will be addressed at a later stage of analysis. The first is that, although
there is no express provision to that effect in Public Notice No. 60, it has been confirmed by India that
purchases by an MOU signatory within India of  previously imported CKD/SKD kits/components that
were subject to a license requirement on their importation, also count towards the signatory's export
balancing requirement.
405
7.212  The second is the assertion by India that the trade balancing obligation has only ever applied
in respect of products that were subject to discretionary import licensing. India has indicated that
since 1 April 2001, the import restrictions for SKD/CKD kits and car components have been
abolished and no licenses are required. As from that date, the signatories of existing MOUs would
continue to be required to discharge the export obligations corresponding to the imports made by them
                                                     
404 See Report of the Appellate Body in US – Wool Shirts and Blouses , WT/DS33/AB/R, adopted on
23 May 1997, p.18 as cited above (DSR 1997:I, 323).
405 There is no dispute between the parties as to th is assertion and we address its legal significance
separately below.WT/DS146/R
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before  that date. They would no longer incur any new export obligations as a result of the further
importation of SKD/CKD kits since these are no longer restricted.406
7.213  There is a factual dispute between the European Communities and India on this aspect of the
scope of the export obligation. The European Communities argues that under the terms of the MOUs
and of Public Notice No. 60, the requirement applies to "imports of kits/components" generally, i.e.not just those kits and components which are or were subject to licensing.
 407  The European
Communities also argues that the trade balancing requirement, irrespective of the scope of the
products covered, would continue to apply so long as the signatories have not achieved the 70%
indigenization level.
2. Order of analysis of the claims
7.214  The Panel recalls that in considering the order of examination of the claims concerning the
indigenization condition, it decided to first examin e the claim of violation of Article III:4 which was
common to both complainants. On the trade balancin g issue, the Panel again wishes to follow the
same approach, namely to seek to determine whether common ground between the claims can be
identified to assist in determining the order of their examination.  This seem to the Panel the best
means of allowing for the possible exercise of  judicial economy while respecting its obligation under
Article 9 of the DSU with regard to the preservation of the rights and obligations of parties in casesinvolving multiple complaints.
7.215  Both complainants assert that Articles III and XI respectively apply to at least some aspects of
the measure. However their claims differ somewhat in their coverage:
– the European Communities merely makes a claim of violation of Article III:4 in relation to its
impact upon purchases made on the domestic market. It considers all other aspects of themeasure to fall under Article XI.
– The United States makes a claim of violation of Article III:4 in relation to both purchases on
the domestic market and in relation to imports made directly by the signatories.  While it thus
takes a broader view than the European Communities as to the relevance of Article III, it alsomakes a distinct comprehensive claim of violation based on Article XI:1.
408
7.216  While the claim that the trade balancing condition is inconsistent with Article XI is common
to both complainants, the claim of inconsistency with Article III:4 argued by the United States
involves aspects of that condition which the European Communities does not argue to be inconsistentwith Article III.4.  The scope of the United States's  claim under Article III:4 is therefore much broader
than that of the European Communities.  In this  instance, because both the European Communities'
and the United States' claims seek to bring the entire measure within Article XI and because the
European Communities addresses a wider range of effects under that Article than under Article III,
the Panel has resolved to begin its analysis of trade balancing under Article XI.
                                                     
406 It is not clear, despite a question put to all three parties on the issue, what the time-frame is for the
execution of outstanding export requirements. Nothing turns on this from a legal point of view, although it
affects the degree of commercial significance of the residual obligation.
407 The Panel will address this factual question and its legal ramifications below in the context of
analysing the scope of the EC's claim. See below, section 4 b.
408 The United States appears to have ultimately argued in the alternative.  It has stated in its responses
to the Panel's questions that the measure might be covered by one or the other provision, but in any case it
should be found contrary to at least one of the two.WT/DS146/R
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3. Relationship between Articles III and XI
7.217  While the Panel has resolved to begin its analysis with Article XI, the parties have addressed
the relative scope of Articles III and XI and their relationship to each other, in light of India's
arguments concerning these issues. In light of this, the Panel felt it appropriate to begin by outlining
its general interpretative approach to this Article and these submissions.
7.218  India has argued that the trade balancing condition cannot fall within the purview of
Article XI.  It asserts that Article XI only applies to border measures. It considers that this measure isnot a border measure because it does not relate to the "process" of importation. It suggests that it
should be considered as an internal measure and hence be analysed under Article III.  This argument
will be addressed in due course in our analysis under Article XI.
7.219  More generally, India has warned of the systemic implications of applying Article XI to other
than "border" measures, as to the effect on the respective scopes of Articles III:4 and XI:1 of GATT.
In particular, there may be a concern that too broad an interpretation of Article XI might lead to it
inappropriately covering ground intended for Article III. Others might assert a contrary concern with a
broad interpretation of Article III:4.
7.220  In that regard the Panel notes that Articles III and XI seem to have been considered to have
distinct scopes of application.  In Canada –FIRA  a panel stated that:
"The Panel shares the view of Canada that the General Agreement distinguishes
between measures affecting the ‘importation' of products, which are regulated in
Article XI:1, and those affecting ‘imported products', which are dealt with in
Article III.  If Article XI:1 were interpreted broadly to cover also internal
requirements, Article III would be partly superfluous ."
409
7.221  Only in the very specific circumstance of state trading enterprises involving a monopoly over
both importation and distribution of goods has a bl urring of the traditional distinction between
measures affecting imported products and measures affecting importation been acknowledged.410
7.222  The Panel feels that it is vital that the task be  approached solely through an application of the
customary rules of interpretation of public international law as required by Article 3.2 of the DSU.
This should occur without any presumption as to some preordained or systemic balance between the
two Articles. The customary rules provide sufficient mechanisms to ensure an appropriate outcomethat should deal with such concerns, as they require consideration of ordinary meaning in context and
in the light of object and purpose of the treaty. In this regard, context includes a reading of each
Article in relation to other potentially relevant provisions and an analysis, where necessary, of any
differences in terminology. The principle of effectiveness would also apply to prevent reducing any
provision to inutility.
7.223  While other provisions in the WTO Agreement may usefully be considered as part of the
context which informs the meaning of a given provision, the scope of that provision should not be
                                                     
409 Panel Report, L/5504, adopted on 7 February 1987, para. 5.14.
410 See the Panel Report on Korea – Various Measures on Beef , WT/DS161/R, WT/DS169/R, adopted
on 10 January 2001, as modified by the Appellate Body Report, para. 766: "Based on the panel findings in theCanada – Marketing Agencies (1988) case, the Panel considers that to the extent that LPMO fully controls both
the importation and distribution of its 30 per cent share of Korean beef quota, the distinction normally made inthe GATT between restrictions affecting the importation of products (i.e. border measures) and restrictions
affecting imported products (i.e. internal measures) loses much of its significance."WT/DS146/R
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assumed a priori  to vary depending on the mere presence of other provisions which may have some
relevance to the situation: the contours of a provision should flow from its terms, as read in context
alongside the other provisions of the agreement. The Panel is also mindful of the fact that different
aspects of a particular measure may legitimately be covered by distinct provisions of the WTO
Agreements.
7.224  For all the foregoing reasons, it therefore cannot be excluded a priori  that different aspects of
a measure may affect the competitive opportunities of imports in different ways, making them fall
within the scope either of Article III (where competitive opportunities on the domestic market are
affected) or of Article XI (where the opportunities for importation itself, i.e. entering the market, are
affected), or even that there may be, in perhaps exceptional circumstances, a potential for overlap
between the two provisions, as was suggested in the case of state trading. Any analysis of the
applicability of either Article III:4 or XI:1 should thus be based on the principles within Article 3.2 of
the DSU. This is how the Panel will proceed in its examination.
4. Claims under Article XI:1
7.225  Both the United States and the European Communities argue that the trade balancing
requirement is inconsistent to Article XI:1 of GATT.  Although the substance of their claims is
essentially similar, they differ somewhat in that  the European Communities initially made its claim
subject to some specific conditions. This will need to be considered as a preliminary matter.
(a) Scope of the European Communities' claim
7.226  The European Communities' request for establishment of a panel indicated the following:
"The measures concerned are contained in:
- Public Notice No. 60 (PN 97-02) of the Indian Ministry of Commerce,
effective 12 December 1997;  and
- the Memorandums of Understanding (MOUs) entered into by certain
manufacturers of automobiles with the Government of India pursuant to
Public Notice No. 60.
The above measures require manufacturers of automobiles to sign an MOU as a
condition for obtaining licenses for importing automotive products that are currently
subject to import restrictions. According to the Indian authorities, the MOUs are
"binding" and "enforceable" instruments, which shall remain valid after the date when
those restrictions are eliminated. The MOUs require (i) to establish "actual production
facilities" in India; (ii) to make a minimum investment; (iii) to achieve a certain levelof "indigenisation"; and (iv) to export a certain amount of automotive products.
The European Communities considers that the requirements imposed by the above
measures are in violation of Articles III:4 and XI:1 of GATT and of Article 2.1 of the
TRIMs Agreement."
7.227  In its First Submission, however, the European Communities indicated that it was making the
claim of violation of Article XI :1 concerning the trade balancing obligation only in so far as:
– prior to 1 April 2001, the MOUs required the "trade balancing" of imports of "components"
other than chassis and bodies;  andWT/DS146/R
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– the MOUs would remain binding and enforceable after 1 April 2001, both with respect to
passenger cars and components therefor.
7.228  In the course of the proceedings, the European Communities further clarified the scope of its
claims, and as was noted above, a disagreement arose and persisted between the EuropeanCommunities and India as to the scope of application of the trade balancing condition.   The Panel
will address this issue first.
(i) The scope of the trade balancing obligation
7.229  The European Communities contends that because the plain meaning of Public Notice No. 60
and the MOUs does not limit the reference in the trade balancing obligation to imports subject to
licensing, it remains concerned that accrued export obligations might include calculations based on
non-restricted imports.
7.230  India argues that the regime has never been interpreted or administered in that way. It asks the
European Communities to rely on its assurances to that effect. In response to questions from the Panel
as to the way this distinction was effectively administered, India explained that ongoing calculation of
the export obligation was based on the actual imports made under the import licenses themselves.  In
response to similar questions, the European Communities was not able to provide any evidence ofcalculations made contrary to India's assertions. It relied instead on the plain meaning of the
documents concerned.
7.231  The Panel notes that the terms of Public Notice No. 60, as reflected in the standard MOU,
refer to an obligation to balance "the actual CIF value of imports of CKD/SKD kits/components"
(subparagraph 3(iv)).  It is true that it is not expressly mentioned in this phrase that this refersexclusively to restricted kits and components.  Nevertheless, these terms should be considered in their
proper context. Paragraph 2 of Public Notice No. 60  provides as follows:  "Pursuant to the above,
imports of components for motor vehicles in CKD/SKD form, which is restricted for import under the
current Export Import Policy , shall be allowed against a license (…)" (emphasis added).  This
suggests that in the context of Public Notice No. 60, it could be argued that where "imports ofCKD/SKD kits/components" are referred to, the reference may be to those "components for motor
vehicles in CKD/SKD form" defined in paragraph 2 of the Public Notice No. 60, i.e. the restricted
items under the EXIM Policy.  The Panel is not persuaded that the ordinary meaning of these words,
in this context, would encompass any non-restricted  components. At most, the plain meaning of the
expression, in context, appears ambiguous.
7.232  In addition, as noted above the European Communities has adduced no additional evidence to
suggest that the reading it suggests is indeed that which prevails, while India has provided an
indication of how it assesses the obligation which suggests a direct reliance on the licenses
themselves.
7.233  In these circumstances, the European Communities has not proven on balance that the trade
balancing requirement accrues in relation to non-restricted imports.  A mere reference to a plain
meaning which, read in context, is debatable, without reference to any evidence of relevant domesticIndian interpretations or reference to evidence from any signatory in support of the contention and in
the face of India's clear assertions as to methodology to the contrary, is not sufficient to support a
factual finding of that nature.  There is thus no basis for any specific ruling on the consistency with
Article XI of the trade balancing condition as it allegedly applies to non-restricted imports as
requested by the European Communities and the Panel declines to do so.WT/DS146/R
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7.234  In ruling on this factual question, the Panel wishes to point out that it has no jurisdiction to
make any binding inter-party determination as to the actual level of the export obligation accrued by
any signatory under individual MOUs. It is merely sa ying that it has not been demonstrated, for the
purposes of this proceeding, that this condition applies to the importation of non-restricted parts or
components.  The Panel's ruling in this regard cannot be determinative of what interpretation might beotherwise made of the scope of this condition in the MOUs on an inter-party basis.
(ii) The continued enforceability of the MOUs after 1 April 2001
7.235  The European Communities also indicated in its First Submission that it was making a claim
of violation of Article XI in relation to the trade balancing only to the extent that the MOUs remained
binding and enforceable after 1 April 2001.  The European Communities specifically argued that the
trade balancing requirement would continue to apply so long as the MOU signatories have not
achieved the 70% indigenization level.  The Panel has previously noted India's confirmation that theMOUs did remain binding and enforceable after that date.
411  More specifically, India confirmed that
it did not intend to release signatories from obligations incurred in relation to imports made before 1
April and that the indigenization condition remained in place.
7.236  In response to questions from the Panel, the European Communities further explained the
qualified submission it had made at that stage. It confirmed its view that the violation it was referringto would have existed as of the date of establishment of the Panel already, but that as a factual matter,
since India had been otherwise authorized to maintain quantitative restrictions on these products
beyond that date, there would have been little prac tical interest in challenging the measures earlier
unless India intended to maintain them after 1 April 2001.  The European Communities further
clarified in the course of the proceedings that it was nonetheless generally requesting the Panel tomake findings that the measures were in violat ion of the WTO Agreements as of the date of
establishment of the Panel, and also that they subsequently remained in violation of the same
provisions.
7.237  The Panel finds the European Communities' explanations of the scope of its claim under
Article XI to have been somewhat confusing at the early stages of the proceeding.
412 Nevertheless, the
European Communities referred to this claim in its request for establishment of a panel and has
clarified that it is essentially requesting the Panel to rule on the measures as they existed as of the date
of its request for establishment of a panel and as they, in its view, continued to exist subsequently. In
the context of the Panel request and terms of reference, the statements as a whole lead the Panel to
conclude that the claim presented by the European Communities under Article XI concerning tradebalancing is appropriately within its terms of reference.
7.238  The Panel understands the European Communities' articulation of its claim in its First
Submission as meaning that it wished to pursue this particular claim only if, as a factual matter, the
MOUs remained binding and enforceable beyond 1 April 2001, rather than as a suggestion that the
Panel's legal assessment of the claim should be on the basis exclusively of the situation as of
1 April 2001. The European Communities confirmed that any violations it was requesting the Panel to
make were violations that would have existed at the time of establishment of this Panel.
                                                     
411 See First Submission, paras. 11 ff.
412 The confusion arose because at one stage it seemed  to have been implied that the claim related only
to the post-April situation.  The Panel is on balance satisfied that the explanations provided by the EuropeanCommunities in the course of the proceedings have clarif ied that they intended the Panel to examine a claim of
violation which would have existed as of its date of establishment, which is appropriate, although the motivationfor the European Communities' request, which is not for a Panel to pass judgment upon, may have restedprincipally on the expectation of the effects of a finding after the 1 April 2001. The DSU allows Members to
exercise their own judgment as to when a case is worth pursuing.WT/DS146/R
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7.239  In light of the foregoing, the Panel considers it appropriate to rule on the EC's claim on the
basis of the measures as they existed as of the date of their request for establishment of this Panel, in
accordance with the approach determined in section B above.  Any implications of the events of 1
April 2001 in relation to the continuation of these violations will be addressed, as determined in the
same section, at a later stage.
(b) Arguments of the parties
7.240  The United States argues that starting in the fourth year, each MOU imposed a quantitative
limitation on imports through the trade balancing obligation. It asserts that the trade balancing
requirement restricts imports because it limits the value of an MOU signatory's imports to the value of
the signatory's exports (which, pursuant to paragraph III, clause (vi), the MOU signatory was required
to specify at the time of signing).  Because there would obviously be limitations on the amount of
exports which a car manufacturer might be able or willing to make, it argues that the trade balancingobligation itself restricts imports.
7.241  In addition, the United States notes that the obligation is clearly enforceable. The Government
of India had confirmed that denial of an import license was effectively mandatory if the trade
balancing obligation was not met. A manufacturer's failure to comply with an MOU obligation could
lead to loss of import privileges or to confiscation of the goods concerned pursuant to variousprovisions of the FTDR Act and regulations thereunder.  It appeared that after April 1, 2001, these
additional provisions would be the instruments through which India would enforce Public Notice
No. 60 and the MOUs (and thus prevent SKD/CKD ki ts/components from being brought into India to
compete with domestic parts and components). For all of these reasons, it considered that the trade
balancing obligation in Public Notice No. 60 and th e MOUs imposed import restrictions as such, and
was therefore inconsistent with Article XI:1 of the GATT 1994.
7.242  The United States further refers to Item 2(a) of the Illustrative List of the TRIMs Agreement
to support its argument, asserting that the MOUs restricted importation to an amount related to the
value of locally produced goods that a manufacturer exports, as foreseen by that item, and the MOUs
were "enforceable".  The Untied States argued that India had confirmed both points.
413  The trade
balancing requirement thus fell within the scope of this paragraph, and consequently it was
"inconsistent with the obligation of general elimination of quantitative restrictions provided for in
paragraph 1 of Article XI of GATT 1994".
7.243  The European Communities argues that the trade balancing obligation stipulated in the MOUs
is inconsistent with GATT Article XI:1 in that it restricts imports of passenger cars, and ofcomponents therefor, by the signatories of the MOUs.  In the view of the EC, it does so because it
places a maximum limit on the value of the imports that the signatories are authorised to make, equal
to the value of their exports.  In practice, there were limits to the amount of exports which a signatory
might be able or willing to make, related both to its manufacturing capacity in India and to the
demand for its products in foreign markets. Thus, by limiting the amount of a signatory's imports to
that of its exports, the trade balancing obligation "restricted" the amount of imports.
414 The European
Communities also refers to Item 2(a) in the TRIMs Illustrative List to support its argument underArticle XI:1.
                                                     
413 India's First Submission, para. 14, and Replies by India to Questions Posed by Japan ,
G/TRIMS/W/15, circulated 30 October 1998, response to Question 24; Exhibit US-5:  "CKD/SKD kits importswould be allowed with reference to the extent of export obligation fulfilled in the previous year."  As discussedabove, the MOUs were also "necessary to obtain an advantage".
414 US response to Question 82 of the Panel.WT/DS146/R
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7.244  As noted above, India first argues that the trade balancing obligation does not fall within the
purview of Article XI because it is not a border measure and does not relate to the "process" of
importation.  It also argues that in any case, after 1 April 2001, the execution of outstanding export
obligations will in no way be tied to imports and therefore will be a straight export requirement,
which is not in itself prohibited by any provis ion of GATT 1994.  This second aspect of India's
defense, which relates to a distinction between the measures as they applied prior to 1 April 2001 and
after that date, will be addressed as necessary in our section on Recommendations.
(c) Scope of Article XI:1
(i) The notion of "measures" within the meaning of Article XI:1
7.245  Article XI:1 provides that:
"No prohibition or restriction other than duties, taxes or other charges, whether made
effective through quotas, import or export licenses or other measures, shall beinstituted or maintained by any [Member] on the importation of any product of the
territory of any other [Member] or on the e xportation or sale for export of any product
destined for the territory of any other [Member]."
7.246  Article XI:1 refers to restrictions "made effective through quotas, import or export licenses or
other measures".  This formulation, which includes a "broad residual category"
415 of "other measures",
suggests a broad scope to the types of measures which can be considered to fall within the meaning of
Article XI:1.
7.247  Past jurisprudence supports such a broad interpretation.  The Panel recalls in particular the
conclusion of the panel in Japan – Semi-conductors  that
"Article XI:1, unlike other provisions of the General Agreement, did not refer to laws
or regulations but more broadly to measures.  This wording indicated clearly that any
measure instituted or maintained by a contracting party which restricted the
exportation or sale for export of products was covered by this provision, irrespective
of the legal status of the measure"416
7.248  Such a broad interpretation of the notion of "measure" has also been subsequently endorsed in
the context of an analysis of that notion under Article XXIII:1 (b),417 and more generally in the
context of WTO dispute settlement.418
                                                     
415 As described in the Panel Report on Argentina – Hides Leather , WT/DS155/R, adopted on 16
February 2001, para. 11.17.
416 Report of the Panel on Japan – Semi-conductors , adopted on 4 May 1988, BISD35S/116, para. 106.
417 See Panel Report on Japan – Film , WT/DS44/R, adopted on 22 April 1998, para. 10.45
(DSR 1998:IV, 1179).
418 See Report of the Appellate Body in Guatemala – Cement I , WT/DS60/AB/R, adopted on
25 November 1998, footnote 47: "In the practice established under the GATT 1947, a "measure" may be any act
of a Member, whether or not legally binding, and it can include even non-binding administrative guidance by agovernment (see Japan – Semi-conductors , adopted 4 May 1988, BISD 35S/116).  A measure can also be an
omission or a failure to act on the part of a Member (see, for example, India – Patents (US) , WT/DS50/R and
WT/DS50/AB/R, adopted 16 January 1998,  and also India – Patents (EC) , WT/DS79/R, adopted 22 September
1998)."  Interestingly, this analysis appears to encompass together analyses of the notion of "measure" as
contained in different provisions of the GATT 1994, including Article XI:1.WT/DS146/R
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7.249  Thus, under past jurisprudence, a network of non-binding incentive measures has been
considered to constitute "measures" and a restriction within the meaning of Article XI:1 of GATT.
Such a broad interpretation is consistent both with  the express terms of the provision, which are all-
encompassing, and also more generally with its context, including other provisions defining the type
of measures which can be validly be submitted to dispute settlement.
7.250  It is notable in this respect that the more spec ific terms of Article III:4 ("laws, regulations or
requirements"), as noted in our analysis of the indigenization, has been broadly interpreted to cover
measures which are not mandatory but are either binding and enforceable or necessary in order to
obtain an advantage.  The Panel sees no reason to interpret the more general notion of "measure"
under Article XI:1 more restrictively, especially as these two provisions, as the Superfund panel
stated, have "essentially the same rationale,  namely to protect expectations of the contracting parties
as to the competitive relationship between their products and those of the other contracting parties".419
7.251  In this instance, India does not seem to dispute that Public Notice No. 60 constitutes a
governmental measure which could properly be the object of dispute settlement. It is less clear,
however, whether it accepts that the MOUs as such can constitute such "measures", including within
the meaning of Article XI:1 of the GATT 1994.
7.252  As previously noted, the MOUs have been si gned between the Government of India and
automotive manufacturers, in accordance with the terms of Public Notice No. 60, a government
measure which provides the framework and basis for these MOUs.  As noted above in the context of
our analysis of the indigenization condition, the MOUs constitute binding and enforceable contracts,
whose signature with all the specified conditions, including trade balancing, was necessary in order to
obtain an advantage, namely the right to import restricted auto kits and components. The acceptanceof this particular condition was thus in itself necessary to obtain the advantage sought (namely, the
right to import restricted items).  Although they were not mandatory in the sense of being directly
applicable to any manufacturer outside of that ma nufacturer's acceptance of it, a manufacturer wishing
to import restricted kits and components had no choice but to sign an MOU.  In addition, the terms of
these MOUs, including the trade balancing condition, were dictated by a pro-forma required by agovernmental measure, Public Notice No. 60, which clearly set out the requirements to be accepted by
car manufacturers for importation of restricted ki ts and components.  The MOUs emanate directly
from a government measure, Public Notice No. 60, which requires car manufacturers to execute an
MOU and comply with the terms contained therein to be able to import the kits and components.
7.253  For these reasons, the Panel finds that the trade balancing condition, as contained in both
Public Notice No. 60 and the MOUs constitutes a "measure" within the meaning of Article XI:1.
(ii) "Restriction on importation" within the meaning of Article XI:1 and  "border measures"
7.254  The restrictions envisaged by Article XI:1 are exclusively restrictions " on importation ".
Since India argues that the measure at issue cannot fall under Article XI because it is not a "border
measure", it is necessary to analyze first whether the phrase "restriction…. on importation" suggests
such a limitation on the scope of Article XI:1.  This argument is considered first, before considering
more generally whether the type of obligation at issue can be said to constitute such a "restriction".
                                                     
419 The Panel is further comforted in this analysis by the fact that the Illustrative List of the TRIMs
Agreement, in its introductory paragraph to item 2 con cerning TRIMs that are inconsistent with Article XI:1,
refers to "those which are mandatory or enforceable under domestic law or under administrative rulings, orcompliance with which is necessary to obtain an advantage".   This reference also suggests an endorsement, inthe context of recourse to Article XI:1 for the purposes of the TRIMs Agreement, of a broad notion of
"measures".WT/DS146/R
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7.255  In its second submission, in support of its argument that the trade balancing obligation was an
internal measure not subject to Article XI, India argued that
"Obviously, the provisions of the MOUs on trade balancing do not affect the process
of entering products into India's customs territory and can also for this reason not
constitute restrictions on importation within the meaning of Article XI:1".420
7.256  As indicated above, the Panel will address any such contentions through an application of the
customary rules of interpretation of public international law.
7.257  The Panel turns therefore to consider the ordinary meaning of the phrase "restriction…on
importation". An ordinary meaning of the term " on", relevant to a description of the relationship
which should exist between the measure and the importation of the product, includes "with respect
to", "in connection, association or activity with or with regard to".421  In the context of Article XI:1,
the expression "restriction… on importation " may thus be appropriately read as meaning a restriction
"with regard to" or "in connection with" the importation of the product.   On a plain reading, this
would not necessarily be limited to measures which directly relate to the "process" of importation. It
might also encompass measures which otherwise relate to other aspects of the importation of the
product.   Thus, at this stage of our analysis, the Panel does not find that the ordinary meaning of the
words supports India's contentions.
7.258  India also makes contextual arguments in suppo rt of its contentions in pointing out the
difference between the use of the term "importation" alone, in Article XI:1, as compared to
"exportation or sale for export".  It appears from these terms that Article XI does not intend to deal
directly with measures relating to the "sale for importation", but this otherwise suggests no limitation
on the manner  in which a given measure might affect or relate to "importation".
7.259  Nor would a contextual comparison with other Articles, such as Article III, support India's
contentions. The use of the term "importation" in Article XI, rather than "imports", or "imported
products", clearly suggests that what is targeted in Article XI:1 is exclusively those restrictions which
relate to the importation itself, and not to already  imported products. This does not, however, support
a conclusion that the only manner in which a measure can be a restriction " on importation " is by
being a "border measure", or a measure relating to "the process of importation", as described by India.
7.260  Contextual and purposive interpretation support this initial conclusion by the Panel. The text
of the Ad note to Article III clarifies that some measures applied "at the point or time of importation"
for imported products are nonetheless to be considered as internal measures under Article III.  This
would appear to confirm that the application of the measure "at the point of importation" is notnecessarily the decisive criterion.  If that note requires a particular measure to be considered as an
internal measure, it would mean that application at the point of importation would not be decisive in
determining the scope of Article XI:1.
422
                                                     
420 Footnote 8, para 20, Second Submission.  See also Annex 1 to second oral statement.
421 Webster's New Encyclopedic Dictionary, 1994 ed.
422 The Panel's conclusions are not dependant on the Ad Note as it could also be read to the contrary to
argue that the expression "at the point or time of importation" reflects a description of what measures wouldnaturally fall within the scope of Article XI, some of them then falling "out" of the scope of the provision byexpress derogation in certain circumstances. Such a view would contend that such derogation would not havebeen necessary if it had been evident that border appli cation of the measure was not sufficient to make it fall
under Article XI.WT/DS146/R
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7.261  Purposive interpretation suggests rather that it is the nature of the measure as a restriction in
relation to importation  which is the key factor to consider in determining whether a measure may
properly fall within the scope of Article XI:1.
7.262  Even if the trade balancing requirement cannot necessarily be considered to relate to the
actual "process" of importation, or to constitute a "border" measure, this would therefore not be asufficient reason to conclude that it cannot come within the scope of Article XI:1.
7.263  However, it still must be determined how it might constitute a "restriction…. on importation"
within the meaning of that provision. A rejection of India's suggested test for the conditions of
applicability of the provision does not imply that th e claimants' contentions are made out. The Panel
turns to address those contentions.
(d) The trade balancing condition as a "restriction … on importation"
(i) The notion of "restriction … on importation"
7.264  Although the title of Article XI refers to the elimination of "quantitative restrictions", the text
of the provision makes no distinction between different types of restrictions on importation.  On the
contrary, the words " No prohibitions or restrictions … whether made effective through  quotas, import
or export licenses or other measures " (emphases added) suggest an intention to cover any type of
measures restricting the entry of goods into the territory of a Member, other than those specificallyexcluded, namely, duties, taxes or other charges.  As was noted by the India – Quantitative
Restrictions  panel,
"the text of Article XI:1 is very broad in scope, providing for a general ban on import
or export restrictions or prohibitions 'other than duties, taxes or other charges'. As was
noted by the panel in Japan - Trade in Semi-conductors , the wording of Article XI:1
is comprehensive: it applies 'to all measures instituted or maintained by a [Member]
prohibiting or restricting the importation, exportation, or sale for export of products
other than measures that take the form of duties, taxes or other charges.'
423 The scope
of the term 'restriction' is also broad, as seen in its ordinary meaning, which is 'a
limitation on action, a limiting condition or regulation'."424
7.265  This Panel endorses the ordinary meaning of the term "restriction" as identified by the
India - Quantitative Restrictions  panel and its view as to the generally broad scope of the prohibition
expressed in Article XI:1. As a result, it can be concluded that any form of limitation  imposed on, or
in relation to importation constitutes a restriction on importation within the meaning of Article XI:1.
7.266  As far as the trade balancing obligation is concerned, it is a condition placed on importation
of the product. It results both from the signature of the MOU (whereby the principle of the obligation
is agreed to, as part of the conditions to gain the right to import the restricted products) and from the
actual importation of products (which determines the "quantum" of the export obligation).  The
MOUs are signed "on the basis of" projections regarding indigenization and trade balancing.425  After
entering into the MOU, signatories had the opportun ity to apply for licenses whenever they wished to
                                                     
423 Panel Report on Japan – Semi-conductors , BISD 35S/116, para. 104.
424 Panel Report on India – Quantitative Restrictions , WT/DS90/R, para. 5.128.
425 What is perhaps not entirely clear in the operation of the MOUs is the extent to which these export
projections by the manufacturers might "bind" them to the extent of preventing them from applying for licensesover the period of the MOU beyond  the initial projections. Nothing turns on this from a legal perspective in
terms of the Panel's analysis.WT/DS146/R
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import kits or components subject to restrictions. It seems that the licenses themselves, before 1 April
2001, made a reference to the trade balancing obligation.
7.267  Both complainants describe the measure as a "limitation" on imports, and highlight the
practical threshold imposed by the export requirement on the value of imports that can be made,
which, they assert, amounts to a restriction.
7.268  The trade balancing condition does not set an absolute numerical limit on the amount of
imports that can be made.   It does, however, limit the value of imports that can be made to the value
of exports that the signatory intends to make over the life of the MOU.   If all signatories could at all
times have an unlimited desire and ability to export, this obligation would be unlikely to have any
impact upon import decisions. That is not a realistic scenario, however and was not contended for by
India. In reality, therefore, the limit on imports set by this condition is induced by the practical
threshold that a signatory will impose on itself as a result of the obligation to satisfy a correspondingexport commitment. The amount of imports is therefore linked to a certain amount of anticipated
exports. The more a signatory would be concerned about its ability to export profitably at significant
levels, the more it would be induced by the trade balancing obligation to limit its imports of the
relevant products.
7.269  The question of whether this form of measure can appropriately be described as a restriction
on importation turns on the issue of whether Article XI can be considered to cover situations where
products are technically allowed into the market without an express formal quantitative restriction, but
are only allowed under certain conditions which make the importation more onerous than if the
condition had not existed, thus generating a disincentive to import.
7.270  On a plain reading, it is clear that a "restriction" need not be a blanket prohibition or a precise
numerical limit. Indeed, the term "restriction" cannot mean merely "prohibitions" on importation,
since Article XI:1 expressly covers both "prohibition or restriction".  Furthermore, the Panel considers
that the expression " limiting condition " used by the India – Quantitative Restrictions  panel to define
the term "restriction" and which this Panel endorses, is helpful in identifying the scope of the notion
in the context of the facts before it.  That phrase suggests the need to identify not merely a conditionplaced on importation, but a condition that is limiting, i.e. that has a limiting effect. In the context of
Article XI, that limiting effect must be on importation itself.
7.271  The Panel believes that a substance over form approach should be taken to the analysis of the
facts in the context of this test.  Such an approach is consistent with that taken by the panel on Japan-
Semi-conductors .
426  The panel examined a series of actions taken by the Government of Japan after
concluding an Agreement on trade in semi-conductors with the United States. These included requests
which the Japanese Government addressed to Japanese producers and exporters of semi-conductorsnot to export semi-conductors at prices below company-specific costs to contracting parties other thanthe United States. There was also a statutory requirement for exporters to submit information onexport prices and systematic monitoring of compa ny and product-specific costs and export prices by
the Government. This was backed up with the use of supply and demand forecasts to impress onmanufacturers the need to align their production to appropriate levels.  The panel concluded that:
"the complex of measures exhibited the rationale as well as the essential elements of a
formal system of export control. The only distinction in this case was the absence offormal legally binding obligations in respect of exportation or sale for export of semi-conductors. However, the Panel concluded that this amounted to a difference in form
                                                     
426 See Panel Report cited above in footnote 410.WT/DS146/R
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rather than substance because the measures were operated in a manner equivalent to
mandatory requirements. The Panel concluded that the complex of measuresconstituted a coherent system restricting the sale for export of monitored semi-
conductors at prices below company-specific costs to markets other that the UnitedStates, inconsistent with Article XI:1."
427
7.272  This finding suggests that measures which involve no formal restriction but rather a network
of strong suggestions can fall within the scope of Article XI:1.  It is true that in that instance, exportswere being restricted, rather than imports, and the panel referred in its final conclusion to a restriction
on "the sale for export". This Panel acknowledges that this phrase has no matching phrase under
Article XI:1 with regard to imports. However, the rest of the Semi-conductors panel's conclusions
suggest that the restrictions found by the panel also concerned exportation (e.g. "The Panel considered
that the complex of measures exhibited the rationale as well as the essential elements of a formalsystem of export control . The only distinction in this case was the absence of formal legally binding
obligations in respect of exportation or sale for export  of semi-conductors.").  This report thus seems
to support a reading of Article XI:1 encompa ssing import limitations made effective through
disincentives to importation, without a formal numerical limit on imports.
7.273  The same panel also found that "export licensing practices by Japan, leading to delays of up
to three months in the issuing of licences for semi-conductors destined for contracting parties other
than the United States, had been non-automatic and constituted restrictions on the exportation of such
products inconsistent with Article XI:1."  This fi nding suggests that a measure that does not preclude
any exportation but rather makes it more burdensome can also amount to a restriction on exportation.
Mutatis mutandis , the same reasoning could apply to a restriction on importation.
7.274  The Panel Report on EEC – Programme of Minimum Import Prices, Licences and Surety
Deposits for Certain Processed Fruits and Vegetables  also made a finding on Article XI:1 which is of
interest in identifying its scope.  In that ca se, the panel examined a minimum import price and
associated security system for tomato concentrate.  The United States was arguing that the system
prohibited importation of goods below a certain price and was, therefore, a restriction within the
meaning of Article XI on the importation of these goods.   The EC, on the contrary, was arguing that
the system was a non-tariff barrier measure and that, in principle, imports of tomato concentrates intothe Community were allowed, but not below the minimum price.  The panel found that "the minimum
price system, as enforced by the additional security, was a restriction "other than duties, taxes or other
charges" within the meaning of Article XI:1".
428
7.275  That report was adopted by the CONTRACTING PARTIES and cited by the
Japan - Semi-conductors  panel as having decided that "the import regulation allowing the import of a
product in principle, but not below a minimum price level, constituted a restriction on importation
                                                     
427 Ibid, para. 117.
428 There was a dissenting opinion on this point. One panelist (out of a panel of five),  however,
"considered that the minimum import price system, as enforced by the additional security, could well be appliedin a way which would qualify it as a "restriction "other than duties, taxes or other charges" within the meaningof Article XI:1.  However, having noted the explanation given with respect to the functioning of the system, this
member considered that importation of tomato concentrates at a price lower than the minimum price could still
be carried out by exporters who had an interest in doing so.  He further considered that the system operated in away to levy an additional charge which raised the price of tomato concentrate imported at a price lower than theminimum price.  Therefore, he concluded that the mi nimum import price system was not being enforced in a
manner which would qualify it as a restriction within the meaning of Article XI."   This suggests that, for thatpanelist, the measure operated so as to levy an additional charge , rather than as an import restriction (i.e. it was
possible to import below the minimum price, but with an additional charge).  BISD 25S/68.WT/DS146/R
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within the meaning of Article XI:1".429  The Panel also notes, in this regard,  the observation made by
the panel in Argentina –Hides and Leather  that "[t]here can be no doubt, in [its] view, that the
disciplines of Article XI:1 extend to restrictions of a de facto  nature". 430
7.276  As noted above, the India – Quantitative Restrictions  panel endorsed the broad scope of the
provision articulated by Japan – Semi-conductors  in finding that a discretionary import licensing
scheme, where licenses were not granted automatically but rather on "unspecified" merits, was
contrary to Article XI:1. This Panel agrees with and adopts these interpretations. For reasons outlined
above, the Panel does not consider that it is a separate requirement of Article XI that a measure can be
described as a border measure. It is the impact of a measure by way of a "restriction  …on
importation" that counts, not the physical place of its application.
(ii) Analysis of the trade balancing condition
7.277  With regard to the trade balancing condition, the Panel finds that as at the date of its
establishment, there would necessarily have been a practical threshold to the amount of exports that
each manufacturer could expect to make, which in turn would determine the amount of imports that
could be made.  This amounts to an import restriction. The degree of effective restriction which would
result from this condition may vary from signatory to signatory depending on its own projections, its
output, or specific market conditions, but a manufacturer is in no instance free to import, withoutcommercial constraint, as many kits and components as it wishes without regard to its export
opportunities and obligations.
7.278  The Panel therefore finds that the trade balancing condition contained in Public Notice No. 60
and in the MOUs signed thereunder, by limiting the amount of imports through linking them to an
export commitment, acts as a restriction on importation, contrary to the terms of Article XI:1.  Withrespect to the European Communities' argument that the MOU signatories that have yet to achieve the
70% indigenization requirement would continue to incur export obligations after 1 April 2001, the
Panel notes that no evidence was presented to show that any such new export obligations have in fact
accrued.
7.279  The Panel is comforted in this finding by the fact that it appears consistent with Item 2(a) of
the Illustrative list of the TRIMs Agreement which suggests that measures linking the amount of
imports to a certain quantity or value of exports can constitute restrictions on importation within the
meaning of Article XI:1.  The Illustrative List thus provides that:
"TRIMS that are inconsistent with the obligation of general obligation of elimination
of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994include those which are mandatory or enforceable under domestic law or under
administrative rulings, or compliance with which is necessary to obtain an advantage,
and which restrict:
(a) the importation by an enterprise of products used in or
related to its local production, generally or to an amount related to
the volume or value of local production that it exports."
431
                                                     
429 Panel Report on Japan – Semi-conductors , BISD 35S/116, para. 105.
430 Panel Report on  Argentina – Hides and Leather , WT/DS155/R, adopted on 16 February 2001,
para. 11.17.
431 The Illustrative List of the TRIMs Agreement is referred to in its Article 2.2 and contained in the
Annex to that Agreement.WT/DS146/R
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7.280  In particular, the Panel notes that this item does not limit the linkage to past exports.
7.281  Nevertheless, the Panel is not ruling on whether the specific type of measure under
consideration here is necessarily the precise type of measure envisaged in the Illustrative List or on
the extent to which this list may operate as an aid to interpretation of Article XI itself.  The Panel also
notes that to fall within the terms of item 2(a), the measures in question may in any case need to becharacterized as measures that "restrict" imports in certain ways. The essence of our analysis has been
to consider the proper meaning of a similar term under Article XI:1 itself.  Nonetheless, this item is at
least consistent with the finding that a measure linking imports to a certain amount of exports
constitutes a restriction on importation within the meaning of Article XI.1.
5. Balance-of-payments defense
7.282  To the extent that a violation of Article XI would be found, India is claiming a defense under
Article XVIII:B, although India also indicates that it  will not be applying any measures for balance-
of-payments purposes after 1 April 2001.
7.283  India argues that for the purposes of the present proceedings, its balance-of-payments
situation should be assessed as of the dates of each request for the establishment of this Panel. This is
not disputed by the complainants.
7.284  India has not presented any evidence as to its balance of payments situation as at the relevant
dates. Instead, India considers that the burden of proof is on the complainants to establish that its
measures are not justified on balance-of-payments grounds.  It cites the India – Quantitative
Restrictions  report as support for its position, as well as the Appellate Body's ruling on burden of
proof in the context of the US – Wool Shirts and Blouses  case under the Textiles and Clothing
Agreement (ATC).
7.285  The Panel does not agree with India's contentions as to burden of proof. In both of these cases
cited by India, the rule applied was the general rule on burden of proof as consistently affirmed by the
Appellate Body and panels. That rule is to the effect that a party claiming a violation must assert and
prove its claim, and that a party asserting a defense is required to prove that the conditions for
invoking that defense are met.  In the India – Quantitative Restrictions  case, while the panel found
that the United States had the burden of proving its own claim that Article XVIII:11 had been violated
by India, it also clearly held that India had the burden of proving its own defense under
Article XVIII:B.  Similarly, in the US – Wool Shirts and Blouses  case, India, as the complainant, had
the burden of proving its own claim that Article 6 of the ATC was violated by the United States. Thus
in both of these cases, the party asserting a particular claim or defense was required to prove itsassertions.
7.286  In this instance, the United States and Europ ean Communities asserted their claims that India
had violated Articles III and XI of GATT 1994 and Article 2 of TRIMs.  They made no
representations concerning Article XVIII:B.  It is  India who invoked Article XVIII:B as a defense to
any violations of Article XI which the Panel might find.  Therefore, it is for India to assert this
defense.
7.287  India suggests that applying the burden of proof to a party claiming a balance of payments
defense but not a party applying a safeguard measure would be systemically unfair to developing
countries. The Panel does not agree that this is an accurate policy consideration that might inform a
purposive interpretation on this issue. Safeguards actions may be taken by any country. More
importantly, areas of coverage such as safeguards, anti-dumping and countervailing duties require
domestic analysis where there is an onus on applicants and where affected foreign interests may beWT/DS146/R
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represented and may use local courts to challenge bureaucratic determinations. It is only where the
foreign interest alleges through the WTO that the procedures and principles were not properly
followed that the burden then lies on it. There is no such domestic process with balance of payments
issues.  Thus the Panel does not find the analogy to be relevant.
7.288  Thus the Panel holds that the burden is on India in relation to this defense. To successfully
assert this defense it must at a minimum, present a prima facie  case that these measures can be
considered to be maintained under Article XVIII:B.
7.289  Article XVIII:B foresees the possibility for developing country Members to apply certain
measures to safeguard their external financial position and to ensure a level of reserves adequate for
their level of development.  Article XVIII:9 lists the substantive conditions which should be met in
order to apply such measures.  In addition, Arti cle XVIII:B and the Understanding on Balance-of-
payments provisions require the notification of such measures to the BOPs Committee.
7.290  In support of its assertion that its measures were justified under Article XVIII:B, India
invokes the notification which it submitted to the BOPs Committee in 1997. It asserts that no new
notification was required in respect of Public Notice No. 60 because the measures it contained were
not significant changes to the measures within the terms of Article XVIII:B.
7.291  Other than that assertion, India has presen ted no evidence of any discussion in the BOPs
Committee subsequent to the rulings of the panel and Appellate Body in the India – Quantitative
Restrictions  dispute.  It has also not explained how any of the substantive conditions foreseen by
Article XVIII:B might be fulfilled. It has also presented no evidence whatsoever concerning its actual
balance of payments during the period which it itself has defined as the relevant time of examination
for this Panel.
7.292  In the light of the foregoing, the Panel finds that India has failed to make a prima facie  case
that its measures were justified under Article XVIII:B.
7.293  The Panel also notes that the complainants have, in response to India's defense, presented
some arguments and figures suggesting that India's balance-of-payments situation was not such as to
justify the application of balance-of-payments measures under Article XVIII:B. India has also notprovided evidence to refute those contentions.
7.294  India has also indicated that it would expect th e Panel to consult with the IMF in determining
India's balance-of-payments situation as of the dates of each claimant's request for establishment of
this Panel.  The Panel does not rule on whether consultation with the IMF is compulsory or not before
the final factual resolution by a panel of a balance-of-payments matter, where there is conflictingevidence presented. Whatever the proper view as to this question, such a consultation could not be
used as a total substitute for asserting and providing a prima facie case as to a defense under
Article XVIII:B, and in the absence of any indication of how the measures might fall within the terms
foreseen in that provision.  It is clear that a panel's fact finding mandate should not be utilised so as to
make out a prima facie case where that is not achieved by the relevant party.
432  At an appropriate
                                                     
432 The Panel recalls in this regard the Appellate Body's observation that "Article 13 of the DSU and
Article 11.2 of the SPS agreement suggest that panels have a significant investigative authority.  However, this
authority cannot be used by a panel to rule in favour of a complaining party which has not established a primafacie case of inconsistency based on specific legal claims asserted by it.  A panel is entitled to seek informationand advice from experts and from any other relevant source it chooses, pursuant to Article 13 of the DSU and, inan SPS case, Article 11.2 of the SPS Agreement, to help it understand and evaluate the evidence submitted andthe arguments made by the parties, but not to make the case for a complaining party".  (Report of the Appellate
Body, Japan – Agricultural Products II , WT/DS76/AB/R, adopted on 19 March 1999, para. 129).WT/DS146/R
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stage in proceedings, consultation of appropriate international experts or authorities could be helpful
in establishing whether one of the specific situations foreseen in Article XVIII:B applied to India's
situation.  As stated by the India – Quantitative Restrictions  panel, such consultation could "assist in
assessing the claims submitted" to the Panel.  However, the arguments presented did not even lead the
Panel to that point.
6. Claims under Article III:4
7.295  In light of the Panel's findings that the trade balancing condition contained in Public Notice
No. 60 and the MOUs is inconsistent with Article XI :1, it wishes to apply the principle of judicial
economy and does not consider it necessary in this instance, to separately consider the United States'
general claim that the trade balancing condition is inconsistent also with Article III:4 of the
GATT 1994.
7.296  Nevertheless, the Panel wishes to make one observation in that regard owing to India's
general claim that the measure should be considered under Article III and the implication that the
provisions are necessarily mutually exclusive. In support of the conclusion that while Articles III:4
and XI:1 deal with "imported products" and "importation" respectively, but without thereby
prejudging what the outcome of such an Article III:4 examination might have been in this instance,
the Panel wishes to note that it sees merit in the proposition that there may be circumstances in whichspecific measures may have a range of effects. In appropriate circumstances they may have an impact
both in relation to the conditions of importation of a product and in respect of the competitive
conditions of imported products on the internal market within the meaning of Article III:4.
433   This is
also in keeping with the well established notion that different aspects of the same measure may be
covered by different provisions of the covered Agreements.
7.297  While the Panel refrains from further consideration of the broader application of Article III:4
to the same features dealt with in the Article XI analysis, there is one distinct element of the trade
balancing measure that was not factually in dispute between the parties and which was alleged by the
complainants to constitute a distinct aspect of violation of Article III:4. This was the export obligation
that India acknowledged to be incurred in relation to previously imported products acquired bymanufacturers directly on the Indian market. This specific aspect was not considered in the
examination under Article XI:1. Because it is a discrete condition attached to the administration of the
trade balancing obligation and because it was addressed by the complainants in their Article XI
analysis, the Panel feels it is appropriate to make a separate ruling on it.
(a) Purchases of restricted imported kits and components on the domestic market
7.298  Both the United States and European Communities argue that the trade balancing condition is
inconsistent with Article III:4 in that it requires MOU signatories who purchase restricted kits and
components on the Indian market to count the value of these purchases towards their trade balancing
obligations.  India has confirmed that,
"if an MOU signatory purchased a component  that was subject to import restrictions
in India from either a trading company or another MOU signatory that had imported
                                                     
433 The Panel notes that the TRIMS Agreement Illustrative List envisages measures relating to export
requirements both in the context of Article XI:1, as noted above in the context of our analysis underArticle XI:1, and in the context of Article III:4 of the GATT 1994, by listing as inconsistent with that provisionmeasures which require "that an enterprise's purchases or use of imported products be limited to an amount
related to the volume or value of local products that it exports" TRIMS Illustrative List, Item 1 (b).WT/DS146/R
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such a component on the basis of an import license, the value of such components
would be taken into account for purposes of the neutralization requirement."434
7.299  The Panel recalls that Article III:4 provides that:
"The products of the territory of any [Member] imported into the territory of any
other contracting party shall be accorded treatment no less favourable than thataccorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation
distribution or use."
7.300  As previously noted, for a violation of Article III:4 to be established, it is necessary to
examine whether (1) imported products and domestic products are like products; (2) the measures
constitute a "law, regulation or requirement"; (3) they affect the internal sale, offering for sale,
purchase, transportation, distribution or use; and (4) imported products are accorded less favourabletreatment than the treatment accorded to like domestic products. The Panel will consider these points
successively.
(i) Like products
7.301  In this instance, the products at stake are the imported kits and components to which the trade
balancing requirement applies. India asserts that these products are those that are/were subject toimport licensing, since these are the only ones for which the trade balancing requirement applies. The
Panel has already separately addressed the factual disagreement on this issue and concluded that the
European Communities have not demonstrated that trade balancing applied in the past, or would still
apply, to non-restricted items.
7.302  For the purpose of this analysis, the Panel will therefore consider only those products that
were subject to restriction, i.e. kits and certain listed components.  As was the case with the analysis
under Article III:4 concerning the indigenization requirement, the only distinguishing factor between
imported kits and components and kits and components of domestic origin would be their origin.
Such differences in origin would not alone be such as to make products unlike.  The Panel also recalls
that it need not, for the purpose of this analysis, demonstrate actual trade in the products concerned toestablish the likeness of the products at stake. The Panel therefore concludes that kits and components
of imported and domestic origin are like products within the meaning of Article III:4.
435
(ii) Laws, regulations or requirements
7.303  The Panel recalls its earlier conclusion that indigenization conditions in Public Notice No. 60
and the MOUs signed thereunder are "requirements" within the meaning of Article III:4 of GATT1994.  This conclusion is equally applicable to the trade balancing, obligation which is, like the
indigenization requirement, one of the conditions provided for in Public Notice No. 60 and to be
                                                     
434 Response to Question 47 (b) of the Panel.
435 See for example the Panel Report on Indonesia – Autos , WT/DS54/R, WT/DS55/R, WT/DS59/R,
WT/DS64/R, adopted on 23 July 1998, para. 14.113 (DSR 1998:VI, 2201) ("… an origin-based distinction in
respect of internal taxes suffices in itself to violate Ar ticle III:2, without the need to demonstrate the existence of
actually traded like products.")
See also the Panel Report on Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000,
as modified by the Appellate Body Report, para. 10.74.
See also the Compliance Panel Report on US – FSC (Article 21.5) , WT/DS108/RW, circulated on
20 August 2001, para. 8.133.WT/DS146/R
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accepted by MOU signatories as a condition for obtaining the advantages of a license. Thus the Panel
concludes that it is a requirement.
(iii) affecting internal sale, use, …
7.304  Having established that the trade balancing condition foreseen in Public Notice No. 60 and
the MOUs signed thereunder is a requirement within the meaning of Article III:4, the Panel must nowconsider whether this requirement is one  "affecting the internal sale, offering for sale, purchase, use
or distribution" of the products at issue, in that it requires MOU signatories purchasing restricted kits
and components within India to count their value towards their export obligation.
7.305  The Panel recalls that the ordinary meaning of the term "affecting" has been understood to
imply "a measure that has "an effect on" and this indicates a broad scope of application".
436  T h e
disciplines of Article III:4 thus govern a broad range of measures, i.e. not only measures which are
directly intended to regulate the product, but in addition, any law, regulation or requirement which
"has an effect" on either the internal purchase, offering for sale etc. of the product. The fact that a
provision is not necessarily primarily aimed at regulating the offering for sale or use of the product on
the domestic market is thus not an obstacle to its "affecting" them. Nonetheless, it applies only to
situations where either internal sale, or purchase (…) or use are affected.
7.306  The fact that the measure applies only to imported products need not, in itself, an obstacle to
its falling within the purview of Article III.437  For example, an internal tax, or a product standard
conditioning the sale of the imported but not of the like domestic product, could nonetheless "affect"
the conditions of the imported product on the market and could be a source of less favorable
treatment.  Similarly, the fact that a requirement is imposed as a condition on importation is not
necessarily in itself an obstacle to its falling within the scope of Article III:4.438
7.307  In the present instance, an MOU signatory choosing to purchase an imported kit or
component within the Indian market will incur an  additional export obligation of a value at least
equivalent to that of the product, whenever the product has been imported subject to restrictions
(which is normally the case for these products).  On the other hand, were it to purchase a locally-made
kit or component, the manufacturer would not incur such an additional export obligation. Thepurchase of the imported good thus carries with it an additional burden not incurred upon the purchase
of a like domestic product.  This obviously affects the competitive conditions of the imported product
on the Indian market and more specifically, affects the conditions of internal offering for sale or
purchase of these products.
                                                     
436 Panel Report on Canada – Autos , WT/DS139/R, WT/DS142/R, adopted on 19 June 2000, as
modified by the Appellate Body Report, para. 10.80.
437 Article III:1 refers to the application of measures "to imported or domestic products", which
suggests that application to both is not necessary.
438 Thus, the "advantage" to be obtained could consist in a right to import a product.  See for instance,
the Report of the second GATT panel on EC – Bananas II  as cited and endorsed in EC – Bananas III ,
WT/DS27/R/USA, adopted on 25 September 1997, as modified by the Appellate Body Report, para. 4.385
(DSR 1997:II, 943:
"The Panel further noted that previous panels had found consistently that this obligation applies to any
requirement imposed by a contracting party, including requirements 'which an enterprise voluntarily accepts toobtain an advantage from the government.'  In the view of the Panel, a requirement to purchase a domestic productin order to obtain the right to import a product at a lower rate of duty under a tariff quota is therefore a requirement
affecting the purchase of a product within the meaning of Article III:4."WT/DS146/R
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(iv) Whether the measure affords less favourable treatment to imported products
7.308  By requiring that the purchaser of an imported kit or component take on an additional
obligation to export cars or components of equal value when such domestic purchases occur, the trade
balancing requirement creates a disincentive to the purchase of these products, and consequently
makes them more difficult to dispose of on the inte rnal market.  This element of the trade balancing
obligation therefore distinctly accords less favorable treatment to these imported products than to like
products of domestic origin, within the meaning of Article III:4 of GATT 1994.
7.309  The Panel therefore finds that, by requiring that MOU signatories count towards their export
obligation under the MOU any purchases of imported restricted kits and components on the Indian
market, the trade balancing condition is in violation of Article III:4 of the GATT 1994.
7. Ruling on the consistency of Public Notice No. 60 with the GATT 1994
7.310  To date the Panel has considered the claims concerning the indigenization and trade balancing
successively, examining each time both Public Notice No. 60 and the MOUs together. The Panel
previously indicated that it thought this to be th e appropriate approach, since both instruments contain
the two specific obligations that are the measures in issue.  Indeed, it is only through the existence of
Public Notice No. 60 that manufacturers were induced to sign the MOUs. While the European
Communities has not objected to such an approach, it has also requested the Panel to make a separateruling that Public Notice No. 60 itself is inconsistent with the GATT and TRIMs Agreement.
439
7.311  This request is not simply a further claim about an identified measure that could be the
subject of a decision to apply judicial economy. It is instead a distinct claim as to a more restrictively
defined measure, albeit still relating to the two conditions of indigenization and trade balancing. As
such, the Panel feels bound to rule on it.
7.312  In order to consider this separate claim, the Panel  will address successively the claims of
inconsistency with Articles III:4 and XI of the GATT 1994.
(a) Consistency of Public Notice No. 60 with Article III:4 of GATT 1994
7.313  In addressing whether Public Notice No. 60 is consistent with Article III:4 of the GATT 1994,
the Panel notes that the following elements must be considered: whether the imported products anddomestic products are "like products"; whether Public Notice No. 60 is a "law, regulation, or
requirement affecting the internal sale, offering for sale, purchase…or use"; whether the imported
products are accorded "less favourable treatment" than that accorded to like domestic products. In the
previous analysis, the Panel found that automotive parts and components of domestic and foreign
origin are like products within the meaning of Article III:4.
7.314  In respect of whether Public Notice No. 60 constitutes a "requirement" under Article III:4, the
Panel first noted that commitments entered into on a voluntary basis by individual firms to obtain an
advantage constituted a "requirement".  In this in stance, the Panel noted that auto manufacturers were
required to accept the indigenization condition set out in Public Notice No. 60 to obtain an import
license to  be able to import the restricted items contained in Public Notice No. 60.  The Panel went
                                                     
439 In response to the Panel's question whether the European Communities was seeking a distinct ruling
on Public Notice No. 60, separate from whether any MOU has been executed, the European Communitiesreplied that it was seeking a distinct ruling.  The European Communities argued that "[t]o the extent that theMOUs impose obligations that are inconsistent with the GATT and the TRIMs Agreement, a requirement toenter into an MOU is also inconsistent with those agreements, regardless of whether any manufacturer actually
concludes a MOU."  See EC's Response to Question 88.WT/DS146/R
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on to conclude that the indigenization condition contained in Public Notice No. 60 is a condition to
the granting of an advantage, i.e. the right to im port restricted kits and components, and therefore
constituted a requirement within the meaning of Article III:4.
7.315  The Panel subsequently found that the indigenization condition affects the internal sale,
offering for sale, purchase and use of the imported parts and components in the Indian market andthat, by requiring auto manufacturers to use a certain percentage of domestic products, it affects the
internal sale of like imported products which affords less favourable treatment to the imported
products.
7.316  The Panel is mindful that Public Notice No. 60 does not, in and of itself, impose a "direct"
obligation on individual manufacturers as it is  the execution of the MOUs that imposes such
obligations.  However, the Panel notes that it is not necessary for actual MOUs to have been signed
under Public Notice No. 60 in order for the indigenization condition, as contained in Public NoticeNo. 60, to afford less favourable treatment to impor ted products within the meaning of Article III:4.
The Panel recalls in particular, in this respect, th at the purpose of Article III:4 is to protect the
competitive opportunities of imported products on the domestic markets.  It is a well established
principle under WTO jurisprudence that Article III of the GATT 1994 is to provide equality of
competitive conditions for imported products in relation to domestic products.  That is, Article IIIrequires Members to provide equality of competitive conditions for imported products in relation to
domestic products.  These competitive conditions are affected even in the absence of actual trade
flows, wherever the conditions afforded to imported products are such as to affect their competitive
opportunities on the market.
440  In this instance, Public Notice No. 60 imposes the acceptance of the
indigenization condition on any manufacturer wishing to import restricted kits or components.  This initself adversely affects the competitive opportunities of all automotive parts and components, as far as
the indigenization condition is concerned because it can be assumed that certain car manufacturers
will wish to import restricted goods and will therefore choose to accept the indigenization condition.
7.317  In light of the foregoing, the Panel finds that Public Notice No. 60, independent of whether
the MOUs have been executed, is a requirement that is inconsistent with Article III:4 of theGATT 1994.
(b) Consistency of Public Notice No. 60 with Article XI:1 of the GATT 1994 in so far as it
contains the trade balancing condition
7.318  In determining whether Public Notice No. 60 is inconsistent with Article XI:1 of the GATT
1994, the Panel recalls its earlier analysis of the trade balancing condition as contained in the previoussection.
7.319  First, it recalls its conclusion that Public Notice No. 60, as a governmental measure requiring
manufacturers to accept certain conditions in order to be allowed to import restricted automotive kits
and components, constituted a "measure" within the meaning of Article XI:1.  This conclusion
remains relevant to this analysis and the Panel confirms its earlier conclusion in this respect.
7.320  Second, in order to establish whether Public Noti ce No. 60, in itself, can be considered to be
inconsistent with Article XI:1, it has to be established that it constitutes a "restriction … onimportation" within the meaning of that provision.   The Panel recalls in this respect its earlier
                                                     
440 The Appellate Body stated that "Article III protect s expectations not of an y particular trade volume
but rather of the equal competitive relationship between imported and domestic products."  See Appellate BodyReport in Japan – Alcoholic Beverages II , WT/DS8/R, WT/DS10/R, WT/DS11/R, adopted on 1 November
1996, p. 16 (DSR 1996:I, 97).WT/DS146/R
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conclusion that the trade balancing condition, as contained both in Public Notice No. 60 and in the
MOUs signed thereunder, constituted a restriction on importation contrary to Article XI:1 in that it
effectively limits the amount of imports that a manufacturer may make by linking imports to
commitment to undertake a certain amount of exports.  Under such circumstance, an importer is not
free to import as many restricted kits or components as he otherwise might so long as there is a finitelimit to the amount of possible exports.
7.321  While the Panel, in reaching its earlier conclusion, analyzed both instruments containing the
trade balancing condition, the conclusion that this condition is inconsistent with Article XI:1 is not
dependent on the signature by individual manufacturers of MOUs as such condition contained in
Public Notice No. 60 is a measure that restricts the import of kits or components.
7.322  The Panel therefore concludes that Public Notice No. 60 in itself, to the extent that it requires
the acceptance of the trade balancing condition in order to gain the advantage of importing therestricted products, imposes a restriction on imports and is inconsistent with Article XI:1 of the
GATT 1994.
G. C
LAIMS UNDER THE TRIM S AGREEMENT
7.323  Both complainants argue that the indigenization and neutralization conditions are in violation
of Article 2 of the TRIMs Agreement, which prohibits the use of trade-related investment measuresinconsistent with Articles III or XI of GATT 1994.
7.324  However, having found that these measures are respectively in violation of Articles III:4 and
XI:1 of the GATT, the Panel applies the principle of judicial economy and finds that it is not
necessary to consider separately whether they are al so inconsistent with the provisions of the TRIMs
Agreement.
VIII.  CONCLUSIONS AND RECOMMENDATIONS
A. C
ONCLUSIONS
8.1 In light of the foregoing findings, the Panel concludes that:
(a) India acted inconsistently with its obligations under Article III:4 of the GATT 1994
by imposing on automotive manufacturers, under the terms of Public Notice No. 60and the MOUs signed thereunder, an obligation to use a certain proportion of local
parts and components in the manufacture of cars and automotive vehicles
("indigenization" condition);
(b) India acted inconsistently with its obligations under Article XI of the GATT 1994 by
imposing on automotive manufacturers, under the terms of Public Notice No. 60 andthe MOUs signed thereunder, an obligation to balance any importation of certain kits
and components with exports of equivalent value ("trade balancing" condition);
(c) India acted inconsistently with its obligations under Article III:4 of the GATT 1994
by imposing, in the context of the trade balancing condition under the terms of Public
Notice No. 60 and the MOUs signed thereunder, an obligation to offset the amount of
any purchases of previously imported restricted kits and components on the Indian
market, by exports of equivalent value;WT/DS146/R
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8.2 The Panel recalls that it has examined the foregoing measures as of the date of the
complainants' requests for establishment of a panel. However, the Panel also recalls that a number of
arguments were exchanged in the course of the proceedings concerning events which took place
during the Panel's proceedings and their potential impact on the rulings or recommendations to be
made by the Panel.
8.3 The Panel had earlier concluded that events subsequent to the requests for establishment of
the Panel had not removed the Panel's initial competen ce to consider the validity of the measures as at
the date of its establishment. It had also noted that separate consideration would be given to the issue
whether the events which took place subsequently, including on or after 1 April 2001, might have
affected the existence of any violations identified and that it would consider whether those events
affect the nature or range of any recommendations it may make to the DSB in accordance with
Article 19.1 of the DSU.  This issue will be addressed now.
B. CONSEQUENCES OF EVENTS HAVING TAKEN PLACE IN THE COURSE OF THE PROCEEDINGS
1. Presentation of the issue: arguments of the parties
8.4 India principally argued that the Panel could not rule on the measures at issue because they had
already been the subject of a DSB ruling and a mutu ally agreed solution.  It also argued that any
future measures which India might take as of after 1 April would be outside of this Panel's terms ofreference.  In addition, India made a number of arguments to the effect that the situation in respect of
the measures at issue had changed after 1 April 2001 and that in any event, India's measures as
applied after 1 April 2001, in the absence of any import licensing restrictions, could not be in
violation of the GATT 1994 or of the TRIMs Agreement.
8.5 India thus argued generally that "Public Notice No. 60 is no longer applicable because the import
restrictions it was to administer no longer exist. In the absence of an import restriction on cars, this
notice cannot be implemented and serves no purpose.  It is therefore not clear to India how the
European Communities and the United States can claim that the Public Notice as such is capable of
violating WTO law."  As for Public Notice No. 60 itself, in its first submission (prior to April 2001),
India indicated that Public Noti ce No. 60 would no longer apply as of 1 April 2001 and explained
what the consequences of this absence of further application of Public Notice No. 60 would be: no
new MOUs would be required and no licenses would be required for the importation of previously
restricted kits and components.  In its second submission, India confirmed that Public Notice would
no longer be applicable in the absence of import restrictions
441.  In response to a concern raised by the
United States that the notice appeared to still remain in effect,442 India explained in its second
submission that "a new public notice  rescinding Public Notice No. 60 is (..) not required to ensure the
consistency of Public Notice No. 60 with Articles III:4 and XI:1 of the GATT."443   The Panel was not
advised by India until the interim review stage that Public Notice had, nonetheless, been repealed in
September 2001.444
8.6 It is clear that India's arguments relating to the elimination of its import licensing regime were
relevant to a number of its legal arguments, including its principal arguments concerning the
inadmissibility of the claims, as having already been the object of dispute settlement procedures.Nonetheless, India also envisaged the possibility th at the Panel might conclude that it was competent
                                                     
441 Second Submission by  India, para. 12.
442 Response to Question 2(b) by the Panel.
443 Second submission by India, para. 14.
444 See document annexed to the Oral Statemen t of India at the interim review meeting.WT/DS146/R
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to examine the matter before it and examine "the operation of Public Notice No. 60 and the trade
balancing provisions under India's former licensing regime".445
8.7 In this respect, India requested that:
If the Panel were to conclude that the operation of Public Notice No. 60 and the trade
balancing provisions under India's former licensing regime was inconsistent with theGATT, it should – following the practice of other panels – note that the licensing
regime had been abolished on 1 April 2001 and that it was therefore not necessary for
the Panel to recommend to the DSB in accordance with Article 19:1 of the DSU that
it request India to bring these measures into conformity with the GATT (emphasis
added).
446
8.8 In addition, India suggested in its first submission that it was quite possible that a number of
MOU signatory manufacturers may have reached, or  be close to reaching, the required level of
indigenization in manufacturing.  At the second substantive meeting, India presented the results of a
survey following a meeting with "the most important car manufacturers from the EC, Japan and the
United States to verify their performance under the MOUs" which led to written confirmation by
these signatories that they had reached the required levels of indigenization, except for one of the
surveyed companies, who remained below the 70% threshold for one car model.447
8.9 India thus also requested that:
"If the Panel were to rule that the indigenization requirements in the MOUs are
inconsistent with Article III:4, it should find that, according to the evidence submitted
by the parties, there remained as of May 2001 only one company that was still bound
by the indigenization requirement with respect to one car model.  India thereforerequested the Panel to limit any recommendation under Article 19:1 of the DSU to
the indigenization requirement that remains to be performed by that particular
company with respect to that model."
448
8.10 Both complainants, to the contrary, generally considered that the disappearance of India's
licensing system did not affect their legal claims and that the measures, as they would remain in placeafter 1 April 2001, would continue to be inconsistent with the provisions invoked by them.  They also
confirmed the nature of their requests for findings in light of these elements, which suggested an
expectation that the Panel would take them into account.
8.11 The United States thus requested the Panel to find that the measures at issue in this dispute,
the indigenization and the trade balancing requirements, imposed by Public Notice No. 60 and theMOUs, were inconsistent with Article III:4 and XI:1 of GATT 1994 and Articles 2.1. and 2.2 of the
TRIMs Agreement.
449 The United States requested this Panel to make findings to this effect, and to
recommend that India bring all such measures into conformity with its obligations.450   In response to
                                                     
445 See para. 3.7 above.
446 Para. 3.8 of the report.
447 Statement of India at the second meetin g, para. 29 and Annex II to that statement.
448 Para. 3.8 of the report.
449 See also Questions 1 and 17 of the Panel.
450 See para 3.1. The United States also considered it would be appropriate for the Panel to rule on
Public Notice No. 60 given that the requirements were still in place through the MOUs.  The United States said
it was not requesting the Panel to make findings on Public Notice No. 60 that were separate from its findings on
the MOUs executed thereunder.  The United States was, however, requesting that the Panel's findingsWT/DS146/R
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questions from the Panel, the United States confirmed that it was "requesting the Panel to make
findings with respect to the indigenization requirement and the trade balancing requirement as such.
Those requirements were in existence at the time the Panel was established, and remain in existence
today.  There is therefore no distinction to be drawn between the measures as they existed at the time
of the Panel establishment and now."451  The United States also indicated in response to a question
from the Panel that "the Panel must of course consider the arguments that India has advanced about
the relevance of the situation after April 1, 2001, since India has made those arguments a central part
of its defense (…)".452
8.12 The European Communities requested the Panel to find that the trade balancing and
indigenization requirements contained in Public Notice No. 60 and in the MOUs concluded
thereunder were inconsistent with Articles III:4 and XI:1 of the GATT 1994 and Article 2.1 of the
TRIMs Agreement as of the date of establishment of this Panel and had remained so after 1 April2001.
453  It clarified that the measures applied after 1 April 2001 continued to be inconsistent with the
GATT 1994 and the TRIMs Agreement because they were the same as the measures applied before
that date.454  Furthermore, the European Communities requested the Panel to find that, at the time
when the Panel was established, Public Notice No. 60 was inconsistent with Article XI:1 and III:4 of
the GATT 1994 and Article 2.1 of the TRIMs Agreement.
8.13 The issue of the impact of certain events subsequent to the request for establishment of the
Panel was therefore clearly raised before the Panel, and it appears from the terms of their arguments
and requests for findings that this issue was relevant in the findings of violation which the Panel might
make with respect to the measures as they were applied as of its establishment.  In these
circumstances, the Panel found it necessary to determine whether it was still appropriate to make arecommendation notwithstanding India's assertion that the legal situation had fundamentally changed
and that there may be nothing left to bring into conformity.
2. Approach of the Panel
8.14 Article 19.1 of the DSU provides that "[w]here a panel or the Appellate Body concludes that a
measure is inconsistent with a covered agreement, it shall recommend that the Member concernedbring the measure into conformity with that Agreement."
8.15 This provision thus envisages a situation where a violation is in existence.  Indeed, this
formulation reflects the usual situation which panels encounter, examining a matter which does not
significantly evolve in the course of the proceedings.  It is only natural in such circumstances for a
panel, following a finding that a measure is inconsistent with a covered agreement, to simplyrecommend, without the need for any further substan tive analysis, that this measure be brought into
conformity with that Agreement.
8.16 In this instance, however, a number of arguments have been presented, as was noted, to
suggest that certain events having occurred in the course of the proceedings fundamentally affect the
existence or persistence of the alleged violations.  In fact, issues relating to the elimination of India's
import licensing regime and its particular impact on the measures at issue in this dispute were
discussed before this Panel from the very first stages of the proceedings.   As noted above, India itself
                                                                                                                                                                    
encompass both Public Notice No. 60 and the individual MOUs (see para 3.2). See also para. 38 of the First
Submission of the United States to the Panel.
451 Response to Question 2 (a) from the Panel.
452 Response to Question 72 from the Panel para. 10.
453 See Second Oral Statement para. 41.
454 Para. 3.5. See also Question 87 of the Panel.WT/DS146/R
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had suggested in its requests for findings that, should the Panel examine the measures and find them
to be inconsistent with India's obligations under the GATT 1994, these factors be taken into account
in the context of the Panel's recommendations under Article 19.1, either to preclude the need for such
recommendations or to limit their scope.  The complainants, on the other hand, have expected the
Panel to make certain findings and recommendations implying that the events having taken place inthe course of the proceedings have been taken into account.
8.17 The determination the panel therefore needs to make is whether it is appropriate for it, in the
circumstances of the case, to take these developments into account and determine in this light
whether it still should make a recommendation under Article 19.1, and, if so, whether the content of
this  recommendation should be affected by these developments.
8.18 In most instances of dispute settlement under the WTO, the measures at issue are not affected,
or argued to be affected, by events having occurred  during the course of the proceedings in relation to
the measures at issue.
455  Some panels have, however, had to consider whether to take into account
amendments made to the measures in the course of the procedure.  While some panels have declined
to examine subsequent amendments to the measures and their conformity with the agreements,456 at
least one panel has taken into account the most recent evolutions of the measures where this allowed it
to find the "current" measures no longer to be in violation457.
8.19 In situations where the withdrawal of the entire measure in dispute has taken place, it may
understandably be possible for the Panel, assuming that it nonetheless had examined the consistency
of the relevant measure, to conclude that that there is no recommendation left to make under
Article 19.1.  However, the situation arising in this instance is quite distinct.  While it is not disputed
that some evolutions have taken place in the more general context of India's import restrictions, theparties are in strong disagreement as to the effect of these evolutions on the specific measures at issue
in this dispute.
8.20 It should first be stressed that the issue arising in this instance is not whether the Panel might
be entitled to examine the WTO-consistency of any new measures which might have been taken by
India after the beginning of these proceedings.  Such subsequent measures have been clearly statednot to be within this Panel's terms of reference.  None of the parties contended that the measures
themselves were no longer those that were within the Panel's initial terms of reference.  The issue is
                                                     
455 The Panel notes, as a general matter, that if a respondent could make changes of any degree to a
measure subject to challenge and then always be able to successfully argue that the Panel's report can have no
ultimate normative effect because the changes are distinct  measures from those originally envisaged, this could
entirely frustrate the dispute settlement system.
456 In Indonesia – Autos , the National Car program was terminated and the regulations and decrees
thereunder were revoked during the panel process.  Citing previous GATT and WTO panel reports, the panelproceeded to make findings on the National Car program.  In US – Section 337 , the challenged measure was
amended during the panel process but the panel refused to take into account such amendments.  See also
Argentina – Textiles , Report of the Appellate Body, para. 64.
457 See under the GATT, the Thailand – Cigarettes  case: the panel took into account, in drawing its
conclusions as to the compatibility of the measure submit ted to it, an amendment in the measure on the basis of
which it was able to conclude that the measure was no longer in violation of the relevant GATT provision:
"the Panel observed that the new Thai measure, by eliminating business and municipal taxes
on cigarettes, removed the internal taxes imposed on imported cigarettes in excess of those
applied to domestic cigarettes.  The Panel note d that (…) the Tobacco Act continued to enable
the executive authorities to levy the discriminatory taxes.  However, the Panel (…) found thatthe possibility that the Tobacco Act might be app lied contrary to Article III:2 was, by itself,
not sufficient to make it inconsistent with the General Agreement".The panel concluded that "the current regulations relating to the excise, business and municipal taxes
on cigarettes are consistent with Thailand's obligations under Article III".WT/DS146/R
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limited solely to the question of whether, as argued by the respondent, certain events subsequent to
the Panel's establishment are such as to affect th e continued relevance of the Panel's initial findings
with regard to measures clearly within its terms of  reference.  This raises the issue of whether they
should be considered, in this light, before the Panel can make appropriate recommendations as to the
need for India to bring its measures into conformity with the GATT 1994. 458
8.21 In approaching this question, the Panel considers it appropriate to seek guidance in the
definition of the mandate given to it by the DSB under the DSU.  The Panel recalls in particular the
terms of Article 11 of the DSU, which describes the function of panels as follows:
"The function of panels is to assist the DSB in discharging its responsibilities under
this Understanding and the covered agreements .  Accordingly, a panel should make
an objective assessment of the matter before it, including an objective assessment of
the facts of the case and the applicability of and conformity with the relevant coveredagreements, and make such other findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in the covered agreements.
(emphasis added and final sentence omitted)"
8.22 The Panel also recalls its own terms of reference in this case:
"To examine, in the light of the relevant provisions cited by the United States in
WT/DS175/4 and by the European Communities in WT/DS146/4, the matters
referred to the DSB by the United States and the European Communities in those
documents and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements .
(emphasis added)"
459
8.23 The Panel believes that it has an important responsibility to the DSB to "assist [it] in making
the recommendations or giving the rulings" provided for under the covered agreements, and, more
generally, to "assist it in discharging its respon sibilities under this Understanding and the covered
agreements" as foreseen in Article 11 of the DSU.  As recalled by the Appellate Body, the aim of
dispute settlement is "to resolve the matter at issue and 'to secure a positive solution to a dispute'".460
8.24 The responsibilities of a panel under the DSU include the requirement under Article 19.1 of
the DSU that "[w]here a panel or the Appellate Body concludes that a measure is inconsistent with a
covered agreement, it shall recommend that the Member concerned bring the measure into conformity
with that Agreement".
8.25 If only as a matter of logic, there can be no sense in making such a recommendation if a Panel
is of the view that the violation at issue has ceased to exist when its recommendation is being made.461
                                                     
458 It should be stressed in this respect that none of the issues raised here relate to any alleged
"worsening" of the situation likely to generate additional violations resulting from the measures at stake, butrather to whether the situation as examined has lost part or all of its legal or practical relevance.
459 See para. 1.4.
460 Australia – Salmon , Report of the Appellate Body, para. 223.
461 This was recalled by the Appellate Body in its report on US – Certain EC Products , where it
observed that "there is an obvious inconsistency between the finding of the Panel that 'the 3 March Measure isno longer in existence' and the subsequent recommendation of the Panel that the DSB request that the UnitedStates bring its measure into conformity with its WTO obligations.  The Panel erred in recommending that theDSB request the United States to bring into conformity with its WTO obligations a measure which the Panel hasfound no longer exists" ( US – Certain EC Products , Report of the Appellate Body, WT/DS165/AB/R, adopted
on 10 January 2001, para. 81).WT/DS146/R
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The Panel does not believe that Articles 11 and 19 of the DSU should be interpreted to demand that a
panel must make a formalistic statement that a measure needs to be brought into compliance when it
is faced with factual and legal arguments that this is no longer the case and must do so without being
entitled to resolve those contentions.
8.26 Indeed, were these issues not taken into account at all in the Panel's assessment of the matter,
there may be a significant risk that the resulting ruling could remain of very uncertain value even as of
the date of release of the Panel's report, as well as potentially be internally inconsistent in making a
recommendation to bring into conformity measures alleged to have ceased to have an effect.
8.27 In the circumstances of the case, the respondent itself has requested that the events which
occurred in the course of the proceedings be taken into account in the context of making the
recommendations under Article 19.1.  The complainants, while they had not specifically requested the
Panel to consider these issues at this stage of its analysis, did make requests for findings which calledfor these subsequent events to be taken into accoun t, in requesting the Panel to find that the measures
had "remained" in violation subsequent to 1 April.
8.28 In light of the foregoing, the Panel felt that it would not be making an "objective assessment
of the matter before it", or assisting the DSB in discharging its responsibilities under the DSU in
accordance with Article 11 of the DSU, had it chosen not to address the impact of events having takenplace in the course of the proceedings, in assessing the appropriateness of making a recommendation
under Article 19.1 of the DSU.
8.29 This is, in the Panel's view, an entirely distinct question from the issue of how India might
appropriately remedy this situation and bring its measures into conformity in the future.  The Panel
does not seek here to engage in such an analysis.  Any future issues arising as to whether India hascomplied with any recommendations resulting from the adoption of this report would be for a
compliance panel to assess.
8.30 It should be highlighted in concluding this section that the decision taken by this Panel to
proceed in this way in the particular circumstances of this case is in no way intended to imply that
panels have a general duty to systematically re-evaluate the existence of any violations identifiedbefore proceeding with making their recommendations under Article 19.1.  This Panel is simply
responding to the particular arguments placed before it, where the parties disagree as to the
implications of subsequent events on the Panel's power to make recommendations and rulings.  The
principal aim of the Panel in proceeding in this manner is to discharge its duty in the most efficient
way towards  resolving the matter at issue in this dispute.
3. Analysis
8.31 The parties agree that as from 1 April 2001 India removed its discretionary import licensing
regime on the products at issue and that Public Notice No. 60 and the MOUs were originally
introduced and operated in the context of this licensing system. This was obviously a significant
change in the situation affecting the conditions of importation of these previously restricted products.
In particular, India clarified that no new MOUs would be required to be signed and no import licenses
would be required for future non-restricted imports.
8.32 However, the question to consider is not whether these changes were significant per se , but
rather, what effect they may have on the foregoing legal and factual analysis of the two measures
before the Panel, namely the indigenization and trade balancing obligations, and consequently, on the
recommendations the Panel might make under Article 19.1 of the DSU.WT/DS146/R
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8.33 India raises essentially two lines of argument:
(a) the general import licensing framework under which the measures operated had
disappeared and that,  as a result, there could be no further violation of the relevant
provisions; more specifically, India argued that one of the instruments containing the
challenged obligations (i.e. Public Notice No. 60), first "ceased to operate" and thenwas formally repealed; it also argued that  after 1 April 2001, the MOUs signed under
Public Notice No. 60 became mere private contracts;
(b) as a factual matter, all signatories but one had fulfilled their indigenization
obligations and the Panel's recommendation in that regard could therefore be limited
to that signatory who had not yet reached required indigenization level. This is a
separate issue from the consequences of the repeal of Public Notice No. 60 as such.
The Panel will however also address it here, since it is raised as a fact of potentialrelevance to the scope of the Panel's recommendations.
8.34 The Panel notes that after 1 April, the situation appears to differ somewhat between the two
instruments in which the violating measures are to be found, i.e. Public Notice No. 60 and the MOUs
signed thereunder. It was alleged that Public Notice No. 60 no longer applied, and then that it was
repealed.  It is not alleged that the MOUs, as such, have ceased to apply.  Indeed, it has beenconfirmed that while no new MOUs will be require d and that previously restricted products could
now be freely imported without licenses, manufacturers are expected to fulfill their indigenization
requirements and outstanding export obligations under existing MOUs.   However, India has also
presented specific arguments to the effect that the nature of the MOUs as mere private contracts since
1 April has also affected how they might be considered as measures for the purposes of WTO disputesettlement.
8.35 As in its principal findings, the Panel will address successively the two challenged measures,
i.e. the indigenization and trade balancing provisions, and consider within these sections the different
issues at stake.
(a) Indigenization provisions
8.36 The Panel recalls that the indigenization provisions, as contained in both Public Notice No. 60
and the MOUs signed thereunder, were found to be inconsistent with the provisions of Article III:4 of
the GATT.
(i) The cessation of the application of Public Notice No. 60 and the MOUs as private contracts
8.37 It is not in dispute that the indigenization requirements contained in MOUs already signed by
individual manufacturers in accordance with Public Notice No. 60 have remained under the same
terms as of 1 April 2001 or any other date.  India confirmed that, even after the elimination of import
restrictions and licensing requirements on the products subject to Public Notice No. 60, it did not
intend to release these manufacturers from their legal obligations under those terms. Nevertheless,
because no new MOUs would be signed, there would be no new violation in respect of any person not
a signatory as of that date.
8.38 However, India considers that since 1 April 2001, the MOUs have become enforceable
merely as private contracts. It argues that there is a fundamental difference between a requirement that
has to be fulfilled to obtain an import license under the Indian trade laws and a requirement under
private contract law with the Government of India, which the Government is free to enforce or not.  ItWT/DS146/R
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has thus argued that India is free to waive or enforce them, and that they have therefore become
discretionary measures which cannot be challenged as such under WTO dispute settlement.462
8.39 India's argument in this regard concentrates  on the means of enforcement rather than the
existence and enforceability of the primary obligation itself.  The fact that the Indian government may
have some "discretion" in seeking the actual enforc ement of the requirements, in that it could choose
to pursue or not pursue its legal rights under the MOUs and enabling legislation, does not
fundamentally alter the fact that the obligation already exists.  The measure's status as a requirement
as at the date of the Panel's establishment does not fundamentally alter, simply because a change has
been made in the background circumstances which ma y then alter the potential means of enforcement.
8.40 A distinction must be made between the bi nding character and enforceability of the
commitment, and its actual enforcement.  As far as a manufacturer having entered into an MOU is
concerned, the commitments already exist and affect commercial behaviour, whether or not the IndianGovernment ultimately would choose to seek their enforcement through specific administrative or
judicial action in the event of breach.
463
8.41 The Panel is supported in this view by the fact that the Illustrative List of the TRIMs
agreement expressly refers to mere enforceability in the context of defining measures which may fall
within the scope of Article III:4 as well as Article XI:1.
8.42 This view is also supported by the jurisprudence. This Panel has previously alluded to
US - Malt Beverages  where a panel found the mandatory price affirmation laws in Massachusetts and
Rhode Island inconsistent with Article III:4 because they accorded imported beer and wine less
favourable treatment than the like domestic products even though the States concerned might  not
have been using their police powers to enforce the legislation.  The panel noted that this did not
change the fact that the measures were mandatory legislation which may influence the decision of
economic operators.
8.43 Changing the historical inducement for entering and then complying with the relevant
commitments from the potential denial of import licensing under Public Notice No. 60 to inducement
for compliance with existing commitments through the potential for contractual or penalty-basedlitigation, does not change the legal and historical basis upon which the relevant companies came to
adopt the obligations in the first place.
8.44 The Panel therefore cannot accept India's argument that the legal nature of the MOUs would
have been altered after 1 April so as to make them  discretionary measures not subject to review under
WTO dispute settlement.  On the contrary, the MOUs in place after 1 April are those very same legal
                                                     
462 Second Submission, para. 30.
463 The Canada – FIRA  panel, in considering an argument by Canada that the undertakings were
"private contractual" arrangements, found that:
"The Panel carefully examined the Canadian view that the purchase undertakings should beconsidered as private contractual obligations of particular foreign investors vis-à-vis the
Canadian government.  The Panel recognized that investors might have an economicadvantage in assuming purchase undertakings, taking into account the other conditions under
which the investment was permitted.  The Panel felt, however, that even if this was so, private
contractual obligations entered into by investors should not adversely affect the rights whichcontracting parties, including contracting par ties not involved in the dispute, possess under
Article III :4 of the General Agreement and which they can exercise on behalf of theirexporters.  This applies in particular to the rights deriving from the national treatmentprinciple, which – as stated in Article III :1 – is aimed at preventing the use of internal
measures 'so as to afford protection to domestic production'." (paras 5.4 to 5.6).WT/DS146/R
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instruments signed by manufacturers prior to 1 April 2001 and that it is only by virtue of this prior
commitment that they remain binding after 1 Apri l 2001, despite the disappearance of the supporting
government measure which served to induce their signature. Suppressing the advantage that served to
induce the manufacturers to sign the MOUs does  not fundamentally alter the analysis of the
commitments they undertook.
8.45 Any signatories who have not attained the stipulated levels are still required to do so. Thus
they would still be induced to favour domestic produc ts if they are concerned to comply with their
contractual commitments to the government of India. As indicated above, the only potential change
relates to the means by which any enforcement of a breach of that obligation would occur, and that
change alone does not alter the nature of the commitment entered into. Hence, the Panel concludes
that the indigenization obligations contained in th e MOUs have not been essentially altered by the
events of 1 April 2001.
8.46 The indigenization requirements as they stand in existing MOUs thus remain in violation of
Article III:4.  The cessation or repeal of Public Notice No. 60 has not suppressed this inconsistency.
Public Notice No. 60 served to induce the signatur e of these MOUs, and these instruments contain the
effective commitments of manufacturers in relation to indigenization and trade balancing.  India has
clearly indicated that these MOUs remain in existence. It has also clearly indicated that it was not itsintention to release signatories from their remaining obligations thereunder, including the
indigenization requirement generally.
464
8.47 In light of the foregoing, the Panel concludes that the indigenization conditions contained in
Public Notice No. 60 and in the MOUs, as they ha ve continued to exist and apply after 1 April 2001,
have remained in violation of the relevant GATT provisions.
(ii) Achievement of the required levels of indigenization by MOU signatories
8.48 India informed the Panel in the course of the proceedings that among the "most important
manufacturers" surveyed in April-May 2001, only one remained below the indigenization threshold
with regard to one car model.  On that basis, India requested the Panel to "limit any recommendations
under Article 19:1 of the DSU to the indigenization requirement that remains to be performed by thatparticular company with respect to that model".
465
8.49 However, the Panel notes that India indicated that the survey on which this assessment is
based concerned "the most important manufacturers".  It is therefore not clear that the figures given
would concern all signatories and that it could be legitimately assumed on the basis of that survey
alone that among all those manufacturers having si gned the MOUs, this would be the only one still
required to fulfil an indigenization requirement.
                                                     
464 The Panel also notes in this regard that signatories who might have reached the required level, at
whatever date, would have, in India's own description, "moved out of the ambit of the MOU" in that regardregardless of the events of 1 April 2001: to the extent that manufacturers would have reached the 70%indigenization level, their situation would arguably not have been fundamentally altered by the continued
application or not of Public Notice No. 60: Moving "out of the ambit of the MOU altogether" as described by
India, arguably would have the same practical consequences as the general suppression of the import licensingregime, regardless of the continuation of Public Notice No. 60.  We note however that there is a persistingdisagreement on this issue among the parties, since both complainants remain concerned that it is unclear whatthe consequences of subsequently  "slipping" below the required level may be.  The Panel does not find itnecessary, for the purpose of its analysis, to rule on this particular issue.
465 Para. 3.8,  cited above.WT/DS146/R
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8.50 Indeed, in the course of the interim review meeting, the European Communities suggested the
name of one company that was not covered by the survey.  The European Communities also noted
during the interim review meeting that the survey provided by India reflected the manufacturers' own
assessment of their fulfilment of their obligations, which may not preclude Indian authorities from
reaching a different conclusion.  The European Communities also recalls that it is, in its view, stillunclear what the effects of falling below the 70% threshold in the future might be.
466
8.51 On the basis of the elements before it, the Panel is not in a position to conclude that it has
been established that only one signatory remains w ho needs to fulfill the indigenization requirement
and would not be able to limit its recommendation to the obligation to be performed by   one of the
signatories only.  Indeed, it is not in a position to assess the exact modalities under which existing
MOU signatories still have to discharge their indigenization obligations.  Nor is it, in its view
necessary to attempt such an assessment for the purposes of this analysis.  In India's own admission,at least one manufacturer yet has to achieve the required level of indigenization and it can thus not be
concluded that this issue has lost any practical relevance so as to preclude the Panel from making
recommendations with regard to the indigenization requirements as contained in the MOUs.
(b) Trade balancing provisions
8.52 The Panel recalls its earlier finding that the trade balancing obligations, as contained in Public
Notice No. 60 and in the MOUs signed thereunder, and as applied as of the date of establishment of
this Panel, were in violation of Articles XI:1 and III:4 of the GATT 1994.
(i) Accrued obligations as independent from imports
8.53 India has argued that outstanding trade bala ncing obligations accrued under the MOUs before
1 April 2001 cannot be in violation of its obligations under GATT 1994 or the TRIMs Agreement,since these obligations will be executed independently of any new imports.  In India's view, these
obligations will therefore not be inconsistent with India's obligations under the WTO, since the WTO
does not generally prohibit export obligations as such.  In particular, India argues that they can no
longer be in violation of Article XI:1, because they will be executed independently of any new
imports.
8.54 The Panel notes in the first instance that this argument concerning the fact that these accrued
obligations will be executed independently of any new imports appears to be addressed towards the
Panel's finding of violation of Article XI:1, and would not be of relevance to its finding on the basis of
Article III:4, which was not tied to a link betw een imports and the amount of exports required.
8.55 This argument draws a distinction between the conditions in which the obligations were
entered into and accrued in the first place and the circumstances in which they will be executed.  In
this instance, it is not disputed that any remaining export obligations accrued in relation to restricted
imports prior to 1 April 2001.  While they might be actually executed independently of the conditions
of any future  imports, this would in fact already have always been the case.  Future restricted imports
would have generated additional  export obligations. They would not as such have affected previously
accrued obligations.
8.56 The fact that, at the time of execution  of any outstanding export obligations, there will be no
future import restrictions does not alter the fact that these particular obligations were accrued  in
relation to imports, in the same way as any other export obligations accrued under the MOUs. They
                                                     
466 Oral Statement at the interim review meeting, para . 12.  This concern is also shared by the United
States.WT/DS146/R
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were certainly not accrued independently of any imports and they are to be executed under the same
terms as were found to be inconsistent with the provisions of both Articles XI:1 and Article III:4 of
the GATT 1994.  These residual obligations are therefore not different in that respect from any other
accrued obligations under the MOUs. Signatories continue to be bound to the execution of conditions
which were found to be inconsistent with the provis ions of Articles III:4 and XI:1 of the GATT 1994.
8.57 The Panel notes that the events of 1 April 2001 did not alter the nature of any export
obligation previously  accrued under the MOUs.  The Panel also notes that no evidence was presented
to show that any new export obligations have in fact accrued for any imports taking place after  1
April 2001.
8.58 The essential issue here is that the obligation foreseen in Public Notice No. 60 and reflected in
the individual MOUs, which was found to be inco nsistent, continues to be binding and to produce
effects on those signatories who have not yet fully discharged their export obligations.  This issuedoes not relate to whether any past execution of trade balancing obligations might be required to be
"undone" or otherwise called into question, but merely to establishing whether the measure previously
found to be in violation of two of the GATT provisi ons continues to have an existence today, so that
the Panel would be justified in making a recommendation that this measure be brought into
conformity with the relevant agreement as of today.
467
(ii) Cessation of the application of Public Notice No. 60 and the MOUs as private contracts
8.59 India's argument concerning the alleged changed nature of the MOUs, as constituting mere
private contracts, has already been addressed in the previous section.  The Panel refers to its analysis
under that section to draw the same conclusion in  the context of the trade balancing provisions,
namely that the MOUs in place after 1 April are those very same legal instruments signed bymanufacturers prior to April 2001 and that it is only by virtue of this prior commitment that they
remain binding after 1 April 2001, despite the disappearance of the supporting government measure
which served to induce their signature.
8.60 With regard to the cessation or repeal of Public Notice No. 60, the Panel notes that Public
Notice No. 36 (RE-2000) which provides that Public Notice No. 60 "stands repealed", also indicates
that "however, export obligation incurred by the MOU signatories in respect of imports made up to
31/3/2001 shall be fulfilled by them within the st ipulated period unless extended by the Government
for good and sufficient reasons."
468  It thus appears that the repeal of Public Notice No. 60 has in any
case not altered the continued existence of export obligations accrued under existing MOUs.
8.61 In light of the foregoing, the Panel concludes that the trade balancing conditions contained in
Public Notice No. 60 and in the MOUs, as they ha ve continued to exist and apply after 1 April 2001,
have remained in violation of the relevant GATT provisions.
8.62 As to the question of any future enforcement of the current obligations of MOU signatories,
the Panel takes note of and welcomes India's statement that any future measures it may take to enforce
the MOUs will not involve any inconsistencies with its WTO obligations. However, the Panel also
                                                     
467  The Panel also notes that it does not seek to engage, in this analysis, in an assessment of the exact
levels of any currently existing trade balancing obligations to be fulfilled.  Indeed, none of the parties have
provided any relevant evidence in that regard.  While this is an issue which may be relevant in relation to theimplementation of any recommendations the DSB might adopt in this case, such an analysis is not required inthis context.
468 Public Notice No. 36 (RE-2000) / 1997-2002, 4th September 2001, as annexed by India to its Oral
Statement during the interim review meeting, with the indication "To be published in the Gazette of India
Extraordinary".WT/DS146/R
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recalls its earlier conclusion that such future actions would in any case not be part of its terms of
reference.
8.63 Finally, the Panel recalls that India has asserted that it did not apply any balance-of-payments
measures after 1 April 2001, so that any defense which it might have been able to establish for the
period prior to that date would in any case not have justified the subsequent continuation of theviolation by India of Arti cle XI:1 of the GATT 1994.
C. R
ECOMMENDATIONS
8.64 In accordance with the terms of Article 3.8 of the DSU, the Panel notes that the violations by
India of its obligations under the GATT 1994 is considered prima facie  to constitute a case of
nullification and impairment of benefits under that Agreement, and that this has not been rebutted.
8.65 The Panel consequently recommends that the DSB request India to bring its measures into
conformity with its obligations under the WTO Agreements.WT/DS146/R
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TABLE 1
Auto components licensing policy
The cabinet decision on the new policy for import of cars in CKD and SKD condition was announced by the principal
information officer who acts as the spokesperson for th e cabinet subsequently.  The DGFT released a notice on
12 December, 1997 to announce the import licensing policy for CKD and SKD imports in the auto industry.Essentially, the public notice requires minimum foreign investment of $50 mn for joint ventures.  Further,
indigenization up to 70 percent is required by the fifth year.  Last, foreign exchange outflow over the five year period of
the MOU must be balanced by corresponding inflow from export of cars and auto components subsequently, relaxationshave been made in specific cases.  Interpretation of the policy too has been simplified.  However, the basic Public
Notice of 12.12.97 continuous as before without amendment.Subject:  Export and Import Policy April, 1997 – March 2002 – Policy relating to import of CKD/SKD kits/componentsby Joint Venture Car manufacturer companies under MOU to be signed with the Government of India.
60-PN In exercise of the powers conferred under Paragraph 4.11 of the Export and Import Policy, 1997-2002 as
12.12.97 amended from time to time, Director General of Foreign Trade hereby draws attention to the above subject 
and the parameters stipulated in the year 1995 for import of CKD/SKD kits/components by the Joint Venture Motor Vehicle manufacturer companies under Memorandum of Understanding to be signed by them with the Government of India.  These parameters have now been reviewed in the light of the changed circumstances and joint venture motor vehicle manufacturing companies (both existing and new) are 
required now to sign a fresh MOU with the Government of India as per the revised parameters.
2. Pursuant to the above, import of components for motor vehicle in CKD/SKD form, which is restricted for 
import under the current Export-Import Policy, shall be allowed for importation against a licence and such a licence will be issued only to joint venture automobile manufacturing companies.  Thus, all joint venture manufacturers shall enter in to an MOU DGFT for import CKD/SKD kits/components.
3. The MOU shall be based on the following parameters:-
(i) Establishment of actual production facilities for manufacture of cars and not for mere assembly of imported
kits/components.
(ii) A minimum foreign equity of US$50 Million to be bro ught in by the foreign partner within the first three 
years of start of operations, if the Joint Venture involves majority foreign equity ownership. However, this condition will apply to new Joint Venture companies only.
(iii) Indigenization of components up to a minimum level of 50% in the third year or earlier from the date of 
clearance of first import consignment of CKD/SKD kits/components and 70% in the 5
th year or earlier.  
Once the MOU signing firm has reached an indigenization level of 70%, there will be no need for further import licences from  DGFT.  Consequently, as and when the firms achieve 70% indigenization, they would go outside the ambit of the MOU automatically.  However, they will discharge the export obligationcorresponding to the imports made by them till that time.
(iv) Regarding export obligation, the firms entering into MOU would achieve broad trade balancing of foreign 
exchange over the entire period of the MOU in terms of balancing between the actual CIF value or imports of CKD/SKD kits/components and the FOB value of exports of cars and auto components over the said period.  The period of export obligation would commence from the third year of commencement of production.  The date of commencement of production would be deemed to be the date of the first release 
of consignment from factory after payment of excise duty, but there would be a  moratorium to two 
years from this particular date of commencement of production during which the firm need not fulfill any export commitment.  However, from the third year onwards, (effective from date of release of first consignment), the MOU signing firm would have an export obligation equivalent to the CIF value of imports made by them till that time for the remainder of the MOU period till they complete the entire export obligation.  From 4
th year onwards, the value of import of CKD/SKD may be regulated with 
reference to the export obligation fulfilled in the previous years as per the MOU.  The export commitment 
would be met by export of cars as well as auto components.  This export obligation will be over and above the EPCG related export obligation.
4. The MOU Scheme would be enforced through the import licensing mechanism and MOU signing firms would 
be granted import licences by DGFT based on above parameters.WT/DS146/R
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5. To monitor the progress in respect of the elements stipulated above all the Joint Ventures would submit annual 
reports to the GFT on the parameters outlined above and a Joint Annual Review of the progress made in respect of these parameters would be undertaken by Ministry of Commerce, DIPP and Department of Revenue.
6. These revised guidelines will apply to all existing and future entrants into this sector.
7. By way of exception to the foregoing, companies intending to set up manufacturing units under foreign 
collaboration for light or heavy commercial vehicles, tract ors, earthmoving equipments etc. will not be required 
to enter into any MOU.  Their requests for CKD/SKD imports shall be considered by the Special Licensing 
Committee on merits on an annual basis.
8. A standard format for MOU is enclosed as appendix to this Public Notice and MOU is required to be signed as 
per this format.WT/DS146/R
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TABLE 2
Memorandum of Understanding (MOU)
I. This   MOU  has  been  made on            day of  1997-98
between
Government of India acting through the Director-Gen eral of Foreign Trade (hereinafter referred to as
the DGFT) Udyog Bhawan, New Delhi,
and
M/s. ……(hereinafter referred to as the party which expression shall be deemed to include their
executors, successors, administrators and assignee).
II. Whereas the party has sought issue of an import licence to cover import of CKD/SKD parts for
manufacture of cars.
III. And whereas the party shall do the following by way of implementation of the Joint Venture:
(i) that the party shall make an investment of Rs. in this joint venture with equity share of US$ (Rs….) of
M/s…., the foreign partner, which will be in freely convertible currency as per the time frame
mentioned hereunder:
Year Foreign Collaborator's
Equity Contribution in freelyconvertible currency.(Rs. in crores)
(US$ millions)
Total investment
(RS. in crores) (US$ in millions)
(ii) That a minimum foreign equity of US$ 50 million to be brought in by the foreign partner within the
first three years of start of operations, if the joint venture involves majority foreign equity ownership.
(iii) that the party shall establish actual manufacturing facilities, and not mere assembly facilities, in India to
produce cars. The following will be production volumes year-wise:
Year Production Volumes (Numbers)
(iv) that the party shall achieve indigenization of components up to a minimum level of 50% in the third
year or earlier from the date of clearance of first import consignment of CKD/SKD kits and 70% in thefifth year or earlier. Once the party has reached an indigenization level of 70% there will be no need forfurther import licence from DGTF. However, the party shall discharge the export obligation
corresponding to the imports made by them till that time.
That the party intends to achieve the following levels of indigenization  of their product, year-wise:
Year Percentage (%) of indigenization
The party shall aggressively pursue and achieve as soon as possible the development of the local supply base
and increased local content, since the same will allow a higher level of indigenization.WT/DS146/R
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(v) that the party intends to import the following number of kits with CIF value as indicated in the first five
years:
Year No. of Kits CIF value (Rs. in crores )
(US$ in millions)
(vi) That the party shall achieve a broad trade balancing of foreign exchange over the entire period of the
MOU in terms of balancing between the actual CIF value of imports of CKD/SKD/components and theFOB value of export of cars and auto components over the said period. The period of export obligation
would commence from the third year of commencement of production. The date of commencement of
production would be deemed to be the date of the first release of consignment from factory afterpayment of excise duty, but where would be a moratorium of two years from this particular date ofcommencement of production during which the firm need not fulfill any export commitment. However,from the third year onwards (effective from date of release of first consignment), the MOU signing firmwould have an export obligation equivalent to the CIF value of imports made by them till that time for
the remainder of the MOU period till they complete the entire export obligation. From 4
th year onwards
the value of imports of CKD/SKD may be regulated with reference to the export obligation fulfilled inthe previous year as per the MOU. The export commitment would be met by export of only cars as wellas auto components,. This export obligation will be over and above the EPCG related export obligation.
That the party intends to achieve export of cars and auto components as under year-wise:
Year Exports (RS. crores)
Exports (US$ in million)
IV. To monitor the progress in respect of the elements stipulated above the party shall submit annual
reports to the DGFT on the parameters outlined above and further licences will be issued to the party on the
basis of an annual report of the progress made in relation to these parameters.
V. The MOU Scheme would be enforced through the import licensing mechanism and MOU signing firms
would be granted import licences by DGFT based on the progress made in respect of the parameters mentionedat para. III above.
Managing Director Director General of Foreign TradeOn behalf of On behalf of Govt. of India
M/s………. M/s……….
Witnesses: Witnesses:1.  1.2. 2.
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