India: WTO Issues Panel Report On India's Domestic Content Requirements For Solar Products

On 24 February 2016, the World Trade Organization ("WTO") issued the panel report in the case brought by the United States regarding "India – Certain Measures Relating to Solar Cells and Solar Modules" (WT/DS/456). The panel concluded that the Domestic Content Requirement ("DCR") measures imposed under Phase I (Batch 1), Phase I (Batch 2), and Phase II (Batch 1) of the Jawaharlal Nehru National Solar Mission ("JNNSM"), which are incorporated or otherwise reflected in various documents within each Batch, including the Guidelines (issued by the Ministry of New and Renewable Energy) and Request for Selection documents (issued by the National Thermal Power Corporation Vidyut Vyapar Nigam Limited and the Solar Energy Corporation of India), the model power purchase agreement, and the individually executed power purchase agreements by NTPC or SECI and solar power developers, are –

1. inconsistent with Article 2.1 of the Agreement on Trade-Related Investment Measures ("TRIMs Agreement")¹ and Article III:4. of the General Agreement on Tariffs and Trade 1994 ("GATT 1994")², and are not covered by the derogation in Article III:8.(a) of the GATT 1994; and
2. not justified under the general exceptions in Article XX(j)³ or Article XX(d)⁴ of the GATT 1994.

The crux of the panel's findings:

• That the DCR measures are trade related investment measures ("TRIMs") covered by paragraph 1(a) of the Illustrative List in the Annex to the TRIMs Agreement⁵, in as much as they expressly stipulate the origin of specified goods that may be used by solar power developers for bidding eligibility and participation under each of the relevant batches of the JNNSM.
  
  This is consistent with the view of previous panels that "if the measures are local content requirements, they would necessarily be 'trade-related' because such requirements, by definition, always favour the use of domestic products over imported products, and therefore, affect trade."
• That the DCR measures are TRIMs that "require the purchase or use by an enterprise of products of domestic origin", as the Guidelines and Request for Selection documents mandate that certain solar power developers participating in the JNNSM use solar cells and/or modules manufactured in India.
• That the DCR measures "are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage", thereby fulfilling the requirements of paragraph 1(a) of the TRIMs Illustrative List.
  
  In this regard, the panel noted that the bidding eligibility and potential contractual benefits under the DCR measures qualify as "advantages" within the meaning of paragraph 1(a) of the TRIMs Illustrative List, a fact that India did not contest. For example, once developers are selected based on the technical and financial criteria of the bid process, power purchase agreements are entered into. These criteria, and the advantages resulting from such selection, such as guaranteed long-term tariffs as well as viability gap funding support (in Phase II – Batch I), are available for all developers meeting the applicable requirements. Compliance with the DCR measures is therefore necessary to obtain an advantage within the meaning of paragraph 1(a) of the TRIMs Illustrative List.
  
  Further, the various contractual obligations and penalties for default by developers, in combination with the requirements established under the relevant Guidelines and Request for Selection documents, sustain the conclusion that the DCR measures are "mandatory or enforceable under domestic law.
• Accordingly, the DCR measures (being TRIMs by definition) are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994, and thereby also inconsistent with Article 2.1 of the TRIMs Agreement.
• That the discrimination relating to solar cells and modules under the DCR measures is not covered by the government procurement derogation in Article III:8.(a) of the GATT 1994, which exempts laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.
  
  In determining this, the panel found that the scope of the term 'products purchased' in Article III:8.(a) is informed, in the first instance, by the product that is subject to the discrimination, or 'like' products, which can be described as products that are in a competitive relationship. This is the scope of the government procurement derogation. In the instant case, the solar cells and modules (purchased by the developers) and the solar power generated from those cells and modules (purchased by government agencies) are not products in a competitive relationship.
  
  To this extent, the panel found the DCR measures indistinguishable in any relevant respect from the DCR measures previously examined under the same provision by the Appellate Body in Canada – Renewable Energy/Feed-in Tariff Program⁶.
• That India's lack of manufacturing capacity of solar cells and modules does not amount to a situation of local and general short supply of solar cells and modules in India. Solar cells and modules are not "products in general or local short supply" in India within the meaning of Article XX(j) and the DCR measures do not involve the acquisition of "products in general or local short supply" in India, and are therefore not justified under the general exception in Article XX(j) of the GATT 1994.
• That India failed to meet the threshold requirements that (other than section 3 of the Electricity Act) the instruments that it has identified are "laws or regulations" within the meaning of Article XX(d) of the GATT 1994. As regards section 3 of the Electricity Act, India failed to demonstrate that the DCR measures are measures to secure compliance with the legal obligations in that section. Accordingly, the DCR measures are not justified under Article XX(d) of the GATT 1994.

Recommendations of the panel

To the extent that India's DCR measures are inconsistent with the TRIMs Agreement and the GATT 1994, as aforesaid, the panel report recommended that India bring its DCR measures into conformity with its obligations under the TRIMs Agreement and the GATT 1994. An appeal of the findings of the panel lies to the Appellate Body, which may uphold, modify or reverse the findings and conclusions of the panel.

A quick glance at the background

• On February 6, 2013, and February 1, 2014, the United States requested for consultations with India concerning certain measures relating to DCR imposed under the JNNSM for solar cells and solar modules. Consultations were held on March 20, 2013 and March 20, 2014, respectively.
• On April 14, 2014, the United States requested the establishment of a panel.
• On May 23, 2014, the Dispute Settlement Body ("DSB") established a panel.
• Meanwhile, several countries including Brazil, Canada, China, Japan, the Republic of Korea and Saudi Arabia, from time to time, notified their interest in participating in the panel proceedings as third parties.
• The panel held its first substantive meeting with the parties on February 3-4, 2015. A session with the third parties took place on February 4, 2015. The panel held a second substantive meeting with the parties on April 28-29, 2015.
• On June 9, 2015, the panel issued the descriptive part of its report to the parties. On July 24, 2015, the panel issued its interim report to the parties. Though all panel proceedings remain confidential until the panel report is circulated to WTO members, contents of the interim report were already circulating in the press by August 2015.
• The panel issued its final report to the parties on August 28, 2015.
• The panel issued its final report to WTO members on February 24, 2016.

Footnotes

1. Article 2 of the TRIMs Agreement, entitled "National Treatment and Quantitative Restrictions", provides:

2. Article III of the GATT 1994 is entitled "National Treatment on Internal Taxation and Regulation". Paragraph 4 of Article III provides in relevant part:

3. Article XX(j) establishes a general exception for measures essential to the acquisition or distribution of products in general or local short supply.

4. Article XX(d) establishes a general exception for measures necessary to secure compliance with laws or regulations which are not inconsistent with the GATT 1994.

5. Paragraph 1(a) of the "Illustrative List" in the Annex to the TRIMs Agreement stipulates that:

6. In that case, the product being procured is electricity, whereas the product discriminated against for reason of its origin is generation equipment. These two products are not in a competitive relationship. Accordingly, the discrimination relating to generation equipment contained in the feed-in tariff programme is not covered by the derogation of Article III:8(a) of the GATT 1994.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.