B. Quantitative Restrictions

9. This dispute concerns the 2,714 restrictions listed in Annex I, Part B of document WT/BOP/N/24 dated 22 May 1997. This document is a notification by India to the WTO Committee on Balance-of-Payments Restrictions ("BOP Committee"), the Council on Trade in Goods, and the Committee on Market Access. ⁹

1. Legal basis under domestic law for import restrictions and import licensing

10. Indian domestic legislation governing import licensing can be found in: (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) the Export and Import Policy 1997-2002.
11. Section 11 of the Customs Act, 1962 provides that the Central Government of India may, by notification in the Official Gazette, prohibit (absolutely or subject to conditions), as specified in the notification, the import or export of any goods. The listed purposes for such prohibition include, inter alia: Indian security; maintenance of public order and standards of decency or morality; conservation of foreign exchange and safeguarding of balance of payments; avoiding shortages of goods; prevention of surplus of any agricultural or fisheries product; establishment of any industry; prevention of serious injury to domestic production; conservation of exhaustible natural resources; carrying on of foreign trade in goods by the State or by a State-owned corporation; and "any other purpose conducive to the interests of the general public." Under Section 111 (d) of the Customs Act, goods imported or exported (or attempted to be imported or exported) contrary to any prohibition are liable to confiscation.
12. The Foreign Trade (Development and Regulation) Act, 1992 ("FTDR Act") which replaced the Imports and Exports (Control) Act, 1947, authorizes the Central Government to prohibit, restrict or otherwise regulate the import or export of goods, by Order published in the Official Gazette (Section 3(2)). Under section 3(3) of the FTDR Act, all goods to which any Order under section 3(2) applies are deemed to be goods the import or export of which has been prohibited under section 11 of the Customs Act, 1962 (and are therefore subject to confiscation under section 111(d) of the Customs Act).
13. The FTDR Act prohibits imports or exports by any person except in accordance with the provisions of the FTDR Act, the rules and orders made thereunder and the Export and Import Policy currently in force (Section11(1)). Under Section 11(2), when any person makes or abets or attempts to make any import or export in contravention of the FTDR Act, any rules or orders made thereunder, or the Export and Import Policy, he is liable to a penalty of up to 1,000 rupees or five times the value of the goods concerned, whichever is greater. Only persons who have been granted an Importer-exporter Code Number ("IEC Number") by the Director General of Foreign Trade (DGFT) may import or export (Section 7). ¹⁰ The Director General, who is authorized to grant, renew or deny import and export licences, under Section 9, may suspend or cancel the IEC Number of any person who has contravened customs laws. ¹¹
14. Section 9 of the FTDR Act also requires the Director General of Foreign Trade as defined in Section 2(d) of the FTDR Act (the "Director General") to record reasons in writing if he fails to grant or renew an import license. If a license is granted, it specifies both the value and the quantity of the item that may be imported. The reasons for which the Director General may deny a license are clearly set forth in Rule 7(1) of the FTR Rules, and include, among others: that an applicant is not eligible for a license in accordance with any provision of the Export and Import Policy, 1997-2002 (the "Exim Policy"); and, in the case of a license for import, that no foreign exchange is available for the purpose. ¹²
15. Section 15 of the FTDR Act provides for an appeal against any decision or order made under the Act. This right of appeal extends to any decision to refuse a license. In the case of an order by an officer subordinate to the Director General, appeal lies to the Director General; in the case of an order made by the Director General, an appeal lies to the Central Government. In addition, although Section 15(3) of the FTDR Act states that "the order made in appeal by the Appellate Authority shall be final�.", it can be challenged as violating a legal or constitutional right under Article 226 of the Constitution before the High Court of any State that is part of the Indian Union. In addition, if the alleged violation is of a fundamental right contained in Part III of the Constitution, it can be challenged under Article 32 of the Constitution before the Supreme Court of India. A challenge would lie, inter alia, on the ground that the decision is arbitrary, irrational or discriminatory. The decision of a High Court in turn can be challenged in an appeal to the Supreme Court of India under various provisions of the Constitution.
16. Section 19 of the FTDR Act authorizes the Central Government to make rules for carrying out the provisions of the Act, by notification in the Official Gazette. The Foreign Trade (Regulation) Rules, 1993 were issued under the authority of Section 19 of the FTDR Act. They provide generally for licence applications, licence fees, licence conditions, refusal, amendment, suspension or cancellation of licences, and enforcement.
17. Section 5 of the FTDR Act authorizes the Central Government to formulate and announce by notification in the Official Gazette the export and import policy. The first such policy, the Export and Import Policy 1992-1997, was in effect from 1992 until 31 March 1997. The policy currently in effect is the Export and Import Policy 1 April 1997 - 31 March 2002. Export and Import Policy statements have been issued once every five years, effective at the 1 April start of the government fiscal year. Revisions during the five-year period generally are published on 1 April of subsequent years during the five-year period, although changes may be made and announced in public notices at any time. The Export and Import Policy 1997-2002 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, and the eligibility requirements including export performance that must be met to qualify for Special Import Licences. Section 4.7 of the Export-Import Policy 1997-2002 provides that "[n]o person may claim a licence 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 licence in accordance with the provisions of the Act and the Rules made thereunder."
18. The Handbook of Procedures published on 1 April 1997 effective for the period 1997 to 2002 sets out the procedures that must be followed to export or import specific goods, and provides application forms for import licences. The ITC (HS) Classifications relates the rules set forth in the Export and Import Policy and the Handbook to the 8-digit product categories set forth in the Harmonized System of commodity classification. For each product listed at the 8-digit level, the book indicates five types of information in five columns: the 8-digit code; the item description, the applicable policy (prohibited, restricted, canalized or free); any conditions relating to the Export and Import Policy (these conditions appear either indicated with the particular item or in licensing notes at the end of the HS Chapter or section thereof); and an indication of whether the product can be imported under a Special Import Licence.

2. Licensing régime

19. India regulates the import of goods by means of the Negative List . If an item is on the Negative List, a prospective importer must apply for a licence to the DGFT.
20. The Negative List classifies all restricted imports in one of three categories: prohibited items, restricted items, and canalized items. None of the prohibited items, listed in Part I of the Negative List, are listed in Annex I, Part B of document WT/BOP/N/24. In WT/BOP/N/24, Annex I, Part B, restricted items are identified with the symbol "NAL" (non-automatic licensing), "SIL" or "STR" in the column "QR symbol". Restricted items are listed in Part II of the Negative List. An item classified as "restricted" under the Negative List is only permitted to be imported against a specific import licence or in accordance with a public notice issued for that purpose. ¹³ The leading item on the Negative List is "all consumer goods, howsoever described, of industrial, agricultural, mineral or animal origin, whether in SKD/CKD condition or ready to assemble sets or in finished form." ¹⁴ Paragraph 3.14 of the Export and Import Policy further defines "consumer goods" as "any consumption goods which can directly satisfy human needs without further processing and include consumer durables and accessories thereof." The Negative List also lists seven product categories to be treated as consumer goods "for the removal of doubts": consumer electronic goods, equipments and systems, howsoever described; consumer telecommunications equipments namely telephone instruments and electronic PABX; watches in SKD/CKD or assembled condition, watch cases and watch dials; cotton, woollen, silk, man-made and blended fabrics including cotton terry towel fabrics; concentrates of alcoholic beverages; wines (tonic or medicated); and saffron. ¹⁵
21. Canalized items, listed in Part III of the Negative List, may in principle be imported only by a designated canalizing (government) agency. A number of canalized items appear in Annex I, Part B of WT/BOP/N/24 (indicated by "STR" in the column labelled "QR Symbol")
22. A person intending to import a restricted item must submit an application for an import licence to the Director General of Foreign Trade in India�s Ministry of Commerce ("DGFT"), or an officer authorized by him ("licensing authority") with territorial jurisdiction. Import licences are not transferable. Any person who imports or exports (with or without a licence) must have an Importer-Exporter Code (IEC) number, unless specifically exempted. ¹⁶ In addition, any person applying for an import or export licence must present a Registration-cum-Membership Certificate (RCMC) granted by the Export Promotion Council relating to his line of business, the Federation of Indian Exporters Organisation, or (if the products exported by him are not covered by any Export Promotion Council) the regional licensing authority. ¹⁷ The application forms for the RCMC requires the applicant to claim status as a merchant exporter or manufacturer exporter of a specific product or products. ¹⁸
23. The application form for import of items covered by the Negative List requests information on the applicant�s name and address, the type of unit, the applicant�s registration number, the end product(s) to be manufactured with licensed capacity, details of the items applied for export, the total CIF value applied for, past production in the previous year, exports done during the previous year, and "justification for import".
24. Whenever imports require a licence, only the "Actual User" may import the goods, unless the Actual User condition is specifically dispensed with by the licensing authority. ¹⁹ Paragraph 3.4 of the Export-Import Policy defines "Actual User" as an actual user who may be either industrial or non-industrial. Paragraph 3.5 of the Policy defines "Actual User (Industrial)" as "a person who utilizes the imported goods for manufacturing in his own unit or manufacturing for his own use in another unit including a jobbing unit." Paragraph 3.6 of the Policy defines "Actual User (Non-Industrial)" as "a person who utilizes the imported goods for his own use in (i) any commercial establishment carrying on any business, trade, or profession; or (ii) any laboratory, Scientific or Research and Development (R&D) institution, university of other educational institution or hospital; or (iii) any service industry." The Actual User then cannot legally transfer the imported goods to anyone except with prior permission from the licensing authority concerned, except for a transfer to another Actual User after a period of two years from the date of import. ²⁰
25. About ten per cent of tariff lines subject to import licensing may also be imported under Special Import Licences (SILs). These items are listed in WT/BOP/N/24, Annex I, Part B by the symbol "SIL" in the "QR symbol" column.
26. Firms receive SILs from the Indian Government in proportion to their exports or NFE (net foreign exchange) earnings. SILs are issued by the DGFT or regional licensing authorities, and are freely transferable (there are SIL brokers and a resale market for SILs).
27. There are various methods by which a person or firm may apply for a Special Import Licence. First, an established private or state-run exporter which meets export performance criteria set forth in Chapter 12 of the Export and Import Policy, and elaborated upon in Chapter 12 of the Handbook, can qualify to be recognized by the regional licensing authority or the DGFT as an Export House, Trading House, Star Trading House, or Super Star Trading House. ²¹ Such designated exporters automatically qualify for SILs on the basis of entitlement rates set out in paragraph 12.7 of the Handbook. ²² Additional bonuses are earned if a designated exporter exports specified products (products made by small-scale industries; fruits, vegetables, flowers or horticultural products; or products made in the North Eastern States) and where over 10% of such an exporter�s exports are to one or more of 43 listed Central and Latin American countries and territories. ²³
28. Other exporters can still receive Special Import Licences equal to 4% of the fob value of their exports, subject to certain minimum export criteria set out in paragraph 11.11 of the Handbook. SILs are also granted to exporters of telecommunications equipment and electronic goods and services; ²⁴ to exporters of diamonds, gems and jewelry; ²⁵ to deemed exporters; ²⁶ and to small scale exporters holding ISO/9000-series or IS/ISO/9000-series quality certification.

III. Claims and Main Arguments

A. Scope of the Complaint

1. 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; and

- recommend that India bring its measures into conformity with the GATT 1994 and the Agreement on Agriculture.

2. At the request of the Panel, the United States clarified that it sought a ruling that India is not currently justified under the balance-of-payments exception. If India asserted that these restrictions were justified under Article XVIII:B of GATT 1994, the United States requested the Panel to accept the findings and determinations made by the IMF. It also requested that the Panel find that the additional evidence presented by the United States corroborated the IMF's determination.
3. The United States considered that the Panel should find that Article XVIII:B is in the nature of an affirmative defense with respect to which India bears the burden of proof and requested the Panel to make an alternative conditional finding that even if the burden of proof were on the United States to make a prima facie case, that India no longer had any justification for maintaining the measures under Article XVIII:B, the United States would have met this burden.
4. The United States further requested the Panel to find that each of the four restrictions, discussed below in paragraph 3.9, constituted a quantitative restriction within the meaning of GATT 1994 and the Agreement on Agriculture in order that there be no confusion as to which measures the Panel's recommendations applied.
5. If the Panel did not agree to the request for the ruling on Article XI:1, Article XVIII:11 and Article 4.2 of the Agreement on Agriculture, then the United States in its second written submission, sought a ruling that the measures at issue were not applied in accordance with Article XIII:2:(a).
6. India requested the Panel to reject the US complaint. India claimed that it was clear from Article XVIII:12 and the 1994 Understanding that the conformity of import restrictions with Article XVIII:9 and 11 must be determined by the General Council and that the Member may maintain the import restrictions until it had been informed of their inconsistency with the criteria set out in Article XVIII:9 and 10 by the General Council. In the absence of such a determination by the General Council, India continued to have the right to maintain the remaining restrictions under Article XVIII:B. In India's view, acceptance of the arguments of the United States would result in making whole paragraphs of Article XVIII:B and whole sections of the 1994 Understanding redundant, altering fundamentally the negotiated balance reflected in the text of Article XVIII:B and the 1994 Understanding. It would also be a serious deviation from practices consistently followed under the GATT 1947 and result in transferring without any basis the authority to determine the legal status of import restrictions from the Committee and the General Council to the IMF and panels. Furthermore India claimed that, in light of Article XVIII:12 (d), as well as Appellate Body rulings, the United States bore the burden of demonstrating that India's restrictions were inconsistent with Article XVIII:11.
7. With respect to the violation of Article XI:1, India claimed that no finding was necessary since the measures at issue had been notified as quantitative restrictions within the meaning of Article XI:1 India added that Article XI:1 simply prohibited quantitative restrictions; it did not regulate how quantitative restrictions that Members were allowed to maintain under exceptions to Article XI:1 were to be administered. India claimed that the manner in which import restrictions were administered was regulated by other provisions, including Article XIII of GATT 1994 and the Agreement on Import Licensing. However, findings on the consistency of the administration of the measures should not be considered by the Panel because the requests were not made, not even subsidiarily, in the first submission of the United States.
8. India also claimed that Article 4.2 of the Agreement on Agriculture, as clarified in the note to this provision, did not cover measures taken under the balance-of-payments provisions of the GATT. Therefore, the restrictions maintained by India were not inconsistent with Article 4.2 of the Agreement on Agriculture.

B. Article XI:1

1. United States

9. The United States contended that India maintained quantitative restrictions consisting of import licensing requirements on thousands of products. These were the items listed in the "Negative List of Imports" in India�s official Export and Import Policy. Most imports into India remained subject to an arbitrary, non-transparent and discretionary import licensing regime; formal quotas did not exist. Persons wishing to import an item on the Negative List had to apply for a license and explain their "justification for import": the authorities provided no explanation of the criteria for judging applications, and no advance notice of the volume or value of imports to be allowed. In fact, licenses were routinely refused on the basis that the import would compete with a domestic producer. The leading item on the Negative List was consumer goods (including many food items), and for many consumer goods inclusion on the Negative List had amounted to an import ban or close to it.
10. The United States considered that the restrictiveness of India's licensing of consumer goods imports was demonstrated by the trade statistics in the Secretariat Report for the Trade Policy Review of India. Table AI.4 (Imports by groups of products, 1980-96) shows that there have been zero imports of clothing since 1980. Table AII.1 (Effective tariff and bindings, by HS chapter) shows 29 HS chapters with zero imports for 1995/96, including inter alia, meat; fish; cereals; malt and starches; preparations of meat or fish; cocoa, chocolate and cocoa preparations; nuts, canned and pickled vegetables and fruits, and fruit juices; wine, beer, spirits and vinegar; leather articles; matting and baskets; carpets; knitted fabrics; clothing; headgear; umbrellas; and furniture. The same TPR report table shows 21 other HS chapters with just US$36 million per chapter in imports for a country of over 900 million population; these include inter alia, dairy products and eggs; coffee; oilseeds; pasta, tapioca, breakfast cereal, and breads; cosmetics; blankets, bed linen, curtains, tents and used clothing; footwear; ceramic products; and musical instruments. ²⁷ Thus, in many cases import licensing amounts to an import ban, or close to it.
11. The United States noted that where an import license was granted for an item on the Negative List, it was only granted to an "Actual User". This "Actual User condition" ruled out any imports by wholesalers or other intermediaries, and itself was a further quantitative restriction on imports. Some of the restrictions on imports were made effective through "canalization": channelling of imports through state trading operations of authorized "canalizing agencies." Where canalizing agencies restricted imports, their operations were a quantitative restriction on imports. Some of the items on the Negative List could be imported by using "Special Import Licences (SILs)." However, these items too remained under restriction. Certain exporters could receive these licenses, which could then be used to import certain designated items which were otherwise subject to the normal discretionary import licensing regime. Items importable with SILs were generally items not produced in India. and were not to be equated with import liberalization.
12. The United States requested the Panel to find that all four measures: (1) restriction of items through discretionary licensing (2) canalization; (3) restriction of items through special import licensing and (4) the "Actual User" condition, constituted quantitative restrictions within the meaning of Article XI:1

To continue with Import licensing as an import restriction

⁹ WT/BOP/N/24, p. 1 (including statement by India that this notification also fulfilled the notification obligations of India under the Decision on Notification Procedures adopted by the Council on Trade in Goods on 1 December 1995 (G/L/59), and that a copy of the notification had been sent to the Chairman of the Committee on Market Access).

¹⁰ Imports made in contravention of section 7 of the FTDR Act are in contravention of section 11 of the Customs Act, 1962 and may be confiscated under section 111(d) of the Customs Act: Uniflex Cables Ltd. v. Collector of Customs, Bombay - 1995 (77) EJ, T.737 (Tribunal).

¹¹ FTDR Act, section 8(1).

¹² Rule 7(1)(j) and (l).

¹³ See Export and Import Policy, 10, para. 4.1 ("Any goods, the export or import of which is restricted through licensing, may be exported or imported only in accordance with a licence issued in this behalf). See also the restrictions listed in Part II of the Negative List of Imports, id., para. 15.2. In a few instances, specific licences are not needed, although importation is still restricted. For instance, the import of radioactive material is allowed without a licence, subject to the recommendation of the Department of Atomic Energy.

¹⁴ Export and Import Policy, Chapter 15, Part II "SKD/CKD" is "semi-knocked down/completely knocked down".

¹⁵ Ibid.

¹⁶ Export and Import Policy, section 4.9 .

¹⁷ Export and Import Policy, paras. 4.10 and 13.8 ; Handbook para. 13.3; Handbook Appendix 14 .

¹⁸ See "Form of Application for Registration cum Membership with Export Promotion Councils" and "Form of Registration cum Membership Certificate", from Handbook, App. 3A and 3B.

¹⁹ Export and Import Policy, para. 5.2.

²⁰ Handbook, para. 5.36 .

²¹ Status as an Export House, Trading House, Star Trading House, or Super Star Trading House is accorded by the DGFT or the regional licensing authority on the basis of the FOB/Net Foreign Exchange (NFE) value of exports of goods and services by the exporter concerned during the preceding three years or the preceding licensing year, at the option of the exporter. Export and Import Policy, para. 12.3.

²² Super Star Trading Houses must have made Rp. 2,250 crores in exports or Rp. 1,800 crores in net foreign exchange earnings in the preceding licensing year, or averaged Rp. 1,500 crores in exports/1,200 crores in NFE earnings in the preceding three licensing years. Export and Import Policy, para. 12.5.

²³ Handbook Vol.1, para. 12.7. The countries and territories targeted are: Antigua, Argentina, Bahamas, Barbados, Belize, Bermuda, Bolivia, Brazil, British Virgin Islands, Cayman Islands, Chile, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, Falkland Islands, French Guiana, Grenada, Guadeloupe, Guatemala, Guyana, Haiti, Honduras, Jamaica, Martinique, Mexico, Montserrat, Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, St. Vincent, St. Kitts-Nevis-Anguilla, St. Lucia, Suriname, Trinidad & Tobago, Uruguay, Venezuela, Virgin Islands (U.S.). Appendix 33.

²⁴ Export and Import Policy, para. 11.9.

²⁵ Exports of diamond, gem, and jewelry products are counted at 50% of the actual FOB value of exports.

²⁶ Chapter 10, para. 10.1 of the Export and Import Policy defines "deemed exports" as transactions in which the goods supplied do not leave India and the payment for the goods is made in India by the recipient of the goods. Para. 10.2 of the Policy provides that the following categories of supply of goods by the main or sub-contractors qualify as "deemed exports" if the goods are manufactured in India: (1) Supply of goods against duty-free licences under the Duty Exemption Scheme; (2) Supply of goods to Export Oriented Units or units located in Export Processing Zones or Software Technology Parks or to Electronic Hardware Technology Parks; (3) Supply of capital goods to holders of licences under the Export Promotion Capital Goods scheme, under certain conditions; (4) Supply of goods to projects financed by multilateral or bilateral agencies under international competitive bidding where the legal agreements provide for tender evaluation non-inclusive of the customs duty; (5) Supply of capital goods and spares to fertilizer plants (up to 10% of free-on-rail value) if under international competitive bidding; (6) Supply of goods to any project for which the Ministry of Finance has permitted duty-free imports; (7) Supply of goods to approved projects in the power, oil and gas sector.

²⁷ Total imports for 1995/96 were US$36,053 million, according to Table A1.4; the products listed here are those listed in Table AIII.1 as having an 0.1% share of total imports (US$36 million).