TWN Info Service on WTO and Trade Issues (Mar16/04)
4 March 2016
Third World Network

WTO rules against India's ‘buy local' provisions for solar cells, modules
Published in SUNS #8190 dated 29 February 2016

Geneva, 26 Feb (Kanaga Raja) -- A dispute panel at the World Trade Organisation (WTO) has ruled that domestic-content requirements (DCR) imposed by India on solar power developers who sell electricity to government agencies under the National Solar Mission are inconsistent with its obligations under the WTO.

In a ruling issued on 24 February, the panel said that the DCR measures are inconsistent with Article 2.1 of the TRIMs Agreement and Article III: 4 of the GATT 1994, and are not covered by the derogation in Article III: 8(a) of the GATT 1994, nor are DCR measures justified under the general exceptions in Article XX(j) or Article XX(d) of the GATT 1994.

The panel also said that to the extent that the measures at issue are inconsistent with Article 2.1 of the TRIMs Agreement and Article III: 4 of the GATT 1994, they have nullified or impaired benefits accruing to the United States (the complainant) under those agreements.

It recommended that India bring its measures into conformity with its obligations under the TRIMs Agreement and the GATT 1994.

According to the panel report, the claims brought by the United States concern certain domestic content requirements (the DCR measures) imposed under India's Jawaharlal Nehru National Solar Mission (National Solar Mission, or JNNSM).

The objective of the National Solar Mission is stated as being "to establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible".

It was launched by the Government of India in 2010, with the aim of generating 20,000 megawatts (MW) of grid-connected solar power capacity by 2022. India subsequently increased that target to 100,000 MW of grid-connected solar power capacity by 2022.

As a means to promote the generation of this capacity, the Government of India enters into long-term power purchase agreements (PPAs) with solar power developers (SPDs). India resells the electricity that it purchases to downstream distribution utilities (also termed "Discoms"), which in turn resell it to the ultimate consumer (e. g. household, industrial, or governmental entities).

A mandatory domestic content requirement was imposed on SPDs participating in Phase I (Batch 1), Phase I (Batch 2), and Phase II (Batch 1).

The JNNSM Mission Document states that the National Solar Mission aims "to promote ecologically sustainable growth while addressing India's energy security challenge", and that it will "constitute a major contribution by India to the global effort to meet the challenges of climate change".

According to the panel report, in its submissions, India stresses the objectives that guide the National Solar Mission, including the attainment of energy security, ensuring ecologically sustainable growth, and ensuring sustainable development. India argues that the DCR measures need to be analysed in the context of those objectives.

Likewise, India argues that the DCR measures need to be seen in the context of India's overall energy scenario and the challenges it is currently facing, which are characterized by India's rising energy deficit, as well as its dependence on fossil fuels and imported materials for its energy requirements.

"Our analysis of the DCR measures proceeds on the understanding that it is the WTO-consistency of those measures, and not the legitimacy of the policy objectives pursued through the National Solar Mission, that is in dispute in this case. India's argumentation regarding the wider policy objectives and factual context of the National Solar Mission relates to the rationale for, and objective behind, the measures at issue. We will take India's policy objectives and the wider factual context into account in the course of our analysis insofar as we conclude that they are legally relevant to our interpretation and application of the relevant articles of the covered agreements raised by the parties' claims and defences," said the panel.

ARTICLE 2.1 OF TRIMS AGREEMENT AND ARTICLE III: 4 OF GATT 1994

On the US claims that the DCR measures accord less favourable treatment to foreign solar cells and modules than that accorded to like domestic products, resulting in a violation of Article III: 4 of the GATT 1994 and of Article 2.1 of the TRIMs Agreement, the panel first found that the DCR measures constitute "TRIMs" within the meaning of Article 1 of the TRIMs Agreement.

It said that the DCR measures are TRIMs that "require" the "use" by "an enterprise" of "products of domestic origin", and "are specified in terms of particular products", namely in terms of solar cells and modules with the possibility of additional specification of the technology used.

It accordingly found that the DCR measures "require the purchase or use by an enterprise of products of domestic origin" within the meaning of paragraph 1(a) of the TRIMs Illustrative List, and concluded that compliance with the DCR measures "is necessary to obtain an advantage" within the meaning of paragraph 1(a) of the TRIMs Illustrative List.

Moreover, it found the various contractual obligations and penalties for default by SPDs, in combination with the requirements established under the relevant Guidelines and Request for Selection documents, to sustain the conclusion that the DCR measures are "mandatory or enforceable under domestic law".

In its conclusion on paragraph 1(a) of the TRIMs Illustrative List, Article III: 4 of the GATT 1994, and Article 2.1 of the TRIMs Agreement, the panel said having found that the DCR measures are TRIMs that "require the purchase or use by an enterprise of products of domestic origin", and that "are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage", it finds that the DCR measures fulfil the requirements of paragraph 1(a) of the TRIMs Illustrative List.

Accordingly, the DCR measures "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.

The panel noted that in the present case, the DCR measures impose requirements on the use of certain types of solar cells and modules exclusively based on the criterion of their origin.

Based on the foregoing, and guided by the reasoning of past panels, it considered that the DCR measures apply to "like products" within the meaning of Article III: 4 of the GATT 1994.

"The DCR measures operate to impose compulsory conditions for bidding eligibility and participation under each of the relevant Batches of the National Solar Mission, and further mandate the use of domestically manufactured solar cells and modules through enforceable contractual obligations of SPDs."

The panel therefore agreed with the United States that the DCR measures are properly viewed as "requirements" affecting the internal sale, purchase, or use of solar cells and modules in India.

On the issue of less favourable treatment, the panel noted that the United States submits that, under the National Solar Mission, an SPD "that opts to use imported solar cells and/or modules is not eligible to participate in such portion of the program subject to" the DCR measures and hence "may not enter into a PPA [Power Purchase Agreement] under the program without undertaking the domestic use commitment".

According to the United States, this creates an "incentive for SPDs to purchase solar cells and modules made in India", resulting in an alteration of the conditions of competition to the detriment of such equipment produced in the United States.

India responds that merely drawing regulatory distinctions or providing different treatment does not necessarily amount to "less favourable treatment".

India contends that "what is required is a careful scrutiny of the domestic content provisions in the bid related documents that are the subject matter of this dispute", and submits a series of factual considerations upon which it alleges that the "bidding conditions ... have not affected the opportunity for imported solar cells and modules to enter the market".

In general, India's counter-arguments relate to the possibility of using imported solar cells and modules to obtain the same benefits and advantages that are otherwise provided to SPDs under the National Solar Mission.

Drawing upon the partial coverage and limited extent of the DCR measures, India highlights the fact that the advantages under the National Solar Mission are available to SPDs using imported cells and modules, and the fact that imported solar cells and modules have a dominant market share overall.

In response to a question from the panel, India confirmed that its position is that there is no "less favourable treatment" in this case for three reasons: (a) the scope of the domestic content requirements did not extend to all cells and modules in Phase I (Batch 1) and Phase I (Batch 2) or all projects in Phase II (Batch 1), and therefore SPDs could use and in fact relied on imported cells and modules; (b) the same advantages were given to all SPDs selected to participate in the National Solar Mission regardless of whether they used imported or domestically manufactured cells and modules; and (c) imported cells and modules currently have a dominant share of the market for solar cells and modules in India.

The panel however said that it is unpersuaded by the arguments advanced by India relating to the absence of "less favourable treatment" under Article III: 4 of the GATT 1994.

In its conclusions, the panel said it has found that the DCR measures fulfil the requirements of paragraph 1(a) of the TRIMs Agreement, thus establishing that they are inconsistent with Article III: 4 of the GATT 1994 and thereby Article 2.1 of the TRIMs Agreement.

"Based on our separate and additional examination of the legal elements of Article III: 4 of the GATT 1994, which we have conducted in the particular circumstances of this case, we also conclude that the DCR measures accord less favourable treatment under Article III: 4 of the GATT 1994."

ARTICLE III: 8(A) OF THE GATT 1994

Article III: 8(a) of the GATT 1994 provides: "The provisions of this Article shall not apply to 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."

India submits that the government procurement derogation under Article III: 8(a) of the GATT 1994 is applicable to the DCR measures, and that, by virtue of this derogation, the DCR measures are not inconsistent with Article III: 4 of the GATT 1994 or Article 2.1 of the TRIMs Agreement.

Having considered the specific basis upon which India seeks to distinguish the facts and circumstances of the present dispute, "we are not persuaded that there is any basis to find that the DCR measures are distinguishable in any relevant respect from the measures examined by the Appellate Body in Canada - Renewable Energy/ Feed-In Tariff Program. In light of the Appellate Body's legal interpretation of Article III: 8(a) as applied to the governmental purchase of electricity and discrimination against foreign generation equipment, we find that the discrimination relating to solar cells and modules under the DCR measures is not covered by the derogation of Article III: 8(a)", said the panel.

In the present case, in assessing whether the DCR measures "govern the procurement" of electricity, the panel recalled its conclusion under Article III: 4 that the DCR measures operate to impose compulsory conditions for bidding eligibility and participation under each of the relevant Batches of the National Solar Mission, and further mandate the use of domestically manufactured solar cells and modules through enforceable contractual obligations of SPDs.

Similar to the measures before the panel and Appellate Body in Canada - Renewable Energy/Feed-In Tariff Program, compliance with these conditions is a "necessary prerequisite" for the government's procurement of the electricity generated by SPDs using the same equipment to which the DCR measures apply.

In this sense, the panel considered that "a connection is articulated between the procurement of electricity" and the requirements imposed by the DCR measures on the use of solar cells and modules.

It therefore concluded that the DCR measures are "laws, regulations or requirements governing the procurement" of electricity.

It also concluded that the procurement of electricity is "by governmental agencies" within the meaning of Article III: 8(a).

On whether the procurement under the DCR measures is of products purchased "for governmental purposes", the panel said its analysis of this element of Article III: 8(a) is confined to identifying the different issues that would need to be considered under this element and the parties' positions on those issues.

"Therefore, we do not decide on the legal questions of whether ensuring the affordable access of a product, or the other governmental purposes and functions identified by India, can constitute a ‘governmental purpose' or ‘public function' within the meaning of Article III: 8(a). Nor do we express a view on whether this may turn on the particular product(s) in question and the specific context in which the government is purchasing and providing such product(s) to other recipients."

In accordance with the Appellate Body's legal interpretation of Article III: 8(a) of the GATT 1994 as applied to the governmental purchase of electricity and discrimination against foreign generation equipment, "we have found that the discrimination relating to solar cells and modules under the DCR measures is not covered by the derogation of Article III: 8(a) of the GATT 1994. Consequently, the discrimination relating to solar cells and modules under the DCR measures is inconsistent with Article 2.1 of the TRIMs Agreement and Article III: 4 of the GATT 1994."

DEFENCE UNDER ARTICLES XX(J) and XX(D) OF THE GATT 1994

The panel noted that India argues that it has an obligation to take steps to achieve energy security, mitigate climate change, and achieve sustainable development, and that this includes steps to ensure the adequate supply of clean electricity, generated from solar power, at reasonable prices. India explains that doing so would reduce its reliance on imported oil and coal.

According to India, ensuring an adequate supply of clean energy generated from solar power is only possible if Indian SPDs in turn have access to a continuous and affordable supply of the solar cells and modules they use to generate that solar power.

It emphasizes that its SPDs currently depend predominantly on foreign solar cells and modules for that purpose, and according to India this dependence on imports of foreign solar cells and modules creates a risk of disruption in continuous and affordable supply of solar cells and modules.

India submits that it is therefore necessary to ensure that there is an adequate reserve of domestic manufacturing capacity for solar cells and modules in case there is a disruption in supply of foreign solar cells and modules.

In sum, India argues that the DCR measures "are essential to the acquisition of solar cells and modules by SPDs that are engaged in solar power generation, in order to ensure realization of India's policy objectives of energy security, sustainable development and ecologically sustainable growth".

The panel noted at the outset of its findings that the US does not contest the legitimacy of the objectives pursued by India. However, the United States argues that India has failed to demonstrate that the DCR are "necessary to secure compliance with laws or regulations" under Article XX(d).

In its analysis, the panel noted at the outset that the general exception contained in Article XX(j) has never been invoked as a defence before a GATT/WTO dispute settlement panel. Article 3.2 of the DSU directs the panel to interpret this provision "in accordance with customary rules of interpretation of public international law".

"In accordance with the general rule of treaty interpretation reflected in Article 31 of the Vienna Convention on the Law of Treaties, we will interpret the terms ‘products in general or local short supply' pursuant to the ordinary meaning of the terms of Article XX(j), read in their context and in the light of the object and purpose of the covered agreements. In accordance with Article 32 of the Vienna Convention, we may have recourse to supplementary means of interpretation to confirm the meaning resulting from the application of Article 31, or to determine the meaning of the terms if we conclude that the interpretation according to Article 31 leaves the meaning ambiguous or obscure, or leads to a result that is manifestly absurd or unreasonable."

The panel said that it is not persuaded that India's "lack of manufacturing capacity of solar cells and modules amounts to a situation of local and general short supply of solar cells and modules in India".

It concluded that the terms "products in general or local short supply" refer to a situation in which the quantity of available supply of a product, from all sources, does not meet demand in a relevant geographical area or market. They do not refer to products in respect of which there merely is a lack of domestic manufacturing capacity.

India has not argued that the quantity of solar cells and modules available from all sources, i. e. both international and domestic, is inadequate to meet the demand of Indian SPDs or other purchasers.

For the reasons set forth, the panel found that solar cells and modules are not "products in general or local short supply" in India within the meaning of Article XX(j) of the GATT 1994. Accordingly, it found that 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.

On whether the DCR measures are measures "to secure compliance with laws or regulations" within the meaning of Article XX(d), the panel noted India's argument that the DCR measures are justified under Article XX(d) because they are "integral to its compliance with both domestic and international law obligations to ensure ecologically sustainable growth while addressing India's energy security challenge, and ensuring compliance with its obligations relating to climate change".

According to India, these obligations are reflected in four international instruments, and four domestic instruments.

India submits that its "international law obligations ... embodied in various international instruments" are: (a) the preamble of the WTO Agreement; (b) the United Nations Framework Convention on Climate Change; (c) the Rio Declaration on Environment and Development; and (d) the United Nations General Assembly Resolution adopting the Rio+20 Document: The Future We Want, adopted by the United Nations General Assembly in 2012.

The panel found that India has failed to meet its burden of demonstrating that any of the international instruments at issue have "direct effect" in India, or that any of those instruments are "rules that form part of [its] domestic legal system".

Accordingly, the panel found that India has failed to demonstrate that the preamble of the WTO Agreement, the United Nations Framework Convention on Climate Change, the Rio Declaration on Environment and Development, and the Rio+20 Document: The Future We Want, adopted by the United Nations General Assembly in 2012, can be considered "laws or regulations" within the meaning of Article XX(d) in the present dispute.

The panel found that, with the exception of Section 3 of the Electricity Act, India has failed to demonstrate that the international and domestic instruments that it has identified are "laws or regulations" within the meaning of Article XX(d).

As regards Section 3 of the Electricity Act, India has failed to demonstrate that DCR measures are measures to "secure compliance" with the legal obligations in this provision.

Accordingly, the panel found that India has failed to demonstrate that the DCR measures are measures "to secure compliance with laws or regulations which are not inconsistent with the provisions of [the GATT 1994]", and that the DCR measures are not justified under Article XX(d) of the GATT 1994.

On whether the DCR measures are "essential" or "necessary" within the meaning of Articles XX(j) and XX(d), the panel said that "having found that the threshold legal elements under Articles XX(j) and XX(d) are not satisfied in this case, and given the limited and specific purpose for our proceeding further with an examination of whether the DCR measures are ‘essential' or ‘necessary', we do not see any compelling reason for the Panel to reach any overall conclusion, or make any finding, on whether the DCR measures are ‘essential' or ‘necessary' within the meaning of Articles XX(j) and XX(d), respectively."

In sum, the panel concluded that ensuring that Indian SPDs have access to a continuous and affordable supply of the solar cells and modules needed to generate solar power is an important objective.

Furthermore, India has provided evidence that establishes that, in the absence of any measures taken by SPDs or India to ensure continued access to foreign solar cells and modules, and simply taking their continued availability "for granted", there is a risk of disruption in the supply of affordable foreign solar cells and modules to India.

With regard to the trade-restrictiveness of the measures, it is not in dispute that the DCR measures restrict the use of foreign solar cells and modules by SPDs that are participating in the National Solar Mission.

With regard to the contribution of the DCR measures to the realization of India's objective, the panel concluded that, in the short term, the DCR measures are unlikely to make any contribution to ensuring Indian SPDs' access to a continuous and affordable supply of the solar cells and modules needed to generate solar power, and arguably undermine that objective.

With regard to the contribution of the DCR measures to the realization of India's objective over the long term, the panel concluded that the information before the panel concerning the effect of the DCR measures on increasing domestic manufacturing capacity of solar cells and modules appears to cast doubt on whether such effect is positive; that India has not identified any related measures that it is taking to ensure the supply of the raw materials and consumables necessary to domestically produce and utilize solar cells and modules; and that it is not clear that domestic manufacturers would sell solar cells or modules to Indian SPDs, as opposed to their foreign competitors, in the event of a shortage or other disruption in the supply of imported solar cells and modules.

Based on the foregoing, the panel found that India has not demonstrated that the DCR measures ensure that Indian SPDs have access to a continuous and affordable supply of the solar cells and modules needed to generate solar power.

"Beyond this, the information submitted to the Panel does not enable us to assess the extent to which the DCR measures could lead to some increased domestic manufacturing capacity of solar cells and modules in the long term, or the extent to which any such increased domestic manufacturing capacity could in turn contribute to reducing the risk of a disruption in Indian SPDs' ability to access to a continuous and affordable supply of the solar cells and modules."

"Thus, we conclude that the effect of the DCR measures is uncertain and unpredictable with respect to the realization of India's objective of ensuring a continuous and affordable supply of solar cells and modules to Indian SPDs."

The panel also considered that the information before the Panel is insufficient to reach a conclusion on the extent to which the alternative measures identified by the United States would contribute to the realization of India's objective, and desired level of protection, as compared with any contribution being made by the DCR measures.

In the event that its findings on the threshold legal elements under Articles XX(j) and XX(d) are modified or reversed on appeal, the panel said it has conducted a limited review of whether the DCR measures are "essential" or "necessary" within the meaning of Articles XX(j) and XX(d) respectively.

"This limited analysis and review has involved identifying the different issues that would need to be considered to make definitive findings, the parties' positions on those different issues, and our factual findings on those issues based on the arguments of the parties and the information provided to the Panel. For the reasons given above, we consider it unnecessary to reach any overall conclusion, or make any finding, on these issues."

It also said that its sees no compelling reason to proceed with any further examination of the DCR measures under the chapeau of Article XX of the GATT 1994, and therefore refrained from doing so. +