Vol. 2, May-July 2006

Luthra & Luthra Trade Law Newsletter

Since our first Newsletter, there have been significant policy announcements on the fiscal front in the form of the Union Budget (2006-07) and the Annual Supplement to the Foreign Trade Policy (2004-09). In line with the government’s policy to consistently lower tariffs, the 2006-07 budget has reduced peak rate of customs duty on non-agricultural products from 15% to 12.5%. There have also been other significant changes such as the introduction of the special CVD of 4% on imports and the introduction of the Duty Free Import Authorization Scheme, which has been formulated with the intention of assisting exporters who need to import several inputs in small quantities.

The Indian government has taken several initiatives to encourage exports and the recently enacted SEZ provisions are slated to provide an unparalleled boost to exports and employment in India. A summary of the benefits available along with implications under the WTO subsidies agreement has been discussed.

Another development, which will have a significant impact on the functioning, performance and competitiveness of the internal markets, is the introduction of the Competition Act, 2002. Though the Act received Presidential assent in 2003, substantive provisions of the Act will be implemented in a phased manner. However, the Act, which replaces the outdated MRTP Act of 1969 is based on principles followed in the United States and the European Union and is leagues ahead of its predecessor. The Act will have far reaching consequences and in order to familiarize our readers with the implications of the Act, important provisions have been discussed in this issue of the Newsletter.

On the WTO dispute resolution front, majority of the disputes in this issue focus on the ‘zeroing’ methodology, which the US uses in the calculation of the dumping margin. The only case not related to ‘zeroing’ is the Soft Drinks case pertaining to the role of the WTO in addressing non-WTO law. Further, most of these cases pertain to an aspect of the dispute settlement process, which can be termed as the compliance phase of a ruling and these cases highlight the complex nature of the WTO’s dispute settlement process.

We have endeavoured to address timely issues affecting domestic as well as international trade policy and hope you will find this Newsletter useful and informative.

Warmly,

Rajiv K. Luthra Managing Partner

In this issue:

I. Indirect Tax highlights of the Indian budget 2006-07

Page 2 II. Salient Features

of the Annual Supplement 2006 to the Foreign Trade Policy 2004-09

Page 4 III. Special Economic

Zones Page 7

IV. The Competition Act, 2002

Page 11

V. Dispute Settlement under the WTO: The “Compliance Panel”

Page 15

VI. WTO Panel and Appellate Body: Significant Recent Disputes

Page 16

VII. AD/CVD Cases against India in the US

Page 26 VIII. Antidumping

Investigations Against Imports into India in 2006

Page 27

From the Editor’s desk Welcome to the second issue of the Luthra & Luthra Trade LawNewsletter

Disclaimer: Luthra & Luthra Trade Law Newsletter does not purport to be and should not betreated as professional guidance or legal opinion on any subject. Copyright in the subject mattercontained herein is exclusively owned by Luthra & Luthra Law Offices and cannot be cited withoutprior authorization.

INDIRECT TAX HIGHLIGHTS OF THE

INDIAN BUDGET 2006-2007 A. Customs A new levy of 4% called the special CV duty, under section 3(5) of the Customs Tariff Act, 1975 which was imposed only on ITA goods last year, has been extended in general to all imports. It will apply to both agricultural and industrial products. It has been levied to counter balance VAT and like the CVD manufacturers will be able to take credit of this additional duty for payment of excise duty on their finished products. Articles of jewellery will, however, attract a lower rate of special CVD at 1%. Certain imports however are exempt from the new CVD and they are:

i. Goods exempt from VAT; ii. Goods exempted both from basic

and CV duty (including CV duty exemption by way of excise duty exemption);

iii. Petroleum crude, kerosene for PDS, LPG for domestic supply, petrol, diesel, coal, coke and petroleum gases and fuels of Chapter 27;

iv. DTA clearances of EOUs/EHTP/ STP/SEZ units, provided such goods are not exempted from VAT/sales tax;

However in line with the government’s past policy of brining down India’s customs duties to ASEAN levels, the peak rate of customs duty on all non-agricultural products has been brought down from 15% to 12.5%. Specific products on which duties have been reduced, are stated below:

• Peak rate for non-agricultural products reduced from 15% to 12.5%; duty on alloy steel and primary and secondary non-ferrous metals reduced from 10% to 7.5%; duty on steel melting scrap raised to 5% and brought on part on par with primary steel.

• Reduction of customs duty on

10 anti-AIDS and 14 anti-cancer drugs to 5%; duty on certain life saving drugs, kits and equipment from 15% to 5%; anti-AIDS and anti-cancer drugs also exempt from excise duty and CVD.

• Import duty on all man-made

fibres and yarns has been reduced from 15% to 10%;

• Import duty on raw

materials such as Dimethyl Terephthalate (DMT), Pure Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG) reduced from 15% to 10%.

• Customs duty on Set Top

Boxes, whether or not covered under ITA (Information Technology Agreement), has been unified at Nil customs duty plus 16% CV duty plus 4% special additional duty of customs.

• CVD under Section 3(3) of

the Customs Tariff Act on computers has been withdrawn consequent to imposition of excise duty at 12% on computers.

• Customs duty on MP3 Players and MPEG4 Players has been reduced from 15% to 5%

B. Excise

• Duty on clearances to Domestic Tariff Area from Export Oriented Units or units in Electronic Hardware Technology Parks, Software Technology Parks etc. is being changed from 50% of the aggregate of customs duties to 25% of basic customs duty plus full CV duty. The duty payable would thus be calculated as follows:

Assessable value = Rs.100 Basic customs duty = 15%; excise duty = 16% Basic customs duty component on clearance from EOU = 25% of 15 = 3.75 Value for levy of CV duty = 103.75 CV duty component = 16.6% Total duty payable = 16.60 + 3.75 = 20.35

Increases in duty

• Excise duty of 12% is being imposed on computers.

• Excise duty of 16% is being

imposed on integrated receiver decoders, also known as set-top boxes.

• Excise duty of 8% is being

imposed on packaged software, also known as canned software on electronic media (software downloaded from the

internet and customized software will not attract duty).

Reductions in duty

• Excise duty on storage

devices i.e. DVD drives, USB flash memory and Combo drives is being reduced to Nil.

• Excise duty on MP3 and

MPEG4 players is being reduced from 16% to 8%.

• Excise duty has been

reduced from 24% to 16% on: (a) Petrol cars with length not exceeding 4 metres and engine capacity not exceeding 1200 cc; and (b) Diesel cars with length not exceeding 4 metres and engine capacity not exceeding 1500 cc.

• Excise duty on Compact

Fluorescent lamps (CFL) is being reduced from 16% to 8%.

• Excise duty on all man made

fibres and filament yarns has been reduced from 16% to 8%.

• Excise duty has been

reduced from 16% to 12% on specified printing, writing and packing paper and paperboard.

SALIENT FEATURES OF THE ANNUAL SUPPLEMENT 2006 TO THE FOREIGN

TRADE POLICY (2004-09)

Duty Free Import Authorisation Scheme Supplementing the Foreign Trade Policy 2004-09, the Government of India has introduced the Duty Free Import Authorisation Scheme by way of the Annual Supplement 2006. The new scheme clubs the Duty Free Replenishment Certificate [DFRC] Scheme (for transferability of import entitlement) and the Advance License Scheme [ALS] (which allows imports before exports). Thus, as of May 1, 2006, the DFRC is being phased out. The new scheme has been introduced attempting to confer on exporters, the benefits of both the DFRC Scheme and the ALS . Export production requires use of many inputs, which are allowed for import without payment of customs duty under the ALS. Due to lack of economies of scale, exporters generally do not import all the specified inputs required and are forced to source them locally at a higher price, consequently losing out on the existing duty free entitlements. Design limitation in the existing duty exemption schemes render them ineffective. As a solution to this problem, the Duty Free Import Authorisation Scheme brings together the DFRC Scheme, which allowed transferability of import entitlements and the ALS, which allowed import before exports without payment of customs duty. The Duty Free Import Authorisation Scheme allows an exporter to import the required inputs before exports and allows the transferability of scrip once the export obligation is complete. The Authorisation will be issued with actual user condition till export obligation is fulfilled and imports made under this

authorisation are exempted from payment of basic customs duty, additional customs duty, education cess, anti- dumping duty and safeguard duty, if any. Also, a minimum 20% value addition will be required for issuance of such authorisation except for certain items in the gems and jewellery sector and items for which specified value addition is prescribed.

Export Oriented Units The Annual Supplement of 2006 has also attempted to improve the Export Oriented Units [EOU] Scheme. Development Commissioners are now to fix time limits for finalizing the disposal of matters relating to EOUs, to achieve smoother functioning. Additionally, the procurement and export of spares/components upto one and half percent of the Free on Board [FOB] value of exports will be allowed to the same consignee/buyer of the export article within the warranty period. The exports of such spares/components can now be effected separately from the capital goods. The Supplement also provides that new units engaged in export of agriculture/ horticulture/ aquaculture products will be allowed to remove capital goods/inputs to the Domestic Tariff Area farm on producing bank guarantee equivalent to the duty foregone on the capital goods/input which are proposed to be taken out. Also, EOUs in the textile sector are now allowed to dispose off the leftover material/fabrics upto 2% of CIF value of imports, on a consignment basis. The Supplement mandates that disposal of leftover material will be allowed on the basis of imports of the previous year, keeping in mind the complexity in settling accounts for every consignment.

Focus Product and Focus Market

The twin schemes of focus product and focus market are being introduced with the understanding that our national export strategy should focus not only on neutralizing duties and levies but also on providing additional stimulus to (a) promote export of products having large employment potential and (b) penetration of strategic markets by Indian products, especially markets in which our exports are comparatively low.

Focus Product

The scheme provides incentives to export of products which have high employment potential in rural and semi urban areas in order to offset the inherent infrastructure bottlenecks and other associated costs involved in marketing of such products. The scheme allows duty credit facility @ 2.5% of the FOB value of exports to fifty percent of the export turnover of notified products such as value added fish and leather products, stationary items, fireworks, sports goods, handloom products bearing handloom mark and handicraft items.

Focus Market The scheme aims at offsetting the high freight cost and other disabilities faced in accessing select international markets. Under the policy it has been stated that the initiative will enhance India’s export competitiveness in these regions. The scheme allows duty credit facility @ 2.5% of the FOB value of exports of all products to the notified countries.

Gems & Jewellery

It is worth mentioning here that the Gem & Jewellery Sector, which accounts for 20% of India’s total exports has been given added emphasis in the just announced Annual Supplement to Foreign Trade Policy (2004-09). Under the new scheme, import of precious metal scrap/ used jewellery will now be allowed for melting, refining and re-export of jewellery. According to the Policy, Exporters will also be allowed to export stones for treatment abroad and subsequent re-import without payment of customs duty. Under the new policy, a slew of sops to the sector like allowing exporters to re-import rejected jewellery and also export jewellery on consignment basis have been provided. With a view to boost export of plain gold/ platinum / silver jewellery, articles and ornaments and enhance their international competitiveness, the value addition norm for such items is being reduced from 7% to 4.5% in the new policy. The Policy aims to project India as a hub for Gem and Jewellery.

Aviation Sector - India as a major

refueling stop for international flights Under the Policy, to make India a major centre for refueling and supply of stores by global carriers, sale of these products would now qualify as exports and get the various benefits available under export promotion schemes. This will enable India to offer competitive fuel prices and attract mid route stops for international flights.

Automotive Hub The new Policy allows import of new vehicles by auto component manufacturers for R&D purposes without homologation (approval by an official authority) being introduced. This is aimed at further accelerating India’s emergence as an important centre for sourcing auto components. However, as the facility is for promoting R&D in the sector, the imported vehicle cannot be registered under the Motor Vehicle Rules in the country and will not be allowed to ply on Indian roads.

Import Policy For Genetically Modified

(GMO) Material For the benefit of the consumer, clear guidelines for import of Genetically Modified Material are being laid down. While making such imports, products, which have been subjected to genetic modification will carry a declaration stating that the product is genetically modified. In case a consignment does not carry such a declaration and is later found to contain Genetically Modified Material the importer will be liable for penal action under Foreign Trade (Development & Regulation) Act, 1992.

Trade Facilitation Measures

Interest for delayed payment of refunds would be made by the government to ensure accountability and cut delays. Another important provision to facilitate trade is pre-shipment certificates in lieu of test report for faster clearances. This also includes fast track clearance procedure for units in Export Oriented Units. Now units having physical turnover of Rs15 crore can avail of the facility of receiving goods and warehousing on self-declaration basis. Under the new policy, suppliers of material to the Special Economic Zones

[SEZ] who receive payment in Indian rupees will now be entitled for Duty Entitlement Pass Book Scheme benefit provided the payment for such supplies is made from the Foreign Currency Account of the SEZ unit. This measure would promote domestic sourcing at competitive pricing.

SPECIAL ECONOMIC ZONES The Foreign Trade Policy in India has, from time to time, extended special benefits and schemes aimed at promoting exports and new technology, such as those for free trade areas (FTAs), export processing zones (EPZs), electronic hardware technology parks (EHTPs), software technology parks (STPs), bio-technology parks (BTPs) and special economic zones (SEZs). The enactment of the new Special Economic Zones Act, 2005, (SEZ Act), takes the incentives for exports one step further by putting in place a simpler and clearer framework for setting up SEZs, which could be for manufacture of goods and/or rendering of services. The new law provides, among other aspects, for regulatory authorities to govern the SEZs, a transparent mechanism for clearances to be obtained, a notification mechanism, and incentives for the SEZ developer and for the units set up within the SEZ. Even though the aforementioned Act came into force only on February 2006, the central government has already approved proposals for private and government promoted SEZs (both sector specific and multi-product) across the country, entailing an investment worth Rs 1,00,000 crore. With the notification of the SEZ Rules in February 2006, the complete legal mechanism for setting up SEZs has finally been put in place.

These new SEZs will provide an employment potential of over 5 lakh, over and above the indirect employment generated during the process of the construction of the SEZs itself. Significant investments may be expected in sectors like IT, pharma, bio-

technology, textiles, petro-chemicals, auto-components etc.1

Approvals have already been granted for setting up 117 SEZs (including 3 Free Trade Warehousing Zones) spread across 15 states and 2 union territories. Of these, 7 new SEZs are now functional and the others are at various stages of implementation. Exports from SEZs during 2004-05 were of the order of US$ 4 billion. This figure represents an annual growth of over 36%. During the period of April-December, 2005, the exports from SEZs stood at about US$ 3.5 billion. Currently, 948 units are in operation in the SEZs, generating employment for more than 1 lakh people.2 What is a SEZ? A SEZ is a specifically delineated duty free enclave that is considered to be foreign territory for the purposes of trade operations and duties and tariffs. All units set up within these geographically demarcated pieces of land, bestowed with state of the art infrastructure and the assurance of hassle-free operation of exports, get special privileges and incentives, as specified in the SEZ Act and Rules. Some key aspects of these will be discussed below. SEZs may be broadly divided into two categories: multi-product SEZs or sector-specific SEZs. Who can set up a SEZ? The Central Government and the State Government or any other person could jointly or severally set up a SEZ for one of the following purposes:

Manufacture of goods; or

1http://pib.nic.in/release/release.asp?relid=15417&kwd 2http://pib.nic.in/release/release.asp?relid=15417&kwd

Rendering of services; or Both manufacturing of goods and

rendering of services; or As a Free Trade and

Warehousing Zone. RIL recently received approval for its Rs 30,000 crore SEZ near Gurgaon. It has also been granted in-principle approval for setting up SEZs in Gujarat and Maharashtra. The Essar Group’s plans for developing a SEZ near Jamnagar were approved by the Centre. The Central government is currently examining the proposal submitted by Vedanta Resources for SEZ status to be granted to its aluminium smelter project in Orissa. Cadila Pharmaceuticals is awaiting approval from the Central Government after having received the approval of the Gujarat Government to set up a pharma SEZ in Dhandhuka, near Ahmedabad. Jubilant Organosys, a custom research and drug discovery services firm in India, has proposed a pharma and chemical SEZ in south Gujarat. Also, leading apparel exporter Orient Craft Ltd. has proposed to set up a SEZ in Gurgaon. A mega gems and jewellery park with SEZ status is proposed to be set up in Bangalore, by the All India Gems and Jewellery Association. Procedure for setting up a SEZ The SEZ Act and Rules lay down certain criteria for the setting up of SEZs. For instance, a proposed SEZ must conform to the requirements relating to the legal rights over the land where the SEZ is proposed, and compliance with all applicable local laws and regulations (for example, those relating to industrial and labour laws, sewerage disposal, and pollution control.)

A Board of Approval for SEZs has been established at the Department of Commerce, Ministry of Commerce and Industry. A person intending to set up a SEZ is required to make an application for approval in the form prescribed under the SEZ Rules 2006. Such person has two options to make an application: the first option is to make the application to the Chief Secretary of the State Government, who in turn shall forward the same to the Board of Approval along with its recommendations. The second option is to make the application directly to the Board of Approval, in which case, after the grant of approval, the person is expected to obtain concurrence with the State Government within six months. Once the Board of Approval approves of the proposal, it communicates the same to the Central Government, upon which the Central Government is required to issue its approval in favour of the applicant (referred to henceforth as the Developer), and notify the SEZ. The Central Government’s approval is valid for a period of three years. Extensions beyond this period may be granted by the Board of Approval, upon a request in writing from the Developer. Setting up a Unit in SEZ Any person who intends to set up a manufacturing, trading or service Unit in a SEZ is required to submit a proposal to the Development Commissioner of that SEZ in the manner prescribed in the SEZ Rules 2006. The Development Commissioner submits the application to the Approval Committee set up by the Central Government for the concerned SEZ. A prime condition for approval of SEZ Units is that such Unit should be a positive Net Foreign Exchange Earner. Net Foreign Exchange Earnings (NFE) is calculated cumulatively for a period of

five years from the commencement of production according to the formula provided in the SEZ Rules 2006. DTA and SEZ The Domestic Tariff Area or DTA means the whole of India (including the territorial waters and continental shelf), but does not include the areas of the SEZs. Under the SEZ Act, supplies from Domestic Tariff Area (DTA) to a SEZ are treated as physical export and a DTA supplier would be entitled to:

• Drawback or DEPB in lieu of Drawback

• Central Sales Tax Exemption • Excise and service tax

exemptions for supply of goods and services to a SEZ

A Unit or a SEZ may also sell goods and services in DTA in accordance with the import policy in force, on payment of all applicable duties. However, sales into the DTA by SEZ Units is subject to achievement of positive NFE cumulatively. Regulatory structure for monitoring activities of the SEZ The Development Commissioner is the administrative authority in charge of a SEZ. Performance of the SEZ units and compliance with the conditions of approval are monitored on an annual basis by the Approval Committee for the SEZ. Units with negative Net Foreign Exchange in the 1st and 2nd year shall be placed under scrutiny. If by the end of the 3rd year, the Net Foreign Exchange continues to be negative, a show cause notice will be issued. If the negative performance continues till the 5th year, penal action under the Foreign Trade (Development and Regulation) Act, 1992 may be initiated. Penal action may also be initiated upon failure by a Unit to

abide by any of the terms and conditions of its approval. Incentives under the SEZ Act & their WTO Compatibility Fiscal incentives are available for both the developer of the SEZ and for an ‘entrepreneur’ who sets up a unit for manufacture of goods or rendering of services within the SEZ. These include the following:

1. exemption from duty of customs on goods imported into, or services provided by a SEZ or a unit in a SEZ

2. exemption from any duty of customs on goods exported from or services provided from a SEZ or a unit within a SEZ to any place outside India

3. exemption from duty of excise on goods brought from any other part of India into a SEZ

4. drawback or other benefits on goods brought or services provided from any other part of India into a SEZ and on services provided in a SEZ by service providers located outside India

5. exemption from service tax on taxable services provided to a developer or unit within a SEZ

6. exemption from securities transaction tax

7. exemption from levy of taxes on the sale or purchase of goods if such goods are meant to carry on the authorized operations by the developer of a SEZ or an entrepreneur in the SEZ

8. a deduction of 100% (under section 10AA of the Income Tax Act, 1961) of profit and gains derived from export for the first five years of operation of a unit in a SEZ, followed by another five years during which time the deduction will be 50 percent of

the profits and gains. For a further period of five years a deduction will be provided of the amount not exceeding 50% of the profit as is debited to the profit and loss account of the previous year, in respect of which the deduction is to be allowed and credited to a reserve account, to be utilized for the purposes of the business of the assessee.

WTO Compatibility of SEZ incentive schemes Going by India’s past experience with the US Department of Commerce [DOC] and the European Commission [EC]3, where the EOU scheme was analyzed, there is some likelihood of similar findings with respect to SEZ’s. The DOC and the Commission have generally held the import duty exemption on raw materials and capital goods to be countervailable subsidies. Similarly, central sales tax reimbursements have also been countervailed. EOUs are also allowed to clear some portion of their production into the DTA on the payment of duty. The DOC held that the EOU did not have a system in place whereby it could be ascertained whether the import duty exemptions and the CST reimbursements were solely provided only for that part of the production, which was exported. As a result of this, the scheme was held to not be a valid duty drawback scheme within the meaning of the WTO Agreement on Subsidies and the entire import duty

3 See, EC- Imposing a definitive Countervailing Duty on imports of certain broad spectrum antibiotics originating in India and collecting definitively the Provisional duty imposed, L 273, 09.10.1998, p. 1. EC- Imposing a definitive Countervailing Duty on imports of polyethylene terephthalate (PET) film originating in India and collecting definitively the provisional, duty imposed L 316, 10.12.99, p. 1

exemption as well as the reimbursement was countervailed. The DOC, in the PET Resin4 case examined excise duty exemptions and found that the program conferred no “benefit” as a result of which it could be countervailed. The DOC held that essentially the amount of excise duty not paid is the same as the CENVAT credit that a non-exporter gets on domestic purchases and which can be offset against domestic sales. Thus, suppliers to an EOU do not get any ‘extra’ credit over and above the credit that is available to non-exporters and therefore this part of the scheme was not countervailed. On the issue of income tax benefits, both the DOC and the EC have countervailed section 80HHC benefits, as they are contingent upon export performance. The same reasoning could be used in evaluating income tax benefits for SEZs.

4 US- Final Affirmative Countervailing Duty Determination of Bottle-Grade Polyethylene Terephthalate (“PET”) Resin from India 70 FR 13460, March 21, 2005

THE COMPETITION ACT, 2002 Introduction The Competition Act, 2002 (the ‘Act’) was given presidential assent in January 2003, and the statutory authority in charge of securing free and fair trade in the country, namely the Competition Commission of India (the ‘CCI’), was set up later that year. However, not soon after the Act was passed with much excitement and expectation, did it find itself entangled in legal wrangles, with the effect that the substantive provisions of the Act are yet to come into force. Genesis The predecessor of the Competition Act 2002, namely the Monopolies and Restrictive Trade Practices Act (MRTP Act) of1969, was enacted to fulfil the directive principle of the Constitution that urged the government to ensure that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.5 The MRTP Act was however, specifically geared towards regulating restrictive and unfair trade practices, and preventing the concentration of economic and monopolistic power. The emphasis of the MRTP Act was against the concentration of wealth in any manner attained and hence inherently anti-monopolistic. In 1991, with the onset of economic liberalization in India, entry barriers and market regulations were slowly dismantled and foreign investment invited. Along with this process, a need was felt for a legal regime that would aid and promote competition.

5 Article 39(c)

A High Level Committee was set up in 1999 to advise the government on a suitable legislative framework for India relating to competition law, based on whose report the Competition Act was passed a new authority known as the Competition Commission of India (the ‘CCI’) was put in place. The Bare Essentials The Competition Act, 2002, covers the following core issues, each of which will be discussed here briefly: 1. Anti–competitive agreements [section 3], 2. Abuse of dominance [section 4], and 3. Combinations [sections 5 & 6] Central to each of the above, is the concept of the ‘relevant market’ which, the CCI needs to determine to examine how competition is said to be adversely affected. This is because the basic concern of the Competition Act is with enterprises that can exercise a reasonable amount of influence in the market. Two key concepts outlined under the Competition Act for defining the ‘relevant market’ are: ‘relevant geographic market’ and the ‘relevant product market’. The relevant geographic market, as the term indicates, is the area in which the conditions of competition for supply of goods and services are distinct and distinguishable from the conditions prevailing in neighbouring areas. The relevant product market is primarily determined on the basis of whether the products or services can be regarded as interchangeable or substitutable by the consumer, by reason of the characteristics and end use of such product. How broadly or narrowly the terms relevant product market and relevant geographic market are defined would depend on the facts and circumstances

of each case. A couple of illustrations on this point from the EC and US are as follows: (a) When considering the ‘tying up’ practices of Microsoft Corporation, the European Commission regarded the whole world as the relevant geographic market. It reasoned that the conditions for competition were the same across the world; computer manufacturers usually obtain a single worldwide license agreement from software manufacturers and import restrictions, transport costs and technical requirements did not constitute significant limitations.6 (b) The District Court of Columbia when restraining Microsoft Corporation from using anti-competitive practices for marketing its personal computer operating system software determined the relevant product market very specifically to be personal computer operating systems for the ‘x86 class of microprocessors’. This was so, because personal computer operating system software are written for specific microprocessors and operating system designed for other microprocessors would not work with x86 microprocessors.7

i. Anti-Competitive Agreements Section 3 of the Act deals with the concept of anti-competitive agreements and can be divided primarily into two types of agreements: Horizontal Agreements and Vertical Agreements. A horizontal agreement is an agreement between two (or more) producers in the 6 See Commission of the European Communities v. Microsoft Corporation, Case COMP/C-3/ 37.792 Microsoft (March 03, 2004) 7 In the present case, users would not have thought an operating system that runs a non-Intel based personal computer to be a successful substitute for an Intel-based personal computer. See United States of America v. Microsoft Corporation, at http://www.usdoj.gov/atr/cases/f0000/0046.htm.

same product market and at the same level of the production or distribution cycle, whereas a vertical agreement is between producers that operate at different levels in the production or distribution cycle. Horizontal agreements tend to be the most harmful to competition and hence are looked upon more severely than vertical agreements. This is because more often than not these are agreements between direct competitors or between ‘people of the same trade’. This is also why some of these agreements are classified as ‘per se’ agreements, i.e. they are presumed to have an appreciable adverse effect on competition. How such agreements are interpreted in practice would depend on each specific circumstance. Two prominent examples from US and EC are as follows. The US Federal Trade Commission rejected the proposed merger between US stationery giants Staples and Office Depot in view of the potential adverse effects on competition. On the other hand, the European Commission cleared a proposed merger between Adidas-Salomon AG and Reebok despite horizontal overlaps, because it found that the brand and pricing positions of the two companies were varied. ii. Abuse of Dominance

Unlike the MRTP, which focused on disciplining mere dominance, the new Act seeks to discipline the ‘abuse’ of dominance. For an abuse of dominance finding it is necessary to first find that the enterprise in question occupied a position of dominance in terms of a particular product market and geographic market for that product. Once an enterprise is found to occupy a dominant position, it needs to be shown

that it has abused its dominant position which can occur where the enterprise imposes unfair or discriminatory conditions on purchases and sales, restricts production of goods or even indulges in practices that deny market access.8 iii. Combinations The third focus area of competition law is that of regulating combinations. A combination for the purposes of the Competition Act cover three kinds of transactions when the total value of assets or turnover of all the parties to the combination cross the threshold limits specified in Section 5 – (1) Acquisition of shares, voting rights

or assets by a person or enterprise of another;

(2) Acquiring of control by a person over an enterprise;

(3) Merger or amalgamation between or amongst enterprises.

Although the term ‘combination’ is broader than the term ‘merger’ they are often used interchangeably. Certain joint ventures may also come within the ambit of the definition depending on the structure and objects of the JV. India is one of only a handful of nations, which includes the U.K., where merger notification is voluntary. In most other jurisdictions, parties are required to compulsorily notify the competition authorities if their merger crosses the threshold limits specified in their respective laws. However, as a matter of practice, most enterprises take the precaution of doing so as the repercussions would be quite serious if the merger is directed to be undone at a subsequent stage. 8 See section 4 (2) (a) to (e) for a complete listing of conditions leading to abuse.

Experience has shown that the majority of mergers notified are cleared quite quickly. In fact recent news reports indicate that the controversial Mittal Steel/ Arcelor takeover bid which has been notified to the European Commission will be cleared “due to the largely complementary nature of the combined group”9. In other cases, where the authority comes to the conclusion that a proposed merger would lead to an appreciable adverse effect on competition, it may yet allow the merger but subject to one of several directions including divestment, requiring access to essential inputs/facilities, dismantling exclusive distribution agreements, removing no-competition clauses, imposing price caps or other restraints on prices, refrain from conduct inhibiting entry, and so on. Mergers are rarely, if ever, completely blocked. Amongst the few mergers blocked by the European Commission was the proposed merger between Honeywell Inc. and General Electric Co. The Commission argued that the combination would have resulted in the creation of dominant positions in the aerospace industry, which would have enabled the merged entity to use the respective market power for the benefit of their other products, thereby eventually eliminating competition. The merger was blocked completely since none of the remedies proposed by GE were seen as sufficient to remove the competition issues identified by the Commission.

9 See for example, http://www.finanznachrichten.de/nachrichten-2006-04/artikel-6273334.asp. In the same breath, analysts also state that the unconditional clearance to the hostile takeover bid could be an attempt by the European Commission to come down harshly on the protectionist tendencies exhibited by the EU member states.

Conclusion

Access to reliable information and data is central to the effective functioning of the CCI. Developed economies have multifarious and rich sources of commercial data, which the competition authorities can rely on in their work. However, the same may not be the position in developing economies like India. Even where the data exists, this may not be available in a form or in sufficient detail so as to be usable by the Commission in deciding individual cases. In some places, the data are protected through confidentiality laws or practices. To its credit, the CCI has already taken cognizance of these issues and initiated the process of ironing out these potentially problematic areas.

DISPUTE SETTLEMENT UNDER THE WTO: THE “COMPLIANCE PANEL”

In our first issue of the Luthra & Luthra Trade Law Newsletter, we had provided a broad overview of the manner in which the WTO’s Dispute Settlement System functions. This volume focuses on one specific aspect of the DSU, namely compliance with either the Panel or Appellate Body (“AB”) ruling. The fact that a Panel or the AB gives its ruling on a dispute does not put to an end to the dispute. Thereafter, the losing Member is required to bring its policy into line with the ruling or recommendations. Article 21 of the DSU gives authority to the DSB for surveillance of implementations of recommendations and ruling by the concerned Members. The first clause stresses “prompt compliance with recommendations or rulings of the DSB [Dispute Settlement Body] is essential in order to ensure effective resolution of disputes to the benefit of all Members”.

The losing Member must state its intention to follow the recommendations of the DSB, which are based on the recommendations of the Panel or AB, at the DSB meeting, which is held within 30 days from the date that the report was adopted. If immediate compliance with the recommendation proves impractical, the member is given a ‘reasonable period of time’ to do so (Article 21.3).

The losing Member may have taken steps to ensure that the challenged measure is brought into conformity with the recommendations. However, the complaining Member may question or disagree that the steps taken do not amount to compliance. It is in such a situation that the role the Compliance Panel comes into play. Where possible, the original Panel that decided the dispute also sits as the Compliance

Panel. The adjudication of the dispute is expedited, as the Compliance Panel is required to circulate its Report within 90 days from the date that the dispute was referred to it. Where it is not possible to give the report within that time period, the Panel has to inform the DSB in writing with the reasons for the delay and an estimate of the time required by the panel.

Majority of the case summaries provided in this issue of the Luthra & Luthra Trade Law Newsletter pertain to Article 21.5 proceedings and they all pertain to various aspects of the ongoing softwood lumber dispute between Canada and the United States. As the cases will reveal, the Panel and the AB have taken somewhat differing stances on this very contentious issue. Further, due to an AB ruling, the ambit of “measures taken to comply” has been widened so that it is now more difficult to circumvent the ruling of a Panel or AB on an original investigation by virtue of an administrative review. It is also noteworthy that pursuant to one of the Zeroing disputes between the US and the EC, the US Department of Commerce is considering re-evaluating using the zeroing methodology in calculating dumping margins. In this regard it has requested comments and a final decision is awaited.10

10 See, 71 Fed Reg 11189, March 6, 2006.

WTO PANEL AND AB: SIGNIFICANT RECENT DISPUTES

United States- Final Countervailing Duty determination with respect to Certain Softwood Lumber from Canada, Article 21.5 of the DSU- Recourse by Canada- Appellate Body Report (WT/DS257/AB/RW), December 20, 2005 This case was brought by Canada against the US on the ground that the US had not “complied” with the Panel and AB’s ruling on the correct application of a methodology for calculating subsidies. The original countervailing duty (CVD) investigation in which the US had used this methodology was challenged by Canada as being incorrect. Both the Panel and AB agreed with Canada and ruled that the US should bring its “measure into conformity” with the WTO rulings. In order to bring the measure (i.e. the original CVD investigation) into conformity with the WTO Rulings the US issued a revised CVD determination. US law provides the US authority (the Department of Commerce or the DOC in this case) to bring any of its determinations into conformity if a WTO ruling says so, under a procedure known as the section 129 determination. Thus, the revised ruling of the original CVD investigation was a section 129 determination and it was issued on the 16th of December 2004. During the same time the US DOC also issued its final determination in the first Assessment Review in the same case. Assessment Reviews in the US are annual reviews conducted after the original investigation to assess retrospectively the final duties to be levied on imports that came into the

country after the final determination in the original investigation. The Review system The US review system of AD duties, unlike the review systems in most countries is on a retrospective basis rather than on a prospective basis. In a prospective system the dumping rate arrived at in the original investigation will be collected from exporters on all shipments that they ship after the imposition of the AD measure. In an annual review in this system, the authority will re-calculate the dumping margin only for the shipments already shipped post the duty and arrive at a rate. If this rate is lower than the rate in the original investigation then the excess amount is refunded. These reviews are annual so they have to be requested every year and if in year 3 for instance, the review is not requested then the rate arrived at in the original investigation will be applied (not the lower rate of the 1st review) to all entries. The US system is different in that, the rate arrived at the original investigation is a called a cash deposit rate. In the annual review (called the Assessment Review) the exporter can ask for a re-calculation of the shipments made after the imposition of the duties in the original investigation and if after an investigation the DOC finds that the duty rate is lower than the rate of the original investigation then it will charge duties as per this new lower rate and provide a refund of the cash deposit to the extent that it is in excess. But this new rate is also the cash deposit rate for the coming year. Thus, unlike the prospective system where the original investigation rate will continue to apply if not reviewed, in the US system the rate calculated during the review becomes the base rate for the next year

and thus can change and can be either lower or higher than the rate calculated in the original investigation. Thus, in the above instance, the DOC conducted an original investigation, which was challenged, and the WTO panel and AB upheld the challenge. The DOC then conducted a section 129 determination or a re-evaluation of the original finding. At the same time it also came out with the findings of its first Assessment Review in the same case and in this review the methodology that had been held to be wrongly applied in the original investigation was re-applied. Canada challenged both the section 129 determination and the First Assessment review as not being in compliance with WTO Rules, but instead of filing a new case at the WTO, it approached the original Panel in an article 21.5 determination. The US challenged this approach and stated that only the section 129 re-determination constituted a ‘measure taken to comply’ with the recommendations and rulings of the DSB. The First Assessment Review was not conducted as a “measure taken to comply” with the recommendations of the DSB and therefore was not within the 21.5 Panel’s jurisdiction. Both the Panel and the AB rejected the US interpretation of article 21.5. In its reasoning the AB stated that article 21.5 refers to the “existence or consistency with a covered agreement of measures taken to comply…”.The reference to the words ‘existence and consistency’ suggests that the effect of a measure is also a relevant factor in determining whether it forms part of a ‘measure taken to comply’. Further, it also stated that it was not upto the

implementing party to decide whether a particular measure is one that is taken to comply. In this case taking the timing, the nature and effects of the section 129 review and the first Assessment Review, it was clear that there were close links between these two determinations to amount to ‘measures taken to comply’. The AB rightly took this view because taking another stand would have resulted in an incongruous result. Had the AB taken the view that only the section 129 determination amounted to a ‘measure taken to comply’ and not the First Assessment Review then the DOC would have only had to amend its final duty based on this ruling. However the first Assessment Review comes after the section 129 determination and thus the cash deposit rate from the section 129 determination would have been superseded by the cash deposit rate from the first Assessment Review. However because the Assessment Review would be outside the scope of the ‘measure taken to comply’, the DOC would have continued to apply a faulty methodology and would have arrived at an incorrect duty rate, thus completely rendering fruitless the entire process of approaching the WTO for relief. This decision is important for it presents a practical opportunity for exporters and governments to challenge assessment reviews as part of a 21.5 proceeding (if the original investigation is already subject to a Panel or AB scrutiny) instead of approaching the WTO fresh which would result in significant cost and time delays.

United States- Investigation of the International Trade Commission in Softwood Lumber from Canada- Recourse to Article 21.5 of the DSU by Canada- Appellate Body Report (WT/DS277/AB/RW), May 9, 2006 This case highlights the complexities as well as the sometimes frustrating results of the WTO dispute settlement process especially in trade remedies cases. This was an appeal from a article 21.5 decision of the Panel which evaluated whether the section 129 determination of the USITC (which is in the nature of a retrial after an adverse WTO Panel or AB ruling against the finding of the DOC or the USITC11) was a measure taken in compliance with the original Panel ruling in the Lumber ITC investigation (adopted by the DSB on April 26, 2004). The original Panel investigated whether the USITC as an objective and unbiased investigating agency could come to the conclusion that there was a ‘threat of material injury’ (as against present material injury) to the domestic US lumber industry. It concluded that the ITC’s ‘threat of material injury determination’ as well as the causal link analysis was not in line with the ASCM as well as the WTO Antidumping Agreement. As a result of this finding the ITC made a re-determination (section 129 determination), which Canada challenged under Article 21.5 of the DSU before a Panel. The Panel ruled in favour of the US ITC’s finding and

11 In US antidumping or CVD cases (also called trade remedies), the Department of Commerce (DOC) investigates the fact of dumping or the subsidization, while the US International Trade Commission (USITC) investigates whether the domestic injury is facing injury as a result of the dumped or the subsidized imports.

Canada challenged the 21.5 Panel’s review before the AB. Thus, the crux of the issue before the AB was the standard of review adopted by the 21.5 Panel in assessing whether the ITC had indeed complied with the original Panel’s recommendation. The AB found that the 21.5 Panel had been very deferential to the analysis and conclusions reached by the ITC and did not ascertain for itself whether the evidence relied upon could have resulted in the conclusions reached by the ITC. The AB stated that a article 21.5 Panel is not required to conduct a de novo review of the case but the examination must be “critical and searching and be based on the information contained in the record and explanations given by the authority in its published report. A Panel must examine whether, in light of the evidence on record the conclusions reached by the investigating authority are reasoned and adequate.” The AB stated that the Panel’s analysis of several explanations was very brief and this led to an inference that the Panel had not been critical and searching in its analysis. Furthermore the Panel did not examine how the same evidence before the ITC in the original determination was the basis for different explanations in the section 129 determination. Additionally on the causal link analysis issue, the 21.5 Panel adopted a standard according to which, if based on the evidence it is demonstrated that the authority could not have reached a particular conclusion, then even if the 21.5 Panel disagreed with the conclusion that the authority reached, it was however bound to sustain it if there was evidence to support it.

The AB rejected this standard of review as posing too high a burden of proof on the complaining party to prove a negative, i.e. proving that the authority could not have reached the particular conclusion that it did. Further this negative standard also derogates from the Panel’s duty to carry out a searching and critical analysis. Thus, the AB agreed with Canada that the 21.5 Panel had not conformed to the appropriate standard of review. The difficulty for Canada now arose in getting the AB to complete the analysis, i.e. to go one step further and also rule that the ITC’s section 129 determination did not amount to compliance with the original Panel’s ruling. Canada had not made this request in writing and raised it during oral arguments. Nonetheless, the AB considering Canada’s request stated that it was not possible for it to complete the analysis as there weren’t enough uncontested facts on the record for it to step into the shoes of the Panel and rule whether the section 129 determination was consistent with the WTO subsidy and AD agreements. Thus inspite of getting a verdict in its favour and winning the case Canada was at a disadvantage as it left open the question of whether the US ITC’s analysis in the section 129 determination was infact in conformity with WTO rules. In order to achieve a compete and comprehensive ruling, Canada will again have to take recourse to Article 21.5 and again seek the setting up of a compliance panel to examine this issue.

United States - Final dumping determination on softwood lumber from Canada - Recourse to article 21.5 of the DSU by Canada- Report of the Panel (WT/DS264/RW), April 3, 2006. This case arose as recourse to the 21.5 or compliance Panel by Canada against the US methodology of ‘zeroing’ used in the DOC final determination of dumping on imports of softwood lumber from Canada. The DOC’s final dumping determination wherein it used the zeroing methodology on a weighted average to weighted average basis was challenged by Canada and the challenge was upheld by the Panel and AB. The two rulings held that the US practice of ‘zeroing’ was found to be in violation of article 2.4.2 of the WTO Antidumping Agreement. In order to bring its final determination into conformity with the rulings, the US DOC conducted a re-determination under the section 129 process. However instead of conducting the dumping margin analysis with a weighted average to weighted average methodology without ‘zeroing’, the DOC calculated dumping margin using the transaction-to-transaction methodology (calculate normal value and export price on a transaction to transaction basis) and again it resorted to ‘zeroing’ in arriving at the margin. Canada complained to the 21.5 Panel that the transaction-to-transaction methodology was inconsistent with article 2.4.2 of the WTO AD agreement. The Panel rejected Canada’s claim and essentially upheld the legality of ‘zeroing’ in a transaction-to-transaction dumping margin calculation. Canada argued that since the original Panel and AB had already held that ‘zeroing’ was prohibited in a weighted

average to weighted average comparison the same conclusion should also apply to applying ‘zeroing’ in a transaction-to-transaction methodology. The 21.5 Panel however disagreed and referred to article 2.4.2 wherein ‘zeroing’ was not expressly prohibited. Canada tried to argue that a reading of article 2.4.2 suggests that a ‘margin of dumping’ can only be found for the product as a whole, which meant that the results of all the transaction-to-transaction comparisons had to be included. It also referred to the original AB and Panel ruling on this very case, which also stated that the dumping margin had to be ascertained for the ‘product as a whole’. The Panel dismissed reliance on the original AB or Panel and stated that the findings in those rulings were specific to the facts presented in that case and specific to the weighted average methodology and therefore not applicable to this 21.5 Panel, which was specifically examining zeroing in the transaction-to-transaction methodology. Canada even relied on the AB ruling in the EC Bed-linen case which held that “by not taking into account all comparisons, the practice of “zeroing” does not provide a “fair comparison” between export price and normal value and is thus inconsistent with article 2.4.” The 21.5 Panel however rejected reliance on the EC-Bed linen case and stated that it was not bound by it. Thus by virtue of this Panel ruling, the following result ensues: zeroing in a weighted average methodology is prohibited; however zeroing in a transaction-to-transaction methodology is permitted. Thus investigating authorities like the DOC can choose the methodology, with or without ‘zeroing’ best suited for its analysis depending upon which methodology leads to a higher dumping margin.

The rulings of the Panels and the AB may finally come to a naught as a result of a settlement that the US and Canada are considering in the almost 2 decade old lumber dispute. It is learned that the US may revoke the AD, CVD duties in place and a substantial portion of the deposits already collected will be distributed to the importers on record. It has also agreed to not initiate any new AD CVD investigations. For its part Canada has agreed to put in certain export measures on softwood lumber. The agreement will likely be for seven years. United States - Laws, regulations and Methodology for Calculating dumping margins (“Zeroing”)- brought by the EC (WT/DS294/AB/R), May 9, 2006 This case is unique because this is the first time that the WTO has ruled that the methodology of ‘Zeroing’ is in itself (in WTO terminology this is called “as such”) violative of the WTO Agreement. There are two significant outcomes of this ruling:

1. it establishes that using ‘zeroing’ in an original investigation in a weighted average to weighted average comparison is prohibited per se.

2. it lends the weight of law to a practice (specifically a ‘methodology’ in this case) and makes it possible for Members to challenge a ‘practice’ (usually unwritten) of a Members as if it were a law.

At the outset, it must be mentioned that India was a third party to this case which is not surprising considering that it has faced several AD actions in the US and thus has a substantial interest in the outcome of this case. This decision is also significant for developing

countries, whose imports are frequently targeted in the US as it establishes once and for all, the fact that the ‘zeroing methodology’ ‘as such’ (atleast in an original investigation when the weighted average to weighted average methodology is used) is WTO incompatible and needs to be modified and thus dispenses with the requirement of countries challenging it each and every time on an ‘as applied’ basis. What is zeroing and how does it affect the dumping margin? In an antidumping investigation the comparison is made between the price of the good in the exporting country’s domestic market (called normal value) and the price of the good in the importing country (called export price). If the normal value is higher than export price, then the product is said to be dumped in the importing country. If the export price on the other hand is higher than the normal value then the good is not dumped. The comparing between the normal value and the export price is usually done on a weighted average basis12 and if there are grades or sub-classifications of the product then a dumping margin is calculated for each grade or sub-classification. The example given below is taken from the Panel report in this case and illustrates the impact of zeroing:

12 But comparisons are also permitted between weighted average normal value and transaction specific export price (called weighted average to transaction or simple zeroing) or even transaction specific normal value to transaction specific export price (called transaction-to-transaction). Thus dumping margin can be arrived at by use of any of these methodologies. Cases later in this newsletter discuss various WTO rulings where these methodologies were used.

Sales Normal value Export Price 1 100 130 2 100 70 Since for the first shipment export price exceeds normal value, the dumping margin in absolute terms is NV-EP = 100-130 = - 30 (minus 30) For the second shipment the dumping margin is 30 To arrive at the total dumping margin for both shipments, if the negative dumping margin is retained then the total dumping margin = -30 +30 = 0/2 =0 If however the minus 30 margin is instead assigned a zero the dumping margin would be 0 = 30 /2 = 15 Thus the use of ‘zeroing’ results in a skewed calculation of the dumping margin as it ignores some sales that were not made at dumped prices. Thus the EC challenged the use of the ‘methodology’ itself rather than bringing a claim that it was illegal as applied specifically in this instance. Reasoning of the Panel and the AB (i) Challenging a methodology In order for the EC to succeed the Panel and the AB had to first establish that the ‘practice’ or ‘methodology’ of zeroing was a law. Thus it had to be given the stature of a norm or law. The AB was aware that a practice such as a methodology was not usually in writing, but it stated that this fact alone is not determinative of a norm. Recognizing that the zeroing methodology was always included in the computer programs that calculated dumping margin and the US DOC had used it

several times consistently before and that it had a general and prospective application, all lent themselves to a finding that it was a norm that could be challenged ‘as such’. Having concurred that the ‘zeroing’ methodology could be challenged as a measure (as it relates to original investigations in which the weighted average to weighted average comparison is used), the AB also agreed with the Panel’s reasoning that the measure was inconsistent with article 2.4.2 of the AD Agreement, which is discussed below. (ii) Discrepancy of zeroing in

weighted average to weighted average calculation with the AD Agreement

Having determined that the methodology of zeroing could be challenged as a measure, the next step was to establish that this measure was WTO inconsistent. The EC relied upon the AB rulings in the EC- Bed linen13 case and the US- Final Lumber AD determination14 wherein the AB had held that article 24.2 requires determination of a margin of dumping for the ‘product as a whole’ and not to categories of the product. Article 2.4.2 speaks of calculating a dumping margin by comparing the “weighted average normal value and the weighted average of prices of all comparable export transactions”. Thus ‘all comparable export transactions’ means that a Member “may only compare those export transactions which are comparable, but it must compare all such transactions” and thus excluding export transactions

13 European Communities – Anti-Dumping Duties On Imports Of Cotton-Type Bed Linen From India WT/DS141/AB/R. 14 Appellate Body Report in United States - Final Dumping Determination on Softwood Lumber from Canada (WT/DS264/AB/R).

where the price is higher than the normal value is against the wording of article 2.4.2. As a result of this the Panel held and the AB confirmed that the DOC was required to include negative margins when it calculated a margin of dumping for the product as a whole. (iii) Zeroing in administrative reviews In the case of administrative reviews, the US applied a weighted-average-to transaction-methodology (‘simple zeroing’) and the EC had challenged the application of the methodology (methodology ‘as applied’) as being violative of several WTO AD Agreement provisions. The Panel took the view that simple zeroing was permitted because article 2.4.2, which was used to discipline weighted average zeroing, did not apply to administrative reviews. The AB disagreed and found in favour of the EC. Administrative reviews are governed under article 9.3 of the WTO AD Agreement and it does not explicitly prohibit zeroing. However the AB noted that article 9.3 also refers to ‘margins of dumping’ as established under article 2. The AB had already held in EC - Bed Linen and US - Final Lumber AD Determination that article 2.1 read with VI of the GATT clearly indicates that dumping has to be calculated for the ‘product as a whole’. The AB recognized that EC Bed Linen as well as the Final Lumber AD Determination dispute pertained to the weighted-average-to-weighted-average methodology but that the ruling in these cases was not based solely on 2.4.2 but also on 2.1. For the purposes of this case, the AB held that article 9.3 refers to article 2 and thus the reasoning established in

the previous cases pertaining to article 2.4.2 and 2.1 also applies to article 9.3 administrative reviews. Due to which, even for administrative reviews, the margins of dumping should have been calculated for the product as a whole and thus ignoring negative margins was violative of article 9.3. The AB however did not decide whether zeroing as applied in administrative reviews based on a weighted-average-to-weighted-average comparison was also violative of article 9.3. In conclusion it should be pointed out that this case is in sharp divergence with the Panel ruling in the “US – Final dumping determination on softwood lumber from Canada –Recourse to article 21.5 15” case which, is discussed above. These two rulings were delivered at approximately the same time but have divergent results. While this case condemned zeroing as a ‘weighted average to weighted-average’ as well as in the ’weighted-average-to-transaction-methodology’, the earlier 21.5 Panel upheld the ‘transaction-to-transaction’ methodology as applied in administrative reviews leading to some doubt as to the exact position on the illegality of ‘zeroing’ in calculating dumping margins. Mexico - Tax Measures on Soft Drinks and other Beverages, Report of the Appellate Body (WT/DS308/AB/R), March 6, 2006

The dispute was raised by the United States with regard to certain tax measures imposed by Mexico on soft drinks and other beverages that use any sweetener other than cane sugar, such as high-fructose corn syrup (HFCS) or

15 WT/DS264/RW

beet sugar. Soft drinks and syrups sweetened exclusively with cane sugar were exempted from the taxes. The tax measures concerned included: (i) a 20% tax on soft drinks and other beverages that use any sweetener other than cane sugar (the ‘soft drink tax’), which is not applied to beverages that use cane sugar; (ii) a 20% tax on specific services (commissioning, mediation, agency, representation, brokerage, consignment and distribution) of soft drinks and other beverages that use any sweetener other than cane sugar (the “distribution tax”); and (iii) a number of requirements imposed on taxpayers subject to the soft drink tax and to the distribution tax (the “book-keeping requirements”).

The US argument was that in Mexico, cane sugar is almost exclusively a domestic product, and before the afore-mentioned taxes, HFCS accounted for 99% of Mexico’s sweetener imports. The application of the taxes however made the use of HFCS in soft drinks and syrups cost-prohibitive. Thus, by taxing soft drinks and syrups made with HFCS, but not those made with cane sugar, the US argued, Mexico imposed a tax designed to discriminate against imports.

The US case before the WTO Dispute Settlement Body was that these taxes were inconsistent with the principle of national treatment as required under Article III of GATT 1994. The national treatment principle, a fundamental principle of GATT 1994, mandates that internal taxes and other regulatory measures of a WTO Member should not be applied in a manner that affords protection to domestic production. Article III therefore requires WTO Member countries to provide equality of competitive conditions for imported products in relation to domestic products.

Mexico argued that its taxes and measures under consideration were covered under the General Exceptions of GATT 1994, and would not otherwise be justifiable under Article XX of GATT. The specific exception relied on by Mexico was Article XX(d), the relevant portion of which reads as follows:

Article XX: General Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any member of measures:

(d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement…”

Mexico’s argument under Article XX(d) specifically was that its measures are necessary to secure compliance by the United States with the United States’ obligations under the North American Free Trade Agreement (NAFTA). Both the US and Mexico are parties to the NAFTA. This free trade agreement progressively eliminates tariffs and non-tariff barriers to trade in goods; and also deals with issues relating to services trade, investment and intellectual property rights. The dispute on HFCS arose because of disagreements between the United States and Mexico on the terms of trade on sugar. Mexico’s argument was that it was imposing taxes in order to ensure compliance by the US with its obligations on allowing

Mexican sugar access into the US under the NAFTA. Mexico argued that that the US might be precluded from relying on its WTO rights due to its alleged non-compliance with NAFTA.

The WTO Appellate Body reiterated the Panel’s findings in this regard and stated that the determination of the application of this principle would “entail a determination whether the United States has acted consistently or inconsistently with its NAFTA obligations.” The AB held that they saw no basis in the DSU for panels and the Appellate Body to adjudicate non-WTO disputes. Article 3.2 of the DSU states that the WTO 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”. Accepting Mexico’s interpretation would imply that the WTO dispute settlement system could be used to determine rights and obligations outside the covered agreements.

The Appellate Body explained that for a measure, otherwise inconsistent with GATT 1994, to be justified under Article XX(d) it would have to be a measure designed to secure compliance with laws or regulations that are not themselves inconsistent with some provision of GATT 1994, and secondly, the measure must be necessary to secure such compliance. The central issue before the WTO Appellate Body, therefore, was whether the term to secure compliance with laws or regulations in Article XX(d) of GATT 1994 encompasses international laws and regulations, in this case, the NAFTA. The WTO noted that the term laws or regulations under Article XX have generally been used in prior occasions to refer to domestic laws or regulations; but these could also include international rules that have become part of the domestic legal

system, either with or without specific domestic implementing legislation.

However, the Appellate Body ruled that international obligations of another Member, in this case the United States, cannot be read into the term laws or regulations under Article XX (d). It held that laws and regulations under Article XX (d) refer to “rules that form part of the domestic legal order of the WTO Member invoking the provision, and do not include international obligations of another WTO Member.” The Appellate Body also clarified that the WTO Panels or Appellate Body cannot become adjudicators of non-WTO disputes.

The Appellate Body therefore held that Mexico cannot resort to Article XX (d) as a defense for its measures.

This case raises some interesting questions on the inter-relationship between WTO law and other international legal instruments. The general principle followed by the WTO Appellate Body is that WTO law is not meant to be read in clinical isolation from public international law. Interplay of rules from other international treaties is a key issue that has been referred to in several cases by the WTO Panel and Appellate Body. The Appellate Body’s ruling in the Mexico-Soft Drinks case therefore needs to be seen in the context of the specific facts of that case, and in the interpretation of the ambit of the general exemption under Article XX(d).

AD/CVD CASES AGAINST INDIA IN THE US Final Results of Countervailing Duty Administrative Review: Certain Hot-Rolled Carbon Steel Flat Products from India: 71 FR 28665, May 17, 2006 The US conducted an administrative review of the CVD imposed on certain hot rolled carbon steel flat products. Pursuant to the US Regulation (19 CFR 351.213(b)), the review covers only those producers or exporters of the subject merchandise that specifically requested the review. Among the Indian exporters only Essar requested a review and was thus covered. The review covers the period January 1, 2004, through December 31, 2004 and the total net subsidy rate for Essar was determined at 4.56 percent ad valorem for the period of review.

ANTIDUMPING INVESTIGATIONS AGAINST IMPORTS INTO INDIA IN 2006

The following table provides an overview of the various antidumping actions considered by the Directorate General for Antidumping and Allied Duties (DGAD) in India. .

Sl. No.

Countries Product Domestic Industry Date of Initiation

Comments

1. China PR Pencillin-G M/s Southern Petro Chemical Industries Corporation

16.1.06 Initiation - Original Normal value Based on constructed cost of production with appropriate adjustments treating China PR as non-market economy.

2. China PR Dry Cell Batteries M/s. Eveready Industries Ltd., M/s. BPL Soft Energy System Ltd., M/s. Matsushita Lakhanpal Battery India Ltd., and M/s. Indo National Ltd.

2.2.06 Initiation - Sunset Review Product Zinc Carbon pencil batteries technically and commercially known as “R6”, “AA”, “UM3” both in paper and metal (both heavy duty and super heavy duty) jacketed form are within the scope of investigation. Other types of batteries such as, alkaline batteries, rechargeable batteries etc. are beyond the scope of the present investigation.

3. China PR and Sweden

Pentaerythritol M/s Kanoria Chemicals & Industries Ltd. (Gujarat)

2.2.06 Final Findings - Original Authority recommended imposition of AD duty not exceeding the dumping margin or injury margin, which ever is lesser.

4. Poland, Saudi Arabia, Russia, Iran, USA and European Union

Oxo Alcohols viz. Normal Butanol (NBA), Iso Butanol (IBA), 2 Ethyl Hexanol (2EHA), Iso Dcecanol, Iso Octanol and Normal Hexanol

Oxo Alcohols Industries Association with Indu Nissan Oxo Chemical Industries Ltd. (Mumbai), National Organic Chemical Industries Ltd. (Mumbai) and Andhra Petro Chemicals Ltd. (Hyderabad)

1.3.06 Final finding - Sunset Review There was no dumping from Poland and though goods from Saudi Arabia, Russia, Iran, USA and European Union were below normal value, there was no injury being caused to the domestic industry and there was no likelihood of recurrence of injury and therefore withdrawal of AD duty was recommended.

5. China PR, Hong Kong and Chinese Taipei

Potassium Permanganate

M/s Universal Chemicals and Industries Pvt. Ltd

3.3.06 Initiation - Sunset Review Grounds for continuation of duty - Continued dumping from China PR. - Volume declined and cost of production has significantly increased, which would intensify dumping. - Existing capacities far exceed their domestic demands, which increase the likelihood of recurrence of dumping.

6. EU, USA and Japan

Hydroxyl Amine Sulphate (HAS)

M/s. Deepak Nitrite Ltd. 4.3.06 Final Findings - Mid Term Review Discontinuation of AD duties imposed was recommended.

7. Switzerland and China PR

Vitamin A Palmitate

M/s Nicolas Piramal India Ltd.

23.3.06 Initiation - Original Normal value Estimated based on the information on selling price of subject goods in Switzerland. In case of China PR, based on constructed cost of production with appropriate adjustments as it is treated as a non-market economy. The domestic industry suggested that EU be considered as the appropriate market economy third country for the purpose of determination of normal value.

8. China PR, Chinese Taipei, Korea PR, Thailand, Malaysia, Indonesia

Nylon Filament Yarn

JCT Ltd. (Hoshiarpur), M/s. Modipon Ltd. (Modinagar), Gujarat State Fertilizers Company Ltd. (Vadodara) and Shree Synthetics Ltd. (Ujjain)

29.3.06 Preliminary Findings Notification of imposition of provisional AD duty.

9. China PR Cellophane Transparent Film

M/s Kesoram Industries (Kolkatta)

30.3.06 Preliminary Findings Notification of imposition of provisional AD duty.

10. China PR Saccharin M/s A S Enterprises, M/s Swati Petrochemicals Pvt. Ltd., M/s Shree Vardhyani Chemical

1.4.06 Preliminary Findings Imposition of provisional AD duty was recommended.

Industry Co. Ltd. and All India Saccharin Manufacturers Association.

11. China PR and Ukraine

Viscose Filament Yarn

Association of Man Made Fibre Industry of India (AMFII) on behalf of M/s Kesoram Industries Ltd., M/s Indian Rayon & Industries Ltd. and M/s NRC Ltd.

4.4.06 Final Findings - Original Imposition of definitive AD duty was recommended on imports from China PR. However, investigations against Ukraine were terminated due to negligible amount of imports.

12. China PR, Hong Kong, Singapore and Chinese Taipei.

Compact Discs – Recordable (CD-Rs)

Optical Disc Manufacturers Welfare Association, New Delhi

4.4.06 Initiation - Original

13. China PR Metronidazole M/s. Aarey Drugs and Pharmaceuticals Ltd.

5.4.06 Final Findings - Sunset Review Continuation of AD duty imposed was recommended.

14. China PR Zinc Oxide M/s Transpek Industries Ltd. and M/s Demosha Chemicals Ltd.

7.4.06 Initiation - Sunset Review Extension and enhancement of the AD duties in force requested, as revocation is likely to result in recurrence of dumping and injury to domestic industry.

15. Chinese Taipei

Acrylonitrile Butadiene Rubber (NBR)

M/s Gujrat Apar Polymers Ltd. (now Apar Industries Limited)

7.4.06 Final Findings - Sunset Review Notification of imposition of AD duty.

16. China PR and Sweden

Pentaerythritol M/s Kanoria Chemicals & Industries Ltd. (Gujarat)

20.4.06 Final Findings - Original Notification of imposition of AD duty by Central Government.

17. Turkey and China PR

Borax decahydrate

M/s Borax Morarji Limited, Mumbai. M/s M.V.Steels and M/s Raj Industries have given their support to the petitioner.

20.4.06 Final Findings - Mid Term Review Notification for discontinuation of AD duty imposed on imports originating in or exported from Turkey.

18. Iran, Saudi Arabia, United States of America, France and Japan

Sodium Hydroxide (Caustic Soda)

M/s Alkali Manufacturers Association of India (AMAI) supported by M/s DCW Ltd., M/s Gujarat Alkalis & Chemicals Ltd., M/s Search Chem Industries Ltd., M/s Grasim Industries Ltd., M/s SIEL Chemical Complex, M/s Bihar Caustic & Chemicals, Ltd., M/s Jayshree Chemicals Ltd, M/s Andhra Sugars Ltd., DCM Sriram, M/S Indian Petrochemicals Corporation Ltd., M/S Standard Alkali and M/S DCM Sriram Consolidated Ltd.

28.4.06 Sunset Review results pending Notification for extending the levy of anti-dumping duty pending the results of the sunset review investigations to September 25, 2006

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