The ongoing battle for access to India's vast whisky and wine market has entered a new phase with the European Union deciding to seek the removal of India's restrictive import duties under WTO's dispute settlement mechanism.
For several years, makers of Scotch whiskies and wines in European countries have been lobbying with the Indian government for the removal of several layers of import duties. Such duties, they allege, have prevented access to the Indian market and encouraged the circulation of counterfeit products.
Based on a complaint lodged in July 2005 by CEPS (the European Spirits Organisation) and CEEV (Comité Européen des Enterprises Vins), the European Commission (EC) -- the executive arm of the EU -- initiated an investigation in September 2005 and has now concluded that the levy of additional duty and extra additional duty amounted to "blatant cases of breaching fundamental WTO rules".
The detailed report, compiled on the basis of representations from various stakeholders and a visit to India earlier this year, was handed over to the Indian government last week.
The report states that the situation was sought to be resolved through diplomatic means over the last five years and added, "This route has failed to resolve the problem".
Sources in the Scotch Whisky Association (SWA) -- one of the key parties to dispute -- accuse Indian liquor producer-politician Vijay Mallya of ensuring that the restrictive import duties are not removed, thus preventing European companies from accessing the multimillion-pound Indian market.
On his part, Mallya has often accused the SWA of hostility and preventing Indian whiskies from being sold in the European markets.
Unless India moves soon to abolish the layers of import duties for Scotch whisky and wine, the EU will take the case to the WTO for settlement, which may lead to retaliatory measures by the EU.
The report alleges that the investigation "has been marked by the refusal of the Indian government to cooperate effectively. That refusal is unprecedented... It has hampered, to some extent, the efforts of the Commission services to conduct a timely examination... The Indian authorities, Indian producers and associations of Indian producers failed to reply to the questionnaires".
It adds that all individual Indian producers of wines and spirits refused the invitation to meet Commission officials during their visit to India.
The complaint against India's import regime for Scotch whisky and wine is that the duties were inconsistent with Articles II, III and XI of the GATT 1994.
According to the report, the investigation has confirmed that the imposition of Additional Duty and the Extra Additional Duty constitute blatant violations of the WTO obligations of India.
The report states: "At this stage, the Community must therefore defend its rights, negotiated in the WTO, to obtain market access for Community producers of BIO wines and spirits in India, and uphold the Community's systemic interest in ensuring that all of its trading partners observe the international trade rules, and the obligations contained in the WTO Agreement."
According to the report, the investigation has confirmed that India applies, in addition to ordinary customs duties (Basic Customs Duty) of 100 per cent (wines) and 150 per cent (spirits) ad valorem, Additional Duty to imported bottled wines at rates of 20 per cent to 75 per cent (depending on the price of the imported products) and to imported bottled spirits at rates of 25 per cent to 150 per cent (depending on the price of the imported products).
It states: "The investigation has also confirmed that India applies, in addition to Basic Customs Duty and Additional Duty, Extra Additional Duty to imported wines and spirits (bottled as well as bulk) at a rate of four percent ad valorem.
"This overall duty burden exceeds, by a large margin, the bound tariffs of India (bound at 150 per cent ad valorem) in respect of both (bottled) wines and spirits, contrary to Article II:1 of the GATT 1994...There is therefore evidence of an obstacle to trade within the meaning of Articles 2(1) and 4(1) of the TBR (Trade Barrier Regulations)."
It is a matter of "serious concerns", the report states, that Bihar, Daman and Diu, Jharkand, Tamil Nadu and Uttaranachal "may be restricting sale of imported wines and spirits, contrary to Articles III:4 or IX of the GATT 1994".
According to EC export statistics, EC producers exported directly to India 249,600 nine-litre cases of spirits in 2004 at a total value of euro 15.8 million, of which approximately euro 12.9 million were whiskies, euro 1.0 million cognacs, armagnacs and brandies, euro 0.7 million vodkas, euro 0.5 million liqueurs, and euro 0.2 million for rums and gins.
EC producers also exported directly to India wines in 2004 at a total value of euro 3.8 million.
Noting the recent liberalisation focus of India's economy and its impact on consumer attitudes, the report states: "The social perception of consuming alcohol is also changing -- notably as regards the consumption of wine -- and drinking is as a result becoming more socially acceptable.
"This change may be enhanced in the coming years by the policy of the Indian government promoting wine production, and consumption of wine as an alternative to Spirits...According to EC industry, Indian producers and an independent study carried out for the Indian government, consumption of wines and spirits is expected to grow respectively by 20 per cent and 10 per cent per year over the next decade."
The report adds that informal, or 'grey', distribution of imported wines and spirits "occurs on a considerable scale within India, according to the Indian government and industry sources".
"Information collected during this investigation suggests that the informal network is mainly supplied by goods smuggled into India or sold -- above the quantitative limits laid down by Indian law -- by duty free outlets in airports. A share of the 'grey' market trade is locally produced counterfeit products."
The report states that despite the elimination of India's non-automatic import licensing regime (quantitative restrictions) in 2001, imports of wines and spirits from the EC decreased in 2002, and since 2003 imports have increased only gradually in line with the overall growth in consumption in India of wines and spirits, leaving the market share of imported wines and spirits virtually unchanged.
"Thus, none of the effects that could be reasonably expected to flow from the elimination of the (WTO-illegal) quantitative restrictions have appeared, and the Indian market for duty-paid BIO products has remained virtually closed as a result of the application of high Basic Customs Duty and Additional Duty since 2001