"We will ride the Euro vehicle (in settling the dispute over India's automobile policy)," Japanese ambassador to India Hiroshi Hirabayashi said soon after signing an agreement for extending a Rs 6.9 crore debt relief grant to India by Japan.

The MoU was cumbersome and the obligations imposed in it were not in conformity with WTO guidelines, he said, adding Japan had joined EU in dragging India to the dispute settlement mechanism on the issue.

Commerce ministry sources said India had held consultations with EC on the automobile policy sometime in December last under the dispute settlement understanding and there had been no progress on the issue after that. "Some Japanese companies are operating in India. So far so good. But we have problems inthe obligations to export automobile components for the imports (of auto kits),' he said.

India's automobile policy stipulates that foreign car makers and joint ventures will have to indigenise 50 per cent of components in three years and 70 per cent in five years. It requires them to also bring in a minimum investment of $50 million and export automobile components to offset foreign exchange outgo on auto kits imports.

Hirabayashi said India would have to try and accommodate concerns of both Japan and EU on this front.

The automobile policy was one of the main issues to be discussed during last week's talks with Japanese officials in Tokyo by commerce secretary C P Prabhu.

Director General of Foreign Trade N N Lakhanpal, who held consultations with EU on India's behalf, told PTI that New Delhi had made it clear to the European nations that even Indian firms had to sign the MoU to import automobile kits.

Commerce ministry sources said EU was yet to react to the discussions held in December last.They said India was satisfied that EU had not sought the setting up of a dispute settlement panel to solve the issue. "Maybe, they are awaiting the outcome of the US dispute over quantitative restrictions on imports imposed by India," the sources said.

A dispute settlement panel had heard the dispute and asked India and the US to mutually agree to a timeframe for dismantling the import curbs. It has also said the timeframe should be over 15 months, the period normally given to a country to implement the dispute settlement body ruling.

A review of the interim ruling is due to be held soon after it was postponed from January 25. The EU has contended that India's automobile policy is discriminatory and against WTO norms.

India has defended the policy saying stipulations have been laid for balance of payment (BoP) position. Already seven car makers - Honda, Daewoo, Ind Auto Limited, Mahindra Ford, General Motors, Fiat Auto Limited and Mercedes -- have signed the MoU with the government.