The World Trade Organization established a panel Tuesday to examine India's import duties on European wines and spirits.
The panel will examine whether wine and liquor restrictions in a number of Indian states comply with international trade rules.
"This is a long-standing issue and of very serious concern," EU trade negotiator Raimund Raith told the WTO's dispute settlement body.
India's basic import duties on wine are 100 percent, while the tariff on spirits is 150 percent, both within WTO limits. However, various government surcharges take the tariffs up to levels reaching as high as 540 percent, depending on the Indian state.
The state of Tamil Nadu goes further still, shutting out foreign alcohol and allowing shops to sell only Indian-made spirits and wines.
India, which had previously indicated it would consider cutting the duties to avoid deepening the dispute, said it was "disappointed that (the EU) has chosen to pursue the matter further."
The two governments had "constructive, fruitful consultations" in the hopes of reaching a settlement, India told the WTO. However, it added that it was "confident that the panel will find the measures are consistent with India's WTO obligations."
India blocked the EU's first request for a WTO investigation earlier this month, but could not delay the panel's establishment at the second time under the commerce body's rules. A WTO case can result in punitive sanctions being authorized, but panels take many months, and sometimes years, to reach a decision.
The U.S. is still in consultations with India, but can ask for its own formal investigation next month if the two sides are still at odds over the surcharges. It could also seek to join in the EU-India dispute as a co-complainant.
"The United States continues to share the (EU's) concern that India's additional and extra additional duties appear to be inconsistent with India's WTO obligations," U.S. trade diplomat David Shark said. "The United States has now also consulted with India with respect to these duties. We continue to urge India to remove the duties quickly to resolve both of these disputes."
India is one of the largest markets for alcohol in the world, according to the EU, with huge potential.
So far, EU alcohol exports to India are a small percentage of their total world sales. India bought EUR23.3 million (US$31.6 million) worth of European spirits in 2004 from Scottish whisky to Finnish vodka and EUR4 million (US$5.4 million) worth of wine.
European spirits producers said their annual exports total more than EUR5 billion (US$6.8 billion). The wine industry sells EUR4.5 billion (US$6.1 billion) each year.
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