The Indian government devised the Defence Procurement Procure (DPP) in order to leverage capital acquisitions to develop the Indian defence industry by fostering the development of internationally competitive enterprises and augmenting capacity for research, design and development related to defence products. The DPP makes defence offset obligations applicable to all capital acquisitions where the indicative cost is INR 300 crore (Indian Rupees three hundred crore) (approximately USD 46 million) or more covered under the following schemes:

  • ‘Buy (Global)’ involving outright purchase from foreign / Indian vendors; and
  • ‘Buy and Make with Transfer of Technology’ i.e. purchase from a foreign vendor followed by licensed production in India.

The procedure for implementing the offset provisions provided for in the DPP is provided in the Defence Offset Guidelines (DOG) annexed as Appendix D to the DPP. Indian enterprises, institutions and establishments engaged in the manufacture of eligible products and/or provision of eligible services, are referred to as Indian Offset Partners (IOP/s). Vendors are free to select IOPs for discharging their offset obligations provided the IOP complies with the guidelines/licensing requirements stipulated by the DIPP as applicable and has not been barred from doing business by the Ministry of Defence (MoD).

The MoD has by way of an amendment dated 10 August 2015 (Amendment) to the DPP (2013) relaxed certain provisions of the DOG relating to providing details of IOPs and changing IOPs or offset components.

The DPP (2008), DPP (2011) and the earlier version of the DPP (2013) required a vendor to submit detailed information regarding the amount of the offset obligations, phasing and a comprehensive break-up of details regarding discharge of offset obligations, details of the proposed IOPs and details of banked credits (if any) in its technical offset proposal for evaluation by the Technical Offset Evaluation Committee (TOEC). Post the Amendment, vendors are now permitted to provide the above information in relation to discharge of their offset obligations and IOPs to the Defence Offset Management Wing (DOMW) at the following time:

  1. in its technical proposal for inspection by the TOEC; or
  2. one year prior to discharge of offset obligations through that IOP; or
  3. at the time of seeking offset credits.

In this regard, it is also important to note that in case an IOP proposal or an offset discharge transaction made by a vendor is considered ineligible by the DOMW, the following consequences may arise:

  • Vendors who had provided information under option (i) above would be permitted to make changes to their offset proposals to make them compliant with the DOG;
  • Vendors who had provided information under option (ii) above shall incur the risk of re-phasing their offset obligations with consequent enhancement of 5% (five per cent) of their offset obligations in case their annual offset discharge commitments are not met due to such ineligibility; and
  • Vendors who had provided information under option (iii) above would be penalised by treating the said offset discharge related transactions as invalid. They also face the risk of re-phasing their offset obligations with consequent enhancement of 5% (five per cent) of their offset obligations in case their annual offset discharge commitments are not met due to such ineligibility.

The Amendment has further empowered the Secretary, Defence Production to approve changes to the IOP (where the change is necessary to enable the vendor fulfil its offset obligations) and/or the offset component. The earlier version of the DPP (2013) required the approval of the Raksha Mantri (Defence Minister) for changes to the offset component.

It is important to note that the Amendment shall come into effect immediately and shall not only apply to procurements and offset contracts governed by the DPP (2013) but also apply to all procurements and offset contracts executed under the earlier DPPs.

Khaitan Comment

The Amendment seeks to remove the practical difficulties faced by vendors in deciding IOPs and executing agreements with the IOPs prior to executing supply contracts with the MoD. Vendors now have an option to negotiate with IOPs and execute agreements with IOPs at any time prior to claiming offset credits.

The Amendment also clearly indicates the proactive approach adopted by MoD to achieve their primary objective of fostering development of the Indian defence industry by enabling vendors discharge their offset obligations using IOPs efficiently.

The Amendment however, has created an ambiguity in relation to the penalty applicable in case of re-phasing of offset obligations by suggesting that re-phasing of offset obligations by a vendor would attract enhancement of its offset obligations by 5% (five per cent) as against a penalty equivalent to 5% (five per cent) of the unfulfilled offset obligation. The said ambiguity is a result of the MoD introducing this Amendment only in the section relating to technical evaluation of IOPs without incorporating similar amendments in the section relating to penalties.