Defence procurement law fundamentals

Mandatory procurement clauses

Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?

India is a common law jurisdiction and upholds the sanctity of contracts and the intention of the parties as reflected in the contractual terms. Therefore, while the procurement process is governed by the relevant framework such as the DPP or the GFR, the contract between the buyer and the vendor is the principal document governing the transaction.

Procurement frameworks such as the DPP and the GFR mandate certain clauses to be included in the contract executed between the buyer and seller. For example, the DPP mandates that standard clauses relating to use of agents, penalty for use of undue influence, access to books of accounts, arbitration and clauses related to governing law must be accepted by the seller.

Apart from the above, general principles of law may be read into the contract under the laws of India. For example, the ICA mandates that a party to a contract must act in good faith. Therefore, even in the absence of an express clause in the contract, the courts may interpret the buyer to have a right to terminate the contract for mala fide acts undertaken by the vendor, such as misrepresentation of facts.

Cost allocation

How are costs allocated between the contractor and government within a contract?

Contracts involving outright purchase of goods and materials from the vendor typically do not demarcate costs between the contractor and the government. The vendor is responsible for all costs incurred up to the delivery of the goods, including the cost of conducting field trials. In certain procurements of high volume but low-value products, the government may reimburse the cost of goods used in trials.

The DPP provides for cost-sharing for specific types of procurements in relation to products identified by the MoD for long-term indigenous development and production. For such procurements, the MoD bears up to 100 per cent of the cost of development of the prototype and provides facilities, items and consumables for field trials and testing of the prototypes.

Disclosures

What disclosures must the contractor make regarding its cost and pricing?

Cost and pricing disclosures depend on the applicable procurement framework and categorisation of the procurement. For certain types of procurements under the GFR or the DPM on fixed rate basis, the bidders are not required to provide costing information and must only submit their price bid for the procurement.

For procurements under the DPP, the bidders are required to make the following disclosures with respect to price:

  • cost of basic equipment;
  • cost of technology transferred (if applicable);
  • cost of recommend manufacturer spare parts;
  • cost of maintenance tools and test equipment;
  • cost of operating manual and technical literature for equipment and spare parts;
  • cost of training aids such as simulators, films, charts, etc;
  • cost of recommended training period;
  • cost of freight and transit insurance;
  • cost of annual maintenance; and
  • cost escalations due to inflation.

In addition to the above, it is standard practice for bidders to specify the validity period of the prices quoted in the tender submissions and to state that the cost and prices quoted are applicable only to the configuration offered for the procurement.

Audits

How are audits of defence and security procurements conducted in this jurisdiction?

The Comptroller and Auditor General of India (CAG) is the apex constitutional authority that undertakes the audit of all government departments and procurements undertaken by them. The CAG conducts performance and compliance audits of all government procurements and issues a report containing its observations with respect to compliance with legal frameworks and achievement of defined objectives. CAG reports are submitted to the Parliament of India and are publicly accessible.

Internal audits of vendors and procurements may also be undertaken by an individual ministry. For example, the DPP empowers the MoD to conduct audits to ascertain compliance with indigenous content requirements, discharge of offset and costing claims under a procurement category. During such an audit, the MoD (as a customer) is contractually permitted to access the records maintained by the vendor and visit the manufacturing location to verify the authenticity of claims made by the vendor or its suppliers.

IP rights

Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?

Defence procurements under most categories of the DPP entail outright purchase with minimal design and development requirement. Therefore, creation of intellectual property during the performance of the contract is not common.

If the government funds the design and development of prototypes, it may retain a non-exclusive licence with government purpose rights in the technical data, software and technology created in the programme. It is pertinent to mention that the funding and development of prototypes is limited to a specific procurement category, namely the Make category, in which participation is restricted to only Indian-owned and controlled entities.

Economic zones

Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement related benefits?

The government is in the process of establishing defence manufacturing corridors in the states of Tamil Nadu and Uttar Pradesh in India. Apart from these two industrial corridors, several states have identified and allocated land for defence manufacturing. Establishing an industrial unit in these designated corridors does not provide any specific tax incentives but significantly reduces the administrative cost and effort to establish a business.

Industrial units established for export purposes are permitted a host of exemptions, available at both central and state level, which include benefits such as exemption from input taxes and refund of output taxes. State governments may also offer subsidised electricity rates and waiver of fees and approvals.

Forming legal entities

Describe the process for forming legal entities, including joint ventures, in this jurisdiction.

Legal entities such as companies and limited liability partnerships are formed under the procedures defined under their respective legislation. The standard process involves applying with the name of the proposed legal entity, the antecedents of the promoters, the proposed capital and the name, objects and by-laws governing the legal entity.

Joint ventures can be incorporated or unincorporated in nature. Unincorporated joint ventures are formed by parties without setting up a separate legal entity and are typically governed by the contractual terms between the party for the venture. Incorporated joint ventures follow the process outlined above for formation of legal entities.

In incorporated joint ventures, the ownership of the legal entity is governed by the shareholder agreements incorporated into the by-laws of the legal entity. Foreign ownership in joint ventures engaged in defence manufacturing is subject to ownership restrictions according to the foreign investment norms of India.

Access to government records

Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?

The Right to Information Act 2005 (RTI) empowers any citizen of India to request information and documents pertaining to the functioning of a government ministry or department, including government-owned enterprises and autonomous organisations. However, the RTI mechanism contains certain exceptions based on which the government can deny the request for information. These exceptions include disclosure of information likely to compromise the national security of India, commercial and trade secrets, confidential information relating to the parliament or state legislatures, information likely to impede a running investigation, information likely to endanger the life or physical safety of any person, etc.

To obtain information under the RTI mechanism, the applicant (being an Indian citizen) is required to apply online on the RTI website of the relevant ministry or department. Each ministry and department is required to have a designated Public Information Officer (PIO), who reviews the application and decides whether the disclosure of the information would be subject to any of the exceptions under law. Subject to such determination, the PIO will either supply or deny the sharing of information with the applicant. In case of denial of information, the applicant may enter the appeal process to argue against withholding of the information.

RTI applications seeking specific information or contracts from the MoD are likely to be denied under the exception for national security. In the event any vendor specific information is sought to be obtained from the MoD, the MoD would be statutorily bound to seek the consent of the third party before offering such information.

Supply chain management

What are the rules regarding eligible suppliers and supply chain management and anti-counterfeit parts for defence and security procurements?

Each RFP issued by the MoD is required to mention the applicable procurement category, which may in turn specify the eligibility criteria of the supplier. For example, procurements under the Indian Designed Developed and Manufactured category can only be undertaken from companies owned and controlled by resident Indian nationals. In certain procurements, the MoD may also specify financial eligibility criteria to ensure the capability of suppliers to fulfil the contract. Entities related to blacklisted suppliers are also frequently denied participation in procurements under the DPP.

In terms of supply chain management, bidders for procurements under the DPP are required to assume responsibility for misconduct or non-performance by entities in their supply chain, including sub-vendors and offset partners. Therefore, discovery of any counterfeit parts by the MoD is likely to be considered as a material breach of the contract by the main contractor under the principal supply contract.