India: An OEM Perspective On Legal Issues Under Offset Manufacturing Arrangements

Last Updated: 5 June 2015
Article by Rajiv Khaitan and Kabir Bogra

Most Read Contributor in India, October 2017


Defence offsets are a significant opportunity for India to provide a growth impetus to its manufacturing sector. The partial liberalization of FDI caps and simplification of the industrial licensing process are some of the steps which have been taken to inspire investor confidence. These steps are also intended to encourage OEMs to engage in more meaningful partnerships with the Indian industry and not merely use it for low end manufacturing tasks.

These recent initiatives are representative first steps and should be viewed positively. However, from a OEMs perspective, entering into a manufacturing arrangement which may require a transfer of technology poses significant legal and commercial risks. Through this article, we have analysed a few options available to OEMs to discharge their offset obligations and the legal risks which they may incur under each of them.

Options to discharge offsets

A few of the options available to an OEM to implement offsets are as follows:

  • Co-development/Co-production
  • Sub-contracting
  • Contract manufacturing
  • Joint ventures
  • Licensed production

From an OEM's perspective, the selection of the Indian partner should be based on its ability to absorb technology, financial capability, experience in managing joint development arrangements and strong ethical & governance standards. Each of these criteria are critical to ensure that the project can be concluded within the term of the offset implementation plan submitted to the MOD.

In light of a few recent examples, another factor which should be considered at the planning stage itself is whether the Indian partner is undergoing a debt restructuring scheme. This is relevant as being a under debt restructuring scheme would require lender consents or waivers which may negatively impact the overall timeline for implementation.

Subsequent to selection of the Indian partner, the more nuanced legal risks under each of these options should be carefully examined while deciding the exact mode of discharge of offset obligations.


From the Indian industry's perspective, co-development/co-production is the preferred route as it would provide them an opportunity to absorb existing technologies and use them as a baseline for future development, thus reducing development costs and increasing efficiency. However, from an OEM's perspective, co-development and co-production are the most challenging routes, requiring detailed planning and a protracted implementation roadmap while evaluating the technical, commercial and legal issues in such an arrangement.

Protection of intellectual property: The most prominent legal issue associated with co-development is centred on the protection of the IP which the OEM is required to supply to its Indian partner. Protecting this IP is imperative since any unauthorized use of the technology (by the partner) would entail a long winded legal dispute and the damages sought by the OEM would require judicial validation. As valuation of technologies is complex and often has significant subjective elements woven into it, the quantum of damages claimed by an OEM would definitely be challenged by the Indian partner, leading to further complications.

With respect to jointly developed intellectual property, OEMs should also ensure that contractual documents provide for joint ownership in this regard. Further, the ability of the Indian partner to sub-license any new joint intellectual property into new markets should be carefully regulated. Ideally, the OEM's revenue share should be higher than that of the Indian partner, since under a co-development arrangement, the OEM would not charge any royalties on the use of its existing technologies.

Taxation: Another area of concern for an OEM are the multitude of taxation issues which may arise in a joint development agreement. For example, the OEM's personnel may be required to spend a substantial amount of time in India, which if not calibrated adequately may result in creation of a permanent establishment of the OEM in India and potentially result in disputes with Indian tax authorities.

Sub-contracting/Contract Manufacturing

Sub-contracting and contract manufacturing arrangements are relatively easier to develop, implement and monitor. These arrangements also provide the Indian partner an opportunity to absorb manufacturing technologies and skills in a shorter period. However, one of the criticisms of these arrangements has been that the technology absorption could be limited to low level activities such as fabrication and assembly skills.

Product liability: From a commercial and legal perspective, the key risk associated with sub-contracting arrangements pertains to product liability concerns. In case the sub-contracted products are required to be integrated with the main products, the OEM should ensure that the sub-contractor's liabilities adequately mirror the OEM's liability under the main contract. Therefore, it is strongly recommended that "flow through" clauses should be woven into the transactional documents.

Protection of intellectual property: As in the case of co-production/co-development model, OEMs should also ensure that their intellectual property is adequately protected under sub-contracting or contract manufacturing arrangements. The defence manufacturing sector is presently limited to a few key Indian manufacturers and each prospective Indian partner is likely to be engaged with multiple OEMs. In such a situation, care should be taken to ensure that the transactional documents include specific instructions with respect to procedures and/or exclusivity, to prevent leakage of confidential information.

Excise Duty: Lastly, though defence products are usually exempted from the levy of Excise duty, the Indian partner may be required to discharge Excise duty liability with respect to manufacture of "dual use" products. In such cases, any free-of-cost supplies made by the OEM to the Indian partner (for example, raw materials or components sent under a bill-to-ship-to transaction) would require to be included in the value of goods cleared by the Indian partner.

This may create a potential pricing problem for the OEM and Indian partner, if under the sub-contracting arrangement the products are required to be purchased at a pre-determined price. Hence, pricing aspects need to be carefully examined to understand the impact of the Indian indirect taxes on the arrangement.

Joint Ventures

The third option available to OEMs is the joint venture route. The earlier FDIregulations capping the equity participation at 26% failed to excite foreign OEMs in any constructive manner. With the increased equity participation, it is expected that OEMs would be encouraged to establish a more meaningful relationship with the Indian industry. Though the Indian industry has several success stories in forming joint ventures in regulated industries (such as insurance), joint ventures in defence production have not met the same level of success.

The concerns of OEMs on restriction of control and operational aspects in joint ventures are well documented and have been frequently voiced by policy analysts and industry representatives. However, if an OEM wishes to set-up a joint venture with a DPSU, certain peculiar issues would merit consideration.

Issues with DPSUs: Formation of joint ventures with DPSUs is governed by the Guidelines for Establishing Joint Venture Companies by Defence Public Sector Undertakings ("Guidelines") issued by the Department of Defence Production under the MOD. The Guidelines permit the "Navratna" and "Miniratna" DPSUs to establish joint ventures with OEMs up to 30% of the DPSU's net worth. However, the equity contribution is capped at not more than 15% in one project, subject to a maximum of INR 1000 crore for Navratna DPSUs and INR 500 crore for Miniratna DPSUs1.

The impact of these guidelines can be seen through the following example. Goa Shipyard, which is one of the largest ship manufacturing entities in India, reported a total turnover of INR 884 crores or USD 147.33 million (approx.) during FY 2013-14. Therefore, if it were to consider setting up a joint venture with a ship manufacturer, it cannot invest more than INR 132 crores or USD 22 million. Further, factoring 49% equity participation by the OEM (equivalent to USD 21 million), the net worth of the JV entity would be only USD 43 million, which, in most cases may be less than the value of the component or equipment required to be manufactured.

Compliance with Security Manual: A joint venture entity operating under an industrial license would also be required to be in compliance with the Security Manual published by the MOD, which provides the manner in which internal systems are required to be implemented and executed.

Therefore, in the event an OEM wishes to form a joint venture with an Indian DPSU, apart from the typical issues which may require consideration, the above issues would require additional consideration.

Licensed Production

Protection of intellectual property: Licensed production is another option which is available to OEMs and is perhaps the most testing for an OEM than any of the other options, since it requires comprehensive dissemination of existing technology and hand-holding to the Indian partner, which is, in effect tantamount to creating a competitor. Therefore, if licensed production arrangements are entered into with an Indian partner, the transactional documents should clearly provide restrictions on usage of the disseminated technology.

Export control restrictions: Another significant legal risk associated with licensed productions is the requirement of the OEM to be in compliance with the export control laws of the exporting country. There have been several instances in the past where licensed technologies have been used against exporting nations in conflicts due to which policy regulators (especially those in the United States) have been increasing the restrictions on technologies being exported.

Product liability: Licensed production arrangements, similar to sub-contracting/contract manufacturing arrangements, pose significant risks on product liability issues. Even in extremely regulated arrangements, quality concerns could arise which may cause delays and adverse financial implications for the OEM. Under licensed production arrangements, OEMs should ensure comprehensive indemnities are factored to protect them in case quality concerns result in cancellation of contracts with a customer.

Based on the above analysis, a sub-contracting or a contract manufacturing arrangement would seem to be the best option in terms of lowering risks from the OEM's perspective.

However, licensed productions and co-development arrangements are better suited for situations in which the OEM desires to manufacture at the lowest possible cost. In opting for this route, it would be advisable for the OEM to ensure that necessary protections with respect to IP and product liability are built into the transactional documents.


1. Approximately USD 167 million and USD 83 million, respectively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.