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Offset Advisory and Compliance Services

Overall procedure would be offsetpartner (also called supplier)identification, offset partner evaluation, offset partner selection, execution of Non-disclosure agreement (NDA), due diligence, execution of Memorandum of Understanding (MoU), negotiation, contract, monitoring and closure.

Procedure in Stages

Stages Objectives Our Approach at Avinav Consulting
1a Familiarisation and selection process
  • Offset planning
  • Company to outline offset partner screening criterion and selection process
  • Assist in defining the screening criterion and selection process considering various risks involved
  • Advice on pros and cons of different approach strategies and assist in evaluating appropriate approach strategy
  • Advice on offset regulations, laws governing technology transfer, IPRs, contracts, foreign exchange controls, foreign trade Policy etc.
  • Assist in preparing standard operating procedures
  • Review of controls relating to the procurement process
1b Offset Partner Selection
  • Company to identify Indian companies that may serve as potential offset partners
  • Compilation of information from internet research, various media/ database and regulatory/public sources on promoters, product portfolios, manufacturing facilities, key customers & vendors, technology & equity collaborations, other group companies etc.
  • Assist in evaluating identified companies based on the screening criterion discussed with Company
  • Evaluate alongside SOPs prepared o offset partner evaluation and selection
  • Advice on laws governing technology transfer, contracts, FEMA, etc., advice on Industrial licensing, export licenses, etc
2 Initial Approach and discussions
  • Execution of NDA to obtain additional information
  • Site visit and meetings
  • Defining key terms and conditions of MoU
  • Signing of MoU
  • Assistance in initial approach to gauge interest and sign NDA with limited disclosure of Client information
  • Evaluation of information
  • Assistance in discussion with potential partners and in defining key terms & conditions
  • Advise on negotiation & risk mitigation strategy
  • Advise on potential structures
  • Assistance in drafting of NDA/letter of intent/MoU, Signing of MoU
  • Review the aforesaid from various regulations perspective
3a Due Diligence
  • Identification of inherent risks based on analysis of regulations, financials, tax filings, vendor / bank contracts, etc.
  • Assessing financial health to understand ability to commit required resources
  • Conduct due diligence/health check review) on potential partners
  • Assess quality of earnings/cash flow/balance sheet and identify outstanding tax liabilities/material issues
  • Review financial commitments, available funding resources to assess the ability to meet contract obligations
  • Identify potential regulatory issues/challenges with the transaction
  • Identify potential risks and recommendations for the consideration of the Company
  • Analysis of the offset partner's level of regulatory compliances and assessing impact of such non-compliances
  • Offset agreement considerations
  • Review of agreements and material contracts
3b Negotiations and signing of contract
  • Negotiating terms of MoU to address findings of due diligence
  • Incorporating adequate safeguard to protect against potential risks
  • Finalising contract terms including conditions precedents (CPs), monitoring and reporting mechanism, terms of terminations and related costs
  • Advise on negotiating key terms and conditions to address identified risks
  • Provide negotiation support for effective discussion and closing of agreements
  • Assist with review of commercial terms, as proposed by the Company, of the contracts and advise on monitoring/reporting mechanism
  • Advise on incorporating default penalties and termination terms
  • Provide advice and assist in drafting/review of transaction documents, viz, purchase contract, purchase orders, technology transfer agreement, ancillary agreements like bank guarantees, indemnity bond, etc
4 Monitoring
  • Monitoring of contract terms and conditions and compliances of offset guidelines
  • Regular review of compliances required under various legislations, such as offset, Industrial licensing, taxes, foreign exchange regulations, export licenses, dispensations, companies act, etc
  • Evaluate risks from time to time
  • Review with SOPs prepared
  • Prepare/review of periodic statements/reports to be filed with MoD, other authorities like DGFT, tax departments, etc
5 Financial Closure
  • To ensure all compliances and risks mitigation
  • Check in order to ensure all regulatory and tax compliances are done
  • To advice on any risks involved
  • To advice on closure of performance bonds and warranty bonds liquidated damages
  • Final closure of books of accounts and rendition of reports
6 Transaction Services - Post Deal Advisory
  • To ensure compliances in post-contract execution
  • Providing complete handholding support for a transaction including:
  • Seeking regulatory approvals from various authorities agencies including MoD, DGFT, MoC, RBI, RoC, etc.
  • Integration with Attorneys for obtaining opinions, support services
  • Reporting to various Regulatory and tax authorities

Key Regulations and Approvals handled in the process

  • Defence procurement procedure including offset guidelines
  • Foreign Exchange Management Act
  • The Companies Act
  • Indian Contract Law
  • Other corporate laws and stamp laws
  • The Arms Act and Rules thereunder
  • Foreign direct investment policy to the extent of licensing guidelines, foreign technology collaboration
  • Local indirect taxes such as import duties, excise duty, value added tax, service tax, etc.
  • Foreign trade policy (FTP) and procedures
  • Advice on Initial insertion of exemption from custom duty and Excise duty
  • Industrial Development Regulation Act covering industrial licensing in the industrial policy
  • Foreign Trade Policy and procedures covering SCOMET guidelines, export license, EPCG schemes, etc.
  • Income tax including transfer pricing regulations
  • Double taxation avoidance agreement with India
  • Approvals for tax dispensation, incentives, etc

Regulatory and Tax Considerations on the Offset Contract

Offset Contract
  • Procurement of goods
  • Foreign direct investment (FDI) in joint venture (JV)
  • Investment in kind in transfer of technology (TOT) form
  • Investment in kind by provision of equipment/ services (through non-equity route)
  • Provision of equipment/ TOT
  • Technology Acquisition
Regulatory and Tax Considerations
  • FTP applicable
  • SCOMET guidelines - FIPB approval (Government approval)
  • FDI 26% or 100% in production or services
  • Industrial licensing required for manufacturing/ production/ integration
  • Transfer Pricing regulations applicable between OEM and Indian JV partners
  • Custom Duty on import of goods- exemption or taxable?
  • Excise Duty- exemption or taxable?
  • Service tax applicable on import of services and TOT
  • Income tax implications and withholding tax implications

Regulatory and Tax Considerations on the Main Contract

Main Contract between MOD and Original Equipment Manufacturer (OEM)
  • Cost of equipment
    • Offshore supply
    • Integration in India
  • Technology provision
  • Spares and integrated logistics support
  • Tools and Jigs
  • Documentation
  • Simulator/ Training
  • Maintenance, repair and overhaul services (MRO)
  • Project Management Service
Regulatory and Tax Considerations
  • Import of equipment - Customs duty exemption?
  • Payment to OEM subject to withholding tax in India
  • Available tax exemption, dispensation and incentives
  • Presence of wholly owned subsidiary or liaison office or project office or branch office in India
  • Permanent establishment risk to be evaluated
  • Integration in India subject to excise- Seeking exemption could be explained
  • Services procured from OEM subject to services tax
  • Compliance with
    • Exchange control Regulations
    • Secondment of Employees
    • Association of Persons (AOP) exposure