VAT and warranty repairs

The CJEU has held that the payment of amounts from by a warrantor to a customer were consideration for a supply of services by that customer where the customer took on the role of implementing repairs on behalf of the warrantor: Suzlon Wind Energy Portugal v Autoridade Tribunataria e Aduaneira (Case C-605/20) (the decision is not currently available in English).

The decision highlights the importance of paying close attention to the actual terms of any agreement. Whilst it might be expected that a payment in respect of guaranteed repair works from a warrantor to a customer would not be consideration for a supply, in this case the arrangements did not merely involve the reimbursement of costs incurred on behalf of the warrantor. The contractual arrangements made it clear that the customer had agreed with the warrantor to carry out services on its own goods in return for payments by the warrantor. All the essential ingredients of a VATable supply were therefore present.

Background

Suzlon Wind Energy Portugal acquired wind turbines and ancillary equipment from its parent company, Suzlon Energy India under the terms of a 2006 umbrella agreement. That agreement included a warranty under which Suzlon India guaranteed the turbines against manufacturing defects for two years on terms that required it to replace the defective parts but did not cover the labour costs associated with the replacement of defective parts.

In 2007, cracks appeared in the blades of wind turbines acquired and sold by Suzlon Portugal. As a result of this, Suzlon Portugal and Suzlon India concluded a service agreement in 2008 for the repair and replacement of the defective blades. In essence, this agreement required Suzlon Portugal to provide repair facilities and services to Suzlon India, acquire necessary equipment and materials for the repair and provide any information and assistance required by Suzlon India. Suzlon Portugal then carried out the replacement or repair of the defective blades and issued Suzlon India with a series of debit notes.

No VAT was charged on the amounts included in the debit notes. Following a tax audit, the Portuguese tax authorities concluded that the amounts charged by Suzlon Portugal to Suzlon India should have been subject to VAT and assessed Suzlon Portugal accordingly. Suzlon Portugal appealed arguing that the amounts were essentially paid under the guarantee pursuant to the 2006 agreement and were not consideration for any supplies made by it.

CJEU decision

The judgment of the CJEU notes that, although Suzlon Portugal benefitted from a guarantee under the 2006 contract, it was also clear that under the 2008 agreement it agreed to provide repair and replacement services for the benefit of Suzlon India. In essence, Suzlon Portugal had chosen to take over the relevant repairs and replacements in Portugal and issued invoices to Suzlon India in relation to the cost of doing so. It used third party suppliers to carry out some of these works, but all invoices were in the name of Suzlon Portugal and it deducted input VAT on those transactions.

The CJEU also noted that the sums relating to repair and replacement work were not entered into "transit" or temporary accounts by Suzlon Portugal, as might have been expected if Suzlon Portugal were acting merely as an agent for Suzlon India. As a result, it was clear that Suzlon Portugal had acted as a taxable person in relation to the repairs and replacement works it had carried out for Suzlon India. Suzlon India had instructed Suzlon Portugal to carry out the works in return for payment in order to give effect to the guarantee. In return, Suzlon Portugal issued debit notes to Suzlon India and so obtained consideration for carrying out those services.

The CJEU also went on to point out that it did not matter that Suzlon Portugal had merely passed on the cost of the repair and replacements without any margin or supplement. The fact that a transaction is carried out at a price higher or lower than the cost price is irrelevant in determining whether there is a supply for consideration.

The existence of the guarantee would only affect the classification of the transaction if it meant that one of the fundamental aspects of a supply was not present in the arrangements. That could be, for example, where the service provider had merely acted in the name and on behalf of the guarantor, merely transiting the sums relating to any goods or services received in connection with the works, not deducting input VAT itself on any such supplies and making it clear on any invoices the name of the company on behalf of whom the goods or services were received.

Comment

The case is somewhat unusual as involving a customer carrying out repairs on defective, guaranteed goods for its own benefit and recharging the guarantor for doing so. Whilst a payment from the guarantor to make right the defects or compensate the customer might be treated as mere compensation and outside the scope of VAT, these arrangements went far beyond that. In effect, the two related companies entered into a wide-ranging contract dealing with the resolution of the defective wind turbines that resulted in Suzlon Portugal agreeing to carry out a variety of works (using third parties) to put right the defects in return for agreed sums paid by the supplier Suzlon India. Whilst it is unusual that these works carried out by Suzlon Portugal were on its own property and for its own benefit, that did not detract from the fact that Suzlon India contracted it to do so and equally benefited from ensuring that the terms of the guarantee were not breached.

It was also highly significant that Suzlon Portugal had obtained input VAT deductions for all the VAT it had incurred in carrying out the works. That clearly indicated that it had received those supplies for its own purposes and not merely as an agent for Suzlon India acting as warrantor.