October 17, 2014
Given that “Buy & Make” with Transfer of Technology (ToT) is the principal category of capital acquisitions relied upon under India’s Defence Procurement Procedure (DPP) for encouraging domestic manufacturing of foreign-origin equipment1, one intuitively expects the DPP to contain a robust set of contractual provisions outlining MoD’s intellectual property rights (IPRs) in technologies being received by Indian Production Agencies (IPAs). On the contrary, as analysed in this note, a quick reading of the DPP reveals that there may be very little guidance of use to procurement professionals on the subject: a situation that is quite different from international best practices such as EU and US’s exhaustive guidance on government’s IPRs in defence acquisitions2 and in procurement of R&D and innovation.3
Management of IPRs, whether in procurement-cum-manufacturing contracts such as “Buy & Make”, or public-funded R&D-cum-productionisation contracts such as “Make” cases, or licensing of DRDO-developed technologies for that matter, has remained one of the relatively unaddressed areas in the DPP. In fact, DRDO practices in technology-licensing have been rather unique, with perhaps the only known case in the world where transfer of IPRs in public-funded technology was effected to a foreign entity without insisting on domestic manufacturing in India4: a practice that appears to be vastly different from the principles approved by the Government of India (GoI) in The Protection and Utilisation of Public Funded Intellectual Property Bill5 and guidelines6 issued by the Ministry of Science & Technology on the subject. In contrast, the US Government (USG) places strong restrictions on foreign transfer of technologies through instruments such as theInternational Traffic in Arms Regulation (ITAR), while also requiring preferential consideration for its small businesses and for domestic manufacturing in case of USG-funded R&D programmes7: a framework that has been increasingly finding mention in EU proposals on account of its obvious public policy advantages8.
This short note accordingly outlines some of the key aspects of the DPP that may need quick course correction, in order that some of the new international defence cooperation initiatives for co-development and co-production of defence equipment being progressed by GoI for implementing the new “Make In India” vision can achieve quick traction, while simultaneously ensuring that the MoD, including the Indian defence industry, can obtain their fair share of reciprocal benefits from these emerging partnerships.
IPRs in ToT as Offsets
ToTis also recognised as a permissible method for discharging offset obligations by foreign vendors in the revised defence offset guidelines (“RDO Guidelines”) of 2012, where in order to be eligible, ToT to (non-Government) Indian enterprises needs to come with “no license fee” and “no restrictions on domestic production, sale or export” stipulations9. However, there is no clarity on, inter alia, the following important legal aspects of the ToT arrangements: (i) whetherother-than-license fees or charges can be levied by a foreign vendor on the Indian recipient, either directly or indirectly, in the form of running royalty payments, goodwill charges, lump-sum capital charges, counter-purchase requirements for equipment or training etc., in which case the restriction on “no license fees” could easily be rendered dysfunctional; (ii) whether foreign manufacturing by Indian recipient(s) can be restricted by the transferor, in which case commercial and operational flexibility of the Indian recipient can take a major hit; (iii) whether MoD as an offset contracting party has any IPRs in the technologies being transferred to Indian entities; and (iv) whether the Indian entity receiving ToT in the first instance can subsequently transfer the same to another Indian entity. By way of comparison, offset program guidelines of the Republic of South Korea stipulate ToT to be free from any charges, and vest proprietary rights/ licenses in ToT, including the right to sub-license, with the Korean Government10, even if the instant possession thereof is with a domestic (Korean) offset partner.
The RDO Guidelines also permit ToT to government institutions to be eligible for discharge of offset obligations11, but quite unlike the provision on ToT to non-government Indian enterprises, the relevant sub-clause does not contain any bare guidance on restrictions vis-à-vis license fees and domestic manufacturing, sales or exports, or on any other government IPRs for that matter. In the case of technology acquisition by DRDO for discharge of offset obligations, the relevant guidelines12 are once again silent on the minimum government-purpose rights that need to be offered by the foreign vendor for claims with a multiplier of one. In addition, while the RDO Guidelines allow higher multipliers to be claimed in cases of technology acquisition by the DRDO depending upon permissions for production and/ or exports13, the relevant sub-clause contains no guidance on legal and commercial terms and conditions, including rights and limitations thereon, in respect of possibilities for further transfer of these technologies by DRDO to Indian production/ exporting entities: an issue that is obviously important given that DRDO is an R&D agency and not a production or exporting entity. In the absence of clear language, RDO Guidelines could therefore lead to a situation where a foreign vendor could claim higher multipliers even while DRDO’s ability to sub-license “acquired” technologies could remain restricted, curtailing the latter’s ability to actually practice the technology under transfer.
ToT and IPRs under Buy & Make
Returning to Buy & Make, it is interesting to note that while the DPP defines “technologies” for transfer under this category, namely, technologies for: (i) repair and overhaul; (ii) production from Completely Knocked Down (CKD)/ Semi Knocked Down (SKD) kits; and (iii) production from raw material and component level (IM kits)14; the phrase “Transfer of Technology” itself is left undefined in terms of minimum IPRs to be acquired by MoD/ IPAs, even while devoting an entire Appendix15 of the standard RFP to transfer of technology. Similarly, in the case of ToT for Maintenance Infrastructure in “Buy (Global)” cases, while the DPP defines the scope of technologies as one for maintenance to an Indian entity which would be responsible for providing base repairs and spares for the entire life cycle of the equipment16, the issue as to what IPRs need to vest with the IPA or with MoD is left largely unaddressed, just as “global rights” (another phrase left undefined) of an IPA17 are left at the absolute discretion of the seller18.
In addition, while “Buy & Make with ToT” creates the impression that complete ToT is obtained by MoD/ IPA for all items and assemblies, a closer look at the DPP shows this perception could be misplaced. For instance, the procedures leave complete discretion with a foreign vendor to deny design/ engineering documentation and manufacturing documentation for items it may choose to classify as Category-5 items19, while also denying such documentation for items it may classifyunder Categories 3 and 420. What this implies is that a vendor is at complete liberty to deny requisite documentation for a very significant numbers of items in proportion to the contracted value of final products, given that most large foreign vendors are integrators rather than in-house manufacturers. In addition, the DPP appears to erroneously classify engineering documentation for Category-2 items as “complete” ToT even though manufacturing documentation is not provided to MoD in such cases21, quite unlike Category-1 items where both engineering and manufacturing documentation are mandatorily required to be made available to an IPA22.