The European Court of Justice (ECJ) made a decision in an interesting case regarding value added tax (VAT) in February 2022. The decision may affect the VAT treatment of cases where the customer decides to carry out the repair of goods under warranty itself or through subcontractors, passing the repair costs on to the supplier.
Under case C-605/20 (Suzlon Wind Energy Portugal), a Portuguese company purchased wind turbines from an Indian affiliated company. The supplier provided a two-year warranty on the products sold, covering components, repairs, and related transport costs, while the cost of labour force to replace defective parts fell on the customer. Unfortunately, the turbine blades cracked during the warranty period, leaving them in need of repair or replacement. Therefore, the Portuguese customer and the Indian vendor entered into a separate service contract, agreeing that whilst the vendor supplies the replacement blades, the customer will be responsible for the equipment, components and services relating to the repair.
Completing the repairs, VAT related to the materials and services purchased in this respect was deducted by the customer. Subsequently, the costs incurred were passed on to the Indian vendor by means of “debit notes”, on which neither VAT nor the legal basis for tax exemption was indicated. In the opinion of the customer, the mentioned costs arose in order to meet the supplier’s warranty obligations and the transactions were mere cost recharges without any profit being realised. The cost recharges therefore do not constitute a supply of services for consideration under the VAT rules. Accordingly, no tax liability was established with respect to the transactions.
However, in the view of the Portuguese tax authority, the Portuguese customer supplied services to the Indian vendor in his own name for consideration under a contract for services, making these services subject to VAT, therefore tax liability should arise with respect to the consideration indicated in the debit notes concerned.
The European Court of Justice shared the Portuguese tax authority’s view. In reaching its judgment, the Court placed particular emphasis on the separate service contract specifically concluded for warranty repairs, the repair and replacement services detailed therein, the wording of the debit notes and the accounting practices of the Portuguese company with respect to the repairs and the cost recharges. The Court further pointed out that the existence of a warranty would only have an impact on the assessment of the transaction in case the service supplying Portuguese company had acted in the name and for the benefit of another (i.e. the Indian supplier), thus treating the goods and services purchased as a transitory item in its books in a suspense account, without deducting input tax. In this case, the Portuguese company should have indicated on the purchase orders and invoices the company’s name for whose benefit the goods were purchased, and the work was carried out. The Court also stated the independency of the supply of services for consideration from any lack of profit on the part of the taxable person, and any warranty on to the goods supplied.
In the light of the ruling, taxpayers may wish to reconsider their own practices regarding warranty repairs: whether the recharge or reimbursement of their warranty costs to the supplier should be considered as a transaction outside the scope of VAT in line with current tax administration interpretation and practice, or rather as supply of services giving rise to VAT, due to the similarity with the Suzlon Wind case.