Are warranty-period repairs services provided for consideration?

An Indian company operating in the wind energy sector provided its EU-based related-through-capital companies with a two-year warranty covering manufacturing defects of components. They supplied wind turbine blades to a Portuguese company. Within the two-year warranty period, cracks requiring repair appeared on the blades. The Portuguese company themselves purchased the necessary materials and arranged for the repair in their own name and for their own account. Subsequently, by issuing debit notes, they recharged the costs to the Indian seller without Portuguese VAT, while claiming the right to deduct VAT on the invoices received from local subcontractors.

Not charging local VAT on the debit notes issued was challenged by the Portuguese tax administrator. The company argued that it was a mere refund of costs of the warranty repair, and not a generation of income, i.e., in their view, the transaction was outside the scope of VAT. However, according to the CJEU, this would apply only if the Portuguese company had acted in and for the seller’s (the Indian company’s) name and account when arranging the repair, recorded the costs on their balance sheet, and, above all, not claimed the right to deduct input VAT. Also, the related invoices would have to be issued directly to the Indian company.

The CJEU noted that a provision of services is deemed to be everything that is not classified as a supply of goods. Both the CJEU and the tax administrator also considered the contractual arrangement in form of a contract for the provision of services between the Portuguese and the Indian companies, whereby the buyer undertook to perform services aiming to repair the wind turbines.

On the criterion of whether a consideration was received, the CJEU commented that debit notes themselves can be regarded as consideration for provided services. The fact that no margin was charged on the costs is irrelevant. The CJEU thus concluded that the disputed transactions must be regarded as a provision of services for consideration; therefore, local VAT should have been charged on the debit notes issued by the Portuguese company.

There are only a few judgments dealing with warranty repairs and the re-invoicing of costs; hence the current decision might help in distinguishing whether a specific case involves the provision of repair services or a mere passing-on of costs.