22 Contingent liabilities and other financial obligations
The contingent liabilities and other financial obligations in the following table are not recognized in the balance sheet.
Operating leases and rents under IAS 17
Guarantee obligations on behalf of associates and third parties
Outstanding orders for projects under construction
Guarantee obligations are principally related to VAT and duties on the one hand and to financing obligations of associated companies on the other. Guarantee obligations will only lead to a cash outflow when called upon. At year-end, no obligations had been called upon. Most of the outstanding orders for projects under construction will be completed in 2020.
DSM has a process in place to monitor legal claims periodically and systematically.
DSM is involved in several legal proceedings, most of which are related to the ordinary course of business. DSM does not expect these proceedings to result in liabilities that have a material effect on the company's financial position. In cases where it is probable that the outcome of the proceedings will be unfavorable, and the financial outcome can be measured reliably, a provision has been recognized in the financial statements and disclosed in Note 18 'Provisions'.
In 2015, an award was issued against DSM Sinochem Pharmaceuticals India Private Ltd. (DSP India) in a protracted arbitration case in India going back to 2004 involving a joint venture that DSP India had formed with Hindustan Antibiotics Ltd., which suspended its operations in 2003. DSP India (renamed to Centrient Pharmaceuticals after divestment by DSM in 2018) is covered by an indemnity from Koninklijke DSM N.V. for this case. In 2015, DSP India made an application with the Civil Court in Pune (India) to set aside the arbitral award. The award amounts to INR 127.5 crore (approximately €16 million as at year-end 2019) excluding interest of 12% per year as of 2004. In 2019, DSM provided the Bombay High Court a bank guarantee of INR 150 crore (approximately €19 million). At the end of 2019, the application proceedings were still pending. DSM has always viewed this case as unfounded and is of the opinion that the likelihood of the award being ultimately set aside is high. Therefore, no liability is recognized in respect of this case.
In 2019, Brazilian tax authorities disagreed with certain tax treatment as applied by the company in 2014–2016, which would have an effect on such prior year income tax returns of around BRL 65 million (approximately €15 million as at year-end 2019), including penalties and interest. DSM views this case as unfounded and considers that the possibility of winning this case is high, as confirmed by external legal counsel. Therefore no liability relating to this case is recognized.