Avaada Clean Energy to be Compensated for Impact of Safeguard Duty on a 5 MW Project

The Central Electricity Regulatory Commission (CERC) directed Kanpur’s Ordnance Factory Board (OFC) to pay ₹36 million (~$485,044) to Avaada Clean Energy Private Limited as compensation for the losses incurred due to the imposition of safeguard duty.

The payment should be made within 60 days of the order as per the rate provided in the power purchase agreement (PPA). The Commission noted that if the parties want, they can mutually agree to a mechanism for the payment of such compensation on an annual basis spread over the period not exceeding the duration of the PPA. The Commission added that the claim regarding restoration to the same economic condition before the occurrence of ‘Change in Law’ and grant of separate carrying cost was not admissible.

Background

Avaada Clean had filed a petition seeking the declaration of safeguard duty as a ‘Change in Law’ and to restore it to the same economic position before the imposition by increasing the tariff.


The petitioner had also requested the Commission to ask the factory board to pay ₹36 million (~`$485,044) as compensation because of safeguard duty and inter-state Goods and Services Tax (IGST) plus carrying cost of 15% from the date of impact until reimbursement by OFC Kanpur.

Earlier, the Solar Energy Corporation of India (SECI) was designated as the nodal agency for the implementation of 300 MW of grid-connected solar projects by defense establishments with viability gap funding under Jawaharlal Nehru National Solar Mission. Giriraj Renewables Private Limited was declared as the successful bidder for the development of a 5 MW solar power project at OFC, Kanpur. Giriraj Renewables formed a special purpose vehicle (SPV), namely Avaada Clean Energy Private Limited, and agreed to set up the solar project at a tariff of ₹4.18 (~$0.06) kWh. Avaada Clean executed the VGF securitization agreement with SECI and also entered the PPA on February 19, 2018, with the factory board. As per the PPA, the scheduled commissioning date was August 18, 2018. However, the project was delayed and commissioned nearly a month later on September 14, 2018.

Safeguard duty was imposed by the government in July 2018 on the import of solar cells. The effective rate of duty then was 25%.

Avaada argued that safeguard duty came into force after the execution of the PPA and before the commissioning of the project.

The EPC contractor, on behalf of Avaada Clean, had imported a total of 32 shipments of solar cells and modules on which total impact of safeguard duty and IGST was calculated to be ₹36 million (~$485,044).

OFC Kanpur argued that there was no compulsion on the petitioner to import the equipment from China or any other country.

The Commission observed that as per the bidding documents, SECI’s role has been of the implementing nodal agency concerning the setting up the project at OFC, Kanpur.

It noted that SECI was not a party to the PPA, and the PPA is a binding document for all purposes between Avaada Clean and OFC Kanpur. It stated that OFC, Kanpur was liable to compensate the petitioner for the ‘Change in Law’ as per the terms of the PPA.

Another objection raised by OFC was that the project was sanctioned and implemented under the defense program, and as per the provisions of the defense procurement manual, 2009, it was not liable to compensate for any ‘Change in Law.’

CERC said that as the defense procurement manual, 2009 does not find mention either in the bid document or the PPA, its terms cannot bound the developer.

The Commission stated that the imposition of safeguard duty had resulted in additional costs, and it has to be reimbursed by the OFC, Kanpur.

Another issue raised by the factory board was that Avaada Clean was duty-bound to employ a cost-effective approach as it was under an obligation to procure solar cells from such countries where the import was not subject to safeguard duty.

The Commission said that Avaada Clean decided for project implementation at the time of bidding and before the imposition of safeguard duty. So, it would not be appropriate to question such commercial decisions.

The Commission noted that IGST was levied by the competent authority in compliance with directions issued by the government of India. Accordingly, the Commission said that in cases where imported goods are liable to safeguard duty, the value of IGST levied on the safeguard duty was also to be allowed.

The Commission directed Avaada Clean to make available to OFC all relevant documents exhibiting the supply of imported goods, duly supported by relevant invoices and auditor’s certificate.

The Commission said that OFC Kanpur should pay the compensation for the imposition of safeguard duty as one-time payment within 60 days from the date of issue of this order.  Alternatively, the parties could mutually agree to a mechanism for the payment of compensation on an annual basis spread over a period not exceeding the duration of the PPA.

India has now extended safeguard duty on the import of solar cells and modules to India for another year starting July 30, 2020.