The Karnataka Electricity Regulatory Commission (KERC) has directed four distribution companies (DISCOMs) to compensate a solar developer for the additional cost incurred due to the imposition of the goods and services tax (GST) under the ‘Change in Law’ clause.

The petitioners— Azure Power and its special purpose vehicles— sought reimbursement of GST incurred on operation and maintenance (O&M).

Background

The petitioners had commissioned solar projects in Karnataka after being declared the successful bidders for bids issued by KREDL.

The petitioners sought reimbursement of GST incurred on O&M charges. The GST came into the effect during the O&M period of the projects.

The petitioners claimed an incremental tariff, considering the additional expenditure incurred and to be incurred during the life of the projects.

However, the petitioners later requested that the Commission declare that they are entitled to be paid against supplementary invoices on actuals for the economic impact of the change in law events.

The DISCOMs argued that the power purchase agreement (PPA) or request for proposal (RfP) does not permit the outsourcing of O&M services to third parties. Therefore, any additional taxes incurred on such outsourced services cannot be considered a change in law event.

Countering the DISCOMs’ arguments, the petitioners said no provisions in the PPA or RfP prevent the project developer from outsourcing the O&M work to a third party. They also argued that outsourcing O&M services is a widely accepted industry practice.

The DISCOMs maintained that the petitioners were tasked with executing the projects themselves, and all associated costs were accounted for in the tariff determined during the bidding process. If the petitioners delegated work to a third party, the petitioners had to bear all costs, including those arising from change in law.

They also disputed the petitioners’ claims for incremental tariffs and said the PPA and RfP do not provide for payment of carrying costs related to change in laws

Commission’s analysis

The Commission noted that the chartered accountant certificate showed that the tax rate on O&M services was 12.36% when executing the PPA. However, the new tax rates were 15% from March 31, 2017 to June 30, 2017 and 18% from July 01, 2017.

The Commission noted that APTEL had already dealt with a similar issue in an earlier Judgement and held that the project developer had the right to outsource O&M services to a third party and claim the benefits of a change in law event, provided the terms of the PPA do not prohibit outsourcing of O&M services to third parties.

The Commission noted that in the present case, there was no evidence that the relevant PPAs or RfPs contained any terms explicitly or implicitly prohibiting outsourcing of the O&M services to third parties. The DISCOMs’ contention was, therefore, unacceptable.

The Commission ordered the petitioners to raise a supplementary invoice to the DISCOMs for the differential tax rates incurred due to outsourcing of O&M services, with a 10% per annum carrying cost.

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