Citing a surge in costs on account of change in the rate of Goods and Services Tax (GST), Tata Power Renewable Energy Limited (TPREL) had approached the Maharashtra Electricity Regulatory Commission (MERC) demanding compensation. In its order, MERC has, however, dismissed the petition filed by TPREL. The developer had sought compensation on the grounds that the increase in GST fell under the ‘Change in Law’ clause in the power purchase agreement (PPA).
TPREL filed a petition with the Commission, requesting to declare the GST rate applicable to the supply and service contracts for setting up solar projects amounted to ‘Change in Law’. The developer also requested the Commission to declare that it was entitled to a sum of ₹281 million (~$3.78 million) and the carrying costs and direct the Maharashtra State Electricity Distribution Company Limited (MSEDCL) to reimburse the amount.
In 2018, MSEDCL had floated a tender to procure 1,000 MW of solar power on a long-term basis from existing or new solar projects through a competitive bidding process to meet its renewable purchase obligation (RPO) targets. A total of eight bidders had submitted their bids. TREPL had participated in the bidding process held in May 2018. In June, a letter of award was issued to TREPL, and the PPA was signed on July 27, 2018, to supply 150 MW of solar to MSEDCL at a tariff of ₹2.72 (~$0.037)/kWh.
As per the terms of the PPA, TREPL was required to construct, operate, and maintain the solar project. Later, TPREL entered into a contract with Tata Power Solar for the erection, procurement, and construction contract.
In February 2019, the PPA was amended, whereby TPREL and MSEDCL agreed to change the project’s location from Solapur in Maharashtra to Jaisalmer in Rajasthan.
TPREL, at the time of the submission of the bid, had considered GST at the rate of 5% on the supply contract and 18% on the contract for civil works (service contract). After the notification issued on December 31, 2018, the GST rate was revised to 8.9% on the supply to set up the projects instead of 5% and 18% on the taxable value of the service contracts for the setting up of the projects.
TPREL, on November 7, 2019, issued a ‘Change in Law’ notice to MSEDCL, highlighting the events and requesting to compensate to the tune of ₹246.2 million (~$3.31 million) immediately along with the appropriate carrying cost, on account of such ‘Change in Law’ event. MSEDCL neither responded to the notice nor compensated TPREL, as requested.
MSEDCL in its reply said that the supply of goods and services needed to set up the project was treated as a ‘works contract’, and the notification brought down the effective rate of GST to 8.9%. The distribution company (DISCOM) argued that the overall rate of GST was reduced from 18% to 8.9% for the supply made to construct the project, and it didn’t change the rate of GST. Hence, the new notification would not fall under the ‘Change in Law’ clause.
The DISCOM further said that the PPA entered with TPREL was for the supply of solar power and not the supply for the construction of the project. In the event of additional cost incurred by TPREL for setting up the project, such additional cost cannot be borne by MSEDCL. The DISCOM further stated that since there was no provision of ‘carrying cost’ in the PPA entered between the two parties, any claim of ‘carrying cost’ needed to be rejected by the Commission.
The Commission noted that TPREL had contended that it had incurred an additional amount of ₹281 million (~$3.78 million) on account of change in the GST rate, and accordingly, was seeking compensation of this amount along with the ‘carrying cost’ from MSEDCL.
The state regulator said that MSEDCL had opposed such contention and stated that before the notification dated December 31, 2018, the rate of GST for the supply of goods and services to set up the project was 18% and that the same would be applicable in this case.
TPREL had claimed that its engineering, procurement, and construction (EPC) contract was covered under ‘supply’ and hence GST at the rate of 5% was applicable. But the construction contract was covered under ‘services’, hence GST at the rate of 18% was applicable at the time of bid submission.
However, concerning the EPC contract, MSEDCL had said that as the contract included activities such as erection and construction, it fell under composite supply, hence GST at the rate of 18% was applicable.
The Commission stated that TPREL has entered into two separate contracts. One was an EPC contract for supplying goods for the solar project and designing, testing, and commissioning such goods. And second, a separate contract is for civil works for the solar power project. The EPC contract of TPREL cannot be termed as a ‘work contract.’
After the 2018 notification, the supply and service contracts for setting up the solar power project attracted a composite tax rate of 8.9%.
“It is important to note that TPREL had placed two separate contracts which seems to be placed to minimized GST implications as per then-applicable laws. But, considering confusion prevailing at that point of time on the applicability of GST rate for an EPC contract, if TPREL would have placed three separate contracts-pure supply of goods contracts, erecting & commissioning contract, and civil contracts, then such increased tax burden could have been avoided,” the Commission observed.
Further, the Commission said that TPREL was expected and required to construct the solar project economically. By not entering into a most appropriate contract for the supply of goods, TPREL lost the opportunity to use a legitimate lower tax rate of 5%.
In April last year, the Central Electricity Regulatory Commission declared that the introduction of GST fell within the scope of the ‘Change in Law’ clause in the PPAs.
Earlier, CERC had dismissed the petitions filed by Azure Power against NTPC and the Solar Energy Corporation of India (SECI), requesting it to consider reimbursement of the incremental cost of project construction and operations and maintenance due to the introduction of GST laws and the claim of carrying cost for the delay in reimbursement.
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