The Bihar Electricity Regulatory Commission (BERC) recently directed the Bihar State Power Holding Company (BSPHCL) to compensate a solar developer for ‘Change in Law’ claims due to the imposition of service tax and goods and services tax (GST).

Regarding the carrying cost, the Commission noted that the power purchase agreement (PPA) had no provision for restoration of the petitioner to the same economic position had the ‘Change in Law’ event not occurred. Without such provision, the question of allowance of carrying cost did not arise.

Azure Power Eris, a wholly-owned subsidiary of Azure Power, had filed a petition requesting an amendment in the PPA executed between Azure Power Eris and the North Bihar Power Distribution Company (NBPDCL) and the South Bihar Power Distribution Company (SBPDCL) regarding the additional cost accrued due to the imposition of GST laws.

Background

Bihar State Power Holding Company initiated a competitive bidding process to select solar power developers to set up 100 MW solar projects.

Azure Power submitted a bid for a 10 MW project and was selected as the successful bidder. In compliance with the provisions of the request for proposal (RfP), Azure Power informed Bihar State Power Holding Company regarding the execution of the project through a special purpose vehicle (SPV), namely Azure Power Eris.

Azure Power Eris executed the PPA for the 10 MW project with North and South Bihar Power Distribution Companies – the subsidiaries of Bihar State Power Holding Company – on January 17, 2015.

Azure Power Eris achieved the project’s commercial operation date on July 14, 2016. Later, in 2018, the developer filed a petition seeking relief per the ‘Change in Law’ clause of the PPA.

The Commission found no merit in the case and rejected the petitioner’s claims regarding the ‘Change in Law’ events.

Aggrieved by the Commission’s order, Azure Power Eris approached APTEL which remitted the case back to the Commission to revisit.

Azure Power Eris argued that the ‘Change in Law’ provision of the PPA protected it from any change in tax or introduction of any tax after the effective date, resulting in any additional recurring expenditure to be incurred by the petitioner.

The developer added that the enactment of service tax laws and GST laws were also covered under the ‘Change in Law’ provision (Article 12), which covered the enactment, coming into effect, promulgation, amendment, modification, or repeal in India, of any law, including rules and regulations framed under such law.

Due to the enactment of the service tax and the GST laws, the petitioner was required to bear additional recurring expenditure after the effective date for the operation and maintenance (O&M) of the project.

Bihar State Power Holding Company, in its reply, said that the petitioner was accountable to Bihar utilities for fulfilling all the obligations assumed under the PPA.

The Holding Company added that outsourcing the O&M contract was entirely a commercial decision undertaken by the developer, and the risk and reward for the same should have to be borne by it.

Azure Power, in its reply, said that as a ‘standard industry practice,’ the O&M activities of the solar project were outsourced to the parent company of the petitioner due to its experience in providing such services in the most effective and cost-efficient manner.

Commission’s analysis

The Commission observed that the ‘Change in Law’ clause under Article 12 of the PPA was not disputed. In terms of APTEL’s ruling, the petitioner’s engagement with a third-party vendor for O&M services was a purely commercial decision. It did not disentitle the relief sought for the increase in cost on account of the ‘Change in Law’ provisions of the PPA.

The state regulator noted that the petitioner was a 100% subsidiary company of the O&M service provider, and it was in direct control of the O&M service provider.

The Commission noted that Bihar State Power Holding Company had rightly pointed out that the present PPA had no provision for restoration of the developer to the same economic position as if ‘Change in Law’ had not occurred. With the absence of such a provision in the PPA, the question of allowance of carrying cost did not arise.

Considering the case’s facts, figures, and circumstances, the state regulator directed Bihar State Power Holding Company to pay its share of ‘Change in Law’ claims, including service tax claims of ₹331,630 (~$4,166) and GST claims of ₹2.59 million (~$32,542), based on supplementary bills of the petitioner supported with auditor’s certificate.

Last December, the Central Electricity Regulatory Commission rejected a solar energy developer’s compensation petition for the additional tax burden on operation and maintenance expenses and carrying costs due to a ‘Change in Law’ event.

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