Citing an increase in costs as a result of a change in the rate of Goods and Services Tax (GST), Azure Power Thirty Four, a wholly-owned subsidiary of Azure Power, had approached the Maharashtra Electricity Regulatory Commission (MERC) demanding compensation. The Commission, however, dismissed the petition filed by Azure Power.
The developer had sought a compensation of ₹225.3 million (~$3.06 million) on the grounds that the increase in GST fell under the ‘Change in Law’ clause in the power purchase agreement (PPA) dated July 30, 2018, executed with the Maharashtra State Electricity Distribution Company Limited (MSEDCL).
MSEDCL had floated a tender on April 9, 2018, to procure 1,000 MW of solar power on a long-term basis from new or existing solar projects to meet its renewable purchase obligation targets. Azure Power Thirty Power was one of the successful bidders, and it signed the PPA with MSEDCL on July 30, 2018, for the supply of 130 MW solar from the project to be developed in Rajasthan.
Following the issuance of the letter of award dated July 2, 2018, Azure Power Thirty Four executed a contract with Azure Power for the supply of solar power.
The developer, in its submission, said that the Government of India issued the GST amendment notification on December 31, 2018, which led to an increase in the applicable GST rate to 8.9% with effect from January 1, 2019. As a result of the hike in rate, the developer had to bear additional project costs.
Further, the developer added that due to the issuance of the amendments, the tax rate had increased from 5% earlier to 8.9%, with effect from January 1, 2019.
After commissioning the solar project and having incurred the additional tax liability, the developer, through its letter dated May 18, 2020, submitted its claim for the ‘Change in Law’ under the PPA to MSEDCL amounting to ₹225.3 million (~$3.06 million).
Since there was no response from MSEDCL for over a month, Azure Power Thirty Four issued another letter dated June 16, 2020, to follow up on its claim. However, MSEDCL, while acknowledging the issuance of the amendment notification as a ‘Change in Law’ event, rejected the said claim.
MSEDCL, in its reply, said that the overall rate of GST was reduced from 18% to 8.9%, and noted that there was no increase in the rate of GST. Hence, the implementation of the amendment notification would fall under the terms of ‘Change in Law,’ but rejected the compensation appeal, arguing that the overall rate of GST had gone down.
Further, the state utility said that the PPA entered with the developer was for the supply of solar power rather than the supply of the solar project. Therefore, MSEDCL was not liable to bear any added costs even if the developer faces any rise in cost while setting up the solar project, the distribution licensee said.
MSEDCL further noted 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 Commission, in its analysis, said that Azure Power Thirty Four had contended that it had incurred an additional cost on account of the change in the rate of GST, and accordingly, was seeking compensation along with the ‘carrying cost’ from MSEDCL.
The MERC noted that the parties were mainly disputing about the GST rate applicable on the date of bid submission and whether the changes introduced in the 2018 notification changed the GST rate applicable for the project under construction.
The Commission observed that post-2018 GST notification, the tax rate for supply of goods to solar projects remained 5%. A separate category of engineering, procurement, and construction (EPC) services was introduced at a tax rate of 18%. And in the case of composite supply, the supply of goods being supplied along with other goods and EPC services, the effective tax rate of 8.9% would be applicable on such a contract.
Further, the Commission noted that by not entering into a most appropriate contract for the supply of goods, the developer lost the opportunity to use a legitimate lower tax rate of 5%. Thus, the additional expenses were due to contracting practice adopted by the Azure Power Thirty Four and not strictly due to a change in the tax rate.
“The contention that placing an EPC contract for setting up the solar power generating system is a well-accepted industrial practice. The Commission does not deny such submission of Azure Power Thirty Four but notes that in given circumstances, it would have been economical and prudent to place goods supply contracts directly with manufacturers of solar modules and other allied equipment. And for services such as erection, testing, and commissioning, it could have placed a separate contract with its sister concern, i.e., Azure Power India,” the MERC said.
Recently, in a similar order, MERC dismissed the plea of Tata Power Renewable Energy, demanding GST compensation under the ‘Change in Law’ clause in the PPA for a 150 MW project.
Earlier, the Central Electricity Regulatory Commission had dismissed the petitions filed by Azure Power against NTPC and the Solar Energy Corporation of India, requesting it to consider reimbursement on the incremental cost of project construction and operation and maintenance due to the introduction of GST laws and the claim of ‘carrying cost’ for the delay in reimbursement.
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Rakesh is a staff reporter at Mercom India. Prior to joining Mercom, he worked in many roles as a business correspondent, assistant editor, senior content writer, and sub-editor with bcfocus.com, CIOReview/Silicon India, Verbinden Communication, and Bangalore Bias. Rakesh holds a Bachelor’s degree in English from Indira Gandhi National Open University (IGNOU). More articles from Rakesh Ranjan.