The Central Electricity Regulatory Commission (CERC) has observed that the enactment of Goods and Services Tax (GST) that came into effect from July 1, 2017, will be covered under the clause of ‘‘Change in Law’.’
The commission was hearing a petition filed by Parampujya Solar Energy Pvt. Limited (PSEPL), a wholly owned subsidiary of Adani Green Energy Limited, and Wardha Solar (Maharashtra) Private Limited (WSPL), a wholly owned subsidiary of PSEPL.
The petitioners had requested the commission to declare the imposition of GST as an event under ‘Change in Law’, and direct the National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India (SECI), which were the respondents in the case, to pay the petitioners the amount claimed under ‘Change in Law’.
Quoting the PPA, the petitioners claimed that they meet the conditions prescribed in the Article 12 for claiming Change in Law, which says that a Change in Law results in any additional recurring/non-recurring expenditure by the developer or any income to the developer.
Moreover, they cited an earlier order of the CERC which held that if an event qualifies as a ‘‘Change in Law’,’ then the due compensation must follow.
However, the respondents, in this case, have argued about the scope and applicability of Article 12 of the PPA and said that in the present PPA, there is no clause dealing with the specific relief under the construction period and therefore, the entire basis of ‘Change in Law’ provision does not arise.
It further argued that the relief for taxes is admissible in case of – “any change in tax or introduction of any tax made applicable for the supply of power by the solar power developers (SPD) as per the terms of this agreement (PPA).”
Therefore, the scope for Change in Law is restricted to the taxes which are imposed for the ‘supply of power’ and other than that the conditions for relief are not admissible.
To this, the petitioners have submitted that the commission has allowed ‘Change in Law’ event under a similar PPA by holding the phrase “for the supply of power” which will include inputs required for such generation and supply of power to the DISCOMs.
The commission observed that it has already cleared that any tax levied through an Act of Parliament after the cut-off date which results in the additional expenditure by the petitioner is covered as ‘Change in Law.’ Previously, it also made it clear that any tax or application of the new tax on ‘supply of power’ covers the taxes on inputs required for such generation and supply of power to the DISCOMs.
Therefore, the present case is no different and the enactment of GST laws will be covered as ‘Change in Law.’
The petitioners argued that after the introduction of GST, a tax slab of 5% to 28% had been introduced concerning goods and services required for the execution, construction, and operation of solar power projects. Previously, these were either exempted or fell under lower tax slabs. Therefore, new taxes have impacted the overall project costs.
For example, a service tax of 15% was being levied on operations and maintenance (O&M) expenses. However, after the GST, a rate of 18% is levied on O&M costs.
However, respondents have argued that it is the responsibility of the petitioners to account for the cost and risk for designing, constructing, erecting, commissioning, completing and testing the power project and mitigating the effect of change.
The commission noted that after the introduction of GST, a tax slab of 5% to 28% is levied under ‘Goods and Services’ for the execution, construction and operation of solar projects, which was previously exempted and categorized as Engineering, Procurement and Construction (EPC) stage (Goods) and O&M stage (services).
Under the EPC stage, if the invoice for the goods or supply of services has been received before July 1, 2017, and the tax has already been paid under the earlier law, then the GST will not apply in such cases, irrespective of the supply been paid fully or partly.
The commission also noted the claims of petitioners saying that the construction cost of the project has escalated to the tune of a few million after the levy of GST.
However, to fully determine the impact of GST on the projects, any reference to component-wise details of the project and respective percentage share of each such component in the overall capital cost is not available. Therefore, the commission relied on its earlier order dated March 23, 2016, to determine the ‘weightage of the components of capital cost’ and the percentage impact on various components. For example, in case of input by a special purpose vehicle or high sea sale by EPC, the effective rate was 0% in the pre-GST regime, whereas after the enactment of GST, 5% will be applicable on intra-state procurement as well as import by any EPC or SPV.
The commission has asked the petitioners to make available all relevant documents exhibiting clear and one to one correlation between the projects and the supply of goods or services to the respondents (NTPC and SECI). The respondents should reconcile the claims for Change in Law on the receipt of the relevant documents and pay the amount claimed to the developers.
In case of O&M stage, the commission is of the view that outsourcing of the O&M services to a third party is not the requirement of the bidding documents. Therefore, the outsourcing of the O&M services is a commercial decision of the petitioners and any increase in cost on account of taxes cannot increase the liability for the respondents. Therefore, the claim of the petitioners on account of the additional tax burden on O&M expenses is not maintainable.
The amount determined by petitioner will be on ‘back to back’ basis and paid by DISCOMS to the petitioners under respective Power Sale Agreements. The claims should be paid within sixty days of the date of this order or from the date of submission of claims by the petitioners whichever is later, failing which late payment surcharge will be added.
The petitioners had also requested the commission to consider the claim of ‘Carrying Cost’ under the principle of recovery of carrying cost/interest and time value of money. They had asked the commission to devise a suitable mechanism for ensuring that the time-value of money is restored by allowing carrying the cost for the period between when the petitioners pay the Change in Law amount and when the respondents compensate them. However, the commission rejected the plea on the basis that no such provision is mentioned in the PPA for ‘dealing with restitution principles of restoration to the same economic position.’
This ruling is consistent with CERC’s earlier ruling on the matter of GST introduction. In October 2018, the CERC had issued an order to compensate developers by giving them an upfront lump sum payment, which they would have incurred as an additional capital expenditure after the introduction of GST Law.
In December 2018, it ordered that the introduction of GST would constitute a ‘Change in Law’ event for the transmission service providers in India.
Recently, the CERC issued another similar order for relief under ‘Change in Law’ with regards to the effect of GST on solar projects which are still in the development phase.
Earlier, Mercom reported how conflicting state commission rulings on the GST rate had created confusion among the stakeholders. This was cleared after the GST Council gave its recommendations on solar power generating projects and other renewable energy projects in the last month of 2018.