JSA successfully represented T.P. Kirnali Limited (a group company of Tata Power) before Maharashtra Electricity Regulatory Commission, in obtaining Change in Law compensation granted due to increase in rate of goods and services tax and basic customs duty

By an order dated May 21, 2024 (“Order”, the Hon’ble Maharashtra Electricity Regulatory Commission (“MERC”) in Case No. 244/AD/2022 held that T.P Kirnali Limited was impacted due to increase in rate of goods and services tax (“GST”) and basic customs duty (“BCD”) and is accordingly entitled for a total compensation of INR 15,48,00,000 (Indian Rupees fifteen crore forty-eight lakh) along with carrying cost.

Brief Facts

In order to meet Solar Renewable Purchase Obligation requirement, Maharashtra State Electricity Distribution Company Limited (“MSEDCL”) issued a request for selection for procurement of 500 MW (five hundred megawatt) of solar power from Intra-State Grid Connected Solar Plant (Phase-V), on a long-term basis, under a competitive bidding process. Tata Power Renewable Energy Ltd. (“TPREL”) was selected for supplying 100 MW (one hundred megawatt) solar power at the tariff of INR 2.90/kWh (Indian Rupees two paise ninety per kilowatt hour). Accordingly, TPREL set up T.P. Kirnali Limited (“Kirnali”) as a wholly owned special purpose vehicle for supplying power to MSEDCL. A power purchase agreement (“PPA”) was executed between Kirnali and MSEDCL on September 16, 2020.

For setting up the project, 2 (two) separate contracts (viz. Supply Contract and Civil Works/ Service Contract) were executed between Kirnali and Tata Power Solar Systems Ltd. (“TPSSL”). At the time of the submission of the bid, the taxes payable were as follows:

BCD was payable at the rate of 5% on import of solar inverters and other items. Additionally, a social welfare surcharge (“SWS”) at the rate of 10% was payable on the BCD amount. Thereafter, GST at the rate of 8.9% was payable on BCD and SWS.
A composite GST (i.e. Central GST, State GST and Integrated SGT) at the rate of 8.9% was payable on Supply and Civil Works/ Service Contracts for setting up of solar power plants [i.e., 5% on 70% (i.e. 3.5%) of the consolidated taxable value of the Supply Contract and Civil Works/ Service Contract and 18% on the remaining 30% (i.e. 5.4%) of the consolidated taxable value of the Supply Contract and Civil Works/ Service Contract].
After the bid-submission date, the Ministry of Finance, Government of India vide notification dated February 1, 2021, increased BCD from 5% to 20% on the import of solar inverters and other items like connectors etc. (i.e after cutoff date of February 28, 2020). The said notification was effective from February 2, 2021. Due to the increase in the rate of BCD, Kirnali was also impacted towards payment of SWS at the rate of 10% and GST at the rate of 8.9% payable on the increased rate of BCD.
On September 30, 2021, the Ministry of Finance on the recommendations of the GST Council issued notifications thereby increasing the rate of GST from 8.9% to 13.8%. These notifications dated February 1, 2021 and September 30, 2021 took place after the bid submission date (i.e. February 28, 2020) and hence qualified as Changes in Law for which Kirnali was entitled for compensation.

Relevant Issues

Whether notifications dated February 1, 2021 and September 30, 2021 amount to Change in Law?
Whether Kirnali is entitled to claim Change in Law considering its undertaking dated September 9, 2021, given to MSEDCL?
Whether Change in Law can be claimed for invoices raised post commissioning?
Whether MSEDCL’s claim of safeguard duty compensation is maintainable?

Findings of MERC

MERC has held the following:

Kirnali is entitled for Change in Law compensation on account of increase in GST and BCD.[1]
Any Change in Law relief would be governed by provisions of the PPA and is to be decided by MERC. A developer’s undertaking to not claim increase in project cost or upward revision of tariff for period of extension of Scheduled Commercial Operation Date (“SCOD”), pursuant to the office memorandums dated May 12, 2021 and June 29, 2021 issued by the Ministry of New and Renewable Energy (“MNRE”), cannot be held against the developer. MNRE in its subsequent office memorandums dated September 15, 2021, and November 3, 2021 has clarified that such undertaking is limited to developer not claiming termination of PPA or increase in project cost for reasons other than Change in Law for the period of extension granted.[2]
Invoices towards supply of service raised post commissioning of project are also eligible for Change in Law relief, provided such invoice are raised within 30 (thirty) days from the date of supply of such service.[3]
MSEDCL’s claim of Safeguard Duty cannot be allowed since the developer has not financially gained due to non-levy of Safeguard Duty. Notification No. 1 of 2018 dated July 30, 2018, clearly provided that there would be no Safeguard Duty after July 29, 2020. In the present case, commissioning of the project would have been beyond July 29, 2020, for which no Safeguard Duty was applicable. This was factored into the bid accordingly.
Carrying cost is allowed at the rate of 1.25% plus SBI MCLR per annum on the compensation amount from the date of payment till date of the Order.[4]
MSEDCL to choose between payment of compensation on lumpsum or per unit basis. This decision is to be communicated to the developer within a month of the Order.[5]

Conclusion

MERC in a progressive Order rightly followed the settled jurisprudence on Change in Law compensation by granting relief for impact on account of increase in GST and BCD. It disregarded extraneous submissions of MSEDCL to restrict compensation due to the developer. Kirnali’s undertaking dated September 9, 2021, was also rightly not held against its claim of Change in Law, since such undertaking only came in context of specific MNRE office memorandums. The undertakings required by these office memorandums have later been clarified to not be in context of Change in Law. In a progressive measure, MSEDCL has been afforded the opportunity at the outset to elect between lumpsum payment or a staggered payout should MSEDCL choose to save on carrying cost.

The JSA team was represented by: