Compensation Granted For Solar Project Affected By Tax Revisions: Tribunal Upholds Change In Law Clause

Posted On - 1 June, 2024 • By - King Stubb & Kasiva

Summary

The Appellate Tribunal for Electricity (APTEL) recently ruled in favour of Azure Power Venus Pvt Ltd (APV) in a significant case involving the interpretation of the Change in Law clause within a Power Purchase Agreement (PPA) with the Solar Energy Corporation of India (SECI). [1]The case arose from the introduction of the Goods and Services Tax (GST) Act, 2017, which substantially increased the project costs for APV. The company sought compensation from SECI under the Change in Law provision, arguing that the new tax regime disrupted the economic balance initially agreed upon in the PPA. SECI, however, rejected the claim, prompting APV to seek redress from regulatory bodies. The Central Electricity Regulatory Commission (CERC) initially ruled in favor of APV, a decision SECI appealed. Ultimately, APTEL upheld the CERC’s decision, affirming APV’s entitlement to compensation and reinforcing the principle of contractual fairness in the face of legislative changes.

Case Timeline

  • Project Agreement (2016): Azure Power Venus Pvt Ltd (APV) entered into a Power Purchase Agreement (PPA) with SECI.
  • Introduction of GST (July 2017): The Goods and Services Tax (GST) was implemented, leading to increased costs for APV.
  • Initial Claim for Compensation (2018): APV claimed compensation under the Change in Law clause of the PPA.
  • SECI’s Rejection (2018): SECI rejected the claim, leading to a legal dispute.
  • Central Electricity Regulatory Commission (CERC) Decision (2019): CERC ruled in favour of APV, allowing compensation.
  • Appeal by SECI (2020): SECI challenged the CERC decision at APTEL.
  • APTEL Judgment (2024): APTEL upheld CERC’s decision, confirming APV’s right to compensation.

Issue Raised

The central issue in this case was whether the introduction of the GST Act, 2017 constituted a Change in Law under the terms of the PPA between APV and SECI. This determination was crucial in deciding whether APV was entitled to compensation for the increased costs incurred due to the new tax regime.

Appellant’s Arguments

Azure Power Venus Pvt Ltd (APV) argued that the implementation of the GST Act represented a significant alteration in the law that directly impacted the financial and operational aspects of their solar project. The Change in Law clause in the PPA was designed to account for such unforeseen legislative changes, ensuring that the economic balance of the contract was maintained. APV emphasized that without compensation, the project would suffer undue financial strain, disrupting the originally agreed-upon terms. Additionally, APV pointed to similar precedents where compensation was granted under analogous circumstances, highlighting the necessity of upholding contractual commitments and fairness.

Respondent’s Arguments

Solar Energy Corporation of India (SECI) countered that the GST implementation did not qualify as a Change in Law under the PPA. SECI argued that the GST was a broad legislative measure affecting multiple sectors, not a specific change targeting the solar industry. They contended that such widespread legislative changes should be considered part of the business risk that APV had to bear. SECI maintained that the PPA’s clauses were not intended to cover comprehensive legislative reforms like the GST and that granting compensation would set a problematic precedent, potentially leading to numerous claims for general legislative changes.

Judgment

The Appellate Tribunal for Electricity upheld the CERC’s decision, affirming that the introduction of the GST Act, 2017, constituted a Change in Law under the PPA. The Tribunal stressed that the purpose of the Change in Law clause was to protect the economic equilibrium of the contract, ensuring that neither party suffered undue financial hardship due to unforeseen legislative changes. APTEL referenced previous rulings where compensation was granted under similar circumstances, reinforcing the consistency and fairness in legal interpretations. The Tribunal’s judgment ensured that APV would receive compensation for the additional costs incurred due to the GST, maintaining the financial balance envisaged in the original PPA.

Analysis

The APTEL’s judgment is a landmark decision that reinforces the interpretation and application of Change in Law clauses in Power Purchase Agreements. This ruling underscores the importance of maintaining contractual stability and predictability, especially in long-term infrastructure projects like solar power developments. The decision reassures investors that unforeseen legislative changes impacting project economics will be compensated, thereby mitigating financial risks, and encouraging investment in the renewable energy sector.

[1] https://cercind.gov.in/2024/orders/136.pdf