Navigating Taxation Turmoil: Legal Battle Surrounding A 250 MW Solar Power Project In Rajasthan

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

Summary:

Mega SuryaUrja Private Limited (MSUPL), formed by Mahindra Susten Pvt Ltd (MSPL) to develop a 250 MW solar power project in Rajasthan, faced an unexpected financial burden when the Goods and Services Tax (GST) rate on solar power devices increased from 5% to 12%. This tax hike significantly impacted the project’s capital cost. MSUPL, under the provisions of their Power Purchase Agreement (PPA) with Solar Energy Corporation of India (SECI) and Haryana Power Purchase Centre (HPPC), claimed this as a “Change in Law” event and sought compensation. The Central Electricity Regulatory Commission (CERC) ruled in favour of MSUPL, acknowledging the GST increase as a change in law and awarding compensation.[1] However, the implementation of compensation for the period after the project’s commercial operation date is pending further orders from the Supreme Court.

Case Timeline:

  • 03.08.2017: Ministry of Power issues guidelines for tariff-based competitive bidding for solar power projects.
  • 13.03.2019: SECI issues a Request for Selection (RfS) for solar power projects.
  • 30.05.2019: MSUPL submits bid for the 250 MW project.
  • 25.07.2019: SECI issues a Letter of Award to MSUPL.
  • 19.03.2020: SECI executes a Power Sale Agreement (PSA) with HPPC.
  • 31.05.2020: PPA executed between MSUPL and SECI.
  • 30.09.2021: Notification increasing GST on solar power devices issued.
  • 20.05.2022 and 17.06.2022: Project commissioned in two parts.
  • 14.11.2022: MSUPL issues change in law notice to SECI and HPPC.
  • 13.04.2023: MSUPL files petition with CERC.
  • 19.05.2024: CERC order issued.

Issues Raised:

  • Change in Law: Whether the increase in GST rates constituted a “Change in Law” event under Article 12 of the PPA.
  • Compensation: Whether MSUPL is entitled to compensation for the increased costs due to the GST hike.
  • Discount Rate: What should be the discount rate for calculating annuity payments as compensation.
  • Carrying Cost: Whether MSUPL is entitled to carrying costs on the additional expenses incurred.

Appellant’s Arguments (MSUPL):

  • The GST increase was an unforeseen event that significantly impacted project costs.
  • The increase occurred after the bid submission date, a crucial cut-off date for Change in Law events in the PPA.
  • The additional GST burden directly affects the project’s financial viability and should be compensated.
  • MSUPL is entitled to carrying costs on the additional expenses incurred due to the GST change.

Respondent’s Arguments (SECI and HPPC):

  • Disputed the classification of the GST increase as a Change in Law event.
  • Argued for a limited scope of compensation, only covering the GST increase on goods and not services.
  • Contended that compensation should only apply to equipment installed before the project’s commercial operation date.
  • Opposed MSUPL’s claim for carrying costs.

Judgment:

The CERC ruled in favour of MSUPL on multiple fronts:

  • Confirmed the GST increase as a valid Change in Law event.
  • Held that MSUPL is entitled to compensation for the increased costs, including both goods and services, as per the PPA’s terms.
  • Determined a discount rate of 9.12% and annuity payment period of 15 years for calculating the compensation.
  • Awarded MSUPL carrying costs on the additional expenses.
  • However, the compensation for the period after the project’s commercial operation was deferred pending a Supreme Court ruling in a related case.

Analysis:

This case demonstrates the significance of clear and comprehensive contractual clauses in PPAs to address unforeseen regulatory changes like tax hikes. The CERC’s decision upheld the principle of protecting investors from unexpected financial burdens. It also emphasized the evolving nature of legal interpretations in the renewable energy sector, as seen in the ongoing debate over the applicability of compensation for post-commercial operation periods.

[1] https://cercind.gov.in/2024/orders/138.pdf