APTEL Accepts TPREL Claim For GST Compensation, After MERC Rejection

In an interesting judgement uploaded yesterday, the Appellate Tribunal for Electricity (APTEL) has upheld an appeal filed by Tata Power Renewable Energy Limited (TPREL) against an order of the Maharashtra Electricity Regulatory Commission (MERC), on compensation for GST law changes. MSEDCL was the other party to the case, as the discom buying the power from TPREL as generator.

The issue at hand was a project awarded to TPREL by MSEDCL, as part of a 1000 MW solar tender in Aril 2018. Under the project, TPREL was allotted 150 MW with the PPA signed on July 27, 2018, for power at Rs 2.72 per unit.

TPREL accordingly entered into a contract with Tata Power Solar Systems Limited (TPSSL) for the project. At the time of the submission of the Bid, GST at the rate of 5% (i.e., 2.5% of CGST and 2.5% of SGST) was payable on such Supply Contracts, in terms of Ministry of Finance’s Notification No. 1/2017-Central Tax (Rate) dated 28 June 2017. This would have covered purchases like modules, the largest cost component, mentioned as worth Rs 512 crores by TPREL.

Similarly, At the time of the submission of the Bid, GST at the rate of 18% was levied (i.e., 9% of CGST and 9% of SGST) on such service contracts, in terms of Ministry of Finance’s Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. This would have covered all civil work.

However, a subsequent notification from the finance ministry on the GST laws made it clear that for composite contracts, 70% of the taxable value would be treated as the supply component of the contract (to be taxed at 5% – CGST + SGST), and the remaining 30% would be considered as service component of the contract (to be taxed at 18% – CGST + SGST).

Thus, these change in law events led to GST at the rate of 8.9% becoming payable on Supply and Service Contracts for setting up of Solar Power Plants instead of 5% on the taxable value of the Supply Contracts and 18% on the taxable value of the Service Contracts for setting up Solar Power Plants. As a result, TPREL’s Supply and Service Contracts with TPSSL for setting up of the Solar Power Plant now attracts a composite tax of 8.9% (i.e. 5% on 70% of the consolidate taxable value of the Contracts and 18% on the remaining 30% of the consolidated taxable value of the Contracts). Since these change in law events have taken place much after TPREL submitted its Bid (i.e., on 8 May 2018) the said Notifications dated 31 December 2018, have adversely affected the cost of the Project envisaged by TPREL at the time of its Bid. Hence TPREL’s case for compensation. Rs 28.10 crores to be precise.

The MERC, in its wisdom, decreed that TPREL erred, by entering into a composite contract, when other winners of the same auction, notably Azure Power had not done so, or made any such claim. To quote, ” if TPREL would have placed three separate contracts viz. pure supply of goods contracts, erecting & commissioning contract, and civil contracts, then such increased tax burden could have been avoided.”

Quite simply, this argument was thrown out by APTEL on the basis that it is not the job of regulators to micromanage affairs of bidders. It also asserted that the change in law event was not in dispute here. Finally, it zeroed in on MERC’s usage of the logic of ‘prudent utility practices’, as mentioned in the PPA, to make it clear that the same did not apply in this case. APTEL ruled that the phrase was used in the context of operation and maintenance of the power plant or Article 3.1(vii) and (viii) of the PPA, it having no relevance to Change in Law provision.

Accordingly, it accepted TPREL’s demand, and sent the case back to MERC to do the calculations and arrive at a figure that could be approved for compensation.