Azure Power’s Petition for GST Compensation Dismissed by MERC

The Maharashtra Electricity Regulatory Commission (MERC) recently heard a petition filed by Azure Power Thirty Four Private Limited (APTFPL), which sought INR 22,52,61,708 in compensation for “increase in costs” due to a change in the rate of Goods & Services Tax (GST) following a notification issued by the Ministry of Finance in December 2018. APTFPL tried to argue that the increase in GST fell under the ‘Change in Law’ clause in the power purchase agreement (PPA), but the commission dismissed the petition.

In April 2018, Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL) floated a tender to procure 1000 MW Solar Power on long-term basis from new or existing solar projects through a competitive bidding process (followed by reverse auction), to meet its Renewable Purchase Obligation (RPO). In July, Azure Power was selected to establish the Solar Power Generating System (SPGS) and sell the solar power generated to MSEDCL. The developer signed a PPA to supply 130 MW to the DISCOM at a tariff of ₹2.72/kWh.

The PPA was amended in February 2019, as a result of which ATPREL and MSEDCL agreed to shift the project to a new location in Jaisalmer (Rajasthan) from the earlier site in Solapur (Maharashtra). While the solar developer had considered GST to be 5% on the supply contract and 18% on the service contract at the time of submitting the bid, a notification released by the MoF in December 2018 revised it to 8.9% on the supply contract. As a result, ATPREL filed a petition before MERC, requesting it to declare that the issuance of the notification amounted to a ‘Change in Law’ under the PPA. Further, it sought that a fixed lump sum compensation of INR 23,38,80,000, which was later revised to INR 22,52,61,708, be paid by MSEDCL.

MERC dismissed ATPREL’s petition, agreeing with MSEDCL’s rationale that although the developer had entered into two contracts- an EPC contract (“supply” as per Azure) and a civil works contract (“services” as per Azure)- the EPC contract also included activities like construction and erection, besides the supply of goods, and should thus be considered a composite supply contract. Hence a GST of 18% was applicable on both the contracts since the beginning, and the MoF’s notification only decreased the composite tax rate to 8.9%. The commission added that the increased tax burden could have been avoided if ATPREL had entered into three different contracts: supply of goods contracts, erecting & commissioning contract, and civil contracts. It further directed the solar developer to construct the project prudently and economically to save costs.

Interestingly, in order to escape the 18% GST applicable on a ‘works contract’, Azure Power also tried to argue in the petition that the SPGS be considered moveable property through a contrived logic that it was “not rooted/embedded to the earth and are only annexed to ground by nuts and bolts”. MERC discredited such an argument by saying, “The Commission underscores that in the present case, APTFPL has signed a PPA of 130 MW with MSEDCL for 25 years. Considering thumb rule of land requirement of 5 acre/MW for a solar project, this solar project would be spread across approximate area of 650 acres. In the opinion of the Commission, by no stretch of imagination such project which is spread over huge area and setup for providing solar power under the PPA for a period of 25 years, cannot be termed as moveable. APTFPL has relied upon various judgments of the Supreme Court and High Court for proving its point that it is movable property. However, considering facts of this matter, the Commission is of the opinion that these judgments may not be applicable in present matter. Accordingly, such projects are strictly immovable as defined for ‘works contract’ under GST Act and hence the GST Rate of 18% was applicable before the Amendment Notifications dated 31 December 2018.”