APTEL Upholds GST Relief On O&M Costs For Solar Developers, Orders CERC To Reconsider

The Appellate Tribunal for Electricity issued a judgment on a series of appeals filed by various subsidiaries of Azure Power and other solar developers against the Central Electricity Regulatory Commission (CERC) and distribution companies. These appeals were primarily about whether the additional costs incurred due to the introduction of Goods and Services Tax (GST) should be compensated under the ‘Change in Law’ clause in Power Purchase Agreements (PPAs). The main argument was that after the implementation of GST on July 1, 2017, developers had to bear extra financial burdens for both the construction and operation of their solar power projects.

The CERC had earlier accepted that GST was a ‘Change in Law’ and allowed compensation for the construction costs (EPC) but denied compensation for Operation and Maintenance (O&M) costs. The commission argued that outsourcing O&M was a commercial decision and not mandatory under the PPAs, hence developers couldn’t claim extra compensation for it. The developers challenged this view, saying the GST increase affected their recurring O&M expenses directly and should be covered under the same ‘Change in Law’ clause.

The Appellate Tribunal rejected CERC’s reasoning and emphasized that recurring expenses like O&M are included under the ‘Change in Law’ clause. It highlighted that just because O&M services were outsourced doesn’t make the cost ineligible for compensation. The tribunal cited earlier judgments, particularly the Parampujya Solar Energy case, which clearly stated that additional tax burdens from GST on outsourced O&M work are valid for compensation. It also criticized CERC for being inconsistent by allowing GST-related relief on construction but not on O&M expenses.

Further, the tribunal addressed counterarguments made by distribution companies and NTPC. Some argued that PPAs didn’t explicitly mention outsourcing and that developers should not pass on costs from their commercial decisions. The tribunal disagreed, stating that such interpretations unfairly penalized developers and contradicted previous rulings that recognized standard industry practices like outsourcing.

The tribunal also dealt with the issue of carrying costs—additional interest or compensation for delays in payment. It noted that the principle of restoring the affected party to the same economic position due to a ‘Change in Law’ justifies such compensation. This aligns with competitive bidding guidelines and earlier legal rulings, including from the Supreme Court, that acknowledge compensation for the time value of money.

Ultimately, the tribunal concluded that Azure Power and other appellants are entitled to compensation for both the EPC and O&M costs affected by GST. It instructed the CERC to reconsider the matter, following the Parampujya judgment. However, it also noted that the Supreme Court is currently reviewing the Parampujya case, and while some parts of enforcement are stayed, others must be complied with. The tribunal ordered that all such matters be dealt with afresh by the CERC in line with established legal precedent.