CERC Relents, Allows GST Compensation On O&M Expenses To Azure Power, Others

Highlights :

  • The issue, linked to GST on O&M services of projects commissioned before GST came into effect in 2017, has been going around courts for the past few years.
  • The latest case involves multiple entities of Azure Power, besides Solar Edge and Solitaire Powertech
CERC Relents, Allows GST Compensation On O&M Expenses To Azure Power, Others CERC Approves Trading Margin of Rs.0.07/kWh in SECI's PSAs with Distribution Firms

In a key development, the Central Electricity Regulatory Commission (CERC) has finally relented, and ruled in favour of GST compensation for a clutch of developers in seven cases (5 of which involve Azure Power owned entities). The issue has been contested around the treatment of GST on O&M (Operations and maintainence) contracts of solar projects by these developers, which had been contested by the principal entities, namely NTPC Vidyut Vyapar Nigam Limited (NVVN) and SECI.

After being rejected earlier by the CERC, the petitioners had moved APTEL for redressal, with the APTEL bench choosing to send the case for reconsideration by CERC in March this year, with the precedence of previous judgements of APTEL where it had chosen to allow such claims.

CERC, in its judgement made it clear that the scope of the judgement would stick to the matter of GST on O&M only, and not the issue of carrying costs claimed by the petitioners, seen as a subsequent claim by the petitioners. When a matter is remanded by the superior court to subordinate court for rehearing in the light of observations contained in the judgement, then the same matter is to be heard again on the materials already available on record. Its scope cannot be enlarged by the introduction of further evidence, regarding the subsequent events simply because the matter has been remanded for a rehearing or de novo hearing.

On the concept of O&M’s, it finally conceded that generators have an implied  right under the PPA  to outsource O&M . Once it is established that levy of a tax on services availed by a generator has an impact on the cost of or revenue from business of generation and sale of electricity – whether directly or indirectly – compensation must follow.

It explained it by explaining that “The contract (PPA),by Article 13 of the PPA, refers to the “business of selling electricity”. The compensation envisaged here cannot be restricted to the activity of “generating electricity”. The expression “business” has a very wide connotation. It is defined as an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income [see Mitra’s Legal & Commercial Dictionary (Sixth Edition)]. Entire gamut of activities connected to the generation, wheeling etc of electricity will have to be treated as covered by the expression “business of supply of electricity”.

The CERC therefore directed the two sides to reconcile and settle their claims. It also directed the responding DISCOMS, that are the ultimate buyers of power, to pay to the NTPC/NVVN/SECI all the above reconciled claims that NTPC/NVVN/SECI has to pay to the Petitioners. However, payment to the Petitioners by NTPC/NVVN/SECI is not conditional upon the payment to be made by the responding DISCOMS to NTPC/NVVN/SECI. In doing this, it was simply recognising the legal validity of the back to back nature of the PPA between the principals and generators, and the PSA’s between the same principals and discoms.

While the net financial implication of the order is not likely to be huge, it finally sets to rest an important principle around change in law claims, in the context of costs incurred by outsourcing key aspects of project, after bidders have provided what is usually a levelised cost of tariff at the bidding stage.

The detailed judgement can be seen here.

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