New Delhi: In a landmark judgment, power sector regulator Central Electricity Regulatory Commission (CERC) has held that the imposition of safeguard duty on imports of solar cells and modules amounts to a “change in law” event for the developers who must be compensated for the increased expenditure.

The order came on two similar petitions filed by ACME Solar Holdings subsidiaries – ACME Rewa Solar Energy and ACME Jodhpur Solar Power – against Solar Energy Corporation of India (SECI) and three discoms of Jaipur, Ajmer and Jodhpur.

SECI had issued a tender for setting up grid-connected Solar PV Projects in Bhadla Phase III Solar Park in Rajasthan for an aggregate capacity of 500 Megawatt and the ACME subsidiaries were selected as developers for the setting up a solar power project of 100 MW capacity in Rajasthan. 

The ACME firms entered into Power Purchase Agreements (PPAs) in September 2017 with SECI for the setting up the 100 Mw project. SECI also entered into back-to-back PSAs for sale of electricity purchased from the two firms to the discoms. ACME also engaged its own firm ACME Cleantech Solutions as contractor and executed an Agreement for Supply of Goods in February 2018.

However, through a notification issued in July 2018, the centre imposed safeguard duty on the import of solar cells and modules at a rate of 25 per cent for the first year (July 2018 to July 2019) and 20 per cent and 15 per cent, respectively, for each of the six months’ period following July 2019.

ACME submitted that the duty resulted in an increase in recurring and non-recurring expenditure and has adversely impacted its business. The solar company argued that the imposition of safeguard duty is covered under Article 12 of the PPAs which provide for “Change in law” and the relief for such an event may be allowed.

On their part, SECI and the discoms opposed ACME’s plea on multiple grounds. Firstly, being a competitively bid project, there cannot be any additional claim except as allowed under the PPAs. 

“The contentions of the Petitioners are misconceived as the incidence of safeguard duty is not on the event of setting up of a solar power plant but is on transaction of import of solar modules. The provision under the PPAs explicitly deals only with the event of setting up of solar power plant, and not on a tax on any input for setting up the plant,” the respondents said.

Secondly, the delay in importing the solar cells and modules is attributable to ACME or its contractors and sub-contractors and meanwhile the imposition safeguard duty levy had come into effect.

Thirdly, the developers did not establish to the satisfaction of the Commission that there has been an actual expenditure and outflow of money on account of payment of safeguard duty to the revenue authorities. Hence, no relief can be granted.

The Respondents in the case – SECI and the discoms – also argued that the petitioners are not procuring the solar cells from any imported sources, but are procuring from their own group company. The imposition of assessment of tax is, therefore, not on the petitioners but on the importer of solar cells.

Pronouncing the judgment, the three member CERC bench comprising I S Jha, M K Iyer and P K Pujari said the imposition of safeguard duty is covered as an event classified as “Change in law” under the Article 12 of the PPA. The Commission directed the petitioners to make available to SECI all the relevant documents exhibiting clear correlation between the projects and the supply of imported goods. 

“The Claim based on discussions shall be paid within sixty days of the date of this Order or from the date of submission of claims by the Petitioners, whichever is later, failing which it will attract late payment surcharge as provided under PPAs,” the order said.

Experts say the regulator’s stance should not come as a surprise as the general legal opinion on this issue has been clear – developers rightly deserve a compensation for safeguard duty that came into effect after the project was bid out. “However, it is the implementation of the compensation that could lead to delays. Unlike regulator determined cost plus tariff, in case of competitively bid out projects, the components of the tariff to be looked at for deciding the exact quantum of relief might become disputed between the parties. That may cause delays,” said Debasish Mishra, Partner at Deloitte Touche Tohmatsu.