APTEL holds Telengana Entry Tax to be a ‘Change in Law’ event under Solar Power Purchase Agreement

The appeal arose from an order dated October 4, 2021 passed by TSERC in Petition No. 22 of 2020, whereby TSERC rejected the claim of ACME Dayakara Solar Power Private Limited that the imposition of entry tax under the Telangana Tax on Entry of Goods into Local Areas Act, 2001 qualified as a Change in Law event under Article 1.12 of the PPA dated 3 March 2015 executed with the Southern Power Distribution Company of Telangana Limited (TSSPDCL).

The dispute related to a 30 MW solar power project developed pursuant to Telangana’s solar procurement program. At the time the bidding process was undertaken, the applicability of entry tax was uncertain owing to pending constitutional challenges across the country. Subsequently, following the Supreme Court’s decision in Jindal Stainless Ltd. v. State of Haryana dated November 11, 2016, the constitutional validity of entry tax legislation was upheld, resulting in entry tax assessments being imposed upon ACME in respect of project equipment brought into Telangana for execution of the project.

ACME contended that the levy of entry tax imposed an additional financial burden that had not been contemplated at the time of bid submission and therefore constituted a Change in Law event under the PPA. It further argued that the Change in Law provisions must be interpreted broadly to preserve the economic equilibrium of the contract and ensure that project developers are restored to the same economic position they would have occupied had the change not occurred. On the other hand, the respondents argued that the tariff discovered under the bidding process was inclusive of all taxes and duties and that the PPA did not contemplate compensation for such levies. According to the respondents, the burden of any future tax liabilities was contractually allocated to the developer and the scope of Change in Law relief ought to be construed narrowly.

Rejecting the reasoning adopted by TSERC, APTEL held that the subsequent imposition of entry tax qualified as a Change in Law event under the PPA. The Tribunal observed that requiring project developers to absorb unforeseen statutory levies that were not factored into the bid would be inequitable and contrary to established principles governing Change in Law relief. APTEL further relied upon the National Tariff Policy, 2016, which recognises that changes in taxes, duties and levies occurring after the bid cut-off date should ordinarily be treated as pass-through events unless specifically excluded by the contractual framework.

The Tribunal also held that excluding subsequently imposed taxes from the scope of Change in Law provisions would substantially dilute the protection intended to be afforded by such contractual clauses. Accordingly, APTEL set aside the TSERC order and remanded the matter to the Commission for determination of the extent of restitution relief payable to ACME on account of the Change in Law event. TSERC was directed to determine the appropriate relief after hearing the parties and examining the relevant material on record. 

Conclusion

The decision provides significant support to renewable energy developers by recognising that statutory tax liabilities arising after bid submission will qualify as Change in Law events and may entitle affected parties to restitution relief under the applicable PPA framework.