2023 (4) TMI 1425 - SC - Indian Laws

Change in law or not - Whether the delay in the performance of the task which has been characterised on its performance within the time as a deemed initial consent would lead to a change in law within the meaning of Article 13.1.1? - HELD THAT - Change in law clause is sought to be invoked apparently contending that there has been a change in interpretation by Indian Governmental Authority which has the final say in terms of the law. The question which looms large before the Court is whether there has been a change in law in terms of change in interpretation placed by the Governmental authority with reference to the position obtaining under the notifications issued under the Customs Act. Even the clauses in the PPA which we have referred to maintain a distinction between a power plant and a captive mine. A power plant cannot be treated as the same as captive mine. In fact Schedule 1A which defines the site refers to the captive mines in terms of the coal blocks which are allotted. The definition of captive mine also indicates that it is the coal mines as described in Schedule 1A and the associated fuel transport system up to the power station. No doubt the word site has also been defined as the land over which the Project will be developed as provided in Annexure 1A. Undoubtedly in view of the very purpose of having a coal mine which is to supply the requisite fuel for the operation of the power plant there would be a certain measure of geographical contiguity. But the question for the consideration before this Court is whether that would decide the fate of the contents of a notification issued under the Customs Act. The application no doubt is filed in the year 2008. What impresses the Court the most is the stand of the customs authorities before the Advance Ruling Authority. We cannot proceed on the basis that the controversy which led to the seeking of the ruling and far more importantly the persistent stand of the customs authority before the Advance Ruling Authority would not shed light on how the Department viewed the matter. This is important as it is the customs department which has issued the exemption notification. Being the authors of the notification they would be best placed to understand the width and purport of a notification granting exemption. They have stoutly opposed the application and laid out various grounds which no doubt has appealed also to the Advance Ruling Authority. This is an aspect which goes a long way to show that the view of the customs authority which in a manner of speaking can also be viewed as forming contemporanea expositio should not be ignored by this Court. Conclusion - The first respondent has not been able to demonstrate that there was a change in law as contemplated in Article 13.1.1 by issuance of the OM dated 17.06.2011. The impugned order is set aside - Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the increase in cost of the water intake system, arising from a change in the location of the water intake as revealed by a second technical report commissioned post-bidding, constitutes a "Change in Law" under Article 13.1.1 of the Power Purchase Agreement (PPA) and is therefore compensable.

(b) Whether the imposition of customs duty on mining equipment imported for captive coal mines integral to the Ultra Mega Power Project (UMPP), following an Office Memorandum (OM) issued by the Ministry of Power, amounts to a "Change in Law" entitling the petitioner to compensation under the PPA.

(c) The extent and scope of the regulatory and adjudicatory powers of the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal under Sections 63, 79, 111, and 125 of the Electricity Act, 2003 in relation to tariff determination, change in law claims, and dispute resolution under a competitively bid long-term PPA.

(d) The applicability and interpretation of the disclaimers and due diligence obligations contained in the Request for Proposal (RFP) and PPA documents, especially regarding reliance on pre-bid technical reports and the consequences of errors therein.

(e) The legal effect of the contractual provisions relating to "initial consents" and "deemed initial consents" in the PPA, particularly concerning the obligations of procurers regarding water linkage and land acquisition, and whether delay or changes here can constitute a change in law.

(f) The interpretation of the customs duty exemption notifications and whether the captive coal mines and associated mining equipment fall within the exemption applicable to mega power projects.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Whether the increased cost of the water intake system constitutes a Change in Law

Legal Framework and Precedents: Article 13 of the PPA defines "Change in Law" and sets out a mechanism for compensation, specifically in Article 13.2(a) for changes during the construction period, linking compensation to increases in capital cost with a defined formula. The RFP and PPA contain disclaimers and impose a duty on bidders to conduct independent enquiries (RFP para 2.7.2.1 and para 4). Relevant precedents include Energy Watchdog v. CERC (2017) and Uttar Haryana Bijli Vitran Nigam Ltd. v. Adani Power Ltd. (2019), which emphasize adherence to contractual provisions and regulatory powers.

Court's Interpretation and Reasoning: The Court noted that the first WAPCOS report, provided pre-bid, estimated the water intake system cost at approximately Rs. 92 crores. After award and PPA execution, a second WAPCOS report recommended a new intake location, increasing the cost to Rs. 244 crores. The Tribunal had found the first report "grossly erroneous" and granted relief, despite the Commission's finding that there was no change in law.

The Court rejected the Tribunal's finding, observing that the second report was commissioned unilaterally by the petitioner without involving procurers, and that there was no material to justify the characterization of the first report as grossly erroneous. The Court emphasized the disclaimers in the RFP and PPA, which clearly absolved the procurers from liability for inaccuracies in the reports and placed the onus on bidders to verify information independently before bidding.

The Court held that the increase in cost due to the change in water intake location did not qualify as a "Change in Law" under Article 13.1.1. The petitioner had accepted the site condition and related risks per PPA clause 5.2 and RFP disclaimers. Further, the initial consent regarding water linkage was fulfilled by procurers by providing access to the water source (Govind Ballabh Pant Sagar) with required approvals before bidding. The petitioner's decision to commission a second report and alter the pipeline route was a commercial risk, not a change in law.

Key Evidence and Findings: The first WAPCOS report, the second WAPCOS report, RFP disclaimers, PPA clauses on site responsibility, initial consents, and communications from procurers confirming water linkage availability were examined. The Court found no evidence of procurers causing or authorizing the change in water intake location or cost escalation.

Application of Law to Facts: The contractual provisions, disclaimers, and regulatory framework collectively indicated that the petitioner bore the risk of site conditions and related cost variations. The increase in water intake system cost was not caused by a change in law or regulatory act but by the petitioner's own decisions post-bid.

Treatment of Competing Arguments: The petitioner argued that the procurers provided erroneous data and that disclaimers could not absolve them of liability for gross errors. The Court disagreed, holding that disclaimers were clear and bidders had a duty to verify. The Tribunal's reliance on equity and regulatory powers to grant relief beyond contract terms was rejected as impermissible rewriting of the contract.

Conclusion: The increase in water intake system cost does not constitute a Change in Law and is not compensable under the PPA or the Electricity Act. The Tribunal erred in granting relief based on this claim.

(b) Whether the imposition of customs duty on mining equipment constitutes a Change in Law

Legal Framework and Precedents: Article 13.1.1 includes changes in law or interpretation by a competent authority as Change in Law. The relevant customs notifications (Nos. 21/2002, 49/2006, and amendments) provide exemptions from customs duty for goods imported for mega power projects. The OM dated 17.06.2011 by the Ministry of Power clarified that exemption applies only to power equipment, not mining equipment. The Advance Ruling Authority had ruled that mining equipment is not exempt.

Court's Interpretation and Reasoning: The Court held that the OM by the Joint Secretary in the Ministry of Power does not constitute a "change in law" under Article 13.1.1 because:

• The Joint Secretary is not the final authority under law for interpretation of customs notifications; that authority lies with the Customs Department under the Customs Act.
• There was no evidence that mining equipment was exempt from customs duty prior to the cut-off date (seven days before bid deadline) or that the OM changed an existing interpretation favorable to the petitioner.
• The notifications clearly distinguish between power projects and coal mining projects, with separate entries and conditions. Mining equipment falls under a different entry (No. 399) which is not exempt.
• The petitioner failed to produce any incontestable material showing prior exemption or favorable interpretation that was altered by the OM.
• The OM merely reiterated the existing position consistent with the Advance Ruling Authority's findings, which the petitioner did not challenge at the time.

Key Evidence and Findings: The Court examined the history and text of customs notifications, the OM dated 17.06.2011, the Advance Ruling Authority's order, and the definitions of "Project," "Power Station," and "Captive Coal Mines" in the PPA. It found that the mining equipment was not exempt before the cut-off date and that the OM did not effect a change in law or interpretation.

Application of Law to Facts: Since the petitioner imported mining equipment and paid customs duty without prior exemption, and since the OM did not change the law but clarified the existing position, no compensable change in law occurred.

Treatment of Competing Arguments: The petitioner argued that the captive coal mines are integral to the power project and thus mining equipment should be exempt. The Court rejected this, noting the clear distinction in customs notifications and lack of evidence of prior exemption. The petitioner's reliance on the OM as a change in interpretation was also rejected.

Conclusion: The imposition of customs duty on mining equipment does not amount to a Change in Law under the PPA and is not compensable.

(c) Scope of Regulatory and Adjudicatory Powers under the Electricity Act

Legal Framework: Section 63 of the Electricity Act provides for tariff adoption based on competitive bidding and guidelines issued by the Central Government. Section 79(1)(b) empowers the Commission to regulate tariffs and adjudicate disputes. Section 111 provides for appeals to the Tribunal. The guidelines and PPA contain detailed provisions on change in law and dispute resolution.

Court's Interpretation and Reasoning: The Court held that while the Commission and Tribunal have regulatory and adjudicatory powers, such powers must be exercised within the express terms of the contract and statutory framework. The Commission cannot rewrite or vary the contract under the guise of regulation. The Tribunal exceeded its jurisdiction by granting relief not based on a change in law but on equity or error in the WAPCOS report.

The Court emphasized the primacy of the PPA's detailed change in law provisions and the binding nature of the competitive bidding process and tariff adoption under Section 63. Section 79 powers are not plenary to override contractual terms. The Court referred to Energy Watchdog (2017) to clarify that Section 63 and 79 must be read harmoniously, with guidelines governing tariff adoption and regulation.

Key Evidence and Findings: The Court analyzed the statutory provisions, guidelines, PPA clauses (especially Articles 13 and 17), and relevant case law.

Application of Law to Facts: The Court found that the Commission's and Tribunal's decisions must conform to the PPA's provisions. The Tribunal's grant of relief beyond change in law was impermissible.

Treatment of Competing Arguments: The petitioner contended that regulatory powers allow equitable adjustment beyond contract terms. The Court rejected this, underscoring contractual sanctity and statutory limits.

Conclusion: Regulatory and adjudicatory powers must be exercised within contract and statutory limits; the Tribunal erred in exceeding these.

(d) Applicability and Effect of Disclaimers and Due Diligence Obligations

Legal Framework: The RFP and PPA disclaimers explicitly state that procurers and their representatives do not warrant the accuracy or completeness of information, including the WAPCOS report, and disclaim liability for losses arising from inaccuracies. Bidders are required to conduct independent enquiries and satisfy themselves regarding all relevant conditions.

Court's Interpretation and Reasoning: The Court held that these disclaimers are clear and unambiguous, and bidders bear the risk of relying on pre-bid information. The disclaimers cannot be circumvented by claims of gross error unless there is evidence of fraud or misrepresentation, which was absent. The Court rejected the petitioner's contention that reliance on a government agency report absolves it from due diligence.

Key Evidence and Findings: The Court examined the disclaimer clauses in the RFP (paras 2.7.2.1 and 4) and PPA (clause 5.2), and found that the petitioner failed to conduct adequate due diligence before bidding.

Application of Law to Facts: The petitioner's failure to verify the water intake location and costs before bidding meant it assumed the risk of cost escalation.

Treatment of Competing Arguments: The petitioner argued disclaimers should not shield procurers from liability for grossly erroneous information. The Court disagreed, emphasizing contractual risk allocation.

Conclusion: Disclaimers and due diligence obligations are effective and bar the petitioner's claims based on alleged errors in pre-bid information.

(e) Effect of Contractual Provisions on Initial Consents and Land Acquisition

Legal Framework: The PPA defines "initial consents" and provides for deemed initial consents upon performance of certain tasks by procurers, including water linkage and land acquisition. Articles 3.1.2A, 3.3.3, and 3.3.3A provide for consequences of delay or failure, including possible termination or purchase of shares by procurers.

Court's Interpretation and Reasoning: The Court found that procurers fulfilled their obligation by providing water linkage from the designated reservoir with requisite approvals before bidding. Delay in land acquisition was acknowledged but did not constitute a change in law. The contract provides remedies for failure to perform, which were not invoked by the petitioner. The petitioner continued the contract, thus waiving any repudiation rights.

Key Evidence and Findings: Communications dated 23.10.2006 confirming water linkage, PPA Schedule 2, and Articles 3.1.2A and 3.3.3 were examined.

Application of Law to Facts: No change in initial consent or law occurred; the petitioner's claim on this ground failed.

Treatment of Competing Arguments: The petitioner argued that changes in water intake location and costs implied a change in initial consent. The Court rejected this, holding the procurers' obligations were met and the petitioner's unilateral actions post-bid cannot be attributed to procurers.

Conclusion: No change in law arises from initial consent or land acquisition issues.

(f) Interpretation of Customs Duty Exemption Notifications

Legal Framework: Customs notifications distinguish between mega power projects and coal mining projects, with separate entries and conditions. Notification No. 21/2002 and its amendments specify exemptions for mega power projects certified by a Joint Secretary in the Ministry of Power. The Advance Ruling Authority's order clarifies that mining equipment does not fall under the exemption applicable to power projects.

Court's Interpretation and Reasoning: The Court agreed that the exemption applies to power plant equipment, not mining equipment. The petitioner failed to show that mining equipment was exempt prior to the cut-off date. The OM of 2011 clarified the existing position rather than changing law. The Court found no basis to treat the captive coal mine equipment as exempt under the power project notification.

Key Evidence and Findings: Customs notifications, Advance Ruling Authority order, and definitions in the PPA were analyzed.

Application of Law to Facts: The petitioner's claim for customs duty exemption on mining equipment was unsupported by law or facts.

Treatment of Competing Arguments: The petitioner argued integration of captive mines with power project entitles exemption. The Court rejected this, emphasizing the separate treatment under customs law.

Conclusion: Customs duty exemption does not extend to mining equipment for captive mines; no change in law claim succeeds.

3. SIGNIFICANT HOLDINGS

"The increase in cost on account of the change in location of the water intake system is not admissible as Change in Law under Article 13.1.1 of the PPA. The petitioner was required to verify the suitability of the location and ensure reliable water supply for the power plant independently and factor in the estimates in the bid. The disclaimers in the RFP and PPA absolve the procurers from liability for inaccuracies in the water intake study report." (Para 33)

"The Office Memorandum dated 17.06.2011 issued by the Ministry of Power does not constitute a Change in Law under Article 13.1.1 of the PPA. The Joint Secretary in the Ministry of Power is not the final authority under law for interpretation of customs notifications. There is no evidence that mining equipment was exempt prior to the cut-off date or that the OM changed the interpretation of the law." (Para 118-120)

"The regulatory and adjudicatory powers of the Commission and Tribunal under Sections 79 and 111 of the Electricity Act, 2003 must be exercised within the express terms of the contract and statutory framework. They cannot rewrite or vary the contract or grant relief beyond the scope of 'Change in Law' as defined in the PPA." (Para 90-92)

"The disclaimers and due diligence obligations contained in the RFP and PPA are effective and bar claims based on alleged errors or omissions in pre-bid information, including the water intake study report. Bidders bear the risk of verifying site conditions and related costs." (Para 78-82)

"The procurers fulfilled their obligations regarding initial consents, including water linkage and land acquisition. Delay or changes in these consents do not constitute Change in Law under the PPA. Remedies for failure to perform are provided in the contract and were not invoked." (Para 60-66)

"The customs duty exemption notifications distinguish between power projects and coal mining projects. Mining equipment for captive coal mines is not exempt under the notification applicable to mega power projects. No change in law arises from the OM of 2011 or the customs duty imposed." (Para 113-130)

"The appeals are allowed. The impugned order of the Tribunal and the consequential order of the Commission allowing compensation for the water intake system cost increase are set aside. The order rejecting compensation for customs duty on mining equipment is upheld." (Para 144-145)