Appellate Tribunal of Electricity in the case of Punjab State Power Corporation Limited vs. Chadha Sugars & Industries Pvt. Ltd& Ors.

The dispute centred around a Power Purchase Agreement(‘PPA’) signed between Punjab State Power Corporation Limited (‘PSPCL’) and Chadha Sugars and Industries Pvt. Ltd (‘Chadha Sugar’) for the supply of surplus power from Chadha Sugar’s 23 MW non-fossil fuel-based co-generation power project.

PSPCL issued a Demand Notice to Chadha Sugar stating that Chadha Sugar had availed Accelerated Depreciation under the Income Tax Act, 1961. According to the PPA and the applicable tariff order, availing Accelerated Depreciation necessitated a reduction in the tariff payable to Chadha Sugar by Rs. 0.18 per unit.

Chadha Sugar contested the demand notice, arguing that they had not benefited from the accelerated depreciation due to sustained losses. They also contended that PSPCL required confirmation from the Punjab Energy Development Agency (‘PEDA’) before revising the tariff, as stipulated in the PPA.

The State Commission on the issue of reduction of tariff on account of availing Accelerated Depreciation held that the demand notice is not in accordance with the PPA as Article 2.1 specifies ‘Section 80(1)(A) of the Income Tax Act’, whereas, Chadha Sugar had availed Accelerated Depreciation under Section 32 of the Income Tax Act and directed PSPCL to refund the amount along with the applicable late payment surcharge. 

1. Whether a lower tariff was payable by PSPCL considering Chadha Sugar had availed Accelerated Depreciation.
2. Whether confirmation from PEDA was required for the application of a reduced tariff upon Chadha Sugar exercising the option of availing Accelerated Depreciation.

Issue 1: Benefit of Accelerated Depreciation

The Appellate Tribunal noted that Section 32 of the Income Tax Act, 1961, governs depreciation, with companies having the option to choose between normal depreciation (straight-line method) and accelerated depreciation (written-down value method). This choice, once exercised, is irreversible and applies to all subsequent years.

The generic tariff order issued by the State Commission in 2010 had established a specific reduction in tariff (Rs. 0.18/kWh) for generating companies opting for accelerated depreciation. This reduction applied irrespective of the actual profit or loss incurred by the company.

The Appellate Tribunal emphasised that Chadha Sugar was aware of this provision, as evidenced by their undertaking, where they agreed to inform PSPCL and comply with the reduced tariff if they chose to avail accelerated depreciation in the future. Furthermore, the PPA itself stipulated a reduced tariff of Rs. 4.39/kWh in case Chadha Sugar availed Accelerated Depreciation.

The Appellate Tribunal rejected Chadha Sugar’s argument that the tariff reduction was inapplicable because they had not realised any actual benefits from the accelerated depreciation. The Tribunal clarified that the “benefit” in this context referred to the pre-defined, quantifiable reduction in tariff (Rs. 0.18/kWh), not the company’s overall financial performance.

The Appellate Tribunal concluded that allowing a generating company to switch between normal and reduced tariffs based on their profit or loss would create an absurd situation.

Issue 2: PEDA Confirmation

Chadha Sugar had argued that PSPCL required confirmation from PEDA before revising the tariff. The PPA stated that if a company was found to have availed benefits like Accelerated Depreciation or subsidies despite providing an undertaking to the contrary, PSPCL, after confirmation from PEDA, would revise the tariff.

The Appellate Tribunal concluded that the above-mentioned clause has to be read in conjunction with other relevant clauses in the PPA. Article 2.1.1(i) and (ii) of the PPA defined the applicable tariffs payable by PSPCL to Chadha Sugar, with no mention of any prerequisite PEDA certification. The financial impact of opting for accelerated depreciation was pre-determined and agreed upon by both parties, negating the need for further financial impact assessment.

Article 2.1.1(iii) of the PPA specifically addressed grants and subsidies, mandating PEDA confirmation regarding the amount claimed by the company and the financial impact to be incorporated into the tariff. The Appellate Tribunal noted that this distinction stemmed from PEDA’s role as the nodal agency for renewable energy, making them privy to information about subsidies and grants.

The Appellate Tribunal judgment emphasised that the quantifiable benefits associated with specific provisions, such as Accelerated Depreciation, are pre-defined and not contingent on the company’s overall financial performance.

The judgment also underscored the importance of reading contractual clauses in harmony with each other to arrive at a coherent and consistent interpretation.