2019 (2) TMI 1389 - HC - VAT and Sales Tax

Classification of the product - Substation Equipments - the equipment installed by the petitioner/company under the contract with its clients Focal Energy Group of Companies as integral and inseparable part of the works contract for erecting and installing the solar power generating system - MP VAT Act - petitioner s contention is that respondent No.1/Commissioner of Commercial Tax has erred in law and facts in passing the impugned order, as the equipments supplied by the petitioner, are part of Solar Power Generating System and are covered under entry No.71. Whether item No.10 of entry no. 71 includes the entire set up, which constitutes solar power generating system or not. According to Oxford Dictionary, system means a set of things work together as parts of a mechanism or a interconnecting work? Held that - The solar power generating system includes all devices or equipments, which are connected or combined together to complete the solar power generating system. If one ingredient is missing, the solar power generating system will not function - thus solar power generating system would necessarily include a substation for evacuation and upliftment of power generated by solar power plants. The Hon ble Supreme Court in the case of CCE v/s Hewlett Packard India Sales Pvt. Ltd. 2007 (8) TMI 347 - SUPREME COURT OF INDIA has explained the meaning of word System with reference to operating system of the computer and it has been held that the pre-loaded operating system recorded in the hard drive of the computer is an integral part of the computer, without which, the computer cannot open and work and has been classified as operating system under entry relating to computer itself. Even by taking into account the aforesaid judgment, this Court is of the opinion that power generating system includes all components even the grid/goods related to substation, without which, the system cannot work - Once an exemption has been granted in the matter of Value Added Tax/Entry Tax for setting up solar power based projects, the exemption has to be given in respect of a complete project, as all the equipment used in the project are integral part of the project and even without one of the equipments, the project cannot function. Once the entry includes Solar Power Project , all the material equipments used for the purposes of setting up power based project are certainly entitled for grant of exemption. The respondents shall grant exemption under entry No.71 (10) in respect of substation equipment/grid and all other equipments supplied by the petitioner during the course of execution of its works contract, as they form integral part of solar power generating system - petition allowed.

Issues Involved:
1. Validity of the order dated 25.03.2017 passed by the Commissioner of Commercial Tax, Madhya Pradesh.
2. Classification of 'Substation Equipments' under the works contract for solar power generating systems.
3. Interpretation of Entry No.71 of Schedule-1 of the Madhya Pradesh Value Added Tax Act, 2002.
4. Scope of exemption for renewable energy devices or equipment under the Madhya Pradesh Value Added Tax Act, 2002.

Detailed Analysis:

1. Validity of the Order Dated 25.03.2017:
The petitioner, a company engaged in the construction and commissioning of Solar Power Plants, challenged the order dated 25.03.2017 by the Commissioner of Commercial Tax, Madhya Pradesh, which rejected their application for exemption/remission on articles used for installing the “Solar Power Generating System.” The petitioner argued that the Commissioner erred in law and facts by not recognizing the substation equipment as part of the solar power generating system, thereby denying them the exemption under Entry No.71.

2. Classification of 'Substation Equipments':
The petitioner contended that the substation equipment installed under the contract with Focal Energy Group of Companies is an integral and inseparable part of the works contract for erecting and installing the solar power generating system. The petitioner argued that the entire solar power generating system, including the substation, should be treated as a renewable energy device or equipment eligible for exemption under Entry No.71.

3. Interpretation of Entry No.71 of Schedule-1:
Entry No.71 of Schedule-1 of the Madhya Pradesh Value Added Tax Act, 2002, lists various renewable energy devices and equipment, including "Solar power generating system." The petitioner asserted that this entry should be interpreted to include all components necessary for the functioning of the solar power generating system, including the substation. The respondents, however, argued that only the solar power generating system itself is exempt, and not the substation equipment or other non-essential machinery.

4. Scope of Exemption for Renewable Energy Devices:
The court examined whether the substation equipment falls under the exemption provided for renewable energy devices. The dictionary definitions of "system" and "power system" were considered, which include all aspects of generation, transmission, distribution, and supply of electricity. The court concluded that the solar power generating system includes all devices or equipment connected or combined to complete the system, including the substation.

The court referenced the Supreme Court's interpretation in CCE v/s Hewlett Packard India Sales Pvt. Ltd., which classified a pre-loaded operating system as an integral part of a computer. Similarly, the court held that the substation is an integral part of the solar power generating system, without which the system cannot function.

Conclusion:
The court found that the policy framed by the State Government aims to promote solar power projects by providing tax exemptions. The Commissioner’s order was deemed to be passed with non-application of mind, as it failed to recognize the integral nature of the substation equipment within the solar power generating system. The court quashed the impugned order dated 25.03.2017 and directed the respondents to grant exemption under Entry No.71 (10) for substation equipment and all other equipment supplied by the petitioner during the execution of its works contract. The petitioner was entitled to all consequential benefits, and any recovery based on the impugned order was also quashed. The writ petition was allowed.

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