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Synopsis

The Supreme Court has upheld the order of the Appellate Tribunal for Electricity, New Delhi of granting carrying cost interest on compounding basis in favour of Adani Power (Mundra) Limited, due to "Change in Law".

Uttar Haryana Bijli Vitran Nigam Ltd approached the Supreme Court aggrieved by the order whereby the Appellate Tribunal had not just permitted carrying cost on simple interest basis but has imposed interest on carrying cost or what is commonly known as interest on interest (compound interest) on carrying cost.

In the year 2010, on account of Environment Clearance dated 20th May, 2010, given by the Ministry of Environment and Forests, Union of India, a Change in Law event took place as Adani Power had to incur additional costs on installing Flue Gas Desulfurization (FGD) unit.

On 17th July, 2014, Adani Power filed a petition before the Central Commission for adjudication of compensation on account of certain Change in Law events including installation of the FGD.

The Central Commission allowed compensation only for certain Change in Law events but disallowed the claim for carrying cost raised by Adani Power.

Aggrieved by this order, both parties preferred appeals before the Appellate Tribunal. The limited grievance raised by Uttar Haryana in their appeal was related to the issue pertaining to the claim in respect of levy of customs duty on electricity removed from Special Economic Zone (SEZ) to Domestic Tariff Area (DTA), whereas Adani Power challenged the rejection of its claim for carrying cost. After this, multiple litigations were filed by the concerned parties.

While referring to the Power Purchase Agreements (PPA) entered into between the parties, Top Court noted that the restitutionary principles encapsulated in Article 13.2 of the PPA would take effect for computing the impact of Change in Law.

CJI Ramana led bench further held that once carrying cost has been granted in favour of Adani Power, it cannot be urged that interest on carrying cost should be calculated on simple interest basis instead of compound interest basis.

"Grant of compound interest on carrying cost and that too from the date of the occurrence of the Change in Law event is based on sound logic. The idea behind granting interest on carrying cost is not far to see, it is aimed at restituting a party that is adversely affected by a Change in Law event and restore it to its original economic position as if such a Change in Law event had not taken place", the bench also comprising Justices Murari and Kohli held.

Noting that Adani Power had to incur expenses to purchase the FGD and install it, and for this, it had to arrange finances by borrowing from banks, Court noted that the interest rate framework followed by Scheduled Commercial banks and regulated by the Reserve Bank of India mandated that interest shall be charged on all advances at monthly rests.

"In this view of the matter, the respondent No. 1 – Adani Power is justified in stating that if the banks have charged it interest on monthly rest basis for giving loans to purchase the FGD, any restitution will be incomplete, if it is not fully compensated for the interest paid by it to the banks on compounding basis", the bench held.

Court was further of the opinion that "the entire concept of restitutionary principles engrained in Article 13 of the PPAs has to be read in the correct perspective as said principle that governed compensating a party for the time value for money, is the very same principle that would be invoked and applied for grant of interest on carrying cost on account of a Change in Law event".

Case Title: UTTAR HARYANA BIJLI VITRAN NIGAM LTD. AND ANOTHER vs. ADANI POWER (MUNDRA) LIMITED AND ANOTHER