Solar power projects face higher costs after customs duty notification

The government, through a notification issued under Section 65(1) of the Customs Act, 1962 (CA 62), has prospectively legitimised the administrative bar on import, without payment of customs duties under the scheme for manufacture in a bonded warehouse, of goods for solar power generation projects which supply electricity. 

 

Sections 57 to 73A of CA 62 deal with warehousing of imported goods. Section 58 deals with licensing private bonded warehouses where imported goods belonging to the licensee may be deposited without payment of any Customs duties. Section 68 of CA 62 mandates payment of the duties when the imported goods are removed from the warehouse in the domestic tariff area (DTA). Thus, the bonded warehouse scheme is essentially a duty deferment scheme. Section 65 of CA 62 deals with carrying on any manufacturing process or other operations in a warehouse in relation to such goods. The Central Board of Indirect Taxes and Customs (CBIC) has prescribed the ‘Manufacture and Other Operations in Warehouse (no.2) Regulations, 2019’ (MOOWR) providing for eligibility conditions for grant of license, bond execution, movement of goods etc. Many manufacturing units, including some power generating entities have obtained licenses under MOOWR. 

 

Through its instruction no.13/2022 dated July 9, 2022, the CBIC asked its Customs field formations not to grant permission for warehousing, without payment of customs duties, of imported solar panels/solar modules and related accessories etc. declared as capital goods to generate electricity (from sunlight),  as resulting/resultant   goods for home   consumption and to review the permissions already granted for such units.  The unstated intention of the restriction was to protect the domestic manufacturers of solar panels/solar modules and related accessories etc. but the government justified the move through a rather specious argument that it is not possible to affix one-time-lock for removal of electricity from the bonded warehouse to the load compartment of the means of transport for supply into DTA or for exports. When challenged, the Delhi High Court, in the case of Acme Heergarh Powertech Pvt. Ltd. [(2024) 19 Centax 196 (Del.)], quashed the instructions as beyond the CBIC’s advisory and clarificatory function. So, the government got Section 65(1) of CA 62 amended through Section 101 of Finance (No.2) Act, 2024 giving itself the power to specify the manufacturing processes and other operations in relation to a class of goods that shall not be permitted in a bonded warehouse. In exercise of the powers so acquired, the government issued notification no. 86/2024-Customs (NT) dated October 16, 2024, denying duty deferment benefit for goods imported for solar power generation projects. Thus, the restriction quashed by the Delhi High Court now comes back through a notification, apparently with prospective effect. However, duty paid goods can be brought into the bonded warehouse for such projects.

 

The solar power producers who estimated 40 per cent basic customs duty deferral on imported solar modules/panels and accessories etc. by setting up their facilities in bonded warehouses have to now revise their project costs upwards. If they had already entered into power purchase agreements, they have to renegotiate the agreements based on the revised costs. The distribution companies purchasing costlier power have to pass on the higher costs to the retail consumers. The end result will be that some solar modules/panel producers will be protected at the cost of the industrial, commercial and domestic retail electricity consumers. 

tncrajagopalan@gmail.com