The Karnataka High Court has held that solar inverters will qualify for a concessional 5% Goods and Services Tax (GST) rate as they are parts of solar power-generating systems. It quashed the order of the Karnataka Department of Commercial Tax, classifying them as general electrical devices taxable at 18%.

Background

In June 2017, the Union government prescribed a concessional GST rate of 5% for specific renewable energy devices and equipment used in their manufacturing. This included solar energy-based devices and solar generating systems.

The petitioner, ABB India, supplied solar inverters and other accessories during the tax period from July 2017 to March 2018. It treated the supplied products as parts of solar energy-generating systems, paying GST at 5%.

The Commercial Tax Department later demanded ₹368.7 million (~$3.85 million) in taxes from ABB for this period.

For the sale of solar inverters and related accessories from April 2018 to March 2019, the department claimed ₹583.9 million (~$6.1 million).

The department claimed taxes of ₹246.7 million (~$2.57 million) for sales from April 2019 to March 2020.

The tax department considered the products supplied by ABB to be general electrical devices, which would attract 18% GST and not 5%, and issued show-cause notices alleging the same.

ABB responded by claiming that the inverters were used in solar projects, industrial applications, and large residential complexes with solar grid systems. This would qualify these products for 5% GST.

The issue was taken up by the Deputy Commissioner of Commercial Taxes, the adjudicating body, who sided with the state’s tax department and rejected ABB’s claims for a 5% concessional rate.

ABB filed an appeal with the Joint Commissioner of Commercial Taxes (Appeals-6), Bengaluru, who also dismissed its claims.

After this order, ABB approached the Karnataka High Court to seek the quashing of the earlier orders of the adjudicating and appellant bodies.

ABB contended that the Karnataka Commercial Tax Department wrongly classified the products it supplied as general electrical devices. Solar inverters convert DC power generated by solar panels into AC power, enabling a solar power-generating system to operate.

ABB added that the purchase orders, invoices, and other documents proved that the inverters were supplied to renewable energy solutions companies.

It submitted that the 5% GST benefit was not restricted only to suppliers of entire solar energy generating systems. It also applied to parts used in manufacturing such systems.

High Court’s Analysis

The High Court noted that ABB’s solar inverters were used only as part of a solar energy grid system and could not be treated like ordinary household power converters.

It was observed that a solar generating system consists of multiple components, including inverters, which are necessary to convert solar DC power into usable AC power and are therefore critical to the generating system.

The High Court held that the 5% GST also applied to suppliers of parts, such as solar inverters, used in such solar energy-generating systems.

The court noted that ABB’s invoices proved that the inverters were used in solar systems.

It referred to earlier judgments that stated that where a notification refers to goods “for use,” the relevant test is intended use. Based on these decisions, the High Court held that ABB’s inverters were intended to be used as parts of solar energy-generating systems.

The High Court held that the orders from the adjudicating and appellate bodies were arbitrary and contrary to law, quashing them and allowing ABB’s claims of 5% concessional GST rate.

This April, the Karnataka High Court issued an interim stay on the enforcement of the Central Electricity Regulatory Commission’s revised deviation settlement mechanism for renewable energy project developers.

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