If a safeguard duty on imports of solar panels and modules is imposed, it would set new precedents on interpreting rules relating to Special Economic Zones. The industry’s position contradicts an earlier stance taken in court by a Adani group company.
The issue has acquired salience with the recent publication of a report by a Parliamentary committee highlighting loss of jobs in India due to the “dumping” of cheap solar equipment imported from China. The impending decision by the Finance Ministry will make or break one section of the industry or another.
The government of India’s Ministry of Commerce and Industry on 16 July proposed that a 25% safeguard duty be imposed on imported solar cells and panels. This proposal is based on a complaint lodged by a group of Indian solar energy equipment manufacturers led by the Adani group’s Mundra Solar PV which owns the largest facility of its kind in the country. The manufacturers have argued that their businesses were facing “heavy losses” due to a surge in cheap imports of solar equipment from China and Malaysia.
For these firms, victory is however still some distance away as the government is yet to take a critical decision on whether or not to have a special tax dispensation for manufacturers located in Special Economic Zones (SEZs). Nearly two-thirds of India’s solar equipment manufacturing facilities, including Mundra Solar, are situated in SEZs. Under the SEZ Act of 2005, the solar panels that these firms sell in the domestic market would also be subjected to the safeguard duty. But this would defeat their very purpose of filing the complaint if the prices of the equipment they sell jumps by around a quarter. That would, in effect, mean that solar equipment manufacturers would end up cutting their nose to spite their face!
The lobby of domestic manufacturers of solar panels and modules have put forth a number of legal arguments to bolster their case for an exemption from payment of the safeguard duty. A close look at the arguments forwarded makes it clear that the industry lobby wants the laws relating to SEZs to be re-interpreted. One of these arguments also appears to contradict a stand taken earlier by an Adani group company in a case before the Gujarat High Court.
All eyes are now on North Block, where the Finance Ministry is headquartered, which is expected to take a final decision on the issue of imposing a safeguard duty. The contentious issue has acquired salience with the presentation of a report by Parliament’s Standing Committee on Commerce on 26 July that said an estimated 2,00,000 jobs may have been lost in India because of imports of cheap Chinese solar panels and modules.
The safeguard duty proposal follows an application filed on 5 December 2017 by the Indian Solar Manufacturers Association (ISMA) before the erstwhile Directorate General of Safeguards in the Ministry of Finance on behalf of five companies: the Adani group’s Mundra Solar PV Limited, Indosolar Limited, Jupiter Solar Power Limited, Websol Energy Systems Limited and Helios Photo Voltaic Limited.
Of these five firms, three, namely, Mundra Solar, Websol Energy Systems and Helios Photo Voltaic are situated in SEZs. Mundra Solar PV, which began production in May 2017, is India’s largest solar equipment manufacturing facility with an annual capacity of 1,200 megawatt and is situated in the Mundra Special Economic Zone in Gujarat.
The application by ISMA sought protection to the domestic industry from a surge in imports of inexpensive solar cells and modules, mainly from China but also from countries such as Taiwan, Singapore and Malaysia. All three SEZ units argued that they qualified to be considered as “domestic” industrial units although they are situated in what are supposed to be “export-oriented” SEZs.
THE SEZ CONUNDRUM
Special Economic Zones are export-oriented industrial areas where a host of Indian laws and taxes do not apply so that the products manufactured in such zones can be priced low in order to enable them to compete in the global market. SEZs are also deemed to lie outside India’s customs territory – a factory in an SEZ does not pay customs duties on imported raw material or on exported finished products.
However, if an unit in an SEZ sells its products in non-SEZ areas in the country (termed the Domestic Tariff Area or DTA), then under Section 30 of the SEZ Act the products would be charged applicable import duties, including safeguard duty, as if it was imported into India from abroad. This is to ensure a level playing-field for units enjoying SEZ concessions vis-à-vis those located outside SEZs in the DTA.
As solar panels have remained exempt from import duty, the SEZ units could sell panels in the domestic market as if they were outside SEZs. But this could change with imposition of the safeguard duty. In the context of the proposed safeguard duty, two interlinked questions have arisen:
Would units in SEZs qualify to be categorised as “domestic” to be eligible for receiving safeguards or protection from imports?
If so, would it imply that their products sold in India will not be subject to the proposed safeguard duty?
The answers to these questions will make or break one section of the country’s solar power equipment industry or the other as two-thirds of India’s installed annual manufacturing capacity of solar cells and half the capacity for solar modules are situated in SEZs.
Two investigations into the complaint by the lobby of solar equipment firms have led to two diametrically different conclusions. The first investigation was conducted by the Director General, Safeguards, at the time, Sandeep M Bhatnagar.
In his “preliminary findings” that were issued on 5 January 2018, Bhatnagar held that the SEZ units can be considered to be part of “domestic industry” because despite being in SEZs they are “physically very much in India” and “adhere to domestic laws (though at times with some relaxations), generate employment, make domestic sales, etc” like domestic industries. “Thus, (an) increase in imports of any item also impacts SEZ units in like manner as it does any other domestic producer operating outside the SEZs,” Bhatnagar’s order contended.
Bhatnagar added that under the SEZ Act, solar panels sold by them in the domestic market would indeed attract the safeguard duty but this would “negate the imposition of safeguard measures … and be counter-productive.”
He suggested that a “remedy” would be to make solar panels cleared from SEZs for sales to the DTA exempt from payment of safeguard duty, adding: “This would maintain the relevance of the safeguard measures in the interest of the domestic industry. This would also satisfy the canon of equity by placing all domestic producers or all constituents of the DI (domestic industry) at par with regard to the applicability of the safeguard measures…”
Bhatnagar, however, said that this decision was not covered in his proceedings as they were limited to laws relating to customs tariffs and not the SEZ Act, and left the final decision “for the consideration of the Government.”
Bhatnagar’s report was soon stayed by the Madras High Court in a petition filed by the Mumbai-based Shapoorji Pallonji & Co. His initial recommendation to immediately impose a steep 70% safeguard duty had spooked Indian solar power plant developers.
In May 2018, the DGS and other trade remedial bodies were integrated into the Directorate General of Trade Remedies (DGTR) under the Ministry of Commerce and Industry.
In June, the DGTR had held a public hearing on the issue. Then, more than seven months after Bhatnagar’s initial recommendation, on 16 July, the final recommendation of the DGTR was to impose a lower safeguard duty of 25%.
The DGTR Sunil Kumar disagreed with Bhatnagar’s argument that the SEZ units qualify as “domestic industry.” In his recommendations, Kumar took note of several representations received by his office that cited past cases where SEZs had been excluded from the scope of “domestic industry.”
Kumar concluded that the law allows for the sale of products from SEZs to the DTA as an “exception” and cannot justify an SEZ unit to be considered as a “domestic” producer in the context of trade remedial measures and the larger framework of the SEZ Act. He pointed out that since two non-SEZ companies in the application accounted for around 40% of total domestic production in 2017-18, their interests could not ignored.
Like Bhatnagar, Kumar too did not take a final decision on whether the safeguard duty would apply to units in SEZs, adding that the “relevant competent authorities” would now have to take this decision based on his contention that units in SEZs units are not part of “domestic industry.”
SEZ UNITS’ ARGUMENTS
The domestic manufacturers of solar equipment located in SEZs have submitted a detailed representation to the DGTR arguing why no safeguard duty is applicable at all on goods sold from an SEZ to the DTA. These are recorded in the DGTR’s recommendations.
These firms have argued that Section 8B of the Customs Tariff Act, 1975, which contains provisions for levying safeguard duty, states “in no uncertain terms” that the duty is to be levied on imports.
The firms then argued that “there is no provision under any extant law in India which deems the clearance of goods manufactured in an SEZ to the DTA as an import,” and stated that this has been held in a “catena of judgements” including Essar Steel versus Union of India(2010) and India Exports versus State of Uttar Pradesh(2012). “Therefore, without the factum of import, there can be no levy of anti-dumping duty, countervailing duty or safeguard duty,” their submission states.
This position, however, appears to contradict the position taken by Adani Power Limited in a case before the Gujarat High Court. In 2010, Adani Power had filed a civil application challenging the central government’s decision to impose import duty on electricity supplied by its Mundra power plant situated in the Mundra SEZ to the Gujarat and Haryana state governments’ power distribution companies.
The judgement in the case, delivered on 15 July 2015 by a division bench of acting Chief Justice V M Sahai and Justice R P Dholaria, recorded Adani Power’s counsel Kamal B Trivedi (also the Advocate General of Gujarat) arguing that “Section 30(a) [of SEZ Act] provides that if any goods are removed from a Special Economic Zone to the Domestic Tariff Area, such goods will be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975…”
Trivedi is further recorded stating that “if any goods are removed from the Special Economic Zone area to the Domestic Tariff Area, then the present customs duty will be leviable treating the goods to be imported from outside India.” At that time, electricity imported into India was exempt from payment of customs duty, and Trivedi argued on behalf of Adani Power that the electricity supplied outside the SEZ would also be exempted from payment of duty “as it will be treated (as if it has been) … imported from outside India.”
The division bench of the Gujarat High Court did not dispute this argument. Its final decision striking down the import duty relied on other grounds that related to double taxation.
The solar manufacturing industry has also argued that Section 30 of the SEZ Act is applicable only to import of inputs by SEZ units. The section mentions country-specific remedial duties such as an anti-dumping duty and a countervailing duty, but since these duties cannot be applied to SEZs, they can only be applied to imports by SEZ units. By this analogy, a safeguard duty should also be applicable to import of inputs and not the finished products, the firms claimed.
Their representation contended: “Section 30 of the SEZ Act, 2005 read with Section 8B(2A) of the Customs Tariff Act, 1975 make it abundantly clear that safeguard duty is only payable on the inputs used in the finished products and not the finished product itself that is manufactured in the SEZ and cleared into the DTA.”
Finally, the companies argued that if a safeguard duty is applied to an input, another safeguard duty cannot be applied to the output since this would amount to double taxation. “Such a levy being illegal, the reference to anti-dumping duties, countervailing duties and safeguard duties in Section 30 of the SEZ Act, 2005 will always have to mean on the value of inputs as otherwise, the duty will be unworkable.”
SETTING A PRECEDENT
The Finance Ministry is in the unenviable position of choosing between setting new precedents to interpreting rules relating to Special Economic Zone jurisprudence or letting a section of the domestic solar equipment manufacturing industry collapse, if not get badly mauled.
The surge in demand for solar power equipment following the Narendra Modi government’s target to install 100 gigawatt of solar power capacity by 2022 has clearly left out domestic manufacturers who were priced out by imported equipment.
According to DGTR’s data, between 2014-15 and 2017-18, the price of imported solar cells and modules dropped 22% and 33%, respectively.
For solar energy projects in India, this helped keep the price of solar power low enough for such power to compete with traditionally less-expensive coal-based electricity. As a result, imports of solar cells multiplied from 1,275 MW in 2014-15 to 9,790 MW in 2017-18 and although domestic sales too grew from 191 MW in 2014-15 to about 774 MW in 2017-18, the market share of domestic solar equipment nearly halved from 13% to 7% over these three years.
For solar equipment manufacturers in SEZs and those located outside, the impending decision of the Finance Ministry could either make them or break them, possibly irreparably. The DGTR has said that the absence of safeguard duty would cause “complete erosion of manufacturing base of (the) solar industry in the country.”
Renewable power consultancy organisation “Bridge to India” has argued in a note that the safeguard duty would not be worth the effort if it is imposed on SEZ units, as the non-SEZ units can only meet about 5% of the demand. “Why impose duties for benefit of some small manufacturers and risk growth in such a crucial sector?” the note asked.
Gyanesh Chaudhary, Managing Director and CEO of Vikram Solar told renewables news service Mercom India that it was critical for the SEZ units to either be exempted from payment of the proposed safeguard duty or that the duty be restricted only to inputs, otherwise they would be rendered “uncompetitive” and forced to down shutters.
In an email to one of the authors of this article, Sundar Raghavan, a project and construction management consultant for renewable energy projects based in Chennai, argued that given the threats posed by climate change, one has to rethink the concept of SEZs from their originally stated role of promoting exports. “Domestic manufacture of solar modules is tantamount to import substitution and if the government’s ‘Make in India’ programme has to fly high, modules from SEZs entering the DTA need to be looked at through a new prism rather than through the existing concept of a SEZ.”
The Ministry of Finance would also have to take into account the Parliamentary committee’s observations on job losses due to import of Chinese solar panels. The Committee, headed by Naresh Gujral, Shiromani Akali Dal’s Member of Parliament in the Rajya Sabha and son of former prime minister Inder Kumar Gujral, considered the subject of Chinese imports of goods into India in October 2017 and after hearing representatives of various government departments and industry groups including the Indian Solar Manufacturers Association.
The panel of MPs was disheartened to note that India was one of the world’s major exporters of solar products between 2006 and 2011 before China started “dumping” their products. “Presently, the exports from India have been decimated and brought to a standstill,” the report said, adding that remedial measures should be taken immediately to protect domestic manufacturers of solar equipment.
Further, the report said: “The anti-dumping framework also suffers (from) … lax implementation. The unscrupulous elements are able to import the Chinese goods by circumventing the goods put under (the) anti-dumping framework through misclassification of products.”
However, the report does not quote the source of the data on job losses stating only that “one estimate suggests that due to the dumping of Chinese solar panel there is a loss of nearly two lakh jobs as nearly half of our domestic industry capacity remains idle.” The committee does not seem to have heard any stakeholder other than ISMA. The government would thus have to balance this claim of job losses against estimates of jobs added in the solar power plant development sector in line with the growth in solar energy installations due to the availability of cheap panels.
The Parliamentary committee was studying the impact of all kinds of imports from China and not just solar equipment. Besides representatives from the Ministry of Commerce and Industry, the panel met representatives of the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry. However, among industry associations from the solar equipment industry, only ISMA’s name is mentioned in the committee’s report.
HIGH STAKES FOR MUNDRA SOLAR
Conversations that the authors have had with representatives of the domestic solar equipment industry indicated nervousness over which way the Ministry of Finance would go given the Adani group’s stakes in the decision and group chairman Gautam Adani’s perceived closeness with Prime Minister Narendra Modi, described recently by his son as “more of a personal relationship.”
The representative of an important player in the solar equipment industry, who competes against the Adani group, cryptically remarked: “The ability of the Adani group to change government policies to suit its interests are legendary. At this juncture we can only wait for the Finance Ministry to take its decision – our future hangs in balance.”
On 20 July, one of the two writers of this article (Paranjoy) sent a draft note and a questionnaire to Gautam Adani, head of the Adani group of companies, seeking his response to the following two questions:
Are you a party to the submissions mentioned in Para 73 of the DGTR’s recommendations dated 16 July 2018?
If so, what are your comments on the fact that the claim made in Para 73, that goods cleared from SEZ to DTA are not subject to safeguard duty, appear contrary to the position taken by your group firm Adani Power Limited before the Gujarat High Court in Special Civil Application No. 3142 of 2010?
The same day the email was sent to Gautam Adani, a person who works in his corporate communications replied asking for the name of the “news platform” where the article would be published and the deadline for receiving the response from his group. The name of NewsClick was mentioned as the publisher and Monday 23 July was specified as the preferred deadline. Till the time of publication on Monday 30 July there was no response from the Adani group.