India’s commitment to achieving net-zero carbon emission status by 2070 is expected to give a boost to the renewable energy sector in India. Renewable energy projects are typically established for a long tenure and entail significant costs. During such long tenure, on occasions, due to various internal and external reasons, restructuring of the ownership structure of such projects is required. In such high-value projects, from the efficacy perspective of restructuring, stamp duty and registration fees involved in restructuring become pertinent. In this context, one debate that always arises is whether, in a transaction of transfer of solar/wind power projects, the solar / wind power projects infrastructure is chargeable to stamp duty as ‘movable property’ or ‘immovable property’. The answer to this question substantially impacts the transaction cost as in most of the Indian states, the stamp duty leviable on the transfer of ‘movable property’ is significantly lower than ‘immovable property’.
Climate change is one of the most urgent and complex challenges of the current time. No discussion on climate change is complete without clean energy solutions that would help to cope with the side effects of the rising temperature, lower consumer energy bills, create jobs, and build the economy.
India has committed to the reduction of carbon emissions by a billion tonnes by 2030 as a part of its COP26 Commitments, and by 2070, India is aiming to achieve a net-zero carbon emission for a sustainable future. To implement these targets, the government is aggressively campaigning and promoting the establishment of renewable energy sources such as solar and wind power projects. More and more MNCs and domestic establishments are investing in these projects on account of ESG audit requirements too.
Ordinarily, setting up any renewable project, including solar and wind power projects for business, entails a significant upfront cost and benefits are reaped over a long tenure. During such long tenure, on account of various internal and external reasons, businesses are required to restructure the ownership structure of such projects. In such high-value restructuring transactions, examining the impact of stamp duty and registration fees becomes significant from a feasibility perspective.
In this context, one question that always attracts debate is whether in a transaction of transfer of solar/wind power projects, solar/wind power projects infrastructure is chargeable to stamp duty as ‘movable property’ or ‘immovable property’. Notably, in India, stamp duty is a state matter and is governed by the respective state legislations. However, in most of the Indian states, the stamp duty leviable on the transfer of ‘movable property’ is significantly lower than ‘immovable property’. Thus, classifying solar/wind power projects infrastructure as ‘movable property’ or ‘immovable property’ would substantially impact the transaction cost. For example, in the State of Rajasthan, which is home to several solar and wind power projects, stamp duty on the transfer of ‘immovable property’ is 6% (+30% cess), whereas stamp duty on the transfer of ‘movable property’ is 0.5% which has been even further reduced by the State government.
The Conundrum of Movable or Immovable Property
Immovable property in India can be categorized as per the definitions available in the Transfer of Property Act, 1882, General Clauses Act, 1897 and the Indian Registration Act, 1908. Stamp legislations define ‘immovable property’ similar to the definition given under the Transfer of Property Act, 1882. The term ‘movable property’ means property of every other description, except immovable property. Definition of ‘immovable property’ includes (a) land; (b) benefits to arrive out of land; and (c) things attached to the Earth or permanently fastened to anything attached to the Earth. In the context of solar/wind power plants, the question arises whether such plants fall under the description of the expression ‘things attached to the earth or permanently fastened to anything attached to the earth’. The expression ‘attached to the earth’ is defined under Section 3 of the Transfer of Property Act, 1882 to mean (a) rooted in the Earth, as in the case of trees and shrubs; imbedded in the Earth, as in the case of walls or buildings; or (c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
However, the mere fact that a system is being attached to the Earth and hence should be classified as immovable property is a fallacy. The essence of the objective behind the attachment, along with the degree and indentment of attachment, is pertinent. In the event of any system or property being attached with the purpose of harvesting the permanent benefit from the land to which it is attached, then in such cases, it would be treated as immovable property. Also, when any system is attached with such an intention that it cannot be removed again without suffering structural damage, then it is classified as immovable property. However, if the attachment is temporary, it cannot be a reason for classification as immovable property.
The Hon’ble Supreme Court, in the case ofT.T.G. Industries Ltd. v. Collector of Central Excise, while considering the question of whether the hydraulic mud guns and tap hole drilling machines required for blast furnaces can be regarded as immovable property, held that the mud guns and the drilling machines erected at the site by the appellant on a specially made concrete platform at a level of 25 feet above the ground on a base plate secured to the concrete platform, will be considered as immovable properties since the whole structure cannot be shifted without dismantling it and then re-erecting it at another site.
In the case ofCommissioner of Central Excise, Ahmedabad v. Solid and Correct Engineering Works and Ors., the Hon’ble Division Bench of the Supreme Court considered whether the asphalt drum mix plant would be considered movable property or immovable property. The Hon’ble Supreme Court held that the plant in question is not an immovable property for the following reasons: (a) the purpose of fixing the plant to the foundation is only for providing stability to the plant; (b) setting up of the plant itself is not intended to be permanent at a given place as it can be moved and is indeed moved after the road construction or repair project for which it is set-up is complete, and (c) the plant cannot be said to be ‘attached to earth’ within the meaning of that expression.
Hon’ble Madras High court, in the case ofBoard of Revenue, Chepauk, Madras v. Venkataswami, (FB), held that the lease of properties relating to a touring cinema (tent, machines etc.), which were collapsible and capable of being removed; however was permanently fastened to the Earth when in use, could not be charged to the to stamp duty under Section 30(a)(1) of Schedule 1A of that Act since the nature of these products was not immovable. It was further observed that the poles of the tent and the machines were annexed to the ground only temporarily and not permanently, thereby not chargeable to Stamp Duty as immovable property.
In the matter ofShri Velayuthaswamy Spinning Mills (P) Ltd. v. The Inspector General of Registration and Ors., the Hon’ble Madras High Court considered the question of whether ‘windmills’ are to be treated as ‘movable property’ and, therefore, could be sold by delivery and the sale deed executed was in respect of the land-only upon which the windmills were situated. The Hon’ble Madras High Court held that since the ‘windmills’ are only installed on the cemented platform on the land for running of ‘windmills’ and not for the benefit of the land, they are movable property, and therefore, no stamp duty was payable on the value of ‘windmills’. However, the judgement of the Madras High Court was challenged in appeal before the Hon’ble full bench of Madras High Court. The Hon’ble full bench of Madras High Court inInspector General of Registration Santhome and Ors. v. Sri Velayuthaswamy Spinning Mills (P) Ltd., held that the windmill has no existence without immovable property and should be attached to the Earth, and the attachment should be of a permanent nature. Hence, the said sale deed was for the sale of immovable property which included the land as well as a windmill.
In the case ofIn Re: Fermi Solar Farms Pvt. Ltd., before the Appellate Authority for Advance Ruling (Goods And Service Tax), Maharashtra (“AAR”), an appeal was filed u/s 100 of the Central Goods and Services Tax Act 2017 and the Maharashtra Goods and Services Tax Act 2017 before the Hon’ble AAR to inter alia determine whether the erection of solar photovoltaic plant amounts to the erection of an immovable property. The AAR held that in the erection of the plant, the object of annexation is of paramount importance, and since there would be no feasibility in moving the plant from one place to another, therefore, it must be treated as immovable property.
In light of the above judgements, it can be observed that a property will be considered to be an immovable property if (a) it is attached to the Earth; (b) it has no independent existence without the immovable property; (c) is of a permanent nature and (d) the annexation is with the object of permanent beneficial enjoyment of the land or building. However, there is no fixed yardstick to determine the classification of a machine as immovable property, and the courts have consistently opined that the issue of whether a machine is attached to the Earth or not has to be decided on the basis of facts of each case.
Even though the Hon’ble Court, in the judgements of Velayuthaswamy Spinning Mills (Supra) and Fermi Solar (Supra) has specifically dealt with the issue of windmill and solar power plant, respectively and have opined that windmill and solar power plants are immovable properties; the facts of each transaction are required to be examined to judge whether they would be covered by the said judgements or not.
It is worthwhile to mention that, in the power sector, it is not uncommon that the land underneath the solar/wind power project is leased for a long term by entities and is not owned by the entities. In the Velayuthaswamy Spinning Mills (Supra) and Fermi Solar (Supra) cases, the owner of the land and windmill/solar power plant was the same, and thus, the tenancy scenarios may not get covered by such cases directly. Various judicial pronouncements have specifically dealt with the issue of whether machinery attached to Earth erected on land by a temporary tenant is movable or immovable property.
In the case ofAddu Achiar v. The Custodian, Evacuee Property, the principal question before the Hon’ble Division Bench of the High Court of Hyderabad was whether the sale of the ice factory, which was erected on premises belonging to another, is to be regarded as for the sale of a movable or immovable property considering the machinery installed on the premises. The Hon’ble Division Bench held that whether the machinery is a permanent fixture would depend upon the intention of the party making the annexation and concluded that the tenant being a temporary occupant of the premises did not intend to make an annexation to be permanently fastened to the Earth. Therefore, the ice factory sold to the petitioner-appellant cannot be regarded as immovable property.
In another case, it was observed that in the case of a lease to run an industrial unit that includes machinery fastened to Earth, the right to remove or sever the machines would be an essential condition to determine whether the lease relates to movable or immovable property. In the case of leased premises, the terms of lease deeds have played a significant role in deciding whether machinery annexed to the Earth is ‘immovable’ property or ‘movable’ property. It is also relevant to highlight that classification between ‘immovable’ property or ‘movable’ property’ also determines whether registration fees become applicable or not, which may become another significant cost factor.
Whether an article is permanently attached to the Earth or not is a complex question of law and facts. It requires intricate determination of both the intentions as well as the factum of attachment to the Earth which must be ascertained from the facts and circumstances of each case. Solar and wind power projects are no exception to this rule. While few judgments have held these projects to be immovable properties, the conclusion cannot be applied as a straitjacket formula to every project. The fact that the owner of the land and the windmill/solar power plant is different may demand a different conclusion. In such cases, the analysis of the terms of the lease deed or the extent of the right of the lessees to remove or sever the windmill/solar power may also change the outcome. Thus, in order to avoid litigation and uncertainty, it is prudent that an assessment of whether the stamp duty and registration fees in the restructuring transaction will be charged as ‘movable property’ or ‘immovable property’ is made in advance. Parties may also consider taking advantage of the advance adjudication mechanism available under the respective stamp laws.
About the Author
Ms. Harsha Totuka is a Partner at Chir Amrit Corporate LLP, Rajasthan.
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Preferred Method of Citation
Harsha Totuka, “Implication of Stamp Duty on Power Sector Restructuring Transactions” (IJPIEL, 2 May 2022)