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The Tax Publishers Taxability of proceeds from sale of Renewable Energy Certificates (REC) issued by CERC - Central Electricity Regulatory Commission *Facts:* Assessee sold REC's issued by CERC and claimed these to be extraordinary income not in the line of business and was not taxable as these were akin to carbon credits. Lower authorities did not accept this stand as REC's were not notified as per Kyoto protocol. On higher appeal - Held in favour of the assessee that REC's were not taxable as these were akin to carbon credits. *Applied:* CIT v. My Home Power Ltd. 2014 TaxPub(DT) 2672 (AP-HC) Essel Mining and Industries Ltd. v. DCIT [ITA No. 602/Mum/2021, dt. 27-6-2022] : 2022 TaxPub(DT) 4744 (Mum-Trib) Dwarikesh Sugar Industries Ltd. v. NFAC [ITA No. 562/Mum/2022, dt. 5-7-2022] : 2022 TaxPub(DT) 4742 (Mum-Trib) Kalpataru Power Transmission Ltd.[2019-TIOL-1424-ITAT-AHM] Alembic Limited [ITA Nos. 553/2017 & 554/2017] (Gujarat High Court 28.08.2017) L.H. Sugar Factory Pvt. Ltd. [2016-TIOL-1942-HC-ALL-IT] Ambika Cotton Mills Ltd. [TS-144-HC-2021(MAD)] LancoTanjore Power Co. Ltd. (2021) 434 ITR 671 (Madras) : 2021 TaxPub(DT) 1762 (Mad-HC) Tamil Nadu Newsprint & Papers Ltd. 2021 TaxPub(DT) 4041 (Mad-HC) Arun Textiles Pvt. Ltd. [2016-TIOL-2212-HC-MAD-IT] Rajasthan State Mines and Minerals Ltd. [2017-TIOL-2297- HC-RAJ-IT] Shree Cement Ltd. [ ITA No. 86/204 dated 22-8-2017] Subhash Kabini Power Corporation Ltd. 2016 TaxPub(DT) 2164 (Karn-HC) Dodson Lindblom Hydro Power Pvt. Ltd. [2019-TIOL-531- HCMUM- IT] "As per the Electricity Act, 2003, the State Electricity Regulatory Commission is to provide a percentage of consumption of power, which should be procured from renewable energy sources referred as Renewable Purchase Obligation (RPO). The Electricity Act/Policies of the National Action Plan of Climate Change (NAPCC) has provided a road map for increasing share of renewable energy in the total electricity generation capacity in the country. The renewable energy consists of electricity generated using biomass, hydropower, solar and wind technology. The object is to reduce environmental pollution caused by emissions from fossil fuel and its impact on the climate change. Therefore, to encourage use of renewable energy the Government of India launched RECs. RECs are basically market based instruments that certify that the bearer owns 1 mg/hour (MWh) of electricity generated from renewable energy resource. Once, the power provider has fed the energy into the grid, the REC received can be sold in the open market or Indian Energy Exchange (IEX), as energy commodity. RECs earned may be sold as a carbon credit to other entities that are polluting to off-set their emissions. Thus, as could be seen from the brief description of REC given above, they are basically issued to incentivize generation of power through renewable energy so as to reduce the effect of emissions, which impact clean environment and leads to global warming. Thus, if we apply the test of purposive interpretation, it can be seen that the object of REC and carbon credits are more or less identical, that is, to reduce the effect of emissions on environment. Therefore, in our view, REC and carbon credit would stand on same footing. For this reason we are unable to accept the contention of learned Departmental Representative that since REC is not approved under Kyoto protocol it cannot be taken at par with carbon credit". *Ed. Note:* There is also a noting on Section 115BBG also being introduced w.e.f. 1-4-2018 to tax carbon credits in this verdict. The years in appeal pertain to earlier years to 1-4-2018. *Case:* DCM Shriram Industries Ltd. v. ACIT 2023 TaxPub(DT) 1838 (Delhi I Bench)

The Tax Publishers

Taxability of proceeds from sale of Renewable Energy Certificates (REC) issued by CERC - Central Electricity Regulatory Commission

Facts:

Assessee sold REC's issued by CERC and claimed these to be extraordinary income not in the line of business and was not taxable as these were akin to carbon credits. Lower authorities did not accept this stand as REC's were not notified as per Kyoto protocol. On higher appeal -

Held in favour of the assessee that REC's were not taxable as these were akin to carbon credits.

Applied:

CIT v. My Home Power Ltd. 2014 TaxPub(DT) 2672 (AP-HC)

Essel Mining and Industries Ltd. v. DCIT [ITA No. 602/Mum/2021, dt. 27-6-2022] : 2022 TaxPub(DT) 4744 (Mum-Trib)

Dwarikesh Sugar Industries Ltd. v. NFAC [ITA No. 562/Mum/2022, dt. 5-7-2022] : 2022 TaxPub(DT) 4742 (Mum-Trib)

Kalpataru Power Transmission Ltd.[2019-TIOL-1424-ITAT-AHM]

Alembic Limited [ITA Nos. 553/2017 & 554/2017] (Gujarat High Court 28.08.2017)

L.H. Sugar Factory Pvt. Ltd. [2016-TIOL-1942-HC-ALL-IT]

Ambika Cotton Mills Ltd. [TS-144-HC-2021(MAD)]

LancoTanjore Power Co. Ltd. (2021) 434 ITR 671 (Madras) : 2021 TaxPub(DT) 1762 (Mad-HC)

Tamil Nadu Newsprint & Papers Ltd. 2021 TaxPub(DT) 4041 (Mad-HC)

Arun Textiles Pvt. Ltd. [2016-TIOL-2212-HC-MAD-IT]

Rajasthan State Mines and Minerals Ltd. [2017-TIOL-2297- HC-RAJ-IT]

Shree Cement Ltd. [ ITA No. 86/204 dated 22-8-2017]

Subhash Kabini Power Corporation Ltd. 2016 TaxPub(DT) 2164 (Karn-HC)

Dodson Lindblom Hydro Power Pvt. Ltd. [2019-TIOL-531- HCMUM- IT]

"As per the Electricity Act, 2003, the State Electricity Regulatory Commission is to provide a percentage of consumption of power, which should be procured from renewable energy sources referred as Renewable Purchase Obligation (RPO). The Electricity Act/Policies of the National Action Plan of Climate Change (NAPCC) has provided a road map for increasing share of renewable energy in the total electricity generation capacity in the country. The renewable energy consists of electricity generated using biomass, hydropower, solar and wind technology. The object is to reduce environmental pollution caused by emissions from fossil fuel and its impact on the climate change. Therefore, to encourage use of renewable energy the Government of India launched RECs. RECs are basically market based instruments that certify that the bearer owns 1 mg/hour (MWh) of electricity generated from renewable energy resource. Once, the power provider has fed the energy into the grid, the REC received can be sold in the open market or Indian Energy Exchange (IEX), as energy commodity. RECs earned may be sold as a carbon credit to other entities that are polluting to off-set their emissions.

Thus, as could be seen from the brief description of REC given above, they are basically issued to incentivize generation of power through renewable energy so as to reduce the effect of emissions, which impact clean environment and leads to global warming. Thus, if we apply the test of purposive interpretation, it can be seen that the object of REC and carbon credits are more or less identical, that is, to reduce the effect of emissions on
environment. Therefore, in our view, REC and carbon credit would stand on same footing. For this reason we are unable to accept the contention of learned Departmental Representative that since REC is not approved under Kyoto protocol it cannot be
taken at par with carbon credit".

Ed. Note: There is also a noting on Section 115BBG also being introduced w.e.f. 1-4-2018 to tax carbon credits in this verdict. The years in appeal pertain to earlier years to 1-4-2018.

Case: DCM Shriram Industries Ltd. v. ACIT 2023 TaxPub(DT) 1838 (Delhi I Bench)