2025 (10) TMI 52 - AAR - GST

AAR rules particulate matter permits are tradable goods under Heading 4907, taxable at 12% GST

AAR held that particulate matter permits are tradable instruments conferring a monetary benefit and qualify as goods classifiable under Heading 4907 ... Taxability - trading of Particulate Matter (PM) permits - levy of GST - classifiable under HSN Heading 4907 or not - HSN Code and rate of GST - HELD THAT:- PSLCs are tradable instruments that allow banks to meet their mandatory Priority Sector Lending (PSL) targets set by the Reserve Bank of India (RBI). Banks that lend more than their PSL targets to priority sectors can sell PSLCs to earn revenue, while banks that fall short can buy these certificates on the RBI’s e-Kuber platform to cover their shortfall. This mechanism creates a market for credit, incentivizes banks to lend more to essential sectors like agriculture and MSMEs, and helps ensure equitable credit distribution across the economy. The Renewable Energy Certificate (REC) mechanism is a market-based instrument, to promote renewable sources of energy and development of market in electricity - Trading of RECs is being undertaken on Power Exchanges on the last Wednesday of every month. Thus, it can be seen that both PSLCs and RECs are tradable instruments like Particulate Matter Permits (PM-permits). All these instruments are used in their respective industry for earning revenue by trading the instruments to those entities who fail to fulfil the obligations imposed by the regulator. PSLCs are instruments used in Banking sector, RECs are used in the Electricity sector and PM-permits are used in the industries which are highly polluting. Thus, PM-permits would also fall under the category of goods and would be classified under Heading 4907 - PM-permits in question would qualify as ‘documents of title’ conferring benefits on the Applicant. From the nature of the document in question, it is evident that the permit is a permission to the permit holder to emit a kilogram of suspended particulate matter (SPM) within a compliance period. Thus, these certificates provide benefit to the applicant inasmuch as these certificates can be used by applicant to offset their organization’s emissions. These permits also hold monetary value as they can be bought and sold in the market. Therefore, these permits would fall under the residuary heading of 4970 00 90. PM-permits to be covered under ‘other marketable securities of a like nature’ or not - Rule of ejusdem generis - HELD THAT:- The rule of ejusdem generis means ‘of the same kind’. As per this rule, general words following specific ones are limited to the same class as the specific words. In the instant case, the statute lists specific type of securities, such as bonds, stocks and debentures. Therefore, the other marketable securities would only refer to other securities similar in nature to bonds, stocks and debentures and not something fundamentally different. PM-permits are permits which allow the holder to emit a kilogram of suspended particulate matter within a compliance period and cannot be equated to a bond, stock and debenture. Whether permits are only for regulatory compliance and any transactions related to them are not considered business income? - HELD THAT:- The permits hold monetary value and the applicant have in their submissions submitted that the trading of these permits is carried out by way of an auction (both weekly and daily) and the market price is discovered based on the bids placed by the participants. Price collars are also instituted to protect the price of permits against unexpected escalations, with the maximum ceiling set at Rs. 100/permit and the floor price at Rs. 5/permit. The price of the permits is determined by supply and demand, mainly during auctions held periodically. Thus, an industry who is holding permits can make a profit by selling the permits, which is reflected in their income. Further, the applicant has also not indicated as to how they account for these incomes in their books of account. Therefore, it appears that the trading of permits would come under the ambit of business income. Whether the sale of the permits is not in the course or furtherance of business? - HELD THAT:- There should be some integral connection or relation between the making of the gift and the carrying on of the business. In the instant case, the Emission Trading scheme for Particulate Matter is a mandatory scheme for the applicant and has a relation with the applicant carrying on their business. As part of this scheme, the applicant has to be in their possession, permits equal to their pollution mass at the end of a compliance period. If there is a shortfall, they would have to buy it from the participating units. If the permits are in excess, they have the option to sell it to another participating unit. This goes on to show that the trading of permits is in the course and furtherance of their business. Whether PM-permits are non-tradable and cannot be freely transferred in the open market? - HELD THAT:- Firstly, the averment that the permits are not tradable is not correct as the applicant have themselves submitted that it is traded on the NeML portal and any person who is participating in the ETS-PM scheme can purchase the permits. Further, the averment that it cannot be freely transferred in the open market but only in the emission market is also of no significance as it is an instrument conferring benefits on the Applicant and therefore, falls under HSN 4907 and liable to GST. For the same reason, the fact that it has an expiry period is also of no significance. Appropriate rate of GST - HELD THAT:- The appropriate rate for goods falling under Heading 4907 is 12 %. Therefore, the applicable rate of GST for trading of PM-permits is 12%. ISSUES PRESENTED AND CONSIDERED 1. Whether trading of Particulate Matter (PM) permits is liable to tax under the GST Act. 2. If taxable, whether trading of PM permits constitutes supply of goods or supply of services under the GST Act. 3. If goods, whether PM permits are classifiable under HSN Heading 4907 and the applicable rate of GST. 4. Ancillary issue considered: Whether PM permits qualify as 'securities' within the statutory definition and whether their regulatory/expiring nature or limited tradability excludes them from being goods. ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: TAXABILITY OF TRADING OF PM PERMITS Legal framework: Section 7 (scope of supply) of the CGST Act includes all forms of supply of goods or services made for a consideration by a person in the course or furtherance of business. The CGST/SGST provisions are read together for applicability. CBIC circulars on tradable instruments (PSLCs/RECs/duty scrips) have addressed tax treatment of certain marketable instruments. Precedent Treatment: CBIC Circulars treating PSLCs and RECs as goods classified under heading 4907 were considered and applied by the Tribunal in reasoning. Interpretation and reasoning: PM permits (as issued under an ETS-PM scheme) are permissions to emit a quantified amount of suspended particulate matter within a compliance period, are digitally created, have monetary value, are allocated and traded on a trading platform (NeML) with periodic auctions and price discovery, and yield realizable income when sold. Trading occurs within a market mechanism subject to price collars and auction rules; participation and allocation are mandatory for selected industries. The trading activity therefore exhibits commercial characteristics (consideration, marketability, price discovery, income generation) and is integrally connected to the appellant's business activities. Ratio vs. Obiter: Ratio - trading of PM permits constitutes a form of taxable supply where it is made for consideration in the course or furtherance of business; the facts support classification as taxable. Obiter - observations on public policy or environmental concerns and discouraging taxation. Conclusion: Trading of PM permits is liable to tax under the GST Act. ISSUE-WISE DETAILED ANALYSIS - ISSUE 2: GOODS OR SERVICES? Legal framework: Definitions of 'goods' and 'services' under the CGST Act; Section 7(2) (transactions in Schedule II not to be treated as supply of goods or services) considered; HSN/explanatory notes relevant for classification into goods headings. Precedent Treatment: CBIC circulars classifying PSLCs/RECs as goods (documents of title) under heading 4907 were applied analogously. Interpretation and reasoning: PM permits are intangible instruments conferring a quantified right (to emit SPM) with fiduciary/monetary value upon issuance, capable of being validated, allocated and traded, and used to discharge a regulatory obligation. HSN explanatory notes for 4907 include 'stock, share or bond certificates and similar documents of title' and items having fiduciary value beyond intrinsic value. The ETS-PM permits confer benefit and entitlement analogous to documents of title/marketable certificates. The fact that permits are digital, subject to expiry, or tradable only within a defined emissions market does not negate their character as instruments conferring transferable economic value. The ejusdem generis rule applied to the statutory definition of 'securities' leads to narrowing 'other marketable securities' to items similar to bonds, stocks and debentures; PM permits differ in nature from typical securities and thus are not captured by that definition, supporting classification as goods rather than securities/services. Ratio vs. Obiter: Ratio - PM permits are to be treated as goods for GST purposes. Obiter - detailed distinction from securities and emphasis that limited tradability/expiry does not prevent classification as goods. Conclusion: PM permits constitute goods under the GST Act and not services. ISSUE-WISE DETAILED ANALYSIS - ISSUE 3: HSN CLASSIFICATION AND RATE Legal framework: Tariff Heading 4907 (documents of title, stock/share/bond certificates and similar documents of title) and applicable rate schedule for goods (notifications specifying rates for headings). Precedent Treatment: CBIC Circulars and treatment of PSLCs/RECs as classifiable under 4907 and taxed accordingly were relied upon as analogous authorities. Interpretation and reasoning: Heading 4907 covers unused postage/revenue stamps, banknotes, cheque forms, stock/share/bond certificates and similar documents of title. Explanatory notes emphasize instruments issued by appropriate authority that possess fiduciary value. PM permits meet these characteristics: issued/validated by regulator, confer a right/benefit (to emit quantified pollutant), possess monetary/market value, and are tradable within the regulated market. Therefore PM permits fall within the residuary scope of heading 4907 (other documents of title) and are not excluded by their regulatory purpose, expiry or limited market venue. Ratio vs. Obiter: Ratio - PM permits are classifiable under HSN 4907. Obiter - discussion that expiry and market-limited trading are immaterial to classification under 4907. Conclusion: PM permits are classifiable under HSN 4907 and the applicable GST rate is 12%. ISSUE-WISE DETAILED ANALYSIS - ANCILLARY ISSUE: WHETHER PM PERMITS ARE 'SECURITIES' Legal framework: Inclusive statutory definition of 'securities' drawn from the Securities Contracts (Regulation) Act; interpretative principle ejusdem generis for construing general words following specific instances. Precedent Treatment: The rule of ejusdem generis applied to limit 'other marketable securities of a like nature' to instruments akin to shares, bonds, debentures, derivatives, units and government securities. Interpretation and reasoning: The statutory list describes conventional financial market instruments; the ejusdem generis rule restricts the residual phrase to items of the same kind. PM permits, being regulatory emission allowances tied to physical emissions and differing in legal and commercial character from conventional securities, cannot be regarded as 'other marketable securities of a like nature.' Consequently, they do not fall within the statutory definition of securities for GST purposes. Ratio vs. Obiter: Ratio - PM permits are not 'securities' within the statutory inclusive definition and thus classification as securities is rejected. Obiter - reasoning on interpretative principles limiting the scope of 'other marketable securities.' Conclusion: PM permits do not qualify as securities under the statutory definition and thus should not be classified as such for GST purposes. CROSS-REFERENCES 1. The determination that PM permits are goods (Issue 2) underpins the conclusions on HSN classification and rate (Issue 3). 2. The finding that PM permits are not securities (Ancillary Issue) supports the rejection of the applicant's argument that the instruments fall outside heading 4907 and/or are exempt by analogy to duty credit scrips. OVERALL CONCLUSIONS 1. Trading of PM permits is taxable under the GST Act. 2. PM permits constitute goods (not services) for GST classification. 3. PM permits are classifiable under HSN Heading 4907 as documents of title and attract GST at the rate of 12%.