Particulate Matter Permits are goods under GST and fall uncler HSN 4907 applicable rate of GST is 12%.

Particulate Matter Permits are classified as goods under GST and the applicable GST rate is 12%.

GUJARAT AUTHORITY FOR ADVANCE RULING

GOODS AND SERVICES TAX

Brief facts:

M/s. Randhir Dyeing and Printing Mills, 33/2, Plot No. 1, Behind Subjail, Khatodra, Surat, Gujarat-395002 [for short- applicant’] is registered under GST and their GSTIN is 24AADFR1112P1ZC.
The applicant has stated that they are a partnership firm and are engaged in the business of manufacturing and selling of garments and made up fabrics as well as doing the job work of dyeing and printing of fabrics.
The Gujarat Pollution and Control Board (GPCB) regulates the manufacturing and processing units under the Water Act, 1974, Air Act, 1981 and the Environment (Protection) Act, 1986. The applicant is having permission from GPCB vide AWH 123809 dtd. 12.01.2023 valid upto 29.01.2028. In pursuance to the letter dtd. 06.03.2019 of the Ministry of Environment, Forest and Climate Change, which directed the Government of Gujarat to introduce a pilot market-based
regulation using Continuous Emission Monitoring System (CEMS), the GPCB GGST-introduced an Emission Trading Scheme for Particulate Matter (ETS-PM) in Surat. This has subsequently been extended to similar units in Ahmedabad.

Important Para

Discussion and findings

Para 12. At the outset, we would like to state that the provisions of both the CGST Act and the GGST Act are the same, except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the GGST Act.
Para 13. We have considered the submissions made by the applicant in their application for advance ruling as well as the submissions made both oral and written during the course of personal hearing. We have also considered the issue involved, the relevant facts & the applicant’s submission/interpretation of law in respect of question on which the advance ruling is sought.
Para 14. We find that the appellant is engaged in the business of manufacturing and selling of garments and made-up fabrics. On the instructions of the Ministry of Environment, Forest and Climate Change a pilot project of Emission Trading Scheme for Particulate Matter was started by the Gujarat Pollution Control Board (GPCB) . Under this scheme, the regulator i.e the GPCB sets a total cap on the emissions released by the participant industries. Emission permits equal to the cap are created and allocated to the participant industries. The industries can trade the permits with each other through a trading platform i.e NCDEX e-markets Limited (NeML). At the end of the compliance period, industries must have enough permits to cover their total emissions failing which they are liable to penalty. Thus, those who make large reduction in emissions are left with excess permits which they can trade with other industries for whom it very expensive to reduce emissions. The applicant is seeking a ruling as to whether they are liable to pay GST on the trading of Particulate Matter Permits (PM-permits).
Para 15. The first averment of the applicant is that the PM-permits are not tangible goods or services but rather represent an intangible right to offset emission. Therefore, PM-credits are privilege/entitlement given to the industries for reducing the emission in the course of their industrial activity. We find that CBIC haSissued Circular No. 34/8/2018-GST dtd. 01.03.2018 , amended vide Circular No. 46/20/2018-GST dtd. 06.06.2018, wherein it has been clarified that Priority Sector Lending certificates (PSLC) has been considered as goods and not securities by the Reserve Bank of India. Further, PSLC are akin to freely tradable duty scrips, Renewable Energy Certificates (REC), REP licences or replenishment licence, which attracted VAT. It was also clarified that the RECs and PSLCs are goods which are classified under heading 4907 and will accordingly attract GST @ 12%.
Para 16. 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. The REC mechanism provides an alternative voluntary route to a generator to sell his electricity from renewable sources just like conventional electricity and sell the green attribute separately to obligated entities to fulfil their Renewable Purchase Obligation (RPO). Trading of RECs is being undertaken on Power Exchanges on the last Wednesday of every month.
Para 17. Thus, from the above, it can be seen that both PSLCs and RECs arc 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 arc highly polluting. Thus, PM-permits would also fall under the category of goods and would be classified under Heading 4907.

Para 18. We also find that heading 4907 covers ‘documents of title’. The s reproduced below: 

HSN explanatory notes to 4907 explains that the characteristic of the products of this heading is that on being issued (if necessary, after completion and validation) by the appropriate authority, they have a fiduciary value in excess of the intrinsic value. These explanatory notes further explain that the products under heading 4907 comprise :
(A) xxx xx xx
(B) xxx xx xx
(F) Stock, share or bond certificates and similar documents of title Stock: These are formal documents issued, or for issue, by public or private bodies conferring ownership of, or entitlement to certain financial interests, goods or benefits named therein

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.

Para 18. The second averment made by the applicant that PM-permits are securities as they appear to fall under the wider term, “other marketable securities of a like nature in or of any incorporated company or other body corporate.” CGST Act defines securities as that which has the same meaning as assigned to it in Section 2(h) of the Securities Contracts (Regulation) Act, 1956. As per Section 2(h):

“securities” include
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate:
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any
mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;

The above definition is an inclusive definition, which defines the securities to include only the above. The applicant’s contention is that the PM-permits can be covered under ‘other marketable securities of a like nature’. In this connection, we would like to invoke the rule of ejusdem generis, a rule of interpretation, which has been relied upon by the courts in a large number of cases for interpreting statutes. 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.

Para 19. The next averment of the applicant is that the permits are only for regulatory compliance and any transactions related to them are not considered business income. They are nothing but incentives given by GPCB on the basis of capitalization in consonance with lesser emission of hazardous gases. Therefore, income received from sale of permits are not supply of goods or services in the course or furtherance of business. We do not agree with this contention of the applicant that buying and selling do not come under the ambit of business income We find 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.

Para 20. As regards the averment that sale of the permits is not in the course or furtherance of business, we observe that the applicant themselves have submitted that GPCB selects the industries based on the polluting nature of the industry to be part of the market and releases the government notification before the launch of the program in a district. All industries selected by GPCB are mandatorily required to be part of the market. As per Section 7 of the CGST Act, 2017, all forms of supply of goods to be made for a consideration by a person in the course or furtherance of business comes under the scope of supply. We find that in the case of Commissioner of Gift Tax v. P. Gheevarghese, Travancore Timbers & Products [1972] 83 ITR 403 (SC)/ (1972) 4 SCC 323, while explaining the meaning of the phrase “in the course of business” in the context of Gift Tax Act, 1958, it was observed that the phrase “in the course of carrying on of business” means that the gift should have some relationship with the carrying on of the business. 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.

Para 21. Lastly, the applicant has submitted that unlike financial scrips, PM- permits are non-tradable and cannot be freely transferred in the open market. Further, if permits are not sold it gets expired at the end of each compliance period and industry cannot reuse them to account for future emissions. Firstly, the averment that the assertion that the permits are not tradable is not correct, as the applicant has themselves submitted that these are traded on the NeML portal and any person who is participating in the ETS-PM scheme can purchase the permits. Further, the averment that the permits cannot be freely transferred in the open market but only in the emission market is also of no significance, as it is not a distinguishing feature of the Applicant. Therefore, the permits fall under HSN 4907 and are liable to GST. For the same reason, the fact that the permits have an expiry period is also of no significance.
Having held that the trading of PM-permits is liable to tax under GST under HSN 4907, we move on to the next question, as to what is the appropriate rate of GST. We would like to reproduce the relevant portions of the rate notification, viz.:

Notification No. 1/2017-CT (Rate) dated 28.6.2017, as amended
SCHEDULE II – 6%

From the above, it is seen that the appropriate rate for goods falling undcr Heading 4907 is 12 %o.’l’herefore, the applicable rate of GS’l’ for trading of PM-permits is 12%

Para-22 In view of the foregoing, we rule as under:

RULING

Q.1 As to whether trading of Particulate Matter Permits vide Bill of Supply No. 1 dtd. 05.10.2024 is liable to tax under the GST Act or not?
Ans:- Yes

Q.2 If yes, then is it Goods or Services under the GST Act?
(a) If it is goods, then as to whether trading activity of Particulate Matter Permits is covered by which HSN Code and rate of GST? 

Ans: Particulate Matter Permits are goods under GST and fall under HSN 4907. The applicable rate of GST is 12%.

(b) If it is services, then as to whether trading activity of Particulate Matter Permits is covered by which SAC code and rate of GST?

Ans: Not answered, in view of answer at (a) above.

Full Order