Taxation of Carbon Credits

[akk]

Query Income  from sale of CER's ;
A company has set up Hydro Power Project and it's profits are eligible for deduction U/s 80 IA.

The provisions of Section 80 IA provides for allowing deduction in respect of profits and gains derived  from the eligible business.

During the course of income tax assessment, Assessing Officer treated the sale of CERs as ancillary profits and  not profits derived from eligible business and hence disallowed deduction U/s 801A.

Our submission :

The  CERs are issued based on  net electricity generated and hence do not fall in the category of  investment linked  incentives OR Profit Linked incentives.

The  origin of CER's are traced to the manufacturing activity and hence it  is a source not beyond the first degree   and are directly linked with the industrial activity ie. Generation of power. 
   
Thus  income from sale of   CER's, being revenue   having direct relation with the business of the company are  taxable as per clause (i) of Section 28 i.e. Income as business income. And hence eligible for deduction U/s 80 IA.

Please advice....

[pawansingla]

Your contention is correct. This income is arising out of operational income .Kindly go through judgment of Nirma for allowing deduction u/s 80IA on interest received from debtors.The ratio will help you.

[rajul5234]

i think you are making a correct claim. though no direct decision is there, i suppose  analogy of ratio of gujarat high court decision   at 283 I T R 402  can support your view.
interpretation by the court for the phrase " derived from business " should help you.

R. K. Patel.

[vdboss]

Following additional points may be considered:

- The Institute of Chartered Accountants of India ('ICAI') has in its draft Guidance Note on Accounting for Self-generated Certified Emission Reductions (CERs), observed that CERs are inventories of the generating entity as they are generated and held for the purpose of sale in the ordinary course of business.

- A CER is the technical term for the Carbon Credits output of CDM projects, as defined by the Kyoto Protocol. Generating hydroelectric power, which has low carbon emission, is eligible project under the CDM Mechanism. Thus it is business activity of generating electricity by the assessee that leads to earning income from sale of CER. CER cannot be equated with duty drawback. As against duty drawback / DEPB, the CERs are being issued based on net electricity generated in a particular period. Thus it needs to be appreciated that methodology of calculation of DEPB / duty drawback is altogether different from that of CERs, which is directly linked to generation of electricity.   

[PANKAJ JAIN]

One of the argument:

By-product :


It can be safely concluded without any hesitation that the earning of carbon credit is primarily linked with the very activity of generation of electricity and it cannot be separated from the same under any circumstances. It can also rightly be equated with any by-product realized as a direct result of manufacturing operation which is sold / disposed off without any further process or activity. 

In view of above, the income from carbon credit should be equated / treated at par with income from sale of a by-product realized as a direct result of manufacturing operation.

There are several decisions of Supreme Court and various High court in respect of allowability of 80IA deduction in respect of income from by product generated during the course of manufacturing activity.

The Supreme Court in the case of Liberty India (317 ITR 218) has observed that the provisions of section 80HH, 80I, 80IA and 80IB have the common scheme. You can therefore rely on the judicial pronouncement wherein income from sale of scrap/by-product has been held to be income derived from an eligible industrial undertaking for the purpose of deduction under section 80HH/ 80I/ 80IA/ 80IB.

All the Best

[satyanveshi]

All the above arguments have been considered by Hyderabad ITAT in the case of My Home Power Limited and finally it has been held by the ITAT that  the proceeds  received by selling CERs i.e. carbon credits are capital receipts and accordingly not taxable. The same is reported in 27 taxman.com 27. Till a High Court reverses this decision, the same can be utilised by everybody to strengthen the argument that carbon credits are not revenue receipts to attract tax liability.  However,  the alternative argument that the deduction u/s 80IA should be extended to carbon credits also is not answered by ITAT as it was felt that this argument is academic in nature. Therefore, we have to wait till a decision comes on the issue of allowability of 80IA deduction on CERs.

[pawansingla]

IT: Income on sale of Certified Emission Reduction/carbon credit which is admittedly a benefit arising out of business of assessee, would fall within definition of 'income' under section 2(24)(vd) and, thus, it is chargeable to tax

IT: Even though income on sale of Certified Emission Reduction/carbon credit would form part of profit and gains of business, yet it cannot be treated as profit 'derived from' industrial undertaking and, therefore, assessee was not entitled for deduction under section 80-IA in respect of said income

■■■

[2014] 47 taxmann.com 416 (Cochin - Trib.)

IN THE ITAT COCHIN BENCH

Apollo Tyres Ltd.

v.

Assistant Commissioner of Income-tax, Cir. 1(1), Kochi*

N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT (TP) APPEAL NO. 4 (COCH.) OF 2013
[ASSESSMENT YEAR 2008-09]
MARCH  7, 2014
II. Section 2(24) of the Income-tax Act, 1961 - Income - Definition of (Carbon credit) - Assessment year 2008-09 - Whether income on sale of Certified Emission Reduction/carbon credit which is admittedly a benefit arising out of business of assessee, would fall within definition of 'income' under section 2(24)(vd) and, thus, it is chargeable to tax - Held, yes [Para 53] [In favour of revenue]

III. Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings (Computation of deduction) - Assessment year 2008-09 - Whether even though income on sale of Certified Emission Reduction/carbon credit would form part of profit and gains of business, yet it cannot be treated as profit 'derived from' industrial undertaking and, therefore, assessee was not entitled for deduction under section 80-IA in respect of said income - Held, yes [Para 57] [In favour of revenue]

[satyanveshi]

Since the Hyd ITAT decision is upheld by High Court of AP which was reported in 365 ITR 82, the decision of Cochin Bench need not be followed and the decision of AP High Court will have precedent value till it is reversed by Supreme Court. Further, in the recent Finance Act also, legislature is silent on this aspect and only in DTC, a provision was incorporated in the section equivalent to sec. 28 that carbon credits are taxable. Anyhow, the issue will take an interesting twist, once  the Kerala High court uphelds the decision of ITAT Cochin bench in future. Till that time the public at large  will argue the AP High Court decision is correct  and the revenue will take support from the decision of Cochin Bench. This will open another pandoras box...............

[pawansingla]

That,s correct.let see how the cat jumps.

[pawansingla]

WHETHER THIS AMENDMENT INCLUDES CARBON CREDIT FOR PURPOSE OF INCOME ?
Following sub-clause (xviii) shall be inserted after sub-clause (xvii) of clause (24) of section 2 by the Finance Act, 2015, w.e.f. 1-4-2016 :
(xviii)       assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43;

[camanojgupta]

In My Home Power Ltd v. Dy. CIT (2013) 50 (II) ITCL 412 (Hyd B-Trib) : (2013) 21 ITR 186 (Hyd B-Trib) : (2013) 151 TTJ (Hyd B-Trib) 616. Since upheld by High Court in the case of CIT v. My Home Power Ltd 365 ITR 82.
In the case of Ambika Cotton Mills Ltd. v. Dy. CIT (2014) 55 (II) ITCL 12 (Chen C-Trib)
and
In Sri Velayudhaswamy Spinning Mills (P.) Ltd. v. Deputy Commissioner of Income-tax ITA No 582/Mds/2013, dt. 12-6-2013 (Chenn B-Trib),
The Carbon Credits Have been held to capital receipts not liable to be taxed.

[pawansingla]

My question was " whether this amendment will include carbon credits also ?

[camanojgupta]

I think no Carbon Credit is not subsidy.