High Court Allows VAT Appeals on Renewable Energy Certificates

The appeals were filed under Section 53 of the Madhya Pradesh Value Added Tax Act, 2002 challenging orders passed by the Madhya Pradesh Commercial Tax Appellate Board, Indore, which had affirmed the assessment and first appellate orders for Financial Years 2012-13 and 2013-14. The issue pertaining to taxing of Renewable Energy Certificates under the VAT Act. The Assessing Officer had assessed the certificates under Entry 3, Part II, Schedule II of the VAT Act as intangible goods like copyright, patent, or license and charged tax at 5% rate. The first appellate authority and the Appellate Board confirmed the assessment orders, resulting in the filing the present VAT appeals before the High Court.

It was argued that each certificate represents one megawatt-hour of electricity generated from renewable sources and injected into the grid, issued in dematerialised form by the Central Agency after verification from the State Load Dispatch Centre. The certificates are exchanged on the Indian Energy Exchange and can be sold only once to an obligated party for discharge of Renewable Purchase Obligations. Once sold, the certificate is extinguished and cannot be resold or traded again. It was submitted that the nature of such certificates is different from patents, copyrights, and licenses, which can be transferred multiple times. The contention was that they should be classified under Entry 13, Schedule I of the VAT Act as electrical energy, which is exempt from tax, instead of being treated as intangible goods under Entry 3, Part II, Schedule II. The respondents raised objections and argued that the sale of certificates is not a sale of electricity per se, but a tradable certificate, and hence the classification done by the authorities was correct.

Issue Raised: Whether Renewable Energy Certificates are to be classified as intangible goods under Entry 3, Part II, Schedule II of the VAT Act, or as electrical energy under Entry 13, Schedule I, exempt from tax.

HC Held: The Court examined Section 86 of the Electricity Act, 2003 and the Regulations of the Central and State Commissions issued in 2010. It was observed that under these regulations, Renewable Energy Certificates are issued by the Central Agency for one megawatt-hour of electricity generated and injected into the grid by eligible entities. The certificates are sold to obligated entities in order to meet Renewable Purchase Obligations and once sold, they stand extinguished. The Court recorded that tangible or intangible goods like patents, copyrights, and licenses can be sold several times, whereas Renewable Energy Certificates can only be used once and cannot be treated as intangible property of the kind covered by Entry 3, Part II, Schedule II of the VAT Act.

In view of these findings, the High Court held that the classification adopted by the Appellate Authority and confirmed by the Appellate Board was incorrect. The orders dated 28.01.2020 and 25.06.2020 were set aside. The questions of law were answered in favour of the appellant. Both the Value Added Tax Appeals were allowed. The Court concluded that Renewable Energy Certificates are to be treated under Entry 13, Schedule I of the VAT Act as electrical energy, exempt from tax, and directed that a copy of the order be kept in the connected appeal also.

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