2025 (2) TMI 319 - AAR - Customs

Taxability - classification of import goods - Renewable Energy Certificates (I-RECs) - intangible goods or not - taxable under the Customs Act 1962 when imported in the electronic form or classifiable as goods under the Customs Tariff Act 1975 when they are imported into India in the physical form? - HELD THAT - Both I-RECs and software are intangible assets. Software exists as digital code or programs used for various applications while I-RECs represent proof of renewable energy generation without physical form. Both can be digitally transferred and traded across borders. Software is often distributed electronically and I-RECs are managed and traded through digital platforms to support renewable energy initiatives globally. Software may be subject to licensing fees or subscriptions while l-RKCs are bought and sold to support renewable energy projects worldwide. The Ld. Advocate for the applicant is right in its contention that in the instant case. I- RECs in question would qualify as documents of title conferring ownership of goods or benefits on the Applicant. From the nature of the document in question it is evident that the I-RECs assign ownership to the renewable electricity generated and its use. In other words the I-RECs certify that the bearer owns one MWh of electricity generated from a renewable energy resource. Further it Can be seen that these certificates provide benefit to the applicant inasmuch as these certificates can be used by applicant to offset their organisation s carbon emissions. Circular No. 15/2011-Customs dated 18-3-2011 inter alia clarifies in para 2 thereof as follows Tariff Item 49070030 of Heading 4907 refers directly to Documents of title conveying the right to use Information Technology software . Hence as per the said Rule 1 mentioned above such paper licenses which are essentially documents conveying the right to use such IT software merit classification under CTH 49070030 - In the case at hand also in a like manner I-RECs are documents of title which coney the right/ownership to the bearer/applicant to one MWh of electricity generated from a renewable energy resource. Conclusion - i) I-RECs downloaded in the electronic form are intangible goods and will not be classifiable as goods under the Customs Tariff Act 1975. Consequently it will not be subject to duties of Customs. ii) The Customs Act 1962 or the Customs Tariff Act 1975 do not necessarily mandate the import of I-RECs in the physical form. iii) The I-RECs when imported in a physical form qualify as documents of title and are therefore classifiable under Heading 49.07 of the First Schedule to the Customs Tariff Act 1975 and specifically under the Tariff Item 4907 00 90.

Summary

The judgment by the Customs Authority for Advance Rulings (CAAR) in Mumbai addresses three primary questions concerning the classification and taxation of International Renewable Energy Certificates (I-RECs) under the Customs Act, 1962, and the Customs Tariff Act, 1975. The applicant, M/s. United Breweries Limited, sought clarity on the classification of I-RECs as goods, their requirement to be imported in physical form, and their classification when imported physically.

Issues Presented and Considered:

The core legal questions considered were:

• Whether I-RECs, when imported in electronic form, qualify as intangible goods and are subject to customs duties under the Customs Act, 1962.
• Whether the Customs Act, 1962 mandates the import of I-RECs in a physical form.
• Whether I-RECs, when imported in physical form, are classifiable as goods under the Customs Tariff Act, 1975.

Issue-Wise Detailed Analysis:

Issue 1: Classification of I-RECs as Intangible Goods

• Relevant Legal Framework: The definition of "goods" under Section 2(22) of the Customs Act, 1962, includes tangible and intangible properties. The Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh established that intangible items could be classified as goods if they have utility, are capable of being bought and sold, and can be transmitted, transferred, delivered, stored, and possessed.
• Court's Interpretation: The Court found that I-RECs, being electronically transferable and having utility for fulfilling Renewable Purchase Obligations, meet the criteria for classification as intangible goods.
• Key Evidence and Findings: I-RECs are used to offset carbon emissions and are traded electronically, similar to software, which has been previously classified as intangible goods.
• Application of Law to Facts: Applying the principles from Tata Consultancy Services, the Court concluded that I-RECs qualify as intangible goods.
• Conclusion: I-RECs imported in electronic form are intangible goods and are not subject to customs duties due to the absence of a mechanism for imposing such duties on intangible goods.

Issue 2: Mandate for Physical Import of I-RECs

• Relevant Legal Framework: The Customs Act, 1962, does not explicitly mandate the import of goods in physical form.
• Court's Interpretation: The Court noted that the Act does not require intangible goods to be imported physically.
• Conclusion: There is no requirement under the Customs Act, 1962, for I-RECs to be imported in physical form.

Issue 3: Classification of I-RECs in Physical Form

• Relevant Legal Framework: The Customs Tariff Act, 1975, and the Harmonized System of Nomenclature (HSN) provide for the classification of goods. Heading 49.07 covers documents of title, which include certificates like I-RECs.
• Court's Interpretation: I-RECs, when imported physically, are documents of title that confer ownership of renewable energy.
• Application of Law to Facts: The Court applied the classification principles to determine that I-RECs fall under Heading 49.07, specifically under Tariff Item 4907 00 90.
• Conclusion: I-RECs imported in physical form are classifiable under Heading 49.07 of the Customs Tariff Act, 1975, and are subject to customs duties.

Significant Holdings:

• The Court affirmed that electronically downloaded I-RECs are intangible goods and not subject to customs duties due to the lack of a mechanism for such duties.
• There is no mandate for the physical import of I-RECs under the Customs Act, 1962.
• Physically imported I-RECs are classifiable under Heading 49.07 as documents of title and are subject to customs duties.

The judgment clarifies the classification and tax implications of I-RECs, distinguishing between their electronic and physical forms and aligning with existing legal precedents on intangible goods.