In a major relief to Telecom Industry, the Supreme Court in the case of M/S Bharti Airtel Ltd. Versus The Commissioner Of Central Excise, Pune has observed that the tower and pre-fabricated buildings (PFBs) are “goods” and not immovable property and since these goods are used for providing mobile telecommunication services, the inescapable conclusion is that they would also qualify as “inputs” under Rule 2(k) for the purpose of credit benefits under the CENVAT Rules.
The bench of Justice B.V. Nagarathna and Justice Nongmeikapam Kotiswar Singh have observed that tower being essential to rendering of output service of mobile telephony, these items certainly can be considered to be “inputs” akin to antenna. Without the towers and the PFBs, there cannot be proper service of mobile telecommunication. Hence, these certainly would come within the definition of “input” under Rule 2(k)(ii).
Table of Contents – Telecom Industry
Background
The core issue involved in this set of appeals is whether the mobile service providers (MSPs) who pay excise duties on various items for setting up their business more particularly for erection of mobile towers and peripherals like pre-fabricated buildings (PFBs) etc. can take the benefit of CENVAT Credit under the CENVAT Credit Rules, 2004 for the purpose of payment of service tax on the output services rendered by them. With respect to the same, conflicting views have been given by two High Courts, namely the High Court of Bombay and High Court of Delhi.
The Bombay High Court has ruled against the MSPs, favouring the Revenue, holding that MSPs are not entitled to CENVAT credit on mobile towers and prefabricated buildings.
The Delhi High Court has held to the contrary extending the benefit of CENVAT credit to the MSPs.
The decisions of both the High Courts have been challenged before this Court by the respective aggrieved parties, by way of the present set of appeals.
What is Rule 3(1) of the CENVAT Credit Rules, 2004?
Rule 3(1) of the CENVAT Credit Rules, 2004 enables a provider of taxable service to claim CENVAT credit paid on any “capital goods” or “input” received in the premises of the service provider. As to what are “capital goods” and “input” have been defined under Rule 2(a)(A) and the Rule 2(k) of the CENVAT Rules.
Are Mobile Towers And Prefabricated Buildings ‘Input’ under Rule 3(1) of the CENVAT Credit Rules, 2004? – Telecom Industry
If the mobile towers and prefabricated buildings, which are the items in issue here, qualify as “capital goods” or “inputs” received in the premises of the mobile service provider, the mobile service provider will be entitled to claim CENVAT credit which can be further used for paying service tax for the output services rendered by the mobile service provider.
While Rule 3(1) is the enabling provision for taking CENVAT credit, Rule (4) provides that the CENVAT credit in respect of “inputs” may be taken immediately on receipt of inputs in the factory of the manufacturer or in the premises of the service provider.
Decision of the Bombay High Court In Bharti Airtel Case
The Bombay High Court rejected the contention of the Assessees that they were entitled to credit of the duties paid on these items since BTS is a single integrated system consisting of tower, GSM or Microwave Antennas, PFB, isolation transformers, electrical equipments, generator sets, feeder cables etc., and these are to be treated as “composite system” classified under Chapter Heading 85.25 of the Tariff Act and hence be treated as “capital goods” and credit be allowed.
The Bombay High Court held that each of the components had independent functions and, hence, these cannot be treated and classified together as a single composite unit.
The Bombay High Court held that all capital goods are not eligible for credit and only those “capital goods” which fall under Rule 2(a)(A)(i) and (ii) relatable to the output services and mentioned in the CENVAT Rules will be available for credit.
The goods in question namely, the tower and parts thereof and PFB cannot be considered to be “capital goods” for the purpose of CENVAT credit as they are neither mentioned nor are components, spares or accessories of goods falling under any of the Chapters or Headings of the Central Excise Tariff Schedule as specified in Rule 2(a)(A).
The Bombay High Court held that admittedly, the goods in question do not fall within the definition of “capital goods”, since towers and parts thereof, once fastened and fixed to the earth, post their erection, become immovable and therefore cannot be classified as goods. Consequently, they cannot be considered capital goods as defined under Rule 2(a)(A).
Hence, the Assessee cannot claim the credit of duty paid on these items. The Court further clarified that only items specified as capital goods under Rule 2(a)(A) would be eligible for CENVAT credit.
The Bombay High Court further held that the goods in question would not be capital goods for the purpose of CENVAT Credit as they are neither components, spares or accessories of goods falling under any of the chapters or headings of the Central Excise Tariff Schedule as specified in sub-clause (i) of the definition of “capital goods”. Thus they are not covered by sub-clause (iii) of Rule 2(a)(A).
Decision of the Delhi High Court In Bharti Airtel Case
The Delhi High Court noted that all components, spares and accessories of such capital goods under Chapter 85, would also be treated as capital goods since CENVAT credit is available to accessories of capital goods.
The Delhi High Court then concluded that tower and PFB/Shelter support the BTS for effective transmission of mobile signals and therefore, enhance the efficiency of BTS and antenna. The towers and shelters, therefore, act as components and parts and in alternative as accessories to the BTS and antenna and thus are covered by the definition of “capital goods”.
Conclusion
The Apex Court held that ‘input’ in relation to manufacturing of final product would mean not only those which are directly used but also indirectly used not only for manufacture of final product whether contained in the final product or not but also used in relation to manufacture of final product or for any of other purpose.
Even if the definition of “input” with reference to output service may not have been explained in an expansive manner as in the case of manufacture of final product under Rule 2(k)(i), the definition of “input” with reference to providing output service under Rule 2(k)(ii) need not be given a restrictive meaning as sought to be done by the CESTAT by holding that tower is not used directly for transmission of signal.
The court held that since the subject matter is same, i.e., what amounts to “input” though the end use is for two different products, one tangible, in the form of final manufactured product, and one intangible i.e., output service, applying similar tests to determine what amounts to “input” would not be impermissible.
“We are unable to agree with the view of the Bombay High Court and accordingly, set aside the judgment in Bharti Airtel (supra) rendered by it and allow the connected appeals,” the court said.
Case Details
Case Title: M/S Bharti Airtel Ltd. Versus The Commissioner Of Central Excise, Pune
Case No.: Civil Appeal Nos. 10409-10410 Of 2014
Date: 20/11/2024
