Supreme Court Allows CENVAT Credit on Mobile Towers and Prefabricated Buildings: Bharti Airtel vs. Commissioner of Central Excise (20 November 2024)

Date of the Judgment: 20 November 2024
Citation: 2024 INSC 880
Judges: B.V. Nagarathna, J., Nongmeikapam Kotiswar Singh, J. (authored the judgment).

Can mobile service providers claim tax credit on the infrastructure they use, like mobile towers and prefabricated buildings? The Supreme Court of India recently addressed this crucial question in a batch of appeals, resolving conflicting views from different High Courts. This judgment clarifies whether these structures qualify as “capital goods” or “inputs” under the Central Value Added Tax (CENVAT) Credit Rules, 2004, impacting how telecom companies manage their tax liabilities.

Case Background

The core dispute revolves around whether mobile service providers (MSPs) can avail CENVAT credit on excise duties paid for items like mobile towers and prefabricated buildings (PFBs). These items are essential for setting up their infrastructure and providing seamless telecom services. The conflict arose because the Bombay High Court ruled against the MSPs, while the Delhi High Court favored them, leading to the Supreme Court intervention to settle the matter.

Mobile service providers typically offer SIM cards, which, once activated, allow subscribers to access wireless telecommunication services. To provide these services, MSPs operate infrastructure such as cell towers, Base Transceiver Systems (BTS), network equipment, prefabricated buildings (PFBs), electricity generators, and battery backups. These components ensure uninterrupted service to subscribers. Some providers only offer passive infrastructure support, consisting of towers and associated ancillaries.

The mobile telecommunication process begins when a subscriber uses a mobile handset to make a call. The handset sends a signal to an antenna on a tower, which then transmits it to the Base Station Sub-system (BSS). The BSS converts the signal into a digital format that can be processed by the network. The processed signal is then routed to the destination through a series of towers. Constant electricity is crucial for this process, hence the use of generators and UPS batteries housed in PFBs.

Mobile towers are purchased in either Completely Knocked Down (CKD) or Semi-Knocked Down (SKD) condition and installed at appropriate sites. Antennas are then fixed to these towers. The excise duties paid on these towers and PFBs are what the MSPs seek to claim as CENVAT credit, which they then use to pay service tax on their output services.

Timeline

Course of Proceedings

The dispute began with a show cause notice issued to Bharti Airtel by the Commissioner of Excise, alleging that the company had wrongly availed CENVAT credit on items that did not qualify as “capital goods” under the CENVAT Credit Rules, 2004. The Commissioner rejected Bharti Airtel’s claims. The Customs Excise and Service Tax Appellate Tribunal (CESTAT) upheld the Commissioner’s view.

The Bombay High Court, in its ruling on 26.08.2014, upheld the CESTAT’s decision, stating that mobile towers and other components do not fall under the definition of “capital goods” or “inputs.” This decision was reiterated in subsequent cases involving Vodafone India Limited, Tata Teleservices Ltd., Idea Cellular Ltd., and Reliance Communications.

On the contrary, the Delhi High Court, in its decision on 31.10.2018, held that towers and associated structures are covered by the definition of “capital goods” and “inputs,” thus allowing MSPs to claim input credit. This judgment was challenged before the Supreme Court, along with the Bombay High Court’s decision.

Legal Framework

The case hinges on the interpretation of the CENVAT Credit Rules, 2004, specifically:

• Rule 3(1): This rule allows a provider of taxable service to claim CENVAT credit on duties paid on “capital goods” or “inputs” received in their premises.
• Rule 2(a)(A): This rule defines “capital goods” as specific goods falling under various chapters of the Excise Tariff Act, including Chapter 82, 84, 85, 90, and certain headings under Chapter 68, along with pollution control equipment and their components, if used in the factory of the manufacturer or for providing output service.
• Rule 2(k): This rule defines “input” as all goods, except certain fuels and motor vehicles, used in or in relation to the manufacture of final products or for providing any output service.
• Rule 4: This rule specifies that CENVAT credit on inputs can be taken immediately upon receipt of the inputs in the premises of the service provider.

The core issue is whether mobile towers and prefabricated buildings (PFBs) qualify as either “capital goods” or “inputs” under these rules. If they do, MSPs are entitled to claim CENVAT credit on the excise duties paid on them.

The CENVAT rules are framed under the Central Excise Act, 1944, which is an act to consolidate and amend the law relating to central duties of excise.

Arguments

Submissions by the Mobile Service Providers (MSPs):

• Towers and PFBs as Capital Goods: MSPs argued that mobile towers and PFBs are “capital goods” as they are essential for providing telecom services. They contended that towers are accessories to antennas, which fall under Chapter 85 of the Excise Tariff Act and are thus “capital goods.” They also argued that PFBs are necessary to house equipment that supports the functioning of the antennas.
• Towers and PFBs as Inputs: MSPs submitted that towers and PFBs should be considered “inputs” as they are used for providing output services. They argued that the definition of “input” under Rule 2(k) is broad enough to include all goods used for providing any output service.
• Integrated System: MSPs contended that the entire telecom system, including towers, antennas, and PFBs, should be considered as a single integrated unit.
• Immovable Property Argument: MSPs argued that towers and PFBs are not immovable properties as they can be dismantled and relocated. They cited various cases to support this argument.
• Immediate Credit: MSPs argued that they are entitled to CENVAT credit as soon as the goods are received in their premises, as per Rule 4(1) of the CENVAT Rules.

Submissions by the Revenue Department:

• Towers as Immovable Property: The Revenue argued that mobile towers, once erected, become immovable property and thus cannot be considered “goods” or “capital goods” under the CENVAT rules.
• Not Components of Antennas: The Revenue contended that towers are not components or accessories of antennas. They argued that towers have independent functions and do not form part of the composition of antennas.
• Independent Functions: The Revenue argued that towers, antennas, and PFBs have independent functions and cannot be treated as a single integrated unit.
• Not Inputs: The Revenue argued that only a manufacturer can avail credit on inputs and not a service provider. They also contended that towers and PFBs are not “inputs” for providing mobile services.
• Restricted Definition: The Revenue argued that only those “capital goods” which are specifically mentioned under Rule 2(a)(A) are eligible for CENVAT credit.

The core of the dispute lies in whether the mobile towers and prefabricated buildings can be classified as “capital goods” or “inputs” under the CENVAT rules. The MSPs argued for a broad interpretation, emphasizing their essential role in service provision, while the Revenue argued for a narrow interpretation, focusing on the physical nature of the items and the specific wording of the rules.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court addressed the following core issues:

1. Whether mobile towers, parts thereof, and prefabricated buildings (PFBs) are “capital goods” within the meaning of the CENVAT Credit Rules, 2004.
2. Whether these items can be considered “inputs” for providing output services under the same rules.
3. Whether the towers and PFBs are immovable property.
4. Whether the MSPs are entitled to CENVAT credit on the excise duties paid on these items.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on several cases and legal provisions to reach its decision. These are categorized by the legal point they address:

Definition of “Goods”

• Article 366 (12) of the Constitution of India – Defines “goods” to include all materials, commodities, and articles.
• Section 2(7) of the Sale of Goods Act, 1930 – Defines “goods” as every kind of movable property.
• Section 2(52) of The Central Goods And Services Tax Act, 2017 – Defines “goods” as every kind of movable property.
• Section 2(d) of The Central Sales Tax Act, 1956 – Defines “goods” as all materials, articles, commodities and all other kinds of movable property.
• Section 2(22) of The Customs Act, 1962 – Defines “goods” to include vessels, aircrafts, vehicles, stores, baggage, currency, negotiable instruments, and any other kind of movable property.
• Section 2(i) of The Competition Act, 2002 – Defines “goods” as defined in the Sale of Goods Act, 1930.
• Section 2(13) of The Motor Vehicles Act, 1988 – Defines “goods” to include live-stock and anything other than equipment ordinarily used with the vehicle.
• Section 2(f) of The Micro, Small And Medium Enterprises Development Act, 2006 – Defines “goods” as every kind of movable property other than actionable claims and money.
• Section 2(14) of The Bureau of Indian Standards Act, 2016 – Defines “goods” includes all kinds of movable properties under the Sale of Goods Act, 1930.
• Section 2(21) of The Consumer Protection Act, 2019 – Defines “goods” as every kind of movable property.

Movable vs. Immovable Property

• Section 3(36) of the General Clauses Act, 1897 – Defines “movable property” as property of every description except immovable property.
• Section 3(26) of the General Clauses Act, 1897 – Defines “immovable property” to include land, benefits arising out of land, and things attached to the earth.
• Section 3 of the Transfer of Property Act, 1882 – Defines “immovable property” and “attached to the earth”.
• Commissioner of Central Excise, Ahmedabad v. Solid and Correct Engineering Works & Ors (2010) 5 SCC 122 – Applied the intendment and functionality test to determine whether an article is movable or immovable. (Supreme Court of India)
• Sirpur Paper Mills Ltd. v. Collector of Central Excise, Hyderabad (1998) 1 SCC 400 – Applied the marketability test to determine if a property is movable or immovable. (Supreme Court of India)
• Narne Tulaman Manufacturers Pvt. Ltd. Hyderabad v. Collector of Central Excise, Hyderabad (1989) 1 SCC 172 – Discussed the concept of immovable property. (Supreme Court of India)
• Quality Steel Tubes (P) Ltd. v. Collector of Central Excise, U.P. (1995) 2 SCC 372 – Applied the marketability test to determine if a property is movable or immovable. (Supreme Court of India)
• Mittal Engineering Works (P) Ltd. v. Collector of Central Excise, Meerut (1997) 1 SCC 203 – Applied the marketability test to determine if a property is movable or immovable. (Supreme Court of India)
• Triveni Engineering & Indus Ltd. v Commissioner of Central Excise (2000) 7 SCC 29 – Applied the marketability test and permanency test to determine if a property is movable or immovable. (Supreme Court of India)
• T.T.G Industries Ltd. Vs. CCE (2004) 4 SCC 751 – Applied the permanency test to determine if a property is movable or immovable. (Supreme Court of India)
• Municipal Corporation of Greater Bombay v. Indian Oil Corporation, 1991 Supp (2) SCC 18 – Applied the permanency test to determine if a property is movable or immovable. (Supreme Court of India)
• Commissioner of Central Excise Versus Virdi Brothers and Ors. (2007) 15 SCC 24 – Relied on a circular regarding items assembled at site. (Supreme Court of India)
• CCE Versus Globus Store Pvt. Ltd. (2011) 15 SCC 200 – Relied on a circular regarding items assembled at site. (Supreme Court of India)

Definition of “Accessory”

• M/s. Annapurna Carbon Industries Co. v. State of Andhra Pradesh (1976) 2 SCC 273 – Defined “accessory” as an object that adds to the effectiveness of something else. (Supreme Court of India)
• Black’s Law Dictionary, (Fifth Edition) – Defined “accessory” as anything which is joined to another thing as an ornament or to render it more perfect.
• Oxford Dictionary – Defined “accessory” as an extra piece of equipment that is useful but not essential or that can be added to something else as a decoration.

Definition of “Input”

• Member, Board of Revenue, West Bengal Vs. M/s. Phelps & Co. (P) Ltd. (1972) 4 SCC 121 – Discussed the meaning of “for use by him in the manufacture of goods for sale”. (Supreme Court of India)
• Industrial Machinery Manufacturers Pvt. Ltd. v. State of Gujarat (1965) 16 STC 380 (Guj) – Considered humidifiers as machinery for use in manufacturing. (Gujarat High Court)

Other Relevant Cases

• Tata Teleservices Ltd. Vs. Bharat Sanchar Nigam Ltd. & Ors. (2008) 10 SCC 556 – Discussed the principles of cellular networks and interdependence of towers and antennas. (Supreme Court of India)
• Saraswati Sugar Mills v. Commissioner of Central Excise, Delhi -III (2014) 15 SCC 625 – Defined “component” as something that goes into the composition of another article. (Supreme Court of India)
• Commissioner of Central Excise, Bolpur Vs. M/s Ratan Melting & Wire Industries (2008) 14 SCR 653 – Held that circulars are not binding on the court. (Supreme Court of India)
• Commissioner of Central Excise, Mumbai, Vs. Hindoostan Spinning and Weaving Mills Ltd. & anr (2009) 14 SCC 221 – Reiterated that circulars are not binding on the court. (Supreme Court of India)
• Ranadey Micronutrients & Ors. v. Collector of Central Excise (2022) 18 S.C.R. 28 – Held that departmental circulars contrary to the statute must be withdrawn. (Supreme Court of India)

Authorities Table

Judgment

The Supreme Court, after analyzing the facts, legal provisions, and previous judgments, ruled in favor of the mobile service providers (MSPs). The Court held that mobile towers and prefabricated buildings (PFBs) are indeed eligible for CENVAT credit.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court relied on the following authorities in its reasoning:

• Solid and Correct Engineering (supra)*: The Court followed this case, applying the intendment and functionality test to determine that towers and PFBs are movable property.
• Triveni Engineering (supra)* and Sirpur Paper Mills Ltd. (supra)*: The Court followed these cases, applying the marketability test to determine that towers and PFBs are movable property.
• Annapurna Carbon Industries Co. (supra)*: The Court followed this case to define “accessory” as an object that adds to the effectiveness of something else.
• Phelps & Co. (supra)*: The Court followed this case to interpret “use” in the context of manufacturing and service provision.
• Tata Teleservices Ltd. (supra)*: The Court relied on this case to highlight the interdependency of towers and antennas in cellular networks.
• Saraswati Sugar Mills (supra)*: The Court distinguished this case, clarifying that the definition of “component” is not limited to items that form part of the composition of another article.
• Ratan Melting & Wire Industries (supra)* and Hindoostan Spinning and Weaving Mills Ltd. (supra)*: The Court followed these cases to reiterate that circulars are not binding on the court.
• Ranadey Micronutrients (supra)*: The Court followed this case to hold that departmental circulars contrary to the statute must be withdrawn.
• The Court also considered the definitions of “goods,” “movable property,” and “immovable property” from various statutes, including the Sale of Goods Act, General Clauses Act, and Transfer of Property Act.

The Court specifically overruled the Bombay High Court’s decision in Bharti Airtel (supra)*, stating that it failed to consider the relevant aspects of movability, marketability, and functionality of the towers and PFBs. The Court also noted that the Bombay High Court did not consider the decision of the Supreme Court in Solid and Correct Engineering (supra)*. The Court approved the Delhi High Court’s decision in Vodafone (supra)*.

Ratio Decidendi

The ratio decidendi of the Supreme Court’s judgment can be summarized as follows:

• Mobile towers and prefabricated buildings (PFBs) are “goods” as they are movable property and can be dismantled and relocated.
• They qualify as “capital goods” because they are accessories to antennas and BTS, which are “capital goods” under Chapter 85 of the Excise Tariff Act.
• They also qualify as “inputs” as they are used for providing output services.
• The definition of “capital goods” and “inputs” under the CENVAT Credit Rules, 2004, should be interpreted broadly to include items essential for providing output services.
• Circulars and departmental instructions cannot override or be inconsistent with the statutory provisions.
• Service providers are entitled to CENVAT credit on duties paid on “capital goods” and “inputs” used for providing their output services.

Flowchart of the Decision-Making Process

Conclusion

The Supreme Court’s judgment in the case of Bharti Airtel vs. Commissioner of Central Excise is a landmark decision that has significant implications for the telecom industry. By allowing CENVAT credit on mobile towers and prefabricated buildings (PFBs), the Court has provided much-needed clarity on the definition of “capital goods” and “inputs” under the CENVAT Credit Rules, 2004. This decision will enable mobile service providers (MSPs) to manage their tax liabilities more effectively and will likely lead to reduced operational costs, which may ultimately benefit consumers.

The judgment also reinforces the principle that departmental circulars and instructions cannot override statutory provisions and that a broad interpretation should be given to the definition of “inputs” to include items essential for providing output services. This decision will have a lasting impact on the interpretation of indirect tax laws and will set a precedent for similar cases in the future.

The Supreme Court’s decision is a victory for mobile service providers, as it resolves the long-standing dispute over CENVAT credit eligibility and provides a clear legal framework for claiming input tax credits on essential infrastructure items. This will promote growth in the telecom sector and ensure a more equitable tax environment.