Telecos can claim tax credit for excise duties paid on towers, infra items: Supreme Court

In a relief to mobile service providers, the Supreme Court on Wednesday held that the telecom companies can take the benefit of CENVAT credit for payment of service tax on the output services rendered by them.

The CENVAT Credit Rules of 2004 refers to the set-off available to manufacturers if they utilise some specific inputs procured by them after paying excise duties for manufacturing their products.

The top court's significant verdict held that mobile service providers are also covered under the CENVAT credit rules as they 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).

A bench of Justices B V Nagarathna and N Kotiswar Singh settled a decade-old dispute which arose after the Bombay High Court order of 2014 which held that the mobile service providers (MSPs) were not entitled to claim CENVAT credit on mobile towers and prefabricated buildings.

The Delhi High Court in 2018, however, held that towers and other associated structures like PFBs are covered by the definition of "capital goods" and are "inputs" as defined under CENVAT Rules and hence, MSPs are entitled to input credit on excise duty paid towards installation of mobile towers and PFBs.

The dispute between the two high court rulings landed in the Supreme Court, which upheld the 2018 verdict of the Delhi High Court and ruled, "the tower and 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".

Justice Singh, who pronounced his first verdict since his elevation in the Supreme Court on July 18, was congratulated by Justice Nagarathna for delivering the verdict on the issue.

Justice Singh, in his 76-page verdict penned on behalf of the bench, said even though tower and the PFBs are not electrical items/equipment in the sense that these do not transmit signals, yet these are indispensable for the effective functioning of antenna by which the radio signals are received and transmitted and accordingly, used for providing the mobile telephonic services to the subscribers.

"Thus, towers and PFBs, though are not electrical equipment for transmission of signals, yet these are used for transmission of signal by the antennas. Therefore, there can be no denying of the fact that there is a close proximity and nexus between their functioning and the ultimate transmission of radio signals which is the output service rendered by the MSPs.

"Hence, the view of the CESTAT which has not been disturbed by the Bombay High Court does not commend our acceptance," the bench said.

It said the link between antenna and tower is almost inseparable for the effective functioning of antenna for providing mobile telecommunication service and it cannot be said that the nexus between antenna and tower is remote.

The bench added that their relationship is quite proximate and inseparable for proper functioning of the antenna. Agreeing with the conclusion arrived at by the Delhi High Court that towers and shelters (PFBs) support the antenna for effective transmission of mobile signals and thus enhance their efficiency, the bench said these articles are components or accessories of antenna are admittedly "capital goods" falling under the Rule 2(a)(A) of CENVAT Rules.

"Further, since these are used for providing output service, i.E., mobile telecommunication service, and since these are 'capital goods' received in the premises of the provider of output service as contemplated under Rule 3(1)(i), the Assessees would be entitled to CENVAT credit on the excise duties paid on these goods," the bench held.

The top court said without the tower, it is not possible to hoist the antenna at the requisite height and without it being securely fastened to the tower, the antenna cannot be kept firm and steady for proper receipt and transmission of radio signals.

"Thus, there cannot be any doubt that a mobile tower can be treated to be an accessory of antenna and BTS. Accordingly, since in terms of subclause (iii) of Rule 2(a)(A), all components, spares and accessories of such capital goods falling under sub-clause (i) would also be treated as capital goods, a mobile tower can also be treated as 'capital good'," it held.

It said the restricted meaning of accessory given by the CESTAT and not differed from by the Bombay High Court is not wholly correct in as much as the meaning of accessory can have different ascribed meanings.

Several mobile companies and network service providers have approached the top court seeking authoritative pronouncement in view of diverging views of the Delhi and Bombay high courts.