CENVAT Credit on mobile towers and pre-fabricated buildings

The Hon’ble Supreme Court in the case of M/S BHARTI AIRTEL LTD. VERSUS THE COMMISSIONER OF CENTRAL EXCISE, PUNE - 2024 (11) TMI 1042 - SUPREME COURT, has held that the tower and prefabricated buildings (PFBs) would qualify as inputs.

ISSUE:

Whether the mobile service providers (MSPs) who pay excise duties on various items for setting up their business more particularly for the 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.

BACKGROUND:

The aforementioned issue was dealt with by Bombay High Court as well as Delhi High Court on two separate occasions wherein the Bombay High Court rejected the plea of the MSPs whereas the Delhi High Court accepted it. Both the decisions were challenged in front of the Supreme Court and thereby settled in this case.

ANALYSIS:

In order to check if the mobile tower and its components are eligible for the benefit of CENVAT Credit, they must fall within the definition of “Capital Goods” and “inputs” under Rule 2(a)(A) and Rule 2(k) of the CENVAT Rules, 2004 respectively.

Capital Goods:

(A) It was contended that since the towers are affixed to the land, they fall under the category of immovable property and thus, are not eligible to be identified as ‘Goods’ and further as ‘Capital Goods’ under the CENVAT rules. However, the Supreme Court held that merely because certain articles are attached to the earth, does not necessarily mean that they are immovable properties.

The court reiterated the following tests in order to identify a property as movable or immovable:

1. Functionality Test: Check the function performed by the good/property
2. Permanency Test: Check if the property is built with an intention of staying there permanently or can it be dismantled and relocated without damage
3. Marketability Test: Check if it can be removed, marketed and sold in the market

(B) A capital Good is eligible for CENVAT only if it falls under the categories mentioned under Rule 2(a)(A) of CENVAT Rules, 2004. Rule 2(a)(A)(i) covers Antenna as well as the Base Transceiver System (BTS) as they fall under Chapter 85 of Central Excise Tariff Act and thus are eligible for CENVAT Credit. On the other hand, Accessories of Goods mentioned under Rule 2(a)(A)(i) are eligible for CENVAT Credit under Rule 2(a)(A)(iii). The court held that since Tower provide stability and height to the Antenna and on the other hand, PFB ensures that there is uninterrupted supply of electricity as well as stores BTS and thus, they are accessories of Antenna and BTS as they add to their convenience and effectiveness. Therefore, the Tower and PFB are included under Rule 2(a)(A) of the CENVAT Rules.

Input:

The court held that ‘Input’ under Rule 2(k) mean all goods used for providing output services. Since the tower and PFB are used for providing output service, i.e. mobile service, these can be considered to be “inputs” within the meaning of Rule 2(k) and CENVAT credit can be availed in respect of these goods for payment of service tax.

The tower being essential to rendering of output service of mobile telecommunication, 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).

CONCLUSION:

The court held that the mobile tower as well as pre-fabricated buildings are “goods” and not immovable property and since these goods are used for providing mobile telecommunication services, they would also qualify as “inputs” under Rule 2(k) for the purpose of credit benefits under the CENVAT Rules.