ITC on Telecommunication Towers Under GST - Excluded From "Plant And Machinery", But Are They Immovable? Part I - From Statutory Exclusion to the Test of Immovability

The Controversy - When a Telecom Tower Enters the ITC Debate

Telecommunication services depend on an extensive physical network. Towers, shelters, antennas, cables, power equipment, and other infrastructure together enable signals to be transmitted across the network. Considerable expenditure is incurred in establishing this infrastructure, and GST is ordinarily paid on the goods and services used for its installation. The availability of input tax credit (ITC) on such expenditure therefore assumes substantial commercial importance for the telecom sector.

At first sight, the statutory position regarding telecommunication towers may appear fairly simple. Section 16(1) of the Central Goods and Services Tax Act (CGST), 2017 recognises the entitlement of a registered person, subject to prescribed conditions, to take credit of input tax charged on goods or services or both used or intended to be used in the course or furtherance of business. Section 17(5), however, blocks credit in certain specified situations. More importantly, the Explanation appearing after Section 17(6), while defining "plant and machinery", specifically excludes telecommunication towers from its scope.

This exclusion may create an immediate impression that ITC relating to telecommunication towers necessarily stands blocked. The issue, however, is considerably more nuanced. Section 17(5)(d), which is particularly relevant to the controversy, applies to goods or services or both received by a taxable person for the construction of immovable property(other than plant and machinery) on his own account, including when such goods or services or both are used in the course or furtherance of business. Therefore, before asking whether a telecommunication tower is excluded from "plant and machinery", an anterior question must be answered: is the tower immovable property at all?

This distinction lies at the heart of the controversy. Exclusion from the statutory expression "plant and machinery" and classification as "immovable property" are two separate legal concepts. The former does not necessarily establish the latter. The decision of the Supreme Court in M/s BHARTI AIRTEL LTD. Versus THE COMMISSIONER OF CENTRAL EXCISE, PUNE - 2024 (11) TMI 1042 - Supreme Court , assumes exceptional importance in this context because it undertakes an elaborate examination of the legal character of telecommunication towers and the principles governing movable and immovable property.

The Statutory Starting Point - ITC under Section 16 and the Restrictions under Section 17(5)

The scheme of ITC under GST begins with Section 16. Broadly stated, the provision entitles a registered person to take credit of input tax charged on supplies of goods or services, or both, used or intended to be used in the course or furtherance of business, subject to the conditions and restrictions prescribed by law. The underlying structure of GST therefore seeks to permit credit of taxes paid on business inputs so that tax is ultimately imposed on value addition rather than becoming a cost at successive stages of the supply chain.

The entitlement under Section 16, however, is expressly made subject to Section 17. Section 17(5) identifies situations in which ITC remains unavailable notwithstanding the general entitlement. For the present discussion, clauses (c) and (d) of Section 17(5) are particularly significant. Section 17(5)(c) deals with works contract services supplied for the construction of immovable property, other than plant and machinery, except where such services are used for further supply of works contract services. Section 17(5)(d), in its relevant framework, deals with goods or services, or both, received by a taxable person for the construction of immovable property on his own account, including where such goods or services are used in the course or furtherance of business.

The expression "construction" is given an extended meaning for this purpose. The Explanation to Section 17(5)(c) and (d) includes reconstruction, renovation, additions, alterations, or repairs, to the extent capitalised to the immovable property. Thus, the statutory restriction is not confined to the initial erection of immovable property. Depending upon the circumstances, subsequent expenditure which is capitalised may also fall within its scope.

The essential foundation of both clauses, however, remains the existence of immovable property. Section 17(5) does not proceed on the basis that every item which is fixed, bolted, embedded, or attached to the earth automatically becomes immovable. Whether the property possesses that legal character must first be determined. This threshold enquiry becomes particularly important for telecom towers because their very functioning requires them to be securely fixed at a particular location, although their components may subsequently be dismantled, transported, and reassembled elsewhere.

The Special Exclusion - Why Telecommunication Towers Are Kept Outside "Plant and Machinery"

The Explanation appearing after Section 17(6) provides a special statutory definition of "plant and machinery" for the purposes of Chapters V Input Tax Credit] and VI [Registration]of the CGST Act. Broadly, it covers apparatus, equipment and machinery fixed to the earth by foundation or structural support, used for making outward supply of goods or services, or both. It also includes such foundations and structural supports.

The definition, however, expressly excludes three categories: land, building or any other civil structures; telecommunication towers; and pipelines laid outside the factory premises. The specific exclusion of telecommunication towers is deliberate and cannot be ignored when examining ITC. Parliament has consciously chosen not to treat telecommunication towers as "plant and machinery" for the purposes of this Explanation.

The significance of this exclusion must, nevertheless, be understood precisely. The Explanation tells us what does not fall within the defined expression "plant and machinery". It does not independently define "immovable property", nor does it expressly declare that a telecommunication tower shall be deemed to be immovable property. These are materially different propositions.

Suppose, for instance, an asset satisfies the characteristics of movable property under the established legal tests. The mere fact that the asset does not fall within the specially defined expression "plant and machinery" cannot, by itself, convert its physical or legal character from movable into immovable. A statutory exclusion determines the scope of the defined expression. It should not ordinarily be extended to create an additional legal fiction which the legislature has not expressly enacted.

This distinction is crucial because Section 17(5)(d) does not block ITC simply on account of goods or services used for the construction of something that is "not plant and machinery". The statutory enquiry first requires the existence of immovable property. Only thereafter does the significance of the plant and machinery exclusion arise. Reading these two requirements in their proper sequence avoids the assumption that exclusion from one statutory definition automatically establishes the other.

The Critical Distinction - Does Exclusion from "Plant and Machinery" Make a Tower Immovable Property?

This brings us to the central conceptual difficulty. A telecom tower is normally erected on a foundation or structural support. Its components are assembled and fixed to provide the stability required for effective functioning. From a purely physical standpoint, therefore, a tower may appear to have become part of the site on which it stands.

Tax law, however, does not determine immovability merely by asking whether an article is physically attached to the earth. Many machines and large pieces of equipment have to be bolted or secured to foundations because they cannot safely or effectively function otherwise. If every such attachment were treated as conclusive, a wide range of industrial machinery would become immovable property merely because operational requirements demand stability.

The real question is therefore not simply whether the article is attached, but why and with what degree of permanence it is attached. Is the attachment intended to make the article a permanent part of the land or building? Or is it merely intended to provide stability while the equipment is being used? Can the equipment be dismantled without destroying its essential identity and shifted to another location? Can it thereafter be reassembled and used for the same purpose? These questions reveal the true nature of the property more accurately than the mere fact of attachment.

The specific exclusion of telecom towers from "plant and machinery" must consequently operate within this wider legal framework. It undoubtedly has statutory consequences, but those consequences cannot be determined by treating the exclusion itself as a legislative declaration of immovability. The character of the tower must first be tested against the principles which distinguish movable from immovable property.

What Makes Property Immovable? - Permanency, Intention and the Test of Dismantling

The CGST Act does not provide an exhaustive definition of "immovable property" to resolve every question of this nature. It therefore becomes necessary to draw guidance from the general law and from judicial decisions that have considered when an article attached to the earth acquires the character of immovable property.

Section 3 of the Transfer of Property Act, 1882, while explaining the expression "attached to the earth", states that it means rooted in the earth, as in the case of trees and shrubs; embedded in the earth, as in the case of walls or buildings; or attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached. Similarly, the General Clauses Act, 1897, defines "immovable property" to include land, benefits arising out of land, and things attached to the earth or permanently fastened to anything attached to the earth.

The word "permanently" assumes considerable importance. Physical attachment by itself is not decisive. The nature of the attachment, the purpose for which it is made, the intention behind it, and the possibility of dismantling and relocation all become relevant. An article may be firmly attached during its operation and yet retain its identity as movable property if the attachment is essentially intended to provide stability and the article is capable of being dismantled and relocated.

Two broad ideas have consequently emerged from judicial jurisprudence-the degree or mode of annexation and the object or intention of annexation. The first looks at the manner in which the item is attached. The second asks why it has been attached. The latter can often be more important. If the purpose is the permanent beneficial enjoyment of the land or building itself, the conclusion may favour immovability. If the attachment merely facilitates the beneficial use of the equipment, the conclusion may be different.

The test of dismantling must also be applied sensibly. The question cannot be whether every nut, bolt, or component can be removed without the slightest damage. Large structures may necessarily require technical dismantling. The more meaningful enquiry is whether dismantling destroys the essential character of the article or whether its principal components can be taken apart, transported, and reassembled so that the equipment continues to perform substantially the same function at another site.

These principles became central to the telecom tower controversy because towers are necessarily secured to their foundations for stability and safety. The question is whether this fixation reflects an intention of permanent annexation to the earth or merely represents the engineering method by which movable telecom equipment is made operational.

Bharti Airtel before the Supreme Court - Re-examining the Legal Character of Telecom Towers

The controversy over telecom towers did not originate under GST. It had a long history under the earlier CENVAT credit regime. Telecom operators had claimed credit for various components used to set up mobile towers and prefabricated buildings or shelters. The Revenue disputed such credit on several grounds, including the contention that towers erected on site acquired the character of immovable property and therefore could not qualify as "goods" for the purpose of CENVAT credit.

Different judicial approaches ultimately led the controversy to the Supreme Court. In M/s BHARTI AIRTEL LTD. Versus THE COMMISSIONER OF CENTRAL EXCISE, PUNE - 2024 (11) TMI 1042 - Supreme Court, the Supreme Court undertook an extensive examination of the issue. Although the dispute arose under the CENVAT Credit Rules and not under the CGST Act, the judgment assumes wider significance because the Court extensively considered the fundamental legal principles governing the distinction between movable and immovable property.

The Supreme Court examined the nature of mobile towers and prefabricated buildings and considered whether their attachment to the earth necessarily deprived them of the character of movable goods. Instead of treating fixation to the earth as conclusive, the Court examined the nature, purpose and permanence of such attachment. The analysis therefore moved beyond a purely physical test and focused upon the commercial and functional character of the equipment.

This approach is particularly relevant to telecom infrastructure. A mobile tower is erected so that antennas and related equipment can function at the required height and stability. Its attachment to a foundation is indispensable for safe operation. But the foundation does not necessarily establish that the tower is intended to become a permanent and inseparable part of the land. The purpose of attachment must therefore be distinguished from permanent annexation.

The Supreme Court's Answer - Fixing a Tower to the Earth Does Not Necessarily Make It Immovable

The Supreme Court in Bharti Airtel made an important distinction between an article which is permanently attached to the earth and an article which is fixed to the earth merely to make it stable and functional. The mere fact that an article is attached to the earth does not automatically make it immovable property. The real question is why it has been attached and whether it can later be dismantled and moved without losing its original character.

The Court explained this principle in paragraph 11.8 of its 76-page judgment in clear terms:

"merely because certain articles are attached to the earth, it does not ipso facto render these immovable properties."

The Court further explained that where the attachment is not intended to be permanent but is only meant to support the goods and improve their functioning, and the goods can be dismantled without changing their nature and can thereafter be moved and sold, they cannot be regarded as immovable property.

Six Tests Identified by the Supreme Court

Significantly, the Supreme Court did not rest its conclusion upon a single test. In paragraph 11.8.1, it summarised six tests that may be applied to decide whether a property is movable or immovable. These are the nature of annexation, object of annexation, intention of the parties, functionality test, permanency test and marketability test.

In simple terms, these tests ask some practical questions. How firmly is the article attached to the earth? Why has it been attached? Was it intended to remain there permanently? Is the attachment merely necessary for the equipment to function properly? Can it be dismantled and shifted without substantial damage? Can it thereafter be sold in the market? The answers to these questions, taken together, determine the true character of the property.

The functionality test is particularly important for telecom towers. A tower has to remain stable because the antenna installed upon it must function at the required height without shaking from wind, rain, or other external forces. Therefore, fixing the tower to a foundation serves the tower and antenna; it does not improve or permanently benefit the land on which the tower stands.

Applying the Tests Specifically to Telecom Towers

The Supreme Court then applied these principles to the actual manner in which telecom towers are installed. A tower is ordinarily brought to the site in completely knocked down (CKD) or semi-knocked down (SKD) condition and assembled there. It is fixed to the earth or a building through nuts and bolts. If the tower has to be shifted, it can be dismantled, removed and reassembled at another location without changing its essential character.

The Court accordingly made the following significant observation in paragraph 11.9.6:

"These attributes negate the permanency test, which is a characteristic of immovable property."

The reason is simple. The tower does not become permanently merged with the land or building merely because it is secured to a foundation. Its fixation is necessary to keep it stable and wobble-free so that the antenna can effectively receive and transmit signals. The attachment is therefore for the effective functioning of the telecom equipment and not for the permanent beneficial enjoyment of the land or building.

The Court also found the marketability test satisfied. A tower can be dismantled, shifted to another location and even sold in the market. Thus, although it may appear immovable while standing at a particular site, its true character is revealed by what can happen when it is required to be relocated. It can be unbolted, dismantled and reassembled without losing its identity as a telecom tower.

After applying the tests of permanency, intention, functionality and marketability, the Supreme Court ultimately concluded that mobile towers and prefabricated buildings are movable properties and, consequently, "goods".

Why Bharti Airtel Matters under GST

Although Bharti Airtel arose under the CENVAT regime, its significance extends to GST because the Supreme Court examined the more fundamental question whether a telecom tower is movable or immovable property. This becomes directly relevant to Section 17(5)(d), which proceeds on the existence of immovable property.

Therefore, the enquiry under GST cannot begin and end with the fact that telecommunication towers are expressly excluded from "plant and machinery". Bharti Airtel provides the jurisprudential foundation for a separate threshold enquiry: is the telecom tower an immovable property in the first place? The statutory exclusion, by itself, does not answer that question.

From Movability to ITC - The Question Now Shifts to GST

Part I of this Article brings out an important distinction. The statutory exclusion of telecommunication towers from "plant and machinery" cannot, by itself, make them immovable property. Bharti Airtel reinforces that movability must be determined independently by applying the established legal tests.

The enquiry, however, does not end there. If a telecom tower is movable but specifically excluded from "plant and machinery", can ITC still be denied under Section 17(5)? Part II of the Article will examine this question in the light of the Delhi High Court's application of Bharti Airtel, the Safari Retreats jurisprudence and the subsequent legislative changes to Section 17(5)(d) with retrospective effect from 01.07.2017.

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