2018 (11) TMI 713 - HC - Service Tax

Telecom towers and shelters qualify for CENVAT credit as capital goods under Rule 2(a) despite becoming immovable property

Delhi HC held that telecom towers, shelters and accessories qualify for CENVAT credit as capital goods under Rule 2(a) of Credit Rules. The court ... Immovable property - permanency test - marketability test - CENVAT credit - capital goods - input - accessories - functional utility test - nexus test - Rule 4(1) of the CENVAT Credit Rules, 2004Immovable property - permanency test - marketability test - Characterisation of towers and pre-fabricated shelters as movable or immovable property for purposes of CENVAT credit - HELD THAT: - The Court applied the principles in Solid & Correct Engineering and Triveni to examine whether towers and shelters, supplied in CKD and bolted to foundations, become immovable. Attachment by bolts to a shallow foundation solely to secure stability and avoid vibration does not amount to assimilation or permanent annexation to the earth within the statutory concept of immovable property. The Court held that the correct inquiry is fact sensitive: whether the goods are so embedded and assimilated that their movable character is extinguished and marketability lost. On the facts, towers and shelters fabricated in factories and delivered CKD, which can be unbolted, moved and reassembled, do not satisfy the permanency/assimilation test and therefore are not immovable property for the purpose of denying excise/CENVAT treatment. [Paras 30, 31, 36, 37, 38]Towers and pre-fabricated shelters supplied in CKD and merely fastened to foundations for stability are not immovable property; the CESTAT erred in treating them as immovable.Capital goods - accessories - functional utility test - Whether towers, shelters and their parts qualify as capital goods or as components/spares/accessories of capital goods under Rule 2(a) of the CENVAT Credit Rules - HELD THAT: - The Court analysed the definition of 'capital goods' and the subsidiary concept of components, spares and accessories. A device is an 'accessory' if it adds to the convenience, effectiveness or functioning of the principal item. Given that antenna/BTS equipment cannot function as intended without towers (which enable placement at required altitude) and shelters (which house equipment), towers and shelters perform an integral, supportive role to BTS/antenna. Applying the functional utility test and the ordinary meaning of 'accessory', the Court held that towers and shelters are components/ accessories of the BTS system and thus fall within the scope of capital goods under Rule 2(a). The CESTAT's reliance on the Bombay High Court to hold otherwise was held to be contrary to the principled analysis. [Paras 46, 47, 48]Towers, shelters and their parts qualify as components/accessories of BTS and therefore fall within the definition of 'capital goods' under Rule 2(a).Nexus test - input - Whether duty-paid inputs used in manufacturing/assembly of towers (e.g., MS angles, channels) satisfy the required nexus with the output service so as to permit CENVAT credit - HELD THAT: - The Court examined the relationship between raw items (angles, channels) and the output service. Though such items fall under Chapter 73 when invoiced, they are incorporated into towers which in turn are used to provide telecom/business support services. The Court held that the requisite nexus exists because the duty-paid articles enter into the making of towers that are integrally used to render the taxable output service; accordingly credit on such inputs cannot be denied for lack of nexus. The CESTAT erred in applying a restrictive nexus analysis that ignored the functional chain from inputs to towers to service provision. [Paras 54, 56]CENVAT credit is available on duty-paid items (e.g., MS angles, channels) used in fabrication of towers because they have the necessary nexus to the output service.Rule 4(1) of the CENVAT Credit Rules, 2004 - CENVAT credit - Whether credit can be availed on receipt of towers/shelters at provider's premises when later erection/affixation may render them immovable - HELD THAT: - Rule 4(1) permits availing credit on inputs upon receipt in the premises of the service provider. The Court held entitlement is to be determined at the time of receipt; subsequent installation or fixation that may create an immovable structure does not defeat a previously valid credit claim where no manufacture or change of identity occurred. Because towers/shelters were received in CKD form and retained their identity (installation being assembly, not manufacture resulting in new dutiable goods), later emergence of an immovable structure does not extinguish the right to credit. The CESTAT's denial on the ground of subsequent immovability was contrary to this timing principle. [Paras 57, 58, 65, 68]Credit may be claimed on receipt of towers/shelters at the provider's premises under Rule 4(1); later affixation does not defeat a valid claim made on receipt.CENVAT credit - intermediate emergence of immovable structure - Whether the emergence of an immovable structure at an intermediate stage is a ground to deny CENVAT credit - HELD THAT: - The Court surveyed authority allowing credit even where an intermediate product becomes immovable, when the inputs/input services are ultimately used for provision of taxable output services or manufacture of dutiable products. Applying that principle, and reiterating that entitlement is assessed at receipt/use for the output service, the Court held that an intermediate emergence of immovability does not automatically bar input or input service credit where the statutory conditions are otherwise satisfied. [Paras 69, 73, 74]Emergence of immovable property at an intermediate stage does not, by itself, preclude CENVAT credit if the inputs/input services otherwise satisfy the statutory tests.Final Conclusion: The appeals succeed: the Court held that towers, shelters and their parts supplied in CKD and assembled at site are not immovable for the purposes of denying excise/CENVAT treatment; such towers, shelters and their components qualify as capital goods or inputs/accessories of BTS under the CENVAT Credit Rules; credit is available on duty-paid inputs used in their fabrication; credit is to be determined at time of receipt under Rule 4(1) and a subsequent emergence of immovable structure at an intermediate stage does not by itself defeat entitlement to CENVAT credit. Appeals by the assessees allowed; Revenue's appeals dismissed. Issues Involved:1. Whether the towers, shelter, and accessories used by the Appellants for providing telecom services are immovable property.2. Whether the Appellants are entitled to claim CENVAT credit on the towers and shelters as 'accessories' either as capital goods or input goods in terms of Rule 2(a) or 2(k) of the Credit Rules.3. Whether the CESTAT erred in applying the nexus test with reference to MS Angles and Channels.4. Whether the Appellants were justified in claiming CENVAT credit of excise duty paid by the manufacturer of towers and shelters after receipt of such towers and shelters at their premises.5. Whether the emergence of immovable structure at an intermediate stage is a criterion for denial of CENVAT credit.Detailed Analysis:Issue 1: Immovable PropertyThe court examined whether towers and shelters are movable or immovable property. The definition of 'immovable property' under Section 3(26) of the General Clauses Act, 1897 and Section 3 of the Transfer of Property Act, 1882 was considered. The court referred to the Supreme Court's decision in *Solid and Correct Engineering Works* which emphasized the 'permanency test.' The court concluded that the attachment of towers to the foundation with nuts and bolts for stability does not make them immovable property. The towers and shelters can be unbolted and reassembled without damage, thus they remain movable. The court held that the CESTAT erred in relying on the Bombay High Court's decision in *Bharti Airtel Ltd.*, which presumed these structures to be immovable.Issue 2: CENVAT Credit on Towers and SheltersThe court analyzed whether towers and shelters qualify as 'capital goods' under Rule 2(a) of the Credit Rules. It concluded that towers and shelters are accessories to the Base Transmission System (BTS) falling under Chapter 85 of the Central Excise Tariff. The court cited *India Cements Ltd.* and *Nokia India Private Ltd.*, which held that accessories supporting capital goods falling under specified chapters are eligible for CENVAT credit. Therefore, towers and shelters, which enhance the efficiency of BTS, qualify as capital goods. The court also held that these items qualify as 'inputs' under Rule 2(k) as they are used for providing output services.Issue 3: Nexus Test with MS Angles and ChannelsThe court held that MS Angles and Channels used in the fabrication of towers have a direct nexus to the output service. These inputs are used in the making of towers, which in turn are used for providing telecom services. The court concluded that the CESTAT erred in applying the nexus test and that credit should be extended to the duty paid on MS Angles and Channels.Issue 4: Justification for Claiming CENVAT CreditThe court examined Rule 4(1) of the Credit Rules, which allows credit on inputs after receipt in the premises of the output service provider. The court held that the eligibility for credit must be determined at the time of receipt of goods. The subsequent treatment of goods (such as fastening or bolting) does not affect their eligibility for CENVAT credit. The court concluded that the CESTAT erred in denying credit based on the eventual immovable nature of the towers and shelters.Issue 5: Emergence of Immovable StructureThe court held that even if an immovable structure emerges at an intermediate stage, it does not affect the eligibility for CENVAT credit. The entitlement to credit is determined at the time of receipt of goods. The court cited several judgments, including *Tata Iron and Steel Company* and *Sai Sahmita Storages (P) Limited*, which support the view that credit is available irrespective of the emergence of immovable property at an intermediate stage. The court concluded that the CESTAT erred in denying credit on this ground.ConclusionAll the questions of law were answered in favor of the assessee and against the Revenue. The court allowed the assessee's appeals and dismissed the Revenue's appeals, holding that the towers and shelters qualify for CENVAT credit as capital goods and inputs, and the emergence of immovable property at an intermediate stage does not deny such credit.