2024 (4) TMI 1314 - AT - Service Tax

Rule 3 entitles telecom service providers to CENVAT credit on capital goods, inputs and input services; appeal remitted

Idea Cellular Ltd. Versus Commissioner of Service Tax-IV

CESTAT MUMBAI (LB) - AT held that Rule 3 of the CENVAT Credit Rules, 2004 clearly entitles providers of taxable telecommunication service to claim credit ... CENVAT Credit - input service procured for rendering of telecommunication service - commissioning and erection of base transceiver station (BTS) - whether the decision in Bharti Airtel Ltd [2014 (9) TMI 38 - BOMBAY HIGH COURT] went against assessees on ineligibility of ‘inputs’ deployed for such erection and commissioning? - absence of nexus that ‘structure’ has with ‘output service’ which is the essence of entitlement - HELD THAT:- Rule 3 of CENVAT Credit Rules, 2004, which governs the core of the scheme, is unambiguous on eligibility of the two classes of assessees, viz., under Central Excise Act, 1944 and Finance Act, 1994, for taking credit of duty/tax liability borne by them on procurement of ‘capital goods’ and ‘input’ from manufacturers and of ‘input service’ from providers of service. As the appellant herein is, just as the assessee before the Hon’ble High Court of Bombay was, provider of ‘telecommunication service’, it is not required to enlarge the factual framework beyond that limited context. Hence, response to reference is all about the eligibility of ‘capital goods’ and ‘inputs’ used for providing any ‘output service’ that was decided in Bharti Airtel Ltd as being the determinant of entitlement of ‘input service’ used for providing an ‘output service’ owing to break in the CENVAT chain that the referral bench alluded to. In handing down the decision in Bharti Airtel Ltd, the Hon’ble High Court had two appeals before it – one pertaining to October 2004 to September 2005 and the other, on conclusion of first adjudication on 19th December 2006, pertaining to three notices for October 2005 to March 2008 – that arrived after confirmation of the first demand which was upheld by the Tribunal and after partial confirmation of the second set was similarly endorsed by the Tribunal - Doubtlessly, the dispute in Bharti Airtel Ltd did not venture upon ‘input service’ which is germane to the present appeal. Thus, the issue in dispute is not only about an activity claimed to be used for providing an ‘output service’ but also by ‘provider of taxable service’ which Bharti Airtel Ltd was not called upon to consider. The distinction lies in the nature of relationship of ‘input’ or ’input service’, as the case may be, with ‘output service’ and the former excluded to the extent that some direct contribution of goods to the taxable activity is not perceivable. Service, on the other hand, is intangible and its use is manifest only in satisfaction obtained by the recipient of the service which, in the present instance, is the appellant. The distinction for evaluation is the destination - either in the service itself for ‘input’ or in the customer for ‘input service’ – as manifest. The deployment of ‘provider of service’ in definition of ‘input service’ renders ‘output service’ to be incomplete without involvement of recipient owing to definition of ‘taxable service’ in section 65(105) of Finance Act, 1994. It, therefore, emerges that ‘input’ and ‘input services’ stand in their respective, and mutually exclusive, contexts for the purpose of CENVAT Credit Rules, 2004. The wide latitude of ‘input service’, even in the post-2011 situation, permits credit of ‘input service’ subject to evaluation of deployment in each case. The subsequent restriction manifests even more extensive intent to cover ‘construction services’ too in the pre-amendment era - The break in chain of manufacture, and only derived impliedly from Bharti Airtel Ltd, was not the sole ground for denial of credit of duty paid on goods that were erroneously claimed to be ‘capital goods’ and wrongly claimed, in the alternative, to be ‘input’ and does not cast its shadow as break in CENVAT chain in all circumstances. The decision in Bharti Airtel is limited to ‘input’ as source of credit consequent on finding of ineligibility for claim as ‘capital goods’ and, therefore, not relevant in dispute over entitlement of ‘input service’ as credit. There is no break in CENVAT chain insofar as ‘input service’ is concerned. The decisions of the coordinate benches survive as precedent to the extent appropriate to the facts of the present dispute. Registry is directed to place the papers before the division bench for disposal of the appeal. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit of service tax paid on input services (construction, erection, commissioning, installation, technical testing & analysis) used for commissioning and erection of BTS towers/shelters used in provision of telecommunication service is admissible under the CENVAT Credit Rules, 2004. 2. Whether the ratio of an authority holding ineligibility of credit for goods (inputs/capital goods) that become part of immovable property (the 'immovable property' doctrine) is applicable to input services, i.e., whether a 'break in the CENVAT chain' established for inputs operates equally to deny credit for input services. 3. The relevance and binding effect, if any, of prior decisions of coordinate benches permitting credit on such input services vis-à-vis a High Court decision disallowing credit of duties on related goods. 4. The impact of amendments to the definitions of 'input', 'capital goods' and 'input service' (notably changes effected in 2009 and 2011) on eligibility for credit in the facts of the dispute. ISSUE-WISE DETAILED ANALYSIS Issue 1: Admissibility of CENVAT credit for input services used in erection/commissioning of BTS towers/shelters Legal framework: Rule 3 and the definitions in Rules 2(a) (capital goods), 2(k) (input) and 2(l) (input service) of the CENVAT Credit Rules, 2004 govern entitlement to take CENVAT credit of duty/tax paid on inputs, capital goods and input services by providers of taxable services. Precedent treatment: Coordinate bench decisions had allowed credit for input services used in erection/commissioning of telecom towers (post- and pre-amendment jurisprudence including Larger Bench treatments). Certain High Court and Tribunal decisions (dealing with goods) had denied credit where goods became immovable property. Interpretation and reasoning: The Tribunal notes that definitions of 'input' and 'input service' stand on different conceptual foundations. 'Input' eligibility depends on goods being 'goods' (excisable/marketable/moveable) and their direct or indirect use in manufacture or in relation to output service. 'Input service' accrues eligibility by being 'used by a provider of taxable service for providing an output service.' Services are intangible and their utility is assessed in the hands of the recipient provider rather than by physical assimilation into goods. The Tribunal distinguishes tangible assimilation tests applicable to goods from destination/use tests applicable to services: an input service used to enable provision of output service remains within the ambit of input service even if the underlying work relates to immovable property. The Tribunal further relies on jurisprudence recognising broad scope of input services (including services in relation to setting up premises) and the destination-based consumption-tax rationale that supports credit for services used in business operations. Ratio vs. Obiter: Ratio - credit for input services is governed by Rule 2(l) and Rule 3 and is not extinguished by the immovable-property tests applied to goods. Obiter - policy history and references to consumption-tax principles used to support interpretation. Conclusion: CENVAT credit of input services used for commissioning and erection of BTS towers/shelters is not per se inadmissible; eligibility must be evaluated under the specific deployment/use criteria of 'input service.' There is no automatic bar to credit solely because the services relate to erection/commissioning on immovable property. Issue 2: Applicability of the 'immovable property / break in CENVAT chain' doctrine (derived from inputs jurisprudence) to input services Legal framework: The immovable-property principle originates from central excise jurisprudence and administrative guidance relating to when assembled/erected items at site cease to be 'goods' for excise purposes; its legal effect under the CENVAT Rules was applied to deny credit for inputs/capital goods that become immovable. Precedent treatment: A High Court decision applied the immovable-property doctrine to deny credit of duties on goods used in erection of telecom towers; coordinate benches allowed credit of input services on analogous facts. Larger Bench and High Court jurisprudence (and Tribunal Larger Bench authority) have emphasised the wider scope of 'input service' and cautioned against mechanically importing input/goods ratios into input-services analysis. Interpretation and reasoning: The Tribunal holds that the 'break in the CENVAT chain' rationale articulated for tangible inputs cannot be ipso facto transposed to input services. The key distinction is functional: inputs are tested by their physical contribution/identity as goods; input services are tested by their use by the provider in rendering output service. The Tribunal observes that the High Court decision expressly limited its scope to the facts before it and to inputs; it did not decide on input services. Consequently, applying the immovable-property rule to input services conflates distinct statutory sources and undermines the separate definitional and operational logic of Rule 2(l). Ratio vs. Obiter: Ratio - the immovable-property/break-in-chain doctrine, as applied to inputs/goods, is limited to that context and not binding to deny credit for input services; Obiter - extensive historical discussion on legacy excise disputes and policy considerations. Conclusion: The 'break in the CENVAT chain' applicable to inputs does not automatically operate to deny CENVAT credit for input services; the doctrines are distinct and must be applied according to the respective definitions and statutory tests. Issue 3: Precedential weight of coordinate-bench decisions permitting input-service credit vs. the High Court decision on inputs Legal framework: Institutional consistency requires Tribunal benches to follow coordinate-bench precedents unless a binding higher-court decision requires departure; references to a Larger Bench are appropriate where conflict exists with binding precedent. Precedent treatment: Several coordinate-bench decisions allowed credit for input services used in erection/commissioning. A High Court decision disallowed credit of duties on goods. The referral bench sought a Larger Bench because of perceived dissonance between coordinate-bench input-service decisions and the High Court input decision. Interpretation and reasoning: The Tribunal analyses the High Court decision and finds it expressly fact-limited to inputs/goods and the eligibility tests for capital goods/inputs. Because the High Court did not address input services, its ratio is confined and not directly binding on disputes about input services. The Tribunal also reviews post-amendment jurisprudence and Larger Bench guidance holding that the definition of input service is wide and independent of input/goods rules. Thus, coordinate-bench decisions permitting input-service credit remain good precedent to the extent facts align. Ratio vs. Obiter: Ratio - coordinate-bench decisions permitting input-service credit survive where they are consistent with the statutory definitions and not negatived by higher-court authority addressing input services; Obiter - observations on institutional consistency and when a Larger Bench reference is required. Conclusion: The coordinate-bench decisions allowing credit for input services remain precedential in appropriate factual situations; the High Court decision on inputs does not invalidate those precedents for input-service disputes. Issue 4: Effect of statutory amendments (2009/2011) to definitions on entitlement Legal framework: Amendments to Rules 2(k) and 2(l) (notably the excision of certain inclusive expressions and the 2011 exclusion of specific construction-related services from 'input service') alter the statutory compass for eligibility and must be applied prospectively to disputes arising after their effective dates. Precedent treatment: Jurisprudence recognises that pre-2011 definitions were wider; post-2011 amendments introduce specific exclusions which change eligibility; tribunals and High Courts have interpreted the pre- and post-amendment positions consistently with legislative intent. Interpretation and reasoning: The Tribunal notes that the relevant period(s) of dispute determine applicability: earlier decisions and statutory language may favour broader coverage of input services prior to exclusionary amendments. The very existence of specific exclusions in 2011 indicates that certain services (including construction-related services insofar as specified) were previously within the scope of input services; amendments are not retrospective and do not affect prior entitlements. The Tribunal applies these temporal rules in assessing precedential applicability. Ratio vs. Obiter: Ratio - legislative amendments modify coverage and must be applied prospectively; Obiter - discussions of legislative intent and the necessity of exclusions. Conclusion: Amendments affect entitlement prospectively; earlier coordinate decisions and claims predicated on the pre-amendment definitions retain force where the dispute concerns the relevant earlier period; post-amendment exclusions must be applied where operative. Final Disposition on Reference The Tribunal answers the reference by holding that the High Court decision limiting credit on inputs is confined to inputs/capital goods and does not govern entitlement to credit for input services. There is no automatic break in the CENVAT chain as regards input services. Coordinate-bench decisions permitting input-service credit survive as precedent insofar as the facts and the applicable statutory period align with those decisions.