2025 (10) TMI 181 - AT - Service Tax

Appeal allows CENVAT credit for telecom operators on duty paid for capital goods, inputs; input services not broken.

M/s Bharti Airtel Limited Versus Commissioner of Service Tax, Delhi

CESTAT CHANDIGARH - AT allowed the appeal, holding that the question of CENVAT credit on duty paid for capital goods and inputs in telecom operations is ... Availment of CENVAT credit of the tax paid - Inputs - capital goods - active infrastructure like Base Station Controller (BSC), Microwave Antena and passive infrastructure like Towers and Pre-Fabricated Buildings/ shelters and the services availed in procuring the same - HELD THAT:- The issue is no longer res integra - Hon’ble Supreme Court in the case of Bharti Airtel [2024 (11) TMI 1042 - SUPREME COURT] held that credit of duty paid on capital goods and inputs is applicable to the telecom operators. Larger Bench in the case of Idea Cellular [2024 (4) TMI 1314 - CESTAT MUMBAI (LB)] held '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.' Thus, nothing survives in the impugned orders - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit is admissible on duties paid in respect of mobile towers and prefabricated buildings/shelters used for provision of telecommunication/mobile services-i.e., whether such items qualify as 'capital goods' and/or 'inputs' under the Cenvat Rules, 2004. 2. Whether CENVAT credit is admissible on input services procured by telecom service providers in relation to the infrastructure used to provide taxable output services. 3. Whether demand of interest and imposition of penalty is sustainable where the credit issue is interpretational in nature, and whether certain show-cause notices are barred by limitation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of CENVAT credit on towers and prefabricated buildings/shelters as 'capital goods' and/or 'inputs' Legal framework: Definitions of 'capital goods' (Rule 2(a)(A)) and 'input' (Rule 2(k)) under Cenvat Rules, 2004; entitlement to Cenvat credit under Rule 3(1)(i) for capital goods/inputs received in premises of provider of output service. Precedent treatment: The Supreme Court's authoritative interpretation in the cited decision concluded that towers and PFBs are components/accessories of BTS/antenna and therefore fall within sub-clause (iii) read with sub-clause (i) of Rule 2(a)(A) as 'capital goods'; the same decision further held that such items qualify as 'inputs' under Rule 2(k) when used for providing the output service (mobile telecommunication). Interpretation and reasoning: The Court accepted that a BTS is a composite system (transmitter, receiver, antenna etc.) and that antenna requires a tower to be placed at appropriate height and stability for effective transmission/reception. This proximate and indispensable relationship renders a tower an accessory/component of BTS/antenna. Rule 2(a)(A)(iii) brings components, spares and accessories within the meaning of capital goods where the primary item is a capital good. Since BTS/antenna fall within Chapter 85 capital goods, towers and PFBs are captured as capital goods. Alternatively, applying Rule 2(k)'s plain language ('all goods used for providing any output service'), towers and PFBs are 'inputs' because they are goods used proximately in rendering mobile service; the provision of 'input' for services need not be confined to a narrow or literal notion of direct electrical connection. Analogous interpretive tests applied in manufacturing contexts (use/essentiality tests) were held applicable by parity of reasoning to the service context, supporting an expansive but proximate reading of 'use.' Ratio vs. Obiter: Ratio - towers and PFBs are capital goods/accessories of BTS/antenna under Rule 2(a)(A)(iii) and thus eligible for Cenvat credit; alternatively, they qualify as 'inputs' used for providing taxable output service under Rule 2(k) and credit is available. Observations about comparative definitions of 'input' in manufacture versus service contexts and illustrative references to other cases (e.g., on essentiality of humidifiers) operate as supporting ratio and persuasive dictum. Conclusions: CENVAT credit on duties paid for towers and PFBs is admissible, either as capital goods or, in the alternative, as inputs used in providing mobile telecommunication services; denial of credit on this basis cannot stand. Issue 2 - Admissibility of CENVAT credit on input services Legal framework: Distinction under Cenvat Rules between tangible 'input' and intangible 'input service'; post-2011 and pre-amendment contours relevant to availability of credit on input services subject to deployment/use tests; evaluation of 'use'/'deployment' in the hands of the recipient service provider. Precedent treatment: A Larger Bench of the Tribunal (Idea Cellular) examined the distinction between 'input' and 'input service' and clarified that the Supreme Court decision (on goods) is limited to 'input' as a source of credit and is not determinative of disputes over entitlement of 'input service.' The Larger Bench held that there is no automatic break in the Cenvat chain for input services and that credit of input services depends on evaluation of deployment/use by the recipient providing taxable service; coordinate bench decisions on input services continue to be precedential to the extent their facts are applicable. Interpretation and reasoning: The Larger Bench analyzed the qualitative difference between tangible inputs (tested by contribution to the taxable service) and input services (tested by use or deployment by the recipient). It concluded that the Bharti Airtel reasoning, which resolves the status of goods as inputs/capital goods, does not decide entitlement in respect of input services. Accordingly, cases denying credit of input service on account of an alleged 'break in CENVAT chain' are not automatically supported by the goods-focused decision; each input-service claim requires factual evaluation of whether the service was used in providing taxable output services. Ratio vs. Obiter: Ratio - entitlement to credit for input services is independent of and not conclusively determined by the Supreme Court's ruling on goods; evaluation hinges on deployment/use by the recipient. Observations limiting Bharti Airtel to 'input' claims are binding ratio of the Larger Bench on that question; statements as to survival of coordinate bench decisions are operative guidance (binding to the extent of facts). Conclusions: Claims for CENVAT credit on input services must be adjudicated on facts of use/deployment by the taxable service provider; the Supreme Court's holding on goods does not preclude admissibility of input-service credit, and there is no automatic break in the Cenvat chain for input services as a class. Issue 3 - Liability for interest, penalty and limitation where credit dispute is interpretational Legal framework: Provisions imposing interest and penalty (Rule 15 of the CCR, 2004; Section 78 of the Finance Act, 1994) and general principles governing imposition where bona fide/interpretational disputes exist; statutory limitation for initiation of show-cause proceedings. Precedent treatment: The judgment records submissions that the issue was interpretational and various authorities have allowed credit; the Court accepted that the substantive credit issues were authoritatively resolved in favour of the appellant(s) by higher precedents. Interpretation and reasoning: Where the entitlement to credit is resolved by authoritative judicial pronouncement in favour of the assessee, demands for credit disallowance, interest and equal penalty predicated on an erstwhile contrary view are unsustainable to the extent they flow from denial of credit which the Court finds available as a matter of law. Limitation objections to certain show-cause notices were raised but the Court's operative holding disposed the appeals on merits in favour of credit entitlement; the decision to allow appeals necessarily carries consequential reliefs as per law (which would include reconsideration of interest/penalty and time-barred demands where applicable). Ratio vs. Obiter: Ratio - penalties and interest based on disallowance of credit that is subsequently held admissible by binding authority are not sustainable; limitation and bona fide interpretational defences are legally relevant and may preclude penalties/interest contingent on facts. Observations on limitation raised in submissions are treated as consequential matters and are not expansively decided beyond noting bar where applicable. Conclusions: Demands of interest and penalty arising from denial of CENVAT credit on towers/PFBs/inputs are unsustainable in view of authoritative precedents allowing such credit; limitation and the interpretational nature of the dispute furnish additional grounds to resist penalty/interest subject to factual and legal application as per law. Accordingly, the impugned orders confirming demand, interest and penalty do not survive. Final Disposition (legal consequence) The appeals succeed: determinations denying CENVAT credit on the impugned infrastructure and related services are set aside in light of the authoritative legal rulings referenced above; consequential reliefs (including as to interest/penalty and limitation) follow as provided by law.