Supreme Court’s Decision: CENVAT Credit for Mobile Towers and Prefabricated Buildings (PFBs)

Posted On - 10 December, 2024 • By - Mukund Gupta

Summary

The Supreme Court of India, in Bharti Airtel Ltd. v. Commissioner of Central Excise[1] (2024), delivered a landmark judgment allowing mobile service providers (MSPs) to claim CENVAT credit on excise duties paid for mobile towers and prefabricated buildings (PFBs). The Court classified these items as “goods” under the CENVAT Credit Rules, 2004, and determined that they qualify as “capital goods” and “inputs,” resolving a long-standing dispute with far-reaching implications for the telecommunications sector.

Background

The dispute arose from conflicting rulings by the Bombay High Court and the Delhi High Court regarding whether mobile towers and PFBs qualify for CENVAT credit under the Rules.

  • Bombay High Court (2014): Held that towers and PFBs, being attached to the ground, are immovable property and ineligible for credit.
  • Delhi High Court (2019): Contrarily, classified them as movable property, allowing credit eligibility.

This case progressed to the Supreme Court for final adjudication, given its significance for tax interpretation and industry practices.

Case Timeline

  1. 2006: Bharti Airtel was served a show-cause notice for availing CENVAT credit on goods deemed ineligible by Revenue authorities.
  2. 2014: Bombay High Court upheld the Revenue’s view, denying credit for towers and PFBs.
  3. 2019: Delhi High Court granted relief to MSPs by recognizing towers and PFBs as movable properties.
  4. 2024: Supreme Court delivered its verdict, siding with the Delhi High Court.

Issues Raised

  1. Are mobile towers and PFBs movable or immovable property?
  2. Do they qualify as “capital goods” under Rule 2(a)(A) of the CENVAT Credit Rules?
  3. Can they be considered “inputs” under Rule 2(k) to avail credit?

Appellants’ Arguments (Bharti Airtel)

  • Movability: Mobile towers and PFBs can be dismantled and relocated without damage, classifying them as movable goods.
  • Accessory to Capital Goods: Towers and PFBs are integral to antennas and BTS, which are “capital goods” under Chapter 85 of the Excise Tariff Act.
  • Functionality: These structures are indispensable for providing telecommunication services, thereby qualifying as “inputs.”

Respondents’ Arguments (Revenue Authorities)

  • Immovability: Towers and PFBs are attached to the earth permanently, rendering them immovable property.
  • Independent Utility: These items function independently and are not components or accessories of any eligible “capital goods.”
  • Restrictive Interpretation: Allowing credit for such items would violate the definitions under the CENVAT Credit Rules.

Judgment

The Supreme Court ruled in favour of Bharti Airtel, making the following determinations:

1. Classification as Goods

The Court applied various statutory definitions and tests:

  • Nature and Object of Annexation: Towers and PFBs are attached to the ground for functional purposes, not for permanent benefit to the land.
  • Functionality Test: Their primary role is to enhance the functionality of antennas and BTS.
  • Marketability Test: These structures can be dismantled, reassembled, and relocated without losing their identity, confirming their classification as movable goods.

2. Qualification as Capital Goods

Under Rule 2(a)(A)(iii), accessories to capital goods listed in Rule 2(a)(A)(i) are themselves “capital goods.” The Court observed that towers and PFBs serve as accessories to antennas and BTS, enabling uninterrupted telecommunication services.

3. Inputs for Output Services

Towers and PFBs met the definition of “inputs” under Rule 2(k) as they are essential for the provision of output services (mobile telecommunication).

4. Overruling the Bombay High Court

The Court rejected the Bombay High Court’s interpretation, affirming the Delhi High Court’s reasoning in Vodafone Mobile Services Ltd., aligning with industrial realities and statutory definitions.

Analysis

The Supreme Court used precedents like Solid and Correct Engineering Works to emphasize that movability is determined by the purpose and method of attachment. The Court’s analysis was exhaustive, applying the marketability test, functionality test, and intention of annexation to classify towers and PFBs as movable.

Industry Implications

  1. Financial Relief: Telecom operators gain significant tax benefits, reducing operational costs.
  2. Precedent for Infrastructure Projects: This ruling sets a template for evaluating tax benefits for similar infrastructure across industries.

Judicial Harmonization

The judgment resolves inconsistencies in earlier rulings, ensuring a uniform approach to tax benefits under CENVAT and future GST frameworks.

Conclusion

The Supreme Court’s decision in Bharti Airtel Ltd. v. Commissioner of Central Excise marks a decisive moment in refining the application of CENVAT Credit Rules, 2004, with far-reaching implications for the telecommunications sector. By affirming that mobile towers and prefabricated buildings (PFBs) are movable goods and integral to the functioning of mobile telecommunication services, the Court has established a precedent that aligns tax law with industry realities. This ruling not only provides clarity on the eligibility of these infrastructure components for CENVAT credit but also offers financial relief to mobile service providers, facilitating further investment in digital infrastructure.

The judgment’s focus on practicality and functionality over rigid technical classifications reflects a progressive approach to tax law, ensuring that legal interpretations foster growth and innovation. Ultimately, this decision highlights the Court’s role in balancing statutory interpretation with industry needs, creating a more predictable and business-friendly regulatory environment that supports the broader goals of India’s digital transformation.

[1][1] Bharti Airtel Ltd. v. CCE, 2024 SCC OnLine SC 3374

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Mangalore | Pune | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com