NOVEMBER 15, 2018

By BL Narasimhan, Principal Partner & Narendra Singhvi, Joint Partner, Lakshmikumaran & Sridharan

THIS article highlights the nuances of disputes concerning admissibility of Cenvat credit on various goods and services to providers of telecommunication services. Recently on 31.10.2018, Hon'ble Delhi High Court has pronounced its verdict in a bunch of matters reported as Vodafone Mobile Services Limited v. Commissioner, - 2018-TIOL-2409-HC-DEL-ST holding the admissibility of such credit in affirmative and disagreeing with the contrary view of Hon'ble Bombay High Court in Bharti Airtel Limited v. Commissioner, - 2014-TIOL-1452-HC-MUM-ST.

The services provided by a telecom operator consist of providing 24 x 7 connectivity to its subscribers. For providing such services, it is indispensable for the operator to establish and run, on 24 x 7 basis, the telecom network. The telecom network consists of cell sites, where the Base Transmission System (BTS) connected with antennas mounted on towers are hosted in pre-fabricated shelters. Such telecom network is either established by the operator itself with the help of vendors and third-party contractors or is hired from infrastructure provider companies, which have already established such network for providing the same to telecom operators. The first situation is relevant for both the telecom operators and the infrastructure companies. Such network is used by the telecom operators for providing telecom services to subscribers and by the infrastructure companies for providing infrastructure support services to telecom operators.

In both cases, the assessees purchase duty-paid towers, pre-fabricated shelters, other parts, components and accessories on payment of Excise Duty. These items are fabricated in the factory of the vendors and brought to cell sites in CKD conditions. It is the Excise Duty paid on these items, Cenvat credit of which has been a subject-matter of prolonged litigation. The assessees further engage service providers for installation of such items along with the BTS to make the whole system functional.

The genesis of these disputes lies in a Board Circular No. 137/315/2007-CX.4, dated 26.02.2008, where it was stated that such items received by the assessees are used for creation of immovable property in the form of installed towers, which is neither goods nor services and thus not eligible for credit. Such criterion of immovability found favor with the Hon'ble Bombay High Court, which held that the telecom infrastructure, being non-marketable, is in the form of an immovable property and cannot be a subject-matter of Cenvat credit scheme. Such view was later followed by larger bench of Hon'ble Tribunal reported as Tower Vision India Private Limited v. Commissioner, - 2016-TIOL-539-CESTAT-DEL-LB. In a bunch of matters, recently, Hon'ble Delhi High Court has disagreed with the views taken in above decisions and held that Cenvat credit is claimed on towers, shelters and related parts, components and accessories, which are movable in nature, both at the time of being brought in the premises of the assessees as also after their installation at the sites.

Given the above, firstly, it is important to note that the above disputes are concerned with the Cenvat credit on goods received by assessees, whether as inputs or capital goods. The admissibility of Cenvat credit on the services received by assessees for installation of the items at site has largely been out of dispute. Though such services are material in creation of the telecom network, the 2008 circular did not question the admissibility of Cenvat credit thereon and in fact, such credit has been allowed by various decisions. The 2008 circular stated in negative about the admissibility of credit only on goods claiming these are inputs for civil structures, which are immovable for being attached to earth, and as such, are not used for providing taxable service.

The admissibility of Cenvat credit must be examined in terms of the Cenvat Credit Rules, 2004, a self-contained code. For adjudging any legal dispute, it is important to first examine the facts of the case considering the relevant legal provisions on first principles and then to support it one way or the other with help of jurisprudence thereon. On such first principles, Rule 3 read with Rule 4 thereof allows Cenvat credit on inputs and input services to a service provider, which are used by it for providing output services. The criteria for treating something as input/ input service is its use for providing output services and therefore, the scope thereof is wide to cover each item/ service, which is integral to provision of telecom services.

The larger bench of tribunal, while agreeing that the tower and BTS Cabin are used for providing output service, negated the question of admissibility of credit claiming the credit is claimed on the items installed at site, which are immovable property. Such findings do not appeal to reason as Cenvat credit is allowed on the Excise Duty paid on inputs, which pre-supposes the movability of goods. The disputes in all these cases pertain to Cenvat credit on towers, shelters etc. as brought to the site in CKD condition, when these are undisputedly movable in nature. When the use of these goods for provision of output services is not disputed, there is no reason for disallowing Cenvat credit thereon taking shelter of extraneous principle of immovability.

The above view has been upheld by Hon'ble Delhi High Court relying on Rule 4(1) of the Credit Rules, which provides for admissibility of credit on inputs on their receipt in the premises. The Court has first held that credit in question is on the towers, shelters and their parts, which are purchased in CKD condition by the assessees and it is not that the assessees manufacture any tower etc. using iron and steel. That such items are undisputedly movable, when being brought into the premises and as telecom services cannot be provided without use of these items, the same qualify as 'inputs' for purposes of Cenvat credit. Such view of court also puts to rest the conflicting approach of department in not disputing the Cenvat credit on input services, in as much as the input services, in terms of department's view, can also be said to be used in creation of immovable civil structure only. Nonetheless, it cannot be denied that such inputs or input services are used for provision of output services and thus eligible under the Cenvat credit scheme. In fact, in a number of other decisions, various courts have discarded, expressly or impliedly, the criterion of immovability adopted by the department in disputing Cenvat credit for providers of other services.

The Delhi High Court has further delved into the question of immovability. It has been held that these items are annexed to the civil foundation, without its assimilation, with help of nuts and bolts with an intention to provide wobble-free operation and not with an intention to be permanently attached to earth. Further as after installation, the same can be dismantled and moved to another location for installation, the same are movable in nature. The Court, while following decision of Hon'ble Supreme Court in Commissioner v. Solid and Correct Engineering Works, - 2010-TIOL-25-SC-CX, further rejected the application of marketability criterion for determining the question of movability, holding that the same has to be determined in terms of definition of immovable property under the Transfer of Property Act, 1882.

The Court has further held that credit on these items is admissible as capital goods also as these items are parts/ components/ accessories to the BTS classifiable under Chapter 85 of the Central Excise Tariff Act, 1985, as they BTS is an integrated system with each component working in tandem with the other to provide cellular connectivity and these items further support the BTS in effective transmission of mobile signals. These findings of the Court are based on a practical and broad view of the terms 'parts'/ 'components'/ 'accessories'. Further, it supports the view that the definitions of 'inputs' and 'capital goods' are not mutually exclusive and an item may qualify as both 'inputs' and 'capital goods' simultaneously.

The Court has further rejected the argument of the department on bringing into existence of intermediate immovable property as a result of installation of towers. It has been held that the eligibility to Cenvat credit on inputs is to be determined at the time of receipt thereof in the premises and thus, the intermediate stages of immovable property etc., if any, are to be disregarded. These findings of the Court support the view that as credit is claimed on inputs, the nexus for their use is to be established with respect to output services without being influenced by the intermediate stages.

This judgment of Delhi High Court, in view of the authors, lays down the correct position of law, which is in line with the statutory provisions of the Credit Rules as also the ever-evolving jurisprudence thereon. The finalization of this dispute, however, is pending consideration of Hon'ble Supreme Court and still has a long-way to go. Till then, this judgment will guide the course of innumerous pending litigations on this issue, not limited to telecom operators alone.

(The views expressed are strictly personal)