DECEMBER 18, 2024

By Ashwarya Sharma, Co-Founder and Head(Legal), RB Lawcorp P Ltd.

THIS article examines a landmark judgment by the Hon'ble Supreme Court in Bharti Airtel Ltd. Versus Commissioner Of Central Excise, Pune - (2024-TIOL-121-SC-CX) that significantly impacts the Indian telecom sector. The case centered around the eligibility of mobile companies and infrastructure providers to claim CENVAT Credit (tax credit) under the CENVAT Credit Rules, 2004, for erecting mobile towers and related infrastructure. 

Background: Conflicting High Court Decisions

Previously, two High Courts had issued contrasting judgments on this issue. The Bombay High Court ruled against CENVAT Credit, holding that towers and their parts became immovable property upon erection in Bharti Airtel Limited v. The Commissioner of Central Excise, Pune - [2014-TIOL-1452-HC-MUM-ST]. Conversely, the Delhi High Court allowed the credit, classifying the towers and parts thereof as movable property and, therefore, goods in the nature of "capital goods" in Vodafone Mobile Services Limited v. CST, Delhi - [2018-TIOL-2409-HC-DEL-ST]. 

Bombay High Court's Decision:

The Bombay High Court ruled that once a tower is erected and fixed to the ground, it becomes immovable property. As a result, it cannot be classified as a "good" under the CENVAT Rules. Consequently, the taxpayer was denied CENVAT Credit for the tower and its components. 

Delhi High Court's Decision:

In contrast, the Delhi High Court took a different view. It held that while towers and their components are attached to the ground, they retain their character as movable property. They can be dismantled, relocated, and sold, making them eligible for CENVAT Credit as "capital goods."  

Key Differences in Interpretation:

The primary difference between the two decisions lies in the interpretation of the term "immovable property." The Bombay High Court focused on the physical attachment of the tower to the ground, while the Delhi High Court considered the nature of the attachment and the possibility of dismantling and relocation.

The Delhi High Court's decision emphasized the functional purpose of the tower and its components, which is to facilitate telecommunication services. The attachment to the ground was seen as a necessary step for operational efficiency, rather than a permanent fixture.  

The Core Issue: Movable vs. Immovable Property

This divergence in interpretation led to uncertainty and litigation for taxpayers in the telecom sector. The Supreme Court's intervention was crucial to resolve this conflict and provide a clear legal framework for the crucial telecom sector. The crux of the dispute hinged on whether mobile towers, their components, and prefabricated buildings (PFBs) are to be considered movable or immovable property for the purpose of CENVAT Credit eligibility. 

The Supreme Court's Reasoning:

The Court delved into the legal definitions of "goods," "movable property," and "immovable property" from various statutes, including the Central Goods and Services Tax Act, 2017, the Transfer of Property Act, 1882, and the General Clauses Act, 1897. It also analyzed several judicial precedents to establish relevant tests for property classification, such as:

  The Court's Decision and Significance

Applying these tests to the case, the Supreme Court held that mobile towers, components, and PFBs retained their character as movable property. While attached to the earth, this attachment served to stabilize and operate the equipment, not for permanent enjoyment of the land. Importantly, these structures can be dismantled, relocated, and even sold, fulfilling the key criteria for movability.

This judgment has far-reaching positive consequences for the telecom sector, contributing 6.5% to India's GDP (https://www.investindia.gov.in/team-india-blogs/opportunities-indian-telecommunication-sector). By allowing CENVAT Credit for tower erection, mobile companies can potentially reduce their tax burden and invest more in infrastructure expansion and service quality.  

Application of the judgement in GST regime 

The Supreme Court's ruling has significant implications for the telecom sector, particularly in the context of GST. Given the Court's determination that telecom towers are movable property, it is reasonable to expect that the same principle would apply under the GST regime. This is especially relevant considering that Section 17(5)(d) of the CGST Act specifically excludes input tax credit (ITC) eligibility only for immovable property other than “plant or machinery”.

Moreover, the exclusion of telecom tower from the definition of "plant and machinery" in the explanation to Section 17 of the CGST Act should also not affect their eligibility for ITC as per the Supreme Court's recent judgment in Chief Commissioner of Central Goods and Service Tax & Ors. Versus M/s Safari Retreats Private Ltd. & Ors. - (2024-TIOL-101-SC-GST) wherein it was clarified that the exclusion applies only to the specific context of Section 17(5)(c) and not to "plant or machinery" under Section 17(5)(d). Therefore, based on the Supreme Court's judgment, telecom companies should be able to claim ITC on the GST paid on the procurement and installation of telecom towers and related infrastructure. This would provide significant relief to the sector and encourage further investment in network expansion and modernization. 

Conclusion:

The Supreme Court's progressive judgment streamlines tax regulations for the telecom sector, fostering further growth and benefitting both service providers and consumers. This landmark decision underscores the importance of clear legal interpretation and its impact on key economic sectors.

[The views expressed are strictly personal.]