The Supreme Court on Wednesday gave a major fillip to telecom companies by allowing them to claim Central Value Added Tax (CENVAT) for the installation of mobile towers and peripherals like pre-fabricated buildings for which they pay excise duties.

A Bench of Justices BV Nagarathna and N Kotiswar Singh held in a judgment that mobile towers and pre-fabricated buildings (PFBs) or shelters fall within the definition of ‘capital goods’ or ‘inputs’ under the CENVAT Rules, 2004 as they provided essential support for the “effective transmission of mobile signals and enhance their efficiency”.

Overturning earlier orders

The judgment authored by Justice Singh was based on appeals arising out of conflicting opinions on the issue from the Bombay and Delhi High Courts.

The Bombay High Court had ruled against the mobile service providers (MSPs), and in favour of the Revenue Department. It had held that MSPs were not entitled to CENVAT credit on mobile towers and prefabricated buildings. The High Court had concluded that mobile towers and other components did not fall within the definition of ‘capital goods’ as under Rule 2(a)(A) of the CENVAT Rules, nor were they “inputs” within the meaning of Rule 2(k) . For these reasons, the High Court had held that MSPs were not entitled to claim CENVAT credit on duty paid on these items. Whereas the Delhi High Court had favoured extending CENVAT credit to the MSPs.

Both the Revenue department and the MSPs, including Bharti Airtel, had challenged the decisions of the High Courts, seeking an authoritative reading of the law by the Supreme Court.

Capital goods

Justice Singh agreed with the view taken by the Delhi High Court that towers and PFBs were capital goods necessary for MSPs to provide “output service”, that is, mobile telecommunication service.

“Under Rule 3(1)(i), the assessees (MSPs) would be entitled to CENVAT credit on the excise duties paid on these goods,” the court held.

Justice Singh reasoned that any item as long it qualified as a “good” and was “used” for providing output service, would come within the purview of “input” under Rule 2(k) and excise duty paid on such items can be claimed as CENVAT credit which may in turn be used for payment of service tax for the output service provided by the MSPs.

The court acknowledged the contentions of the MSPs that a mobile tower was a part of the ‘Base Transceiver Station’ (BTS) and antenna, all of which form components of an integrated telecom system. “A mobile service cannot be provided by the service provider without tower, antenna and BTS,” the judgment quoted. Likewise, PFBs shelter ancillary items such as battery back-up, rectifier, UPS, gensets, etc which are indispensable components of the mobile telephone system.

The apex court agreed with the Delhi High Court’s application of the “functional utility test” to hold that mobile towers and PFBs were required by MSPs for “providing output service on a commercial scale”.

The apex court dismissed the Revenue Department’s contention that towers and PFBs were immovable properties which did not answer to the description of ‘goods’.

“We are of the opinion that merely because certain articles are attached to the earth, it does not ipso facto render these immovable properties. If such attachment to earth is not intended to be permanent but for providing support to the goods concerned and make their functioning more effective, and if such items can still be dismantled without any damage or without bringing any change in the nature of the goods and can be moved to market and sold, such goods cannot be considered immovable,” the Supreme Court noted.

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