Whether mobile service providers who pay excise duties on various items for setting up their business infrastructure can claim the benefit of CENVAT Credit?

M/s Bharti Airtel Ltd. v. Commissioner of Central Excise, Pune (2024 INSC 880)

Core Legal Issue that arose before the Supreme Court 

The fundamental question arose before the Hon'ble Supreme Court was whether mobile service providers (MSPs), who pay excise duties on various items for setting up their business infrastructure — particularly for erection of mobile towers and peripherals like prefabricated buildings — can claim the benefit of CENVAT Credit under the CENVAT Credit Rules, 2004 ("CENVAT Rules"), for the purpose of payment of service tax on the output services rendered by them.

Background and Conflicting High Court Decisions

This case arose due to conflicting views taken by two High Courts:

Bombay High Court Position

The Bombay High Court in Bharti Airtel Limited v. Commissioner of Central Excise, Pune (decided on August 26, 2014) held against the MSPs, ruling that mobile towers and other components do not fall within the definition of "capital goods" as defined under Rule 2(a)(A) of the CENVAT Rules, nor are these "inputs" within the meaning of Rule 2(k). Therefore, MSPs were not entitled to CENVAT credit on duty paid on these items and has given a decision in favour of the Revenue Department. 

Delhi High Court Position

In contrast, the Delhi High Court in Vodafone Mobile Services Limited v. CST, Delhi (decided on October 31, 2018) held that towers and associated structures like prefabricated buildings are covered by the definition of "capital goods" and are "inputs" as defined under CENVAT Rules. Hence, MSPs are entitled to input credit on excise duty paid towards installation of mobile towers and PFBs.

Most of the Assessees before the SC were Mobile Service Providers (MSPs). The MSPs typically provide sim cards to the subscribers either in physical or electronic form, on activation of which the subscribers are able to enjoy wireless telecommunication service. 

The Hon'ble SC discussed in detail the procedure of provisioning of services by the MSPs. For rendering of services, MSPs own and operate infrastructure such as cell towers, Base Transceiver System (BTS) along with accompanying network equipment and structures like pre- fabricated building (PFBs), electricity generating sets (Gensets), battery back-up and stabilisers for uninterrupted power supply to ensure seamless telecom service to the subscribers. The afore-mentioned equipments are critical in rendering of services by the MSPs. 

The MSPs or the infrastructure providers purchase these above-mentioned items from the manufacturers for installation at the appropriate locations. It is the excise duties paid on purchase of the mobile towers or parts thereof for erection of PFBs, which are sought to be claimed by MSPs as CENVAT credit. This credit is thereafter utilised for payment as service tax for the output service provided by the MSPs to the consumers. This credit availed is the subject matter of dispute in the proceedings wherein the two High Courts have given contrary views.  

Firstly, understanding the applicable legal framework, Rule 3(1) of the CENVAT Credit Rules, 2004 enables a provider of taxable service to claim CENVAT credit paid on any “capital goods” or “input” received in the premises of the service provider. It is to be further noted that “capital goods” and “input” have been defined under Rule 2(a)(A) and the Rule 2(k) of the CENVAT Rules. Therefore, if the mobile towers and prefabricated buildings, which are the items in issue here, qualify as “capital goods” or “inputs” received in the premises of the mobile service provider, the mobile service provider will be entitled to claim CENVAT credit. 

Supreme Court's Analysis and Reasoning

1. Nature of Mobile Towers and PFBs: Movable or Immovable Property

The SC observed that for the items to be “capital goods”, these must first have the traits of “goods”. The term “goods” SC held that has been defined in an expansive manner, in the widest amplitude, under Article 366 (12) of the Constitution of India so as to include all materials, commodities and articles. However, the broad definition of 'goods' was of no avail to the Court. The Court also noted the definition of the term 'goods' as elaborated in other statues and relied on the definition of 'goods' as mentioned in the Sales of Goods Act, 1930.

The Supreme Court examined whether mobile towers and prefabricated buildings constitute movable or immovable property in light of the Section 3 of the Transfer of Property Act, 1882 which specifies that “immovable property does not include standing timber, growing crops or grass”. SC observed 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 Court applied several tests developed through precedents:

• Nature of Annexation: this test ascertain how firmly the property is attached to the earth. If the property is attached in a way that it cannot be removed without damage, it is an immovable property. 
• Object of Annexation: If the attachment is for the permanent beneficial enjoyment of the land, the property is to be classified as immovable.  
• Intendment and Functionality Test: The Court examined the purpose and function of the attachment to the earth. If the parties intend that the property in issue is for permanent addition to the immovable property, it will be treated as immovable. If the attachment is not meant to be permanent, it indicates that it is movable. 
• If the article is fixed to the ground to enhance the operational efficacy of the article and for making it stable and wobble free, it is an indication that such fixation is for the benefit of the article, such the property is movable. 
• Marketability Test: Whether the goods can be brought to market and sold. In such case if the article can be removed or sold, even if attached to the earth or an immovable property. 
• Permanency Test: Whether the items are permanently attached or can be relocated. In case the property can be dismantled or relocated without damages it may be movable property. 
• Mobility Characteristics: Whether the items can be dismantled and relocated without losing their essential character

The Court noted that mobile towers possess characteristics of mobility as they can be dismantled and relocated to another place or site. The fastening to the foundation is merely for the purpose of keeping the antenna stable and wobble-free, not for permanent beneficial enjoyment of the land. Court was of the view that mobile towers are movable property. 

2. Towers and PFBs as "Inputs" under Rule 2(k)

The Supreme Court examined whether towers and PFBs qualify as "inputs" for the purpose of CENVAT Credit. The Court held that the use of towers and PFBs cannot be said to be remotely connected with the output service. Rather, their usage in providing the output service is not remote but proximate. In fact, without the use of towers and PFBs, it is inconceivable that the service provider can provide mobile services effectively.

The Court emphasized: "Rather, towers and PFBs are indispensable being accessories of antenna for providing mobile services." 

3. Functional Nexus with Output Services

The Supreme Court observed that towers and PFBs, though not electrical equipment for transmission of signals, are used for transmission of signals by the antennas. Therefore, there is a close proximity and nexus between their functioning and the ultimate transmission of radio signals which is the output service rendered by the MSPs.

4. The Supreme Court thereafter examined whether towers and PFBs are 'capital goods' ?

Agreeing with the decision of Delhi High Court, Court held that towers and shelters (PFBs) support the BTS/antenna for effective transmission of mobile signals and thus enhance their efficiency and since these articles are components/accessories of BTS/antenna which are admittedly “capital goods” falling under Chapter 85 within sub-clause (i) of Rule 2(a)(A) of CENVAT Rules, these items consequently are covered by the definition of “capital goods” within the meaning of sub-clause (iii) read with sub-clause (i) of Rule 2(a)(A) of CENVAT Rules. 

Final Decision

The Supreme Court ruled that Mobile towers and prefabricated buildings qualify as "inputs" under Rule 2(k) of the CENVAT Credit Rules, 2004, and MSPs are entitled to claim CENVAT credit on excise duties paid on these items. 

Significance of the Judgment

This judgment is significant for the following reasons:

• Resolves Judicial Conflict: Settles the divergent views between two High Courts on an important issue affecting the telecommunications sector
• Financial Impact: Provides substantial relief to mobile service providers by allowing them to claim CENVAT credit on significant capital expenditure incurred by them for the inputs. 
• Clarifies Legal Position: Establishes clear principles for determining the nature of mobile towers and related infrastructure as movable goods rather than immovable property
• Broadens Input Definition: Adopts a purposive interpretation of "inputs" under the CENVAT Rules, focusing on functional nexus rather than rigid categorization. 
• Potential Industry Impact: Affects major telecom operators including Bharti Airtel, Vodafone India, Tata Teleservices, Idea Cellular, Reliance Communications, and Indus Towers

Conclusion

The judgment, therefore, represents a major victory for the telecommunications industry in India. By recognizing mobile towers and prefabricated buildings as eligible for CENVAT credit, the Supreme Court has provided clarity on a long-standing dispute and affirmed a more liberal interpretation of the CENVAT Credit Rules that recognizes the functional realities of modern telecommunications infrastructure.