In a big win for the telecom sector, the Supreme Court Wednesday ruled service providers can claim Cenvat credits on central excise duties paid to buy key telecom infrastructure, such as towers and their components, green shelters, prefabricated buildings (PFBs) and other related materials.
Bharti Airtel, Vodafone Idea and Indus Towers stand to benefit from the ruling, which industry sources believe will give more than Rs 1,000 crore worth of benefits, cumulatively, to these companies.
“This pivotal ruling will have a positive impact on our company's financial exposure,” said Prachur Sah, MD & CEO, Indus Towers. “With this favourable outcome and a settled tax position, we are poised to continue advancing digital infrastructure growth across the country.”
The core issue raised before the SC in a huge batch of appeals was whether mobile service providers (MSPs), who pay excise duties on various items for setting up their business more particularly for erection of mobile towers and peripherals, can take the benefit of CENVAT Credit under the CENVAT Credit Rules 2004 for the purpose of payment of service tax on the output services rendered by them.
Conflicting views had emerged on the issue from the High Courts of Bombay and Delhi. While the Bombay High Court had ruled favoured the Revenue by holding that MSPs were not entitled to CENVAT credit on mobile towers and PFBs, the Delhi High Court had given a contrary ruling by extending the benefit to them. The decisions of both the HCs were challenged before the SC.
Setting aside the Bombay High Court's 2014 ruling that towers and green shelter were "immovable property", and hence did not qualify as "capital goods" or "inputs" as defined under the 2004 Rules, a Bench comprising Justices BV Nagarathna and N Kotiswar Singh said that the tower and PFBs are “goods” and not immovable property and since these goods are used for providing mobile telecommunication services, “the inescapable conclusion is that they would also qualify as “inputs” under Rule 2(k) for the purpose of credit benefits under the CENVAT Rules.”
“Thus, towers and PFBs, though are not electrical equipment for transmission of signals, yet these are used for transmission of signal by the antennas. Therefore, there can be no denying of the fact that 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. Hence, the view of the CESTAT which has not been disturbed by the Bombay High Court does not commend our acceptance,” the apex court said in its 76-page judgment.
The SC noted that antenna, tower, Base Transceiver System (BTS) along with accompanying network equipment and structures like PFBs, generation set typically constitute essential components for providing seamless mobile telecommunication service to the consumers/subscribers.
“The judgment is a major relief to the telecom industry. Denial of credit on taxes paid on towers was incorrect and contrary to the very scheme of Cenvat credit. This judgment will also have an impact on similar issues arising under GST,” senior counsel Tarun Gulati said.
'Valid Claims'
Excise duties are paid on purchase of the mobile towers or parts thereof and for erection of PFBs which are sought to be claimed by MSPs or the infrastructure providers as CENVAT credit. It is thereafter used for payment as service tax for the output service provided by the MSPs to the consumers.
Legal and industry experts welcomed the SC ruling that affirmed the telecom industry’s entitlement to claim the credit for taxes and duties paid on towers and its parts.
Anuradha Dutt, lawyer and managing partner of DMD Advocates, termed it as a "towering win on tower matters for the telecom industry."
"The groundbreaking judgment has decided an issue on which few thousand crores were riding for the telecom industry. Telecom services are rendered by telcos through telecom towers and shelters on which they pay tax (excise duty) while purchasing and then offset it against service tax payable on telecommunication services. The Bombay HC denied such credit stating the towers are immovable. The SC corrected this finding by allowing cenvat credit and removing the cascading impact of taxes.”
“The judgment will not only help the industry in fulfilling the compliances, but will also help reduce the financial burden on the sector,” Lt. Gen. Dr. S.P. Kochhar, Director General, COAI, said.
Manoj Kumar Singh, Director General of the Digital Infrastructure Providers Association, said that this forward-looking decision would strengthen the foundation of Digital India.
"This landmark decision will further strengthen our industry's capability to meet the escalating demands of digital connectivity while catalyzing fresh investments in the sector, fostering innovation, and advancing the government's vision of a digitally empowered India,” he said.
Bharti Airtel, Vodafone Idea and Indus Towers stand to benefit from the ruling, which industry sources believe will give more than Rs 1,000 crore worth of benefits, cumulatively, to these companies.
“This pivotal ruling will have a positive impact on our company's financial exposure,” said Prachur Sah, MD & CEO, Indus Towers. “With this favourable outcome and a settled tax position, we are poised to continue advancing digital infrastructure growth across the country.”
The core issue raised before the SC in a huge batch of appeals was whether mobile service providers (MSPs), who pay excise duties on various items for setting up their business more particularly for erection of mobile towers and peripherals, can take the benefit of CENVAT Credit under the CENVAT Credit Rules 2004 for the purpose of payment of service tax on the output services rendered by them.
Conflicting views had emerged on the issue from the High Courts of Bombay and Delhi. While the Bombay High Court had ruled favoured the Revenue by holding that MSPs were not entitled to CENVAT credit on mobile towers and PFBs, the Delhi High Court had given a contrary ruling by extending the benefit to them. The decisions of both the HCs were challenged before the SC.
Setting aside the Bombay High Court's 2014 ruling that towers and green shelter were "immovable property", and hence did not qualify as "capital goods" or "inputs" as defined under the 2004 Rules, a Bench comprising Justices BV Nagarathna and N Kotiswar Singh said that the tower and PFBs are “goods” and not immovable property and since these goods are used for providing mobile telecommunication services, “the inescapable conclusion is that they would also qualify as “inputs” under Rule 2(k) for the purpose of credit benefits under the CENVAT Rules.”
“Thus, towers and PFBs, though are not electrical equipment for transmission of signals, yet these are used for transmission of signal by the antennas. Therefore, there can be no denying of the fact that 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. Hence, the view of the CESTAT which has not been disturbed by the Bombay High Court does not commend our acceptance,” the apex court said in its 76-page judgment.
The SC noted that antenna, tower, Base Transceiver System (BTS) along with accompanying network equipment and structures like PFBs, generation set typically constitute essential components for providing seamless mobile telecommunication service to the consumers/subscribers.
“The judgment is a major relief to the telecom industry. Denial of credit on taxes paid on towers was incorrect and contrary to the very scheme of Cenvat credit. This judgment will also have an impact on similar issues arising under GST,” senior counsel Tarun Gulati said.
'Valid Claims'
Excise duties are paid on purchase of the mobile towers or parts thereof and for erection of PFBs which are sought to be claimed by MSPs or the infrastructure providers as CENVAT credit. It is thereafter used for payment as service tax for the output service provided by the MSPs to the consumers.
Legal and industry experts welcomed the SC ruling that affirmed the telecom industry’s entitlement to claim the credit for taxes and duties paid on towers and its parts.
Anuradha Dutt, lawyer and managing partner of DMD Advocates, termed it as a "towering win on tower matters for the telecom industry."
"The groundbreaking judgment has decided an issue on which few thousand crores were riding for the telecom industry. Telecom services are rendered by telcos through telecom towers and shelters on which they pay tax (excise duty) while purchasing and then offset it against service tax payable on telecommunication services. The Bombay HC denied such credit stating the towers are immovable. The SC corrected this finding by allowing cenvat credit and removing the cascading impact of taxes.”
“The judgment will not only help the industry in fulfilling the compliances, but will also help reduce the financial burden on the sector,” Lt. Gen. Dr. S.P. Kochhar, Director General, COAI, said.
Manoj Kumar Singh, Director General of the Digital Infrastructure Providers Association, said that this forward-looking decision would strengthen the foundation of Digital India.
"This landmark decision will further strengthen our industry's capability to meet the escalating demands of digital connectivity while catalyzing fresh investments in the sector, fostering innovation, and advancing the government's vision of a digitally empowered India,” he said.
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