Mobile Towers & Pre-Fabricated Buildings Moveable Properties, Qualify As 'Capital Goods' For CENVAT Credit : Supreme Court

The Supreme Court in a recent decision held that mobile service providers (MSPs) could avail the benefit of Central Value Added Tax/CENVAT Credit over excise duties paid on items such as mobile towers and prefabricated buildings. 

The bench of Justice BV Nagarathna and Justice N Kotiswar Singh observed that since mobile towers and PFBs could be detached and relocated, they qualified as movable properties and accessories in enhancing the functionality of the mobile service antenna attached on top of the tower. Thus, the items qualified as 'capital goods' or 'inputs' which were indispensable to provide effective mobile services (output) and MSPs can get a credit set-off on these items. 

The main issue considered by the Court was whether the Mobile Service Providers (MSP) could claim CENVAT Credits for the duties they paid on resources like tower part, shelter, prefabricated buildings (PFBs)

In considering so, the bench examined whether tower part, shelters etc come within the ambit of 'capital goods' or 'inputs' under the Central Value Added Tax/CENVAT Credit Rules, 2004 and whether 'capital goods' would encompass towers. 

What Is The CENVAT Credit Scheme? 

Under the scheme, the manufacturers get the benefit of set-off when certain inputs are used to complete their final product. Under the CENVAT Credit Rules, several 'input' items are enlisted to avail the credit, with each 'input' item being defined under the Rules. 

An example of such input goods would be - the engine parts , glass or metal used in manufacturing of a car. 

Notably, Rule 3(1) of 2004 Rules allows a provider of taxable service to claim CENVAT credit paid on any “capital goods” or “input” received in the premises of the service provider. 

The terms 'capital goods' or 'input' have been defined under Rule 2(a)(A) and Rule 2(k) which is discussed in detail below. 

What Led To The Present Dispute?  

The appellant Bharti Airtel (MSP) was served a show cause notice on April 25, 2006 by Commissioner of Excise alleging that appellant had wrongly taken and utilised CENVAT Credit on certain goods which do not qualify as “capital goods” within the meaning of CENVAT Credit Rules, 2004 and thus, availing such credit was contrary to the definition under Rule 2(a)(A) and Rule 4 of the CENVAT Rules.

The goods mentioned in the said show cause notice include amongst others: (i) towers and parts of towers; (ii) prefabricated building (PFB) used as a shelter for protecting transmission devices which are the primary concern of these proceedings.

The Commissioner had also imposed penalties while noting that items like tower, antenna, prefabricated building (PFB) etc. have independent and definite functions and cannot be treated as a single integrated unit and accordingly, these items/goods cannot be treated as capital goods and CENVAT credit cannot be allowed.

The Revenue held that only equipment like BTS, transmitter, antenna which are used in providing telecom service and which are covered under various Chapters under Rule 2(a)(A) are eligible for CENVAT credit vide order dated 19.12.2006 of the Commissioner of Excise/Revenue.

The said order was then challenged before the CESTAT in appeal along with another order of the revenue for recovery of the penalty amount.  The CESTAT however, upheld the decision revenue orders. 

The decision then travelled in appeal before the Bombay High Court. The High Court in its order dated 26 August 2014 also upheld the decision of the revenue authorities. 

The Bombay High Court was of the view that as per the definition clauses in CENVAT Rules - the items concerned that is tower and parts because of being fastened and fixated to the earth after their erection became immovable properties and could not come under the definition of 'capital goods'. 

The towers and other parts in completely knocked down condition (CKD) or semi-knocked down condition (SKD) would fall under  Chapter Heading 7308 of the Central Excise Tariff Act, but the aforesaid heading is not specified either in clause (i) or clause (ii) of Rule 2(a)(A) of the CENVAT Rules to be treated as “capital goods”.

Notably, heading 7308 of the Central Tariff Act covers structures and parts made out of iron or steel excluding PFBs. As per Rule 2(a)(A) capital goods means (unless the context otherwise requires)- 

"(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, [heading 6805, grinding wheels and the like, and parts thereof falling under [heading 6804 and wagons of sub-heading 860692]] of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipment;

(iii) components, spares and accessories of the goods specified at (i) and (ii);

(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof; 

(vii) storage tank, [and]

[(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis [but including dumpers and tippers], 

used -

(1) in the factory of the manufacturer of the final products; or

[(1A) outside the factory of the manufacturer of the final products for generation of electricity [or for pumping of water] for captive use within the factory; or]

(2) for providing output service;"

The High Court also rejected the view that tower is an accessory of antenna since, without tower, antenna cannot be installed, and consequently, antenna cannot function and hence tower should be treated as part or component of antenna. 

It was concluded that all capital goods are not eligible for credit and only those “capital goods” which fall under Rule 2(a)(A)(i) and (ii) relatable to the output services and mentioned in the CENVAT Rules will be available for credit. The tower and parts thereof and PFB cannot be considered to be “capital goods” for the purpose of CENVAT credit as they are neither mentioned nor are components, spares or accessories of goods falling under any of the Chapters or Headings of the Central Excise Tariff Schedule as specified in Rule 2(a)(A). 

The decision was then challenged before the Supreme Court. 

However, a contrary stand was taken by the Delhi High Court in its decision in Vodafone Mobile Services Limited vs Commissioner Of Service Tax held that (1) the concerned items were in fact movable goods and (2) credit could be availed on them as they come under the definition of 'capital goods' as the items qualified as 'accessories' or 'component' of the Base Transceiver Station (BTS) and antenna. 

The Delhi High Court opined that the entire tower and shelter are fabricated in the factories of the respective manufacturers and thereafter, are supplied in CKD condition to the mobile service providers. It was held that these are merely fastened to the civil foundation to make these wobble free and stable. It was also held that tower and PFB can be unbolted and reassembled without any damage and relocated to a new site. 

The High Court further observed that the items of tower, PFBs etc were accessories of capital goods under Rule 2(a)(A). The Court noted that an accessory is an article or device that adds to the convenience or effectiveness but is not essential to the main machinery. It was held that tower has to be considered as an essential component/part of the “capital good” being BTS and the antenna. The Antenna which receives and transmits signals and used for providing output mobile service cannot be installed high above the ground without the tower. 

The PFBs were also accessories in the sense that they were used for the placement of various BTS equipment and other devices in a dust-free environment with ambient temperature.

The Assesses before the Supreme Court majorly contended that the mobile tower is an accessory of “antenna” which is part of “BTS” and since antenna and BTS fall under Chapter 85 which are “capital goods”, mobile tower being accessory of antenna and BTS is to be treated as “capital good” by virtue of sub-clause (iii) of Rule 2(a)(A). Similar is the case with PFBs. It also contended that the concerned items be considered as movable properties and thus 'goods'.

The Revenue Authorities on the other hand claimed that the towers and PFBs have independent functions and existence and have specific utilities and thus these cannot form part of a composite system or a single unit and hence they cannot be considered to be accessories of the antenna or BTS. The Revenue rejected the argument that concerned items were movable properties as they were mainly fixated to the earth and incurred damage on re-installation. 

Mobile Towers, PFBs Qualify As Movable Properties And Can Be Considered As 'Goods' : Supreme Court Observes 

 The Court first dissected what the term 'goods' meant. It relied on the definition of goods under Section 2(27) of the General Clauses Act 1897 which states : 

“goods” means every kind of movable property other than actionable claim and money; and includes stocks, shares, growing crops, grass, and things attached to forming part of the land which are agreed to be severed before sale or under contract of sale

The court then dissected what would mean a 'movable property' for it fall under the definition of goods. Here reliance was placed on the conjoint reading of Section 3(36), 3(26) of the General Clause Act and Section 3 of the Transfer of Property Act, 1882. 

Section 3(36) of the General Clauses Act defines a movable property as : “movable property” shall mean property of every description, except immovable property; 

Whereas, Under S. 3(26), Immovable property would include -e land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

The Court further dwelt on what was meant by 'attached to the earth' under S. 3 of the TPA which states : “attached to the earth” means: (a) rooted in the earth, as in the case of trees and shrubs; (b) imbedded in the earth, as in the case of walls or buildings; or (c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached. 

It was thus understood by the Court, that for towers and PFBs to qualify as goods, they cannot be immovable properties which are rooted in earth, imbedded in earth or attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached. 

The court then turned to a few settled principles of laws to understand the nature of towers and PFBs before concretely concluding that they were in fact movable goods. In doing so, the Court referred to the intendment and functionality test as laid down in Commissioner Of Central Excise, Ahmedabad v. Solid and Correct Engineering.  

In the said case, the issue for consideration was whether the asphalt drum/hot mix plant, though apparently appearing to be immovable and fixed to the structure embedded to the earth, can be considered to be movable. Since the machine was fixed and attached to earth primarily for the purpose of providing wobble-free operation of the machine, it was not intended to make the machine a permanent fixature to the earth. 

Within this functionality test, the Court examined two other tests - test of marketability and test of lack of permanency. For the test of marketability, the Court therein referred to the decision in Triveni Engineering & Industries Ltd. & Anr. V. Commissioner of Central Excise where it was held that "if the goods in question are capable of being taken into the market and sold, the same cannot be treated to be as immovable but movable property."  

The Court in Solid and Correct Engineering thus concluded that if the goods which were fixed to the earth could be dismantled without any damage or change in the nature of goods it would signal 'absence of permanency'  and cannot be considered as an 'immovable property'.

Applying the above principles in the present case, the Court analysed that while the towers and PFB can be dismantled from its installed location and re-installed at another place, the damages incurred in the process is to the BTS/BSC (Base Station Controller) or the cables and not the movable property- towers of PFB. 

The Court, concluded that the mobile towers and PFBs would be goods as they are movable properties. 

"There can no dispute that if the newly set up BTS/BSC is relocated to another site it may entail certain damages. However, what is important to be noted is that the damage is qua the BTS/BSC or cables connecting the various components, but not the tower itself or PFB with which we are concerned. If the tower or the PFB can be dismantled and relocated in another site without causing any damage to either the tower or PFB, the mobility or the marketability of these items is retained. Thus, as far as the tower and PFBs are concerned, these exhibit the character of a movable property."

"In view of the above decisions, 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."  

"Applying the tests of permanency, intendment, functionality and marketability, it is quite clearly evident that these items are not immovable but movable within the meaning of Section 3 of the Transfer of Property Act, read with Section 3 (36) of the General Clause Act."

"If we consider the nature of annexation of the tower to the earth, it is seen that the annexation is not for permanent annexation to the land or the building as the tower can be removed or relocated without causing damage to it." 

Mobile Towers And PFBs Constitute As Accessories To 'Capital Goods' Under 2004 Rules  

The court first dissected the term 'accessory' as per its dictionary meaning. The bench observed that accessory meant "any such item which adds to the beauty, convenience or effectiveness of some other items can be said to be accessory of that other thing and it may or may not be essential for functioning of main machinery." 

Reliance was also placed on the decision in M/s. Annapurna Carbon Industries Co. v. State of Andhra Pradesh which held that an accessory would mean an object or a device that is not essential in itself but that adds to the beauty or convenience or effectiveness of something else or is supplementary or secondary to something of greater or primary importance, which assists in operating or controlling the said good, and thus serves as its accessory.

Thus the bench observed that an accessory would mean anything which enhances the efficacy of the main good. 

"In order for any article to be considered a component of another article, it does not necessarily mean that it has to be consumed or used up for producing the said another article as in the case of a manufacturing process. In our considered opinion, a component of any good would also mean to include those which make the good fully functional and make such a good more effective." 

The Court then analysed the above proposition in terms of the characteristics of mobile towers and PFBs and how they act as an accessory to the antenna by enhancing the latter's functionality. 

"The tower itself is not an electrical component of microwave antenna per-se, yet it is necessary and helps in keeping the antenna at proper height and in a stable position so that the antenna can transmit signals for ensuring uninterrupted and seamless services to the subscribers. It is with the aid of the tower that the potential of the antenna is fully realised, making it function optimally. Without tower, antenna cannot effectively function for the purpose it is used. Hence, there can be no doubt that tower is to be considered as an accessory of antenna" 

"PFBs enhance the efficacy and functioning of mobile antenna as well as BTS and accordingly, PFBs can also be considered as accessories to the antenna and BTS which are “capital goods” falling under Chapter 85 of the Schedule to the Central Excise Tariff"

Thus the Court concluded that mobile towers and PFBs fall under the definition of "Capital goods" with a combined reading of Rule 2(a)(A)(i) and (iii) of 2004 Rules. 

Rule2(a)(A)(i) states that capital goods consist of those goods falling under Chapter 85 of the 1st Schedule to the Excise Tarrif Act. 

Notably Chapter 85 includes within its fold 'other aerials or antenna'- thus including mobile network antennas. 

And Rule 2(a)(A)(iii) states that any accessory or component of those goods listed in Chapter 85 would also come under the purview of 'capital goods'.  

The Court also concluded that since mobile towers and PFBs qualified as 'capital goods' and are being used for an output service of mobile service, they can be considered as an 'input' within the terms of Rule 2(k). 

As per Rule 2(k)(iv), an input means 'all goods used for providing any [output service]. Thus mobile towers and PFBs were held to be inputs and telecom providers could now avail credit upon these items as per Rule 3 of the CENVAT Credit Rules 2004. 

Thus the Court upheld the view taken by the Delhi High Court and set aside the contrary ruling of the Bombay High Court. The Court ruled that "Having held that the tower and pre-fabricated buildings (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." 

Case Details : M/S BHARTI AIRTEL LTD. v. THE COMMISSIONER OF CENTRAL EXCISE, PUNE | CIVIL APPEAL NOS. 10409-10410 OF 2014

Citation : 2024 LiveLaw (SC) 909

Click here to read the judgment