Relief for telcos as SC grants right to claim tax credits on infra duties

Overturns 2014 Bombay HC ruling classifying infrastructure items as non-capital goods

In a win for telecommunications companies (telcos) such as Bharti Airtel, Vodafone Idea, Reliance Communications, Indus Towers, and Tata Telecommunications, the Supreme Court (SC) ruled on Wednesday that they can avail of tax credits for duties paid on infrastructure like towers, parts, shelters, printers, and chairs, against the service tax they pay for providing cellular services.

 

The Division Bench of Justices B V Nagarathna and N Kotiswar Singh overturned a 2014 Bombay High Court (HC) ruling, which had said that telcos could not avail themselves of central value-added tax (cenvat) credit on infrastructure for offsetting the service tax paid on cellular services. This ruling aligns with the views of several other HCs, particularly the 2018 Delhi HC decision.

   

“Having held that towers and prefabricated (prefab) buildings are ‘goods’ and not immoveable property, and since these goods are used for providing mobile telecommunications (telecom) services, the inescapable conclusion is that they qualify as ‘inputs’ under Rule 2(k) for credit benefits under the Cenvat Rules,” the court observed.

 

Until now, the government had mandated that telecom companies pay excise duties on various items necessary for setting up their businesses, particularly for the erection of mobile towers and associated peripherals like prefab buildings. However, it restricted them from claiming cenvat credit under the Cenvat Credit Rules, 2004, to offset service tax payments on the output services they provided.

 

The scheme allows manufacturers and service providers to offset taxes paid on inputs, capital goods, and input services against taxes payable on their final product or service. It was designed to avoid the cascading effect of taxes — where tax is levied on tax at various stages of production or service provision. This, in turn, helps lower the price of finished goods for consumers and reduces manufacturing costs for producers.

 

There had been conflicting views from the Bombay and Delhi HCs on this matter, which were challenged before the SC by both the telcos and revenue. The key legal question was whether tower parts and shelters qualify as ‘capital goods’ or ‘inputs’ under the Cenvat Rules and whether towers can be considered components of capital goods.

 

“The apex court’s judgment will not only help the industry comply with regulations but also reduce the financial burden on the sector. By confirming the view of the Delhi HC, this verdict reinforces fairness and consistency in taxation,” said S P Kochhar, director-general (D-G) of the Cellular Operators Association of India.

 

The Digital Infrastructure Providers Association (DIPA), which represents tower firms, said the judgment would significantly improve the financial health of infrastructure providers, enabling them to accelerate the deployment of digital infrastructure across India.

 

“It will release substantial working capital that can be strategically reinvested in infrastructure development, while simultaneously reducing the overall cost of service delivery across the sector,” said Manoj Kumar Singh, D-G of DIPA.

 

The pivotal ruling will have a positive impact on the financial exposure of Indus Towers, the second largest tower infrastructure company in the country, MD & CEO Prachur Sah said. "With this favourable outcome and a settled tax position, we are poised to continue advancing digital infrastructure growth across the country,” he said.

 

Lawyers noted that the judgment may have a limited impact

 

“Since the ruling pertains to the service tax regime, which has now been merged into goods and services tax (GST), its prospective effect will be limited. However, in the recent case of Safari Retreats, the SC also held a similar view regarding the allowability of GST credit on building construction,” said Ankit Jain, partner at Ved Jain & Associates.

 

Lengthy legal fight

 

The central excise department had issued a show cause notice in April 2006 to Airtel for availing of cenvat credit on excise duty paid for tower parts, prefab shelters, printers, chairs, and other equipment up to 2006, totalling Rs 2.04 crore.

 

According to the department, items like towers and shelters did not qualify as capital goods or inputs, as they were not part of the final service rendered to consumers. The department also alleged that Airtel had suppressed facts to claim ineligible credit and sought recovery of the credit, with penalties and interest, along with proposed confiscation of goods.

 

However, Airtel argued that towers and shelters were integral to the base transceiver station system, which qualifies as ‘capital goods’ under the rules. When the dispute reached the Commissioner of Central Excise, it ruled that towers were immoveable property and not ‘goods’, imposing a penalty equal to the credit amount and interest on Airtel.

 

The department also issued demand notices from October 2004 to March 2008 for Rs 17.43 crore. A second commissioner’s order in March 2009 partially allowed credit for antennae but rejected credit for towers and shelters, arguing that they were not capital goods or inputs.