Bharti Airtel Judgment: Analysis, Implications and Way Forward

The Supreme Court in Bharti Airtel Ltd. v. CCE¹ has significant implications for the telecommunication sector specifically concerning the availment of Central Value Added Tax (Cenvat) credit on towers and shelters/pre-fabricated buildings (PFBs) procured by the telecommunication companies for providing output services. Vide its judgment, the Supreme Court held that telecom companies are entitled to avail Cenvat credit of excise duty paid on towers and shelters procured by them for providing output services.

Background

Initially, there was a long-standing debate on whether these structures, viz. towers, shelters/PFBs, etc. could be considered immovable property/inputs/capital goods, thus affecting their eligibility for Cenvat credit. The Supreme Court has provided much-needed clarity by resolving the conflicting decisions of the Bombay High Court and the Delhi High Court.

The Bombay High Court in Bharti Airtel Ltd. v. CCE² decided the issue in favour of the Revenue and held that upon affixation and fastening to the earth, the towers and shelters become immovable properties and therefore, denied Cenvat credit of excise duty paid on towers and shelters procured for providing output services.

However, the Delhi High Court in Vodafone Mobile Services Ltd. v. CST³ took a contrary stand and held that the towers and shelters cannot be termed as immovable property and therefore, assessees are eligible to avail Cenvat credit on towers and shelters.

Supreme Court’s judgment: Key considerations

Aggrieved by the above judgments, the respective parties filed appeals before the Supreme Court. The Supreme Court, in its ruling, considered the statutory provisions, judicial precedents and the findings given by the High Courts in their impugned judgments and decided the following three crucial points:

(i) Towers and shelters are movable properties

(a) The Supreme Court applied various tests, viz. permanency, intendment, functionality and marketability tests as laid down in various judgments⁴ to hold that the towers and shelters are not immovable but movable properties inasmuch as the towers and shelters can be dismantled and relocated in another site without causing any damage to the towers and shelters.

(b) It was noted that the towers are fixed to the land or building for enhancing the operational efficacy and proper functioning of the antenna affixed on the tower by making it stable and wobble free.

(c) The Supreme Court applied the functionality test, to hold that the attachment of towers to the earth/building is not for the benefit of land/building but only for the better function of the antenna which is mounted on the tower.

(ii) Towers and shelters qualify as “capital goods”

(a) The Supreme Court noted that the towers help in keeping the antenna at proper height and in a stable position so that the antenna can transmit signals uninterruptedly and seamlessly. Further, the shelters house, other base transceiver station (BTS) equipment/diesel generator, which provide alternative and uninterrupted power supply to the antenna.

(b) It was therefore held that the towers and shelters are accessories to the antenna and BTS and therefore, were to be treated as capital goods in terms of sub-clause (iii) of Rule 2(a)(A) of the Central Value Added Tax (CENVAT) Credit Rules, 2004⁵.

(iii) Towers and shelters qualify as “inputs”

(a) The Supreme Court held that the towers and shelters are items which are used for providing output services (i.e. mobile telecommunication services) inasmuch as without the towers and shelters, the service providers cannot provide such output services in an effective manner. Therefore, the use of towers and shelters in providing output service is not remote but proximate and the towers and shelters can be qualified as “inputs” under Rule 2(k) of the CENVAT Credit Rules, 2004⁶.

Implications of the judgment of Supreme Court

(i) Implication under the service tax regime

In light of the judgment of the Supreme Court, the Chhattisgarh High Court in BSNL v. CCE & Customs⁷ allowed the appeal filed by the assessee and set aside the judgment of the Tribunal, wherein it was held that the assessee was not eligible to avail credit of excise duty paid on towers and shelters procured by them for providing output telecom services.

(ii) Implication under the goods and services tax (GST) regime

Further, the Delhi High Court in Bharti Airtel Ltd. v. Commr. (CGST)⁸ disposed of a batch of writ petitions which involved common issue relating to availment of input tax credit of GST paid on the goods and services received by the assessees for setting up of towers and shelters. In the said case, the Department sought to deny such credit on the ground that the inputs/input services are received and used for construction of immovable property and therefore, input tax credit is restricted as per the provisions of Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017 and explanation to Section 17 of the CGST Act, 2017.

The Delhi High Court observed that the restriction envisaged under Section 17(5)(d) of the CGST Act, 2017 would apply only if the towers and shelters qualify as immovable property. Thereafter, the Court relied upon the judgment of the Supreme Court and noted that since the towers and shelters are movable property, they would not fall within the ambit of Section 17(5)(d) of the CGST Act, 2017 and thus, the denial of input tax credit to the assessees would not sustain.

Way forward under tax laws

The judgment of the Supreme Court in Bharti Airtel Ltd. case⁹ is likely to have a positive impact on several matters pending before different forums, viz. the Supreme Court, High Court, tribunals. Vandana Global batch¹⁰ currently pending before the Supreme Court, is one of the cases likely to benefit from the judgment of the Supreme Court.

In the said case¹¹, the larger Bench of the Tribunal dismissed the appeal filed by the assessee and denied the availment of credit inter alia on the ground that the steel items, viz. angles, joints, beams, channels, etc., used in the construction work, results into structures, which are permanently embedded to the earth. Thus, they cannot be qualified as “goods” and therefore, cannot be qualified as “capital goods”. The judgment of the larger Bench of the Tribunal was reversed by the Chhattisgarh High Court¹² against which, an appeal was filed by the Department before the Supreme Court which was dismissed on the ground of low tax effect.

However, Bharti Airtel Ltd. judgment¹³ may have a positive implication on a batch of matters¹⁴ still pending before the Supreme Court, on the similar issue.

Further, the judgment of Bharti Airtel Ltd. case¹⁵ will also be helpful in determining the eligibility of assessees to avail credit of duty paid on the construction of the following items affixed on the earth through nuts and bolts under both erstwhile regime as well as the GST regime:

(a) Storage tanks and silos.

(b) Pre-fabricated buildings.

(c) Shelters and other structural supports.

(d) Aluminium cabins, etc.

Way forward under other laws

The effect of the judgment of Supreme Court will also have wide ramifications on the following laws:

(a) Property tax: The ratio regarding movability of mobile towers as laid down by the Supreme Court in Bharti Airtel Ltd. case¹⁶ may also have impact on levy of property tax by the State Legislature, particularly, when the Supreme Court in Ahmedabad Municipal Corpn. v. GTL Infrastructure Ltd.¹⁷, has held that mobile tower forms part of the “building” for the purposes of Entry 49 of List II¹⁸ of the Seventh Schedule¹⁹ to the Constitution²⁰.

The Telecommunications Act, 2023²¹

Notably, the Parliament enacted the Telecommunication Act, 2023 (Telecom Act) wherein, Section 14(3)²² of the Telecom Act, 2023 (effective from 26-6-2024) stipulated that the telecom towers installed on any property shall not be considered to be a part of such property for the purpose of leviability of any property tax, levy, cess, fees or duties as may be applicable on that property.

Furthermore, to provide consistency with other laws, Section 52(2)²³ of the Telecom Act, 2023 provides that in case of conflict between the provision of the Telecom Act, 2023 and any other law, the provision of the Telecom Act, 2023 will prevail.

Therefore, in light of the above provisions, it will be interesting to see the interplay of the ratio laid down by the Supreme Court in Ahmedabad Municipal Corpn. case²⁴ and Bharti Airtel Ltd. case²⁵ in accordance with Section 14²⁶ of the Telecom Act, 2023.

(a) The Building and Other Construction Workers’ (Regulation of Employment and Conditions of Service) Act, 1996²⁷ (BOCW Act): In various States, the Tax Department has issued/passed assessment notices/order against the telecom companies demanding them to deposit one per cent cess of the cost of expenditure incurred by them in erection and installation of the mobile towers. Notably, in terms of Section 2(1)(d)²⁸ of the BOCW Act, 1996, to qualify as “building or other construction work”, there must be some activity of construction carried out in respect of the structures specified thereunder. Further, the Supreme Court in U.P. Power Transmission Corpn. Ltd. v. CG Power and Industrial Solutions Ltd.²⁹ also held that the civil work not qualifying under the ambit of construction work do not attract the levy of cess amount under the BOCW Act, 1996.

The telecom companies have challenged these assessment notices/orders before the High Courts inter alia on the ground that telecom towers are temporary structures which are erected and installed with the help of nuts and bolts to provide wobble free operations. Therefore, as there is no “construction work” which is undertaken by the telecom companies, the erection and installation of the telecom towers will not be covered within the definition of “building and other construction work”. The judgment of the Supreme Court in Bharti Airtel Ltd. case³⁰ may also strengthen the arguments taken by the assessees on these matters pending before the High Courts.