Disallowance of Cenvat credits to the telecom industry
April, 16th 2012
Several earlier articles in this column have discussed the indirect tax issues surrounding the mobile telecommunications industry. An important constituent of this industry, namely the passive infrastructure sector, has witnessed significant litigation, in terms of the excisability of the communication towers that are erected in situ as well as on the availability of input credits on the goods and services used by the sector.
The first issue on chargeability to excise duty of the activity of erection of telecommunication towers etc. has now concluded vide the Mumbai High Courts decision in CCE Vs. Hutchison Max Telecom Pvt. Ltd. (2007 TIOL -809-HC-MUM), wherein it held that such activity brought into being immoveable property in the form of towers etc. and hence could not be subject to excise duty. This article discusses a recent important decision of the Mumbai Tribunal in the case of Bharti Airtel Ltd. Vs. CCE (2012-TIOL-209-CESTAT), which is on the other issue of availability of CENVAT credit on goods and services used in the erection of such passive infrastructure.
By way of background, the mobile telecommunications industry provides cellular telephone services through the use of active and passive infrastructure, to use industry terminologies. The active infrastructure, as the name implies, comprises the core elements of cellular telephony in the form of a network of contiguous radio cells providing coverage through operating on a dedicated set of radio channels of defined frequencies. Elements of the active infrastructure are the base transceiver station (BTS), the base station controller (BSC), the mobile switching centre (MSC) and microwave and GSM antennae. The antennae enable both the transmission and receipt of radio signals, enabling the cellular telephony to proceed uninterrupted as the subscriber is mobile. In contrast, the passive infrastructure comprises the elements which enable the active infrastructure to operate as described above. The telecom towers are used for hoisting the antennae to predetermined and technically viable heights for optimum coverage of the cellular network. The towers are typically erected at the site themselves and also comprise poles for mounting the antennae, shelters and housing for electrical and telecom equipment.
The question that arose in the case in point was whether the duties paid on the parts of towers were eligible for input tax credits under the CENVAT regime as either capital goods or as inputs themselves. It was argued by the appellants that the towers and parts thereof were critical components of the cell site, being an integrated telecom system classifiable as goods under a particular tariff heading in the excise schedule. It was submitted that the antennae could not receive and transmit signals unless they were installed high above the ground on the towers that were erected for this purpose.
It was also argued that the shelters and housing were also part of the cell site and hence eligible for credits. The fundamental proposition was that cellular telephony services could not be provided without the telecom towers. The alternate argument canvassed by the appellants was that the towers and parts thereof as well as the housing would qualify as inputs used for providing the output telecom services. A catena of case law on all aspects of the matter was relied upon in support of these arguments.
The department, on the other hand, argued that the erection of towers at site was a material fact since upon assembly, they become immoveable property. Such immoveable property was not covered by the definition of capital goods notwithstanding that what was received at site as duty paid goods, on which credits were sought, were parts of towers or towers in disassembled form . Reliance was placed on the decision of the Mumbai High Court in Hutchison Max (supra) which had held the cell site to be immoveable property. Structural support for radio antenna, as provided by the towers, could not be considered as part of the antenna at all. It was also argued that the tower companies were increasingly independent businesses and their business model typically required such towers to be used by several telecom operating companies, based on rental agreements executed for the purpose. It was hence incorrect to argue that the towers would be a part of antennae belonging to several such operating companies. It was also argued that antennae could be commercially deployed for providing telecom services without the use of towers, simply by installing them high rise buildings etc. The department also relied on several judgements.
The Tribunal discussed the definition of capital goods and inputs in the relevant rules. It emphasized that the definition of capital goods fundamentally relied on the classification of the goods under particular chapters of the Central Excise Tariff. As regard inputs, the Tribunal placed reliance on the definition which inter alia extended to all goods used for providing any output services.
The Tribunal then considered the principal argument of the appellants that the cell site comprising the antennae, towers, BTS, housing etc. was an integrated system classifiable under the particular heading of the Central Excise Tariff which qualified as capital goods in terms of the definition referred to above and stated that the Mumbai High Court's decision in Hutchison Max (supra) negated this argument of the appellants. The Tribunal held that the cell site could not be classifiable under the excise tariff at all, in view of the above decision holding it to be immoveable property in nature.
Consequently, it could not be argued that the towers and parts thereof could be treated as components of the qualifying goods under the definition of capital goods.
On the other point that the towers ought to be construed as essential part of the antennae, the Tribunal held that a component or part of any goods means something was required to make these goods a finished item. Since the towers merely enabled the antennae to function, they did not enter the composition of the antennae themselves and could not be construed as components or parts thereof. Finally, on the alternate plea that the towers and parts thereof were inputs under the relevant definition, the Tribunal held that in order for this argument to be upheld it must first be demonstrated that the towers and parts thereof were goods and were thereafter used for providing an output service. Since towers were immoveable property, this alternate argument failed at the threshold. Accordingly, the Tribunal negated the claim for input credits on any parts of the passive infrastructure used for providing mobile telephony services.
It must be kept in mind that the passive infrastructure is increasingly owned and operated by standalone companies providing such infrastructure to telecom operators for a consideration. The relevant question under the GST would be the admissibility of input credits on towers etc. on the understanding that the revenue streams of these companies in the form of rentals received from the telecom operators could conceivably be charged to the GST.