Telcos entitled to CENVAT credit on tower parts, shelters and chairs: Supreme Court

The Supreme Court on Wednesday allowed appeals filed by telecommunication companies such as Airtel, Vodafone Idea and Tata telecommunications challenging orders that held that they were not entitled to Central Value Added Tax Credit (CENVAT credit) on tower parts, shelter, printers and chairs [M/S Bharti Airtel Limited v. Commissioner of Central Excise, Pune III].

The judgment was passed by a Division Bench of Justices BV Nagarathna and N Kotiswar Singh.

"We have allowed the appeals in the main matter as well as connected matters by the companies. We have upheld the 2021 Delhi High Court decision and have set aside the Bombay High Court decision of 2014 in Bharti Airtel," Justice Singh said, while reading out the operative portion of the judgment.

A copy of the detailed order is awaited. 

The question of law raised in these appeals was whether tower parts and shelters qualify as "capital goods" or "inputs" under the Central Value Added Tax/ CENVAT Credit Rules, 2004 and whether towers can be considered components of capital goods.

The CENVAT credit scheme allows manufacturers and service providers to offset taxes paid on inputs, capital goods, and input services against the taxes payable on their final product or service. This system was designed to avoid the cascading effect of taxes, that is, where tax is levied on tax at various stages of production or service provision. Avoiding the cascading effect would bring down the price of the finished goods for the consumers and the cost of manufacturing for manufacturers. 

Genesis of the dispute

Bharti Airtel availed CENVAT credit on excise duty paid for tower parts, prefabricated shelters, printers, chairs and a few other equipment till 2006. The credit was used to offset it against service tax payable on telecommunication services. However, the Central Excise Department issued a show-cause notice in April 2006, contending that the company had wrongly availed ₹2.04 crore CENVAT credit. 

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

Airtel contended that towers and shelters form an integral part of the Base Transceiver Station (BTS) system, which qualifies as "capital goods" under the rules. It was further argued that the goods qualify as "inputs" since they are essential for providing telecommunication services.

The dispute reached the Commissioner of Central Excise, who rejected Bharti Airtel's arguments in December 2006 and disallowed the credit, concluding that the towers were immovable property and not "goods." The commissioner further imposed a penalty equal to the credit amount and interest was imposed as well.

Further demand notices issued for subsequent periods (October 2005 to March 2008) raised an aggregate demand of ₹15.4 crores. A second Commissioner’s order in March 2009 partially allowed credit on antennas but rejected credit for towers and shelters, reiterating that they were not capital goods or inputs.

Bharti Airtel challenged the orders before the Customs Excise Service Tax Appellate Tribunal (CESTAT), arguing that towers and shelters qualify as capital goods or inputs under the CENVAT Credit Rules. The CESTAT also rejected this contention as a result of which Airtel filed an appeal before the Bombay High Court.

In August 2014, the Bombay High Court ruled that Airtel was not entitled to take CENVAT credit on these items prompting it to file an appeal in the Supreme Court. Similar orders were passed by the Bombay High Court in cases filed by various other telecom players. 

Meanwhile, in 2021, the Delhi High Court took a contrary view and allowed telcos to take CENVAT credit on these items. The revenue filed an appeal against this decision. The Supreme Court today has affirmed the Delhi High Court's view.

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