Today, On 20th November, The Supreme Court ruled that telecom companies are entitled to CENVAT credit on tower parts, shelters, and chairs. The key issue in these appeals was whether these items should be classified as “capital goods” or “inputs” under the Cenvat Credit Rules, 2004. The Court’s decision clarifies the eligibility for tax credits on these items.
New Delhi: The Supreme Court granted appeals from telecommunications companies, including Airtel, Vodafone Idea, and Tata Telecommunications, that contested orders stating they were not eligible for Central Value Added Tax Credit (CENVAT credit) on items such as tower parts, shelters, printers, and chairs.
The judgment was delivered by a Division Bench comprising Justices BV Nagarathna and N Kotiswar Singh.
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“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 set aside the Bombay High Court decision of 2014 in Bharti Airtel,”
Justice Singh announced while reading the judgment’s operative portion. The key legal question 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 categorized as components of capital goods.
The CENVAT credit scheme enables manufacturers and service providers to offset taxes paid on inputs, capital goods, and input services against taxes owed on their final products or services. This system aims to prevent the cascading effect of taxes, where tax is applied at multiple stages of production or service delivery. By mitigating this effect, the scheme lowers the prices of finished goods for consumers and reduces manufacturing costs for producers.
Bharti Airtel previously claimed CENVAT credit on excise duties paid for tower parts, prefabricated shelters, printers, chairs, and other equipment until 2006. This credit used to offset service tax on telecommunications services. However, the Central Excise Department issued a show-cause notice in April 2006, alleging that Airtel had incorrectly claimed Rs. 2.04 crore in CENVAT credit.
The department contended that items like towers and shelters did not qualify as capital goods or inputs, as they were not integral to the final service provided to consumers. It also accused Airtel of suppressing facts to obtain ineligible credits. The notice sought recovery of the credit along with penalties and interest, and proposed the confiscation of goods.
Airtel argued that towers and shelters are essential components of the Base Transceiver Station (BTS) system, classifying them as “capital goods” under the rules. They also maintained that these items qualify as “inputs” necessary for delivering telecommunication services.
The matter escalated to the Commissioner of Central Excise, who dismissed Airtel’s arguments in December 2006 and denied the credit, asserting that the towers were immovable property and not “goods.” The commissioner imposed a penalty equal to the credit amount, along with interest.
Further demand notices for later periods (October 2005 to March 2008) totalled Rs. 15.4 crores. A second Commissioner’s order in March 2009 partially allowed credit on antennas but rejected it for towers and shelters, reaffirming their classification as neither capital goods nor inputs.
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Bharti Airtel then appealed to the Customs Excise Service Tax Appellate Tribunal (CESTAT), arguing that towers and shelters should qualify as capital goods or inputs under the CENVAT Credit Rules. However, CESTAT denied this claim, leading Airtel to appeal to the Bombay High Court.
In August 2014, the Bombay High Court ruled that Airtel was not entitled to CENVAT credit on these items, prompting the company to appeal to the Supreme Court. Similar decisions were made by the Bombay High Court regarding other telecom companies.
In contrast, the Delhi High Court issued a ruling in 2021 that permitted telecom companies to claim CENVAT credit on these items, prompting the revenue authority to appeal. Today, the Supreme Court upheld the Delhi High Court’s position.