DA Newsflash (Central Excise) - SC upheld ITC eligibility on Telecom Infra

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Issue: Whether mobile towers and prefabricated buildings (PFBs) used by mobile service providers (MSPs) qualify as “capital goods” or “inputs” under the CENVAT Credit Rules, 2004, and whether they are eligible for Input Tax Credit (ITC) under GST laws.

Relevant Provisions:

• Rule 2(a)(A) of CENVAT Credit Rules, 2004 (Definition of "capital goods").
• Rule 2(k) of CENVAT Credit Rules, 2004 (Definition of "input").
• Rule 3(1) of CENVAT Credit Rules, 2004 (Claiming CENVAT credit).
• Section 17(5)(d) of the CGST Act, 2017 (Restriction on ITC for immovable property).

Observation and Judgment: The Supreme Court ruled in favor of mobile service providers, holding that mobile towers and PFBs are movable properties primarily used for telecommunication services. Their attachment to the ground is for functionality and stability, not for permanent use. This classification qualifies these items as "capital goods" or "inputs" under the CENVAT Credit Rules, enabling MSPs to claim CENVAT credit on excise duties paid.

The Court also clarified that mobile towers and PFBs serve as essential accessories to Base Transceiver Stations (BTS) and antennas, crucial components in telecom services. By applying the functionality and proximity tests, the Court emphasized that the towers and PFBs play an indispensable role in providing telecommunication services, thereby qualifying for ITC under CENVAT rules.

However, under the GST framework, the Court highlighted the limitations imposed by Section 17(5)(d) of the CGST Act, which prohibits ITC for immovable property except for plant and machinery. Drawing parallels with the Safari Retreats judgment, the Court noted that the functionality test could determine whether telecom infrastructure like towers can qualify as “plant or machinery” under GST laws. This approach leaves the GST treatment of such items open to further litigation and fact-specific inquiries.

DA Insights: The SC ruling expands the scope of ITC under CENVAT by emphasizing the functional and accessory nature of telecom towers and PFBs. However, under GST, Section 17(5)(d) still poses challenges for telecom companies, requiring case-by-case evaluations based on the functionality test.

Case Reference: M/s Bharti Airtel Ltd. vs. The Commissioner of Central Excise, Pune; Supreme Court of India (2024 INSC 880) and Chief Commissioner of CGST & Ors. vs. M/s Safari Retreats Pvt. Ltd. & Ors. (Civil Appeal No. 2948 of 2023).

GST Implications and Safari Judgment Insights:

• GST Challenges: Section 17(5)(d) of the CGST Act restricts ITC for immovable property, which may exclude towers and PFBs unless classified as "plant or machinery." Telecom companies must now establish the functional necessity of these structures to qualify for ITC under GST.
• Parallels with Safari Judgment: The Safari Retreats case introduced the functionality test for determining whether immovable property, such as malls, qualifies as a “plant.” Similar principles could apply to telecom towers, creating an avenue for claiming ITC.
• Impact on Telecom Sector: While the SC ruling provides clarity under the CENVAT regime, the GST treatment of telecom infrastructure remains complex and uncertain, with exclusions under Section 17(5)(d) potentially increasing costs for service providers.

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