By TIOL News Services

MUMBAI, AUG 27, 2014: THIS is case which decision was being eagerly awaited by both sides. And the judgment is out and in favour of the Revenue.

Tweet it, Whatsapp it or post it on FB for it's a victory for the Revenue. For all this, perhaps one would be using the same service provider!

And the implications are bound to be felt all over the country.

The facts:

Appellant is engaged in providing cellular telephone services and is paying service tax. They availed CENVAT credit of excise duty paid on towers parts and shelters/ prefabricated buildings purchased by them and alleged to be used for providing output service. The credit so availed was utilised for payment of service tax on the output service.

The department objected to the availment of CENVAT credit on these items and proceedings were initiated.

The CCE, Pune-III passed an order-in-original dated 19.12.2006 &confirmed the demand of Rs.2,04,39,093/- along with penalties etc. In respect of towers and parts thereof, prefabricated building, printers and office chairs, the Commissioner observed that the appellant had availed benefit of Cenvat Credit on the Base Transreceiver Station (BTS) claiming to be a single integrated system consisting of tower, GSM or Microwave Antennas, Prefabricated building, isolation transformers, electrical equipments, generator sets, feeder cables etc. It was observed that these systems have been treated as “composite system” classified under Chapter 85.25 of the Tariff Act and that the appellant's contention that these systems should be treated as 'capital goods' and credit be allowed, could not be accepted. It was observed that each of these goods had independent functions and hence, they cannot be treated and classified as single unit. It was observed that all capital goods are not eligible for credit and only those relatable to the output services would be eligible for credit. It was further observed that only telecom equipments like BTS transmitters which are used in providing telecom services alone would be liable to input credit. The challenge on limitation was also not accepted.

The Tribunal had granted a stay in the matter by observing that the appellant had a prima facie case in favour. In the matter of the credit taken on Printers and Office chairs, the Advocate offered to deposit Rs.10 lakhs. See 2007-TIOL-1150-CESTAT-MUM.

Three further SCNs were issued covering the period October 2005 to March 2008 making an aggregate demand of Rs.15,40,63,898/-.

By an orderdated 23.3.2009, the Commissioner disallowed the Appellant's claim for credit amounting to Rs.13,02,08,928/-. However, Cenvat credit on antenna amounting to Rs.2,38,54,970/- was allowed and the demand in that regard was dropped. The demand in respect of other items viz. the tower and parts thereof and the prefabricated building was confirmed. While confirming the demand in respect of tower and parts thereof, it was observed by the Commissioner that tower is fixed to the earth and after its installation becomes immovable and therefore, cannot be goods. It was also observed that even in CKD or SKD condition, the Tower and parts thereof would fall under Chapter heading 7308 of the Central Excise Tariff Act which is not specified in clause (i) or clause (ii) of Rule 2(a)(A) of the Credit Rules,2004as capital goods.It was further held that tower and parts thereof are not directly utilised for output service as the same has been basically a structural support for certain equipment. Such towers by no stretch of imagination can be considered parts of telecom equipment or as telecom equipment by themselves and it was thus held that tower and parts thereof do not qualify as capital goods. Applying the same reasoning, credit on prefabricated building was also rejected.

Appeal No.ST/145/2009 was filed before the Tribunal against this order. The Tribunal directed a pre-deposit of Rs.5 crores. See 2010-TIOL-1003-CESTAT-MUM.

The appellant being aggrieved by the said order passed by the Tribunal had filed Central Excise Appeal no.116 of 2010 before the Bombay High Court.

By an order dated 18.11.2010 passed by this Court while admitting the appeal filed by the appellant, directed the Tribunal to dispose of the appeal alongwith other pending appeals without any pre-deposit, as expeditiously as possible and preferably within a period of six months. See 2011-TIOL-35-HC-MUM-ST.

And thus the order dated 6.1.2012 came to be passed by the Tribunal whereby both the appeals filed by the appellant have been rejected. The appellant's plea that the towers and parts thereof and the prefabricated building, printers and office chairs are capital goods under the Credit Rules,2004 as also the alternate plea of the appellant that the said goods are inputs falling under Rule 2(k) of the Credit Rules were also rejected. See 2012-TIOL-209-CESTAT-MUM.

Consequently, two appeals came to be filed before the Bombay High Court.

In a marathon order running into ninety pages, the High Court has passed its verdict rejecting the appeals filed by the Cellular Telephone service provider.

After distinguishing each and every case law cited by the appellant and upon examination of the case laws cited by the Counsel for the Revenue, the High Court made the following observations -

++ A combined reading of sub-clause (a)(A) (i) and (iii) and sub-rule (2) indicates that only the category of goods in Rule 2(a)(A) falling under clause (i) and (iii) used for providing output services can qualify as capital goods and none other.

++ The position of the goods in question vis–a-vis the plain application of the rules is that the tower and parts thereof are fastened and are fixed to the earth and after their erection become immovable and, therefore, cannot be goods.The towers are admittedly immovable structures and non-marketable and non-excisable.

++ Further in the CKD or SKD condition the tower and parts thereof would fall under the chapter heading 7308 of the Central Excise Tariff Act. Heading 7308 is not specified in clause (i) or clause (ii) of rule 2 (a) (A) of the Credit Rules so as to be capital goods. The goods in question would not be capital goods for the purpose of CENVAT credit as they are neither components, spares and accessories of goods falling under any of the chapters or headings of the Central Excise Tariff Schedule as specified in sub-clause (i) of the definition of capital goods.

++ The reliance of the judgment [in Simbhaoli Sugar Mills Ltd.] on behalf of the Revenue is quite appropriate. The enunciation of law as laid down in the judgment clearly goes to show that the towers are immovable property and non-excisable and hence, can neither be regarded capital goods so as to fall within the definition of ‘capital goods' appearing in Rule 2(a) of the Credit Rules, nor can be categorized as ‘input' applying Rule 2(k) of the Credit Rules.

++ A plain reading of the definition of ‘capital goods' as defined under Rule 2(a)(A) of the Credit Rules show that all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No.6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Central Excise Tariff Act; pollution control equipment; components, spares and accessories of the goods specified at sub clauses (i) and (ii) which are used either in the factory for manufacture of final products but does not include any equipment or appliance used in the office and those used for providing output service.

++ In the CKD or SKD condition the tower and parts thereof would fall under the chapter heading 7308 of the Central Excise Tariff Act. Heading 7308 is not specified in clause (i) or clause (ii) of rule 2 (a)(A) of the Credit Rules so as to be capital goods.

++ The Appellants contention that they were entitled for credit of the duty paid as the Base Transreceiver Station (BTS) is a single integrated system consisting of tower, GSM or Microwave Antennas, Prefabricated building, isolation transformers, electrical equipments, generator sets, feeder cables etc. and that these systems are to be treated as “composite system” classified under Chapter 85.25 of the Tariff Act and be treated as 'capital goods' and credit be allowed, also is not acceptable.

++ It is clear that each of the components had independent functions and hence, they cannot be treated and classified as single unit. It is clear that all capital goods are not eligible for credit and only those relatable to the output services would be eligible for credit. The goods in question in any case cannot be held to be capital goods for the purpose of CENVAT credit as they are neither components, spares and accessories of goods falling under any of the chapters or headings of the Central Excise Tariff Schedule as specified in sub-clause (i) of the definition of capital goods.

++ Admittedly the goods in question namely the tower and part thereof, the PFB and the printers do not fall within the definition of capital goods and hence the appellants cannot claim the credit of duty paid on these items.

++ As regards second contention of the appellants that the tower and part thereof, the PFB and the printers would also fall under the definition of ‘input' as defined Rule 2(k) also cannot be sustained.

++ Explanation (2) of sub-rule (k) provides that ‘input' include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer. A plain reading of the definition of input indicates that in the present context, clause (i) of Rule 2 (k) may not be of relevance as same pertains to manufacturing activity and pertains to goods used in relation to manufacture of final product or any other purpose within the factory of production.

++ Tower and parts thereof are fastened and are fixed to the earth and after their erection become immovable and, therefore, cannot be goods.

++ The alternative contention of the appellant, that tower is an accessory of antenna and that without towers antennas cannot be installed and as such the antennas cannot function and hence the tower should be treated as parts and components of the antenna, at the first blush appeared to be attractive however a deeper scrutiny shows that the same is without substance. It would be misconceived and absurd to accept that tower is a part of antenna. An accessory or a part of any goods would necessarily mean such accessory or part which would be utilized to make the goods a finished product or such articles which would go into the composition of another article. The towers are structures fastened to the earth on which the antennas are installed and hence cannot be considered to be an accessory or part of the antenna.

++ From the definition of the term ‘input' as defined in 2 (k) of the Credit rules it is clear that the Appellant is a service provider and not a manufacturer of capital goods. A close scrutiny of the definition of the term ‘capital goods' and ‘input' indicates that only those goods as used by a manufacturer would qualify for credit of the duty paid.

++ A service provider like the appellant can avail of the credit of the duty paid only if the goods fall within the ambit of the definition of capital goods as defined under Rule 2(a)(A) of the Credit Rules. The contention of the appellant that they are entitled for the credit of the duty paid towers and PFB and printers is defeated by the very wording of the definition of input. In any case towers and PFB are in the nature of immovable goods and are non-marketable and non-excisable. If this be the position, then towers and parts thereof cannot be classified as inputs so as to fall within the definition of Rule 2(k) of the Credit rules.

Concluding that there is no infirmity or illegality in the findings as recorded by the Tribunal in holding that the subject items are neither capital goods under Rule 2(a) nor inputs under Rule 2(k) of the Credit Rules and hence CENVAT credit of the duty paid thereon was not admissible to the appellants, the High Court rejected the appeals as being devoid of merit.

(See 2014-TIOL-1452-HC-MUM-ST)