Reliance Jio allowed Rs 253 Cr CENVAT Credit by CESTAT in matter of 4G Mobile Towers

The appellant, Reliance Jio is a telecom operator and claims to be offering Long Term Evolution-Fourth Generation wireless telecommunications. For the purpose of rendering such telecommunication services, various monopoles, masts, poles and telecom towers which house the radio transmission and reception equipments such as antennas, routers, switches and electrical utility items like SMPs and battery have been installed by the appellant across the country. Monopoles, masts, poles and telecom towers shall collectively, for the sake of convenience, be called as ‘towers’, though they are known as separate articles in the market.

The appellant claims that the 4G towers installed by it are different from the 2G/3G towers that used to be installed earlier by other operators for the reason that the towers of the appellant are merely fastened above the ground on a foundation using nuts and bolts, unlike the towers of operators providing 2G/3G services whose towers were embedded in the earth. According to the appellant, the towers installed by it can be moved to other locations and in fact, have been moved on several occasions without causing any damage to the towers.

Audit & Credit Reversal ‘under protest’

The department conducted an audit of the records of the appellant for the period April 2010 to September 2015 and the appellant was called upon to explain its eligibility to credit availed on towers. The appellant submitted an explanation but by a letter dated 03.11.2015 the Superintendent issued an audit report stating that the appellant had wrongly availed credit on telecom towers.

The appellant, thereafter, reversed CENVAT credit amounting to Rs.2,53,53,30,484/- ‘under protest’. The said credit was availed during the period March 2014 to June 2017, out of which credit of Rs.2,44,03,60,834/- was availed as ‘inputs’ and credit of Rs.9,49,69,650/- was availed as ‘capital goods’.

Application of Refund with Assistant Commissioner and Rejection thereof

Soon after the reversals were made, the appellant was advised that such reversal of credit was not warranted in the absence of any show cause notice or determination of liability and in any event, the judgments of the Bombay High Court in Bharti Airtel Ltd. vs. Commissioner of Central Excise, Pune-III6 and Vodafone India Ltd. vs. Commissioner of Central Excise, Mumbai-II did not apply to the facts of the case of the appellant. Accordingly, the appellant filed a claim for refund of the credit reversed by an application dated 10.11.2017 pointing out that the telecom towers installed by it were movable in nature since they were merely fixed with nuts and bolts on a foundation and not embedded in the earth as a result of which they could be dismantled and relocated without causing any damage.

The Assistant Commissioner, Belapur, however, issued a show cause notice dated 17.01.2018 alleging that the goods on which CENVAT credit had been availed were neither ‘capital goods’ nor ‘inputs’ as defined under the 2004 Rules as they were ‘attached to the earth’, being immovable structures ‘fixed to ground’. The show cause notice also relied on the judgment of the Bombay High Court in Bharti Airtel and alleged that since the said goods were immovable property, CENVAT credit was not admissible. Accordingly, the show cause notice proposed to reject the refund application.

The appellant filed a detail reply dated 07.02.2018 to the aforesaid show cause notice and justified its eligibility to avail credit and also its entitlement to claim refund.

The submissions made by the appellant were not accepted and the refund application was rejected by the Assistant Commissioner for the following reasons:

(i) Towers and parts thereof are fixed to the earth on installation and become immovable and, therefore, cannot be considered to be goods;

(ii) The Bombay High Court in Bharti Airtel and Vodafone India held that telecommunication towers, being immovable in nature, are neither capital goods nor inputs;

(iii) Towers, whether fixed on rooftop or land, occupy space and enjoy the benefit of the area on which it is fixed. It creates restriction on mobility of others to use that particular area or space;

(iv) The decisions of the Supreme Court in Commissioner of Central Excise, Ahmedabad vs. Solid & Correct Engineering Works8 and Mallur Siddeswara Spinning Mills (P) Ltd. vs Commissioner of Central Excise, Coimbatore9 and that of the Tribunal in I.G.E. (India) Ltd. vs. Collector of Central Excise10 were inapplicable as the same were rendered in the context of a generator or X-ray equipment, which are ‘capital goods’ in terms of rule 2(a) of 2004 Rules, unlike towers which are not ‘capital goods’;

(v) Towers are classifiable under Excise Tariff Heading11 7308, which is not one of the specified headings covered under rule 2(a) (A) of the 2004 Rules. Also, towers cannot be said to be part, component or an accessory of specified capital goods; and

(vi) In terms of the definition of ‘input’ in rule 2(k) of the 2004 Rules, a manufacturer is entitled to credit of inputs and not a service provider. In so far as a service provider is concerned, it can avail credit only if inputs are used for manufacturer of capital goods as defined in rule 2(a). Towers, not being capital goods, credit as inputs is not admissible.

Application of Refund with Commissioner (Appeals) and Rejection thereof

Feeling aggrieved by the said order dated 10.04.2018 passed by the Assistant Commissioner, the appellant filed an appeal before the Commissioner (Appeals) contending that the judgment rendered by the Delhi High Court in Vodafone Mobile Services Limited vs. Commissioner of Service Tax, Delhi was applicable to the case of the appellant and that the judgments of the Bombay High Court in Vodafone India and Bharti Airtel were inapplicable, as the mobile towers of the appellant were merely fixed or attached to the foundation by nuts and bolts and were not embedded into the earth.

The Commissioner (Appeals) did not accept the contention advanced by the appellant and upheld the order passed by the Assistant Commissioner on the grounds that:

(i) The towers and parts thereof are fastened and fixed to the earth and after their erection become immovable property and therefore, cannot be considered as goods;

(ii) Also, the towers and parts thereof in CKD condition are classifiable under ETH 7308 and do not satisfy the conditions stipulated in clauses (i) and (ii) of rule 2(a) (A) of the 2004 Rules so as to be eligible for credit as capital goods;

(iii) The towers and their parts are also not components, spares or accessories of capital goods falling under any of the Chapter Headings specified in clause (i) of rule 2(a)(A) of the 2004 Rules;

(iv) The Bombay High Court in Bharti Airtel and Vodafone India held that telecommunication towers, being immovable in nature, are neither capital goods nor inputs under the 2004 Rules and consequently credit is not admissible;

(v) The judgment of the Supreme Court in Solid & Correct Engineering is not applicable as the plant in that case was fixed at site to a foundation to give stability to the plant and to keep its operation vibration free and that the said plant was moved after completion of the road construction and repair project; and

(vi) The judgment of the Delhi High Court in Vodafone Mobile Services would also not be applicable since the judgments of the jurisdictional Bombay High Court in Bharti Airtel and Vodafone India are binding.

This appeal with CESTAT has been filed to assail the order dated 30.08.2019 passed by the Commissioner (Appeals).

Representation to CESTAT (Customs, Excise & Service Tax Appellate Tribunal)

Contention of Appellant

Shri Rafique Dada, learned senior counsel assisted by Shri Vipin Jain, Shri Vishal Agarwal, Shri Zuber Dada and Shri Kartik Dedhe made following submissions:

(i) As it is not the case of the department that the towers and other accessories on which CENVAT credit has been availed are rooted in the earth or embedded in the earth or attached to what is embedded in the earth for permanent beneficial enjoyment of that to which it is attached or permanently fastened to anything attached to the earth, credit cannot be questioned on the ground that on installation the towers and other accessories become immovable property and consequently cease to be goods;

(ii) The towers installed by the appellant are not permanently fastened or permanently fixed on the foundation. The towers of the appellant are fastened with ‘nuts and bolts’ on the foundation which is erected above the ground. The nuts and bolts assembly for all the towers is above the ground. Therefore, no part of the tower is ‘embedded’ in the earth, unlike the erstwhile towers in Bharti Airtel and Vodafone India decided by the Bombay High Court. The appellant had, at all stages of the proceedings, made this averment in all its pleadings and the same has not been disputed by the department at any stage;

(iii) The telecom services provided by the appellant are based on LTE 4G technology and operate in a spectrum where the average height and weight of towers is lesser than that of erstwhile towers used by operators to render services based on 2G/3G technology;

(iv) The towers of the appellant, being merely attached on the foundation with nuts and bolts, can be easily moved and have, in fact, been moved to the other locations without any damage, unlike the traditional towers, which on account of being embedded in the earth, suffered damage on relocation;

(v) The facts of the present case are entirely different from those before the Bombay High Court in Bharti Airtel and Vodafone India, where the High Court examined the question as to whether a tower which was admittedly ‘embedded in the earth’ was to be regarded as immovable property or not. In Bharti Airtel, there was a clear concession made by the operator that the tower was immovable. In Vodafone India, there was no such direct admission but it was contended that despite the towers being ‘embedded in the earth’, the same were to be considered as movable property since, such embedment was not for the beneficial enjoyment of land. The decision of the Delhi High Court in Vodafone Mobile Services is squarely applicable to the facts of the appellant;

(vi) The judgments of the Bombay High Court in Bharti Airtel and Vodafone India have also not considered the test of permanency as laid down by the Supreme Court in Solid & Correct Engineering and the eligibility of credit is required to be determined at the time of receipt of the goods;

(vii) The show cause notice did not dispute that the towers were used for the provision of output services. The Assistant Commissioner and the Commissioner (Appeals) have also not come to such a conclusion. The only reason that has been assigned is that the Bombay High Court has held in Bharti Airtel that the telecom towers, being immovable, do not qualify as capital goods or inputs. As the towers in the instant case are not immoveable, the judgement of the Bombay High Court in Bharti Airtel would not be applicable for holding that telecom towers do not qualify as inputs and/or capital goods;

(viii) Insofar as the credit availed as ‘capital goods’ to the tune of Rs.9,49,69,651/- is concerned, the same is with respect to the goods which have been classified under Chapters 84 and 85 of the First Schedule to the Central Excise Tariff Act, 198513, which Chapters are specified under clause (i) of rule 2 of 2004 Rules, as being capital goods;

(ix) The balance credit has been availed as ‘inputs’ in respect of which there is no dispute that the same were used for provision of output service, which is the only requirement in law; and

(x) Even if the said credit had been availed as capital goods, the same would have been admissible, as the towers are clearly ‘accessories’, if not parts and components, of the ‘e-Node B’ system;

Contention of Department

Shri Shambhunath and Shri Dilip Shinde, learned authorized representatives of the department have, however, supported the impugned order passed by the Commissioner (Appeals) and made the following submissions:

(i) The refund application filed by the appellant is premature as the refund reversed on protest becomes due only if the show cause notice issued under rule 14 of the 2004 Rules is decided in favour of the appellant. In the present case, the show cause notice dated 12.03.2019 has not been adjudicated upon and so the finding recorded by the Commissioner (Appeals) is correct. In this connection reliance has been placed upon the judgments of the Jharkhand High Court in Gyan Enterprises Trade Division vs. Coal India Ltd.14 and of the Karnataka High Court in Primacy Industries Ltd. vs. Union of India;

(ii) The goods, being towers and their parts, would fall under Chapter 73 of the Excise Tariff Act and, therefore, would not be “capital goods” under rule 2(a) of the 2004 Rules;

(iii) The towers are also not accessories of the telecommunication devices fixed on the towers as the towers do not perform any function of the telecommunication equipment;

(iv) The contention of the appellant that the towers enhance the effectiveness of the telecommunications system is not correct;

(v) The towers are used as a structure supporting telecommunication equipment and as per definition of “input” in rule 2(k) of the 2004 Rules, goods used for laying of foundation or making of structures for support of capital goods are specifically excluded from the definition of “input” with effect from 01.07.2012;

(vi) The contention of the appellant that the judgments of the Bombay High Court in Bharti Airtel and Vodafone India would not be applicable since the services provided by the appellant are based on LTE 4G technology, unlike the towers used by the other operators to render services based on 2G/3G technology, is not tenable since the towers used for supporting 2G/3G/4G technology are towers supporting capital goods. In support of this contention, reliance has been placed on the Larger Bench decision of the Tribunal in M/s. Wipro Ltd. v.
Commissioner of Central Excise, Bangalore-III ; and

(vii) Telecommunication towers irrespective of size or location used for support of capital goods for transmitting 2G/3G/4G are neither “capital goods” nor “input” under the 2004 Rules.

CESTAT Order

47. Insofar as credit to the tune of Rs. 9,49,69,651/- availed as capital goods is concerned, there is no dispute that the said goods are classifiable under Chapters 84 and 85 of the Excise Tariff Act and that the same are specified headings in the definition of capital goods under rule 2(a)(A)(i) of the 2004 Rules. There is absolutely no ground for denying credit in respect of these goods, save and except for the allegation and findings that these goods became immoveable property. It has already been held that these goods, on which the appellant availed credit, even after fixing them to a foundation do not acquire the character of an immoveable property. There is, therefore, no basis for denying credit as capital goods in respect of the goods classifiable under Chapters 84 and 85 of the Excise Tariff Act.

48. Insofar as the balance credit availed as inputs is concerned, the learned authorized representatives of the department urged a new ground, which was not even part of the allegations contained in the show cause notice nor part of the findings of the Commissioner (Appeals), that the definition of input contains an exclusion clause which excludes from the ambit of inputs all goods “used for making structures for support of capital goods”. The contention, therefore, is that credit cannot be taken for towers.

49. It is not possible to accept this contention. The telecom towers cannot be regarded as “goods used for making structures for support of capital goods”, when they are themselves structures for support of capital goods. The words “used for making” appearing in the exclusion clause cannot be ignored while construing and interpreting the said exclusion clause. Clearly, the exclusion clause seeks to cover steel items of general use such as angles, channels, bars CTD/TMT bars, which are raw materials used for making structures. Explanation 2 under the definition of ‘input’, which was inserted on 07.07.2009, specifically refers to these steel items of general use. The said Explanation reads as under:

“Explanation 2 – Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer but shall not include cement, angles, channels. Centrally Twisted Deform (CTD) bar or Thermo-Mechanically Treated (TMT) bar and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods.”

50. Thus, as the telecom towers in the present case are not immoveable property, and since immovability of such towers was the only ground for rejection of the refund claim, it has to be held that all such items on which CENVAT credit was taken as ‘inputs’ are eligible for credit as inputs.

51. This being the case, there is no need to examine the alternative claim of the appellant that these items could also be covered under the definition of capital goods.

52. Learned authorized representatives of the department also pointed out that the show cause notice had sought to reject the claim for refund on the ground that the issue of admissibility to credit on towers and part thereof had been decided by the Bombay High Court in Bharti Airtel and Vodafone India, but an appeal against the same is pending before the Supreme Court where the appellant had filed an Intervention Application. The contention advanced is that since the issue as to whether the appellant is entitled to avail credit on merits is pending determination in the show cause notice dated 12.3.2019 issued by the Commissioner to the appellant, the Tribunal should not decide the matter on merits.

53. A show cause notice had been issued seeking to reject the claim for refund alleging that the appellant was not entitled to avail credit on the telecom towers. The Assistant Commissioner as also the Commissioner (Appeals) adjudicated upon the claim of the appellant for entitlement to avail credit on the telecom towers. These orders have not been reviewed and no appeals have been preferred by the department on the ground that the said orders could not have examined the aspect of eligibility to credit. It is, therefore, not open to the learned authorized representatives to contend that this aspect of admissibility to credit cannot be examined by the Tribunal. This issue has been decided by the Assistant Commissioner and the Commissioner (Appeals) by elaborate findings.

54. Learned authorized representatives of the department also contended that the refund claim filed by the appellant is premature as the show cause notice dated 12.03.2019 issued under rule 14 of the 2004 Rules has not been decided.

55. It is seen that CENVAT credit was reversed by the appellant under protest without there being determination of the liability. After the credit was reversed, the appellant was advised that such a reversal was not warranted. It accordingly, applied for refund of the credit reversed by it which was a method by which such a credit that had been reversed could have been restored. This is what was observed by the Tribunal in Usha International vs. Commissioner of Customs, Mumbai. The Tribunal held that where an assessee has reversed credit under protest, without there being any determination, such an assessee can seek restoration of such reversal by filing a claim for refund and it is impermissible for the authorities dealing with the refund claim to reject the same as being premature. For coming to this conclusion, the Tribunal relied upon the judgment of the Punjab and Haryana High Court in Century Metal Re-cycling vs. Union of India, wherein it was held that irrespective of whether or not the amount deposited during the course of investigation was voluntary or otherwise, there is no justification in retaining the amount unless there is an assessment and that in all such cases, the assessee is entitled to claim refund. The relevant observations of the Tribunal are reproduced below:

“9. Shri Vipin Jain, ld. Counsel appearing for the appellant has assailed this view by citing a plethora of judgments and decisions of which two judgments, one of the Punjab & Haryana High Court and other of the Madras High Court are directly on the point. The judgment of the Punjab & Haryana High Court in the case of Century Metal Recycling Pvt. Ltd. v. Union of India – 2009 (234) E.L.T. 234 was dealing with a situation where refund was claimed of the amounts deposited in the course of investigation and there was a dispute, as in the present case between the two parties on the question whether such payments had been made voluntarily or under duress. The High Court held that the question whether the payment was voluntary or under coercion was irrelevant and that as long as there was an assessment and demand, the amount deposited could not be appropriated. The relevant paragraph of this judgment is extracted below:

“13. As far as the amount deposited by the petitioners is concerned, case of the petitioners is that the same was deposited under coercion. Case of the respondents was that the same was deposited voluntarily. Whatever be the position, unless there is assessment and demand, the amount deposited by the petitioners cannot be appropriated. No justification has been shown for retaining the amount deposited, except saying that since it was voluntarily deposited. In view of this admitted position, the petitioners are entitled to be returned the amount paid.”

A division bench of the Madras High Court in the case of Sanmar Foundaries Ltd. v. Commissioner reported in 2015 (325) E.L.T. 854 held that the revenue had no right to retain amounts deposited in the course of an investigation, unless such amounts had been paid either towards a confirmed demand or if such payments were being made in terms of Section 11A(6) of the Central Excise Act, 1944, which corresponds to Section 28(2) of the Customs Act. Various judgments, including the judgment of the Punjab & Haryana High Court were taken note of in this order. We therefore hold that the findings of the lower authorities that the claim for refund was premature is untenable.

10. Even otherwise, we find that once an application of refund has been filed before the refund sanctioning authority, the said authority is duty bound to decide the refund application one way or the other. The refund application can either be rejected or allowed in part or in full. The provisions of Section 27 do not entitle the refund sanctioning authority to return the refund application by terming the same to be premature. Therefore, the action of the Asstt. Commissioner in terming the application as premature is really an act of refusal to exercise a statutory duty to decide upon the refund application one way or the other. For this reason also, the order of the lower authorities is untenable.”

56. Learned authorized representatives of the department relied on the decision of the Karnataka High Court in Primacy Industries Ltd, to support the contention that the determination of eligibility to refund should be kept in abeyance till the notice deciding the issue on merits is adjudicated.

57. This judgment does not help the department as the notice that was issued to reject the refund had not questioned the eligibility of the assessee to the benefit of MEIS and the assessee had challenged the notice issued seeking to reject the refund claim. In the instant case, the notice has questioned the eligibility of the appellant to avail credit on merits and consequently, there is no reason to keep the refund proceedings pending.

58. The learned authorized representatives of the department also placed reliance on the judgment of the Jharkhand High Court in Gyan Enterprises Trade Division vs. Coal India Ltd.25. The said judgment was rendered in the context of a dispute between entities bidding for coal vis-à-vis coal manufacturers, who were claiming that excise duty was required to be paid on the value including Royalty and Stowing. The buyers of coal challenged this action of the manufacturer on the ground that the issue as to whether Royalty was a tax was pending decision before the Supreme Court and consequently, it was not permissible for the manufacturer to recover excise duty on the amount of Royalty and Stowing. It is in these facts that the High Court directed the buyers to reimburse the manufacturers of the excise duty component.

59. The aforesaid discussion would lead to the inevitable conclusion that the appellant was justified in availing CENVAT credit of central excise duty, as ‘inputs’, on items indicated in Part-I of the chart contained in the paragraph 43 of this decision and as ‘capital goods’ on the items contained in Part-II of the said chart. The appellant would, therefore, be entitled to refund of the said CENVAT credit which was reversed by it ‘under protest’.

60. The impugned order dated 30.08.2019 passed by the Commissioner is, accordingly, set aside and the appeal is allowed with consequential relief, if any.