Telcos Triumph: Supreme Court Clears Use Of Tax Credits On Infrastructure Duties

Telecom companies can avail tax credits accumulated for duties paid on towers, tower parts, shelters, and the like against the service tax they pay for providing cellular services, the Supreme Court has held.

In doing so, the top court has provided relief to various telcos such as Bharti Airtel Ltd., Vodafone Idea Ltd., Indus Towers Ltd., Reliance Communications Ltd., and Mahanagar Telephone Nigam Ltd.

The judgment was pronounced by a two-judge bench comprising Justices BV Nagarathna and N Kotiswar Singh.

In allowing the appeals filed by telcos, the top court has set aside a 2014 verdict of the Bombay High Court that disallowed telcos, Bharti Airtel in particular, from availing CENVAT credit against the service tax paid for providing its services.

The court has upheld the Delhi High Court's view on this issue, wherein it had extended the benefit of CENVAT credit to the mobile service providers back in 2018.

Generally speaking, tax credits represent the quantum of money that taxpayers are allowed to subtract from their final tax liability. These credits help businesses in reducing their tax liabilities owed to the government.

This ruling holds significant importance for the telecommunications sector in both the pre-GST and GST eras, said Abhishek Jain, Indirect Tax Head & Partner at KPMG.

Taxes on towers represented a substantial expense for the industry. With the input tax credit on these costs being upheld, telecommunication companies are expected to see a notable positive impact on their profit and loss statement, Jain added.

In an exchange filing on Wednesday, Indus Towers stated that the top court's decision allowing tax credit claims for towers and related infra is set to reduce its contingent liability by Rs 3,704 crore.

At the heart of the issue lay the question of whether telcos can claim tax credits for duties paid on tower parts, shelters or prefabricated buildings, office chairs, and printers purchased by them against the service tax paid for providing cellular services.

In 2014, the Bombay High Court had held that credit cannot be allowed as all these items such as towers and its parts thereof, shelters, office chairs, and printers had independent functions and hence, they cannot be treated and classified as a single unit.

It said that only those goods that are directly relatable to the output service, which is providing cellular service, would be eligible for credit.

“Tower and parts thereof are fastened and are fixed to the earth and after their erection become immovable and therefore cannot be goods,” the high court said.

The court had also rejected the argument that antennas, a component through which cellular service is provided, are fastened to towers, and without towers, antennas cannot be installed, and therefore they should be considered as a composite unit for the availment of tax credits.