Input credit on passive infrastructure: Resolution or Confusion

[Pankaj Goel]

Historically the passive infrastructure (mobile phone towers) sector has been plagued with intense litigation. The sector, though is a backbone for the telecommunication sector, has a huge capital expenditure requirements which inturn resulted into availability of huge CENVAT credit to be adjusted over a period of time.

The authorities in the interest of revenue, denied the entire CENVAT credit by holding that the passive infrastructure so constructed is nothing but an immovable property and hence ineligible for credits. Though there were many counter arguments which the assessees are still pursuing the higher courts, this article examines the position in the Revised GST law (RGL).

Section 17 of the RGL, on the lines of definition of inputs and input service under the CENVAT Credit Rules, 2004 (‘CCR’), has proposed to deny credits on certain supplies. Two of the relevant exclusions for this article are as follows:

(c) works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service;

(d) goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business;

Explanation 1.- For the purpose of this clause, the word “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Explanation 2.- ‘Plant and Machinery’ means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.

From the plain reading it should be noted that as a general rule the credit of works contract service is not available, the exception is the works contract service for construction of plant and machinery. Furthermore, the way the term ‘plant and machinery’ is defined is interesting for this discussion.

This term is defined in an ambiguous manner. The two interpretations that need attention are:

1. Whether the foundation and structural support is only for telecommunication tower; and
2. Whether the foundation and structural support relates to all apparatus, equipment, machinery and pipelines.

The arguments in favour of first interpretation can be as follows:

• Absence of comma after the word ‘telecommunication tower’;
• Term ‘used for making outward supply’ is meant for tower only since the apparatus, equipment, machinery etc. though are integrally connected to manufacture etc. but might not be for provision for service unless factual context requires otherwise.

On the other hand the second interpretation is equally strong in a way that the availability of credit under the RGL is liberal has compared to CCR. While CCR required direct relationship with the provision of services, the RGL requires the supply to be used for the purpose of business. Accordingly, extending the argument to the definition it can be well argued that restricting the foundation and structural support only to towers will limit the purpose and hence the second interpretation should prevail. Moreover, the second interpretation is also in line with the stand adopted by the Tribunals under the CCR in relation to availability of credit on support materials.

In a nut shell though the RGL, in its present form, will prove boon to the passive infrastructure industry. However, the varied interpretation may lead the revenue authorities to litigate the matter and hence returning back to the pre GST era, wherein a substantial chunk of litigation pertained to availability of credits.