Machinery is usually fastened to earth in factories. Whether it warrants classification as immovable property has always been a bone of litigation under the erstwhile CENVAT regime. Hence, the post delves into this topic in the context of recent decision of the Hon'ble High Court of Delhi in Vodafone Mobile Services Ltd. v. Commissioner of Service Tax, Delhi dated October 31, 2018.
Facts
In the said case, the assessee availed CENVAT credit of excise duty inter alia on telecom towers. This was used to pay service tax on the output service of mobile telephony.
However, the Revenue disputed availment of CENVAT credit on the following grounds:
- that telecom towers did not qualify as 'input' under Cenvat Credit Rules, 2004, since they are immovable in nature; and
- they also do not qualify as 'capital goods' since they did not fit within the tariff heading as specified in the definition under the said Rules.
The Hon'ble CESTAT agreed with the Revenue. Hence, inter alia, the critical question which came up on appeal before the Bench was whether telecom towers are movable (or) immovable property.
Definitions
Section 3(36) of the General Clauses Act, 1897 defines movable property obviously as "property of every description, except immovable property". On the other hand, Section 3 of the Transfer of Property Act, 1882 defines "immovable property" in a sketchy manner that it does not include standing timber, growing crops or grass.
Comparatively, Section 3(26) of the General Clauses Act, 1897 gives a better definition that "immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth". Further, according to Section 3 of Transfer of Property Act, 1882, the term "attached to earth" means:
- rooted in the earth, as in the case of trees and shrubs;
- imbedded in the earth, as in the case of walls and buildings;
- attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
From the above definitions, it is apparent that if machinery is permanently fastened to earth for the beneficial enjoyment of land/building, it warrants classification as immovable property. With this basic definition, let us understand how the Supreme Court dealt with this issue.
'Permanency Test' to determine immovable nature of property under the erstwhile CENVAT regime
In re: Sirpur Paper Mills Ltd. [1997 taxmann.com 265 (SC)], the Apex Court dealt with the issue on whether the paper machine assembled at site (mainly with the help of components bought from the market) and embedded in earth can be subject to excise duty. The assessee argued that since the machine was embedded in a concrete base, it was immovable property though such embedding was meant only for a wobble-free operation. The Court disagreed with the assessee's argument and held that the machine does not become immovable property merely since it was attached for a more efficient operation. The Apex Court gave an apt example that if a water pump is fixed on a cement base for operational efficiency & security, it would not become immovable property. The Supreme Court's decision in re: Solid and Correct Engineering Works [(2010) 5 SCC 122] too was on the same footing.
In the instant case (viz., in re: Vodafone Mobile Services Ltd.) too, the entire tower was fabricated in the factory of the manufacturer and supplied in CKD condition. It was merely fastened to the civil foundation to make it wobble-free and ensure stability. They can be unbolted and reassembled in a new location without damage. Thus, there was no intent to annex it to earth permanently for the beneficial enjoyment of land. The leave & license agreements also evidenced that the licensee had the right to add or remove the aforesaid appliance, apparatus, equipment, etc. On account of these, it was held that a telecommunication tower is not an immovable property under the erstwhile CENVAT regime.
Position under GST law
The GST law too does not define "immovable property". However, it provides an exhaustive definition of "plant and machinery" as follows (refer Explanation to Section 17 of the CGST Act, 2017):
- It means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both;
- It includes such foundation and structural supports;
- But it excludes:
- land, building or any other civil structures;
- telecommunication towers; and
- pipelines laid outside the factory premises.
Further, Section 17(5) of the CGST Act blocks input tax credit (ITC) in respect of:
- works contract services when supplied for construction of an immovable property:
- except in case of plant and machinery; or
- except where it is an input service for further supply of works contract service;
- goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
From the above, it is clear that ITC is not available in respect of construction of immovable property but plant and machinery is excluded from the scope of immovable property. Hence, ITC is available in respect of construction of plant and machinery which are used for making outward supplies.
Thankfully, the definition of "plant and machinery" clearly brings 'machinery fixed to earth' within its ambit. Hence, the position under GST law is unambiguous and saves a ton of litigation for the assessees. However, will a smart assessee question the law-maker's power to classify telecommunication towers as immovable property - especially with the aforesaid decision of the Hon'ble High Court of Delhi (albeit under the erstwhile law) being at cross-roads with the fiction under GST law - is worth watching and could be a fodder for litigation in the years to come.
