Actually the time update is not based on inference from location data, but rather it is actively transmitted by the cell network as part of the GSM standard.
Though it's possibly worth pointing out that time/date is not a _requirement_ to the standard and not all networks implement it. It's possibly also worth pointing out that most recent Android devices seem to use NTP at the OS level rather than relying on GSM broadcast info.
http://en.wikipedia.org/wiki/NITZ