Migration from one phase to another would not result in transfer of license awarded in Phase I

Brief of the case:

• The ITAT Delhi in the case of Digital Radio Broadcasting Ltd. held that the migration from one phase to another phase cannot be considered as transfer of license awarded under phase I particularly when the license agreement restrict any type of transfer or assignment of license or rights thereunder.
• Such migration is rater a modification in terms and conditions of license awarded under Phase I and thus,, allowable as deduction for the modified period of license awarded under Phase II as per Sec 35ABB(1).

Facts of the case:

• The assessee company are engaged in the business of FM radio broadcasting under a license awarded from the Ministry of Information and Broadcasting, Government of India for operation of FM radio station in different cities.
• In an auction held in March, 2000 it was awarded a license for radio broadcasting for a period of 10 years against a license fee Rs. 7.12 crores and subsequently there is an escalation clause of 15 % every year during the term of license. Such licenses were made operational from 29.04.2003. As the F M radio industry was suffering from high amount of fixed license fees, Government of India came out with a new policy document dated 13.7.2005 for expansion of F M radio Broadcasting services through private agencies known as Phase – II. Existing broadcasters in metro cities were not entitled to participate in these fresh bids but they were three options as under:

i) Migrate to Phase – II policy regime with fresh term of 10 years provided they had operationalized their FM channels and paid off all license fees dues of Phase –I license up to the cut-off date of 1st April 2005 and were not in default of any other license conditions till the date of migration to phase – II.

ii) Continue to remain under Phase – I policy regime

iii) Surrender their FM channel under Phase -I license in order to exit.

• The assessee opted for migration to Phase – II and paid one time entry fee and accordingly got a new grant of permission n agreement executed with the ministry of Information and broadcasting.
• Assessee claimed deduction of balance license fee (remaining unallowed till AY 2005-06)of Rs. 12.65 crores in AY 2006-07 considering the migration to Phase –II as transfer in the nature of relinquishment of license awarded under Phase-II. AO disputed such claim in one shot and disallowed the same considering it as capital loss which is not covered by Sec 35ABB(2).
• CIT(A) on appeal held that the assessee cannot claim the unallowed fee in one shot because the migration was not transfer within the meaning of Sec 35ABB rather migration of license of assessee from Phase-I to phase –II of the licensing policy for F M radios, remaining unallowed expenditure u/s 35ABB becomes part and parcel of the licensing fee payable for phase- II and same shall be added to the license fee of phase – II, hence he granted deduction of Rs 1,26,58,244/- being 1/10th of Rs 12,65,82,440/-.
• Aggrieved by the order of CIT(A) both assessee and revenue preferred an appeal before ITAT.
  

Contention of the Assessee:

• It was submitted that migration of license from Phase – I regime to Phase – II license regime is to be considered as transfer of license and therefore, assessee is entitled to claim deduction of unallowed balance license fee u/s 35ABB(2) because license was a capital asset and the migration had resulted into relinquishment of its rights capital asset and by virtue of Sec 2(47) the said relinquishment was transfer of capital asset.
• Even otherwise, in dictionary meaning of ‘migration’ and ‘transfer’ are synonyms. Hence, from this angle also, migration of license from Phase – I regime to Phase – II license regime is to be considered as transfer of license and therefore, the Assessee‘s case is covered under sub-section (2) of section 35ABB.
• Even further, if assessee had opted to surrender its Phase – I license instead of migrating to Phase – II license, then the remaining unallowed license fee expenditure relating to Phase – I license would have been allowed to the assessee during the year under consideration in accordance with section 35ABB (1) of I.T. Act even if the ‘Assessee had made a bid for and obtained a new Phase -II license for the same city. By opting for and migrating from Phase – I to Phase – II license, the case of the assessee is not different from the above mentioned situation and therefore, the entire remaining unallowed license fee expenditure pertaining to Phase – I license deserves to be allowed during the year under consideration itself and not over the next 10 years period which is applicable to the new Phase – II license.
  

Contention of the Revenue:

• It was submitted by the learned counsel for the revenue that license is a statutory permission to operate FM broadcasting and cannot be termed as capital asset within the meaning of Sec 2(14).
• It was also submitted that definition of transfer as given in Sec 2(47) could not be imported in Sec 35ABB(2). Further, for a transfer to take place there has to be two person i.e. one transferor and another transferee and in this case transferee is absent and hence it cannot be called transfer u/s 2 (47) .
• Thus, such claim was not allowable as the same capital loss without transfer of license within the meaning of Sec 35ABB(2).
  

Held by ITAT Delhi:

• The tribunal observed that license is a capital asset in view of the decision of Honorable Delhi high court in CIT V Bharti Hexacom Limited ITA no 1336 of 2010.
• As per Sec 35ABB (2) the assessee in case of transfer of telecom license can claim the excess of balance of license fee (remaining unamortized) over the sale proceeds provided :i) there is a transfer of license and there should be proceeds of the transfer.
• The plea of the assessee that remaining unamortized fee of Rs. 12.65 crores paid under Phase-I is allowable accordance with Sec 35ABB(2) because the case of the assessee does not fall in Sec 35ABB(2) as the agreement of license entered into between assessee and Govt does not authorize assessee to transfer the license under this agreement. The following extract of the agreement makes it very clear “The License is non- transferable. The License shall not grant a sub- license or lease the channel /broadcast services in whole or in part.” As the assessee is prevented from transferring the license as well as the transfer of any right contained in the license there is no transfer of license by way of migration.
• Further, on comparison of terms and conditions of the agreement under Phase I and Phase II , the tribunal did not observe any substantial difference except that License fee payments has changed from Fixed fee basis‘ to revenue sharing basis‘ and duration of payment. Hence, in the opinion of the tribunal there was no transfer of license made by assessee but it is same license for the same city with modified terms and conditions. Therefore, the claim of assessee for deduction in one shot of the whole sum of Rs 12,65,82,440/- paid under Phase-I of the license u/s 35ABB (2) was rejected.
• The license fee paid by assessee during Phase I by virtue of which it has got right for automatic migration to PHASE –II is not capital loss incurred by the assessee but assessee is eligible for deduction of the same u/s 35ABB (1) over the remaining life of license modified by PHASE –II policies. The same has been held by CIT(A) and tribunal find no infirmity in the order of CIT(A).
• The alternative plea of the assessee that depreciation could be allowed on the license fee as per Sec 32(i)(ii) is also not sustainable because as per Sec 35ABB(8) where a deduction for any previous year under Sec 35ABB(1) is claimed and allowed, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year.