CIT Vs Bharti Hexacom Ltd (Supreme Court of India)
The Supreme Court of India, in a recent landmark ruling, addressed a critical issue that has significant implications for the telecom industry and the broader business landscape in the country. The judgment revolves around the classification of telecom license fees as either capital or revenue expenditure. This distinction has far-reaching consequences, especially for telecom companies operating in India.
In this comprehensive article, we will delve into the details of this ruling, providing an in-depth analysis of its significance, the implications it holds for telecom operators, and how it shapes the financial and operational landscape for these companies. We will explore the legal and financial aspects of the judgment and consider its implications for various stakeholders.
Background of the Supreme Court Ruling
The Supreme Court’s ruling hinges on the fundamental distinction between two types of payments: those made to acquire a right and those made as royalty. Understanding this distinction is crucial to grasp the implications of the judgment.
- Payment to Acquire a Right: When a payment is made to acquire a right, it signifies the purchase of an asset, either tangible or intangible, with enduring advantages for the purchaser. This means that the ownership of the right vests with the purchaser.
- Payment of Royalty: On the other hand, royalty payments are made for the use of a right or asset, without transferring ownership. In cases of royalty, the right or asset continues to be owned by the original rights holder. Such payments are often linked to annual sales, annual profits, or other variables tied to the use of the asset.
The Supreme Court’s decision underscores that the classification of an expenditure as capital or revenue depends on the nature of the right acquired through the payment or transaction. In the context of telecom license fees, the payment is essentially for the acquisition of the right to provide telecommunication services, which is deemed a capital asset.
Critical Considerations in the Supreme Court’s Decision
The ruling takes into account several critical considerations that have a profound impact on the classification of telecom license fees as capital expenditure:
1. Nature of the Right: In the telecom industry, the annual variable license fee paid by operators is essential for maintaining the right to provide telecommunication services. This fee is based on a percentage of the operator’s gross revenue. Unlike payments of royalty in other sectors, this license fee has a direct and crucial link to the core business operations, as failure to pay the fee may result in the revocation of the operator’s license under the Telecom Act.
2. Legal Obligations: Failure to pay the annual variable license fee would lead to the revocation of the license and the cessation of telecommunication services. The continuity of business operations is entirely contingent on the payment of both the entry fee and the variable license fee.
3. Non-transferability of the License: The license granted under the 1999 policy was non-transferable and non-assignable, and any default in the payment of the license fee could result in the revocation of the entire license.
4. Amortization: The payments for the entry fee and variable license fee can be amortized as capital expenditures according to Section 35ABB of the Income Tax Act.
Impact on Telecom Companies in India
Now, let’s explore the ramifications of this ruling on telecom companies in India:
1. Financial Reporting and Tax Planning: The Supreme Court’s decision necessitates a reevaluation of financial reporting and tax planning strategies for telecom operators. Payments made for the acquisition of the right to operate telecommunication services must be treated as capital expenditures. This impacts how these payments are recorded in financial statements and how tax liabilities are assessed.
2. Business Continuity and License Compliance: For telecom companies, adhering to the payment schedule for license fees is of paramount importance. Failure to make timely payments can result in the revocation of the license and the cessation of operations. Telecom operators must carefully manage their financial obligations to ensure business continuity.
3. Regulatory Compliance: Compliance with the regulations set by the Department of Telecommunications (DoT) is vital. Telecom companies need to maintain robust compliance mechanisms to ensure that they adhere to payment schedules and other regulatory requirements.
4. Investment Decisions: Telecom operators often make significant investments in network infrastructure, technology, and services. The categorization of license fees as capital expenditure can influence investment decisions. Capital expenditure can be depreciated over time, which may affect financial projections and return on investment calculations.
5. Legal Implications: The legal aspect of the ruling is significant. Telecom operators must fully understand the legal obligations and consequences of the ruling. Non-compliance can have severe legal ramifications, making it essential to consult legal experts in this field.
Conclusion
The Supreme Court’s judgment on the classification of telecom license fees as capital expenditure carries substantial implications for the Indian telecom industry. Telecom operators must adapt their financial reporting, tax planning, and compliance strategies accordingly. The ruling underscores the importance of recognizing that payments for the acquisition of the right to operate telecommunication services should be considered capital expenditure, irrespective of the payment structure. Understanding the implications of the court’s judgment is essential for telecom companies to ensure their operations and business continuity in this evolving regulatory landscape.
In summary, this ruling has profound financial, operational, and legal consequences for the telecom sector in India. It reiterates that the nature of the right acquired through the payment is paramount and that telecom license fees should be treated as capital expenditures, emphasizing the importance of timely payments and compliance with regulatory obligations. Telecommunication companies must navigate these new legal waters to maintain their business operations effectively.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
Delay condoned.
2. Leave granted.
3. The judgment of the Division Bench of the High Court of Delhi, dated 19 December, 2013 in ITA No. 1336 of 2010 and connected matters, whereby the High Court of Delhi, confirming the decision of the Income Tax Appellate Tribunal, New Delhi (hereinafter, “Tribunal” for short) has held that the variable licence fee paid by the respondents-assessees under the New Telecom Policy, 1999 ((hereinafter referred to as “Policy of 1999” for the sake of convenience), is revenue expenditure in nature and is to be deducted under Section 37 of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for the sake of brevity) is assailed in these appeals. Some of these appeals also arise from judgments passed by the High Courts of Bombay and Karnataka, following the judgment of the Division Bench of the High Court of Delhi, dated 19 December, 2013.
4. Since common questions of law and facts arise in these appeals, they have been clubbed together and heard and disposed of by this common judgment.
Bird’s eye view of the controversy:
5. The controversy in these cases revolves around the question, as to, whether, the variable licence fee paid by the respondent-assessees to the Department of Telecommunications (hereinafter referred to as “DoT”, for short) under the New Telecom Policy of 1999 (Policy of 1999) is revenue expenditure in nature and is to be allowed deduction under Section 37 of the Act, or, whether the same is capital in nature, Section 35ABB of the Act.
Brief facts of the case:
6. The National Telecom Policy of 1994 was substituted by the New Telecom Policy of 1999 dated 22 July, 1999. The said Policy of 1999 stipulated that the licencee would be required to pay a one-time entry fee and additionally, a licence fee on a percentage share of gross revenue. The entry fee chargeable would be the fee payable by the existing operator upto 31 July, 1999, calculated upto the said date and adjusted upon notional extension of the effective date. Subsequently, w.e.f. 01 August, 1999, licence fee was payable on a percentage of Annual Gross Revenue (“AGR”, for short) earned. The quantum of revenue share to be charged as licence fee was to be finally decided after obtaining recommendation of the Telecom Regulatory Authority of India (“TRAI”) but in the meanwhile, the Government of India fixed 15% of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI’s recommendation by the Government, adjustment of the dues was to be made.
6.1. Clause 7 of the Policy of 1999 stipulated that upon migration thereto, the licencees would forego the right of operating in a regime of limited number of operators as per the existing licensing agreement and would operate in a multiple licence regime, that is, additional licences without any limit could be issued in a given service area. The period of licence was stated to be twenty years from the effective date of the existing licence agreement, that is, the 1994 Agreement. Migration to the Policy of 1999 was on the condition and premise that the conditions should be accepted as a package in entirety and simultaneously and all legal proceedings shall be withdrawn and no dispute relating to the period upto 31 July, 1999 shall be raised at any future date. If all the terms were accepted, amendments to the existing licence agreement would be signed. The respondents herein migrated to the Policy of 1999. They had paid licence fee upto 31 July, 1999. The respondents treated the licence fee paid upto to 31 July, 1999 that is, the one-time licence fee as stipulated in the letter/communications dated 22 July, 1999, as capital expenditure.
6.2. The respondent companies which are engaged in the business of telecommunication services have procured licences in different telecom circles. Initially, the said licences were given under a licence agreement executed in the year 1994 for a period of ten years subject to expansion of one year or more at the discretion of the authorities. The said licence was non-transferable and non-assignable. In case, there was a breach of any term of the licence or default in payment, the licence could be revoked after providing sixty days’ notice. The licence gave the right to operate the services within a geographical area on a non-exclusive basis and the authorities would have the right to modify the conditions of the licence as explained in Schedule A and Schedule B of the licence agreement, in the interest of general public or for security considerations. The schedules pertained to the area of service, tariff ceiling etc.
6.3. In the above backdrop, for the sake of convenience, the specific facts of the lead matter, Civil Appeal No. 11128 of 2016 shall be narrated hereinunder:
Pursuant to the request of the respondent-assessee, a licence was granted to it, inter-alia on certain terms and conditions to establish, maintain and operate cellular mobile services. Accordingly, having accepted the Policy of 1999 and migrated thereto, after paying the licence fee upto 31 July, 1999, i.e., the one-time licence fee as stipulated in the Communication dated 22 July, 1999, the respondent-assesee continued in the business of cellular telecommunication and associated value added services, under the regime governed by the Policy of 1999.
6.4. The respondent-assessee filed its return of income on 01 November, 2004 for the assessment year 2003-2004 declaring nil income. The same was processed under Section 143(1) of the Act on 30 March, 2006. The case was selected for scrutiny and a notice was issued to the respondent-assessee under Section 143(2) of the Act, on 20 October, 2005.
6.5. It was noted that an amount of Rs. 11,88,81,000/-, which was the licence fee paid by the assessee on revenue sharing basis, was claimed by the respondent-assessee as revenue expenditure. In that regard, vide questionnaire dated 15 November, 2006, the assessee was required to explain as to why the said amount may, instead, be treated as capital expenditure and amortised over the remaining licence period of twelve years. The respondent-assessee furnished its response to the questionnaire, on 04 December, 2006. On consideration of the assessee’s response, an Assessment Order was passed on 27 December, 2006 observing that the amount of Rs. 11,88,81,000/-, i.e. the licence fee paid by the assessee on revenue sharing basis, which was claimed as a revenue expense, ought to have instead been amortised over the remainder of the licence period, i.e., twelve years. Accordingly, an amount of Rs. 99,06,750/- was allowed as a deduction under Section 35ABB of the Act and the remaining amount of Rs. 10,89,74,250/- was disallowed and added back to the income of the respondent-assessee.
6.6. Being aggrieved, the respondent-assessee filed an appeal before the Commissioner of Income Tax (Appeal), New Delhi. In view of the decision of the Commissioner of Income Tax (Appeal) in the assessee’s own case for the assessment year 2003-2004, it was reaffirmed vide order dated 27 September, 2007 that the annual licence fee calculated on the basis of annual gross revenue of the assessee would be revenue expenditure deductible under Section 37 of the Act.
6.7. Aggrieved by the said order, the appellant-Revenue preferred an appeal before the Tribunal, New Delhi. By order dated 24 July, 2009, the Tribunal dismissed the Revenue’s appeal following its earlier order dated 29 May, 2009 in ITA No. 5335 (Del)/2003 in the case of Bharti Cellular Ltd., for the assessment year 2000-2001, the facts of which case were held to be identical to the facts of the case at hand. Being aggrieved, the Revenue filed an appeal before the High Court of Delhi.
6.8. Before the High Court, the Revenue made the following submissions:
That the respondents were granted a licence under the agreement executed under the Indian Telegraph Act, 1885 (hereinafter referred to as the “Telegraph Act” for the sake of brevity). This agreement stated that the licence was granted on certain terms and conditions to establish, maintain and operate cellular mobile services. That the significance of the words “establish, maintain and operate” in the original licence cannot be lost sight of under the Telecom Policy of 1999. The nature and character of the licence fee was not changed. What was changed was only the method of computation. That the assessees had accepted the licence fee payable under the 1994 Agreement as a capital expenditure. They cannot now dispute the same under the Policy of 1999. That under the Policy of 1994, from the fourth year onwards, the assessee had to pay a fixed sum per hundred subscribers. The only change that was made was in the measure, namely, that under the Policy of 1999, the amount was modified to 15% of the gross revenue, but the nature and character of the payment was the same. That mere payment of an amount in instalments did not convert or change the capital payment to a revenue payment. That in order to acquire the right to operate telecom services, obtaining of licence was a sine qua non. The term of the licence was twenty years from the date of commencement and therefore the expenditure is in the nature of capital expenditure.
6.9. Per contra, the contention of the assessee before the High Court was that the licence fee payable under the Policy of 1999 was in the nature of revenue expenditure. This was because the earnings are shared and the licence fee depends upon the gross revenue and is payable yearly. That the new operators under the Policy of 1999 were issued licences and were required to pay a one-time licence fee for entry and to start operations and in addition, yearly turn over based licence fee was payable. One-time payment of licence fee was capital expenditure in nature but yearly payable licence fee was revenue expenditure. It was a running expense for maintaining and operating the business of telecommunication and therefore, considered in the commercial sense, the yearly payment was in the nature of revenue expenditure.
6.10. Since the Tribunal had held that variable licence fee paid by the assessees was properly deductible as revenue expenditure, the substantial question of law raised by the High Court at the instance of appellant Revenue was, “whether the variable licence fee paid by the respondents under the Telegraph Act, and Indian Wireless Telegraphy Act, 1933 payable under the New Telecom Policy 1999 or 1994 Agreement, is revenue expenditure or capital expenditure which is required to be amortized under Section 35ABB of the Act?”
The pertinent observations of the High Court and the salient aspects discussed in the judgment dated 19 December, 2013 are as under:
i. Section 35ABB applies when expenditure of a capital nature is incurred by an assessee for acquiring a right for operating telecommunication services. It is immaterial whether the expenditure is/was incurred before or after commencement of the business to operate telecommunication services but what is material is that the payment should be actually made. That Section 35ABB is not a deeming provision but comes into operation and is effective when the expenditure itself is of a capital nature and is incurred towards acquiring a right to operate telecommunication services or for the purposes of obtaining a licence for the said services. That Section 35ABB does not help in determining and deciding the question, as to, whether licence fee paid under the Policy of 1999 or under the 1994 Agreement, was/is capital or revenue in nature.
ii. That there was no decision of the Supreme Court or any of the High Courts directly applicable to the factual matrix of the case and therefore, it would be useful to consider a number of decisions of this Court including, Empire Jute Co. Ltd. vs. Commissioner of Income Tax, (1980) 124 ITR 1 (“Empire Jute Co. Ltd.”); Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal, (1955) 27 ITR 34 (“Assam Bengal Cement Co. Ltd.”); Board of Agricultural Income Tax, Assam vs. Sindhurani Chaudurani, (1957) 32 ITR 169 (“Sindhurani”); Enterprising Enterprises vs. Deputy Commissioner of Income Tax, (2007) 293 ITR 437 (“Enterprising Enterprises”).
iii. Having referred to the aforesaid decisions, three other judgments were noticed by the Delhi High Court which, according to learned ASG appearing for the appellant-Revenue were wrongly applied to the case at hand. The said judgments are, Jonas Woodhead and Sons Ltd. vs. Commissioner of Income Tax, (1997) 224 ITR 342 (“Jonas Woodhead and Sons”), Southern Switch Gear Ltd. vs. CIT, (1998) 232 ITR 359 (“Southern Switch Gear Ltd.”); CIT, Madras vs. Best and Co. (Pvt.) Ltd., (1966) 60 ITR 11 (“Best and Co.”).
iv. After considering all of the aforesaid judgments, the Delhi High Court in paragraph 29 discerned the facts of the present case as under:
“29. When we turn to the facts of the present case, the following position emerges:
i. The licence was issued under a statutory mandate and was required and acquired, before the commencement of operations or business, to establish and also to maintain and operate cellular telephone services.
ii. The licence was for initial setting up but, thereafter for maintaining and operating cellular telephone services during the term of the licence.
iii. Contrary to what was stated, under the licence agreement executed in 1994 the considerations paid and payable were with the understanding that there would be only two players who would have unfettered right to operate and provide cellular telephone service in the circle. The payment, therefore, had element of warding off competition or protecting the business from third party competition.
iv. Under the 1994 agreement, the licence was initially for 10 years extendable by one year or more at the discretion of the Government/authority.
v. 1994 Licence was not assignable or transferable to a third party or by way of a sub-licence or in partnership. There was no stipulation regarding transfer or issue of shares to third parties in the company.
vi. Under the 1994 agreement, the licencee was liable to pay fixed licence fee for first 3 years. For 4th year and onwards, the licencee was liable to pay variable licence fee @ Rs. 5,00,000/- per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee payable for 4th to 6th year and with modified but similar stipulations from 7th year onwards.
vii. The licence could be revoked at any time on breach of the terms and conditions or in default of payment of consideration by giving 60 days’ notice.
viii. The authority also reserved the right to revoke the licence in the interest of public by giving 60 days’ notice.
ix. Under 1999 policy, the licencee had to forego the right of operating in the regime of limited number of operators and agreed to multiparty regime competition where additional licences could be issued without limit.
x. There was lock in period on the present shareholding for a period of 5 years from the date of licence agreement i.e. the effective date and even transfer of shareholding directly or indirectly through subsidiary or holding company, was not permitted during this period. This had the effect of ‘modifying’ or clarifying the 1994 agreement, which was silent.
xi. Licence fee calculated as a percentage of gross revenue was payable w.e.f. 1 August, 1999. This was provisionally fixed at 15% of the gross revenue of the licensee but was subject to final decision of the Government about the quantum of revenue share to be charged as licence fee after obtaining recommendation of the Telecom Regulatory Authority of India (TRAI).
xii. At least 35% of the outstanding dues including interest payable as on 31 July, 1999 and liquidated damages in full, had to be paid on or before 15 August, 1999. Dates for payments of arrears were specified.
xiii. Past dues upto 31 July, 1999 along with liquidated damages had to be paid as stipulated in the 1999 policy, on or before 31 January, 2000 or earlier date as stated.
xiv. The period of licences under 1999 policy was extended to 20 years starting from the effective date.
xv. Failure to pay the licence fee on yearly basis would result in cancellation of licences. Therefore, to this extent licence fee was/is payable for operating and continuing operations as cellular telephone operator.”
v. On a consideration of the aforesaid aspects, the Delhi High Court held that the payment of licence fee was capital in part and revenue in part and that it would not be correct to hold that the whole fee was capital or revenue in nature in its entirety. It was further observed that the licencees/assessees in question required a licence in order to start or commence business as cellular telephone operators; that payment of a licence fee was a precondition for the assessees to commence or set up the business. That it was a privilege granted to the assessee subject to payment and compliance with the terms and conditions. For immediate reference, paragraph Nos.31 to 36 of the said judgment are extracted as under:
“31. Licence fee under the 1994 agreement ensured that there would be only two private operators in a circle and thus their limited monopoly would be protected and competition by way of third-party private players was warded off. Restricted monopoly of the licencees was ensured. The licence fee fixed included an element towards the said right of the licencees. 1994 agreement, for first three years postulated a lump-sum payment irrespective of number of subscribers. Minimum fee was also prescribed for later years. It appears that licencees were unable to make payments as per the 1994 agreement and under the 1999 policy, were required to pay lump-sum payment for past arrears before specified dates.
32. There was restriction under the 1994 agreement, on transfer of the licence or even grant sub-licence but there was no specific restriction on change of shareholding. 1999 policy ensured that even shareholding did not change for a period of 5 years from the effective date. The effect of acquiring the licence has been examined in paragraph 15 above. The licence was not assignable or transferrable as such, but induction of share capital, transfer of shares etc. was permitted subject to conditions in the 1999 policy. In commercial sense the licence constituted and continues to be the most valuable right which the company has and possesses. Thus, the payment made is for acquiring the licence which is essential and mandatory, prerequisite for establishing the business and for operations or continuance and running of business. Yet, as observed below, it cannot be equated with one time entry fee which a person has to pay to establish the business. It therefore, represents composite payment, both capital and revenue.
33. The licence fee was imposed and payable under the Indian Telegraph Act and other statutory provisions and was/is mandatory. Failure to pay the same would/will result in discontinuance or stoppage of business operations. Under 1999 policy, the amount payable speaks of sharing of gross revenue earned by the service provider from the customers. 1994 agreement as noticed did have a provision for sharing but with minimum payment stipulation. In case of nonpayment of licence fee, the licence could be revoked and licencee was not permitted to carry on and continue cellular telephone service. Thus, the licence fee payable was/is equally with the objective and purpose to maintain and operate cellular telephone services. It was also an operating expense and non payment can lead to cancellation as one of the consequences. Endurement requires current expenses and is subject to payment on revenue share. It will not be correct to hold or propound that entire payment during the term of licence, is deferred capital payment. This was/is not the intent under the 1994 agreement or 1999 policy. The intent is to also share the gross earning to maintain and operate the licence.
34. The licence fee as such is similar to both prospecting fee, acquisition of right to lease as well as leases which enabled removal of sand/tendu leaves, etc. as nothing has to be won over, or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the ‘asset’ i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence.
35. The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. As observed in Empire Jute Co. Ltd. (supra), the enduring benefit test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmatic view and considerations rather than juristic classification is the determinative factor. The payment of yearly licence fee on revenue sharing basis is for carrying on business as cellular telephone operator. It is a normal business expense.
36. Read in this manner, the licence granted by the Government/authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on the gross revenue to continue, to be able to operate and run the business, it would also be revenue in nature. Failure to make stipulated revenue sharing payment on yearly basis would result in forfeiting the right to operate and in turn deny the assessee, right to do business with the aid of the capital asset. Non-payment will prevent and bar an assessee from providing services.”
vi. In paragraph 36, it was observed that the licence granted by the Government or the concerned authority to the assessee would be a capital asset and yet, since the assessee had to make the payment on a yearly basis on the gross revenue to continue to be able to operate and run the business, it would also be in the nature of revenue expenditure. Having opined thus, the High Court decided to apportion the licence fee as partly revenue and partly capital and divided the licence fee into two periods, that is, before and after 31 July, 1999 and observed that the licence fee that had been paid or was payable for the period upto 31 July, 1999 i.e. the date set out in the Policy of 1999, should be treated as capital expenditure and the balance amount payable on or after the said date should be treated as revenue expenditure. The reasons for the same were stipulated in paragraphs 43 to 46 of the said judgment which reads as under:
“43. Licence fee was payable for establishment, maintenance and operation of cellular telephone service. Establishment and set up took place in the initial years and thereafter the payments made were/are for operation or maintaining the cellular telephone service. Initial outlay and payment, therefore, is capital in nature, whereas the outlays and payments made subsequently are to operate and maintain the service. 1999 policy in the form of letter dated 22 July, 1999 also refers to one time entry fee which is chargeable and had to be calculated as licence fee dues payable upto 31 July, 1999 and licence fee was thereafter payable on percentage share of gross revenue. The new licences issued to others also stipulated one time entry fee and then licence fee payment on sharing basis. In view of the new 1999 policy, the earlier policy which restricted competition, underwent a change and licencees forgo their right to operate in the regime of limited number of operators. Another reason why we feel that licence fee payable for the period on or before 31 July, 1999 should be treated as capital and the amount payable thereafter as revenue, is justified and appropriate in view of Section 35ABB. We have already quoted the said section above. The provision provides that licence fee of capital nature shall be amortized by dividing the amount by number of remainder years of licences. Thus, the capitalized amount of licence fee is to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee alongwith the brought forward amortized amount would be allowed as deduction. After a particular point of time, deduction allowable under Section 35ABB would be more than the actual payment by the assessee as licence fee for the said year. This would normally happen after the mid-term of the licence period. Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period.
44. ITA Nos. at serial Nos. 1 to 9 above primarily relate to variable licence fee, which is to be shared under the 1999 Policy whereas, ITA No. 417/2013 filed against Hutchison Essar Ltd. relates to the period of variable licence fee payable for the fourth year under the 1994 Agreement.
45. The effect thereof is that we are treating about 20% of the expenditure in terms of the tenure as per the 1999 Policy as capital in nature, whereas if we apply the 1994 Agreement, we would be treating about 40% of the expenditure as per the tenure as payable towards establishing or setting up of cellular business. By the time 1999 Policy was implemented in the case of the respondents-assessees, the cellular telephone business had already commenced and was in operation. The 1999 Policy had the effect of extending period of licence from 10 years to 20 years, but from the effective date. The view, we have taken, effectively means that the entire licence fee paid in the initial first four years is treated as capital in nature i.e. the expenditure incurred to establish cellular telephone business, whereas the balance expenditure payable on year to year basis from 5 year onwards is treated as revenue expenditure to run and operate cellular telephone business.
46. However, we would like to discuss two judgments relied upon by Huthison Essar Pvt. Ltd. in support of their contention that the variable fee even prior to 31 July, 1999 should be treated as revenue expenditure. As noted above, this was the 4 year and the contention of the assessee is that in this year even as per the 1994 agreement, payment had to be made on revenue sharing basis subject to the minimum guarantee. Learned counsel for the assessee had relied upon CIT v. Sharda Motors Industry Ltd. (supra). In the said case reference was made to J.K. Synthetics Ltd. (supra) to hold that no substantial question of law arises. The Revenue had relied upon Southern Switch Gear Ltd. v. CIT (1998) 232 ITR 359 (SC), but the said judgment was distinguished on the ground that lump-sum royalty was paid and 25% thereof was disallowed by the tribunal on the ground that it was capital payment. In Sharda Motor Industries Ltd. (supra), royalty was to be paid on quantity of goods produced calculated per piece. However, this does not appear to be sole basis why the payment made was treated as revenue expenditure. The court had relied upon other facts which are noticed in paragraph 3 of the same judgment i.e. the payment was made for running business. The question of apportionment and payment was not made to establish business. In CIT v. Modi Revlon (P.) Ltd. (2012) 26 Taxmann.com 133 (Delhi), a Division Bench of this High Court observed that the tests evolved over the period have disapproved the applicability of the ‘once and for all’ payment and more structured approach which would take into account several factors like the licence tenure; whether licence created further rights; whether there was restriction for use of confidential information; whether benefits were transferred once and for all; whether after expiry of the licence, plans and drawings were to be returned, etc. As held and observed above, it is nature and object for which the payment is made which determines the character of payment. In the said case, it was observed that there was nothing to show or to suggest vesting of knowhow in the assessee and therefore, the assessee did not derive any enduring benefit. Thus, the royalty payment was held to be revenue in nature.”
In view of the above discussion, the substantial question was answered by the High Court in the following manner:
“47. In view of the aforesaid findings, the substantial question mentioned above in item Nos. 1 to 9 is answered in the following manner:
(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31 July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 1 August, 1999 should be treated as revenue expenditure.
(ii) Capital expenditure will qualify for deduction as per Section 35ABB of the Act.
48. The appeal ITA No. 417/2013 by the Revenue in the case of Hutchison Essar Pvt. Ltd., pertains to the assessment year 1999-2000 i.e. year ending 31 March, 1999. It is for the period prior to the period 31 July, 1999. As per the discussion above, the licence fee payable on or before 31 July, 1999 should be treated as capital expenditure and the licence fee payable thereafter should be treated as revenue expenditure. In view of the aforesaid position, the question of law admitted for hearing in this appeal as recorded in the order dated 21 August, 2013, has to be answered in favour of the revenue and against the respondent assessee.”
6.11. Aggrieved by the aforesaid reasoning and conclusions arrived at by the High Court of Delhi in its judgment dated 19 December, 2013, which has been followed by High Courts of Delhi, Bombay and Karnataka, the appellant-Revenue has preferred these appeals.
Submissions:
7. We have heard the learned Additional Solicitor General of India (ASG), Sri N. Venkataraman for the Revenue and learned senior counsel Sri Ajay Vohra, Sri Arvind Datar and learned counsel Sri Sachit Jolly, for the respondent-assessees and perused the material placed on record.
Submissions on behalf of the appellant-Revenue:
7.1. Learned ASG, at the outset, submitted that the judgment of the High Court of Delhi dated 19 December, 2013 is incorrect inasmuch as it has sought to dissect the payment of licence fee to hold that the entry fee paid in the initial four years ought to be treated as capital expenditure and amortised accordingly, while the fee payable on an annual basis from the fifth year onwards, as a percentage of the gross revenue of the assessees was treated as revenue/business expenditure. It was further contended as follows:
i. That the schedule of payment cannot recharacterize the transaction under income tax law, particularly when this Court had laid down from time to time that the schedule of payment, whether lump-sum or periodical, is immaterial in determining its classification under income tax law. The payment(s) towards the same purpose, i.e., payment of licence fee, cannot be characterised partly as capital and partly as revenue in nature by artificially defining one part as an entry fee and the remainder, payable annually, when both types of payment was towards licence fees.
ii. That when the respondent-assessees have duly amortised the licence fee paid annually as capital expenditure, under the 1994 licence regime as well as the entry fee under the Policy of 1999 regime, there was no basis to reclassify the same as revenue expenditure insofar as variable licence fee is concerned for the subsequent years. Variable payments made annually, based on the annual gross revenue in the relevant year were also towards licence fee. Therefore, there could not have been a shift in the tax treatment thereof upon migration to a new regime, wherein merely the payment schedule was revised while preserving the character of the payment.
iii. That payments made, either of entry fee or of annual licence fee, is in essence only towards securing a licence to establish, maintain or operate a telegraph i.e. system. If either of the aforesaid payments is not made, or short paid, the licence would be revoked under Section 8 of the Telegraph Act. Further, Section 4 of the said Act authorises the Government to grant licence against a consideration. Therefore, both entry fee as well as annual licence fee are included within the ambit of ‘consideration’ chargeable under Section 4. Hence, any submission that licence fee should be split into two components, namely, entry fee for acquiring the licence and variable licence fee for operating the licence, has no legal basis. Such a fragmentation is neither statutorily permissible, nor prescribed in the licence agreement.
iv. Referring to Section 35ABB of the Act, which allows amortisation of expenditure incurred for obtaining a licence to operate telecommunication services, it was contended that the said provision applies in relation to payments made for “acquiring any right to operate telecommunication services” whether such payment was made “before the commencement of the business to operate or thereafter at any time during the previous year.” In view of the aforesaid expression, the mode and manner of payment becomes irrelevant. As long as the payment is towards licence fee, the expenditure so incurred will be “in the nature of capital expenditure” as envisaged under Section 35ABB of the Act.
v. That the expression “either before the commencement of the business to operate or thereafter” is also found in Section 35ABA of the Act which pertains to the right to use Spectrum, similar to Section 35ABB which relates to licence to operate telecommunication services. The legislative intent is therefore clear that both these rights would flow from the Central Government on payment, and further, the payment would be partly lump-sum and partly in a deferred manner, considering the nature of rights acquired.
vi. Reliance was placed on the decision of a Constitution-Bench of this Court in Aditya Minerals Pvt. Ltd. vs. Commissioner of Income Tax, (1999) 8 SCC 97 (“Aditya Minerals Pvt. Ltd.”) to assert that the law laid down therein is that as long as payment is towards a capital expenditure, it is immaterial whether it is paid in lump-sum or as periodical payments, or, as a combination of both. That the mode of payment will not be determinative in identifying the nature of the expenditure, i.e., as to whether it is capital or not.
vii. That the decision of this Court in Assam Bengal Cement Co. Ltd. has clarified that the aim and object of the expenditure would determine the character thereof, while the source and manner of payment would have no consequence.
viii. Referring to the cases of Jonas Woodhead and Sons, Southern Switch Gear Ltd. and Best and Co., which have been referred to by the High Court of Delhi in the impugned judgement, it was submitted that reliance on the said cases is misplaced inasmuch as the said cases did not deal with a single source/purpose towards which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, this Court held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act is a single licence to establish, maintain and operate telecommunication services. Since it is not a licence for divisible rights which conceives of divisible payments, apportionment of the licence fee by holding that the entry fee paid is towards establishment and therefore, capital, while the licence fee paid as a percentage of gross revenue is towards operation and maintenance and therefore, Revenue, is without legal basis.
ix. Reliance was placed on the decision of this Court in CIT vs. Jalan Trading Co. Pvt. Ltd., (1985) 4 SCC 59 (“Jalan Trading Co.”) to submit that in the said case this Court had an occasion to consider an annual payment in the form of profit sharing towards the right to carry on business. That in the said case, this Court concluded that the annual payment of 75% profit share would still be a payment that was capital in nature, as the same was paid as consideration under a deed of assignment for the right to carry on business. That this judgement will squarely apply to the facts of the present case since the annual payment based on AGR is only towards licence fees and merely because it is paid on the annual gross revenue, the payment cannot be construed as a revenue expenditure.
With the aforesaid submissions, it was prayed that these appeals filed by the Revenue be allowed and the impugned judgments of the High Courts of Delhi, Bombay and Karnataka, following the judgment of the Division Bench of the High Court of Delhi dated 19 December, 2013, be set aside and it be declared that the annual payment is in the nature of a capital expenditure.
7.2. Per contra, learned senior counsel, Sri Ajay Vohra, appearing on behalf of the respondent-assessees in Civil Appeal No. 11130 of 2016, supported the judgment of the Division Bench of the High Court of Delhi dated 19 December, 2013 and submitted that the said judgment was passed based on a correct appreciation of the facts of the case and the law and therefore, the same would not call for any interference by this Court. It was further submitted as follows:
i. That on a bare reading of the said provision and the mode of amortisation of expenses, it is patently clear that the same would be applicable only if the following cumulative conditions are satisfied:
a) the expenditure is capital in nature;
b) the expenditure is incurred by an assessee on acquisition of the right to operate telecom services;
c) the expenditure represents payment actually made to obtain a licence.
Thus, for attracting the provisions of Section 35ABB, it is necessary that the expenditure under consideration must be capital in nature and is incurred for acquiring or obtaining a licence, which gives the right to the assessee to operate telecom services.
ii. That in the present case, the respondent-assessees had obtained the licence in the year 1994 and had thereafter set up the telecommunication infrastructure and started operating telecommunication services. The payment of licence fee under the fixed regime, i.e., prior to migration to the Policy of 1999 was for obtaining the licence, thereby resulting in the acquisition of the right to operate telecommunication services. Therefore, the fixed licence fee upto 31 July, 1999 was amortised and allowed in terms of Section 35ABB of the Act. On the other hand, the variable licence fee payable w.e.f. 01 August, 1999, is a percentage of the AGR. The same is not in the nature of capital expenditure as it is not incurred with a view to acquire the right to operate telecommunication services. The said services were already being operated by the respondents by virtue of a licence which had been obtained in the year 1994. The variable licence fee was, thus, for continuing the right to operate telecommunication services, which were already being operated and provided by the respondent-assessees.
iii. Referring to the salient features of the Policy of 1999, it was submitted that the said policy made a paradigm shift by making qualitative changes in licence conditions. It facilitated the entry of new players on payment of one-time entry fee and variable revenue share. The policy document highlights and emphasises the distinction between a one-time fee which is the payment for obtaining the licence, on the one hand and the variable licence fee, which is payment made on a recurring basis based on revenue share, for continuing the right to operate telecommunication services. Therefore, the one-time entry fee to be paid by a new entrant obtaining a licence post 31 July 1999 is required to be amortised under section 30ABB of the Act while the variable licence fee payable as a revenue share would be admissible business expenditure or revenue deduction.
iv. That the Policy of 1999 has not only changed the mechanism of payment but also modified the rights accruing under the licence already obtained vide the original agreement dated 29 November 1994, in lieu of the payment of variable licence fee. The tenure of the licence was increased from ten to twenty years; the licence fee was bifurcated into two parts, i.e., fixed entry fee paid for obtaining the licence and variable annual licence fee paid for continuing with the licence. Thereby the whole complexion of the consideration provided under the original agreement, was changed. That, since the restriction of the number of players or operators in each region was completely lifted, coupled with the fact that variable licence fee was to be paid on an annual basis, in order to continue with the right to operate telecommunication services, no enduring benefit was accruing to the respondent-assessees. Neither was there any monopoly right, nor would the licence remain valid and subsist for an indefinite period of time. The licence would be valid only so long as the annual payment of variable licence fee was made.
v. That the provisions of Section 35ABB of the Act were introduced in the year 1996. At that time, the concept of variable licence fee did not exist. Application of the said provision to variable licence fee would give rise to absurd results, not intended by the Legislature.
vi. That payment of variable licence fee from 01 August, 1999 is not for “acquiring any right to operate telecommunication services”, which right vested in and was being exploited by the assessees pursuant to obtaining the licence in 1994 and setting up the requisite infrastructure.
vii. Further, variable licence fee paid from 01 August, 1999 could not be regarded as payment made “to obtain a licence”, so as to fall within the ambit of Section 35ABB of the Act.
That Section 35ABB of the Act would not be attracted in the present case to require amortisation of the variable licence fee, because:
a) payment of variable licence fee is not in the nature of capital expenditure;
b) such payment is not incurred for “acquiring any right to operate telecommunication services”;
c) such payment has not been made “to obtain a licence”.
With the aforesaid submissions, it was prayed that the High Courts’ decision as to the inapplicability of Section 35ABB of the Act, to the facts of the present case, be upheld, and these appeals be dismissed as being devoid of merit.
7.3. Learned senior counsel, Sri Arvind P. Datar, appearing on behalf of some of the respondent-assessees in Civil Appeal Nos. 11131 of 2016 and 153 of 2021 adopted the submissions of Sri Ajay Vohra and further submitted as under:
i. That it would be incorrect to suggest that the annual licence fee which is paid as a percentage of the revenue earnings is paid to acquire the right and obtain the licence. That it is absurd to state that every year, each telecom licencee acquires the right and obtains a licence. Acquisition of the right and obtaining the licence is a one-time event and the expenditure for acquisition of the licence is always capital expenditure. Section 35ABB of the Act covers this aspect of the transaction.
ii. That the annual licence fee, even though termed as a licence fee is in essence, expenditure incurred to operate the telecommunication services from year to year. Such expenditure is incurred annually to earn revenue and consequently is an annual revenue expenditure. In various sectors, such as mining, oil exploration, etc., the licences are acquired on payment of a lump-sum amount. This expenditure is to acquire a right and obtain licence to engage in mining, oil exploration, and so on. Thereafter, annual amounts are paid, depending on the quantities of minerals or petroleum that is extracted. It was submitted that by analogy, the one-time entry fee paid by existing telecom operators and the entry fee that was paid by all the new entrants, was capital expenditure which resulted in acquisition of rights and obtaining licence. However, the annual licence fee, which varied according to the AGR in the relevant year, was incurred annually on revenue earned and consequently is an annual revenue expenditure.
iii. Referring to the decision of this Court in Mewar Sugar Mills Ltd. vs. CIT, (1973) 3 SCC 143 (“Mewar Sugar Mills Ltd.”), it was submitted that in the said case, the expenditure incurred by the assessee was apportioned and it was held that the sums paid by the assessee for acquisition of monopoly rights for manufacture of sugar were in the nature of capital expenditure, while the royalty paid on a yearly basis was revenue expenditure. It was submitted in that context that the principle laid down in the said case would directly apply to the case at hand. The one-time entry fee is payed for acquiring the licence and is therefore in the nature of capital expenditure; whereas, the annual licence fee is to operate the licence and earn profits, therefore, the same is revenue expenditure.
iv. That a similar view was taken in CIT vs. Sarada Binding Works, (1976) 102 ITR 187 (“Sarada Binding Works”) wherein the Madras High Court considered various judgments of this Court and held that a lump-sum payment to acquire a right would be capital expenditure, whereas any amount paid as royalty based on annual earnings or profit would be revenue expenditure. That the payment of annual licence fee, in the present case, would be similar to the payment of royalty as it relates to the annual turnover and would therefore be revenue in nature.
v. That it could not be axiomatically held that the nomenclature ‘annual licence fee’ would itself indicate that the annual variable licence fee was also incurred for the purpose of acquiring the capital asset, i.e., the licence and therefore, had to be amortised under Section 35ABB of the Act. The nomenclature does not mean that a licence is acquired annually or the licence is obtained annually. This amount is the expenditure incurred to operate the telecom licence and earn revenue or profits. In this regard, reliance was placed on the dictum of this Court in Sundaram Finance Ltd. vs. State of Kerala, (1966) 2 SCR 828 to submit that the use of a particular expression is not conclusive of the nature of a transaction.
vi. That the judgment of this Court in Jalan Trading Co., sought to be relied upon by the appellant-Revenue would have no application to the facts of the present case as unlike in the case at hand, there was no lump-sum payment in the said case. The agreement itself provided for 75% of the net profits to be paid for the assignment of the right to carry on business. The aim or object of payment of the said consideration was for the purpose of acquiring the right to carry on business. However, in the present case, the annual licence fee is paid not to acquire the licence, but to operate the telecom licence and earn revenue or profits. Hence, the decision of this Court in Jalan Trading Co., turns on its own facts.
7.4. Sri Sachit Jolly, learned counsel appearing for the respondent-assessees in Civil Appeal No. 4902 of 2022 adopted the submissions of learned senior counsel, Sri Ajay Vohra and Sri Arvind P. Datar and further contended as follows:
i. That merely because the DoT can rescind the licence owing to nonpayment of the variable licence fee, it does not mean that the payment of such fee is towards the acquisition of the licence. Violation of other conditions of licence like non-maintenance of KYC of subscribers could also lead to cancellation of licence. In fact, payment of licence fee for any one year, neither leads to acquisition of any new asset nor to any enduring benefit. Further, the benefit, if any, of the variable licence fee is only restricted to one year to which the payment pertains. Hence, the same could not be held to be capital expenditure or expenditure incurred for acquisition of a capital asset.
ii. That the interpretation sought to be canvassed by the appellant would result in a completely absurd result wherein the deduction under Section 35ABB would exceed the actual payment made by the assessee in a given year, in the later years. This aspect of the matter was rightly appreciated by the Delhi High Court in the impugned judgement and it was accordingly held that the interpretation proposed by the appellant would give Section 35ABB a ballooning effect with the amortised amount substantially increasing in the later years and in the last year, the entire licence fee along with the brought forward, amortised amount would be allowed as deduction. It was rightly held that after a certain point of time, deduction allowable under Section 35ABB would be more than the actual payment made by the assessee as licence fee for that year.
In this context, reliance was placed on the decision of this Court in CIT, Bangalore vs. J.H. Gotla, A.I.R. 1985 SC 1698 to contend that it is settled law that an interpretation which leads to an absurd result should be avoided and such interpretation should give way to a more harmonious interpretation so that the legislation is given its desired result.
iii. With the aforesaid submissions, it was stated that the impugned decision of the High Court of Delhi is detailed and well-reasoned. It is not contrary to any principle laid down by this Court and hence does not merit interference. It was prayed that the appeals filed by the Revenue be dismissed on the ground that there is no infirmity in the impugned judgment of the High Court of Delhi.
Reply arguments:
8. By way of reply, learned ASG, Sri N. Venkataraman, reiterated his submissions while also contending that the judgment of this Court in Mewar Sugar Mills Ltd. and the judgment of the Madras High Court in Sarada Binding Works, relied upon by Sri Datar to substantiate the claim that the same source of expenditure incurred by an assessee could be construed as partly capital and partly revenue would not come to the aid of the respondents-assessees in the present case. In this regard, it was further submitted as follows:
i. That in both the aforesaid cases sought to be relied upon by Sri Datar, a single source of expenditure was not split partly as capital and partly as revenue expenditure. On the contrary, in both of those decisions, this Court examined two different constituents of expenditure and held one to be capital and the other to be revenue in nature.
ii. That in Sarada Binding Works the facts were that the agreement in question envisaged conveyances of two distinct aspects: first, the right to run the business of Chandamama Publications for a consideration of a fixed sum of Rs.5000/- per annum; second, royalty on the sales equivalent to 10% of the net profit of each year of business. The High Court’s judgment categorically records that annual payments based on the turnover had no nexus with the payment made to acquire the right to carry on trade, which was also paid annually at Rs.5000/- every year. However, in the facts of the present case, the entry fee as well as the annual licence fee payable as a percentage of AGR, are both towards the same purpose, i.e., acquisition of licence to carry on telecommunication operator services.
iii. That similarly, in the case of Mewar Sugar Mills Ltd., two different payments were made, relatable to two different subject matters. In the said judgment, this Court noted that the payment of royalty based on quantity of sugar manufactured, was not with a view to acquire monopoly rights. In the said case, there were two clearly discernible purposes towards which the payment of lump-sum consideration and payment of royalty were made. However, in the present case, the purpose of payment of entry fee as well as the annual licence fee, is singular, i.e., to acquire and retain the right to carry on the business of rendering telecommunication services.
In light of the aforesaid submissions, Sri N. Venkataraman urged that this Bench may allow the appeals filed by the Revenue.
Points for consideration:
9. Having heard the learned counsel for the respective parties and on perusal of the material on record, the following points would emerge for our consideration:
i. Whether the variable annual licence fee paid by the respondents- assessees to the DoT under the Policy of 1999 is revenue in nature and is to be allowed deduction under Section 37 of the Act, or, the same is capital in nature and is accordingly required to be amortised under Section 35ABB of the Act?
ii. Whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31 July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue?
iii. What order?
Statutory Framework:
10. The statutory scheme and structure of the Act on the characterisation of capital expenditure is as follows:
10.1. Section 32 of the Act identifies tangible and intangible assets which are capital in nature and prescribes the mode and manner of depreciation. Section 32(1)(i) identifies a list of tangible assets and Section 32(1)(ii), a set of intangible assets which includes licences. Explanation 3 to Section 32(1) defines ‘assets’ into two categories, i.e., tangible and intangible. Licences are identified as intangible assets and are therefore, capital in nature.
10.2. Any capital asset is depreciable in terms of Section 32 of the Act, unless specifically dealt with elsewhere. One of the exceptions to depreciation of capital assets is amortisation. Sections 35A, 35AB, 35ABA and 35ABB form one cluster of exceptions wherein, the capital assets referred to in the relevant sections have to be amortised in the manner and mode prescribed therein.
10.3. Amortisation is a form of depreciation, however, the distinction between the two being that in the case of depreciation, an asset may be depreciated progressively, and may even be exhausted before the lifetime expectancy of the asset in question, whereas, in the case of amortisation, the value of the asset gets progressively depleted, matching with the expected timeframe of the right.
10.4. A brief overview of the provisions of the Act which provide for amortisation as a prescribed method, is as under:
i. Section 35A of the Act provides for amortisation of expenditure incurred on acquisition of patent rights or copyright which are intangible assets.
ii. Section 35AB of the Act prescribes the method of amortisation in the case of acquisition of know-how.
iii. Section 35ABA of the Act prescribes the method of amortisation of expenditure incurred on obtaining the right to use spectrum.
iv. Section 35ABB of the Act provides for amortisation of the expenditure incurred for obtaining a licence to operate telecommunication services.
11. At this juncture, it would be useful to reproduce Section 35ABB (1) of the Act, which reads as under:
“35ABB. Expenditure for obtaining licence to operate telecommunication services.—
(1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
Explanation.—For the purposes of this section,—
(i) “relevant previous years” means,—
(A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced;
(B) in any other case, the previous years beginning with the previous year in which the licence fee is actually paid, and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force;
(ii) “appropriate fraction” means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years;
(iii) “payment has actually been made” means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.”
(2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is transferred.
(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred.
Explanation.—Where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.
(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years.
(5) here a part of the licence is transferred in a previous year and sub-section (3) does not apply, the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by—
(a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred.
(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.
(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.
(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year.
11.1. Section 35ABB of the Act governs the treatment of expenditure incurred by entities to obtain a licence for operating telecommunication services in India. The provision addresses the tax treatment of such expenses and ensures that they align with the income tax framework. With effect from 1 April 1996, this provision provides for amortisation of capital expenditure incurred for acquisition of any right to operate telecommunication services, regardless of whether such cost is incurred before the commencement of such business or thereafter. The cost is allowed to be amortised in equal instalments in the years for which the licence is in force. The amortisation commences from the year in which such business commences (where such cost is incurred before the commencement of such business) or the year in which such cost is actually paid, irrespective of the method of accounting adopted by the assessee for such expenditure.
11.2. In order for Section 35ABB of the Act to be applicable, the following cumulative conditions specified in Section 35ABB (1) of the Act are to satisfied:
First, the expenditure must be capital in nature;
Second, the expenditure must be incurred by an assessee for the purpose of acquisition of the right to operate telecom services;
Third, the expenditure must represent the payment actually made to obtain a licence.
Thus, for attracting the provisions of Section 35ABB, it is necessary that the expenditure under consideration must be capital in nature and is incurred for acquiring or obtaining a licence which gives the right to the assessee to operate telecommunication services. Section 35ABB of the Act operates and is effective when the expenditure itself is of a capital nature and is incurred for acquiring a right to operate telecommunication services or is made to obtain a licence for the said services.
Further, the definitions of “relevant previous years”, “appropriate fraction” and “payment has actually been made” have been given by way of an Explanation for the purpose of this Section. Sub-section (2) to (5) deal with deduction to be made accordingly when a licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than or exceed the expenditure incurred remaining unallowed. Sub-section (6) to (7) deal with situation where, in a scheme of amalgamation, demerger, etc. as to how the provisions of sub-section (2), (3) and (4) of Section 35ABB would not apply but the provisions of this Section shall, as far as may be, apply to the amalgamated company or to the demerged company, apply to the resulting company as they would have applied to the amalgamating company if the latter had not transferred the licence or to the demerged company if the latter had not transferred the licence, as the case may be. Sub-section (8) states that where a deduction for any previous years under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under the sub-section (1) of Section 32 for the same previous year or any subsequent previous year.
11.3. The salient aspects of Section 35ABB (1) of the Act may be read as under:
(i) Purpose and nature of expenditure – Capital expenditure incurred for the purpose of obtaining licence to operate telecommunication services.
(ii) Mode of amortisation of expenses – For each year of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure, shall be allowed.
(iii) Conditions to be satisfied for applicability of the Provision –
(a) The expenditure must be capital in nature;
(b) The expenditure must be incurred by an assessee for the purpose of acquisition of the right to operate telecom services;
(c) The said expenditure may be incurred before the commencement of business to operate telecommunication services, or thereafter at any time during any previous year;
(d) The expenditure must represent the payment actually made to obtain a licence.
12. Since the variable licence fee paid by the respondents-assessees to the DoT under the Telecom Policy of 1999 is stated to be imposed and collected on the strength of the Telegraph Act, the relevant provisions of the said Act are extracted hereinunder for immediate reference:
“4. Exclusive privilege in respect of telegraphs, and power to grant licences:-
(1) Within India, the Central Government shall have the exclusive privilege of establishing, maintaining and working telegraphs:
Provided that the Central Government may grant a licence, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part of India:
Provided further that the Central Government may, by rules made under this Act and published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks fit, the establishment, maintenance and working-
(a) of wireless telegraphs on ships within Indian territorial waters and on aircraft within or above India, or Indian territorial waters, and
(b) of telegraphs other than wireless telegraphs within any part of India.
Explanation.– The payments made for the grant of a licence under this subsection shall include such sum attributable to the Universal Service Obligation as may be determined by the Central Government after considering the recommendation made in this behalf by the Telecom Regulatory Authority of India established under sub-section (1) of section 3 of the Telecom Regulatory Authority of India Act, 1997 (24 of 1997).
(2) The Central Government may, by notification in the Official Gazette, delegate to the telegraph authority all or any of its powers under the first proviso to sub-section (1).
The exercise by the telegraph authority of any power so delegated shall be subject to such restrictions and conditions as the Central Government may, by the notification, think fit to impose.”
(3) Any person who is granted a license under the first proviso to sub-section (1) to establish, maintain or work a telegraph within any part of India, shall identify any person to whom it provides its services by–
(a) authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or
(b) offline verification under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or
(c) use of passport issued under section 4 of the Passports Act, 1967 (15 of 1967); or
(d) use of any other officially valid document or modes of identification as may be notified by the Central Government in this be half.
(4) If any person who is granted a license under the first proviso to sub-section (1) to establish, maintain or work a telegraph within any part of India is using authentication under clause (a) of sub-section (3) to identify any person to whom it provides its services, it shall make the other modes of identification under clauses (b) to (d) of sub-section (3) also available to such person.
(5) The use of modes of identification under subsection (3) shall be a voluntary choice of the person who is sought to be identified and no person shall be denied any service for not having an Aadhaar number.
(6) If, for identification of a person, authentication under clause (a) of sub-section (3) is used, neither his core biometric information nor the Aadhaar number of the person shall be stored.
(7) Nothing contained in sub-sections (3), (4) and (5) shall prevent the Central Government from specifying further safeguards and conditions for compliance by any person who is granted a license under the first proviso to sub-section (1) in respect of identification of person to whom it provides its services.
Explanation.– The expressions “Aadhaar number” and “core biometric information” shall have the same meanings as are respectively assigned to them in clauses (a) and (j) of section 2 of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016).
xxx xxx
“8. Revocation of licences:- The Central Government may, at any time, revoke any licence granted under section 4, on the breach of any of the conditions therein contained, or in default of payment of any consideration payable there under.”
xxx xxx
“PART IV
PENALTIES
20. Establishing, maintaining or working unauthorized telegraph:–
(1) If any person establishes, maintains or works a telegraph within India in contravention of the provisions of section 4 or otherwise than as permitted by rules made under that section, he shall be punished, if the telegraph is a wireless telegraph, with imprisonment which may extend to three years, or with fine, or with both, and in any other case, with a fine which may extend to one thousand rupees.
(2) Not withstanding anything contained in the Code of Criminal Procedure, 1898 (5 of 1898), offences under this section in respect of a wireless telegraph shall, for the purposes of the said Code, be bailable and non-cognizable.
(3) When any person is convicted of an offence punishable under this section, the Court before which he is convicted may direct that the telegraph in respect of which the offence has been committed, or any part of such telegraph, be forfeited to Government.”
“20A. Breach of condition of licence:– If the holder of a licence granted under section 4 contravenes any condition contained in his licence, he shall be punished with fine which may extend to one thousand rupees, and with a further fine which may extend to five hundred rupees for every week during which the breach of the condition continues.”
“21. Using unauthorized telegraphs:– If any person, knowing or having reason to believe that a telegraph has been established or is maintained or worked; in contravention of this Act, transmits or receives any message by such telegraph, or performs any service incidental thereto, or delivers any message for transmission by such telegraph or accepts delivery of any message sent thereby, he shall be punished with fine which may extend to fifty rupees.”
12.1. The Telegraph Act is the parent legislation under which licences to establish, maintain or work a telegraph are issued. Section 4(1) of the Telegraph Act states that the Central Government shall have the exclusive privilege of establishing, maintaining and working telegraphs. The proviso to Section 4(1) indicates that the Central Government may grant a licence to any person to establish, maintain or work a telegraph within any part of India on such conditions and in consideration of such payment as it thinks fit.
12.2. Section 8 of the Telegraph Act allows the Central Government to revoke at any time any licence granted under Section 4 thereof, on breach of any of the conditions therein contained or in default of payment of any consideration payable thereunder.
12.3. Section 20 of the Telegraph Act declares that any person who establishes, maintains or works a telegraph in contravention of the provisions of Section 4 shall be punished with imprisonment, which may extend to three years, or with fine, or with both. Section 20A and 21 deal with breach of conditions of licence and the consequences of using unauthorised telegraphs.
12.4. A bare perusal of the aforesaid provisions of the Telegraph Act would throw light onto the following aspects:
i. The Central Government may grant a licence to establish, maintain or work a telegraph, by granting a licence on payment of a licence fee, under the proviso to Section 4(1) of the Telegraph Act.
ii. The Central Government may, under Section 8, revoke any licence issued under Section 4 of the Telegraph Act, on ground of default in payment of consideration.
iii. Any contravention of Section 4 of the Telegraph Act, or of conditions of the licence issued under Section 4, would invite imprisonment and/or imposition of fine.
13. We shall now refer to the terms of the Licence Agreement entered into under the Policy of 1994 and the terms of migration of the existing licencees to the New Telecom Policy, 1999 regime, with a view to examine whether the nature and character of the licence fee was changed in light of migration.
13.1. For ready reference, a specimen licence agreement dated 29 November, 1994, in favour of Bharti Cellular Ltd. is extracted hereinunder. It is to be clarified at this juncture that the date of agreement with each respondents may be different but the terms are identical:
“Licence Agreement under the Indian Telegraph Act
This Agreement made the 29th day of November, 1994 between the President of India acting through the Director (TM-IX), Department of Telecommunications (called the Licenser) of the ONE PART and M/s. Bharti Cellular Ltd., registered under The Companies Act 1956 and having its registered office at 15th Floor, Devika Tower, 6 Nehru Place, New Delhi-110 019. (hereinafter called the Licensee which expression shall unless excluded by repugnant to this context be deemed to include its successor in business) of the OTHER PART.
Whereas in exercise of the powers of the Central Government under Sub Section 2 of Section 4 of the Indian Telegraph Act 1885, the Central Government delegated its powers to Telegraph Authority (hereinafter referred to as Authority) by GSR 806 Gazette of India, Part II, Section 3(i) dated 24th August 1985.
And whereas pursuant to the request of the Licensee the Authority has agreed to grant licence to the Licensee on the terms and conditions appearing hereinafter to establish, maintain and operate Cellular Mobile Telephone Service upto the subscriber’s terminal connection (hereinafter called the Service) in the areas given in Schedule “A” annexed hereto and the Licensee has agreed to accept the same on the terms and conditions appearing hereinafter.
Now this Agreement witnesseth as follows:
1. In consideration of mutual covenants as well as the licence fee payable in advance in terms of schedule ‘C’ and observations and/or due performance of all the terms and conditions to be observed/performed on the part of the licensee, the Licenser does hereby grant licence to the Licensee to establish, maintain and operate Cellular Mobile Telephone Service upto the subscriber’s terminal connection in the areas given in Schedule “A” annexed hereto on the terms and conditions mentioned in Schedule “C” annexed
2. The licence is granted initially for a period of 10 years extendible for one year or more at a time at the discretion of the authority, on such terms and conditions as the Authority may, at his sole discretion, agree provided that the Licensee is not in default or has committed/any breach of any terms and conditions of the Licence. The licence fee payable is given in Schedule “C” condition 19 of this licence.
3. The licence is governed by the provisions of the Indian Telegraph Act, 1885 and Indian Wireless Telegraphy Act, 1933 as modified from time to time.
4. Unless otherwise mentioned in the subject or context appearing hereinafter the main body of the agreement and all the Schedules annexed hereto including the tender documents will form part and parcel of this agreement provided however in case of conflict terms of this agreement and those of schedules hereto will prevail over the tender documents.
5. In this Agreement words and expressions will have the same meaning as are respectively assigned to them in the Schedule “C” Part-I.
6. The licensee should clearly indicate the specifications of the service to the subscribers at the time of signing the contract with them.
7. The Ceiling Tariff to be charged from the subscribers of the service is given in Schedule “B” annexed hereto. Licensee can charge less tariff without any approval of the Authority.
8. The bank guarantees to be given by the licensee prior to the signing of the Licence Agreement is given in Schedule “D” annexed hereto.
9. The Licensee will not assign or transfer its rights in any manner whatsoever under the licence to a third party or enter into any agreement for sub-licence and/or partnership relating to any subject matter of the licence to any third party either in whole or in part i.e. no sub-leasing /partnership/third party interest shall be created.
10. In case of interruption of service lasting for more than 72 hours, an appropriate rebate shall be given to the users of the service by the Licensee. The Authority reserves the right to, in case of a default, impose any penalty as it may deem fit.
11. The Authority may at any time revoke the licence on the breach of any of the terms and conditions therein contained or in default of payment of any consideration payable thereunder by giving a 60 days
12.1 The Licensee is not allowed to use any encryption in the network.
12.2 The Licensee is required to provide list of subscribers to the Authority every quarter regularly and, as and when required by the Authority.
12.3 The Authority or its representative will have an access to the MSC as well as the technical facility provided by the Licensee for monitoring, inspection etc. without giving any prior notice.
13. It is further agreed and declared by the parties that notwithstanding anything contained hereinbefore, that
(i) The licence is issued on non-exclusive basis. The Authority reserves the right to operate the service within the same geographical area.
(ii) The Authority reserves the right to modify at any time the terms and conditions of the licence covered under Schedules “A”, “B”, “C”, and “D”, annexed hereto, if in the opinion of the Authority it is necessary or expedient to do so in the interests of the general public or for the proper conduct of telegraphs or on security consideration.
(iii) The Authority reserves the right to revoke the licence at any time in the interest of public by giving a 60 days’ notice.
(iv) Notwithstanding anything contained anywhere else in the licence the Authority’s decision shall be final.
(v) The authority reserves the right to take over the entire services and networks of the licensee or revoke/ terminate /suspend the licence in the interest of national security or in the event of a national emergency/war or low intensity conflict type of situations.
In Witness whereof the parties hereto have caused this Agreement to be executed through their respective authorized representatives the day and year first before written
Signed and Delivered
for and on behalf of
President of India”
(Emphasis by us)
13.2. The conditions on which the licence was granted were stipulated in Schedule A and Schedule B of the licence agreement. The payment of licence fee was in the following terms:
“PAYMENT OF LICENCE FEES
19.1 The Licence fee payable by licencee for each service area shall be regulated as follows: –
