Case Law (SC) -- Payment of entry fee as well as the variable annual licence fee paid by the assessees to the DoT under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the Act

 CIT v. Bharti Hexacom Ltd [2023 INSC 917] dated 16.10.2023

Issue:

Capital V. Revenue Expenditure

Whether, the variable licence fee paid by the respondent-assessees to the Department of Telecommunications 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.

Good compilation of all old decisions their summary and impressive discussions on classification of Capital V. Revenue Expenditure (Pages 79 to 90).

-        -Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal, (1955) 27 ITR 34 (SC).

-        Member of the Board of Agricultural Income Tax, Assam vs. Sindhurani Chaudurani, (1957) 32 ITR 169 (SC).

-        Pingle Industries Ltd. vs. Commissioner of Income Tax, (1960) 40 ITR 67 (SC).

-        Commissioner of Income Tax, U.P. vs Maheshwari Devi Jute Mills Ltd., (1965) 57 ITR 36 (SC).

-       R.B. Seth Moolchand Suganchand vs. Commissioner of Income Tax, Delhi, (1973) 3 SCC 257.

-        CIT, Bombay vs. Jalan Trading Co., (1985) 4 SCC 59.

-     Commissioner of Income Tax vs. Bombay Burmah Trading Corporation, (1986) 161 ITR 386 (SC).

-        Aditya Minerals Pvt. Ltd. vs. Commissioner of Income Tax, (1999) 239 ITR 817.

-        Enterprising Enterprises vs. Deputy Commissioner of Income Tax, (2007) 293 ITR 437 (SC).

-        M/s Gotan Lime Syndicate vs. Commissioner of Income Tax, (1966) 59 ITR 718 (SC).

-        Commissioner of Income Tax vs. Best and Co. (Pvt.) Ltd. (1966) 60 ITR 11 (SC).

-    Travancore Sugars and Chemicals Ltd. vs. Commissioner of Income-tax, (1966) 62 ITR 566 (SC).

-        Commissioner of Income Tax, Bombay City I vs. CIBA India Ltd., (1968) 69 ITR 692 (SC).

-        Jabbar (M.A.) vs. Commissioner of Income Tax, Andhra Pradesh, (1968) 68 ITR 493 (SC).

-        Lakshmiji Sugar Mills Co. Pvt. Ltd. vs. Commissioner of Income Tax, (1972) 82 ITR 376 (SC).

-        Devidas Vithaldas and Co. vs. C.I.T., Bombay City, (1972) 3 SCC 457.

-        Mewar Sugar Mills Ltd. vs. CIT, (1973) 3 SCC 143.

-        Empire Jute Co. Ltd vs. Commissioner of Income Tax, (1980) 124 ITR 1 (SC).

-     L.H. Sugar Factory and Oil Mills Pvt. Ltd. vs. Commissioner of Income Tax, U.P., (1980) 125 ITR 293.

-    Commissioner of Income Tax vs. Associated Cement Companies Ltd., (1988) 172 ITR 257 (SC).

-     Alembic Chemical Works Co. Ltd. vs. Commissioner of Income Tax, Gujarat (1989) 177 ITR 377 (SC).

-      Jonas Woodhead and Sons. India Ltd. vs. Commissioner of Income Tax, (1997) 224 ITR 342 (SC).

-        Commissioner of Income Tax vs. Madras Auto Services Pvt. Ltd., (1998) 233 ITR 468 (SC).

-        Honda Siel Cars India Ltd. vs. Commissioner of Income Tax, Ghaziabad, (2017) 8 SCC 170

-        Mohan Meakin Breweries Ltd. vs. Commissioner of Income Tax, (1997) 220 ITR 878. (HP)

-        Commissioner of Income Tax vs. Sarada Binding Works, (1976) 102 ITR 187 (Mad)

-    Commissioner of Income Tax vs. Southern Switch Gear Ltd., (1984) 148 ITR 272 (Mad) affirmed in Southern Switch Gear Ltd. vs. CIT, (1998) 232 ITR 35 (SC).

-        CIT vs. Saw Pipes Ltd., (2008) 300 ITR 35 (Del)

-        CIT vs. J.K. Synthetics, (2009) 309 ITR 371 (Del)

-        Commissioner of Income Tax vs. Sharda Motors, (2009) 319 ITR 109 (Del)

-        CIT vs. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 (Del)

Holding:-

“25. In light of the aforesaid discussion and having regard to the tests and principles forged by this Court from time to time, as detailed in paragraphs hereinabove, we shall proceed to consider 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, i.e. before and after 31 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.

We answer the said question in the negative, against the assesses and in favour of the Revenue for the following reasons:

i. Reliance placed by the High Court on the decisions of this Court in Jonas Woodhead and Sons and Best and Co. and the decision of the Madras High Court in Southern Switch Gear Ltd. as approved by this Court appear to be misplaced inasmuch as the said cases did not deal with a single source/purpose to 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 that conceive of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure is without any legal basis.

ii. Perhaps, the decision of the High Court could have been sustained if the facts were such that even if the respondents-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right is not preserved under the scheme of the Telegraph Act which we have detailed above. Hence, the apportionment made by the High Court is not sustainable.

iii. The fact that failure to pay the annual variable licence fee leads to revocation or cancellation of the licence, vindicates the legal position that the annual variable licence fee is paid towards the right to operate telecom services. Though the licence fee is payable in a staggered or deferred manner, the nature of the payment, which flows plainly from the licensing conditions, cannot be recharacterized. A single transaction cannot be split up, in an artificial manner into a capital payment and revenue payments by simply considering the mode of payment. Such a characterisation would be contrary to the settled position of law and decisions of this Court, which suggest that payment of an amount in instalments alone does not convert or change a capital payment into a revenue payment.

iv. It is trite that where a transaction consists of payments in two parts, i.e., lump-sum payment made at the outset, followed up by periodic payments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the assessee. However, in the present case, the successive instalments relate to the same obligation, i.e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunication services as a composite whole. This is because in the absence of a right to establish, maintenance and operation of telecommunication services is not possible. Hence, the cumulative expenditure would have to be held to be capital in nature.

v. Thus, the composite right conveyed to the respondents-assessees by way of grant of licences, is the right to establish, maintain and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999. vi. Further, it is to be noticed that even under the 1994 Policy regime the payment of licence fee consisted of two parts:

  a) A fixed payment in the first three years of the licence regime;

b)A variable payment from the fourth year of the licence regime onwards, based on the number of subscribers. Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime must be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure insofar as variable licence fee is concerned.

26. As per the Policy of 1999, there was to be a multi-licence regime inasmuch as any number of licences could be issued in a given service area. Further, the licence was for a period of twenty years instead of ten years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period upto 31 July, 1999 were to be closed. If the migration to the Policy of 1999 was accepted by the assessees herein or the other service providers, then all licence fee paid upto 31 July, 1999 was declared as a one time licence fee as stated in the communication dated 22 July, 1999 which was treated to be a capital expenditure. The licence granted under the Policy of 1999 was non-transferable and nonassignable. More importantly, if there was a default in the payment of the licence fee, the entire licence could be revoked after sixty days notice. The provisions of the Telegraph Act particularly Section 8 thereof are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, we hold that the payment of entry fee as well as the variable annual licence fee paid by the respondents-assessees to the DoT under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the Act. In our view, the High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services, as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31 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. The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on annual basis.

27. Therefore, in the ultimate analysis, the nomenclature and the manner of payment is irrelevant. The payment post 31 July, 1999 is a continuation of the payment pre 31 July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterized as capital only.

28. In the result, 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, is hereby set aside.”