6897/2018 CIVIL APPEAL NO(S)._ _______of 2023 (@ SLP (C)_________OF 2023 (@DIARY NO(S). ________of 2023 (@ SLP(C) NO. 11139/2016 CIVIL APPEAL NO(S). 11145/2016 CIVIL APPEAL NO(S). 11146/2016 CIVIL APPEAL NO(S). 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. 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. 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. 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. On consideration of the assessee’s response, an Assessment Order was passed on 27 December, 2006 observing that the amount of Rs. In view of the decision of the Commissioner of Income Tax (Appeal) in the assessee’s 8 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.
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). 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. 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. 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 11 services or for the purposes of obtaining a licence for the said services. 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”). vs Commissioner of Income Tax, (1997) 224 ITR 342 (“Jonas Woodhead and Sons”), Southern Switch Gear Ltd. After considering all of the aforesaid judgments, the Delhi High Court in paragraph 29 discerned the facts of the present case as under: “29. 5,00,000/- per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee payable for 4 to 6 year and with modified but similar stipulations from 7 year onwards. 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. The authority also reserved the right to revoke the licence in the interest of public by giving 60 days’ notice. 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. 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 15 players was warded off. 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.
In case of non- payment 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 16 maintain and operate cellular telephone services. 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. Read in this manner, the licence granted by the Government/authority to the assessee would be a 17 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. 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.
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 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. 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 19 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. 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. 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. 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. 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. 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.
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. 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. 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. 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. 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. 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. 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.
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. 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. 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”. 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. 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.
That a similar view was taken in CIT vs Sarada Binding Works, (1976) 102 ITR 187 (“Sarada Binding Works”) wherein the 32 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. 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. That merely because the DoT can rescind the licence owing to non- payment of the variable licence fee, it does not mean that the payment of such fee is towards the acquisition of the licence. That the interpretation sought to be canvassed by the appellant would result in a completely absurd result wherein the deduction 34 under Section 35ABB would exceed the actual payment made by the assessee in a given year, in the later years. 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. 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 36 also paid annually at Rs.5000/- every year. In the said case, there were two clearly discernible purposes towards which the payment of lump-sum consideration and payment of royalty were made. Whether the variable annual licence fee paid by the respondents- assessees to the DoT under the Policy of 1999 is revenue in nature 37 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? Section 32(1)(i) identifies a list of tangible assets and Section 32(1)(ii), a set of intangible assets which includes licences. 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; 40 (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 (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.
(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. (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. 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. 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. 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.
(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 acquiring 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. 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). 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 46 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 PassportsAct, 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 thisbehalf. (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. 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. 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 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. 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. 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. 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 hereto. 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. 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. (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 53 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. (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. 5 lakhs (five lakhs) per 100 (one hundred) subscribers or part thereof; subject to the minimum shown below :- Minimum Licence Fee for Fourth to Sixth Service Area Year Seventh (for each year) year onwards (for each year) (Rs.in crores) Bombay 18 24 Delhi 12 16 Calcutta 9 12 Madras 6 8 a) For purpose of charging the lump-sum Licence fee for the first three years, the year shall be reckoned as twelve months, beginning with the date of commissioning of services or completion of 12 months from date of signing of Licence Agreement, whichever is earlier. five lakhs per hundred subscribers or part thereof is based on the unit call rate of Rs. Fixed amount of licence fee was to be paid for the first three years, irrespective of the number of subscribers, as provided in 56 paragraph 19 of the agreement and such amounts was subject to increase annually. The consequence of non-payment of licence fee was termination of the licence agreement. Pursuant to the acceptance of the terms of migration, the original licence agreement was amended. Subject:- Amendment in the Licence Agreement No 842-1893-TM Dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi Metro Service Area as a consequence to Migration to revenue sharing regime of New Telecom Policy-1999 (NTP-99) Sirs, In consideration of the acceptance by the Licensee, of the terms and conditions contained in the offered Migration Package vide No 842-153/99-VAS (Vol.
Provisionally the licensor has fixed 15% of the gross revenue as license fee and presently the gross revenue for this purpose shall mean the total 58 revenue of the Licensee Company under the license excluding, (a) the PSTN related call charges paid to Bharat Sanchar Nigam Limited (BSNL)/MTNL or any other Telecom Service Provider and, (b) service tax or charge collected by the Licensee on behalf of the Government from their subscribers. (iv) The acceptance of the Migration Package shall be taken and deemed as full and final settlement of all existing disputes whatsoever, for the period upto 31.7.1999 (the cut-off date) irrespective of whether they are related to the Migration Package or not.
Case Title: C.I.T., DELHI VS. BHARTI HEXACOM LTD.
Case Number: CIVIL APPEAL NO(S). 11128 OF 2016 (2023 INSC 917)
