The Supreme Court in its recent judgement has held that the right to run a telecom business not continue even if the network operator fails to pay the annual licence fee based on Annual Gross Revenue (“AGR”) under the Telegraph Act,1885.
The department challenged the judgment of the Division Bench of the High Court of Delhi, whereby the High Court of Delhi, confirming the decision of the Income Tax Appellate Tribunal, New Delhi (“Tribunal”) has held that the variable licence fee paid by the respondents assessees under the New Telecom Policy, 1999 (“Policy of 1999”), is revenue expenditure in nature and is to be deducted under Section 37 of the Income Tax Act, 1961 (“the Act”) is assailed in these appeals.
The National Telecom Policy of 1994 was substituted by the New Telecom Policy of 1999 dated 22 July 1999 which 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 up to 31 July 1999, calculated up to the said date and adjusted upon a notional extension of the effective date.
Subsequently, w.e.f. 01 August 1999, the licence fee was payable on a percentage of AGR earned. The quantum of revenue share to be charged as licence fee was to be finally decided after obtaining the 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 licensee as provisional licence fee.
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.
In CIT vs. Jalan Trading Co. Pvt. Ltd.,(“Jalan Trading Co.”), the 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.
In Sarada Binding Works heavy reliance was placed on senior counsel Mr Datar. The agreement relevant to the said case envisaged conveyances of two aspects: first, the right to run the business of ‘Chandamama Publications’ on payment of a fixed sum of Rs. 5000/- per annum; second, royalty to be paid annually on sales equivalent to 10% of the annual net profits.
There are clear findings to the effect that the payment of royalty in instalments, in the absence of any definitive duration, cannot be linked to the right to carry on trade. That the payment of royalty had no nexus with the capital sum.
The two-judge bench comprising Justice B V Nagarathna and Justice Ujjal Bhuyan observed that “it cannot be said that the variable licence fee payable annually has no nexus with the acquisition of the capital asset, i.e., the licence to render telecom services, as, it is the payment of entry fee as well as the variable licence fees which together enable the assessees to carry on the said business. Hence the aforesaid case would not apply to the present case having regard to its distinct facts.”
“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. Hence, the apportionment made by the High Court is not sustainable.”, the court viewed.
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