In a significant Supreme Court ruling, the bench of Justice B. V. Nagarathna and Justice Ujjal Bhuyan declared that the entry and variable annual licence fees paid to the Department of Telecom (DoT) under the New Telecom Policy of 1999 are considered capital expenses and can be amortised in line with Section 35ABB of the Income Tax Act, 1961.
The central question in this matter was whether the variable licence fee paid under the 1999 Policy should be categorised as revenue expenditure, allowing for a deduction under Section 37 of the Act, or if it should be considered capital expenditure as per Section 35ABB of the Income Tax Act.
The 1999 New Telecom Policy replaced the 1994 National Telecom Policy and introduced a one-time entry fee and a percentage of gross revenue as a licence fee for telecom licensees. The entry fee was calculated based on existing operator fees up to July 31, 1999, and adjusted for notional extension. From August 1, 1999, the licence fee was based on the Annual Gross Revenue (AGR), with a provisional licence fee set at 15% of the gross revenue until a final fee was determined based on TRAI’s recommendations.
The respondent-assessee,the telecom company acquired a non-transferable and non-assignable licence for telecommunication services in 1994, initially granted for ten years with the possibility of extension. These licences could be revoked with a 60-day notice in case of breach or payment default, and they allowed non-exclusive operation within specified areas, subject to possible modifications for public interest or security concerns.
The Supreme Court held that the licence fees paid under the Policy of 1999 are capital in nature due to their link to the right to operate telecom services. Even though paid in instalments, their fundamental nature remains unchanged as per the licensing conditions.
The Court also stated that artificially dividing this single transaction into capital and revenue components based solely on the payment schedule is not permissible. Such a classification would contradict established legal principles.
The bench observed that “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.”
The Delhi High Court’s decision to apportion the expenditure into capital and revenue components based on the periods before and after July 31, 1999, was deemed incorrect by the Supreme Court. They emphasised that the payment remained for the same purpose, despite the change in the payment method.
The Supreme Court’s verdict set aside the judgments of the Delhi High Court and other High Courts and concluded that the payment post-July 31, 1999, continues the payment made before that date but in an altered format. This change in payment method does not alter the essential nature of the payment, which is a mandatory and intrinsic part of the licence and trade existence, thus classifying it as capital expenditure.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
