The Supreme Court of India in the case of Bharti Hexacom Ltd held that the license fee for a License under the Telegraph Act 1885 cannot be partly revenue and Partly Capital by Dividing into Two periods.
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 Annual Gross Revenue (“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.
It was noted that an amount of Rs. 11,88,81,000/-, which was the licence fee paid by the assessee on a revenue-sharing basis, was claimed by the respondent-assessee as revenue expenditure. An Assessment Order was passed 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.
Per contra, the contention of the assessee before the High Court was that the licence fee payable under the Policy of 1999 was like revenue expenditure. This was because the earnings are shared and the licence fee depends upon the gross revenue and is payable yearly.
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 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.
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.
Since the entry fee as well as variable licence fees are traceable to the same source, they would both have to be held to be capital in nature, even though the variable licence fee is paid in a staggered manner.
The two-judge bench comprising Justice B V Nagarathna and Justice Ujjal Bhuyan observed that “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.”
Further held that the payment of the 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 by Section 35ABB of the Act. 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 an annual basis. The Court set aside the judgment of the Division Bench of the High Court of Delhi and connected matters.
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