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Issues for consideration:Whether the variable annual licence fee paid by the respondents-assessees to the Department of Telecommunications (DoT) underthe New Telecom Policy of 1999 is revenue expenditure in natureand is to be allowed deduction under Section 37 of the IncomeTax Act, 1961, or, the same is capital in nature and is accordinglyrequired to be amortised under Section 35ABB of the Act; andWhether the High Court of Delhi was right in apportioning thelicence fee as partly revenue and partly capital by dividing thelicence fee into two periods, that is, before and after 31st July,1999 and accordingly holding that the licence fee paid or payablefor the period upto 31 July, 1999 i.e. the date set out in the Policyof 1999 should be treated as capital and the balance amountpayable on or after the said date should be treated as revenue.Income Tax Act, 1961 – ss. 35ABB and 37– The New TelecomPolicy, 1999 – Variable licence fee paid to DoT under the NewTelecom Policy of 1999 – Revenue Expenditure or CapitalExpenditure.Held: 1. In considering whether an item of expenditure is of acapital or revenue nature, one must consider the nature of theconcern, the ordinary course of business usually adopted in thatconcern and the object with which the expenditure is incurred.Attention must be paid not only to the form of the transaction, butalso its substance. What is material is the nature of right soughtto be secured through the payment or transaction in question. Thepurpose towards which the expenditure is incurred must guideany attempt to categorise the expenditure. The structure or formof the transaction or the payment schedule is hardly suggestive ofthe nature of the transaction. Therefore, it cannot be axiomaticallyheld that an expenditure which in its core, capital in nature, isactually to be treated as a revenue expenditure simply becausethe payment is structured in installments. The determinativetest to identify whether an expenditure structured in the form ofinstalments is in the nature of a capital expenditure or revenueexpenditure, would be to first assess whether the payment madeeither in lump-sum or in instalments relates to the acquisition orexpansion of a capital asset, or by contrast, relates to the workingof an asset to produce profits; whether the consideration payabletowards the acquisition or expansion of a capital asset has simplybeen chopped up into smaller sums payable in instalments, for thesake of convenience. The annual payment of variable licence fee isonly towards licence fees and merely because it is paid in annualinstalments based on the Adjusted Gross Revenue (AGR), thepayment cannot be construed as revenue. The annual payments oflicence fee as also the entry fee relate to a singular purpose, i.e.,the acquisition of the right to carry on the business of renderingtelecommunication services. This right being in the nature of acapital asset, any payment(s) made towards the acquisition of theright, whether in lump-sum or in annual instalments dependent onthe AGR, would be in the nature of capital disbursement(s). Wherethe periodic payments are referrable to or have a nexus with theoriginal obligation undertaken by the assessee as considerationfor acquisition of a right, the periodic payments would be in thenature of capital expenditure, notwithstanding the fact that theyare payable as a percentage of profits, gross revenue or sales. Inthe present case, since the entry fee as well as variable licencefees are traceable to the same source, they would both have tobe held to be capital in nature, notwithstanding the fact that thevariable licence fee is paid in a staggered manner. [Paras 22,22.1, 22.2, 23.3, 23.4 and 24].2. The payment of entry fee as well as the variable annual licencefee paid by the respondents-assessees to the DoT under the Policyof 1999 are capital in nature and may be amortised in accordancewith Section 35ABB of the Act. The High Court of Delhi was notright in apportioning the expenditure incurred towards establishing,operating and maintaining telecom services, as partly revenue andpartly capital by dividing the licence fee into two periods, that is,before and after 31 July, 1999 and accordingly holding that thelicence 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 capitaland the balance amount payable on or after the said date shouldbe treated as revenue. The nature of payment being for the samepurpose cannot have a different characterisation merely becauseof the change in the manner or measure of payment or for thatmatter the payment being made on annual basis. In the ultimateanalysis, the nomenclature and the manner of payment is irrelevant.The payment post 31 July, 1999 is a continuation of the paymentpre 31 July, 1999 albeit in an altered format which does not takeaway the essence of the payment. It is a mandatory paymenttraceable to the foundational document i.e., the license agreementas modified post migration to the 1999 policy. Consequence ofnon-payment would result in ouster of the licensee from the trade.Thus, this is a payment which is intrinsic to the existence of thelicence as well as trade itself. Such a payment has to be treatedor characterized as capital only. [Paras 26 and 27]Tax / Taxation: Expenditure – Whether a given expenditure iscapital or revenue in nature – Determination of – Principles andTests – Considerations which are immaterial in determiningthe question – Discussed. [Paras 19 and 21]Tax / Taxation – Classification of expenditure or receipts– Difficulty of relying on a single precedent for purpose ofclassification – Precedent.Held: The propositions made in earlier cases, if sought to beapplied to a different case which the authors of those propositionsdid not have in mind, could lead to absurd results. It is trite that thewords in a judgment must not be construed in the same manneras those in a legislation. Hence, it is neither wise nor suitable toextend the dictum of one case, premised on the facts of the saidcase, to another fact-situation which is seemingly similar but notreally so. This is particularly so when there is no precedent whichhas been rendered in an identical fact situation, as is the case inthe instant matters. [Para 23]Tax / Taxation: Capital assets – Depreciation and Amortisation– One of the exceptions to depreciation of capital assets isamortisation – Income Tax Act, 1961 – ss.35A, 35AB, 35ABAand 35ABB.Held: Amortisation is a form of depreciation, however, thedistinction between the two being that in the case of depreciation,an asset may be depreciated progressively, and may even beexhausted before the lifetime expectancy of the asset in question,whereas, in the case of amortisation, the value of the asset getsprogressively depleted, matching with the expected timeframe ofthe right. [Para 10.3]Royalty – Distinction between payment made to acquire aright, and payment of royalty for use of a right or asset –Discussed. [Para 20 |
