2013 (12) TMI 1115 - HC - Income Tax

Whether variable licence fee paid by the assessees was properly deductible as revenue expenditure or or capital expenditure which is required to be amortized under Section 35ABB of the Income Tax Act, 1961 - The licence was issued under a statutory mandate and was required and acquired, before the commencement of operations or business, to establish and also to maintain and operate cellular telephone services. - Held that - payment of licence fee was capital in part and revenue in part and it would not correct to hold that the whole fee was capital or revenue in entirety. The licencees i.e. the assessees in question required a licence in order to start or commence business as celluar telephone operator. The requirement to procure a licence or pay licence fee was a precondition before the assssee could commence or set up the business in question. The fee was certainly paid to the Government for permitting and allowing an assessee to set up/start cellular telephone service which otherwise was not permitted or prohibited under the Telegraph Act. In a way, it was a privilege granted to the assessee subject to payment and compliance with the terms and conditions. The expenditure incurred for establishing or for setting up/construction of any factory/business would be capital, but the amount paid on yearly basis for running or operation of the factory/business would be normally revenue in nature. - Decided partly in favor of revenue. Power to Court to bifurcate and divide the licence fee into capital and revenue and what percentage or ratio should be attributed to revenue and capital account. - Held that - The difficulty in apportionment cannot be a ground for rejecting the claim either of the Revenue or of the assessee. Such an apportionment was sanctioned by courts in Wales v. Tilley, Carter v. Wadman (H.M. and T. Sadasivam v. Commissioner of Income-tax, Madras. In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. Basis of apportionment - Held that - It would appropriate and proper to divide the licence fee into two periods i.e. before and after 31st July, 1999. The licence fee paid or payable for the period upto 31st July, 1999 i.e. the date set out in the 1999 policy should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. Capital expenditure will qualify for deduction as per Section 35ABB of the Act. - Decided partly in favor of revenue.

Issues Involved:
1. Whether the variable license fee paid by the assessees was deductible as revenue expenditure.
2. Whether the interest on delayed payment of license fee was deductible as revenue expenditure.

Detailed Analysis:

1. Deductibility of Variable License Fee as Revenue Expenditure:
The primary issue in these appeals is whether the variable license fee paid by the respondents under the Indian Telegraph Act, 1885, and Indian Wireless Fee Act, 1933, under the New Telecom Policy, 1999, or the 1994 agreement, is revenue expenditure or capital expenditure required to be amortized under Section 35ABB of the Income Tax Act, 1961.

Key Points:
- Section 35ABB applies when capital expenditure is incurred for acquiring a right to operate telecommunication services.
- The respondents are engaged in telecommunication services and have procured licenses in different circles.
- Under the 1994 agreement, the license fee was fixed for the first three years and variable from the fourth year onwards.
- The National Telecom Policy 1999 introduced a one-time entry fee and a license fee based on a percentage of gross revenue.
- The respondents have migrated to the National Telecom Policy, 1999, and treated the one-time license fee as capital expenditure.
- The Revenue contends that the license fee under both the 1994 agreement and the 1999 policy is capital in nature.
- The assessees argue that the annual variable license fee under the 1999 policy is revenue expenditure as it is essential for continuing business operations.

Court's Findings:
- The license fee is partly capital and partly revenue.
- The fee paid up to 31st July 1999 is capital expenditure, while the fee paid after 1st August 1999 is revenue expenditure.
- The license fee payable under the 1994 agreement for the initial years was for establishing the business, thus capital in nature.
- The fee under the 1999 policy is for maintaining and operating the business, thus revenue in nature.

2. Deductibility of Interest on Delayed Payment of License Fee:
In ITA Nos. 893/2010 and 1333/2010, an additional issue arises regarding whether the interest on delayed payment of license fee is capital or revenue expenditure.

Key Points:
- The interest paid by Bharti Cellular Ltd. and Bharti Telenet Ltd. for delayed payment of license fee was disallowed by the Assessing Officer as capital expenditure.
- The Commissioner (Appeals) upheld this view, stating that the interest was capital expenditure because the license fee itself was capital in nature.

Court's Findings:
- The nature of the interest payment depends on whether it relates to the license fee payable before or after 31st July 1999.
- Interest on license fee payable before 31st July 1999 is capital expenditure.
- Interest on license fee payable after 31st July 1999 is revenue expenditure.
- The matter is remanded to the tribunal to determine the exact nature of the interest payment based on the period it pertains to.

Conclusion:
The court concluded that the variable license fee is partly capital and partly revenue expenditure. The fee paid up to 31st July 1999 is capital expenditure, while the fee paid after 1st August 1999 is revenue expenditure. The interest on delayed payment of license fee is to be treated based on the period it pertains to, with the matter remanded to the tribunal for further examination.

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