2015 (3) TMI 940 - HC - Income Tax

Interest on payment qua the license fee - whether could not be amortised in view of Section 35ABB - whether the licence fee payable by telecom service providers to the Department of Telecommunications is to be treated as capital or revenue expenditure? - Held that - As decided Commissioner of Income Tax V. Bharti Hexacom 2013 (12) TMI 1115 - DELHI HIGH COURT in the licence fee payable on or before 31st July, 1999 should be treated as capital expenditure and the licence fee payable thereafter should be treated as revenue expenditure. In view of the aforesaid position, the question of law admitted for hearing in this appeal as recorded in the order dated 21st August, 2013, has to be answered in favour of the revenue and against the respondent assessee.Capital expenditure will qualify for deduction as per Section 35ABB of the Act. - Decided in favour of revenue.

Summary

Issues:
1. Treatment of license fee as capital or revenue expenditure.
2. Classification of interest on delayed payment of license fee as capital or revenue expenditure.

Issue 1: Treatment of license fee as capital or revenue expenditure:
The primary issue in this case revolves around the treatment of license fee payable by telecom service providers to the Department of Telecommunications as either capital or revenue expenditure. The judgment refers to a previous Division Bench decision in Commissioner of Income Tax V. Bharti Hexacom, which concluded that the license fee is partly revenue and partly capital expenditure. Specifically, it was determined that license fee payable up to July 31, 1999, should be treated as capital expenditure, while the fee on a revenue-sharing basis after August 1, 1999, should be considered revenue expenditure. Capital expenditure qualifies for deduction under Section 35ABB of the Income Tax Act. The court upheld this interpretation and directed that the question of law admitted for hearing be answered in favor of the revenue and against the respondent assessee.

Issue 2: Classification of interest on delayed payment of license fee:
Another aspect of the case pertains to the classification of interest on delayed payment of license fee as either capital or revenue expenditure. The court noted that in the assessment year 2000-01, interest amounts were paid by the assessee to the Department of Telecommunication for late payment of license fee. The Assessing Officer initially disallowed these payments, considering them as capital in nature due to lack of details and the expenses relating to a prior period. The Commissioners (Appeals) for the relevant entities held that the interest paid was capital expenditure because the license fee itself was of a capital nature. However, the court emphasized that the classification of interest payments depended on whether they related to the period before or after July 31, 1999. If the interest was for the pre-July 31, 1999 period, it should be capitalized; if for the post-July 31, 1999 period, it should be treated as revenue. The court ordered a remand on this issue due to unclear facts and directed a fresh examination to determine the nature of the interest payments. Ultimately, the court decided in favor of the Revenue and against the respondent-assessee, with the matter remitted for further consideration in line with the observations provided.

In conclusion, the High Court's judgment addressed the treatment of license fee and interest on delayed payment of license fee in the context of capital and revenue expenditure. The decision provided clarity on the categorization of these expenses based on specific timelines and revenue-sharing arrangements. The court's detailed analysis and directions aimed to ensure proper application of tax laws and deductions concerning these financial transactions within the telecom sector.