2023 (10) TMI 786 - SC - Income Tax

Nature of expenses - apportioning the licence fee as partly revenue and partly capital - variable licence fee paid by the assessees under the New Telecom Policy, 1999 to Department of Telecommunications ( DoT ) - Allowability of revenue expenses u/s 37 or capital in nature to be amortised u/s 35ABB - migration to the Policy of 1999 - Whether the High Court of Delhi 2013 (12) TMI 1115 - DELHI HIGH COURT was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly holding that the licence 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 capital and the balance amount payable on or after the said date should be treated as revenue? HELD THAT - The expenditure is to be attributed to capital if it be made with a view to bringing an asset or advantage into existence, however, it is not necessary that it should always achieve the intended result in order to be held to be capital in nature. Thus the sum spent in trying to procure an agency agreement or a licence, may be capital expenditure though the intended agency or licence may not be ultimately secured. By enduring , it is meant enduring in the way that fixed capital endures and it does not connote a benefit that endures in a sense that for a good number of years it relieves the assessee of a revenue payment. Payment of royalty - distinction between a payment made to acquire a right, and payment of royalty in a broad sense - Stated in the most simplistic manner, acquisition of a right would mean purchase of an asset, tangible or intangible, for the enduring advantage of the purchaser. When a right is said to be acquired, it means that the ownership of the said right vests with the purchaser. By contrast, payment of royalty is to use a right or asset. The right or asset is not per se acquired by the person or entity authorised to use it but continues to vest with the owner of the right. In case of royalty, payment is made merely to secure the right to use an asset for a stipulated duration. When the payment of royalty ceases, in most cases, the right to use the asset also ceases. Most often, the amount of royalty to be paid is dependent on the annual sales. Further, in order to qualify as royalty, the payment must have no nexus with the acquisition of a capital asset, vide Travancore Sugars and Chemicals Ltd. 1966 (9) TMI 44 - SUPREME COURT , Mewar Sugar Mills Ltd. 1972 (9) TMI 12 - SUPREME COURT The decision of this Court in Gotan Lime 1965 (11) TMI 35 - SUPREME COURT is highly instructive while attempting to draw a distinction between payment made to acquire a right, and payment of royalty for use of a right or asset.This Court, while holding that the payment in question therein was revenue expenditure, reasoned that the payment was not for securing an enduring advantage but was a royalty payment in order to obtain raw material and hence, a revenue expenditure. The above dictum is clear on the aspect of the distinction between payment made to acquire a right and payment of royalty inasmuch as it lays down in express terms that if a payment is made, not towards securing an enduring advantage or asset, but towards a right to use an asset, the same would be royalty. It has further been stated in no unclear terms that where a payment is not referrable to the acquisition of a capital asset (particularly, mining lease in the said case), but only secures a right to use the asset, the same would be royalty and hence classifiable as a revenue expenditure. What is material is the nature of right sought to be secured through the payment or transaction in question. The purpose towards which the expenditure is incurred must guide any attempt to categorise the expenditure. The structure or form of the transaction or the payment schedule is hardly suggestive of the nature of the transaction. Therefore, it cannot be axiomatically held that an expenditure which in its core, capital in nature, is actually to be treated as a revenue expenditure simply because the payment is structured in instalments. Determinative test to identify whether an expenditure structured in the form of instalments is in the nature of a capital expenditure or revenue expenditure, would be to first assess whether the payment made either in lump-sum or in instalments relates to the acquisition or expansion of a capital asset, or by contrast, relates to the working of an asset to produce profits; whether the consideration payable towards the acquisition or expansion of a capital asset has simply been chopped up into smaller sums payable in instalments, for the sake of convenience. We shall proceed to answer whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i.e. before and after 31 July, 1999 and accordingly holding that the licence 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 capital and the balance amount payable on or after the said date should be treated as revenue in the negative, against the assesses and in favour of the Revenue for the following reasons Reliance placed by the High Court on the decisions of this Court in Jonas Woodhead 1997 (2) TMI 4 - SUPREME COURT and Best and Co 1965 (11) TMI 23 - SUPREME COURT and Southern Switch Gear Ltd 1997 (12) TMI 105 - SC ORDER as approved by this Court appear to be misplaced inasmuch as the said cases did not deal with a single source/purpose to which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, this Court held that the payments could be apportioned. However, 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. Decision of the High Court could have been sustained if the facts were such that even if the respondents-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right is not preserved under the scheme of the Telegraph Act which we have detailed above. Hence, the apportionment made by the High Court is not sustainable. The fact that failure to pay the annual variable licence fee leads to revocation or cancellation of the licence, vindicates the legal position that the annual variable licence fee is paid towards the right to operate telecom services. Though the licence fee is payable in a staggered or deferred manner, the nature of the payment, which flows plainly from the licensing conditions, cannot be recharacterized. A single transaction cannot be split up, in an artificial manner into a capital payment and revenue payments by simply considering the mode of payment. Such a characterisation would be contrary to the settled position of law and decisions of this Court, which suggest that payment of an amount in instalments alone does not convert or change a capital payment into a revenue payment. It is trite that where a transaction consists of payments in two parts, i.e., lump-sum payment made at the outset, followed up by periodic payments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the assessee. In the present case, the successive instalments relate to the same obligation, i.e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunication services as a composite whole. This is because in the absence of a right to establish, maintenance and operation of telecommunication services is not possible. Hence, the cumulative expenditure would have to be held to be capital in nature. Thus, the composite right conveyed to the respondents-assessees by way of grant of licences, is the right to establish, maintain and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999. As noticed that even under the 1994 Policy regime the payment of licence fee consisted of two parts a) A fixed payment in the first three years of the licence regime; b) A variable payment from the fourth year of the licence regime onwards, based on the number of subscribers. Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime must be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure insofar as variable licence fee is concerned. As per the Policy of 1999, there was to be a multi-licence regime inasmuch as any number of licences could be issued in a given service area. Further, the licence was for a period of twenty years instead of ten years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period upto 31 July, 1999 were to be closed. High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services, as partly revenue and partly capital by dividing the licence fee into two periods - 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 annual basis. The nomenclature and the manner of payment is irrelevant. The payment post 31 July, 1999 is a continuation of the payment pre 31 July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterized as capital only. Judgment of the Division Bench of the High Court of Delhi and connected matters, is hereby set aside.

Summary

Issues Involved:
1. Whether the variable annual licence fee paid by the respondents-assessees to the DoT under the Policy of 1999 is revenue in nature and is to be allowed deduction under Section 37 of the Act, or, the same is capital in nature and is accordingly required to be amortised under Section 35ABB of the Act?
2. Whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly holding that the licence 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 capital and the balance amount payable on or after the said date should be treated as revenue?

Summary:

Issue 1: Nature of Variable Annual Licence Fee
The Supreme Court examined whether the variable annual licence fee paid by the respondents-assessees to the Department of Telecommunications (DoT) under the New Telecom Policy of 1999 is revenue in nature and deductible under Section 37 of the Income Tax Act, 1961, or capital in nature and required to be amortised under Section 35ABB of the Act. The Court held that the payment of 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 in accordance with Section 35ABB of the Act. The Court reasoned that the nature of the 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 emphasized that the payment is intrinsic to the existence of the licence as well as the trade itself, and such a payment has to be treated or characterized as capital only.

Issue 2: Apportionment of Licence Fee by High Court
The Supreme Court also examined whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31 July, 1999, and accordingly holding that the licence fee paid or payable for the period upto 31 July, 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. The Court held that the High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating, and maintaining telecom services, as partly revenue and partly capital. The Court reasoned that the composite right conveyed to the respondents-assessees by way of grant of licences is the right to establish, maintain, and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999. The Court concluded that the payment post 31 July, 1999 is a continuation of the payment pre 31 July, 1999 albeit in an altered format which does not take away the essence of the payment.

Conclusion:
The Supreme Court set aside the judgment of the Division Bench of the High Court of Delhi, dated 19 December, 2013, in ITA No. 1336 of 2010 and connected matters, as well as the judgments passed by the High Courts of Delhi, Bombay, and Karnataka, following the judgment of the Division Bench of the High Court of Delhi, dated 19 December, 2013. The appeals filed by the appellant(s)-Revenue were allowed, with parties to bear their respective costs.