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TMI Blog2013 (12) TMI 1115X X X X Extracts X X X X X X X X Extracts X X X X ..... Hutchinson Essar Pvt. Ltd 1999-2000 2. The principal and core issue raised in the present appeals is similar i.e. whether licence fee payable is capital or revenue expenditure. However, there is one basic difference between appeals listed at Sl. Nos. 1 to 9 in paragraph 1 above, and the appeal in the case of Hutchison Essar Pvt. Ltd. i.e. ITA 417/2013 which should be noticed and referred to at the very outset. The said appeal relates to assessment year 1999-2000 and pertains to licence fee paid under and in terms of an agreement executed in 1994 with the Department of Telecommunications/Government of India, whereas other appeals listed at Sl. Nos. 1 to 9 above, relate to variable licence fee on revenue sharing basis paid under the new Telecom Policy, 1999. However, as the facts and issues are identical, we have deemed it appropriate to decide the appeal filed against Hutchison Essar Pvt. Ltd. along with appeals at Sl.Nos. 1 to 9. Wherever necessary, we have dealt with the issue and contentions raised in the said appeal separately. 3. Common substantial question of law required to be decided in these appeals reads:- "1. Did the Tribunal fall into error in holding that the varia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the previous year in which the licence is transferred. (3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred. Explanation.-Where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. (4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but comes into operation and is effective when the expenditure itself is of a capital nature and is incurred for acquiring a right to operate telecommunication services or is made to obtain a licence for the said services. It can be incurred before commencement of business or thereafter, but should be incurred during the previous year. Thus Section 35ABB by itself does not help us in determining and deciding the question whether licence fee paid under the New Telecom Policy 1999 or under the 1994 agreement, was/is capital or revenue in nature. 7. Undisputed facts which are relevant may be now noticed. The respondent companies are engaged in business of telecommunication services and value added related services. They have procured licence in different circles. Originally the said licences were awarded under licence agreement executed in 1994. The period of licence as stipulated was for ten years initially, expandable for one year or more at the discretion of the authorities. The licence could not be assigned, transferred in any manner, whatsoever to any third party or by entering into agreement by sub-licence, partnership etc. The authorities had the right to revoke the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year as balance period, if any. c) For the purpose of calculation of Licence fee from the fourth year onwards as indicated in para 19.1 above, the number of subscribers at the end of each month shall be added for all the months of the year and divided by the number of completed months. ........ (f) The rate of Rs. five lakhs per hundred subscribers or part thereof is based on the unit call rate of Rs.1.10. Fourth year onwards, as defined in the clause 19.1(d), the rate of Rs. five lakhs will be revised based on the prevalent unit call rate. The revision will be limited to 75% of the overall increase in the unit rate during the period preceding such revision. Agreement further stipulated: 19.2 On completion of three years from the date of commissioning/provision of services; the Authority reserves the right to fix the share of the gross revenue from rental, air time charges for all other services provided from the cellular network of the Licensee, as additional licence fee. 19.3 The annual Licence fee as prescribed above does not include Licence fees payable to WPC wing of Ministry of Communications (WPC) for use of Radio Frequencies which shall be paid separately by the Lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e condition and premise that the conditions should be accepted as a package in entirety and simultaneously and all legal proceedings shall be withdrawn and no dispute for the period upto 31st July, 1999, shall be raised at any future date. After the terms were accepted, amendments in the existing licence agreement would be signed. 10. The respondents have migrated and accepted the National Telecom Policy, 1999. Respondents herein in ITA Nos. 1328/2010, 1336/2010, 114/2012, 996/2011, 893/2010, 1680/2010, 1679/2010, 177/2010, 1333/2010 have paid the licence fee upto 31st July, 1999, i.e. one time licence fee as stipulated in the letter/ communications dated 22nd July, 1999 and have treated the said payment as capital expenditure. 11. Hutchinson Essar Telecom Pvt. Ltd., respondent in ITA No. 417/2013 has not treated the fourth year payment under the 1994 agreement as capital expenditure but as revenue expenditure, and their contentions are being examined separately below. 12. In view of the legal issue involved, we are not referring to the factual details in respect of each assessment year i.e. details with regard to date of filing of return, income declared under normal provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was capital in nature, cannot dispute and deny the capital nature of the same payment under National Telecom Policy 1999. Even under the 1994 agreement for the 4th year, the respondent assessee had to pay the fixed sum per 100 subscribers. The nature and character of the payment was same but amount was modified to 15% of the gross revenue under the National Telecom Policy 1999. Further, mere payment of an amount in installments does not convert or change the capital payment to revenue in nature. The criteria of once and for all payment or installment payment co-relatable to percentage of gross-turnover was not determinative of the true character of the payment. True nature of the payment has to be determined on the basis of the advantage or benefit procured which in the present case relates to initial set-up of business. Right to the licence had resulted in acquisition of right to operate. Thus it was a capital payment. The term of the licence was/is 10 or 20 years from the date of commencement and therefore, the expenditure was capital in nature. 14. The contention of the assessee, on the other hand, was that the licence fee payable under the National Telecom Policy 1999 was rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case with the licence granted to the respondent companies and the nature and character of the licence in their hands and not the value of the shares held by the shareholders, in spite of the fact that there was a lock in period or prohibition regarding transfer of shares for the period of 5 years and thereafter the shares were transferable. There cannot be any doubt or debate that while computing the value of the share in the hands of the shareholder, the factum and position that the respondent company has been allotted the licence was/is a relevant and important factor. However, we do not think that this can be the sound and sole basis or ground to hold that the licence in the hands of the respondent company was/is a capital asset. Value of a share in the hands of a shareholder may not determinatively and conclusively reflect and answer the question whether the asset held by the company was a capital asset. Market value of a share is dependent upon several factors including future prospects, nature of trade etc. These may not be an asset for the company. We cannot on this basis alone, determine and decide whether the variable licence fee paid on annual basis is capital or revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during benefit test, therefore, was not conclusive and cannot be mechanically applied without considering the commercial aspect. 17. The second test which can be applied was fixed and circulating capital test. Fixed capital being what the owner turns to profit by keeping it in his possession; circulating capital is what the assessee makes profit by parting or letting the product/asset change masters/hands. This test could be applied when the acquisition of asset clearly falls within one of the two categories but the test would breakdown where the expenditure does not fall easily within the specified category. The demarcation line between assets out of which profits were earned and the profit made upon assets or with assets, was thin and difficult to draw in several cases. It was observed that purchase of loom hours was not like circulating capital (labour, raw material, power etc.), but "loom hours" were also not a part of fixed capital. Revenue's contention that purchase of loom hours was for acquisition of source of profit or income and, therefore, capital expenditure, was rejected on the ground that source of profit or income was the profit making apparatus which had remained u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of agricultural land and parting with certain rights paid anterior to landlord and tenant relationship, it was held was not in the nature of rent, and thus, capital payment. It was emphasized that the payment was not for use of land but for the land to be put to use by the assessee. Salami was not rent paid in advance. 19. In Enterprising Enterprises vs. Deputy Commissioner of Income Tax (2007) 293 ITR 437, the Supreme Court affirmed the decision of Madras High Court reported in [2004] 268 ITR 95, after referring to Pingle Industries Ltd. vs. CIT [1960] 40 ITR 67 (SC); Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC) and Aditya Minerals Pvt. Ltd. vs. CIT [1999] 239 ITR 817 (SC), stating that distinction lies between the case of where royalty or rent was paid and where the entire amount of lease premium was paid either at one time or in installments. Royalty or rent would be revenue expenditure, while the latter would be capital expenditure. 20. This brings us to an earlier decision of the Supreme Court in the case of Pingle Industries Ltd. vs. Commissioner of Income Tax, Hyderabad (supra). The majority judgment held that the quolnama which entitled the assessee to extract st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arted and was paid irrespective of the mineral obtained. This demonstrated that the object for the payment was to initiate business; though the period of licence was one year it did not make the payment, revenue payment. Prospecting license fee cannot be equated with payment for stock in trade. 22. In CIT vs. Bombay Burmah Trading Corporation (1986) 161 ITR 386, the Supreme Court observed that lump sum consideration paid on surrender of export rights in a forest lease, where the assessee had right to extract and cut timber and remove them on payment of royalty, was capital payment. The payment was for sterilization of the profit making apparatus i.e. the capital asset. The forest lease was also not a stock in trade. The determining factor, it was observed was nature of trade in which the asset was employed. If the payment made, represented profit in a new form, it would be income, but if the money paid related to structure of assessee's profit making apparatus and affected the conduct of business, the sum received for cancellation or variation of agreement, would be a capital receipt. 23. In Commissioner of Income Tax vs. Madras Auto Services (P) Ltd. (1998) 233 ITR 468 (SC), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred for the purpose of day to day business, which was manufacture of penicillin and, therefore, not for entirely a new venture unconnected and different from existing business. Secondly, it would be unrealistic to ignore rapid advances in research in antibiotic and attribute a degree of durability and permanence to technical know-how in this fast changing area. Rapid strides in science and technology in the field of medicines cannot be readily pigeon-holed as capital outlay. Moreover, it was not a case of exclusive acquisition. 25. Having reproduced several judgments on the question of the decisive tests, it would be appropriate to notice one decision wherein expenditure incurred has been held to be in part capital and revenue because the tests show that expenditure incurred was for several considerations i.e. there was overlapping of capital and revenue expenditure. This aspect has been examined in detail separately below. In Jonas Woodhead and Sons (India) Ltd. vs. Commissioner of Income Tax (1997) 224 ITR 342 (SC), question arose whether 25% of the amount paid as royalty to the foreign company for technical information/ know how relating to setting up of a plant for manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to be overexacting. (iii) The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context." 26. At this stage, it would be relevant to clarify and elucidate the once and for all payment test. It is not necessary that once and for all payment would result in an enduring benefit nor is it a firm rule that periodical payments do not show enduring benefit. The said test has its apparent limitation, if we apply the said test without equal importance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against an expense undertaken for the benefit of the business as a whole ; (iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit-making structure to work more efficiently leaving the source or the profit making structure untouched would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down ; (v) expenditure incurred for grant of licence which accords "access" to technical knowledge, as against, "absolute" transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts i.e. direct association between cost incurred and earning of specific item of income to compute true and correct taxable income. In Oracle India Private Ltd. (supra) it has been highlighted that while determining the question whether payment was capital or revenue in nature, the primary aim of the court or the authority was to determine income earned by the assessee during two points of time without impairing his capital or incurring personal debts. The concept of capital maintenance was critical in distinguishing whether the expenditure was for capital or revenue purposes. Reference can also be made to the decision of Delhi High Court in CIT vs. Sharda Motors Industry Ltd. (2009) 319 ITR 109 (Del.). 29. When we turn to the facts of the present case, the following position emerges: i. 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. ii. The licence was for initial setting up but, thereafter for maintaining and operating cellular telephone services during the term of the licence. iii. Contrary to what was stated, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st July, 1999 and liquidated damages in full, had to be paid on or before 15th August, 1999. Dates for payments of arrears were specified. xiii. Past dues upto 31st July, 1999 along with liquidated damages had to be paid as stipulated in the 1999 policy, on or before 31st January, 2000 or earlier date as stated. xiv. The period of licences under 1999 policy was extended to 20 years starting from the effective date. xv. Failure to pay the licence fee on yearly basis would result in cancellation of licences. Therefore, to this extent licence fee was/is payable for operating and continuing operations as cellular telephone operator. 30. Having noted the aforesaid factual position, we feel 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with minimum payment stipulation. In case of non-payment of licence fee, the licence could be revoked and licencee was not permitted to carry on and continue cellular telephone service. Thus, the licence fee payable was/is equally with the objective and purpose to maintain and operate cellular telephone services. It was also an operating expense and non payment can lead to cancellation as one of the consequences. Endurement requires current expenses and is subject to payment on revenue share. It will not be correct to hold or propound that entire payment during the term of licence, is deferred capital payment. This was/is not the intent under the 1994 agreement or 1999 policy. The intent is to also share the gross earning to maintain and operate the licence. 34. The licence fee as such is similar to both prospecting fee, acquisition of right to lease as well as leases which enabled removal of sand/tendu leaves, etc. as nothing has to be won over, or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the ‗asset' i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure as it relates to and is a part of the operational expenses. These cannot be equated with capital expenditure incurred in the form of fee paid to the Registrar of Companies at the time of fresh incorporation, the analogy drawn in the said decision. The Division Bench of Himachal Pradesh High Court in the said decision has quoted the following passage from "Kanga and Palkhivala's the Law and Practice of Income-tax, Eighth Edition, Volume I" :- "License, permit and monopoly. - There are some early English cases on this topic which have to be used with caution. Payment by the lessee of licensed hotel premises to the local authorities as the ‗monopoly value' on the grant of a three year license was held to be capital expenditure on the ground that the monopoly right of trading for three years as a licensed victualler attained the dignity of a capital asset. Likewise, money expended by a brewery firm in an attempt (successful or unsuccessful) to acquire new licensed premises or by a public carrier to obtain a license for a larger fleet of vehicles or the price of a license granted to a carting contractor for a period of eight years to deposit earth, slag, etc., on the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original agreement. Under the 1999 policy, the new entrants were liable to pay entry fee which was the total licence fee payable upto 31st July, 1999, and thereafter they were liable to pay the variable licence fee. Thus, the new entrants have clearly paid the "capital" entry or establishment fee and then are obliged to pay operating or maintenance fee in form of variable licence fee. 40. In Jonas Woodhead and Sons (India) Ltd. (supra), the Assessing Officer had himself treated 25% of the amount paid as royalty as capital and the balance amount was treated as revenue expenditure. Similarly in Southern Switch Gear Ltd. vs. CIT (1998) 232 ITR 359, the Supreme Court has affirmed decision of the Madras High Court in CIT vs. Southern Switch Gear Ltd. (1984) 148 ITR 272, wherein royalty payable was apportioned and 25% thereof was treated as capital payment or expenditure on the ground that the right to manufacture certain goods exclusively in India should be taken as an independent right secured by the assessee from the foreign company and this right was of enduring nature. The more authoritative and lucid discussion for the purpose of the present controversy is in CIT, Madras vs. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The manner of such apportionment has perforce to be left to the assessing authorities. 22. The answer to the question referred to the High Court is that only such part of the sums of Rs. 66,790 and Rs. 3,35,371 as is attributable to the loss of the agency is assessable under section 10 of the Act for the assessment years 1951-52 and 1952-53. We accordingly modify the answer given by the High Court in that regard." In Tilly v. Wales (Inspector of Taxes) [1943] A.C. 386, the House of Lords observed that the amount paid was partly in consideration of surrender of assessee's right to pension and partly for surrender of increased salary under an agreement. Pension amount was held to be capital and not taxable but, the sum paid for reduction in salary was taxable. The amount had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee alongwith the brought forward amortized amount would be allowed as deduction. After a particular point of time, deduction allowable under Section 35ABB would be more than the actual payment by the assessee as licence fee for the said year. This would normally happen after the mid-term of the licence period. Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period. 44. ITA Nos. at serial Nos. 1 to 9 above primarily relate to variable license fee, which is to be shared under the 1999 Policy whereas, ITA No. 417/2013 filed against Hutchison Essar Ltd. relates to the period of variable license fee payable for the fourth year under the 1994 Agreement. 45. The effect thereof is that we are treating about 20% of the expenditure in terms of the tenure as per the 1999 Policy as capital in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and more structured approach which would take into account several factors like the licence tenure; whether licence created further rights; whether there was restriction for use of confidential information; whether benefits were transferred once and for all; whether after expiry of the licence, plans and drawings were to be returned, etc. As held and observed above, it is nature and object for which the payment is made which determines the character of payment. In the said case, it was observed that there was nothing to show or to suggest vesting of know-how in the assessee and therefore, the assessee did not derive any enduring benefit. Thus, the royalty payment was held to be revenue in nature. 47. In view of the aforesaid findings, the substantial question mentioned above in item Nos.1 to 9 is answered in the following manner: (i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31st July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 1st August, 1999 should be treated as revenue expenditure. (ii) Capital expenditure will qualify for deduction as per Section 35ABB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, 1999 or was for the subsequent period. If interest paid was in respect of license fee payable for the period prior to 31st July, 1999, it will have to be capitalised. Similarly, if the interest was payable on license fee for the period post 31st July, 1999, it should be treated as revenue in nature/character. The contention that it was a prior period expense does not appeal to us and has to be rejected, as the interest was paid during the year in question. 52. Learned counsel for the assessees has submitted that there cannot be any factual dispute that this interest was paid to the Department of Telecommunication on delayed payment of license fee under the 1999 policy and not on account of license fee payable for period prior to 31st July, 1999. We cannot from the facts on record, decipher the exact details as this aspect has not been examined by the tribunal. The tribunal has held that interest paid was revenue in nature because the license fee payable itself was revenue in nature, irrespective of fee payable prior to 31st July, 1999. We have held to the contrary. The said question of law, therefore, is answered in favour of the Revenue and against the respondent-assessee but ..... X X X X Extracts X X X X X X X X Extracts X X X X
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