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TMI Blog2023 (10) TMI 786X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 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 dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 Pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11137/2016 CIVIL APPEAL NO(S). 11140/2016 CIVIL APPEAL NO(S). 11141/2016 CIVIL APPEAL NO(S). 11139/2016 CIVIL APPEAL NO(S). 11142/2016 CIVIL APPEAL NO(S). 11143/2016 CIVIL APPEAL NO(S). 11145/2016 CIVIL APPEAL NO(S). 11146/2016 CIVIL APPEAL NO(S). 11147/2016 CIVIL APPEAL NO(S). 163/2018 CIVIL APPEAL NO(S). 11129/2016 CIVIL APPEAL NO(S). ________OF 2023 (@ SLP (C)__________OF 2023 DIARY NO(S). 24728/2023) B. V. NAGARATHNA] And UJJAL BHUYAN , JJ. For the Appellant : Mr. N Venkatraman, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. V. C. Bharati, Adv. Mr. Rahul Vijay Kumar, Adv. Mr. Rupesh Kumar, Adv. Mr. S A Haseeb, Adv. Mrs. Gargi Khanna, Adv. Mr. Manish Pushkarna, Adv. Mr. Vikrant Yadav, Adv. Mr. Rajesh Kumar Singh, Adv. Mr. Raj Bahadur Yadav, AOR Mrs. Anil Katiyar, AOR For the Respondent : Mr. Sachit Jolly, Adv. Ms. Anuradha Dutt, Adv. Ms. Disha Jham, Adv. Ms. Soumya Singh, Adv. Ms. B. Vijayalakshmi Menon, AOR Mr. Harpreet Singh Ajmani, AOR Mr. Arvind P. Datar, Sr. Adv. Mr. Ajay Vohra, Sr. Adv. Ms. Kavita Jha, AOR Mr. Vaibhav Kulkarni, Adv. Mr. Udit Naresh, Adv. Mr. Arvind Datar, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Mahesh Agarwal,, Adv. Ms. Sayaree Basu Mallik, Adv. Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommendation of the Telecom Regulatory Authority of India ( TRAI ) but in the meanwhile, the Government of India fixed 15% of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI s recommendation by the Government, adjustment of the dues was to be made. 6.1. Clause 7 of the Policy of 1999 stipulated that upon migration thereto, the licencees would forego the right of operating in a regime of limited number of operators as per the existing licensing agreement and would operate in a multiple licence regime, that is, additional licences without any limit could be issued in a given service area. The period of licence was stated to be twenty years from the effective date of the existing licence agreement, that is, the 1994 Agreement. Migration to the Policy of 1999 was on the 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 relating to the period upto 31 July, 1999 shall be raised at any future date. If all the terms were accepted, amendments to the existing licence agreement would be signed. The respondents herein migrated to the Policy of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent-assessee as revenue expenditure. In that regard, vide questionnaire dated 15 November, 2006, the assessee was required to explain as to why the said amount may, instead, be treated as capital expenditure and amortised over the remaining licence period of twelve years. The respondent-assessee furnished its response to the questionnaire, on 04 December, 2006. On consideration of the assessee s response, an Assessment Order was passed on 27 December, 2006 observing that the amount of Rs. 11,88,81,000/-, i.e. the licence fee paid by the assessee on revenue sharing basis, which was claimed as a revenue expense, ought to have instead been amortised over the remainder of the licence period, i.e., twelve years. Accordingly, an amount of Rs. 99,06,750/- was allowed as a deduction under Section 35ABB of the Act and the remaining amount of Rs. 10,89,74,250/- was disallowed and added back to the income of the respondent-assessee. 6.6. Being aggrieved, the respondent-assessee filed an appeal before the Commissioner of Income Tax (Appeal), New Delhi. In view of the decision of the Commissioner of Income Tax (Appeal) in the assessee s own case for the assessment year 2003-2004, it was rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause the earnings are shared and the licence fee depends upon the gross revenue and is payable yearly. That the new operators under the Policy of 1999 were issued licences and were required to pay a one-time licence fee for entry and to start operations and in addition, yearly turn over based licence fee was payable. One-time payment of licence fee was capital expenditure in nature but yearly payable licence fee was revenue expenditure. It was a running expense for maintaining and operating the business of telecommunication and therefore, considered in the commercial sense, the yearly payment was in the nature of revenue expenditure. 6.10. Since the Tribunal had held that variable licence fee paid by the assessees was properly deductible as revenue expenditure, the substantial question of law raised by the High Court at the instance of appellant Revenue was, whether the variable licence fee paid by the respondents under the Telegraph Act, and Indian Wireless Telegraphy Act, 1933 payable under the New Telecom Policy 1999 or 1994 Agreement, is revenue expenditure or capital expenditure which is required to be amortized under Section 35ABB of the Act? The pertinent observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the licence agreement executed in 1994 the considerations paid and payable were with the understanding that there would be only two players who would have unfettered right to operate and provide cellular telephone service in the circle. The payment, therefore, had element of warding off competition or protecting the business from third party competition. iv. Under the 1994 agreement, the licence was initially for 10 years extendable by one year or more at the discretion of the Government/authority. v. 1994 Licence was not assignable or transferable to a third party or by way of a sublicence or in partnership. There was no stipulation regarding transfer or issue of shares to third parties in the company. vi. Under the 1994 agreement, the licencee was liable to pay fixed licence fee for first 3 years. For 4th year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art and that it would not be correct to hold that the whole fee was capital or revenue in nature in its entirety. It was further observed that the licencees/assessees in question required a licence in order to start or commence business as cellular telephone operators; that payment of a licence fee was a precondition for the assessees to commence or set up the business. That it was a privilege granted to the assessee subject to payment and compliance with the terms and conditions. For immediate reference, paragraph Nos.31 to 36 of the said judgment are extracted as under: 31. Licence fee under the 1994 agreement ensured that there would be only two private operators in a circle and thus their limited monopoly would be protected and competition by way of third-party private players was warded off. Restricted monopoly of the licencees was ensured. The licence fee fixed included an element towards the said right of the licencees. 1994 agreement, for first three years postulated a lump-sum payment irrespective of number of subscribers. Minimum fee was also prescribed for later years. It appears that licencees were unable to make payments as per the 1994 agreement and under the 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence. 35. The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. As observed in Empire Jute Co. Ltd. (supra), the enduring benefit test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmatic view and considerations rather than juristic classification is the determinative factor. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one time entry fee and then licence fee payment on sharing basis. In view of the new 1999 policy, the earlier policy which restricted competition, underwent a change and licencees forgo their right to operate in the regime of limited number of operators. Another reason why we feel that licence fee payable for the period on or before 31 July, 1999 should be treated as capital and the amount payable thereafter as revenue, is justified and appropriate in view of Section 35ABB. We have already quoted the said section above. The provision provides that licence fee of capital nature shall be amortized by dividing the amount by number of remainder years of licences. Thus, the capitalized amount of licence fee is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tribunal on the ground that it was capital payment. In Sharda Motor Industries Ltd. (supra), royalty was to be paid on quantity of goods produced calculated per piece. However, this does not appear to be sole basis why the payment made was treated as revenue expenditure. The court had relied upon other facts which are noticed in paragraph 3 of the same judgment i.e. the payment was made for running business. The question of apportionment and payment was not made to establish business. In CIT v. Modi Revlon (P.) Ltd. (2012) 26 Taxmann.com 133 (Delhi), a Division Bench of this High Court observed that the tests evolved over the period have disapproved the applicability of the once and for all payment 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital expenditure and amortised accordingly, while the fee payable on an annual basis from the fifth year onwards, as a percentage of the gross revenue of the assessees was treated as revenue/business expenditure. It was further contended as follows: i. That the schedule of payment cannot recharacterize the transaction under income tax law, particularly when this Court had laid down from time to time that the schedule of payment, whether lump-sum or periodical, is immaterial in determining its classification under income tax law. The payment(s) towards the same purpose, i.e., payment of licence fee, cannot be characterised partly as capital and partly as revenue in nature by artificially defining one part as an entry fee and the remainder, payable annually, when both types of payment was towards licence fees. ii. That when the respondent-assessees have duly amortised the licence fee paid annually as capital expenditure, under the 1994 licence regime as well as the entry fee under the Policy of 1999 regime, there was no basis to reclassify the same as revenue expenditure insofar as variable licence fee is concerned for the subsequent years. Variable payments made annually, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court in Aditya Minerals Pvt. Ltd. vs. Commissioner of Income Tax, (1999) 8 SCC 97 ( Aditya Minerals Pvt. Ltd. ) to assert that the law laid down therein is that as long as payment is towards a capital expenditure, it is immaterial whether it is paid in lump-sum or as periodical payments, or, as a combination of both. That the mode of payment will not be determinative in identifying the nature of the expenditure, i.e., as to whether it is capital or not. vii. That the decision of this Court in Assam Bengal Cement Co. Ltd. has clarified that the aim and object of the expenditure would determine the character thereof, while the source and manner of payment would have no consequence. viii. Referring to the cases of Jonas Woodhead and Sons, Southern Switch Gear Ltd. and Best and Co., which have been referred to by the High Court of Delhi in the impugned judgement, it was submitted that reliance on the said cases is misplaced inasmuch as the said cases did not deal with a single source/purpose towards 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfied: a) the expenditure is capital in nature; b) the expenditure is incurred by an assessee on acquisition of the right to operate telecom services; c) the expenditure represents payment actually made to obtain a licence. Thus, for attracting the provisions of Section 35ABB, it is necessary that the expenditure under consideration must be capital in nature and is incurred for acquiring or obtaining a licence, which gives the right to the assessee to operate telecom services. ii. That in the present case, the respondent-assessees had obtained the licence in the year 1994 and had thereafter set up the telecommunication infrastructure and started operating telecommunication services. The payment of licence fee under the fixed regime, i.e., prior to migration to the Policy of 1999 was for obtaining the licence, thereby resulting in the acquisition of the right to operate telecommunication services. Therefore, the fixed licence fee upto 31 July, 1999 was amortised and allowed in terms of Section 35ABB of the Act. On the other hand, the variable licence fee payable w.e.f. 01 August, 1999, is a percentage of the AGR. The same is not in the nature of capital expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the provisions of Section 35ABB of the Act were introduced in the year 1996. At that time, the concept of variable licence fee did not exist. Application of the said provision to variable licence fee would give rise to absurd results, not intended by the Legislature. vi. That payment of variable licence fee from 01 August, 1999 is not for acquiring any right to operate telecommunication services , which right vested in and was being exploited by the assessees pursuant to obtaining the licence in 1994 and setting up the requisite infrastructure. vii. Further, variable licence fee paid from 01 August, 1999 could not be regarded as payment made to obtain a licence , so as to fall within the ambit of Section 35ABB of the Act. That Section 35ABB of the Act would not be attracted in the present case to require amortisation of the variable licence fee, because: a) payment of variable licence fee is not in the nature of capital expenditure; b) such payment is not incurred for acquiring any right to operate telecommunication services ; c) such payment has not been made to obtain a licence . With the aforesaid submissions, it was prayed that the High Courts de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext that the principle laid down in the said case would directly apply to the case at hand. The one-time entry fee is payed for acquiring the licence and is therefore in the nature of capital expenditure; whereas, the annual licence fee is to operate the licence and earn profits, therefore, the same is revenue expenditure. iv. That a similar view was taken in CIT vs. Sarada Binding Works, (1976) 102 ITR 187 ( Sarada Binding Works ) wherein the Madras High Court considered various judgments of this Court and held that a lump-sum payment to acquire a right would be capital expenditure, whereas any amount paid as royalty based on annual earnings or profit would be revenue expenditure. That the payment of annual licence fee, in the present case, would be similar to the payment of royalty as it relates to the annual turnover and would therefore be revenue in nature. v. That it could not be axiomatically held that the nomenclature annual licence fee would itself indicate that the annual variable licence fee was also incurred for the purpose of acquiring the capital asset, i.e., the licence and therefore, had to be amortised under Section 35ABB of the Act. The nomenclature does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and it was accordingly held that the interpretation proposed by the appellant would give Section 35ABB a ballooning effect with the amortised amount substantially increasing in the later years and in the last year, the entire licence fee along with the brought forward, amortised amount would be allowed as deduction. It was rightly held that after a certain point of time, deduction allowable under Section 35ABB would be more than the actual payment made by the assessee as licence fee for that year. In this context, reliance was placed on the decision of this Court in CIT, Bangalore vs. J.H. Gotla, A.I.R. 1985 SC 1698 to contend that it is settled law that an interpretation which leads to an absurd result should be avoided and such interpretation should give way to a more harmonious interpretation so that the legislation is given its desired result. iii. With the aforesaid submissions, it was stated that the impugned decision of the High Court of Delhi is detailed and well-reasoned. It is not contrary to any principle laid down by this Court and hence does not merit interference. It was prayed that the appeals filed by the Revenue be dismissed on the ground that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lecommunication services. In light of the aforesaid submissions, Sri N. Venkataraman urged that this Bench may allow the appeals filed by the Revenue. Points for consideration : 9. Having heard the learned counsel for the respective parties and on perusal of the material on record, the following points would emerge for our consideration: i. Whether the variable annual licence fee paid by the respondentsassessees 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? ii. 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? iii. What order? Statutory Framework: 10. The statutory scheme an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure. Explanation. For the purposes of this section, (i) relevant previous years means, (A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; (B) in any other case, the previous years beginning with the previous year in which the licence fee is actually paid, and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force; (ii) appropriate fraction means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years; (iii) payment has actually been made means the actual payment of expenditure irrespective of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns (2), (3) and (4) shall not apply in the case of the amalgamating company; and (ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence. (7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company), (i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and (ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence. (8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year. 11.1. Section 35ABB of the Act governs the treatment of expenditure incurred by entities to obtain a licence for operating telecommunication services in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamated company or to the demerged company, apply to the resulting company as they would have applied to the amalgamating company if the latter had not transferred the licence or to the demerged company if the latter had not transferred the licence, as the case may be. Sub-section (8) states that where a deduction for any previous years under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under the sub-section (1) of Section 32 for the same previous year or any subsequent previous year. 11.3. The salient aspects of Section 35ABB (1) of the Act may be read as under: (i) Purpose and nature of expenditure - Capital expenditure incurred for the purpose of obtaining licence to operate telecommunication services. (ii) Mode of amortisation of expenses For each year of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure, shall be allowed. (iii) Conditions to be satisfied for applicability of the Provision (a) The expenditure must be capital in nature; (b) The expenditure must be incurred by an assessee for the purpose of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish, maintain or work a telegraph within any part of India, shall identify any person to whom it provides its services by-- (a) authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or (b) offline verification under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or (c) use of passport issued under section 4 of the PassportsAct, 1967 (15 of 1967); or (d) use of any other officially valid document or modes of identification as may be notified by the Central Government in thisbehalf. (4) If any person who is granted a license under the first proviso to sub-section (1) to establish, maintain or work a telegraph within any part of India is using authentication under clause (a) of sub-section (3) to identify any person to whom it provides its services, it shall make the other modes of identification under clauses (b) to (d) of sub-section (3) also available to such person. (5) The use of modes of identification under subsection (3) shall be a voluntary choice of the person who is sought to be ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usand rupees, and with a further fine which may extend to five hundred rupees for every week during which the breach of the condition continues. 21. Using unauthorized telegraphs: If any person, knowing or having reason to believe that a telegraph has been established or is maintained or worked; in contravention of this Act, transmits or receives any message by such telegraph, or performs any service incidental thereto, or delivers any message for transmission by such telegraph or accepts delivery of any message sent thereby, he shall be punished with fine which may extend to fifty rupees. 12.1. The Telegraph Act is the parent legislation under which licences to establish, maintain or work a telegraph are issued. Section 4(1) of the Telegraph Act states that the Central Government shall have the exclusive privilege of establishing, maintaining and working telegraphs. The proviso to Section 4(1) indicates that the Central Government may grant a licence to any person to establish, maintain or work a telegraph within any part of India on such conditions and in consideration of such payment as it thinks fit. 12.2. Section 8 of the Telegraph Act allows the Central Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whereas in exercise of the powers of the Central Government under Sub Section 2 of Section 4 of the Indian Telegraph Act 1885, the Central Government delegated its powers to Telegraph Authority (hereinafter referred to as Authority) by GSR 806 Gazette of India, Part II, Section 3(i) dated 24th August 1985. And whereas pursuant to the request of the Licensee the Authority has agreed to grant licence to the Licensee on the terms and conditions appearing hereinafter to establish, maintain and operate Cellular Mobile Telephone Service upto the subscriber's terminal connection (hereinafter called the Service) in the areas given in Schedule A annexed hereto and the Licensee has agreed to accept the same on the terms and conditions appearing hereinafter. Now this Agreement witnesseth as follows: 1. In consideration of mutual covenants as well as the licence fee payable in advance in terms of schedule 'C' and observations and/or due performance of all the terms and conditions to be observed/performed on the part of the licensee, the Licenser does hereby grant licence to the Licensee to establish, maintain and operate Cellular Mobile Telephone Service upto th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the terms and conditions therein contained or in default of payment of any consideration payable thereunder by giving a 60 days notice. 12.1 The Licensee is not allowed to use any encryption in the network. 12.2 The Licensee is required to provide list of subscribers to the Authority every quarter regularly and, as and when required by the Authority. 12.3 The Authority or its representative will have an access to the MSC as well as the technical facility provided by the Licensee for monitoring, inspection etc. without giving any prior notice. 13. It is further agreed and declared by the parties that notwithstanding anything contained hereinbefore, that (i) The licence is issued on non-exclusive basis. The Authority reserves the right to operate the service within the same geographical area. (ii) The Authority reserves the right to modify at any time the terms and conditions of the licence covered under Schedules A , B , C , and D , annexed hereto, if in the opinion of the Authority it is necessary or expedient to do so in the interests of the general public or for the proper conduct of telegraphs or on security consideration. (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year shall be reckoned as twelve months, beginning with the date of commissioning of services or completion of 12 months from date of signing of Licence Agreement, whichever is earlier. b) The fourth year for purpose of charging the Licence fee shall be the period from the completion of the third year as defined above to the 31st day of March succeeding. The annual Licence Fee for the fourth year will therefore, be computed prorate with reference to the actual number of days. Thereafter, the year for purpose of levy of Licence fee shall be the financial year i.e. 1st April to 31st March and part of the 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. XXX (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extracted as under: GOVERNMENT OF INDIA MINISTRY OF COMMUNICATIONS DEPARTMENT OF TELECOMMUNICATIONS (VAS CELL) SANCHAR BHAWAN, 20, ASHOKA ROAD, NEW DELHI-110001 No 842-47/2000-VAS/Vol. IV Dated: January 29, 2001 To M/s Bharti Cellular Ltd. D-184, OKHLA Industrial Area, Phase-1, New Delhi-110 020. Subject:- Amendment in the Licence Agreement No 842-1893-TM Dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi Metro Service Area as a consequence to Migration to revenue sharing regime of New Telecom Policy-1999 (NTP-99) Sirs, In consideration of the acceptance by the Licensee, of the terms and conditions contained in the offered Migration Package vide No. 842-153/99-VAS (Vol. V) (Pt.) dated 22.7.1999 for migration to the revenue sharing regime under New Telecom Policy-1999, the license agreement shall stand substituted and modified as follows with effect from 1.8,1999, notwithstanding anything contained in the License Agreement: (i) The Licensee shall forego the right of operating in the regime of limited number of operators after 01.08.1999 and shall operate in a multipoly regime, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subject: Amendment in the Licence Agreement No. 842-18/93-TM dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi Service Area as a consequence to Migration to revenue sharing regime of New Telecom Policy-1999 (NTP-99). In continuation of Amendment dated 29th January, 2001 of the aforesaid License Agreement and more specifically Para (ii) thereto, reserving the power to take a final decision on the quantum of license fee and WPC charges; the licensor hereby decides the following in pursuance of the said power which shall modify and supersede whatever is contained and described in the Licence Agreement or the above stated Amendment. (i) Annual License fee at the rate of 15% of Adjusted Gross Revenue (AGR) shall be payable by you, with effect from 1st August, 1999. (ii) In addition the cellular licenses shall pay spectrum charges, with effect from (1.8.1999) the cutoff date of change over to NTP-99 regime, on revenue share basis of 2% of AGR towards WPC Charges covering royalty payment of the use of cellular spectrum upto 4.4 MHz+4.4 MHz and Licence fee for Cellular Mobile handsets Cellular Mobile Base Stations and also for possession of wireless tele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll refer to as under: (a) At the outset, we preface our discussion by the observations of this Court in Alembic Chemical Works Co. Ltd. vs. CIT, (1989) 3 SCC 329 ( Alembic Chemical Works Co. Ltd. ) wherein the transaction in question was with regard to the one-time payment made under an agreement with a foreign firm, by the assessee, to obtain technical know-how for increasing yield of penicillin in its existing plant. While considering the nature of the said transaction, this Court indicated that in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is not possible to formulate any general rule even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation . This Court further held that there is no single definitive criterion which by itself demarcates whether a particular outlay is capital or revenue. Therefore, the once for all test as well as the test of enduring benefit may not be conclusive. Consequently, the various terms and conditions of the agreement, the advantages derived by an assessee under the agreement, the payment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a capital expenditure. (b) In Empire Jute Co. Ltd., the question which arose was whether the sale of loom hours was to be held to be in the nature of capital receipt and hence not taxable. The transaction involved one jute mill transferring loom hours to another for consideration, subject to certain conditions. It was observed in the said case that a capital expenditure would be for securing an enduring benefit but when it comes to acquiring an advantage in the commercial sense, the enduring benefit test should not be applied mechanically. In the said case, another test was adopted, i.e., fixed and circulating capital test. It was observed that the purchase of loom hours was not like circulating capital (labour, raw material, power etc.) but loom hours were also not part of fixed capital. It was observed that whether an expenditure is revenue or capital should depend upon practical and business considerations rather than juristic classification of legal rights. That the test to be adopted was whether the expenditure was in view of a business necessity or expediency, i.e., was the expenditure a part of assessee s working expenditure or a part of process of profit earning; whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on several factors including whether the assessee had set up an entirely new business, or whether the technical knowhow was for the betterment of the product which was already being produced; whether it was a part and parcel of the existing business or a new business?; whether on expiry of the period of agreement, the assessee was required to give back the plans, drawings etc., which were obtained from the foreign company or could continue to manufacture the products? The assessing officer in the said case had treated 25% of the amount paid as royalty as capital and the balance amount was treated as revenue expenditure. The question that came up for consideration before this Court was, whether, on the facts and in the circumstances of the said case, the Tribunal was right in holding that 25% of the amount paid by the assessees therein as royalty to Jonas Woodhead and Sons was capital expenditure and therefore not allowable as revenue expenditure under the provisions of the Act for the Assessment years 1961-1968 and 1968-1969. It was observed that this question would depend upon several factors stated above and the cumulative effect of a construction of the various terms and cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the entire or a part of the earning apparatus or structure. It was held that if a loss of a particular agency was incidental to the business, compensation received would be a revenue receipt but if it was compensation received for the loss of an enduring asset, then it would be a capital receipt. But for this, the previous history of the business and relative importance of the agency lost and the position of the business after the loss of the said agency have to be scrutinized by the department. While considering the said issue, on the facts of the said case, it was held that the asseessee therein was a well-established and long standing company in South India which had taken up innumerable agencies in different lines and one such agency had been taken from the Imperial Chemical Industries (Exports) Limited, Glasgow. When there was no material to show that the loss of the said agency was so large that the business of the agency was dislocated, on considering the facts of the said case, this Court observed that the loss of the said agency by the assessee was only a normal trading loss and the income it received was revenue receipt. Another question which was considered was whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing operations for the commercial production of penicillin in the assessees existing plant had become obsolete or inappropriate in relation to the exploitation of the new subcultures of the high-yielding strains of penicillin supplied by a company, Meiji and that the mere introduction of the new bio-synthetic source required the erection and commissioning of a totally new and different type of plant and machinery. 14.4. Another case which has been discussed by the High Court in the impugned Judgment and relied upon by the appellant Revenue is Pingle Industries Ltd. In the said case, the majority judgment stated that the payment in question therein was made with a view to acquire a long-term lease and a right to mine stones and the lease was conveyed to the assessee who had to extract the stones and convert them as a stock-in-trade. That the expenditure was incurred towards securing a capital asset from which, after extraction, stones could be converted into stock-in-trade. The payment, though periodic, in fact, was neither rent nor royalty but a lump-sum payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and commission paid under the said agreement was in the nature of a capital expenditure and the same was not allowable as a deduction under the Act. 14.6. Learned senior counsel Sri Datar relied upon four decisions which we shall discuss as under: (a) In Travancore Sugars and Chemicals Ltd. vs. Commissioner of Income-tax, (1966) 62 ITR 566 (SC) ( Travancore Sugars and Chemicals Ltd. ), the facts were that three undertakings run by the Government of Travancore were taken over by a company under an agreement wherein the assets of the three undertakings were agreed to be sold by the Government to the new company. Cash consideration for the sale of the assets of the three undertakings was to be paid and also 20% of the annual net profit subject to a maximum of Rs.40,000/- was to be paid to the Government. The said 20% was later reduced to 10% by an amendment of the terms of the agreement. The question was, whether, the said payment was allowable under Section 10 of the Act. The High Court held that the amount constituted a capital expenditure. However, this Court held that the payment in question was in the nature of revenue expenditure for the following reasons: i) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment cannot be converted to a revenue payment. However, the majority held that the transaction did not amount to a sale and that the payment of consideration for the use of the goodwill of the business which is indefinite and depends on the profits earned by the company each year can be a revenue expenditure. (c) Reliance was also placed on Sarada Binding works by Sri Datar. In the said case, a registered firm carrying on business as a book binder and publisher had entered into an agreement with B under which it obtained the right to run the business of a publication concern for a consideration of a fixed sum of Rs.5,000/- per annum plus a sum equivalent to 10% of the net profits of each year of business. The assessee claimed the said amount as a business expenditure. The Madras High Court held that where the transaction in question amounted to a purchase of the business, the consideration paid partly as a fixed annual sum and partly a periodical payment on a certain percentage of the profits earned by the assessee from the said business could not be treated entirely as capital payment. The fixed annual sum payable was a capital payment but the periodical payments of sums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of account ? Therefore, in the said case, the Madras High Court held that the payments were of revenue character and that there were no elements present which would justify the court in attributing to the payments a capital character. The payments were fixed with reference to the profits which were indirectly related to the turnover. The payments were not related to any specified sum which was agreed upon by the parties as purchase price of the business. The decision of the Madras High Court was upheld by this Court. (d) Sri Datar has also referred to the decision of this Court in Mewar Sugar Mills Ltd. In the said case, a licence was granted by the then ruler of Udaipur State for the manufacture of sugar which was to be a monopoly enduring to the assessee s benefit for thirty two years. One of the conditions was that no permission would be granted to any other person for starting a sugar factory for a period of thirty-two years from the date of the said order. Another condition was that royalty must be charged on the sugar manufactured in the factory. No other tax was to be charged. After the grant of the monopoly, a limited company was floated called the Mewar Indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition. Capital expenditure It was held that the expenditure was not a part of working or operational expenses, but was for acquiring a capital asset. The expenditure was held to be a capital expenditure although it was payable per annum, as it protected and gave the right to the assessee to carry on business unfettered by outsiders. 2 Member of the Board of Agricultural Income Tax, Assam vs. Sindhurani Chaudurani, (1957) 32 ITR 169 (SC). Lump-sum payment (non-recurring) made by the prospective tenant to the landlord as consideration for settlement of agricultural land. Capital expenditure It was held that such payment was not in the nature of rent, but in the nature of capital expenditure as the same was incurred prior to the coming into effect of the landlord-tenant relationship. 3 Pingle Industries Ltd. vs. Commissioner of Income Tax, (1960) 40 ITR 67 (SC). Lump-sum amount, payable in instalments for acquiring exclusive monopoly rights to extract flag stones from certain quarries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rilisation of the profitmaking apparatus, i.e., the capital asset. The payment was not only with a view to earn profit in a new form, but was made to structure the assessee s profit-making apparatus and affected the conduct of business. 8 Aditya Minerals Pvt. Ltd. vs. Commissioner of Income Tax, (1999) 239 ITR 817. Advance rent for fifteen years to be paid, calculated at the rate of Rs. 35/- per month, for lease of land for excavation of minerals and subsidiary purposes. Capital expenditure That the rent paid by the assessee was in the nature of a deposit and was adjustable against the rent of each month. Since the rent for the entire period of lease was paid in advance, the expenditure would be capital expenditure. Reliance was placed on Pingle Industries Ltd. 9 Enterprising Enterprises vs. Deputy Commissioner of Income Tax, (2007) 293 ITR 437 (SC). Proportionate lease rent paid by mining lessee for acquiring leasehold right for extracting minerals from mineral bearing land. Capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ories. Revenue expenditure That the assessee did not become entitled, even for the period of the agreement to the patents and trademark of the Swiss Company. That the assessee merely had a licence to trade and access to the patents and trademark of the Swiss Company for the limited period of the agreement. That the assessee did not acquire any asset or advantage of enduring nature. 14 Jabbar (M.A.) vs. Commissioner of Income Tax, Andhra Pradesh, (1968) 68 ITR 493 (SC). Payment made for a short term lease of eleven months for quarrying and to carry away, sell and dispose of sand which was lying on the surface of a river bed. Revenue expenditure That the lease was for a short period and the expenditure incurred by the assessee was not related to the acquisition of an asset or of a right of enduring nature, but merely to obtain stock-intrade in the form of sand. 15 Lakshmiji Sugar Mills Co. Pvt. Ltd. vs. Commissioner of Income Tax, (1972) 82 ITR 376 (SC). Expenditure incurred on construction an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the assessees for purchase of loom hours was held to be expenditure incurred as part of the process of profit earning. The said expense was categorised as an outlay of a business in order to carry it on and to earn profit out of the expense. It was concluded that the expense was a part of the cost of operating the profit earning apparatus and was clearly in the nature of revenue expenditure. 19 L.H. Sugar Factory and Oil Mills Pvt. Ltd. vs. Commissioner of Income Tax, U.P., (1980) 125 ITR 293. i. Assessee s contribution towards the construction of a dam, pursuant to the request of the Collector; ii. Expenditure incurred by the assessee towards the construction of roads in the area around its factory, under a Sugarcane Development Scheme floated by the State Government. i. Merely an act of good citizenship and not deductibl e expenditur e . ii. Revenue expenditure i. That the assessee s contribution towards the construction of a dam, carried no advantage for the business of the assessee. The same was contributed without any obligation to do so and was simply an act of good citizen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot a case of exclusive acquisition. 22 Jonas Woodhead and Sons. India Ltd. vs. Commissioner of Income Tax, (1997) 224 ITR 342 (SC). i. Payment made towards accessing the know-how and technical information regarding the setting up of a plant; ii. Payment in the form of royalty for the services to be rendered to the assessee by the foreign firm. The consolidated payments made were apportioned and 25% thereof was held to be in the nature of capital expenditure while 75%, payable on services, was held to be revenue expenditure. Under the agreement with the foreign company, what was set up by the assessee was a new business and the foreign company had not only furnished information and technical know-how but had also rendered valuable services in the setting up of the factory itself. That even after expiry of the agreement there was no embargo on the assessee to continue to manufacture the product. 23 Commissioner of Income Tax vs. Madras Auto Services Pvt. Ltd., (1998) 233 ITR 468 (SC). Expenditure incurred by the assessee on demo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andamam a Publications was held to be Capital expenditure; ii. Royalty was held to be in the nature of revenue expenditure. That payments calculated as a certain percentage of profits of a business for an indefinite period of time cannot be treated as payments by instalments of a capital sum. The payment of royalty was related to the future profits of the assessee and had no nexus with the capital sum. 3 Commissioner of Income Tax vs. Southern Switch Gear Ltd., (1984) 148 ITR 272 (Madras High Court) Decision affirmed by this Court in Southern Switch Gear Ltd. vs. CIT, (1998) 232 ITR 35 (SC). i. Payment of technical collaboration/ technical aid fees by the assessee to a foreign company; ii. Royalty payable in five instalments for the acquisition of an exclusive privilege of manufacturin g and selling the products. i. Technical collaboration fee was held to be capital expenditure; ii. 25% of the royalty was held to be capital in nature, while 75% was stated to be revenue expenditure. That by making a payment of royalty, the assessee had acquired an exclusive privile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration paid by the assessee annually, as a percentage of sales price, to Revlon Mauritius Ltd. for supply of technical know-how to manufacture goods. Revenue expenditure That notwithstanding the fact that the assessee was the sole licencee of the brand within a given territory, expenditure would be revenue in nature because the ownership of the brand continued to be with Revlon Mauritius. That there was nothing in the agreement suggestive of any vesting of the know-how or part of it, or the goodwill of the brand, in the assessee. 16. We may also refer to some decisions of the Courts in England, with a view to cull-out certain tests, which, although should not be treated as over-exacting, may suggest some broad and general guidelines to ascertain as to which side of the line the outlay in any particular case might reasonably be held to fall. 16.1. The City of London Contract Corporation Ltd. vs. Styles, (1887) 2 TC 239 is the first of the line of cases where courts in England considered the issue as to the categorisation of expenditure, as capital or revenue. Bowen, L.J. broadly indicated that the outlay on the acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands. However, in the said case, it was observed that 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. 16.6. It was clarified in Mallet vs. Staveley Coal and Iron Co., (1928) 2 K.B. 405 ( Mallet ) that where the expenditure is to bring into the hands of the company a necessary ingredient of their existing business, which is important but still ancillary to the business, the expenditure is to be debited to the circulating capital rather than to the fixed capital, which is employed in and sunk in the permanent assets of the business. 16.7. The test of fixed or circulating capital was also adopted by Lord Hanworth, M.R. in Anglo-Persian Oil Co. vs. Dale, (1932) 1 K.B. 124 ( Dale ) wherein it was observed: I am inclined to think that the question whether the money paid is provided from the fixed or the circulating capital comes as near to accuracy as can be suggested. In further elucidation of the principle, it was laid down as follows: a) The expenditure is to be attributed to capital if it be made with a view to bringing an asset or advantage int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business. The distinction was thus made between the acquisition of an income-earning asset and the process of the earning of the income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of the earning of the profits was revenue expenditure. It was further observed that on acquisition of a business and when a liability to pay yearly sums is taken over, those yearly sums were not deductible in computing future profits for tax purposes, as they form a part of the consideration for the acquisition of the business. 16.9. A similar guideline was expressed in Sun Newspapers Limited and the Associated Newspapers Limited vs. The Federal Commissioner of Taxation, (1938) 61 C.L.R. 337, wherein it was stated that the expenditure incurred towards establishing, replacing and enlarging the profit yielding subject must be contrasted with the continual flow of working expenses, which ought to be supplied continually out of the returns of revenue. While the former category of expenditure would be capital in nature, the latter would be revenue. It was further held that while applying the enduring benefit test the words, permanent or enduri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Granada Motorway Services Ltd., (1979) 53 T.C. 92 ( Tucker ); Mallet, respectively. However, the relationship between the expenditure and the acquisition, improvement or disposal of a capital asset must be proximate and not remote. For instance, payment made to staff could not be said to be payment made for acquisition of goodwill and hence capital in nature, although, the staff by serving well may help create the goodwill, vide Lawson vs. Johnson Matthey Plc., (1992) 65 T.C. 39. iii. Identifiable asset test: It is necessary to identify a specific capital asset for which the expenditure is incurred, vide Tucker. When the asset is an intangible benefit (licences, trading agreements etc.) it will be necessary to ask whether the identifiable asset is of a sufficiently substantial and enduring nature to count as capital, vide Dale; CIR vs. Carron Company, (1968) 45 T.C. 18; Heather vs. PE Consulting Group Ltd., (1972) 48 T.C. 293. iv. Expenditure on commercial advantages generally: Expenditure on commercial advantages dependent on a particular trading relationship is likely to be capital only if a permanent advantage, such as the closing down of a potentially damaging competi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to acquire the concern. 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. ((1925) 10 T.C. 155). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of the assessee a necessary ingredient of their existing business, which is important but still ancillary to the business, the expenditure is to be debited to the circulating capital (revenue account) rather than to the fixed capital (capital account). iv. Where there is no enlargement of the permanent structure or of capital assets and the expenditure essentially relates to the operation or working of the existing apparatus, such an expenditure would be on revenue account, vide Empire Jute Co. Ltd. v. The question as to whether an expenditure is capital or revenue in nature is to be judged in every case in the context of business necessity or expediency. The first aspect to be considered is whether, the expenditure is a part of the assessee s working expenditure or a part of profit earning. Further, an inquiry must be made as to, whether, the expenditure was necessary to acquire a right of permanent character, the possession of which is a condition precedent for carrying on a particular trade. In the event that the answer to the first question is in the negative and the second question is in the affirmative, the expenditure is inarguably capital in nature. In this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended use, vide Devidas Vithaldas and Co. Where the asset is not purchased or is not vested with the assessee, but the assessee has simply acquired a right to use the asset, the payment would be of revenue nature, vide CIT vs. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 ( Modi Revlon Pvt. Ltd. ). Payment of royalty : 20. In the present case, before considering the issue as to categorisation of the variable licence fee payable as a percentage of gross revenue, it is also necessary to understand the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut only secures a right to use the asset, the same would be royalty and hence classifiable as a revenue expenditure. 20.2. Relying on the decision in Gotan Lime, this Court in Mewar Sugar Mills Ltd. while considering a transaction wherein the assessee therein paid: (a) Lump-sum payment to acquire monopoly rights for manufacture of sugar in Udaipur; and (b) payment to the ruler of Udaipur State, at the rate of 2% of the price of the sugar manufactured, held that the payment of the 2% royalty on the price of sugar manufactured by the appellant therein had no relationship with the payment referable to the monopoly conferred under the grant and hence, it was in the nature of revenue expenditure. 20.3. Another ingredient of payment as royalty is that in most cases, it relates to and is dependent on the profit earned or sales made by working an asset, rather than the acquisition of the asset itself. Such periodic payments, particularly those which are based on turnover of profit and which are not related to any predetermined lump-sum are towards royalty and correctly deductible as revenue expenditure. 20.4. In CIBA India Ltd., this Court held that payments made for the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure is incurred, vide Assam Bengal Cement Co. Ltd. Attention must be paid not only to the form of the transaction, but also its substance. Where the transaction takes the form of a contract or other deed, it depends upon a proper construction of the terms of the contract whether a payment made thereunder is a capital disbursement or revenue expenditure. The true nature of a transaction must be gathered by placing emphasis on the business aspect of the transaction. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from the practical and business point of view. This aspect of the transaction is then, to be reconciled with juristic classification of the legal rights, if any, secured, employed, or exhausted in the process. 22.1. Therefore, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of 75% of its annual net profits. That since the assessee had acquired a capital asset (right to carry out the business of the assignor), any payment made towards securing such a right would be capital in nature. This dictum would clearly demonstrate that when an expenditure is in its core capital in nature, neither the fact that the same was paid in instalments, nor the fact that the quantum of expenditure was dependent on the revenue or profit of the assessee, would warrant a change in the classification of the transaction. 23. Before proceeding to consider the facts of the present case in light of the precedents discussed hereinabove, it is necessary to preface our views by stating that it is perhaps one of the most familiar arguments in Courts (particularly in matters involving an issue as to classification of expenditure or receipts), that the case at hand bears close resemblance to another case falling on one or the other side of the line, and must therefore be decided in the same manner. This thought was conveyed by Lord Radcliffe in Nchanga Copper Mines wherein it was pointed out that in considering allocation of expenditure between capital and income accounts, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, were instalments of capital and were not admissible as revenue deductions. 23.3. Similarly, as discussed hereinabove, this Court in Jalan Trading Co. had the occasion to consider the issue pertaining to classification of an annual payment based on profit sharing towards the right to carry on business. This Court concluded that since the annual payment of 75% profit share was paid by the assessee in consideration of the right to carry on the business of the assignors, the payment would be capital in nature. In doing so, this Court examined the contention of the assessee therein that, since what was paid as consideration was not a pre-determined lump-sum amount but an annual payment out of profits, such a payment should be held to be revenue in nature. The three-Judge Bench of this Court rejected the said contention suggesting that when an expenditure is in its core capital in nature, neither the fact that the same was paid in instalments, nor the fact that the quantum of expenditure was dependent on the revenue or profit of the assessee, would warrant a change in the classification of the transaction. This judgment will apply on all fours in deciding the case at hand, since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee by the foreign firm, the consideration for the second prong being in the nature of royalty. It is in that backdrop that the consolidated payment was apportioned and 25% thereof was held to be in the nature of capital expenditure while 75%, payable on services, was held to be revenue expenditure. Further, it is also relevant to note that in the said case the exercise of apportionment into the aforesaid fractions was carried out by the Madras High Court. Against the judgment of the High Court, the Revenue did not prefer an appeal before this Court on the findings pertaining to apportionment of 75% towards services. What was appealed against by the assessee was with regard to categorisation of 25% of the consolidated expenditure as capital expenditure. The assessee alone was the appellant before this Court. Therefore, the question as to apportionment of 75% towards services, was not considered and decided by this Court in the said case. We are of the view that the judgment of this Court in Jonas Woodhead and Sons would not come to the aid of the respondentassessees because the issue before this Court in the said case did not relate to a single right wherein the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 4000 each. Paragraph 5 of the judgement of the High Court referred to clause 6 of the agreement which dealt with know-how and clause 7 thereof, which dealt with supervision and direction, besides recommending appointment or dismissal of employees and also training them in the factory. In paragraph 6, it was held that expenditure on technical know-how is capital in nature and should be apportioned at 25% and the services rendered relatable to 75% of the consideration was revenue in nature. When the assessee therein filed an appeal before this Court against the finding that technical know-how is capital in nature and should be apportioned at 25%, the appeal was dismissed. Therefore, it is clear that the said case also did not pertain to one source of expenditure being split, partly as capital and partly as revenue in nature. In the said case, the Courts have examined two different constituents of expenditure and held one component to be capital in nature while the other to be revenue in nature. 24.4. Next, we advert to the facts in Sarada Binding Works on which heavy reliance was placed by learned senior counsel Mr. Datar. The agreement relevant to the said case envisaged co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear to the effect that royalty based on manufacture was in no way connected to the acquisition of monopoly rights. But such a finding would be erroneous in the facts of the present case since what is paid is only for acquisition of a right by way of licence fee. Further, in the said case, royalty payment had been divorced from the payment for the right to carry on business since any failure to pay royalty could not have, by any stretch, resulted in the withdrawal of the right to carry on trade. The right to carry on trade would have remained unaffected whether or not royalty payment was made. Failure to make royalty payment, could have at the most, led to civil consequences, but not a revocation of the right to carry on trade, whereas, in this batch of matters, the position is not the same. Admittedly, any failure to pay the annual variable licence fee will inevitably lead to revocation of the licence under Section 8 of the Telegraph Act. Further, the respondents will be disabled from carrying on the business of offering telecommunication services, even for a day in the absence of a valid licence. Continuation of the right to carry on the said business is contingent on the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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. iv. 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. However, in the present case, the successive instalments relate to the same obligation, i.e., payment of licence fee as consideration for the right to est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 8 thereof are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, we hold 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. In our view, 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 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 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. 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. 27. Therefore, in the ultimate analysis, the nomenclature and the manner of paym ..... X X X X Extracts X X X X X X X X Extracts X X X X
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