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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 ..... VIL 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. Abhinav Gart, Adv. Mr. Abhinav Garg, Adv. Mr. Abhinabh Garg, Adv. Mr. E. C. Agrawala, AOR JUDGMENT NAGARATHNA, J. Delay condoned. 2. Leave granted. 3. The judgment of the Division Bench of the High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment 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that the conditions should be accepted as a package in entirety and simultaneously and all legal proceedings shall be withdrawn and no dispute relating to the period upto 31 July, 1999 shall be raised at any future date.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 1999. They had paid licence fee upto 31 July, 1999. The respondents treated the licence fee paid upto to 31 July, 1999 that is, the one-time licence fee as stipulated in the letter/communications dated 22 July, 1999, as capital expenditure. 6.2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reaffirmed vide order dated 27 September, 2007 that the annual licence fee calculated on the basis of annual gross revenue of the assessee would be revenue expenditure deductible under Section 37 of the Act. 6.7. Aggrieved by the said order, the appellant-Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, 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 observations of the High Court and the salient aspects discussed in the judgment dated 19 December, 2013 are as under: i. Section 35ABB applies when expenditure of a capital nature is incurred by an assessee for acquiring a right for operating telecommunication services. It is im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 and onwards, the licencee was liable to pay variable licence fee @ Rs. 5,00,000/- per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee payable for 4th to 6th year and with modified but similar stipulations from 7th year onwards. vii. The licence could be rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1999 policy, were required to pay lump-sum payment for past arrears before specified dates. 32. There was restriction under the 1994 agreement, on transfer of the licence or even grant sublicence but there was no specific restriction on change of shareholding. 1999 policy ensured that even shareholding did not change for a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 payment of yearly licence fee on revenue sharing basis is for carrying on business as cellular telephone operator. It is a normal business expense. 36. Read in this manner, the licence granted by the Government/authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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, it was observed that there was nothing to show or to suggest vesting of knowhow in the assessee and therefore, the assessee did not derive any enduring benefit. Thus, the royalty payment was held to be revenue in nature." In view of the above discussion, the substantial question was answered by the High Court in the following manner: "47. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 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, based on the annual gross revenue in the relevant year were also towards licence fee. Therefore, there could not have been a shift in the tax treatment thereof upon migration to a new regime, wherein merely the payment schedule was revised while preserving the character of the payment. iii. That payments made, either of entry fee or of annual licence fee, is in essence only towards securin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature 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 Court held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act is a single licence to establish, maintain and operate telecommunication services. Since it is not a licence for divisible rights which conceives of divisible payments, apportionment of the licence fee by holding that the entry fee paid is towards establishment an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining 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 as it is not incurred with a view to acquire the right to operate telecommunication services. The said services were already being operated by the respondents by virtue of a licence which had been obtained in the year 1994. The variable licence fee was, thus, for continuing the right to operate telecommunication services, which were already being operated and provided by the respondent-assessees. iii. Referri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht 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' decision as to the inapplicability of Section 35ABB of the Act, to the facts of the present case, be upheld, and these appeals be dismissed as being devoid of merit. 7.3. Learned senior counsel, Sri Arvind P. Datar, appearing on behalf of some of the respondent-assessees in Civil Appeal Nos. 11131 of 2016 and 153 of 2021 adopted the submissions of Sri Ajay Vohra and further submitted as under: i. That it would be incorrect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s") 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 not mean that a licence is acquired annually or the licence is obtained annually. This amount is the expenditure incurred to operate the telecom licence and earn revenue or profits. In this regard, reliance was placed on the dictum of this Court in Sundaram Finance Ltd. vs. State of Kerala, (1966) 2 SCR 828 to submit that the use of a particular expression is not conclusive of the nature of a transaction. vi. That the judgment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual 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 infirmity in the impugned judgment of the High Court of Delhi. Reply arguments: 8. By way of reply, learned ASG, Sri N. Venkataraman, reiterated his submissions while also contending that the judgment of this Court in Mewar Sugar Mills Ltd. and the judgment of the Madras High Court in Sarada Binding Works, relied upon by Sri Datar to substantiate the claim that the same source of expenditure incurred by an assessee could be construed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999 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 and structure of the Act on the characterisation of capital expenditure is as follows: 10.1. Section 32 of the Act identifies tangible and intangible assets which are capital in nature and prescribes the mode and manner of depreciation. Section 32(1)(i) identifies a list of tangible assets and Section 32(1)(ii), a set of intangible assets which includes licences. Explanation 3 to Section 32(1) defines 'assets' into two categories, i.e., tangible and intangible. Licences a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee." (2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is transferred. (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The provision addresses the tax treatment of such expenses and ensures that they align with the income tax framework. With effect from 1 April 1996, this provision provides for amortisation of capital expenditure incurred for acquisition of any right to operate telecommunication services, regardless of whether such cost is incurred before the commencement of such business or thereafter. The cost is allowed to be amortised in equal instalments in the years for which the licence is in force. The amortisation commences from the year in which such business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious 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 acquisition of the right to operate telecom services; (c) The said expenditure may be incurred before the commencement of business to operate telecommunication services, or thereafter at any time during any previous year; (d) The expenditure must represent the payment actually made to obtain a licence. 12. Since the variable licence fee paid by the respondents-assessees to the DoT under the Telecom Policy of 1999 is stated to be imposed and collected on the strength of the Telegraph Act, the relevant provisions of the said Act are extracted hereinunder for immediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 identified and no person shall be denied any service for not having an Aadhaar number. (6) If, for identification of a person, authentication under clause (a) of sub-section (3) is used, neither his core biometric information nor the Aadhaar number of the person shall be stored. (7) Nothing contained in sub-sections (3), (4) and (5) shall prevent the Central Government from specifying further safeguards and conditions for compliance by any person who is granted a license under the first proviso to sub-section (1) in respect of identification of person to whom it provides its services. Explanation.-- The expressions "Aad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cences 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 Government to revoke at any time any licence granted under Section 4 thereof, on breach of any of the conditions therein contained or in default of payment of any consideration payable thereunder. 12.3. Section 20 of the Telegraph Act declares that any person who establishes, maintains or works a telegraph in contravention of the provisions of Section 4 shall be punished with imprisonment, which may extend to three years, or with fine, or with both. Section 20A and 21 deal with breach of conditions of licence and the consequences of using unauthorised telegraphs. 12.4. A bare perusal of the aforesaid provisions of the Telegraph Act would throw light onto the following asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the subscriber's terminal connection in the areas given in Schedule "A" annexed hereto on the terms and conditions mentioned in Schedule "C" annexed hereto. 2. The licence is granted initially for a period of 10 years extendible for one year or more at a time at the discretion of the authority, on such terms and conditions as the Authority may, at his sole discretion, agree provided that the Licensee is not in default or has committed/any breach of any terms and conditions of the Licence. The licence fee payable is given in Schedule "C" condition 19 of this licence. 3. The licence is governed by the provisions of the Indian Telegraph Act, 1885 and Indian Wireless Telegraphy Act, 1933 as modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority 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) The Authority reserves the right to revoke the licence at any time in the interest of public by giving a 60 days' notice. (iv) Notwithstanding anything contained anywhere else in the licence the Authority's decision shall be final. (v) The authority reserves the right to take over the entire services and networks of the licensee or revoke/ terminate /suspend the licence in the interest of national security or in the event of a national emergency/war or low intensity conflict type of situations. In Witness whereof the parties hereto have caused this Agreement to be executed through their respective authorized representatives the day and year first before written Signed and Delivered for and on behalf of President of India" (Emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Licensee on the rates prescribed by the WPC and as per procedure specified by it (condition 20)." 13.3. The key features of the licence agreement under the 1994 Policy regime may be enumerated as under: i. The licence was granted enabling the licencee to establish, maintain and operate cellular mobile telephone service, within a given geographical area. ii. The licence was granted for a period of ten years, which was extendable for five years or more, at the discretion of the licensor, i.e., the Central Government, unless terminated earlier. iii. Fixed amount of licence fee was to be paid for the first three years, irrespective of the number of subscribers, as provided in paragraph 19 of the agreement and such amounts was subject to increase annually. iv. From the fourth year onwards, the amount of licence fees to be paid, was depende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally the licensor has fixed 15% of the gross revenue as license fee and presently the gross revenue for this purpose shall mean the total revenue of the Licensee Company under the license excluding, (a) the PSTN related call charges paid to Bharat Sanchar Nigam Limited (BSNL)/MTNL or any other Telecom Service Provider and, (b) service tax or charge collected by the Licensee on behalf of the Government from their subscribers. The Government will take a final decision about the quantum of revenue share, definition of revenue for this purpose, after taking into consideration the recommendations of (iii) Period of Licence: The period of license shall be twenty years from the effective date of the existing license agreement unless terminated for the reasons stated therein. The Licensor may extend the period of license, if requested during 19th year from the effective date for a period of 10 years at a time on mutually agreed terms and conditions The decision of licensor shall be final in regard to grant of extension. (iv) The acceptance of the Migration Package shall be taken and deemed as full and final settlement of all existing disputes whatsoever, for the period upto 31. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions, following migration into the Policy of 1999 regime, may be presented in a tabular form, as under : Sl. No. Parameters for Distinction National Telecom Policy, 1994 New Telecom Policy, 1999 1. Details of the payment to be made by the operator: i. Fixed licence fee for the first three years; ii. From the fourth year onwards, the amount of licence fees to be paid, was dependent on the number of subscribers, irrespective of the revenue account by the licencee from such subscribers, subject to the prescribed minimum i. One-time entry fee paid by existing telecom operators and entry fee that was paid by all the new entrants; ii. Variable annual licence fee paid as a percentage of AGR. 2. Maximum number of operators permissible in a circle Two No restriction 3. Validity of the licence 10 years, subject to extension. 20 years, subject to extension. 4. Right of the operator/ licencee to assign/transfer the licence Licence was nonassignable and nontransferable. Restriction on assignment/transfer of licence was relaxed. 14. The discussion on the points set out above, in our view, must begin with a detailed review of relevant case la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether made "once for all" or in different installments co-relatable to the percentage of gross turnover of the product, etc. to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset(s) and after the court comes to the conclusion that it does, then, has to be held to be a capital expenditure. It was further observed that no single definitive criterion by itself would be determinative and therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities, the various clauses of the agreement are to be examined. On fact, as regards the question as to whether "once for all" payment made under an agreement with a foreign firm by the assessee to obtain technical knowhow, for increasing yield of penicillin in its existing plant with a condition to keep the said know-how confidential, constituted business expenditure allowable for deduction, this Court held in the affirmative. M.N. Venkatachalia, J. (as the learned Chief Justice then was) held that in computing the income chargeable under the head "Profits and Gains of Business or Profession", Section 37 of the Act enables the deduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (d) In Sindhurani, salami or lump-sum payment of non-recurring nature made by the prospective tenant to the landlord as consideration for settlement of agricultural land and parting with certain rights paid anterior to landlord and tenant relationship was held not to be in the nature of rent and thus capital payment. It was held 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. (e) In Enterprising Enterprises, this Court affirmed the decision of Madras High Court after referring to Pingle Industries Ltd. vs. CIT, (1960) 40 ITR 67 (SC) ("Pingle Industries Ltd."); Gotan Lime vs. CIT, (1999) 239 ITR 718 ("Gotan Lime") and Aditya Minerals Pvt. Ltd. to hold that there is a distinction between a payment of royalty or rent and where the entire amount of lease premium was paid either at one time or in instalments. Royalty or rent is a revenue expenditure whereas the payment of a lease premium either at one time or in instalments would be a capital expenditure. 14.2. Having referred to the aforesaid decisions, three other judgments were noticed by the Delhi High Court which, according to learned ASG appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty. That alone did not make it a revenue expenditure. Therefore, the question raised was answered in favour of the Revenue and the appeals filed were dismissed. b) In Southern Switch Gear Ltd., this Court affirmed the decision of the Madras High Court, 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. (c) In Best and Co., the respondent assessee therein was carrying on business and had innumerable agencies and compensation was received on account of cancellation of one agency and the question was, whether, the said compensation was capital or revenue receipt in nature; whether by the termination of an agency the asseessee therein had lost an earning asset and the compensation paid for the destruction of such an asset was a capital receipt and therefore not liable to tax. K. Subba Rao. J. (as the learned Chief Justice then was) speaking for a three-Judge Bench observed that the question, as to, whether, the compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said case, compensation received was held to be revenue receipt as the respondent assessee had innumerable agencies in different lines and had given up only one to continue business in other lines. Loss of an agency, it was observed, was in the normal course of business and a part of normal business, therefore, the amount received as compensation was revenue in nature. At the same time, it was accepted that the compensation paid/received on account of a restrictive covenant for a specified period on which the assessee had undertaken not to take up competitive agency was a capital receipt and therefore, not taxable. 14.3. In Alembic Chemical Works Co. Ltd., on facts, it was observed that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. That the further circumstance that the agreement pertained to a product already in the line of the established business of the assessees and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not to allow any other person to excavate stones in the area of those six villages. The lease was in the nature of exclusive right and a monopoly. In case of any default of the instalment, the contract would be reauctioned after one month's notice to the contractor, who would be responsible for any shortfall but would not have the benefit of any extra amount. 14.5. Learned ASG also relied upon the judgment in Jalan Trading Co. In the said case, a manufacturing company gave its sole selling agency to a firm, namely, Jalan Trading Company for two years with a right to renew by an agreement under a deed of assignment. The benefit of the agreement was assigned to the assessee on its payment of 75% of its profit and commission, remuneration and other moneys received under the said agreement or any further agreement. The assessees therein claimed the payment of 75% of their profits in the relevant assessment year as a business deduction. The question was, whether, the payment was a revenue expenditure or a capital expenditure. It was observed, on facts, that the assessee therein was a new company and it had acquired under the contract the right to carry out a business on a long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill of the business would amount to an acquisition of a capital asset and the purchase price will be a capital expenditure. This Court also considered the question whether, it would make any difference whether, the consideration is paid in lump-sum, or at one time, or in instalments, distributed over a definite period. It was held that where the acquisition is not of the goodwill itself but for the right to use it, the expenditure would be a revenue expenditure. It was further observed that if the payment is in the nature of royalty it has to be treated as a revenue expenditure. The main reason for holding that the transaction did not amount to the sale of goodwill was that the duration of the payment as also the amount of consideration was indefinite as they depended on the rise and fall in the profits of the business. In the said case, it was observed by a majority of 3:1 that "in distinguishing between capital and revenue expenditure, the courts have applied in different cases different tests. Nonetheless, it is recognised that none of them by itself is conclusive and the determination one way or the other has to be made on the facts and circumstances of each case. However, Sik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent so that the former part is taxable and deductible whilst the latter is not." On facts, the case before was classified as falling under the third category and it was held that the question, whether, the payment is capital or revenue has to be considered in relation to the facts of each case and the true nature of the payment has to be ascertained from the documents and all the surrounding circumstances with the important features to consider being the nature of the original obligation, the period of time during which the payments are to continue, whether or not they are expressed in the form of instalments of some capital sum and what provisions, if any, are made for commutation. Further, four tests in deciding the question, whether, a particular expenditure is allowable or not were also quoted from the same treatise. The said extract is as under: "In general, however, in order to decide whether some particular expenditure of a trader should be brought into account, four tests, similar to those considered in relation to receipts, should be applied. First, is the expenditure wholly and exclusively laid out for the purposes of the trade? If not, it will be excluded. Secondly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only other question being that the payment of 2% royalty on the price of sugar manufactured by the appellant therein was relatable to the monopoly rights and therefore was capital expenditure was considered. It was found 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. It was observed that on the facts and circumstances of the said case, the expenditure incurred, that is, payment of 2% royalty payment on the sugar manufactured was a revenue expenditure while the payment made in respect of the monopoly rights obtained was of a capital nature. The applicability of the judgments discussed hereinabove to the case at hand, shall be examined at a later juncture. 15. A tabular representation outlining the classification of different transactions by this Court in various cases, is as under: Sl. No. Citation Transaction In Question Classification of the Transaction in Question by this Court: Reasons for classification: 1 Assam Bengal Cement Co. Ltd. vs. Commissioner of Income Tax, West Bengal, (1955) 27 ITR 34 (SC). Payment made by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay vs. Jalan Trading Co., (1985) 4 SCC 59. 75% profit share, paid as consideration under a deed of assignment, for the right to carry on business. Capital expenditure That what was conveyed was the right to carry on the whole business and what was agreed to be paid was a profit share of 75% every year, as consideration to acquire this right. The fact that the payments were made annually would have no bearing on the nature of the transaction. 7 Commissioner of Income Tax vs. Bombay Burmah Trading Corporation, (1986) 161 ITR 386 (SC). Lump-sum consideration paid by the assessee for surrender of export rights in a forest lease, where the assessee had the right to extract and cut timber and remove them on payment of royalty. Capital expenditure That the payment was for sterilisation 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, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee at the rate of 6% of the net selling price, to the Swiss Company, on receiving the formula, scientific data, working rules and prescriptions pertaining to the manufacturing and processing of products discovered and developed in the Swiss Company's laboratories. 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. Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 citizenship and hence, not deductible. ii. That construction of roads in the area around the assessee's factory would be considerably advantageous to the business of the assessee as it would facilitate transport of sugarcane into the factory and manufactured sugar out of the factory. Hence, such expenditure was indubitably connected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 demolishing an existing building and constructing a new building, during the subsistence of a 39 year lease, whereafter, the assessee continued to be a lessee in the building which belonged to the lessor. Revenue expenditure That the asset created, though of an enduring nature, did not belong to the assessee. 24 Honda Siel Cars India Ltd. vs. Commissioner of Income Tax, Ghaziabad, (2017) 8 SCC 170. Lump-sum fee payable by the assessee to M/s Honda Motors Company Ltd., Japan in five continuous instalments after commencement of commercial production of Honda cars by the assessee, under a licensing and technical assistance agreement between the parties. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusive privilege to manufacture and sell the products. Therefore, the said expenditure was to be treated partly as capital and partly revenue. The value of the royalty related to the acquisition of the right of enduring nature was estimated at 25% and treated as capital expenditure, while the rest was stated to be revenue expenditure. 4 CIT vs. Saw Pipes Ltd., (2008) 300 ITR 35 (High Court of Delhi) Service charges paid by the assessee to Maharashtra State Electricity Board (MSEB) to set up a service line for supplying electricity, as part of an arrangement wherein the ownership of the cables would remain with the MSEB. Revenue expenditure That the service lines did not belong to the assessee but to the MSEB and were laid out to enable the assessee to conduct its business more effectively. Hence, the same was to be regarded as revenue expenditure. 5 CIT vs. J.K. Synthetics, (2009) 309 ITR 371 (High Court of Delhi) Payment made by the assessee under an agreement to access technical information of a foreign company, whereby there would be no transfer of ownership of the know-how in favour of the assessee, and the access was granted on a non-exclusive basis. Revenue expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncur every year. This test was adopted by Rowalatt J. in Ounsworth (Surveyor of Taxes) vs. Vickers Ltd., (1915) 3 K.B. 267 ("Vickers Ltd.") wherein it was observed that the real test was between expenditure which was made to meet a continuous demand for expenditure as opposed to an expenditure which was made once and for all. In the course of the judgment however, it was suggested that what was determinative was whether the particular expenditure could be put against any particular work or whether it was to be regarded as an enduring expenditure to serve the business as a whole. 16.3. The latter guideline laid down in Vickers Ltd. served as the foundation for the test prescribed by Viscount Cave L.C. in the oft-cited case on the subject, British Insulated Helsby Cables Ltd. vs. Atherton, (1926) AC 205 ("Atherton"), wherein it was observed that when an expenditure 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 trade, such an expenditure is property attributable to capital and not to revenue. 16.4. The expression "enduring benefit of a trade" was further explained as meaning not "everlasting", but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot connote a benefit that endures in a sense that for a good number of years it relieves the assessee of a revenue payment. However, in Van Den Berghs, Limited vs. Clark (H.M. Inspector of Taxes), (1935) 19 T.C. 390, Lord Macmillan veered round to the test of enduring benefit and expressed reservations regarding the test of fixed and circulating capital. That "where the character of the expenditure shows that what has resulted is something which is to be used in the way of business, the test may be useful; but in cases close to the dividing line, the test seems useless." 16.8. A third test was propounded in Robert Addie & Sons Collieries Ltd. vs. Commissioners of Inland Revenue, (1924) 8 T.C. 671, while determining whether a given expenditure is capital or revenue in nature: "Is it part of the Company's working expenses, is it expenditure laid out as part of the process of profitearning? or, on the other hand, is it a capital outlay, is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all?" The said test was adopted by the Privy Council in Tata Hydro- Electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had paid for purchasing tendu leaves from the forest, which right included the right of entry and coppicing and pollarding. The said expenditure was for acquiring the raw materials for the manufacturing business and thus a capital expenditure. In the said case, the assessee was a paid manufacturer who had obtained shortterm contracts with the Government and other forest owners to obtain tendu leaves from the forests. The Judicial Committee held that these contracts were, in a business sense, for the purpose of securing supplies to the manufacturers of one of the raw materials of his business. They granted no interest in land or the plants or trees and therefore, the expense incurred in this regard was not a capital expenditure. 17. A study of the aforesaid decisions of the Courts of England would reveal that the following factors have guided the Courts in the said jurisdiction in determining the nature of transactions: i. Periodicity of payments: In the broadest sense, capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which will incur every year. However, expenditure which is not 'once and for all' may nevertheless be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit-making structure: The question to consider is, whether, the payment was made with a view to earn profit in a new form, or to structure the assessee's profit making apparatus. While the former category of expenditure would be revenue in nature, the latter would be capital. 18. The test that was adopted, almost universally, in the early decisions in India, is akin to the one laid down by Viscount Cave L.C. in Atherton. 18.1. In Commissioner of Income Tax, Bombay vs. Century Spinning, Weaving and Manufacturing Co., (1942) 10 ITR Suppl., M.C. Chagla J. observed that the legal touchstone which is most familiarly applied in the Indian context is that of Viscount Cave in Atherton's case. 18.2. In Benarsidas Jagannath, In re, (1946) 15 ITR 185, a Full Bench of the Lahore High Court attempted to reconcile the tests referred to hereinabove and deduced the following broad tests for distinguishing capital expenditure from revenue expenditure: "It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." 19. It may be useful at this juncture, to attempt to cull out the broad principles/tests that have been forged and adopted by this Court from time to time, while determining whether a given expenditure is capital or revenue in nature: i. Capital expenditure is one met with a view to bring into existence an asset for the enduring benefit of the trade. However, this rule is not applicable in every case. The nature of the advantage acquired has to be considered in the commercial sense and only when the advantage is in the capital field, deduction on the said expenditure could be disallowed by applying the enduring benefit test. If the advantage consists merely of facilitating trading operations or enabling the management or conduct of business more effectively or profitably, while leaving the fixed capital untouched, the said expenditure would be on revenue account, though the advantage may endure for an indefinite period, vide Empire Jute Co. Ltd. Therefore, the enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing significant changes to the structure of the assessee's profit making apparatus, the same is revenue in nature. Alembic Chemical Works Co. Ltd. was decided on the above premise. vii. It is not necessary that in all cases, once and for all payment would result in an enduring benefit, nor it is a firm rule that periodical payment would not carry with it an enduring benefit. viii. Mere payment of an amount in instalments does not convert or change a capital payment into a revenue payment. Similarly, lumpsum payment can represent revenue expenditure if it is incurred for acquiring circulating capital though payment is made once and for all. Likewise, payment made in instalments can be for acquiring a capital asset, the price of which is paid over a period of time. Therefore, what is relevant is the nature of the original obligation and whether the subsequent payment made in instalments relates to or has a nexus with such original obligation or not. Where the subsequent payments, are towards a purpose which is identifiably distinct from the original obligation of the assessee, the same would constitute revenue expenditure. However, where each of the successive instalments relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of a capital asset, vide Travancore Sugars and Chemicals Ltd.; Mewar Sugar Mills Ltd. 20.1. The decision of this Court in Gotan Lime is highly instructive while attempting to draw a distinction between payment made to acquire a right, and payment of royalty for use of a right or asset. In the said case, this Court considered the issue as to the classification of the annual payment made by the assessee therein, in lieu of the right to excavate limestone in a certain area. This Court, while holding that the payment in question therein was revenue expenditure, reasoned that the payment was not for securing an enduring advantage but was a royalty payment in order to obtain raw material and hence, a revenue expenditure. The pertinent observations of this Court are extracted hereinunder: "We are of the opinion that in the present case the royalty payment is not a direct payment for securing an enduring advantage; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment; but the fact that there is no lumpsum payment here cannot by itself lead to the conclusion that yearly payments to be made under the mining lease have rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of the asset and not for its acquisition. In such cases, the payment of royalty, has no relation to the capital value of the asset authorised to be used. 21. In our view, the following considerations are immaterial in determining the question, as to, whether, a payment is a capital disbursement or in the nature of a revenue expenditure: i. Lump-sum and periodical payment: Lord Greene in Inland Revenue vs. Williams, 11 ITR Suppl. 84 famously remarked, "There is no magic in the distinction between a lump-sum and periodic sums". That the expense is a periodic expense or a lumpsum payment is immaterial for the purpose of determining its nature. A lump-sum payment may be revenue expenditure, for instance, when it represents the commutation of a series of annual revenue payments; and a recurring periodic payment may be capital expenditure, for instance when it represents the payments by instalments of a capital sum, vide Assam Bengal Cement Co. Ltd. ii. Magnitude of payment: The magnitude of a disbursement is immaterial for the purpose of determining its nature, for, magnitude is a relative term, vide Prendergast vs. Cameron, 8 I.T.R. Suppl. 75 (HL). iii. Entries in books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset, or by contrast, relates to the working of an asset to produce profits; whether the consideration payable towards the acquisition or expansion of a capital asset has simply been chopped up into smaller sums payable in instalments, for the sake of convenience. The dictum of this Court in Pingle Industries Ltd., is relevant in this regard. 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 the assessee's trade. According to this Court "it was really the entire sum chopped into small payments for his convenience." Hence, the amount could not be described as a business expense, because the outgoings every month were not to be taken as spent over purchase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words in a judgment must not be construed in the same manner as those in a legislation. Hence, it is neither wise nor suitable to extend the dictum of one case, premised on the facts of the said case, to another fact-situation which is seemingly similar but not really so. This is particularly so when there is no precedent which has been rendered in an identical fact situation, as is the case in the instant matters. 23.1. In such situations, the solution may not be found in any one precedent. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, while some to the other. It is an appreciation of all guiding factors, premised in common business sense, which must provide the ultimate answer, rather than mere analogy or comparison. It is with such an approach that we shall proceed to consider the facts of the case at hand in light of certain precedents referred to or/and relied upon by the High Court of Delhi as well as those cited at the Bar. 23.2. We also wish to refer to the dictum of the King's Bench Division in Commissioners of Inland Revenue vs. Ramsay, 20 T.C. 79. The facts of the said case were that the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -sum or in annual instalments dependent on the AGR, would be in the nature of capital disbursement(s). 23.4. This conclusion is also consistent with the view of this Court in Pingle Industries Ltd., wherein by a majority of 2:1 held that the payment, towards acquisition of a long-term lease to win mine stones, though periodic, was neither rent nor royalty but a lump-sum payment in instalments for acquiring a capital asset of enduring benefit to trade. This Court refused to hold that the periodic payments were towards purchase of stones, but instead opined that the payments were in discharge of a singular original obligation to the jagir. Therefore, it emerges that where the periodic payments are referrable to or have a nexus with the original obligation undertaken by the assessee as consideration for acquisition of a right, the periodic payments would be in the nature of capital expenditure, notwithstanding the fact that they are payable as a percentage of profits, gross revenue or sales. 24. Hence, we are of the considered view that in the present case, since the entry fee as well as variable licence fees are traceable to the same source, they would both have to be held to be ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst transaction related to the compensation paid by the principal for the termination of agency business, while the second was with respect to the payment made towards the non-compete clause. On the first aspect, namely, the compensation received for the loss of agency, it was held that what would be determinative was whether loss of agency would affect the entire business structure, resulting in a loss of enduring nature, or, whether it was a loss due to an ordinary incident in the course of business. If it was the former, it would be capital, and if it was the latter, it would be revenue in nature. It was concluded vis-à-vis the first transaction that the loss of the said agency by the assessee was only a normal trading loss and therefore the income received in this regard was a revenue receipt. As regards the non-compete clause it was held that the same was a restrictive covenant and was therefore, capital in nature. In paragraph 14 of the judgment of this Court, it was recorded in unequivocal terms that the "compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt." Therefore, Best and Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue expenditure: i. That payments calculated as a certain percentage of profits of a business for an indefinite period of time as royalty cannot be treated as payments by instalments of a capital sum; ii. The payment of royalty was related to the future profits of the assessee and had no nexus with the capital sum. In the said case, there are clear findings to the effect that the payment of royalty in instalments, in the absence of any definitive duration, cannot be linked to the right to carry on trade. That the payment of royalty had no nexus with the capital sum. However, in the present case, it cannot be said that the variable licence fee payable annually has no nexus with the acquisition of the capital asset, i.e., the licence to render telecom services, as, it is the payment of entry fee as well as the variable licence fees which together enable the assessees to carry on the said business. Hence the aforesaid case would not apply to the present case having regard to its distinct facts. 24.5. Sri Datar has also sought to rely upon the decision of this Court in Mewar Sugar Mills Ltd. However, we do not see how this judgment would bolster up the respondents' case. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We answer the said question in the negative, against the assesses and in favour of the Revenue for the following reasons: i. Reliance placed by the High Court on the decisions of this Court in Jonas Woodhead and Sons and Best and Co. and the decision of the Madras High Court in Southern Switch Gear Ltd. as approved by this Court appear to be misplaced inasmuch as the said cases did not deal with a single source/purpose to which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, this Court held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act is a single licence to establish, maintain and operate telecommunication services. Since it is not a licence for divisible ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. vi. Further, it is to be 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. 26. As per the Policy of 1999, there was to be a multi-licence regime inasmuch as any number of licences could be issued in a given service area. Further, the licence was for a period of twenty years instead of ten years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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