IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E" NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
&
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
I.T.A. No.7541/DEL/2017
Assessment Year: 2014-15
Telenor (India) v. ACIT, Circle-25(1),
Communications Pvt. New Delhi.
Ltd., New Delhi.
TAN/PAN: AAECT 1511C
(Appellant) (Respondent)
Appellant by: Shri G.S. Agarwal, Sr. Adv. &n
Shri K.M. Gutpa, Adv..
Respondent by: Shri S.S. Rans, CIT(DR)
Date of hearing: 29 08 2018
Date of pronouncement: 26 11 2018
ORDER
PER AMIT SHUKLA, J.M.:
The aforesaid appeal has been filed by the appellant
assessee against impugned order dated, 30.11.2017, passed by
Ld. CIT (Appeals)-23, New Delhi for the quantum of assessment
passed u/ 143(3) for the Y 2014-15.
2. In the aforesaid appeal, the appellant has raised as many
as eight grounds of appeal, however the said grounds relates
mainly to the two additions made and sustained of sums of Rs.
ITA No.7541/Del/2017 2
1558.57 crore made on account of short term capital gain; and of
Rs. 220.80 crore on account of unearned revenue for the AY
2014-15.
3. Since, the major controversy involved in this appeal pertains
to an addition made of Rs 1558.57 crores, by way of short term
capital gains, we consider it appropriate to consider and
adjudicate the said controversy first. The background and facts
in brief leading to making of an addition of the aforesaid sum by
way of short term capital gains are being recapitulated here as
under:
3.1 The assessee company was incorporated on 24.02.2012 as,
"M/s Telewings Communications Services Pvt. Ltd." which is a
part of Telenor Group. The appellant was engaged in the business
of providing telecommunication services. The assessee is a
subsidiary of Telenor South which held 74% of shareholding of in
the assessee company. The appellant and M/s Unitech Wireless
(Tamilnadu) Private Limited are group companies of the foreign
parent company namely, Telenor ASA (in which Government of
Norway held majority shares) (`Telenor Group'). M/s Unitech
Wireless (Tamilnadu) Private Limited (herein after referred to as
`UW'), an Indian company, was engaged in the business of
providing telecom services in India. It had been stated that the
majority shares of UW were held by Telenor Group which is a
Norway based company engaged in the telecommunication
business. In the year 2008, "UW" and its affiliates had been
granted 22 unified access service licenses (`UASL') by Department
of Telecommunications (`DoT') in 22 circles against a payment of
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one-time non-refundable entry fee of Rs. 1658.57 crores. In
respect to the licenses as aforesaid granted, agreements had been
entered between UW and its affiliate companies on one hand and
President of India (acting through DoT) on the other hand. The
licenses had been granted as per Indian Telegraph Act, 1885 in
22 circles were for a period of 20 years.
3.2 Thereafter, the Hon'ble Supreme Court of India in a Public
Interest Litigation, vide its judgment dated 02.02.2012 quashed
all of the 122 licenses granted by the Government of India in
2008, including 22 licenses as had been granted to UW. The Apex
Court, however, by its subsequent orders, had allowed the
operation of such licenses till February 15, 2013 by passing
interim orders in the interest of subscribers/customers and
directed TRAI to make recommendations for the grant of fresh
licenses and allocation of spectrum in 2G Band in 22 service
areas by auction as was done in allocation of spectrum in 3G
band. It had further directed the Central Government to consider
the recommendations of TRAI and take appropriate action within
next one month and fresh licenses be granted by auction.
3.3 After the licenses were quashed, the Telenor Group
participated in the fresh auction initiated as per the directions of
Hon'ble Supreme Court through its affiliate, the appellant
company, which had been incorporated on 24.2.2012. In
pursuance to the directions issued by the Apex Court dated
02.02.2012, the Government of India, through DoT issued a
public Notice Inviting Applications (NIA) for the grant of fresh
licenses to eligible telecom operators through an auction. In the
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aforesaid auction, the appellant participated and became
successful bidder when its bid amount was accepted in 6 circles
for an adequate consideration of Rs. 4018 crores. On being
successful bidder, it claimed a set off of Rs 1657.58 crores which
represented the sum paid by UW for obtaining licenses in 22
circles as non-refundable entry fee in the year 2008. The
appellant thus made a claim of a set-off of the said sum. This set-
off was made in view of a response to a query no. 74 published by
the Government of India on 12.10.2012 in respect of the fresh
auction so initiated. The query and response thereto as placed
before us in the paper book and also extensively referred to is
extracted here below:-
Query Response
The original entry level Pan India A set off is allowed against the
license fee of Rs. 1506.82 crore (along Earnest Money and the payment
with interest from the date of due in the event of spectrum
payment of such license fee) which being won in this auction. The
was paid for acquiring the licenses, total amount of such set off shall
which are quashed by the Hon'ble be limited to the total entry fee
Supreme Court for no reason paid by the entity for all its
attributable to a licensee, should be licenses which have been
allowed to be set off against the quashed by the Supreme Court.
earnest money required to be paid for No interest will be due on this
participating in the new auction and amount.
against the successful bid amount in
the event of a successful bid. In the
event there would be any shortfall in
the money required to be paid by xxx
on successful bid and the license fee
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Query Response
already paid to you in respect of the
quashed 21 UASL, xxx shall
obviously pay such additionally.
3.4 It was pointed out before us that, earlier to the fresh
auction, the appellant and Telenor Group also addressed several
letters to DoT seeking clarification in respect of the transfer of
business of UW to the appellant and also seeking a set-off of non-
refundable entry fees paid by UW to the appellant, in the event of
the appellant being successful in obtaining the licenses under the
fresh auction. On 05.11.2012, DOT in response, modifying its
earlier clarification dated 12.10.2012, observed that group
companies are eligible to participate in auction and would be
considered for transfer of the business of cancelled licensees, if
they become successful in obtaining licenses under fresh
auction. The relevant extract of the aforesaid communication was
as under:
"Upon completion of transfer of business from a holder of
quashed license to a winning bidder in accordance with
extant law, the response to query No. 23 will be applicable
to the transfer to such winning bidder provided that holder
of quashed License and winning bidder are controlled by a
common entity with not less than 26% shareholding in both
entities directly or indirectly, provided that such transfer is
in accordance with law and in line of Supreme Court Order
in 2G case"
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3.5 On 14.11.2012, the Appellant Company participated online
in the fresh auction and became successful in obtaining
spectrum licenses in respect of six circles for an aggregate
consideration of Rs. 4018.20 crores. Pursuant to such an
auction, the appellant was to make an upfront payment of Rs.
1326.03 crores by 01.12.2012 to DoT in respect of such six
spectrum licenses and the remaining sum was to be paid
subsequently in instalments. The appellant by its letter dated
23.11.2012 requested DoT to set-off of non-refundable one-time
entry fee of Rs. 1658.57 crores paid by UW against the upfront
fee so payable and adjust the balance amount against the
subsequent instalments. However, there had been no response
from DoT on the aforesaid request made by the appellant. The
appellant however made a payment of on 01.12.12012 of upfront
fee of Rs. 1326.03 crores, under protest with a request to DoT, to
allow the set off of the entry fee paid by UW and refund of the
excess amount to appellant. After obtaining the licenses under
fresh auction, appellant however entered into two agreements on
06.12.2012 with UW for acquiring the business of UW as a going
concern, i.e., (i) Business Transfer Agreement (BTA); and (ii)
Actionable Claim Agreement. Under the business transfer
agreement, the appellant acquired the entire right, risk and
interest of UW in its business as a going concern, other than
"excluded assets" and "excluded liabilities". "Excluded Assets and
liabilities" were defined in the BTA. `Excluded assets' did not
include all the UASLs etc. which were either incapable of being
transferred or which may be transferred with consent, but such
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consent had not been received on or before the completion date.
The relevant extract of the agreement was as under:
"(a) All the UASLs, ILD license, NLD license and any other
statutory license acquired by the seller in the due course of
business which are either (i) incapable of being transferred, or (ii)
which may be transferred with consent, but such consent has not
been received on or before the Completion Date.
(b) Spectrum allotted to the seller by the DoT in each circle;
***
(e) all causes of action (including counterclaims) and defences
against third parties relating to any of the Excluded Assets or the
Excluded Liabilities as well as any books, records and privileged
information relating exclusively thereto (the Excluded Claims)."
3.6 The appellant, as noted above had also entered into another
agreement namely, "Actionable claim agreement", wherein UW
had agreed to transfer actionable claims, i.e. including the set off
of the license fee, which in principle, was expected to be allowed
by DoT to cancelled license holder entities who acquired licenses
in the fresh auction conducted in November 2012. The queries of
the appellant to DoT with respect to the eligibility of the set off of
license fee remain unanswered by DoT and thus, in the preamble
to the actionable claim agreement, the same has been recorded
by the parties. Relevant extract form the preamble to the
actionable claim agreement reads as under:-
"(D) The DoT has in the document entitled queries and
responses dated 12 October, 2012 to the Notice Inviting
Applications dated 28 September, 2012 (NIA), permitted a
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set off of the license fee paid by entities whose UASLs stand
quashed pursuant to the Supreme Court Orders, against
the earnest money and the payments due in the event of
spectrum being won in the recently concluded 2G auction
(Spectrum Auction). Further, the DoT has, by way of an
amendment dated 18 October, 2012 to the NIA, prescribed
the format in which details of the license fee paid by entities
whose UASLs stand quashed are to be specified in the
application form for participating in the Spectrum Auction.
****
(F) Unitech Wireless did not participate in the Spectrum
Auction and will have no future operations effective 18
January 2013 as a result of which Unitech Wireless will not
be able to claim the benefit of the set off of License Fee
which has been permitted by the DoT. Further, the business
of Unitech Wireless to be transferred to Telewings as a
result of which Telewings will be entitled to claim set off of
the License Fee against payments being made it to the DoT
(Set Off). The parties have agreed that Telewings shall pay
fair consideration, which has been computed on an arm's
length basis to Unitech Wireless for facilitating such
entitlement and the parities. Therefore, wish to execute this
agreement to record the terms thereof"
3.7 Under the actionable claim agreement, UW transferred all
the rights, claims, demands, cause of action or all other rights
against the DoT (including the payment of license fee) to the
Appellant. The relevant part of the agreement reads as under:-
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"All claims judgments, demands, lawsuits, causes of action,
choses in action, rights of recovery and other rights of Unitech
Wireless, whether arising under tort or contract, arising under or
in connection with all warranties and representations , implied
or express, all actions , indemnities and guarantees against the
DoT relating to the grant by the DoT of the UASLs to Unitech
Wireless and the payment of the License Fee for the UASLs
granted to Unitech Wireless by the DoT in 2008 shall together
constitute Actionable"
3.8 The consideration for transfer of such actionable claim had
been agreed at 50% of the amount of set off allowed to appellant.
It was also stated in the said agreement that, if the DoT rejects or
fails to provide its approval on the set off of license fee to the
appellant by 18.01.2013, the Actionable Claims shall be
transferred back to UW and the agreement shall expire. On
06.12.2012, the appellant intimated the DoT about the execution
of the BTA and Actionable claim agreements and requested DOT
to grant an approval for the implementation of business transfer
and also to allow a set-off of entry fee paid by UW to the appellant
it being successor-in-interest of UW. On 11.11.2013, DoT
addressed a letter directing the appellant and UW to provide an
indemnity bond and undertakings for approval of business
transfer agreement. The DoT specifically sought an undertaking
by the aforesaid communication that, with respect to licenses
quashed by the order of Hon'ble Supreme Court, all the dues of
DoT would be paid and cleared in terms the licenses and all
undischarged liabilities of UW shall be discharged / paid by the
appellant. Both the parties, as had been directed, furnished the
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undertakings and the indemnity bonds as per the directions of
DoT and on 27.11.2013, DoT granted the approval for transfer of
UW business to appellant. DoT, however, did not respond in
respect of the set off of licenses fee paid by UW.
3.9 One important fact as which is quite pertinent is that,
parties having given their undertakings as aforesaid, both the
parties decided to revive the actionable claim agreement, which
had expired since DoT had not allowed the set off of license fee to
appellant. The parties amended the actionable claim agreement
by way of a letter dated 30.12.2013 on account of additional
liabilities assumed by the Appellant and duly recorded the same.
Pursuant to the same, the consideration for transfer of actionable
claim was reduced to partially offset the additional liabilities
assumed by the appellant. Under the revised agreement, the
consideration was modified as 50% of the amount of set off
allowed or Rs. 100 crores whichever is less.
3.10 On 31.03.2014, after protracted communications between
the appellant and DOT, Ministry of Communication and IT, it was
intimated to the appellant that the entry fee paid by M/s Unitech
Wireless (Tamilnadu) Pvt. Ltd. has been set off against the
payable bid amount for winning spectrum by M/s. Telewings
Communications Services Private Limited. The appellant in its
books of accounts prepared under the Companies Act had
reflected the amount of set off as a capital reserve. However, for
the purposes of computing income under the Income tax Act, the
amount by which the license fee had been set off had been
reduced from the cost of licenses allotted to it. On the said
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reduced cost, the appellant had claimed depreciation. One of the
appellant's submission both before the Ld. Assessing Officer as
well as before the Ld. CIT (A) was that, by the amount of set off,
the license fee payable by it stood reduced which had reduced the
cost of licenses. The appellant further contended that the set off
was allowed to it not because it had any right in it but on the
principle of equal restitution when the Government took a policy
decision. This contention of the assessee had been supported by
"Report No. 55 of 2015" of the Comptroller and Auditor
General of India which had been tabled before both the Houses
of Parliament. In the said report, it was submitted before us that
in the said report CAG had itself held that M/s Telewings
Communications Services Private Limited had no right on set-off
from the earlier licence paid which was cancelled by the Hon'ble
Supreme Court. The appellant's alternative submission before the
AO was, the amount of set off was a capital receipt since the set
off allowed, was in the nature of concession and had not resulted
by way of independent business transaction.
4. The learned AO however held that on the execution of
business transfer agreement, does not give rise to a taxable event
during the year in the hands of the assessee company but
execution of the actionable claim agreement gave a rise to a
taxable event. He held, that the appellant had acquired all the
rights, title, risk and interest of UW against DoT by entering into
an actionable claim agreement which included a right of set off of
the entry fee of Rs. 1658.57 crores, which sum had been paid by
UW to DoT for acquiring 22 licenses in the year 2008 against the
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payment to be made to DoT for acquiring spectrum in an auction
conducted in November 2012. It was held by him that any right
acquired under the agreement constitutes a `capital asset' within
the meaning of section 2(14) of the Act. He thus held that the
appellant company had acquired a right to set off of the entry fee
paid of Rs. 1658.57 crores, by UW to DoT, against any payment
to be made by it upon its being successful bidder in the auction
conducted in November 2012. He further held that the aforesaid
capital asset, i.e., right had been acquired by the appellant on
06.12.2012 for a consideration of Rs. 100 crores or 50% of the
value of set off permitted by the DoT. Having held that the
appellant had acquired a capital asset, he further held that the
said right to set off was exercised by the assessee company on
31.03.2014 being the date, under which the set off was allowed
by DoT. Consequently, he held that consequent to the set off,
capital asset acquired by the appellant was extinguished and
thus there was a `transfer' of a capital asset within the meaning
of section 2(47) of the Act. In view thereof, he held that since the
asset acquired by the assessee, before it got extinguished, which
asset had been held by it for a period less than 36 months, and
that the said capital asset constituted a short term capital asset
within the meaning of section 2(14) of the Act. AO held that the
difference between the cost of acquisition and the full value of
consideration constituted capital gain liable to be assessed in the
hand of the assessee.
5. The assessee, being aggrieved, preferred an appeal before
the learned CIT (A) against the said order. The learned CIT (A)
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negated the various contentions raised by the appellant before
him and held that the approach of the AO to bring to tax the
aforesaid sum being in accordance with law, there is no infirmity
in his order. However, he held that for the purposes of calculating
depreciation, the AO had erred in not adopting the cost of
acquisition at Rs. 4018.20 crores instead of the sum considered
by the appellant which was a sum after reducing the cost of
acquisition by the amount of set off allowed to it by DoT. He
further in the alternative also held that the acquisition of right to
set off of the license fee and subsequent set off allowed by the
DoT against the license fee payable for fresh licenses, is
adventure in the nature of trade and commerce and it is covered
u/s 28 of the Act and as such is taxable under the head profits
and gains from business and profession.
6. Before us, learned Senior Counsel Mr. C. S. Aggarwal ahd
not argued the case at length not only orally but also in writing
which briefly are set out as below:-
(a) There existed no right of set off with UW. It had been
submitted that UW had in the year 2008 paid onetime non-
refundable entry fee and soon the licenses got cancelled, all
rights, title and interest in the said licenses got terminated
with no right of refund to it. This is well demonstrated from
the agreement entered into by the appellant with DoT. He
contended that the learned CIT (A) has erred in his order
when he observed that there was no agreement entered into
between UW and Government of India, which is factually
incorrect.
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(b) That the appellant on 06.12.2012 had entered into two
agreements. Under the business transfer agreement, it had
acquired the business operations of UW as an ongoing
concern and the amount of set off arose on acquisition of
business and has no separate, independent existence. It
was however explained that the amount of set off was not
granted to it by way of any right, title and interest therein
but on the principles of restitution and as such the finding
that the appellant had acquired any right of set off itself is
misconceived.
(c) Thirdly, it was contended that the alleged right of set off
could not be termed as either short term capital asset or a
business receipt since the set off of the license fee was
allowed by way of policy decision of the Government of India
and was based on the principles of right to equal restitution.
(d) The next submission of his was that, the actionable claim
agreement had only permitted it to exercise its legal remedy
for enforcement of claims and counter claims with DoT. In
such event the appellant had merely acquired right which is
in the nature of right to `sue' and no more. It was further
submitted that right to sue is not a capital asset and as
such there being no right which could be regarded in the
nature of capital asset.
(e) It was further submitted by him that even assuming and
without admitting that the same agreement namely
Actionable Claim Agreement, is an independent contract, in
that event also amount of set off allowed could not be taxed
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in the year under consideration since the agreement had not
been culminated in as much as only one of the transaction
has been completed and other remains yet to be settled
between the DoT and the appellant. It was further
submitted that the final taxability of gain or loss, if any,
could be considered in the year in which all the claims and
counter claims are settled by the DoT and not in the
piecemeal manner. It was further submitted that the
exercise of alleged right of set off of license fee is not in the
nature of extinguishment which constituted transfer within
the meaning of section 2(47) of the Act.
(f) He also brought to our notice, the report No. 55 of 2015 of
CAG which had been tabled before the Parliament wherein it
had been stated by the CAG that no set off of non-
refundable entry fee was permissible to the appellant on the
grounds that the setoff would be permitted only to the
quashed license holder participating in the auction and
since the appellant was not the quashed license holder, set
off of entry fee paid by UW (quashed license holder) against
the payment due from the appellant was not as per approval
of empowered group of Ministers.
(g) It was further contended by him that the appellant had not
acquired any right to claim a set off which right of set off
could only be acquired by it from the Government which
alone was capable to grant such a set off had been allowed.
(h) That the amount stated to have been set off was an amount
waived off by the Government in part and not that the
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appellant had acquired any right in capital asset which
could have been transferred by it.
(i) The learned Counsel further submitted that in the absence
of any enforceable right in law to claim refund or set off
being in existence been with UW, no capital asset much less
stated to have been held by the UW, it could not have been
held by the revenue, that the assessee had acquired any
right of set off. He had emphasized that the right must be
such a right which is enforceable in law. He contended that
there being no enforceable right of set off with UW, in law,
as such set off allowed in any case cannot be equated with
any right which was in the nature of capital asset held by
UW and was acquired by the appellant under an actionable
claim agreement.
(j) It was next contended by him that UW had ceased to have
any proprietary right upon cancellation of the licenses by
the Supreme Court on 02.02.2012 and that the license
holders were not owners but merely held licenses to exploit
the same and ownership remains with DoT. This
submission was supported by the provisions contained in
Section 4(1) of Indian Telegraph Act, 1885 under which the
licenses were granted in the year 2008. In view thereof the
agreement entered by it on 06.12.2012 between the
appellant and UW, there was no capital asset held by UW
which could be regarded as an actionable claim.
(k) Further, the actual cost of license fee borne by the appellant
was as a result of unilateral action of DoT, when DoT
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bestowed the said set off in favour of the appellant and as
such set off could only reduce the amount of license fee
paid. In support he cited the judgment of the High Court of
Delhi in the case of Steel Authority of India vs. CIT,
reported in 348 ITR 150.
7. In short, his contentions were that the AO and CIT(A) both
have erred on facts and in law in concluding the appellant had
acquired any right which right got extinguished and thus there
arose a capital gain liable to be assessed as short term capital
gain. The aforesaid submission was made apart his further
contention that the assessee had not entered into any venture in
the nature of trade, so as to hold that income accrued to it by
way of business income. In support he relied on the judgment of
the Supreme Court in the case of Shrimant Padmaraje R.
Kadambande vs. CIT reported in 195 ITR 877. He had further
alternatively contended that even if it is held that the appellant
had acquired a capital asset, there can be no computation of
capital gain, since the set off i.e. concession provided by the DoT
was under a policy decision of Government of India had not been
extinguished. The ld. Senior Counsel also provided the details of
the treatment provided by it in the books of accounts and the
basis thereof. It was his contention that mere fact that it had
paid Rs. 100 crores as consideration, cannot by itself be regarded
as valid ground to hold that it had acquired any capital asset
when there existed no capital asset with UW.
8. Elaborating its first contention, the ld. Senior Counsel
submitted that upon cancellation of the licenses by the order of
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Apex Court, the licenses allotted to UW in 2008 stood quashed
and all the rights, title and interest in the said licenses were
terminated. As per the terms of the agreement between UW and
DOT, the one-time entry fee paid by UW in respect of such
licenses was non-refundable. Further, there being no provision,
under the agreement, for claiming of a refund or set off of such
entry fee. It could not been held that there was any vested right
with the license holders to seek either a set off or a refund
thereof. Accordingly, there being no right with UW to claim a set
off or refund of such entry fee from DOT, which could be stated
to be enforceable in law. The Hon'ble Supreme Court in its order
dated 02.02.2012 had neither dealt with issue of the Entry Fee
paid to Government of India by those 122 License holders nor it
had dealt with process of claiming the refund of such amount or
adjustment, if any, which is to be made in future in respect of
spectrum fee deposited by license holders. Further, it is evident
from the various press releases, notifications issued by the DOT
that no party had any inherent or vested right to seek refund or
set off of entry/spectrum fee of quashed licenses.
9. During the course of hearing, we had asked the Ld. Senior
Counsel about the treatment of non-refundable license fee paid
by the erstwhile cancelled license holders. In response, it was
submitted by him that as per the information available in public
domain that, refund claim had been rejected by the DoT
specifically in the case of M/s Loop Telecom Limited which also
not found favour from Telecom Dispute Settlement & Appellate
Tribunal (`TDSAT'). In view of the above, it was submitted by him
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that UW had no right of a claim of refund of the one-time non-
refundable entry fee paid in respect of the 22 licenses.
Accordingly, it was submitted by him that it cannot be contended
by the Revenue that UW had any right, which was enforceable in
law whatsoever in the entry fee paid by it and as such, it had
transferred such an alleged right of set off to the appellant under
the actionable claim agreement.
10. Regarding the observation made by ld. CIT (A) in its order
that there was no contract between UW and GOI as per Indian
Contract Act 1872, he submitted that the aforesaid finding was
based in disregard of the agreement entered between UW and
DOT dated 29.02.2008 which had been completely overlooked by
the ld. CIT (A) nor did he attempt to call for such a document i.e.
agreement from the appellant. He submitted that whenever a
license is granted, there has to be necessarily an agreement
between the licensor and licensee as per law. However, such a
license has been placed by the assessee on record. Accordingly,
the observations made by the Ld. CIT (A) were factually incorrect.
11. The second submission of the Senior Counsel was that set
off had been allowed to the appellant on the basis of principle of
equal restitution as a policy decision taken by the Government of
India and thus in pursuance to the overall acquisition of
business of UW as an ongoing concern and it had no separate
independent existence. Both the agreements (BTA and actionable
claim agreement) were entered by the appellant and UW on same
date for transfer the business of UW in a seamless manner so as
to maintain the continuity of services to the customers of UW.
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The intent of the parties was that entire business, customers,
employees etc. of UW including claims and counter claims of
third parties and DoT for the period in which the cancelled
licenses are in operation to be acquired by the appellant with
approval of DoT. Due to regulatory norms and commercial
reasons, the part of the DoT's claims over UW and UW's claim
over DoT were kept under the agreement of actionable claims
though the same were part of the overall business operations
which had been transferred to the appellant. In effect, both the
agreements were composite and integral to each other which
relates to the transfer of business with lock, stock and barrel
including contingent assets and liabilities of UW. Accordingly, the
set off allowed by DoT to the appellant is part of the overall
transaction of acquisition of business of UW and was not a
separate independent transaction which was in the nature of
acquisition of any capital asset.
12. The learned Senior Counsel had emphasized that the such
a set off was allowed by DoT to the appellant not by virtue of the
agreement entered with UW but as per the policy decision taken
by the Empowered Group of Ministers (EGoM) based on the
principle of equal restitution which was in the nature of a
concession bestowed upon it by the Government. It was
submitted by the Senior Counsel that the DoT in line with
directions of Hon'ble Supreme Court made fresh auction. It
further clarified its position on two fundamental issues i.e.
participation of the cancelled license holders in the fresh auction
as well as to allow transfer of business and customers to
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ITA No.7541/Del/2017 21
successful bidders including cancelled license holders if they
eventually succeed in fresh auction for those areas. The DoT
further issued clarification regarding participation of group
companies if they are held by the same parent company, directly
or indirectly. He had further contended that DOT at the time of
initiating fresh auction had not even assured the license holders
whose licenses were quashed, that they will be eligible for a
refund or set off of the license fee paid by them. Even the NIA
also did not so stated that any set off is allowable to the cancelled
license holders or any other group entity in the event, such
companies are successful in fresh auction. Subsequently, a
policy decision was taken by the Empowered Group of Ministers
(EGoM) in October 2012 based on which the DoT issued
clarification that the set off of the earlier license fees paid by the
entities would be adjusted against the earnest money and
subsequent payment due, if the same entities participate and are
successful in the auction. The amount will be limited to the total
licenses fees paid by the entities for UASLs that were quashed by
the Hon'ble Supreme Court. It was contended by him that UW
did not participate in the fresh auction. In fact it was submitted
by him that there was no clarity as regards to the amount of the
license fees paid by the license holders. The entities whose
licenses were cancelled and who successfully bid for the fresh
licenses, got the set off allowed from the government as a policy
decision taken by it. No refund of licenses fees has been granted
to any other entities whose licenses were cancelled and who have
not participated in the fresh spectrum auction. Considering that
a new entity (i.e. appellant) participated and won spectrum for
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ITA No.7541/Del/2017 22
Telenor Group, both UW as well as Telenor group represented
before DoT for allowing the set off to appellant. However, this was
completely contingent upon the final decision of DoT. In fact CAG
Report states that on February 23, 2013 a decision was taken by
the DoT that no set-off of this non-refundable spectrum fee would
be given to appellant. However, subsequently in the meeting
convened by the EGoM in March, 2013, a decision was taken to
permit the set off to the appellant. Therefore, in substance, the
set off was allowed to appellant not by virtue of the agreement it
entered with UW, but as per the policy decision of Government of
India. Accordingly, the amount of set off bestowed upon the
appellant by the Government of India is not in the nature of a
capital asset which could be transferred by UW or acquired by
the appellant under an agreement.
13. The Senior Counsel further submitted that the amount of
set off allowed by the DoT to appellant against the fresh spectrum
fee is not chargeable to tax as the same arose in the capital field
and on account of the reason that the appellant being successor-
in-interest in the business of quashed licenses of UW which had
been statutorily recognised by the DoT and Government of India.
Therefore, the amount of set off of Rs 1,658.57 crores from the
license fee payable by the appellant to DoT, was on account of
spectrum fee can alone be construed to be an amount that has
been borne by another person for the purpose of acquiring the
spectrum licenses which could only be considered as grant or
reimbursement of cost of fresh spectrum fee. Accordingly, the
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appellant had rightly reduced the same from the cost of fresh
spectrum fee.
14. Thereafter, the Senior Counsel placed reliance on
Explanation 10 to Section 43(1), and argued that by allowing the
set-off to appellant, the DoT has given a grant or reimbursement
of the license fee/ entry fee to appellant (which otherwise was
due to UW if it participated in fresh auction of spectrum).
Therefore, the cost of fresh spectrum fee is directly/ indirectly
met by the cost of spectrum to the extent of Rs. 1,658.57 crores
by way of grant or reimbursement. He relied upon the decision of
the Hon'ble Delhi High Court in the case of Steel Authority of
India Ltd. v. Commissioner of Income-tax [2012] 20 taxmann.com
198 (Delhi), wherein the Hon'ble High Court in para 13 has
summarised the correct and true position for insertion of
Explanation 10 to section 43 of the Act in the following words:
"...Apparently Explanation 10 was introduced to ensure
appropriate computation of actual cost of assets in case
subsidy is received. After the introduction of Explanation 10,
it is no longer possible to contend that the subsidy given by
the government, by whatever name called, cannot be reduced
from the actual cost of the assets in terms of Section 43(1) of
the Act for the purpose of allowing depreciation. But
Explanation 10 does not cover the case of waiver of the loan.
It covers only the grant of a subsidy or re-imbursement by
whatever name called. The case of the assessee may not,
therefore, fall under Explanation 10, but having regard to the
facts as found which we have alluded to earlier, the waiver of
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ITA No.7541/Del/2017 24
the loan amounted to the meeting of a portion of the cost of
the assets under the main provisions of Section 43(1) of the
Act. The waiver of the loan is not a mere quantification of a
subsidy granted generally for industrial growth. It was
granted specifically to the assessee and the assessee in its
books of accounts reduced the cost of the assets by the
amount waived. This reflected a contemporaneous
understanding of the purpose of the grant of the loan on the
part of the assessee. As already mentioned earlier, the
assessee is a public sector undertaking and the loan and the
later waiver were from the Government of India. The loans
under the SDF were specifically for meeting the capital cost of
the assets, on which depreciation was being claimed."
15. Accordingly, it had been submitted by him that the
amount allowed by the DoT to be set off with fresh spectrum fee
only had an effect to reduce the cost of spectrum allotted in fresh
auction, which resulted into reduction in the cost of spectrum
cost eligible for depreciation under section 32 of the Act. Thus,
the effect of the completion of the transactions under the
Business Transfer Agreement and Actionable Claim Agreement
that both had become part of the single transaction i.e. transfer
of the business of UW in favour of the appellant on going concern
basis. It had been further submitted that the appellant has
already reduced the amount of set off by claiming depreciation on
lower value and hence the amount in question cannot be held
chargeable to tax either as short capital gain or as an income
from business and the treatment accorded by the appellant for
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ITA No.7541/Del/2017 25
the tax purposes deserves to be accepted as proper and valid. His
submission was that the set off has been bestowed upon the
appellant by the Government of India as a policy decision taken
on the basis of principle of equal restitution and accordingly, the
same cannot be considered as a right acquired by the appellant
through an agreement which is in the nature of a capital asset.
The learned Senior Counsel has submitted that in case if it is
held that in the quashed licenses, UW had any such right then
such right was only right to sue and to seek damages by civil suit
which obviously was not an actionable claim. It was thus stated
by him that it is not correct to contend, as has been held by AO
and upheld by CIT (A) that the appellant had acquired any right
from UW which was separate and independent right under the
Actionable claim agreement. Accordingly, the submission of the
Senior Counsel was that there is no capital asset in the nature of
right to claim refund or set off which can be transferred by UW to
the appellant under BTA or the actionable claim agreement.
16. Based on the aforesaid, the ld. Senior Counsel submitted
that there being no enforceable right either under contract or
statutorily, as per which UW could seek a refund or set off the
amount of one-time entry fee so as to enable the appellant to
have acquired any such right from UW under an actionable claim
agreement. It was submitted that the Ld. CIT (A) in his order has
also held that the appellant had earned an income and such an
income is an income being adventure in the nature of trade. With
regard to the aforesaid finding, it was submitted that the set off
has been granted from the license fee payable by it to DoT and
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ITA No.7541/Del/2017 26
the said sum of set off has not resulted into any business
transaction entered by it with DoT. The said sum of set off so
allowed was in the nature of mere waiver or concession from the
license fee payable and cannot be held to be an income much
less business income. The assumption of the revenue that the
assessee had carried on any activity which had resulted into
earning of income is highly hypothetical and illusory. In the
instant case the assessee has received no sum directly or
indirectly. It had not entered into business transaction or any
transaction with DoT in respect of such amount so waived and
had been set off by DoT on the principle of equal restitution.
17. Further, it was submitted that the appellant is not in the
business of trading of UASL. Further, the DoT guidelines
applicable at that time did not permit trading/sharing of
spectrum with pre-approval from DoT. It was privy only to the
Appellant and the Appellant alone could use it to render
permitted telecom services. Thus, the right of set off against the
spectrum fees cannot, by any stretch of imagination, be
construed in the revenue field or sum chargeable to tax under the
head PBGBP. It has been held by the Apex court in number of
cases that to determine the nature of receipt (i.e. either capital or
revenue), it is important to carry out a purpose test i.e. a purpose
for which the amount is being received by an assessee. The
Learned Senior Counsel placed reliance on the case of CIT v.
Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392 (SC). The
purpose of such set off is merely to obtain benefit in the capital
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field and that is allowed by the Government voluntary by taking
policy decision.
18. The proposition that, whether the sum is receipt in the
nature of capital or revenue is well defined, i.e., as a general rule,
a receipt is capital in nature when it is relatable to fixed capital
and on the other hand, revenue receipt is a receipt when it is
relatable to circulating capital. In the present case, the entire
expenditure incurred by the appellant under the Business
Transfer Agreement and Actionable Claim Agreement was
incurred out of fixed capital to acquire and create capital asset on
infrastructure that was to be provided before the commencement
of the business. Therefore, any receipt arising from the same
expenditure, would be of capital nature and would be reduced
from the capital cost of the appellant so acquired and not in
nature of income arising from the business as held by the Ld.
CIT(A) in its order.
19. His next submission of Mr. Aggarwal was that since UW
does not have any right in the one-time license fee paid, what has
been transferred through the actionable claim agreement was
merely a right to sue/claim damages which itself is not a capital
asset. It was submitted that upon cancellation of licenses by the
Hon'ble Supreme Court, the UW does not have any right,
whatsoever, in the entry fee paid in respect to the 22 licenses
allotted by DoT in 2008. As per the terms of UASL agreement
between UW and DoT, the amount of onetime entry fee paid by
UW is non-refundable and therefore, the sum payable by UW was
neither refundable nor could have been refunded since neither
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ITA No.7541/Del/2017 28
UW had any right, title or interest in the said license fee paid nor
it could have transferred the same to the appellant. Therefore,
the appellant had not acquired any right to set off the license fee
paid by UW under the actionable claim agreement which is in the
nature of a capital asset as per the provisions of the Act.
Reference was also made by him to Section 3 of Transfer of
Property Act, 1882 (T.P. Act), which defines actionable claim as
under:
"actionable claim" means a claim to any debt, other than a
debt secured by mortgage of immovable property or by
hypothecation or pledge of movable property, or to any
beneficial interest in movable property not in the
possession, either actual or constructive of the claimant,
which the Civil Courts recognize as affording grounds for
relief, whether such debt or beneficial interest be existent,
accruing, conditional or contingent."
It was contended that, since the amount paid by the UW was
non-refundable as such, same does not bear the character of
debt, and hence the sum paid by the UW to DoT would not be
actionable claim. Also, UW had no beneficial interest in movable
property and the amount paid by it to DoT was non-refundable
and on the quashing of the licenses, the said fee paid became
non-existing asset and was thus not transferrable. As such in the
absence of UW had any interest in a movable property, there
could have been no agreement of transfer and any such
agreement was void. The mere fact that there was some
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negotiation going on between the appellant and UW and
possibility of Government decision on said issue, there exist no
right which was transferrable and as such in the absence of any
right being in existence there could have been no right acquired
by the appellant nor could there have been any transfer made by
UW. The letter dated 31.03.2014 merely shows that DoT on its
own volition had set off the entry fee paid by UW against the
payable bid amount by the appellant company when it directed
the appellant that, the amount equated annual installment of Rs.
200,45,84,952/- will be paid. It was a mere concession given by
the Government and there was no right, title or interest had been
acquired by it from UW as an asset which was transferrable. In
short, the learned Senior Counsel for the appellant contended
that the amount of non refundable sum as a license fee paid by
UW to DOT was not a debt owed by DOT towards UW.
20. He further supported his submission when he sought to
place reliance on the judgement in the case of Bancharam
Majumdar v. Adyanath Bhattacharjee (1969) 36 Cal 936 where it
has been laid down that a "debt" is a sum of money which is now
payable or will become payable in future by reason of a present
obligation. Debt is nothing more than the benefit of an obligation
to pay money. It is in law as in fact a very different thing from a
sum of money in a man's own possession. The appellant claimed
that though it entered into an actionable claim agreement with
UW for transfer of all the claims, judgements, demands etc. as
well as right to represent UW with respect to the forfeited amount
of spectrum fee by UW, the agreement merely gives the appellant
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the right to seek legal remedy for compensation/refund/set off of
one time spectrum fee paid by UW based on the principle of
Restitution as well specific performance. The sequence of events
stated also highlighted that due to intervention of the Court, the
licenses allotted by DoT were cancelled and DoT/Government of
India failed to fulfil its obligation to allow the access of spectrum
licenses for 20 years. The remedy available with the appellant is a
legal remedy which can be exercised within the framework of law
which includes right to sue for compensation/damages against
the DoT in appropriate Court.
21. Mr. Aggarwal also contended that mere right to sue
cannot be transferred as per the provision of T.P. Act. When a
contract is broken, it gives rise to a civil wrong which may entitle
the injured party to sue the wrong doer (1) for damages liquidated
or unliquidated, or (2) for specific performance and in some cases
(3) for restitution or even (4) an injunction. In the given case, the
contract between UW and DoT for allowing the telecom licenses
for 20 years got terminated in pursuance to the cancellation of
licenses by Hon'ble Supreme Court. Further, the Hon'ble Court
also directed the Government of India to conduct the fresh
auction of licenses. Accordingly, the asset i.e. telecom licenses,
which were subject matter of contract between UW and DoT,
were disposed-off (i.e. extinguished), the only remedy available
with UW was the right to sue for the compensation/refund of the
amount paid to DoT. Further, Section 5 of the TP Act defines the
expression 'transfer of property' without attempting to define the
term 'property'. It would, however, suffice to say that the term
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'property' is used in its widest and most generic legal sense so as
to include all actionable claims. Section 6 states that property of
any kind may be transferred, except as otherwise provided by the
TP Act or by any other law in force for the time being. Clauses (a)
to (i) which immediately follow enumerate what cannot be
transferred. Clause (e), with which is relevant in the given case,
states that 'a mere right to sue cannot be transferred'.
Accordingly, in the given case, upon termination of contract
between UW and DoT, the only right which survived with UW was
a right to sue for damages/compensation on breach of contract.
This right was not an actionable claim within the meaning of
section 3 of the TP Act, since it could `not be said to be a debt or
a beneficial interest in movable property not in the possession of
UW. It was a mere right to sue which could not be transferred by
virtue of section 6(e) of the TP Act. In view of the aforesaid, the
appellant has neither acquired any capital asset within the
meaning of Section 2(14) of the Act under the aforesaid
actionable claim agreement from UW nor there was any transfer
as envisaged in Section 2 (47) of the Act.
22. The learned Senior Counsel also relied upon the decision
of Hon'ble Gujarat High Court in the case of Baroda Cements and
Chemicals Ltd. vs. CIT (158 ITR 636). In the said case, the
assessee entered into a contract with another company to
purchase a second-hand mill for an agreed price. Subsequently,
the vendor committed a breach of the contract by defaulting to
sell the machinery, etc., to the assessee and sold the same to a
third party. The assessee received compensation in full and final
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ITA No.7541/Del/2017 32
settlement of all claims arising ex-contracts on account of the
breach of the contract. The assessee claimed that the impugned
receipt was a non-recurring capital receipt and being casual, was
not liable to tax. The ITO while agreeing that it was in the nature
of capital receipt, held that the payment resulted in
extinguishment of the assessee's right to acquire the subject-
matter in intangible asset, and was, therefore, covered by section
2(47), read with section 45, and was liable to tax as short-term
capital gain. The Tribunal upheld the ITO's order. On appeal, the
Hon'ble Court held as under:
"Once there is a breach of contract and the defaulting party
not only refuses to perform his part of the contract but also
disposes of the subject-matter, the injured party has nothing
left in the contract except the right to sue for damages. After
the amendment of section 6(e) of the Transfer of Property Act
a mere right to sue, whether arising out of tortuous act or ex-
contract, is not transferable. The word 'mere' indicates that if
the right to sue is accompanied with any other right under the
contract, it would not be hit by section 6(e). In the instant
case, there was a total cessation of the contract and the only
right which survived in the assessee was a right to sue the
defaulting party which could not be transferred.
Further, both sections 45 and 48 postulate the existence of a
capital asset and the consideration received on transfer
thereof. If the transfer takes effect on extinguishment of a
right in the capital asset, there must be receipt of
consideration for such extinguishment to attract liability to
tax. Now in legal parlance the terms 'consideration' and
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ITA No.7541/Del/2017 33
'compensation' or 'damages' have distinct connotations. The
former in the context of sections 45 and 48 would connote
payment of a sum of money to secure transfer of a capital
asset; the latter would suggest payment to make amends for
loss. But once there was a breach of contract by one party
and the other party did not keep it alive but acquiesces in the
breach and decides to receive compensation thereof, the
injured party could not have any right in the capital asset
which could be transferred by extinguishment to the defaulter
for valuable consideration. That was because a right to sue
for damages not being an actionable claim, a capital asset,
there could be no question of transfer by extinguishment of
the assessee's rights therein since such a transfer would be
hit by section 6(e). In any view of the matter, the impugned
sum received by way of compensation by the assessee was
not consideration for the transfer of a capital asset. Moreover,
if the revenue fails to show that the assessee had incurred a
cost as in the present case, it would be impossible to compute
the income chargeable to tax under the head 'Capital gains'
and what the revenue would be charging would be the
capital value of the asset and not any profit or gain.
Accordingly, the sum received as compensation was not
liable to capital gains tax."
In light of the above, it was contended by him that it is evident on
the facts of the case that, UW has merely transferred its right to
sue, if any for compensation /damages or to enforce legal remedy
in favour of the appellant under the actionable claim agreement
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ITA No.7541/Del/2017 34
which cannot be termed as a capital asset under section 2(14) of
the Act.
23. The learned Senior Counsel strenuously contended that
had there been any right of set off, there could have been no
occasion for the DoT to have denied such a right and instead
such a right would have been allowed, whereas in the instant
case, on 31.03.2014, DoT on without prejudice has allowed the
set off against the payable bid amount. This shows that set off
has been bestowed to the appellant as per the policy decision of
the Government of India and not in view of any existing right.
That right must be enforceable in law and it is not any and every
right whether it is enforceable in law or not can be regarded as
capital asset. Though the DoT was not under an obligation to
allow the refund of spectrum fee in respect of the cancelled
licenses or to allow set off thereof, however, due to the
subsequent changes in the Policies, the DoT allowed set off of the
spectrum fee of the cancelled licenses to the Appellant. The set
off so allowed to the appellant was subject to conditions and the
rights of DoT to recover all claims/counter claims of cancelled
licenses of UW from the appellant. This was clearly evident from
the undertaking given by the Appellant to DoT to discharge all
liabilities of the cancelled licenses whose license/entry fee was
allowed to be set off against the spectrum fee payable for the
fresh licenses. It was submitted that the appellant had received a
number of notices from DoT for such liabilities which were
pending for quantification/ascertainment as appellant had
contested the quantification and determination/applicability of
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ITA No.7541/Del/2017 35
said liabilities before appropriate forums. Sample copies of show
cause notices amounting to Rs. 970.56 Cr were submitted by the
appellant to the AO at assessment stage. Further, it was
submitted that the appellant may receive more notices in future
as well. Accordingly, it was argued that the amount of set off
allowed could not be taxed in the year under consideration since
the agreement for acquisition of actionable claim had not been
culminated in as much as only one to the transaction has been
completed and other remains yet to be settled between the DoT
and the appellant. It had been submitted that at best, the
amount allowed to be set off by DoT was mere advance of money
to appellant and could not be termed as transfer of capital asset
namely alleged set off of spectrum fee. As per the actionable
claim agreement, bunch of assets and liabilities had been
acquired by appellant from UW. As a precondition for approving
the BTA, DoT sought an undertaking from the appellant, where it
was required to assume various contingent liabilities of UW,
including dues owed to the DoT. The appellant recorded the said
fact in the amendment agreement dated 30.12.2013 that the
consideration for transfer of actionable claim was revised due to
various liabilities assumed by the Appellant by way of giving
undertaking to DoT for the cancelled licenses. Accordingly, the
payment of Rs. 100 crores was merely a part payment for
actionable claims and the remaining amount shall be payable to
DoT as and when it was demanded instead of UW on account of
undertaking given to DoT. Also, it was stated that there is defined
procedure laid down in TP Act that how the assignment of
actionable claim would be effected between the parties including
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ITA No.7541/Del/2017 36
assignor, assignee and other person. It was submitted that
Section 132 of the TP Act states that the transferee (i.e.
Appellant) of an actionable claim shall take it subject to all the
liabilities and equities and to which the transferor (i.e. UW) was
subject in respect thereof at the date of the transfer. The
transferee of actionable claim is subject to meet all obligations of
the transferor i.e. the transferor if had any liabilities against such
actionable those were also to be assumed by the transferee and
he had no option whatsoever selectively take liabilities of the
transferor in respect of such actionable claim. It is a general rule
that the assignee will not get a better title than the assignor.
Accordingly, a transferee of a claim is only entitled to get what
transferor is eligible to receive. If the debtor has a right to receive
some amount from the assignor, then he has the right to set off
such amount against the payment to be made to the assignee.
24. Thus, in the facts of the present case, the spectrum fee paid
by UW was in relation to services provided till the date spectrum
licenses were cancelled by the Hon'ble Supreme Court. The
liabilities accrued to UW on account of cancelled licenses are
thus intrinsically linked with the spectrum fee paid by UW to
DoT. Accordingly, the moment, UW assigned its rights on
spectrum fee alongwith its all claims as well as right to set off, all
corresponding liabilities of UW due to DoT were automatically
vested with appellant due to the provisions of section 132 of the
TP Act. The appellant placed reliance on the decision of Supreme
Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC)
wherein it has been held that the expression to compute gain or
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ITA No.7541/Del/2017 37
loss has to be understood in its commercial sense and there can
be no computation of such profits and gains until the
expenditure which is necessary for the purpose of earning the
receipts is deducted therefrom irrespective of whether the
expenditure is actually incurred or the liability in respect thereof
has accrued even though it may have to be discharged at some
future date. Thus, he submitted that the cost of acquisition was
indeterminate in the given case and the same was supported by
the provisions of TP Act. Accordingly, the capital gains cannot be
computed and taxable in the year under consideration. The final
taxability of gain or loss, if any, could be considered in the year
in which all the claims and counter claims are settled by the DoT
and not in the piecemeal manner.
25. With respect to the last contention that there is no transfer
of any asset as envisaged under section 2(47) of the Act, the
appellant contended that the AO and the Ld. CIT (A) were
incorrect in making a finding that upon exercise of right to set off
by the appellant on 31.03.2014, the capital asset acquired from
UW under the actionable claim agreement was extinguished
which constituted as transfer as per section 2(47) of the Act. On
this his submission was that the appellant had exercised such
right by way of surrender as per the contractual and policy
decision of the Government of India, and thus, could not be
termed as extinguishment of rights therein or exchange as
alleged by the AO and Ld. CIT(A). Surrender of rights does not
amount to 'transfer' within the meaning of section 2(47) of the
Act. Also, once the set off has been allowed to it by the DoT, the
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ITA No.7541/Del/2017 38
alleged capital asset i.e. right to set off the license fee itself has
been destroyed. Where asset is extinguished by its destruction,
there can be no transfer of the asset. It has been contended that
there was no extinguishment of any right. Since, the alleged right
came to end as soon as the amount had been set off by DoT on
its own volition and as such the same cannot be regarded as
extinguishment of any right therein as envisaged in Section 2(47)
of the Act. The said proposition was being upheld by the
Judgement of Hon'ble Madras High Court in the case of
Neelamalai Agro Industries Ltd. v. Commissioner of Income-tax
(2002) 259 ITR 651 (Madras HC) wherein the court held as
under:
"18. In the case of Mrs. Grace Collis (supra), the Court did not
have occasion to go into the question as to whether the
destruction of a capital asset which as a consequence brings
about the extinguishment of the rights of the assessee-owner
in such asset, would amount to transfer. The Court did not
hold that Vania Silk Mills (P.) Ltd.'s case (supra) was wrongly
decided, or that the definition of 'transfer' in section 2(47),
particularly, the use of the words 'extinguishment of any
rights therein' would cover cases of destruction of the capital
asset. Cases such as the destruction of the capital asset in a
fire, or its complete loss as in the case of sinking of a vessel
in the sea, cannot be regarded as having been brought within
the fold of definition of 'transfer' in section 2(47), by reason of
what has been said and laid down in the case of Mrs. Grace
Collis (supra).
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20. The law laid down in Vania Silk Mills (P.) Ltd.'s case
(supra), that extinguishment of rights in a capital asset as a
necessary consequence of destruction of the asset does not
amount to transfer, has not been overruled by the Apex Court
in the case of Mrs. Grace Collis (supra)."
Contention Raised by Ld. CIT-DR on behalf of the Revenue.
26. On the other hand, Mr. S. S. Rana, the learned CIT DR
appeared for the revenue, in his submission strongly supported
the findings of the AO and CIT (A) and contended that:
(a) The appellant had acquired under the business transfer
agreement, business operations as a going concern and the
right of set off was independent right and was not a part of
business transfer agreement.
(b) It was next submitted by him that the set off of refund of Rs.
1558.70 crores to UW can be said to be amount received by
it, based upon the right of equal restitution. However he
submitted that the transfer of his right of the set off from
UW to the assessee is not based on right to equal
restitution. He stated that the transaction entered by the
assessee was commercial transaction based upon the
payment of Rs. 100 crores to UW. He further submitted that
the appellant is trying to push the non-existing fact, there
was a contract between UW and Government of India as per
Indian Contract Act 1872 and what was transferred by UW
to the appellant was a right to set off of refund and not any
right to sue.
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ITA No.7541/Del/2017 40
(c) His further contention was that the reliance placed by the
appellant on CAG's report that the same was tabled before
the Parliament on 11.03.2016 and was thus not available
upto the date of filing of return which is subsequent event
and cannot be affect taxability of the amount in the year
under consideration. It was stated by him that subsequent
report cannot be stated to be that the amount was
contingent liability on the date of filing of return of income.
In support of his contention that the exercise of the right of
set off of the license fee was not in the nature of
extinguishment which constitutes transfer u/s 2(47) of the
Act, he read the findings of the CIT(A) in paras 5.3 to 5.5.4.
It was held that set off of refund was a capital asset as per
the provisions of section 2(14) of the Act.
(d) He further submitted that the right of set off constituted
transfer as defined in section 2(47) of the Act.
(e) The learned CIT DR had further submitted that the cost of
acquisition as required u/s 48 of the Act cannot be regarded
as indeterminate for the reasons stated by the CIT(A) in his
order in paras 5.1 to 5.7.4.
(f) He further supported the findings of the CIT(A) wherein it
had been held that the assessee in the alternative earned
income by way of profits and gains from the business and
relied on the following judgments:
(i) CIT vs. Kasturi Estates Pvt. Ltd., 62 ITR 578 (Mad.)
(ii) M. Raman Pillai vs. CIT, 51 ITR 829 (Ker.)
(iii) CIT vs. P.K.N. Co. Ltd., 80 ITR 65(SC)
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(iv) R. Dalmia vs. CIT, 137 ITR 665 (Del.)
(v) Lakshminarayan Ram Gopal & Son Limited vs.
Government of Hyderabad, 25 ITR 449 (SC)
(vi) Dalhousie Investment Trust Co. Ltd. vs. CIT, 68 ITR 486
(SC).
(g) He had objected to the admission of additional evidence
furnished, without stating which of the evidence furnished by
the assessee, was additional evidence.
REJOINDER BY APPELLANT
28. The appellant filed its rejoinder on 03.04.2018 on the
contentions raised by the Ld. CIT (DR) in its submissions.
Regarding the first contention, the Senior Counsel submitted that
there was no requirement to enter into an actionable claim
agreement for allowing alleged right of set off of the license fee
paid by UW. It was only by way of abundant precaution that the
said agreement was entered into by the parties. Thus, the
submission of the Ld. CIT (DR) was devoid of any merit and liable
to be rejected. It was submitted that the Ld. CIT (A) failed to
appreciate that the set off was allowed by DoT due to the policy
decision of the Government of India and not by virtue of the
Actionable Claim Agreement entered with UW. The findings of the
Ld. CIT(A) were incorrect as the entire factual position and
documents were placed on records which are completely
disregarded and misconceived. The two agreements were made
because of the no clear guidelines issued for transfer of business
of UW. In respect to the second contention, the Senior Counsel
Appellant relied on its earlier submission that the set off was
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allowed to the appellant merely by way of a policy decision of
Government of India and based on right to equal restitution. The
relevant quote of the report of the CAG was extensively relied
upon by him to supports the said view. Also, the Ld. CIT (DR)
also not disputed the finding of the CAG and DoT stated in the
CAG Report. Also, the contention of the Ld. CIT(DR) that there is
no agreement between UW and Government of India was
factually incorrect and devoid of any merit as the Government of
India through DoT had entered into an agreement with UW vide
agreement dated 29.02.2008 which constituted a valid contract
as per the provisions of Indian Contract Act, 1872 which was
placed on record by the appellant. Further, the Ld. CIT(A) failed
to appreciate that UW had no other right except right to sue
Government of India for breach of contract. Even such rights
have been invoked by other persons, though not successfully.
The appellant placed the judgement of TDSAT in the case of Loop
Telecoms on record. The submission of the Ld. CIT (DR) that CAG
Report has been tabled subsequently and was not available up to
the date of filing of return of income had no relevance and
completely misconceived. In respect to the same, the Senior
Counsel submitted that the report of the CAG has been tabled
much before the completion of the assessment proceedings and it
was not the case where the assessee had withdrawn its claim on
account of the aforesaid report. On the contrary, it was a case,
where the Assessee argued that the sum was not chargeable to
tax as capital gains and in support of this, the factual analysis
given by a constitutional body i.e. CAG was placed on record. The
Ld. CIT (DR) had placed reliance on the order of Ld. CIT(A) to
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argue that the right of set off of refund was a capital asset as per
section 2(14) of the Act and it was transferred by UW to the
assessee as per section 2(47) of the Act. The Senior Counsel
submitted that the Ld. CIT(A) failed to appreciate that the term
`right' is not used in the definition of `Capital Asset' in section
2(14) of the Act. The Ld. CIT(A) drew analogy from section 55 of
the Act and right in itself could be `Capital Asset', but failed to
appreciate on the facts of the case that rights which are held as
capital asset are capable of transfer and identifiable and not
inchoate or contingent right in the form of `right to sue' as in the
present case. The Ld. CIT (DR) erred in contending that the
exercise of right by the Appellant resulted in relinquishment of
the asset or the extinguishment of any right therein which was to
be considered as transfer as per section 2(47) of the Act. The
Senior Counsel submitted that once the set off has been allowed
by DoT, the asset itself has been destroyed. Where asset is
extinguished by its destruction, there can be no transfer of the
asset. Further, it had been contended that there was no
extinguishment of any right. Since, the alleged right came to end
as soon as the amount had been set off by DoT on its own
volition and as such the same cannot be regarded as
extinguishment of any right therein as envisaged in Section 2(47)
of the Act. The Senior Counsel placed reliance on the judgement
of Hon'ble Madras High Court in the case of Neelamalai Agro
Industries Ltd. v. Commissioner of Income-tax (2002) 259 ITR
651 (Madras HC). It was also contended by the Ld. CIT(DR) that
the Assessee had made an application to DoT seeking a set off of
spectrum fee paid by UW wherein it had never been contended by
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ITA No.7541/Del/2017 44
it that it would sue the DoT if the set off was not granted. The
contention of the Ld. CIT (DR) that since there was no notice
issued of threat to sue it amounts to acceptance/admission on
the part of the Assessee that it had a right to seek a set off of the
spectrum fee paid by UW. It was submitted by Senior Counsel
that on the face of it such a contention was fanciful. It was
submitted that by making an application with DoT, the Assessee
had not get vested with the right to set off. The Assessee could
not adopt two course of action, one by threatening to sue and
other by seeking benevolence. The all what assessee did was
seeking a benevolence which benevolence was in the nature of
waiver or concession in the amount of spectrum fee payable to
DoT in respect to the fresh licenses.
Decision
29. We have considered the rival submissions, perused the
relevant material placed on record including the written
submissions filed by both the parties and the orders of the lower
authorities. The first issue before us, is about the taxability of Rs
1658.57 crores under section 45 of IT Act in respect of an
amount, allowed to the appellant on 31.03.2014 "without
prejudice", as a set off being non-refundable entry fee paid by the
UW to DOT in the year 2008 against the allocation of licenses to
the appellant against the fresh spectrum fee payable in respect of
the newly acquired spectrum of six circles in an auction
conducted on 14.11.2012. Thus, the core/issue, which needs to
be examined is, whether the appellant had acquired any such
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`capital asset', in the form of a right to set off, under an
agreement of actionable claim dated 06.12.2012 from the UW.
29. In order to examine the above issue, we have carefully
examined the facts, leading to the set off non-refundable entry fee
paid by the UW in year 2008 which have been detailed, in the
earlier part of the this order and is summarised as below:-
i. UW had acquired 22 licenses from the Government of India
to operate as telecom operator in 22 Circles on payment of
Rs. 1658.57 Crores in aggregate in the year 2008 on first
cum first service basis.
ii. The contracts had been entered between the DOT and UW
in respect of the 22 licenses under the Indian Telegraph Act,
1885. Under the aforesaid contracts, when the UW had paid
one time non-refundable entry aggregating to Rs. 1658.57
Crores in respect of 22 licenses.
iii. Subsequently, the Hon'ble Apex Court in a Public interest
Litigation vide its judgement dated 02.02.2012 quashed the
allotment of 122 licenses including the 22 licenses allotted
to UW in 2008. The Hon'ble Apex Court in the interest of the
users of the telecom services under said licenses allowed the
operations of such 122 licenses till 15.02.2013 by passing
interim orders time to time. The Apex Court also issued
directives to Government of India to make fresh auction of
said 122 quashed licenses by way of fair transparent
manner. Here, it is important note that the judgement of the
quashing of licenses by the Hon'ble Apex Court, the contract
of granting licenses to UW and others stood quashed.
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Further, it is also evident from the judgement of the Hon'ble
Apex Court that, no directions had been made, regarding
the amount paid as one time non-refundable entry paid by
various operators.
iv. The appellant placed on record the report of CAG which was
tabled before the Parliament on 11.03.2016 in support of its
contention that the "non-refundable entry fee" paid by the
telecom companies which is not liable to be transferred or
refundable in any circumstances.
v. That under the terms of the contracts of allotment of
licenses in 2008 the same did not provide for any refund of
the entry fee paid by the operator DOT as the same were
non-refundable even in the case of surrender of licenses.
vi. The appellant company was incorporated on 24.02.2012 in
which the Telenor Group held 74% equity and remaining
shares was held by an Indian Company, Lakshyadeep
Investment & Finance Limited.
vii. That the appellant had been incorporated to act as telecom
operator in India with intention to provide
telecommunication services in India.
viii. That on the directives of the Hon'ble Apex Court, DOT had
issued a Notice Inviting Applications (NIA) in public domain
on 28.09.2012 and further it had subsequently published
responses to the Queries to NIA on 12.10.2012 of the
telecom companies who had desired to participate in the
fresh auction. Such responses made by DOT were broadly,
to decide the issue, namely eligibility of the participant's
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technical and financial qualification bidder and with respect
telecom operator whose licenses were quashed by the Apex
Court. (query no. 23) Further also, the transfer of business
of quashed licenses in case to successful bidder including in
favour having group entities (Query No. 31 to 35 and
clarification dated 12.10.2012 issued by DOT in respect of
Query 31) was responded. Finally, the Set off one time non-
refundable fee paid by quashed license holder in 2008
(query no. 74) was also explained.
ix. In addition to above, the appellant has placed on record all
communications and letters addressed by the appellant,
UW, and Telenor Group to DOT and the responses in
respect thereof.
x. The significant communications before the appellant
became successful bidder in fresh auction are:-
a) 04.10.2012: The appellant sought clarification/permission
from DOT for transfer of business of UW as an ongoing
concern basis.
b) 15.10.2012: UW based upon clarification issued on NIA
sought refund of entry fee paid in 2008, as it had been
decided by UW that they would not participate in fresh
auction to be conducted in November 2008.
c) 17.10.2012: Telenor Group intended to participate in fresh
auction through appellant and communicated its desire for
the transfer of UW telecom business to appellant as on
going concern upon the appellant being successful bidder in
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fresh auction. It is also communicated that the UW would
not participate in fresh auction and requested to DoT to
consider the set off of entry fee paid by UW as part of overall
transfer of telecom business in accordance then existing
policy.
d) The appellant being declared successful bidder on
14.11.2012 in fresh auction in respect of 6 circles became
liable to pay Rs. 4018.20 Crores as spectrum fee.
e) Subsequently on 06.12.2012, the agreement for business
transfer as well as actionable claim were entered by the
appellant with UW.
f) Thereafter, the appellant made other several representations
to DOT for approval of business transfer of UW as well as
set off of entry fee against the spectrum fee payable in
respect of the fresh licenses acquired by the appellant and
in furtherance of the approval of business transfer granted
by the DOT. The appellant submitted undertakings and
indemnities with respect to the liabilities of UW in respect of
the quashed licenses.
g) Finally, on 31.3.2014, the DOT allowed the set off of Rs.
1658.57 crores to appellant on without prejudice basis.
30. The above facts are demonstrated from the records placed
before us. Considering the aforesaid fact and having heard the
contentions of both the parties in respect of the taxability of a
sum of Rs. 1658.57 crores under the head capital gain, it is
necessary for us to render our findings about the nature of the
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receipt. It is undisputed fact that the assessee had been allowed
a set off of Rs. 1658.57 crores by DoT on 31.03.2014 and was
without prejudice basis. The aforesaid sum has been brought to
tax as short term capital gain. In order to attract the provisions of
section 45 of the Act, it is axiomatic that there has to be an
income derived by the assessee on transfer of a `capital asset'. In
the instant case in our opinion the appellant had not acquired
any capital asset from UW under an agreement dated
06.12.2012, since UW had no such asset held by it at any point
of time. The `asset' in the instant case, is stated to be a `right' in a
property. There is no dispute that right in a property is an asset
u/s 2(14) of the Act. However in the instant case, UW had no
such right, title, interest in the amount of non-refundable entry
fee paid by it to DoT in the year 2008. In fact, UW had exploited
said licenses from the year 2008 till the date when said licenses
were quashed, i.e., for a period of 4 years. In such circumstances,
one time non-refundable entry fee, after the licenses were
exploited by it, UW had been left with no right, title, interest in
the amount paid as license fee paid to DoT. Further, having gone
through the agreement entered by UW with DoT, we find there is
no provision of refund of any sum paid as entry fee. In fact it is
also not a case, where DoT had failed to perform its obligations to
UW; and therefore, ostensible conclusion is that UW had no
right, title or interest under the said agreement. Further
statutorily too, under the provisions of `Indian Telegraph Act'
there was no provision seeking refund of the onetime entry fee
paid by the license holders. In such circumstances, we do not
find any justification to hold that the appellant had acquired any
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right from UW, when in our opinion UW itself had no right, title,
interest in the amount of non-refundable entry fee paid by it. In
our opinion it is not any and every `right' which can be regarded
as a capital asset. `Right' must be such a right which is
enforceable in law either under a statute or under binding
contractual agreement. In view thereof, in our opinion since UW
had been left with no right, title, interest in the amount of entry
fee paid in the year 2008 in respect of the licenses granted to
UW, it cannot be validly held that UW held any capital asset,
which capital asset could be stated to have been acquired by the
appellant from UW under an actionable claim agreement dated
06.12.2012. We have also noticed that under the aforesaid
agreement, the appellant had paid Rs. 100 crores to acquire such
an alleged right. Be that as it may, the mere fact that the
appellant had paid Rs. 100 crores against such an alleged right,
will not be a decisive factor to the nature of the asset alleged to
have been acquired by it. The relevant clauses of the agreement
entered between the assessee and UW under which theappellant
had paid Rs. 100 crore are extracted herein below:
"....
(F) Unitech Wireless did not participate in the Spectrum
Auction and will have no future operations effective 18
January 2013 as a result of which Unitech Wireless will not
be able to claim the benefit of the set off of License Fee which
has been permitted by the DoT. Further, the business of
Unitech Wireless to be transferred to Telewings as a result of
which Telewings will be entitled to claim set off of the License
Fee against payments being made it to the DoT (Set Off). The
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parties have agreed that Telewings shall pay fair
consideration, which has been computed on an arm's length
basis to Unitech Wireless for facilitating such entitlement and
the parities. Therefore, wish to execute this agreement to
record the terms thereof.
....
TRANSFER OF ACTIONABLE CLAIMS
....
"1.2 All claims judgments, demands, lawsuits, causes of
action, choses in action, rights of recovery and other rights of
Unitech Wireless, whether arising under tort or contract,
arising under or in connection with all warranties and
representations , implied or express, all actions , indemnities
and guarantees against the DoT relating to the grant by the
DoT of the UASLs to Unitech Wireless and the payment of the
License Fee for the UASLs granted to Unitech Wireless by the
DoT in 2008 shall together constitute Actionable Claims.
...
2. CONSIDERATION
.....
2.2 The consideration has been computed on the basis that
Unitech Wireless which shall cease to have any business
operations effective from 18 January, 2013, will not have any
opportunity to claim the set off of License Fee and the process
involved in seeking the set off will be preliminary driven by
the efforts of Telewings"
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31. The said agreement had been modified by way of an
amendment letter dated 30.12.2013 as the appellant had given
indemnities and undertakings sought by DoT for approval of
BTA. After giving the undertakings, the parties amended the
actionable claim agreement to take into account the changes
made in the BTA on account of additional liabilities assumed by
the Appellant and duly recorded the same in the amendment
letter dated 30.12.2013. The relevant clauses of the said
amendment letter are reproduced hereunder:
"2. The parties failed to obtain the aforesaid DoT approval
by 18 January 2013 and further did not agree to a different
date in writing. Accordingly, the Actionable Claims remain
with Unitech Wireless.
3. Despite the expiry of the Agreement, Unitech Wireless
and Telewings have pursued the business transfer
agreement dated 6 December 2012 (BTA) signed between the
Parties which required specific approvals from the
Department of Telecommunications (DoT) for transfer of
certain UASL related resources from Unitech Wireless to
Telewings.
4. As a precondition to such approvals, the DoT sought an
undertaking from Telewings whereby it was required to
assume various additional contingent liabilities of Unitech
Wireless, that were not contemplated in the BTA, including
dues owed to the DoT. Telewings agreed to provide the
undertaking and consequently assumed such liabilities of
Unitech Wireless."
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In view of the above, the consideration agreed in the actionable
claim agreement had also been modified in the said amendment
letter which is as under:
"8. In view of the above, the Parties have agreed to revive
the Agreement and agree to the following amendments:
(a) The Parties agree that as on the date of this letter,
clause 2.1 of the Agreement shall be deleted and replaced
with the following clause 2.1:
"In consideration of the transfer of Actionable Claims
from Unitech Wireless to Telewings, Telewings shall make a
payment of Unitech Wireless which is the lower of:
(a) INR 100 crore; or
(b) 50% of the value of the Set Off permitted by the DoT.
Which the parties agree would be the fair value for the
Actionable Claims (Consideration)"
(b) The Parties agree that as on the date of this letter,
clauses 4.1(a) and 4.1(b) of the Agreement will stand deleted
in their entirety."
32. In view thereof, we are of the considered opinion that UW
had no enforceable legal right, title, interest in the amount of
non-refundable entry fee paid by UW to DoT. Once we conclude
that, there was no right, title, interest which was enforceable in
law, the answer to the issue involved, in our opinion is that, since
UW had no right, title, interest in the said non-refundable entry
fee or it was not entitle to make any claim from DoT for set off of
the said license fee, UW could have not transferred any such
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right so as to enable the appellant to acquire such an alleged
right.
33. Further, the fact that the appellant had paid Rs. 100 crores
to acquire such a right, under the actionable claim agreement,
itself shows, when there existed no right, the amount so paid by
the appellant was apparently by way of abundant precaution to
safeguard its interest. However, in our opinion, it cannot be held
that the assessee had acquired any capital asset which was
transferred by it by way of extinguishment in favour of DOT, as
held by the Revenue on mere fact that the appellant had paid Rs
100 crores which in our opinion is not a decisive factor.
34. Our aforesaid opinion further gets supported by the CAG's
Report No. 55 of 2015 which has been heavily relied upon by the
Ld. Sr. Counsel before us, for the sake of convenience, is being
extracted herein below:
"...It was seen in audit that M/s VTL, M/s ICL, M/s TCSPL4
and M/s SSTL were allowed set-off of entry fee of Rs.
5476.30 crores against the auction fee payable in November
2012 / March 2013. Audit has following observations:
· The entry fee paid by the licensees was one-time entry
fee and was non-refundable as per terms and conditions of
UAS license. Further, the Attorney General of India in his
response to the legal opinion sought by DoT's query "Whether
entry fee paid by licensees needs to be refunded as demands
are being made by the licensees?", stated (August 2012) that
the question of refund of entry fee paid by the licensees does
not arise at this stage.
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ITA No.7541/Del/2017 55
· NIA stipulated that the companies/licensees whose
licenses were slated to be quashed as per the directions of
the Supreme Court would be treated as `New Entrant'. This
meant that they had to deposit the full auction fee without
any linkage to entry fee paid for their quashed licenses.
· Further the Hon'ble Supreme Court had not made any
distinction amongst the licensees while quashing the 122
licenses of the nine operators. But DoT on the plea of the
operators that their licenses were cancelled for no fault of
theirs, created two categories of quashed licensees-licensees
whose licenses were cancelled due to their fault and
licensees whose licenses were quashed without their fault
and allowed set-off on the principle of equal restitution.
......
· It was also pointed out by the Comptroller and Auditor
General of India in his Performance Audit Report No.19 of
2010-11, that VTL and Unitech were ab-initio ineligible to
obtain the UAS licenses.
......
· M/s. TCSPL requested (October 2012) DoT for allowing
set-off of the onetime entry fee of ` 1658.57 crore paid by
M/s. Unitech in 2008 for obtaining 22 UAS licenses which
was cancelled by the Hon'ble Supreme Court. On 23
February 2013, a decision had been taken by the DoT
that no set-off of the non-refundable entry fee was
permissible to TCSPL on the grounds that set-off would
be permitted only to the quashed license holder
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ITA No.7541/Del/2017 56
participating in the auction and since M/s TCSPL was
not a quashed license holder, set-off of entry fee paid
by Unitech (quashed license holder) against the
payment due from TCSPL (participating entity), was not
as per approval of EGoM. On 05 March 2013, TCSPL again
requested DoT that though they were separate entity, DoT
should set-off the one-time entry fee paid by the Unitech
group against the payment due from them. On the same date
(i.e. on 05 March 2013) a note for the EGoM was prepared
and the same was approved in the meeting of the EGoM held
on 06 March 2013.
Audit observed that the `supplementary note' to EGoM
prepared on 05 March 2013 did not include the facts
regarding suppression of vital information at the time of
submission of their application, submission of false certificate
and misrepresentation of facts, etc. by Unitech group though
these were brought out by the C&AG in Report No. 19 of
2010-11 and also the decision taken by the DoT that no set-
off of the non-refundable entry fee was permissible to TCSPL.
Further, TCSPL was incorporated on 24 February 2012 only,
well after the decision of Hon'ble Supreme Court of India (02
February 2012) on cancellation of UAS licenses.
On this being pointed out, the DoT replied (October 2013)
that,
· The CAG cannot comment on and object to the matter of
policy.
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ITA No.7541/Del/2017 57
· As regards the criminal liability of the M/s Unitech Wireless,
the matter is still pending before the various courts, without
establishing the same there is no legal basis for taking civil
action. Besides, in the operative part of its order, the Hon'ble
Supreme Court did not make any such distinction between
operators while allowing the operators to continue operations
as well as to participate in the auction of spectrum process.
· Set-off allowed was not in the nature of refund of entry fee
and not allowed to any of the quashed license holders that
did not participate and win spectrum in auction.
· The decision to allow set-off was taken by the EGoM in the
light of the various representations and submissions by the
stakeholders and guided by the principle of equal restitution.
· Set-off was taken as full up-front payment and no set-off was
allowed to be carried forward against future instalments.
· The request of the Telenor Group was not acceded to by
the DoT in accordance with the then extant
policy/guidelines on the issue and therefore it was
decided by the competent authority to refer the matter
to EGoM and the decision to allow set-off was an
administrative decision taken by the EGoM on 06
March 2013.
........
The replies of the DoT are not acceptable as:
· Audit has not questioned the policy of the Government per-se.
Audit has commented on the incompleteness and inadequacy
of information submitted to EGoM.
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ITA No.7541/Del/2017 58
· Decision on Show-cause Notices issued by DoT to VTL and
Unitech group relating to their eligibility as on date of
submission of application for UAS licenses was pending with
DoT at the time of submission of note to the EGoM for set-off.
This fact was also not brought to the notice of EGoM by DoT
in its note. Further, despite DoT's awareness regarding
pendency of the matters pertaining to criminal liability of the
M/s Unitech Wireless before the various courts, DoT neither
brought it to the notice of EGoM in its note nor waited till
finalization of these matters and allowed set-off of one time
entry fee paid by M/s Unitech against the auction price
payable by M/s TCSPL.
· Since TCSPL was a separate legal entity and a new company
incorporated (24 February 2012) after the Hon'ble Supreme
Court judgment (02 February 2012), it was not eligible for set-
off against payment made by another legal entity. DoT had
not initially allowed the proposal of set-off on this ground, but
subsequently referred the request for set-off to EGoM, which
was approved by EGoM on 06 March 2013.
· Since the one-time entry fee paid by the operators was non-
refundable as per the license agreement, the question of the
claim for refund with interest for the pro-rata amount for the
balance period as stated by the DoT does not arise.
· Even the revenue of ` 7741.65 crores earned by these
companies from the quashed licenses since 2008 was not
considered by DoT while preparing the note for EGoM for set-
off of non-refundable entry fee. In this way the licensees
appear to have been rewarded for losing their licenses, as for
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the period of operation of the license (2008-12), no entry fee
was levied on the licensees due to set-off allowed.
Thus, set-off of the non-refundable entry fee of ` 5476.30
crore, paid by licensees whose license was declared illegal
and quashed by the Hon'ble Supreme Court, against the
auction price payable for spectrum in 1800 MHz/800 MHz
held in November 2012 / March 2013 was inappropriate and
deprived the Government of the revenue to that extent.
34. In short, the conclusion of CAG in respect of the set off
allowed to appellant is summarized as below: -
i. That the set off allowed by the DOT to the quashed
license holders was inappropriate and thus deprived the
Government of the revenue.
ii. CAG's report confirms the fact that the entry fee paid in
respect of quashed licenses was non-refundable to the
quashed license holders and they do not have any
contractual right to seek refund of such one-time entry
fee.
iii. The CAG report also highlighted that the fresh auction fee
payable by the successful bidder had no linkage to entry
fee paid for their quashed licenses.
iv. CAG report also confirms that the appellant is not eligible
for the set off of non-refundable entry fee paid by UW.
The initial request of the setoff of entry fee paid was
rejected by the DOT on 23.02.21013. However, the
subsequent request of the appellant is placed before the
EGOM on 05.03.2013, when the appellant again
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requested DoT that though they were a separate entity,
DoT should set-off the one-time entry fee paid by the
Unitech group against the payment due from the
appellant. On the same date (i.e. on 05.03.2013), a note
for the EGoM was prepared and the same was approved
in the meeting of the EGoM held on 06.03.2013 which
shows that the set off was granted not by way of any right
but on the basis of principle of equal restitution.
v. DOT responded on October 2013 to CAG, (i.e. much prior
to actual set off allowed to appellant on 31.03.2014),
where DOT itself stated that set off of entry fee was
allowed as a policy decision guided by the principle of
equal restitution.
vi. With respect of the set off of entry fee allowed to the
appellant, it was confirmed that the decision to allow set-
off was an administrative decision taken by the EGoM on
06.03.2013 and initially the request of the Telenor Group
was not acceded to by the DoT in accordance with the
then existing policy/guidelines on the issue.
35. From the perusal of the aforesaid report and as observed
above, it is evident that CAG was also of the considered opinion
that UW had no right, title, interest to claim any set off and so far
as the appellant is concerned, in any case, the appellant had no
legal enforceable right to seek a set off and has been also stated
in the aforesaid report of CAG, as being not allowable to the
appellant. On the issue of nature and effect of CAG report, it was
submitted by the learned Senior Counsel that CAG, which is a
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constitutional body, in its Report prepared under Article 151 of
the Constitutionand tabled before the Parliament, is binding in
nature which deserves to be taken into consideration to decide
the present issue, especially when it dealt with the controversy
arising on account set off of non refundable entry fee to various
telecom operators. He further submitted that the Article 151 of
Constitution of India is binding on all executive and statutory
authorities and thus revenue's stand is contrary to the report of
the CAG which is impermissible both on facts and in law.
36. We are in tandem with Mr. Aggarwal on the point that the
CAG Report which was available in public domain and also
placed before CIT (A) has to be given due weightage. The objection
of the ld. CIT DR that the taxability of the amount cannot be
judged on basis of CAG report which was tabled before the
Parliament after the filling of return of income is not acceptable.
Further, the power of CAG and case law relied upon by the
appellant, we agree that CAG being a Constitutional Authority,
the findings as noted in the Report cannot be disputed and
consequently its findings in the Report cannot be ignored. We
observe that there is no inconsistency between the facts stated in
CAG report regarding the event which lead to the set off of such
amount and submission made by the appellant before us.
Therefore in the absence of any contrary material, we consider it
appropriate to have to accept the facts and findings recorded in
CAG report. Accordingly, the objections of the ld. CIT DR that the
taxability of the amount in question cannot be decided by
considering the CAG report is rejected.
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37. The other issue, i.e., the need of entering into two separate
agreement, i.e., Business Transfer Agreement and Actionable
Claim Agreement on 06.12.2012 separately, Mr. Aggarwal had
contended that need of entering into an agreement for actionable
claim alongwith Business Transfer Agreement arose since the
appellant had become a successful bidder in respect of six of the
circles in the fresh auction. It was thus, considered as a
commercially prudent to enter into Business Transfer Agreement
and also an Actionable Claim Agreement on 06.12.2012 with UW.
The intent and purpose of the parties to enter into two separate
agreements was for the acquisition of business as an ongoing
concern for commercial consideration and such consideration
had also been communicated to DOT much prior to its
participation in the fresh auction. However, the DoT had, in its
responses to various queries, had not formulated the regulations,
procedures and policies for transfer of business of quashed
license holders and thus only as an abundant precaution, the
part of the DoT's claims over UW and UW's claim over DoT were
kept under the agreement of actionable claims which were linked
with overall business operations of UW which were acquired by
the appellant as a going concern. The submission of Mr. Aggarwal
that, on account intention of the appellant to be treated as
successor-in-interest of the business UW and subsequently
agreed to take excluded liabilities of UW towards DOT, clearly
shows that the transaction of set off entry fee is not independent
transaction but composite transaction in respect of acquiring the
business of UW with all assets and liabilities are acceptable, and
is thus accepted.
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38. In view of our finding in preceding paras, that alleged right
to set off is not a capital asset in the hands of the appellant on
account of set off by DOT on 31.3.2014, otherwise also, we hold
that, the appellant had not acquired any capital asset and as
such no asset was transferred by it by way of alleged
extinguishment. Thus, the other contentions raised in the course
of hearing by the parties were mere academic in nature and do
not require separate adjudication. Accordingly, the action of the
AO and Ld. CIT (A) is reversed on this count.
39. Having dealt with chargeability of such amount as short
term capital gain, we are left with the alternative contention of
the Revenue that the such sum is chargeable to tax as income
from business as the activity of entering into agreement of
actionable claim and subsequently getting set off of entry fee is
an income by way of "adventure in nature trade and commerce".
Since, we have already expressed as aforesaid our opinion that
the amount in question which has been allowed as set off being
by way of administrative and policy decision of Government of
India unilaterally and there is no quid pro quo, between the
appellant and DOT for such decision, therefore same could not be
held adventure in the nature of trade and commerce. The ld. CIT
DR had relied upon the finding of the CIT (A) in its order and did
not make any further submissions. On the other hand, Mr.
Aggarwal had submitted the transaction is on capital account
and as such there is no question, it could be taxed as revenue
receipt. He had further drawn our attention with respect to the
fact that the even the licenses issued by the DOT are not tradable
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and license holder merely get the right to exploit the licenses. In
our opinion the set off had been granted from the license fee
payable by it to DoT and the said sum of set off has not resulted
into any business transaction entered by it with DoT. The said
sum of set off so allowed was in the nature of mere waiver or
concession from the license fee payable and cannot be held to be
an income much less business income. In the instant case the
assessee has received no sum directly or indirectly. It had not
entered into business transaction or any transaction with DoT in
respect of such amount so waived and such sum had been set off
by DoT on the principle of equal restitution. Also, we find that the
appellant is not in the business of trading of UASL. Further, the
DoT guidelines applicable, at that time did not permit
trading/sharing of spectrum. It was privy only to the Appellant
and the Appellant alone could use it to render permitted telecom
services. Thus, the set off against the spectrum fees cannot, by
any stretch of imagination, be construed in the revenue field or a
sum chargeable to tax under the head profit and gains from
business and profession.
40. Thus, in our considered view, the action CIT(A) to tax such
amount as business receipts is devoid any merit.The amount of
set off is allowed on account administrative and policy decision
and not by way of adventure in nature of trade. The CIT (A) in its
order placed reliance in the case Of CIT vs. Kasturi Estates
reported in 62 ITR 578 which is clearly distinguishable as the
issue in the said case was whether the sale and purchase of land
would fall under capital field or revenue field. Accordingly, the
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appellant also succeed on this count. In view of the above, the
ground nos. 2 to 4 are allowed.
41. The second issue involved in this appeal is in respect of the
taxability of unearned revenue of Rs. 220.80 crores in the current
year i.e. AY 2014-15.
42. As discussed above, the Appellant is engaged in the
business of providing telecom services and only operates on the
Pre-Paid business model. The Appellant does not provide Post
Paid mobile services. The main revenue of the Appellant
comprises of subscription revenue from Pre-Paid plans in the
form of talk-time and revenue from Interconnect Usage charges
are received from other telecom operators. During the year under
consideration, the Appellant had reported a revenue from
operations amounting to INR 1,263.4 crores in its audited
financials. The subscription received which remained unutilised
at year end amounting to INR 220.80 crores has been disclosed
as Unearned Revenue as a Current Liability under the head
"Other Liabilities" in the audited financials and has been offered
to tax in the succeeding year when the said sum was accrued to
it as income. In other words, the aggregate receipt by the
appellant which included unearned revenue, aggregates to Rs.
1484.20 crores. The AO held that unearned revenue of Rs 220.80
crores is also the income accrued to the Appellant during
financial year 2013-14 relevant to AY 2014-15 (i.e. the year of
receipt of the said amount by the Appellant) since the conditions
for revenue recognition stipulated in AS 9 are unequivocally
satisfied and no additional efforts are required by appellant to
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keep on providing services. Also, he held that there is no
ambiguity regarding the quantum and collection of revenue and
that there is no further obligation of the appellant, to refund the
money to the subscribers. The Ld. CIT (A) has confirmed the
order of AO.
43. The submission of the appellant in respect of the aforesaid
treatment by the AO is that, it follows mercantile system of
accounting, wherein income on account of prepaid plans would
accrue and be recognized over the period, in which the Appellant
has the obligation to render the concerned services and not upon
mere receipt of money. Further, as per the guidelines of DoT, the
telecom companies are required to share their revenue with DoT
as per terms of license granted to them. Accordingly, in order to
adopt a transparent system for payment of license fee on revenue
sharing basis, the Appellant installed integrated ERP software as
per which the revenue in respect of services that has been
provided to the customers was automatically recognized in the
accounts i.e. talk time charges were recognized on the basis of
actual use of customers which is a normal practice followed by
the telecom companies as per the terms with DoT. The amount in
respect of which the customers had not used the prepaid card,
was treated as advance in the balance sheet and shown as
liability towards customers under the head "Unearned Revenue".
In the next year, when the talk time was actually used, the same
was adjusted with Unearned Revenue and credited as income in
the profit and loss account in that year. Once the validity period
for the prepaid card was over, entire amount was recognized as
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revenue, whether used or not. The said treatment is in conformity
with AS-9 on Revenue Recognition which is duly disclosed in
Notes to Accounts and has been consistently followed by the
Appellant. For revenue from rendering of services, the AS-9
provides that revenue from services should be recognised when
all of the following criteria are satisfied:-
· Performance has been achieved;
· Revenue is measurable, i.e., no significant uncertainty
exists regarding the amount of the consideration that will be
derived from rendering the service;
· It is not be unreasonable to expect the ultimate collection.
As all the above conditions are to be met cumulatively, thus
revenue could not be recognised until the performance of service
has been achieved. Since, the appellant is yet to provide the
services in respect to the unutilised talktime of the customers,
the revenue in respect to the same was not booked in the
financial statements as income and recorded as unearned
revenue in the Balance Sheet. The appellant has placed reliance
on decision of Hon'ble Delhi High court in the case of CIT v
Dinesh Kumar Goel [2011] 331 ITR 10 (Delhi) where it is
specifically held that under AS-9 revenue is recognized only when
the services are actually rendered. If the services are rendered
partially, revenue is to be shown proportionate with the degree of
completion of the services. Also, the Appellant had placed
reliance on the decision of this Tribunal in the case of ACIT vs.
Shyam Telelinks Limited (2013) (151 TTJ 464) wherein on the
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identical facts, the additions made by the AO on account of
unearned revenue is deleted by the Tribunal.
44. The findings of the AO that no additional efforts are
required to keep on providing the services to the customers with
respect to such unused talk time is incorrect since in the
subsequent year, the appellant has to incur operational cost for
providing such services which indeed has been incurred and had
been stated of Rs 342.24 crores on an estimated basis. Further,
the Ld. CIT (A) has also erred in our opinion in observing that the
accrual of income takes place at the time of selling of recharge
vouchers. The Ld. CIT(A) had also in fact directed the Appellant
to provide the accounting entries with respect to the recognition
of revenue in the books of accounts. The Appellant submitted the
same during the course of appellate proceedings, when it had
been explained that sales were recorded by the appellant as and
when the services are consumed and completed and not prior to
that. The payment received from distributors/customers was
treated as advance of sale and shown as liability in the balance
sheet. The advance amount is further transferred to unearned
revenue upon activation of recharge coupons and as and when
the customer utilises the services, the corresponding revenue is
transferred from Unearned Revenue account to the income
account. This entry is an automated entry made through the
integrated ERP system used by the appellant for accounting and
billing purpose. On monthly basis, the amounts are booked in
the books of accounts for ease of convenience.
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44. The appellant, in alternative, has also submitted that if the
said some is taxable as income for the captioned year, the
corresponding expenditure should be allowed against such
income on the basis of matching principles on estimation basis.
The appellant placed reliance on the decision of Supreme Court
in the case of CIT vs. Bilahari Investment Pvt. Ltd. reported in
299 ITR 1 and Calcutta Co. Ltd. vs. CIT (1959) (37 ITR 1) (SC).
45. The learned CIT (DR) placed reliance on the order of AO and
CIT(A) and argued that the income is accrued to the appellant in
the current year as all the conditions as per AS-9 are already met
and no further efforts are required from the appellant in future.
Further, it was submitted by him that the appellant is under no
obligation to refund the unused amount of talk time to the
customers. He further contended that the decision of this
Tribunal in the case of Shyam Telelinks Limited (Supra) deals
with the method of accounting followed by the assessee. As this
is the first year of operations of the appellant, there is no
precedent in the case of appellant regarding the method
accounting.
46. We have heard the rival submissions of both parties,
perused the material placed on record and the orders of the lower
authorities. The contention of Mr. Aggarwal is that the amount of
unearned revenue has not accrued to the appellant during the
captioned assessment year and accordingly, not taxable in given
year. He has placed reliance on the decision of this Tribunal in
the case of ACIT vs. Shyam Telelinks Limited (Supra) which was
subsequently followed in the case of DCIT vs. Sistema Shyam
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Teleservices Ltd. (ITA No. 3926/Del/2014). In addition to this, it
was submitted that the appellant has duly recognised such
amount as income in the next financial year (i.e. FY 2014-15) and
offered the same to tax in the relevant assessment year.
Therefore, the said additions only resulted in a timing difference
and the overall taxable income remains the same and as such,
there is no loss to the Revenue. The CIT (DR) relied upon the
order of AO and Ld. CIT (A) based on the contention that the
amount had accrued to the appellant in the captioned year and
the AO had rightly brought to tax the same in the hands of the
Company. We find that the facts of the present case are identical
to the facts and circumstances of the case of ACIT vs. Shyam
Telelinks Limited (Supra) and is squarely covered by the decision
of this Tribunal wherein on the basis of identical facts the ITAT
deleted the additions made by the AO. The relevant paras of the
order of ITAT are reproduced as below:
"The very premise on which the Assessing Officer has proceeded in
making the addition is not correct. The fundamental principle is that
income is to be recognized when it accrues to assessee, whereas
expenditure is to be charged the moment liability gets crystallized. The
two aspects cannot be mingled and have to be considered separately.
[Para 14]"
"There is no gainsaying that receipt of amount and accrual of income
are entirely two different concepts. Every receipt of amount cannot be
treated as income and only that part of receipt can be treated as income
which can be legally appropriated by the receiver in his own right to the
exclusion of its giver. As long as the payer has some right over the
amount it has paid to the payee, it cannot be said that income has
accrued to the payee. A legal right to appropriate the amount should
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have accrued in favour of the payee for recognizing the sum as income.
Unless debt has accrued in favour of payee, it cannot be said that
income had accrued to the payee. [Para 15]"
"In the present case, the main dispute is regarding revenue recognition
relating to unused talk time remaining available as at the end of the
year. As noted earlier, there is no dispute that company had to
provide talk time to its subscriber till the expiry of the period of
card or till complete utilization of talk time, whichever is
earlier. As long as assessee is under obligation to provide talk
time, it cannot be said that a debt has accrued in favour of
assessee-company against the subscriber. The assessee cannot
appropriate the charges relating to available talk time to the
exclusion of subscriber as long as it is under obligation to
provide the said services. Therefore, the Commissioner (Appeals) in
principle has rightly accepted the mode of revenue recognition by
assessee. The department has submitted that from the system followed
by the assessee, there is every likelihood of revenue leakage. In this
regard it was submitted that the matter can be restored to the file of
Assessing Officer for verification of this aspect only. Therefore, the
matter is restored to the file of the Assessing Officer for the limited
purpose of verification whether in the subsequent year the assessee
has declared the revenue in respect of expired prepaid cards or not. In
case no discrepancy is found in this regard, no adjustment is called for
with the assessee's mode of revenue recognition. [Para 16]"
47. The aforesaid approach had also subsequently been
followed by the Tribunal in the case of DCIT vs. Sistema Shyam
Teleservices Ltd. (ITA No. 3926/Del/2014). The appellant being
also in the same industry and therefore, following the same
principle of recognizing the revenue as in the aforesaid cases, we
uphold the contentions of the Assessee that the unearned
revenue had accrued to the appellant as income for the AY 2014-
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15. Accordingly, the earlier orders of this Tribunal are applicable
in the case of the appellant also.
48. Hence, we direct the learned AO to examine whether
unearned revenue of Rs 220.80 crores has been offered to tax in
the succeeding year, if so, then the said amount is directed to be
deleted. However, in case, the appellant, fails to satisfy the
learned AO, then the AO is directed to allow corresponding
expenditure incurred by the appellant to be stated Rs. 342.24
crores be allowed as deduction in the year under consideration,
which of course subject to the verification by the learned AO.
Accordingly, the above ground of appeal is allowed as directed
above for statistical purpose.
49. In the result appeal of assessee is partly allowed for
statistical purposes.
Order Pronounced in the open Court on 26th November, 2018.
Sd/- Sd/-
[PRASHANT MAHARISHI] [AMIT SHUKLA]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 26th November, 2018
72
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