* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No. 1336/2010
Reserved on: 13th August, 2013
% Date of Decision: 19th December, 2013
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr.Kamal Sawhney, Sr. Standing
Counsel
versus
BHARTI HEXACOM LTD ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA 1679/2010
COMMISSIONER OF INCOME TAX .....Appellant
Through: Mr.Kamal Sawhney, Sr. Standing
Counsel
Versus
BHARTI CELLULAR LTD ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA 1680/2010
COMMISSIONER OF INCOME TAX .....Appellant
Through: Mr.Kamal Sawhney, Sr. Standing
Counsel
Versus
BHARTI CELLULAR LTD ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA 114/2012
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr.Abhishek Maratha,
Senior Standing Counsel
With Ms.Anshul Sharma, Adv.
Versus
ITA 1336/2010 & conn. cases. Page 1 of 46
BHARTIHEXACOM LTD ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA 996/2011
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr.Abhishek Maratha,
Senior Standing Counsel
With Ms.Anshul Sharma, Adv.
Versus
BHARTI HEXACOM LIMITED ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA 1328/2010
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr.Kamal Sawhney, Sr. Standing
Counsel
Versus
BHARTI HEXACOM LTD ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA 177/2012
COMMISSIONER OF INCOME TAX ..... Appellant
Through:Mr.Abhishek Maratha, Senior
Standing Counsel with
Ms.Anshul Sharma,Adv.
Versus
BHARTI AIRTEL LTD ..... Respondent
Through: Mr.Ajay Vohra, Ms.Kavita Jha and
Mr.Kaanan Kapur, Advocates
ITA No. 893/2010
Reserved on: 29th November, 2013
Date of Decision: December, 2013
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr.Kamal Sawhney, Sr. Standing
Counsel
ITA 1336/2010 & conn. cases. Page 2 of 46
versus
BHARTI CELLULAR LTD. ..... Respondent
Through: Ms.Kavita Jha, Advocate
ITA 1333/2010
COMMISSIONER OF INCOME TAX .....Appellant
Through: Mr.Kamal Sawhney, Sr. Standing
Counsel
Versus
BHARTI TELENET LTD. ..... Respondent
Through: Ms.Kavita Jha, Advocate
ITA No. 417/2013
Reserved on: 25th September, 2013
Date of Decision: December, 2013
COMMISSIONER OF INCOME TAX VI ....Appellant
Through Mr. Amol Sinha, Sr. Standing Counsel
Versus
HUTCHINSON ESSAR TELECOM PVT. LTD. ....Respondent
Through Mr. N.K. Kaul, Sr. Advocate with
Mr. Salil Kapoor, Mr. Vikas Jain and
Mr. Sanat Kapoor, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J.
This common judgment/order will dispose of appeals filed by
Commissioner of Income Tax, Delhi I/Delhi VI, as identical
question of law arise for consideration in the following cases:
S No. ITA No. Name of the Assessee Assessment
Year
1. 1328/2010 Bharti Hexacom 2003-04
2. 1336/2010 2004-05
3. 114/2012 2006-07
ITA 1336/2010 & conn. cases. Page 3 of 46
4. 996/2011 2007-08
5. 893/2010 Bharti Cellular 2000-01
6. 1680/2010 2001-02
7. 1679/2010 2002-03
8. 177/2010 Bharti Airtel Ltd. 2005-06
9. 1333/2010 Bharti Telenet Ltd. 2000-01
10. 417/2013 Hutchinson Essar Pvt. Ltd 1999-2000
2. The principal and core issue raised in the present appeals is
similar i.e. whether licence fee payable is capital or revenue
expenditure. However, there is one basic difference between appeals
listed at Sl. Nos. 1 to 9 in paragraph 1 above, and the appeal in the
case of Hutchison Essar Pvt. Ltd. i.e. ITA 417/2013 which should be
noticed and referred to at the very outset. The said appeal relates to
assessment year 1999-2000 and pertains to licence fee paid under and
in terms of an agreement executed in 1994 with the Department of
Telecommunications/Government of India, whereas other appeals
listed at Sl. Nos. 1 to 9 above, relate to variable licence fee on
revenue sharing basis paid under the new Telecom Policy, 1999.
However, as the facts and issues are identical, we have deemed it
appropriate to decide the appeal filed against Hutchison Essar Pvt.
Ltd. along with appeals at Sl.Nos. 1 to 9. Wherever necessary, we
have dealt with the issue and contentions raised in the said appeal
separately.
3. Common substantial question of law required to be decided in
these appeals reads:-
1. Did the Tribunal fall into error in holding that
the variable licence fee paid by the assessees was
properly deductible as revenue expenditure?
4. As is apparent from the substantial question of law quoted
above, the issue raised is whether the variable licence fee paid by the
ITA 1336/2010 & conn. cases. Page 4 of 46
respondents under Indian Telegraph Act, 1885, and Indian Wireless
Fee Act 1933, payable under the New Telecom Policy 1999 or 1994
agreement, is revenue expenditure or capital expenditure which is
required to be amortized under Section 35ABB of the Income Tax
Act, 1961 (Act, for short).
5. At the very outset, we would like to reproduce Section 35ABB,
which reads:
"35ABB.(1) In respect of any expenditure, being in the
nature of capital expenditure, incurred for acquiring any
right to operate telecommunication services[either before
the commencement of the business to operate
telecommunication services or thereafter at any time
during any previous year] and for which payment has
actually been made to obtain a licence, there shall, subject
to and in accordance with the provisions of this section, be
allowed for each of the relevant previous years, a
deduction equal to the appropriate fraction of the amount
of such expenditure.
Explanation.--For the purposes of this section,--
[(i) "relevant previous years" means,--
(A) in a case where the licence fee is actually paid before the
commencement of the business to operate
telecommunication services, the previous years beginning
with the previous year in which such business
commenced;
(B) in any other case, the previous years beginning with the
previous year in which the licence fee is actually paid, and
the subsequent previous year or years during which the
licence, for which the fee is paid, shall be in force;]
(ii) "appropriate fraction" means the fraction the numerator of
which is one and the denominator of which is the total
number of the relevant previous years;
(iii) "payment has actually been made" means the actual
payment of expenditure irrespective of the previous year
in which the liability for the expenditure was incurred
according to the method of accounting regularly employed
by the assessee.
ITA 1336/2010 & conn. cases. Page 5 of 46
(2) Where the licence is transferred and the proceeds of
the transfer (so far as they consist of capital sums) are less
than the expenditure incurred remaining unallowed, a
deduction equal to such expenditure remaining unallowed,
as reduced by the proceeds of the transfer, shall be
allowed in respect of the previous year in which the
licence is transferred.
(3) Where the whole or any part of the licence is
transferred and the proceeds of the transfer (so far as they
consist of capital sums) exceed the amount of the
expenditure incurred remaining unallowed, so much of the
excess as does not exceed the difference between the
expenditure incurred to obtain the licence and the amount
of such expenditure remaining unallowed shall be
chargeable to income-tax as profits and gains of the
business in the previous year in which the licence has been
transferred.
Explanation.--Where the licence is transferred in a
previous year in which the business is no longer in
existence, the provisions of this sub-section shall apply as
if the business is in existence in that previous year.
(4) Where the whole or any part of the licence is
transferred and the proceeds of the transfer (so far as they
consist of capital sums) are not less than the amount of
expenditure incurred remaining unallowed, no deduction
for such expenditure shall be allowed under sub-section
(1) in respect of the previous year in which the licence is
transferred or in respect of any subsequent previous year
or years.
(5) Where a part of the licence is transferred in a previous
year and sub-section (3) does not apply, the deduction to
be allowed under sub-section (1) for expenditure incurred
remaining unallowed shall be arrived at by--
(a) subtracting the proceeds of transfer (so far as they consist
of capital sums) from the expenditure remaining
unallowed; and
(b) dividing the remainder by the number of relevant previous
years which have not expired at the beginning of the
previous year during which the licence is transferred.
(6) Where, in a scheme of amalgamation, the
amalgamating company sells or otherwise transfers the
licence to the amalgamated company (being an Indian
company),--
ITA 1336/2010 & conn. cases. Page 6 of 46
(i) the provisions of sub-sections (2), (3) and (4) shall not
apply in the case of the amalgamating company; and
(ii) the provisions of this section shall, as far as may be, apply
to the amalgamated company as they would have applied
to the amalgamating company if the latter had not
transferred the licence.]
[(7) Where, in a scheme of demerger, the demerged
company sells or otherwise transfers the licence to the
resulting company (being an Indian company),--
(i) the provisions of sub-sections (2), (3) and (4) shall not
apply in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply
to the resulting company as they would have applied to the
demerged company if the latter had not transferred the
licence.]
(8) Where a deduction for any previous year under sub-
section (1) is claimed and allowed in respect of any
expenditure referred to in that sub-section, no deduction
shall be allowed under sub-section (1) of section 32 for the
same previous year or any subsequent previous year.
6. As is apparent from the Section itself, it applies when
expenditure of capital nature was/is incurred by an assessee for
acquiring a right for operating telecommunication services. It is
immaterial whether the expenditure is/was incurred before or after
commencing the business to operate telecommunication services.
But, the payment should be actually made. We agree with the
counsel for the respondents that the said provision does not stipulate
or mandate that any expenditure for a right to operate
telecommunication services or payment made for the said licence
as per the section is deemed to be a capital expenditure. Section
35ABB is not a deeming provision but comes into operation and is
effective when the expenditure itself is of a capital nature and is
incurred for acquiring a right to operate telecommunication services
or is made to obtain a licence for the said services. It can be incurred
ITA 1336/2010 & conn. cases. Page 7 of 46
before commencement of business or thereafter, but should be
incurred during the previous year. Thus Section 35ABB by itself
does not help us in determining and deciding the question whether
licence fee paid under the New Telecom Policy 1999 or under the
1994 agreement, was/is capital or revenue in nature.
7. Undisputed facts which are relevant may be now noticed. The
respondent companies are engaged in business of telecommunication
services and value added related services. They have procured
licence in different circles. Originally the said licences were awarded
under licence agreement executed in 1994. The period of licence as
stipulated was for ten years initially, expandable for one year or more
at the discretion of the authorities. The licence could not be assigned,
transferred in any manner, whatsoever to any third party or by
entering into agreement by sub-licence, partnership etc. The
authorities had the right to revoke the agreement on breach of any
term or on default of payment by giving sixty days notice. The
licence was issued on non-exclusive basis and the authorities reserved
their right to operate the same services within the geographical area
and had right to modify the conditions of the licence as stipulated in
the Schedules A to D, when considered necessary or expedient in the
interest of general public or for proper conduct of telegraph services
or for security considerations. Even otherwise, the authorities had the
right to terminate the licence at any time in public interest by giving
sixty days notice. Schedule A, prescribed the area of service;
Schedule B prescribed the tariff ceiling and stipulated that all tariff
increases shall be subject to prior approval of the authorities but the
lower tariff could be charged from the users without prior approval.
ITA 1336/2010 & conn. cases. Page 8 of 46
There was stipulation that no free time could be given in the air time.
Licence fee payable under this agreement was as under:-
PAYMENT OF LICENCE FEES
19.1 The Licence fee payable by licencee for each
service area shall be regulated as follows:-
Licence Fee For
-------------------------------------------------------------------
----
Service Area 1st Year 2nd Year 3rd
Year
--------------------------------------------------------------------------
--
(Rupees in Crores)
Bombay 3 6 12
Delhi 2 4 8
Calcutta 1.5 3 6
Madras 1 2 4
4th Year and onwards
@ Rs. 5 lakhs (five lakhs) per 100 (one hundred)
subscribers or part thereof; subject to the minimum
shown below:-
Minimum Licence Fee for
Fourth to Sixth Year Seventh year
onwards
Service Area (for each year) (for each year)
(Rs.in crores)
Bombay 18 24
Delhi 12 16
Calcutta 9 12
Madras 6 8
a) For purpose of charging the lump-sum Licence fee
for the first three years, the year shall be reckoned
as twelve months, beginning with the date of
commissioning of services or completion of 12
months from date of signing of Licence Agreement,
whichever is earlier.
b) The fourth year for purpose of charging the Licence
fee shall be the period from the completion of the
third year as defined above to the 31st day of March
ITA 1336/2010 & conn. cases. Page 9 of 46
succeeding. The annual Licence Fee for the fourth
year will therefore, be computed prorate with
reference to the actual number of days. Thereafter,
the year for purpose of levy of Licence fee shall be
the financial year i.e. 1st April to 31st March and part
of the year as balance period, if any.
c) For the purpose of calculation of Licence fee from
the fourth year onwards as indicated in para 19.1
above, the number of subscribers at the end of each
month shall be added for all the months of the year
and divided by the number of completed months.
........
(f) The rate of Rs. five lakhs per hundred subscribers or
part thereof is based on the unit call rate of Rs.1.10.
Fourth year onwards, as defined in the clause
19.1(d), the rate of Rs. five lakhs will be revised
based on the prevalent unit call rate. The revision
will be limited to 75% of the overall increase in the
unit rate during the period preceding such revision.
Agreement further stipulated:
19.2 On completion of three years from the date of
commissioning/provision of services; the Authority
reserves the right to fix the share of the gross
revenue from rental, air time charges for all other
services provided from the cellular network of the
Licensee, as additional licence fee.
19.3 The annual Licence fee as prescribed above does
not include Licence fees payable to WPC wing of
Ministry of Communications (WPC) for use of
Radio Frequencies which shall be paid separately by
the Licensee on the rates prescribed by the WPC
and as per procedure specified by it (condition 20).
8. National Telecom Policy 1999 stands recorded in
communication dated 22nd July, 1999. The said policy stipulates that
licencee would be required to pay one time entry fee and licence fee
on percentage share of gross revenue. Entry fee chargeable would be
the fee payable by the existing operator upto 31st July,1999 calculated
upto the said date and adjusted upon notional extension of the
ITA 1336/2010 & conn. cases. Page 10 of 46
effective date. Licence fee as a percentage of gross revenue under the
licence shall be payable w.e.f. 1st August, 1999. The quantum of
revenue share to be charged as licence fee would be finally decided
after obtaining recommendation of Telecom Regulatory Authority of
India (TRAI) but meanwhile the Government had fixed 15% of the
gross revenue of the licencee as provisional licence fee. On receipt of
TRAI`s recommendation by the Government, final adjustment of the
dues would be made.
9. Clause (vi) of the said letter indicates that there were only two
cellular operators in the area/service area and it was postulated that if
either of the cellular operator did not accept the package, both the
existing operators would continue the earlier licence till the validity
of the said licence. In clause (vii), stipulated that upon migration to
National Telecom Policy 1999, the licensees would forego right of
operating in the regime of limited number of operators as per existing
licencing agreement and would operate in multiple licence regime i.e.
additional licences without any limit might be issued in a given
service area. It was further stipulated that there shall be a lock-in of
the present shareholding for a period of 5 years from the date of
licence agreement and the transfer of shareholding directly or
indirectly through subsidiary or holding companies shall not be
permitted during this period. However, issue of additional share
capital by licencee companies/their holding companies, by issue of
private placements/ public issues would be permitted. This lock-in
time would not be applicable in case of transfer of shares by
enforcement of pledge by the lending financial institutions/banks due
to defaults. The period of licence was stated to be 20 years from the
effective date of the existing licence agreement i.e., the 1994
ITA 1336/2010 & conn. cases. Page 11 of 46
agreement. Migration to National Telecom Policy 1999, was on the
condition and premise that the conditions should be accepted as a
package in entirety and simultaneously and all legal proceedings shall
be withdrawn and no dispute for the period upto 31st July, 1999, shall
be raised at any future date. After the terms were accepted,
amendments in the existing licence agreement would be signed.
10. The respondents have migrated and accepted the National
Telecom Policy, 1999. Respondents herein in ITA Nos. 1328/2010,
1336/2010, 114/2012, 996/2011, 893/2010, 1680/2010, 1679/2010,
177/2010, 1333/2010 have paid the licence fee upto 31st July, 1999,
i.e. one time licence fee as stipulated in the letter/ communications
dated 22nd July, 1999 and have treated the said payment as capital
expenditure.
11. Hutchinson Essar Telecom Pvt. Ltd., respondent in ITA No.
417/2013 has not treated the fourth year payment under the 1994
agreement as capital expenditure but as revenue expenditure, and
their contentions are being examined separately below.
12. In view of the legal issue involved, we are not referring to the
factual details in respect of each assessment year i.e. details with
regard to date of filing of return, income declared under normal
provisions, book profits etc. We shall concentrate upon the legal
issue raised and the facts relevant for determining the said legal issue.
For the purpose of clarity, we have recorded and set out details of the
writ petitions, name of the respondent-assessee, the assessment years
and the amount involved:
ITA 1336/2010 & conn. cases. Page 12 of 46
S No. ITA No. Name of the Assessee Assessment Amount Involved
Year
1. 1328/2010 Bharti Hexacom Ltd. 2003-04 Rs.8,69,16,000/-
2. 1336/2010 2004-05 Rs.10,89,74,250/-
3. 114/2012 2006-07 Rs.27,60,36,300/-
4. 996/2011 2007-08 Rs.48,83,07,556/-
5. 893/2010 Bharti Cellular Ltd. 2000-01 Rs.27,82,30,588/-
6. 1680/2010 2001-02 Rs.54,93,43,930/-
7. 1679/2010 2002-03 Rs.61,07,90,625/-
8. 177/2010 Bharti Airtel Ltd. 2005-06 Rs.2,76,48,900/-
Net amount
disallowed after
disallowance and
amortization.
9. 1333/2010 Bharti Telenet Ltd. 2000-01 Rs.4,80,67,869/-
10. 417/2013 Hutchinson Essar Pvt. 1999-2000 Rs.18,64,57,000/-
Ltd
13. The contention and the facts highlighted by the Revenue are that
respondents were granted a licence under an agreement executed under the
Indian Telegraph Act. This agreement dated 29th November, 1994, in the
case of Bharti Cellular Ltd. (date of agreement with each respondents may
be different but the terms are identical) states that pursuant to the request of
the licencee i.e. the respondent assessee, the authority had agreed to grant
licence to the assessee on the terms and conditions appearing hereinafter to
establish, maintain and operate cellular mobile services. The said
agreement further stipulates that in consideration of mutual covenants and
licence fee payable in advance, the licensor, i.e. the Government grants
licence to the licencee, i.e. the assessee, to establish, maintain and operate
cellular mobile service. The emphasis has been laid on the words
establish, maintain and operate` in the original licence and it was
highlighted that it was only pursuant to licence agreement that the
respondent assessees could establish the business. The National
Telecom Policy 1999 did modify terms of the original licence but the
new policy did not change the true nature and character of the licence
fee. Only the method of computation was altered and changed.
ITA 1336/2010 & conn. cases. Page 13 of 46
Therefore, the respondent assessees who accept and admit that licence
fee payable under the 1994 agreement was capital in nature, cannot
dispute and deny the capital nature of the same payment under National
Telecom Policy 1999. Even under the 1994 agreement for the 4th
year, the respondent assessee had to pay the fixed sum per 100
subscribers. The nature and character of the payment was same but
amount was modified to 15% of the gross revenue under the National
Telecom Policy 1999. Further, mere payment of an amount in
installments does not convert or change the capital payment to
revenue in nature. The criteria of once and for all payment or
installment payment co-relatable to percentage of gross-turnover was
not determinative of the true character of the payment. True nature of
the payment has to be determined on the basis of the advantage or
benefit procured which in the present case relates to initial set-up of
business. Right to the licence had resulted in acquisition of right to
operate. Thus it was a capital payment. The term of the licence
was/is 10 or 20 years from the date of commencement and therefore,
the expenditure was capital in nature.
14. The contention of the assessee, on the other hand, was that the
licence fee payable under the National Telecom Policy 1999 was
revenue in nature. The earnings were/are shared. The licence fee
depends upon the gross revenue and was/is payable yearly. Licence
by itself was not an asset or a right which could be sold. Under the
National Telecom Policy, 1999 there was no limit on the number of
operators and the licence granted was non-exclusive. New operators
were issued licences and were required to pay one time licence fee for
entry and start of operations in addition to yearly turnover based
licence fee. Onetime payment of licence fee was capital in nature and
ITA 1336/2010 & conn. cases. Page 14 of 46
yearly payable licence fee was not capital in nature as it was essential
and an annual necessity/obligation to continue to do business. It was a
running expense. Nature of expenditure incurred was not on addition
to fixed capital but for maintaining and operating the business of
telecommunication. The nature of expenditure should be judged in
commercial sense. Annual variable expenditure did not create or add
to a profit making apparatus. It was not part of machinery or a plant.
The appellant was wrongly assuming that the licence fee paid on
yearly basis was a source of profit. The licence fee paid on yearly
basis was a fee payable for continuing business activity and on non-
payment, licence could/can be revoked. Thus, there was/is no
enduring benefit. A licence being an indivisible right and cannot be
bifurcated into right to establish, operate and maintain.
15. Before we examine the legal position, we would like to first
deal with and examine the contention as to whether or not licence
under the National Telecom Policy 1999 was transferable and the
effect thereof. The licence stands issued to the company as the
operator, but behind the company are the real owners i.e. the
shareholders. However, a shareholder is distinct and not synonymous
with company to whom the licence under the Telegraph Act, has been
issued. Clause (viii) of the National Telecom Policy, 1999 permits
transfer of shareholding by the shareholders directly or indirectly
after lock-in period of 5 years. Therefore, it bars the licencee i.e.
respondents herein from registering or recording change of
shareholding pattern directly or indirectly with subsidiary company
within such period. However, additional equity share capital by the
licencee company or their holding companies by private placement or
public issues was/is permitted. We are concerned in the present case
ITA 1336/2010 & conn. cases. Page 15 of 46
with the licence granted to the respondent companies and the nature
and character of the licence in their hands and not the value of the
shares held by the shareholders, in spite of the fact that there was a
lock in period or prohibition regarding transfer of shares for the
period of 5 years and thereafter the shares were transferable. There
cannot be any doubt or debate that while computing the value of the
share in the hands of the shareholder, the factum and position that the
respondent company has been allotted the licence was/is a relevant
and important factor. However, we do not think that this can be the
sound and sole basis or ground to hold that the licence in the hands of
the respondent company was/is a capital asset. Value of a share in
the hands of a shareholder may not determinatively and conclusively
reflect and answer the question whether the asset held by the
company was a capital asset. Market value of a share is dependent
upon several factors including future prospects, nature of trade etc.
These may not be an asset for the company. We cannot on this basis
alone, determine and decide whether the variable licence fee paid on
annual basis is capital or revenue in nature. At the same time the
license was/is an important and relevant aspect that
determined/determines the true market value of the respondent
companies.
16. At this stage, it would be appropriate to refer to relevant case
law on the subject though we did not find or come across any
decision of the Supreme Court or the High Court directly applicable
to the factual matrix of the present cases. Starting point of discussion
on the said question invariably begins with the decision of the
Supreme Court in the case of Empire Jute Co. Ltd. vs. Commissioner
of Income Tax (1980) 124 ITR 1 (SC). Revenue in the said case
ITA 1336/2010 & conn. cases. Page 16 of 46
relied upon an earlier decision of the Supreme court in CIT vs.
Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 (SC), wherein
sale of loom hours were held to be in nature of capital receipt and
hence not taxable. The said decision was distinguished on several
grounds but noticeably it was recorded that the said case had
proceeded on a common accepted basis that loom hours was an asset.
In Empire Jute Co. Ltd. (supra), on deeper elucidation of relevant
facts, it was noticed that there was contractual agreement restricting
the right of every mill to work their looms to their full capacity as
there was over capacity but low demand. This restriction had the
effect of limiting the production and consequently the profits which
the assessee could earn. Under the same agreement, one mill could
transfer loom hours to another for consideration subject to conditions.
Thus, purchase of loom hours had the effect of relaxing the restriction
on operation of loom hours and enabled the purchaser to work their
looms for longer duration and earn profits. The Supreme Court
observed that capital expenditure was one made with a view to bring
into existence an asset for enduring benefit to the trade. But this rule
of enduring benefit was subject to and could break down for good
reasons. The nature of advantage has to be considered in commercial
sense and only when the advantage was in capital field, the
expenditure could be disallowed by applying the enduring benefit
test. If the advantage consisted merely facilitating trading operations
or enabling the management or conduct of business more efficiently
or profitably, while leaving the fixed capital untouched, the said
expenditure would be on revenue account, though the advantage may
endure for an indefinite period. Enduring benefit test, therefore, was
ITA 1336/2010 & conn. cases. Page 17 of 46
not conclusive and cannot be mechanically applied without
considering the commercial aspect.
17. The second test which can be applied was fixed and circulating
capital test. Fixed capital being what the owner turns to profit by
keeping it in his possession; circulating capital is what the assessee
makes profit by parting or letting the product/asset change
masters/hands. This test could be applied when the acquisition of
asset clearly falls within one of the two categories but the test would
breakdown where the expenditure does not fall easily within the
specified category. The demarcation line between assets out of which
profits were earned and the profit made upon assets or with assets,
was thin and difficult to draw in several cases. It was observed that
purchase of loom hours was not like circulating capital (labour, raw
material, power etc.), but loom hours were also not a part of fixed
capital. Revenue`s contention that purchase of loom hours was for
acquisition of source of profit or income and, therefore, capital
expenditure, was rejected on the ground that source of profit or
income was the profit making apparatus which had remained
untouched. There was no enlargement of permanent structure or
capital assets. Primarily and essentially the expenditure was relating
to operation or working of looms, which constituted profit earning
apparatus. The Supreme Court, however, added a word of caution that
in the field of taxation, analogies could be deceptive and misleading
but nevertheless they referred to an example of an assessee acquiring
raw material regulated under a quota system to increase his
production. Money spent to acquire the quota right, it was observed
would entitle the assessee to acquire more raw material to increase
profitability of the profit making apparatus and would undoubtedly be
ITA 1336/2010 & conn. cases. Page 18 of 46
revenue expenditure as it was a part of the operating cost. However,
the said example relates to already existing or ongoing industry.
Outgoing whether it was revenue or capital, it was highlighted, should
depend upon practical and business point of view, rather than juristic
classification of legal rights. The question should be judged in the
context of business necessity or expediency; was the expenditure a
part of assessee`s working expenditure or a part of process of profit
earning; whether the expenditure was necessary to acquire a right of
permanent character, the possession of which was a condition for
carrying on trade ?, etc.
18. It may be now appropriate and proper to refer to judgments of
the Supreme Court relating to lease agreements as they may have
some bearing and elucidate legal principles which are of relevance.
In Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal (1955) 27
ITR 34 (SC), payment made by the assessee for acquiring lease of
mine stone quarries for manufacture of cement for 20 years on
payment of yearly rent as well as protection fee to ward off
competition, was held to be capital expenditure. In the said case, the
consideration payable was per annum but was for the entire or whole
duration of the lease and it protected and gave right to the assessee to
carry on business unfettered from outsiders. It was held that the
expenditure was not a part of the working or operational expenses but
for acquiring a capital asset. Similarly, in Member of the Board of
Agricultural Income Tax, Assam vs. Sindhurani Chaudurani and
Ors. (1957) 32 ITR 169 (SC), salami or lump sum payment for non-
recurring nature made by the prospective tenant to the landlord as
consideration for settlement of agricultural land and parting with
certain rights paid anterior to landlord and tenant relationship, it was
ITA 1336/2010 & conn. cases. Page 19 of 46
held was not in the nature of rent, and thus, capital payment. It was
emphasized that the payment was not for use of land but for the land
to be put to use by the assessee. Salami was not rent paid in advance.
19. In Enterprising Enterprises vs. Deputy Commissioner of
Income Tax (2007) 293 ITR 437, the Supreme Court affirmed the
decision of Madras High Court reported in [2004] 268 ITR 95, after
referring to Pingle Industries Ltd. vs. CIT [1960] 40 ITR 67 (SC);
Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC) and Aditya
Minerals Pvt. Ltd. vs. CIT [1999] 239 ITR 817 (SC), stating that
distinction lies between the case of where royalty or rent was paid and
where the entire amount of lease premium was paid either at one time
or in installments. Royalty or rent would be revenue expenditure,
while the latter would be capital expenditure.
20. This brings us to an earlier decision of the Supreme Court in
the case of Pingle Industries Ltd. vs. Commissioner of Income Tax,
Hyderabad (supra). The majority judgment held that the quolnama
which entitled the assessee to extract stones from quarries for a period
of 12 years on annual payment (some amount was paid in advance to
secure annual payment) was capital expenditure as the assessee was
extracting stones which after dressing were sold as flag stones. It was
observed that the lease was for long term with right to extract stones
in six villages, without limit by measurement or quantity, and entitled
the assessee to exclusive rights. The majority held that the
expenditure was capital in nature and cannot be equated with cases
wherein assessee had acquired right to pick up tendu leaves for
manufacture of bidi, which was equivalent to purchasing of raw
material for manufacturing business. It was observed that stones in
ITA 1336/2010 & conn. cases. Page 20 of 46
situ were stock in trade of business, but lease payments were capital
in nature as the stones only upon extraction became stock in trade.
The payment though periodical was neither rent nor royalty, but
payment was for acquiring an asset for enduring benefit i.e. right to
extract stones and not stones itself.
21. In Jabbar (M.A.) vs. CIT, Andra Pradesh [1968] 68 ITR 493
(SC), the assessee had taken a short term lease of 11 months for
quarrying purposes to carry away, sell and dispose of sand which was
lying on the surface of river bed without excavation or skillful
extraction. The said expenditure was held to be of revenue character,
in spite of fact that the interest on land was also conveyed, observing
that this was not decisive. The decisive factor was the object for
which the lease was taken and the nature of payment, when and while
obtaining the lease. This decision was distinguished by the Supreme
Court in R.B. Seth Moolchand Suganchand vs. CIT, New Delhi
(1972) 86 ITR 647 as minerals in this case were part of the land and
had to be won, extracted and brought to the surface unlike the case of
Jabbar (M.A.) (supra) where the minerals i.e. the sand was on
surface and thus was a case relating to expenditure for acquisition of
stock in trade and, revenue in nature. Similar treatment was given to
the licence fee paid for one year for prospecting emeralds which was
in addition to royalty on emerald excavated and sold. The first part
i.e. the licence fee for prospecting, it was held was capital. The
contention that the licence fee was not a lease rent and did not create
interest in land was rejected, observing that prospecting licence was
issued before operations had started and was paid irrespective of the
mineral obtained. This demonstrated that the object for the payment
was to initiate business; though the period of licence was one year it
ITA 1336/2010 & conn. cases. Page 21 of 46
did not make the payment, revenue payment. Prospecting license fee
cannot be equated with payment for stock in trade.
22. In CIT vs. Bombay Burmah Trading Corporation (1986) 161
ITR 386, the Supreme Court observed that lump sum consideration
paid on surrender of export rights in a forest lease, where the assessee
had right to extract and cut timber and remove them on payment of
royalty, was capital payment. The payment was for sterilization of
the profit making apparatus i.e. the capital asset. The forest lease was
also not a stock in trade. The determining factor, it was observed
was nature of trade in which the asset was employed. If the payment
made, represented profit in a new form, it would be income, but if the
money paid related to structure of assessee`s profit making apparatus
and affected the conduct of business, the sum received for
cancellation or variation of agreement, would be a capital receipt.
23. In Commissioner of Income Tax vs. Madras Auto Services (P)
Ltd. (1998) 233 ITR 468 (SC), the assessee had incurred expenditure
on demolishing the existing building and constructing a new building
at their own expense. The new building belonged to the lessor and
the assessee remained a lessee but at a low rent. Term for lease was
39 years but the Supreme Court held that the expenditure was revenue
in nature as the newly constructed property from the beginning was
owned by the lessor. It was emphasized that the asset created, though
of enduring nature, did not belong to the assessee (there have been
statutory amendments but we are not required to examine the said
amendments in the present decision. The ratio is relevant).
Reference was made to Lakshmiji Sugar Mills Co. P. Ltd. vs. CIT
(1971) 82 ITR 376 (SC), wherein expenditure incurred on
ITA 1336/2010 & conn. cases. Page 22 of 46
construction and development of roads between different sugarcane
producing centers and sugar factories was held to be revenue in
nature as it was incurred for the purposes of facilitating running of
assessee`s motor vehicles etc. Similarly in L.H. Sugar Factory and
Oil Mills (P) Ltd. vs. CIT (1980) 125 ITR 293 (SC), amount paid as
contribution for construction of roads in an area around the factory
under a scheme was held to be revenue in nature. CIT vs. Associated
Cement Companies Ltd. (1988) 172 ITR 257 (SC) was quoted and
observed that the expenditure incurred to concrete the main road was
revenue as the installation and accessories were assets of the
municipality. This was despite the fact that the assessee had secured
immunity from liability to pay municipal rates and taxes for 15 years.
In these cases, the expenditure had been incurred to bring about some
kind of enduring benefit but did not bring into existence any asset for
the benefit of the assessees. The expenses were made for the
purposes of conducting business more profitably and fruitfully and
the asset created did not belong to the assessee. It was noticed that
the creation of asset, resulted in saving of considerable revenue
expenditure in form of lower rent.
24. In Alembic Chemical Works Co. Ltd. Vs. Commissioner of
Income Tax, Gujarat (1989) 177 ITR 377 (SC) the assessee had
acquired know-now to produce higher yield and sub-culture of high
yielding range of penicillin. The said expenditure was in the line of
existing manufacture. It was lump-sum payment but the expenditure
was held to be revenue in nature primarily on two grounds that it was
incurred for the purpose of day to day business, which was
manufacture of penicillin and, therefore, not for entirely a new
venture unconnected and different from existing business. Secondly,
ITA 1336/2010 & conn. cases. Page 23 of 46
it would be unrealistic to ignore rapid advances in research in
antibiotic and attribute a degree of durability and permanence to
technical know-how in this fast changing area. Rapid strides in
science and technology in the field of medicines cannot be readily
pigeon-holed as capital outlay. Moreover, it was not a case of
exclusive acquisition.
25. Having reproduced several judgments on the question of the
decisive tests, it would be appropriate to notice one decision wherein
expenditure incurred has been held to be in part capital and revenue
because the tests show that expenditure incurred was for several
considerations i.e. there was overlapping of capital and revenue
expenditure. This aspect has been examined in detail separately
below. In Jonas Woodhead and Sons (India) Ltd. vs. Commissioner
of Income Tax (1997) 224 ITR 342 (SC), question arose whether
25% of the amount paid as royalty to the foreign company for
technical information/ know how relating to setting up of a plant for
manufacture of products was capital expenditure. Referring to the
issue in question, it was observed that the answer would depend upon
several factors including whether the assessee had set up a completely
new plant with a new process, new technology, or the technical
knowhow was for betterment of the product which was already being
produced; was it a part and parcel of existing business or a new
business?, Whether on expiry of period of agreement, the assessee
was required to give the plans, drawings etc., or could continue to
manufacture the products?, etc. It was accordingly observed as
under:-
In the case of Alembic Chemical Works Co. Ltd. v.
Commissioner of Income-Tax Gujarat :
ITA 1336/2010 & conn. cases. Page 24 of 46
[1989]177ITR377(SC) , the question for consideration
was whether the lump-sum payment made by the
assessee for obtaining the know-how to produce higher
yield and sub-culture of high yielding strain of
Penicillin would be a capital expenditure or a revenue
expenditure. The Tribunal had rejected the claim of the
assessee holding the expenditure to be a capital
expenditure. On appeal to this Court it was held:
(i) It would be unrealistic to ignore the rapid advances
in research in antibiotic medical microbiology and to
attribute a degree of endurability and permanence to the
technical know-how at any particular stage in this fast
changing area of medical science. The state of the art in
some of these areas of high priority research is
constantly updated so that the know-how could not be
said to bear the element of the requisite degree of
durability and no ephemerality to share the
requirements and qualifications of an enduring capital
asset. The rapid strides in science and technology in the
field should make us a little slow and circumspect in too
readily pigeon-holding an outlay, such as this, as
capital,
(ii) In the infinite variety of situational diversities in
which the concept of what is capital expenditure and
what is revenue arises, it is well-nigh impossible to
formulate any general rule, even in the generality of
cases, sufficiently accurate and reasonably
comprehensive, to draw any clear line of demarcation.
However, some broad and general tests have been
suggested from time to time to ascertain on which side
of the line the outlay in any particular case might
reasonably be held to fall. These tests are generally
efficacious and serve as useful servants; but as masters
they tend to be overexacting.
(iii) The question in each case would necessarily be
whether the tests relevant and significant in one set of
circumstances are relevant and significant in the case on
hand also. Judicial metaphors are narrowly to be
watched, for, starting as devices to liberate thought,
they end often by enslaving it.
The idea of "once for all" payment and "enduring
benefit" are not to be treated as something akin to
statutory conditions; nor are the notions of "capital" or
"revenue" a judicial fetish. What is capital expenditure
and what is revenue are not eternal verities but must
ITA 1336/2010 & conn. cases. Page 25 of 46
needs be flexible so as to respond to the changing
economic realities of business. The expression "asset or
advantage of an enduring nature" was evolved to
emphasise the element of a sufficient degree of
durability appropriate to the context.
26. At this stage, it would be relevant to clarify and elucidate the
once and for all payment test. It is not necessary that once and for all
payment would result in an enduring benefit nor is it a firm rule that
periodical payments do not show enduring benefit. The said test has
its apparent limitation, if we apply the said test without equal
importance to the questions; what was acquired and why payment
was made? The real and core test is whether payment (whether once
and for all or in installment) was for acquisition of capital asset or
rights of enduring benefit. Quantum of payment is not relevant for
determining the said question as it is the nature and quality of
payment and not quantum or manner of payment which is decisive.
Lump-sum payment can represent revenue expenditure, if it is
incurred for acquiring circulating capital though payment is made in
one go and similarly payment made in installments can in fact be for
acquiring a capital asset, price of which is paid for over a period of
time.
27. It would be relevant here to produce the tests or principles laid
down in a recent decision of this court in CIT vs. J.K. Synthetics Ltd.
[2009] 309 ITR 371 (Delhi) which are as under:-
An overall view of the judgments of the
Supreme Court, as well as of the High Courts
would show that the following broad principles
have been forged over the years which require
to be applied to the facts of each case :
(i) the expenditure incurred towards initial outlay
of business would be in the nature of capital
ITA 1336/2010 & conn. cases. Page 26 of 46
expenditure, however, if the expenditure is
incurred while the business is on going, it
would have to be ascertained if the expenditure
is made for acquiring or bringing into existence
an asset or an advantage of an enduring benefit
for the business, if that be so, it will be in the
nature of capital expenditure. If the
expenditure, on the other hand, is for running
the business or working it with a view to
produce profits it would be in the nature of
revenue expenditure ;
(ii) it is the aim and object of expenditure, which
would determine its character and not the
source and manner of its payment ;
(iii) the test of once and for all payment, i.e., a
lump sum payment made, in respect of, a
transaction is an inconclusive test. The
character of payment can be determined by
looking at what is the true nature of the asset
which is acquired and not by the fact whether it
is a payment in lump sum or in an instalment.
In applying the test of an advantage of an
enduring nature, it would not be proper to look
at the advantage obtained, as lasting forever.
The distinction which is required to be drawn
is, whether the expense has been incurred to do
away with, what is a recurring expense for
running a business as against an expense
undertaken for the benefit of the business as a
whole ;
(iv) an expense incurred for acquisition of a source
of profit or income would in the absence of any
contrary circumstance, be in the nature of
capital expenditure. As against this, an
expenditure which enables the profit-making
structure to work more efficiently leaving the
source or the profit making structure untouched
would be in the nature of revenue expenditure.
In other words, expenditure incurred to fine
tune trading operations to enable the
management to run the business effectively,
effi-ciently and profitably leaving the fixed
assets untouched would be an expenditure of a
revenue nature even though the advantage
obtained may last for an indefinite period. To
that extent, the test of enduring benefit or
ITA 1336/2010 & conn. cases. Page 27 of 46
advantage could be considered as having
broken down ;
(v) expenditure incurred for grant of licence which
accords access to technical knowledge, as
against, absolute transfer of technical
knowledge and information would ordinarily be
treated as revenue expenditure. In order to sift,
in a manner of speaking, the grain from the
chaff, one would have to closely look at the
attendant circumstances, such as :
(a) the tenure of the licence.
(b) the right, if any, in the licensee to create further
rights in favour of third parties,
(c) the prohibition, if any, in parting with a
confidential information received under the
licence to third parties without the consent of
the licen-sor,
(d) whether the licence transfers the fruits of
research of the licen-sor, once for all,
(e) whether on expiry of the licence the licensee is
required to return back the plans and designs
obtained under the licence to the licensor even
though the licensee may continue to
manufacture the product, in respect of which
access to knowledge was obtained during the
subsistence of the licence.
(f) whether any secret or process of manufacture
was sold by the licensor to the licensee.
Expenditure on obtaining access to such secret
process would ordinarily be construed as capital
in nature ;
(vi) the fact that the assessee could use the technical
knowledge obtained during the tenure of the
licence for the purposes of its business after the
agreement has expired, and in that sense,
resulting in an enduring advantage, has been
categorically rejected by the courts. The courts
have held that this by itself cannot be decisive
because knowledge by itself may last for a long
period even though due to rapid change of
technology and huge strides made in the field of
ITA 1336/2010 & conn. cases. Page 28 of 46
science, the knowledge may with passage of
time become obsolete ;
(vii) while determining the nature of expenditure,
given the diversity of human affairs and
complicated nature of business ; the test
enunciated by courts have to be applied from a
business point of view and on a fair
appreciation of the whole fact situation before
concluding whether the expenditure is in the
nature of capital or revenue.
In CIT vs. Saw Pipes Limited (2008) 300 ITR 35, the Delhi High
Court observed, that as the service lines did not belong to the assessee
and the expenses were incurred to enable the assessee to conduct its
business more efficiently, the expenditure was revenue in nature.
28. Recently, this Bench had dealt with a similar question in the
case of Oracle India Pvt. Ltd./Oracle Software India Limited , ITA
Nos. 25/2012 and 797/2006 and other connected cases decided on
25th November, 2013 and it was elucidated that underlined purpose of
differentiating capital and revenue expenditure was matching of costs
with income or receipts i.e. direct association between cost incurred
and earning of specific item of income to compute true and correct
taxable income. In Oracle India Private Ltd. (supra) it has been
highlighted that while determining the question whether payment was
capital or revenue in nature, the primary aim of the court or the
authority was to determine income earned by the assessee during two
points of time without impairing his capital or incurring personal
debts. The concept of capital maintenance was critical in
distinguishing whether the expenditure was for capital or revenue
purposes. Reference can also be made to the decision of Delhi High
Court in CIT vs. Sharda Motors Industry Ltd. (2009) 319 ITR 109
(Del.).
ITA 1336/2010 & conn. cases. Page 29 of 46
29. When we turn to the facts of the present case, the following
position emerges:
i. The licence was issued under a statutory mandate and was
required and acquired, before the commencement of operations
or business, to establish and also to maintain and operate
cellular telephone services.
ii. The licence was for initial setting up but, thereafter for
maintaining and operating cellular telephone services during
the term of the licence.
iii. Contrary to what was stated, under the licence agreement
executed in 1994 the considerations paid and payable were
with the understanding that there would be only two players
who would have unfettered right to operate and provide cellular
telephone service in the circle. The payment, therefore, had
element of warding off competition or protecting the business
from third party competition.
iv. Under the 1994 agreement, the licence was initially for 10
years extendable by one year or more at the discretion of the
Government/authority.
v. 1994 Licence was not assignable or transferable to a third
party or by way of a sub-licence or in partnership. There was
no stipulation regarding transfer or issue of shares to third
parties in the company.
vi. Under the 1994 agreement, the licencee was liable to pay fixed
licence fee for first 3 years. For 4th year and onwards, the
licencee was liable to pay variable licence fee @ Rs.5,00,000/-
ITA 1336/2010 & conn. cases. Page 30 of 46
per 100 subscribers or part thereof, with a specific stipulation
on minimum licence fee payable for 4th to 6th year and with
modified but similar stipulations from 7th year onwards.
vii. The licence could be revoked at any time on breach of the
terms and conditions or in default of payment of consideration
by giving 60 days` notice.
viii. The authority also reserved the right to revoke the licence in
the interest of public by giving 60 days` notice.
ix. Under 1999 policy, the licencee had to forego the right of
operating in the regime of limited number of operators and
agreed to multiparty regime competition where additional
licences could be issued without limit.
x. There was lock in period on the present shareholding for a
period of 5 years from the date of licence agreement i.e. the
effective date and even transfer of shareholding directly or
indirectly through subsidiary or holding company, was not
permitted during this period. This had the effect of
modifying` or clarifying the 1994 agreement, which was
silent.
xi. Licence fee calculated as a percentage of gross revenue was
payable w.e.f. 1st August, 1999. This was provisionally fixed
at 15% of the gross revenue of the licencee but was subject to
final decision of the Government about the quantum of revenue
share to be charged as licence fee after obtaining
recommendation of the Telecom Regulatory Authority of India
(TRAI).
ITA 1336/2010 & conn. cases. Page 31 of 46
xii. At least 35% of the outstanding dues including interest payable
as on 31st July, 1999 and liquidated damages in full, had to be
paid on or before 15th August, 1999. Dates for payments of
arrears were specified.
xiii. Past dues upto 31st July, 1999 along with liquidated damages
had to be paid as stipulated in the 1999 policy, on or before 31 st
January, 2000 or earlier date as stated.
xiv. The period of licences under 1999 policy was extended to 20
years starting from the effective date.
xv. Failure to pay the licence fee on yearly basis would result in
cancellation of licences. Therefore, to this extent licence fee
was/is payable for operating and continuing operations as
cellular telephone operator.
30. Having noted the aforesaid factual position, we feel that
payment of licence fee was capital in part and revenue in part and it
would not correct to hold that the whole fee was capital or revenue in
entirety. The licencees i.e. the assessees in question required a
licence in order to start or commence business as celluar telephone
operator. The requirement to procure a licence or pay licence fee was
a precondition before the assssee could commence or set up the
business in question. The fee was certainly paid to the Government
for permitting and allowing an assessee to set up/start cellular
telephone service which otherwise was not permitted or prohibited
under the Telegraph Act. In a way, it was a privilege granted to the
assessee subject to payment and compliance with the terms and
conditions.
ITA 1336/2010 & conn. cases. Page 32 of 46
31. Licence fee under the 1994 agreement ensured that there would
be only two private operators in a circle and thus their limited
monopoly would be protected and competition by way of third party
private players was warded off. Restricted monopoly of the licencees
was ensured. The licence fee fixed included an element towards the
said right of the licencees. 1994 agreement, for first three years
postulated a lump-sum payment irrespective of number of
subscribers. Minimum fee was also prescribed for later years. It
appears that licencees were unable to make payments as per the 1994
agreement and under the 1999 policy, were required to pay lump-sum
payment for past arrears before specified dates.
32. There was restriction under the 1994 agreement, on transfer of
the licence or even grant sub-licence but there was no specific
restriction on change of shareholding. 1999 policy ensured that even
shareholding did not change for a period of 5 years from the effective
date. The effect of acquiring the licence has been examined in
paragraph 15 above. The licence was not assignable or transferrable
as such, but induction of share capital, transfer of shares etc. was
permitted subject to conditions in the 1999 policy. In commercial
sense the licence constituted and continues to be the most valuable
right which the company has and possesses. Thus, the payment made
is for acquiring the licence which is essential and mandatory,
prerequisite for establishing the business and for operations or
continuance and running of business. Yet, as observed below, it
cannot be equated with one time entry fee which a person has to pay
to establish the business. It therefore, represents composite payment,
both capital and revenue.
ITA 1336/2010 & conn. cases. Page 33 of 46
33. The licence fee was imposed and payable under the Indian
Telegraph Act and other statutory provisions and was/is mandatory.
Failure to pay the same would/will result in discontinuance or
stoppage of business operations. Under 1999 policy, the amount
payable speaks of sharing of gross revenue earned by the service
provider from the customers. 1994 agreement as noticed did have a
provision for sharing but with minimum payment stipulation. In case
of non-payment of licence fee, the licence could be revoked and
licencee was not permitted to carry on and continue cellular telephone
service. Thus, the licence fee payable was/is equally with the
objective and purpose to maintain and operate cellular telephone
services. It was also an operating expense and non payment can lead
to cancellation as one of the consequences. Endurement requires
current expenses and is subject to payment on revenue share. It will
not be correct to hold or propound that entire payment during the term
of licence, is deferred capital payment. This was/is not the intent
under the 1994 agreement or 1999 policy. The intent is to also share
the gross earning to maintain and operate the licence.
34. The licence fee as such is similar to both prospecting fee,
acquisition of right to lease as well as leases which enabled removal
of sand/tendu leaves, etc. as nothing has to be won over, or extracted.
Part payment was towards an initial investment which an assessee had
to make to establish the business. It was a precondition to setting up
of business. It has element and includes payment made to acquire the
asset` i.e. the right to establish cellular telephone service. But the
licence permits and allows the assessee to maintain, operate and
continue business activities. Payment of licence fee has certain
ITA 1336/2010 & conn. cases. Page 34 of 46
ingredients and is like lease rent which is payable from time to time
to be able to use the licence.
35. The licence acquired was initially for 10 years and the term
was extended under the 1999 policy to 20 years but this itself does
not justify treating the licence fee paid on revenue sharing basis under
the 1999 policy as a capital expense made to acquire an asset. As
observed in Empire Jute Co. Ltd. (supra), the enduring benefit test
has limitation and cannot be mechanically applied without
considering the commercial or business aspects. Practical and
pragmatic view and considerations rather than juristic classification is
the determinative factor. The payment of yearly licence fee on
revenue sharing basis is for carrying on business as cellular telephone
operator. It is a normal business expense.
36. Read in this manner, the licence granted by the Government/
authority to the assessee would be a capital asset, yet at the same
time, the assessee has to make payment on yearly basis on the gross
revenue to continue, to be able to operate and run the business, it
would also be revenue in nature. Failure to make stipulated revenue
sharing payment on yearly basis would result in forfeiting the right to
operate and in turn deny the assessee, right to do business with the aid
of the capital asset. Non- payment will prevent and bar an assessee
from providing services.
37. Counsel for the Revenue has relied upon decision of the
Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. Vs.
Commissioner of Income Tax, (1997) 220 ITR 878. In the said case
the High Court has held that payment made to the State towards
license fee or permit under the provisions of Punjab Excise Act and
ITA 1336/2010 & conn. cases. Page 35 of 46
Punjab Distilleries Rules applicable to the State of Himachal Pradesh,
was capital expenditure. The imposition was for construction, for
working of distillery and referred to manufacture of different kinds of
liquor. We respectfully doubt the ratio of the said decision to the
extent it observes that license fee for working of the distillery and
relating to quality/kind of liquor would be capital expenditure. The
expenditure incurred for operating or running of distillery would not
be capital expenditure as it relates to and is a part of the operational
expenses. These cannot be equated with capital expenditure incurred
in the form of fee paid to the Registrar of Companies at the time of
fresh incorporation, the analogy drawn in the said decision. The
Division Bench of Himachal Pradesh High Court in the said decision
has quoted the following passage from Kanga and Palkhivala`s the
Law and Practice of Income-tax, Eighth Edition, Volume I :-
License, permit and monopoly. -- There are some early
English cases on this topic which have to be used with
caution. Payment by the lessee of licensed hotel premises to
the local authorities as the monopoly value` on the grant of a
three year license was held to be capital expenditure on the
ground that the monopoly right of trading for three years as a
licensed victualler attained the dignity of a capital asset.
Likewise, money expended by a brewery firm in an attempt
(successful or unsuccessful) to acquire new licensed premises
or by a public carrier to obtain a license for a larger fleet of
vehicles or the price of a license granted to a carting
contractor for a period of eight years to deposit earth, slag,
etc., on the land of the licensor, was held to be capital
expenditure.
The law has evolved considerably as a result of acceptance of
the crucial principle that the distinction between capital and
revenue expenditure should be determined from the practical
and business view point and in accordance with sound
accountancy principles, eschewing the legalistic approach. A
license fee is revenue expenditure, and payments made to the
State for a license or permit are none the less deductible
although the license or permit may carry with it an exclusive
right, where the monopoly` or the exclusive character of the
ITA 1336/2010 & conn. cases. Page 36 of 46
right is incidental to the license or permit. Annual
payments made to the State, in lieu of tax on motor
vehicles per trip, for the exclusive right to ply buses on a
certain route, are revenue disbursements, and so also are
royalties paid to the State for a monopoly right to
excavate raw materials or stock-in-trade or for an
exclusive license to manufacture sugar.
38. In Mohan Meakin Breweries Ltd. (supra) the Division Bench
rightly observed that that the aforesaid passage supports the case of
the assessee. Thus, we observe that the expenditure incurred for
establishing or for setting up/construction of any factory/business
would be capital, but the amount paid on yearly basis for running or
operation of the factory/business would be normally revenue in
nature.
39. The next question or issue which arises is whether the Court
can bifurcate and divide the licence fee into capital and revenue and
what percentage or ratio should be attributed to revenue and capital
account. It is the contention of the Revenue that the respondent
assessee i.e. Bharti Cellular Ltd., Bharti Hexacom Ltd. and Bharti
Airtel Ltd. had themselves treated and regarded the licence fee
payable under the 1994 agreement as capital expenditure. Even in
case of Hutchinson Essar Pvt. Ltd., licence fee paid under 1994 policy
for first three years was treated by the assessee as capital expenditure.
In the fourth year Hutchinson Essar Pvt. Ltd. has treated the variable
licence fee payable subject to minimum of @ Rs.5,00,000/- per 100
subscribers as revenue expenditure and the other assessees have
treated the revenue sharing licence fee under the 1999 policy as
revenue expenditure. The 1999 policy has to be read alongwith
original agreement but it did make a substantial dent and substantially
modified the original agreement. Under the 1999 policy, the new
ITA 1336/2010 & conn. cases. Page 37 of 46
entrants were liable to pay entry fee which was the total licence fee
payable upto 31st July, 1999, and thereafter they were liable to pay the
variable licence fee. Thus, the new entrants have clearly paid the
capital entry or establishment fee and then are obliged to pay
operating or maintenance fee in form of variable licence fee.
40. In Jonas Woodhead and Sons (India) Ltd. (supra), the
Assessing Officer had himself treated 25% of the amount paid as
royalty as capital and the balance amount was treated as revenue
expenditure. Similarly in Southern Switch Gear Ltd. vs. CIT (1998)
232 ITR 359, the Supreme Court has affirmed decision of the Madras
High Court in CIT vs. Southern Switch Gear Ltd. (1984) 148 ITR
272, wherein royalty payable was apportioned and 25% thereof was
treated as capital payment or expenditure on the ground that the right
to manufacture certain goods exclusively in India should be taken as
an independent right secured by the assessee from the foreign
company and this right was of enduring nature. The more
authoritative and lucid discussion for the purpose of the present
controversy is in CIT, Madras vs. Best and Co. (Pvt.) Ltd. (1966) 60
ITR 11(SC). In the said case, the respondent assessee was carrying
on business and had innumerable agencies. Compensation was
received on account of cancellation of one agency and the question
was whether the said compensation was capital or revenue in nature.
Majority judgment answered the said question observing that
compensation and loss of agencies could be both capital and revenue
depending upon facts of each case and whether the cancellation had
affected the earning apparatus or structure from physical, financial,
commercial and administrative point of view. The answer required
examination; how many agencies the assessee had; their nature, how
ITA 1336/2010 & conn. cases. Page 38 of 46
many agencies were lost and what was the effect on the income as
well as the structure of the entire business; whether the loss of agency
was ordinary incident in the course of business etc. In the said case,
compensation received was held to be revenue expenditure as the
respondent assessee had innumerable agencies in different lines and
had given up only one, to continue business in other lines. Loss of
agency, it was observed, was in normal course of business and being
a part of normal business, the amount received as compensation was
revenue in nature. At the same time, it was accepted that the
compensation paid/received was also on account of restrictive
covenant for a specified period under which the assessee had
undertaken not to take up competitive agency. It was observed that
compensation attributable to the restrictive covenant was a capital
receipt and, therefore, not taxable. It was observed:-
In the present case, the covenant was an independent
obligation undertaken by the assessee not to compete
with the new agents in the same field for a specified
period. It came into operation only after the agency was
terminated. It was wholly unconnected with the
assessee's agency termination. We, therefore, hold that
that part of the compensation attributable to the
restrictive covenant was a capital receipt and hence not
assessable to tax.
The next questions whether the compensation paid is
severable. If the compensation paid was in respect of
two distinct matters, one taking the character of a
capital receipt and the other of revenue receipt, we do
not see any principle which prevents the apportionment
of the income between the two matters. The difficulty in
apportionment cannot be a ground for rejecting the
claim either of the Revenue or of the assessee. Such an
apportionment was sanctioned by courts in Wales v.
Tilley, Carter v. Wadman (H.M. and T. Sadasivam
v. Commissioner of Income-tax, Madras. In the present
case apportionment of the compensation has to be made
on a reasonable basis between the loss of the agency in
ITA 1336/2010 & conn. cases. Page 39 of 46
the usual course of business and the restrictive
covenant. The manner of such apportionment has
perforce to be left to the assessing authorities
22. The answer to the question referred to the High
Court is that only such part of the sums of Rs. 66,790
and Rs. 3,35,371 as is attributable to the loss of the
agency is assessable under section 10 of the Act for the
assessment years 1951-52 and 1952-53. We accordingly
modify the answer given by the High Court in that
regard.
In Tilly v. Wales (Inspector of Taxes) [1943] A.C. 386, the House of
Lords observed that the amount paid was partly in consideration of
surrender of assessee`s right to pension and partly for surrender of
increased salary under an agreement. Pension amount was held to be
capital and not taxable but, the sum paid for reduction in salary was
taxable. The amount had to be apportioned reasonable for the two
considerations.
41. Thus, it would be appropriate and proper to apportion the
licence fee as partly revenue and partly capital.
42. The next obvious question is, on what basis apportionment
should be done and what could be the proportion of apportionment
between capital and revenue expenditure. We have given due
consideration to the said issue and felt that it would appropriate and
proper to divide the licence fee into two periods i.e. before and after
31st July, 1999. The licence fee paid or payable for the period upto
31st July, 1999 i.e. the date set out in the 1999 policy should be
treated as capital and the balance amount payable on or after the said
date should be treated as revenue. There are several reasons why we
have taken the said date as a cut-off point, rather than partly
apportioning expenses through the entire term of the licence. These
reasons are elucidated in the paragraph below.
ITA 1336/2010 & conn. cases. Page 40 of 46
43. Licence fee was payable for establishment, maintenance and
operation of cellular telephone service. Establishment and set up took
place in the initial years and thereafter the payments made were/are
for operation or maintaining the cellular telephone service. Initial
outlay and payment, therefore, is capital in nature, whereas the
outlays and payments made subsequently are to operate and maintain
the service. 1999 policy in the form of letter dated 22nd July, 1999
also refers to one time entry fee which is chargeable and had to be
calculated as licence fee dues payable upto 31st July, 1999 and licence
fee was thereafter payable on percentage share of gross revenue. The
new licences issued to others also stipulated one time entry fee and
then licence fee payment on sharing basis. In view of the new 1999
policy, the earlier policy which restricted competition, underwent a
change and licencees forgo their right to operate in the regime of
limited number of operators. Another reason why we feel that lisence
fee payable for the period on or before 31st July, 1999 should be
treated as capital and the amount payable thereafter as revenue, is
justified and appropriate in view of Section 35ABB. We have already
quoted the said section above. The provision provides that licence fee
of capital nature shall be amortized by dividing the amount by
number of remainder years of licences. Thus, the capitalized amount
of licence fee is to be apportioned as a deduction in the unexpired
period of the licence. The provision will have ballooning effect with
amortized amount substantially increasing in the later years and in the
last year the entire licence fee alongwith the brought forward
amortized amount would be allowed as deduction. After a particular
point of time, deduction allowable under Section 35ABB would be
more than the actual payment by the assessee as licence fee for the
ITA 1336/2010 & conn. cases. Page 41 of 46
said year. This would normally happen after the mid-term of the
licence period. Section 35ABB, therefore, ensures that the capital
payment is duly allowed as a deduction over the term and once the
expenditure is allowed, it would be revenue or tax neutral provided
the tax rates remain the same during this period.
44. ITA Nos. at serial Nos. 1 to 9 above primarily relate to variable
license fee, which is to be shared under the 1999 Policy whereas, ITA
No. 417/2013 filed against Hutchison Essar Ltd. relates to the period
of variable license fee payable for the fourth year under the 1994
Agreement.
45. The effect thereof is that we are treating about 20% of the
expenditure in terms of the tenure as per the 1999 Policy as capital in
nature, whereas if we apply the 1994 Agreement, we would be
treating about 40% of the expenditure as per the tenure as payable
towards establishing or setting up of cellular business. By the time
1999 Policy was implemented in the case of the respondents-
assessees, the cellular telephone business had already commenced
and was in operation. The 1999 Policy had the effect of extending
period of licence from 10 years to 20 years, but from the effective
date. The view, we have taken, effectively means that the entire
license fee paid in the initial first four years is treated as capital in
nature i.e. the expenditure incurred to establish cellular telephone
business, whereas the balance expenditure payable on year to year
basis from 5th year onwards is treated as revenue expenditure to run
and operate cellular telephone business.
46. However, we would like to discuss two judgments relied upon
by Huthison Essar Pvt. Ltd. in support of their contention that the
ITA 1336/2010 & conn. cases. Page 42 of 46
variable fee even prior to 31st July, 1999 should be treated as revenue
expenditure. As noted above, this was the 4th year and the contention
of the assessee is that in this year even as per the 1994 agreement,
payment had to be made on revenue sharing basis subject to the
minimum guarantee. Learned counsel for the assessee had relied
upon CIT vs. Sharda Motors Industry Ltd.(supra). In the said case
reference was made to J.K. Synthetics Ltd. (supra) to hold that no
substantial question of law arises. The Revenue had relied upon
Southern Switch Gear Ltd. vs. CIT (1998) 232 ITR 359 (SC), but the
said judgment was distinguished on the ground that lump-sum royalty
was paid and 25% thereof was disallowed by the tribunal on the
ground that it was capital payment. In Sharda Motor Industries Ltd.
(supra), royalty was to be paid on quantity of goods produced
calculated per piece. However, this does not appear to be sole basis
why the payment made was treated as revenue expenditure. The
court had relied upon other facts which are noticed in paragraph 3 of
the same judgment i.e. the payment was made for running business.
The question of apportionment and payment was not made to
establish business. In CIT vs. Modi Revlon (P.) Ltd. (2012) 26
Taxmann.com 133 (Delhi), a Division Bench of this High Court
observed that the tests evolved over the period have disapproved the
applicability of the once and for all` payment and more structured
approach which would take into account several factors like the
licence tenure; whether licence created further rights; whether there
was restriction for use of confidential information; whether benefits
were transferred once and for all; whether after expiry of the licence,
plans and drawings were to be returned, etc. As held and observed
above, it is nature and object for which the payment is made which
ITA 1336/2010 & conn. cases. Page 43 of 46
determines the character of payment. In the said case, it was
observed that there was nothing to show or to suggest vesting of
know-how in the assessee and therefore, the assessee did not derive
any enduring benefit. Thus, the royalty payment was held to be
revenue in nature.
47. In view of the aforesaid findings, the substantial question mentioned
above in item Nos.1 to 9 is answered in the following manner:
(i) The expenditure incurred towards licence fee is partly revenue
and partly capital. Licence fee payable upto 31st July, 1999 should be
treated as capital expenditure and licence fee on revenue sharing
basis after 1st August, 1999 should be treated as revenue expenditure.
(ii) Capital expenditure will qualify for deduction as per Section
35ABB of the Act.
48. The appeal ITA No. 417/2013 by the Revenue in the case of
Hutchison Essar Pvt. Ltd., pertains to the assessment year 1999-2000
i.e. year ending 31st March, 1999. It is for the period prior to the
period 31st July, 1999. As per the discussion above, the licence fee
payable on or before 31st July, 1999 should be treated as capital
expenditure and the licence fee payable thereafter should be treated as
revenue expenditure. In view of the aforesaid position, the question
of law admitted for hearing in this appeal as recorded in the order
dated 21st August, 2013, has to be answered in favour of the revenue
and against the respondent assessee.
49. In ITA Nos.893/2010 and 1333/2010, an additional issue arises
for consideration. This additional issue relates to interest on delayed
payment of license fee and whether the same was capital or revenue
ITA 1336/2010 & conn. cases. Page 44 of 46
expenditure. By order dated 18th September, 2012, the following
substantial question of law was admitted for hearing and disposal:-
Whether the Tribunal fall into error in holding
that the interest on the delayed payment of license
fee also partook of the same nature as license fee
and was deductible as revenue expenditure?
50. We are inclined to pass an order of remand on this question as
we find that the facts on the said aspect are not lucid and clear. In
the assessment-year 2000-01, the assessment year subject matters of
ITA 893/2010 and 1333/2010 in the case of Bharti Cellular Ltd. and
Bharti Telenet Ltd. now known as Bharti Infotel Ltd., the assessee
had paid interest of Rs.1.75 crores and Rs.2.24 crores to the
Department of Telecommunication for delayed payment of license
fee. The Assessing Officer disallowed the said payments observing
that these were on capital account. The assessment order records that
no details had been furnished and the expenses pertained to prior
period. The payment was considered to be capital in nature because
the license fee was also capital expenditure.
51. Commissioner (Appeals) in the case of Bharti Cellular Ltd.
(ITA 893/2010) held that interest paid was capital expenditure
because license fee itself was capital in nature. The said opinion was
followed by Commissioner (Appeals) in the case of Bharti Telenet
Ltd., now known as Bharti Infotel Ltd. The answer to the question
would depend upon the finding whether payment related to license
fee payable period prior to 31st July, 1999 or was for the subsequent
period. If interest paid was in respect of license fee payable for the
period prior to 31st July, 1999, it will have to be capitalised.
Similarly, if the interest was payable on license fee for the period post
ITA 1336/2010 & conn. cases. Page 45 of 46
31st July, 1999, it should be treated as revenue in nature/character.
The contention that it was a prior period expense does not appeal to
us and has to be rejected, as the interest was paid during the year in
question.
52. Learned counsel for the assessees has submitted that there
cannot be any factual dispute that this interest was paid to the
Department of Telecommunication on delayed payment of license fee
under the 1999 policy and not on account of license fee payable for
period prior to 31st July, 1999. We cannot from the facts on record,
decipher the exact details as this aspect has not been examined by the
tribunal. The tribunal has held that interest paid was revenue in
nature because the license fee payable itself was revenue in nature,
irrespective of fee payable prior to 31st July, 1999. We have held to
the contrary. The said question of law, therefore, is answered in
favour of the Revenue and against the respondent-assessee but with
an order of remand to decide the controversy afresh keeping in view
the observations made above.
53. The appeals are accordingly disposed of. In the facts and
circumstances, there will be no orders as to costs.
(SANJIV KHANNA)
JUDGE
(SANJEEV SACHDEVA)
JUDGE
DECEMBER 19th, 2013
kkb/NA/VKR
ITA 1336/2010 & conn. cases. Page 46 of 46
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