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COMMISSIONER OF INCOME TAX Vs. BHARTI HEXACOM LTD
January, 02nd 2014
*             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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