Telcos in a Fix: Licence Fee to be Treated as Capital Expenditure

In a common judgment dated October 16, 2023, the Supreme Court in C.I.T., Delhi v. Bharti Hexacom Ltd. (CA No.11128 of 2016) and other cases, held that the payment of variable annual licence fee to the Department of Telecommunications under the New Telecom Policy, 1999, has to be treated as capital expenditure. Hence, the entire fee amount would not be eligible for deduction in the same year and would have to be amortised over the remainder of the licence period.

In November 2004, the respondent, Bharti Hexacom Ltd., a wholly-owned subsidiary of Bharti Airtel Ltd. declared nil income in its return wherein the licence fee amount of Rs.11.88 Crore was claimed as revenue expenditure. Thereafter, the matter was picked up for scrutiny and after receiving the assessee’s response, an assessment order was passed in 2006 holding that the said amount should have been amortised in accordance with Section 35ABB of the Income Tax Act, 1961. As per this provision, the appropriate fraction of the amount, Rs. 99.06 Lakh was allowed as a deduction while the remaining amount of Rs. 10.89 Crore was disallowed and added back to the respondent’s income.

This decision was challenged by the respondent via an appeal filed before the Commissioner of Income Tax (Appeal) who ruled in favour of the assessee and stated that the licence fee constituted revenue expenditure deductible under Section 37 of the Act. The same was later on, upheld by the Income Tax Appellate Tribunal. When the matter came up for hearing before the Delhi High Court, the respondent maintained that the one-time payment of the licence fee under the previous policy (of 1994) was capital expenditure, whereas the licence fee payable on a yearly basis under the New Telecom Policy, 1999, was revenue expenditure since it was a “running expense” for operating the business of telecommunication.

In its order dated December 19, 2013, the Delhi High Court held that the expenditure incurred was partly revenue and partly capital in nature; the fee payable up to July 31, 1999, i.e., under the previous policy, constituted capital expenditure and the fee paid on a revenue-sharing basis after August 1, 1999, amounted to revenue expenditure.

This led the Revenue to approach the Supreme Court. After hearing the parties, the Division Bench of Justice BV Nagarathna and Justice Ujjal Bhuyan observed that the “nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on annual basis”.

Consequently, the Court allowed the appeals, set aside the judgment of the Delhi High Court, and held that the payment of the entry fee along with the variable annual licence fee made by the respondent was capital in nature which could be amortised as per Section 35ABB of the Act.

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In the present case, the respondent-assessee had claimed the expenses of the variable licence fee as revenue expenditure under Section 37 of the Act (i.e., the full amount paid) but the Apex Court ruled that the fee was capital in nature and hence, had to be treated in accordance with Section 35ABB. The said provision clearly states that the deductions with respect to capital expenditure incurred in the acquisition of any right to operate the telecommunication services shall be proportionately claimed over the licence period. Consequently, the assessee would not be eligible to claim the balance amount of expenditure (i.e., Rs. 10.89 Crore) which was supposed to be amortised, as the licence period has expired.

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After hearing the parties, the Division Bench of Justice BV Nagarathna and Justice Ujjal Bhuyan observed that the “nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on annual basis”.

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