Telecom licence fees under the 1999 regime were capital expenditure, with only statutory amortisation available.

Where a telecom licence confers a composite right to establish, maintain and operate services, periodic payments made to keep that licence alive remain part of the consideration for acquiring and continuing that capital right. The annual variable licence fee under the 1999 regime was therefore capital expenditure falling within Section 35ABB and not revenue expenditure deductible under Section 37. The fee could not be split into capital and revenue components merely by reference to payments made before and after 31 July 1999, because both payment forms related to the same underlying licence obligation. The outgoing was thus wholly capital, with only statutory amortisation available.

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Issues: (i) Whether the variable annual licence fee paid under the New Telecom Policy, 1999 was revenue expenditure deductible under Section 37 of the Income-tax Act, 1961 or capital expenditure amortisable under Section 35ABB of the Income-tax Act, 1961; (ii) Whether the licence fee could be apportioned as partly capital and partly revenue by splitting the payments into periods before and after 31 July 1999.

Issue (i): Whether the variable annual licence fee paid under the New Telecom Policy, 1999 was revenue expenditure deductible under Section 37 of the Income-tax Act, 1961 or capital expenditure amortisable under Section 35ABB of the Income-tax Act, 1961.

Analysis: The licence conferred a composite right to establish, maintain and operate telecommunication services, and the payment structure, whether by one-time entry fee or annual revenue share, was only the manner of discharging consideration for that composite right. Section 35ABB applies where the expenditure is capital in nature and incurred for acquiring the right to operate telecommunication services. The annual variable fee remained linked to the continuance of the licence itself, and non-payment exposed the licensee to revocation under the Telegraph Act. The changing form of payment did not alter the character of the outgoing.

Conclusion: The variable annual licence fee was capital in nature and fell within Section 35ABB, not Section 37.

Issue (ii): Whether the licence fee could be apportioned as partly capital and partly revenue by splitting the payments into periods before and after 31 July 1999.

Analysis: The apportionment approach was rejected because the payments traced to a single source and a single underlying obligation, namely the licence to carry on telecom business. The cases relied on for apportionment involved distinct subject matters or separate components of consideration, whereas here the entry fee and the annual variable fee were different modes of payment for the same licence right. The composite right could not be artificially bifurcated on the basis of payment schedule.

Conclusion: The apportionment between capital and revenue was impermissible.

Final Conclusion: The licence fee payable under the 1999 regime was held to be capital expenditure throughout, and the assessees were entitled only to amortisation under the statutory scheme.

Ratio Decidendi: Where a single licence confers a composite right to carry on business, periodic revenue-linked payments made to keep that licence alive are not decisive of character; if the payments are referable to acquisition and continuance of the same capital right, the whole outgoing is capital and cannot be split merely by the mode or timing of payment.

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