DTH licence fee and contractual interest deductions upheld where telecommunication capital rules did not apply

Section 35ABB applies only to capital expenditure for acquiring a right to operate telecommunication services, and does not extend to DTH broadcasting activity; the variable licence fee, being a recurring payment linked to revenue and renewal terms, was therefore allowable as revenue expenditure under section 37(1). A contractual interest liability on delayed licence fee, where the rate and basis of computation were fixed and the assessee followed the mercantile system, was treated as an ascertained and measurable obligation rather than a contingent claim; the provision was therefore deductible under section 37(1).

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Issues: (i) Whether variable licence fee paid by a DTH operator to the Ministry of Information and Broadcasting is governed by section 35ABB of the Income-tax Act, 1961, or is allowable as revenue expenditure under section 37(1); and (ii) whether the provision for interest on delayed payment of licence fee is an ascertained liability deductible under section 37(1).

Issue (i): Whether variable licence fee paid by a DTH operator to the Ministry of Information and Broadcasting is governed by section 35ABB of the Income-tax Act, 1961, or is allowable as revenue expenditure under section 37(1).

Analysis: Section 35ABB applies to capital expenditure incurred for acquiring a right to operate telecommunication services. The definition of telecommunication service under the TRAI framework excludes broadcasting services. The assessee's business was found to be DTH broadcasting, not telecommunication, and the licence fee was a recurring payment linked to annual revenue and the short period of licence renewal. The decision relied on by the lower authority concerned telecom operators and did not govern the assessee's broadcasting activity.

Conclusion: Section 35ABB was held inapplicable and the variable licence fee was held allowable as revenue expenditure under section 37(1), in favour of the assessee.

Issue (ii): Whether the provision for interest on delayed payment of licence fee is an ascertained liability deductible under section 37(1).

Analysis: The interest obligation arose directly from the licence agreement, which fixed the rate and basis of computation. The existence of disputes regarding adjusted gross revenue and enhanced licence fee did not by itself make the interest liability contingent. The assessee followed the mercantile system, had received repeated demand notices, and the liability was capable of reliable estimation on contractual terms. The provision was therefore treated as a present and measurable obligation rather than an unascertained contingency.

Conclusion: The provision for interest on delayed licence fee was held to be an ascertained liability and deductible, in favour of the assessee.

Final Conclusion: The assessee's claim for deduction of the variable DTH licence fee was accepted as revenue expenditure, and the disallowance of the interest provision was also set aside, resulting in dismissal of the Revenue's appeals.

Ratio Decidendi: Section 35ABB is confined to capital expenditure for acquiring a right to operate telecommunication services and does not extend to DTH broadcasting activity; a contractual interest liability computed with reasonable certainty under the mercantile system is an ascertained liability deductible under section 37(1).

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