TaxTMI 
TaxTMI 
2013 (12) TMI 1115
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....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 subst....
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....re 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 sh....
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....r 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 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 b....
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....e 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 ....
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....nding 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 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 e....
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....ees 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. 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....
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....ore, 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 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....
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....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 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 li....
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....hat 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 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 eithe....
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....nce 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 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 p....
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....ical 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, 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.....
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....enerality 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 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 durabilit....
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.... 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, efficiently 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....
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.... 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.). 29. When we turn to the facts of the present case, the fol....
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.... 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). 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 31st 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 ....
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....ents composite payment, both capital and revenue. 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 m....
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....pplicable 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 t....
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.... 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 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 ....
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....efore, 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 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 Ac....
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....me 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 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 n....
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....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 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 ....