TaxTMI 
TaxTMI 
2000 (9) TMI 1053
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....f the accounts (network cost) that the assessee had debited a sum of Rs. 282.60 crores as licence fees to the Department of Telecommunications (DOT). The amount was debited to the P&L a/c for the year. He noticed that similar amounts were debited in the accounts of the earlier years as under : Assessment year Amount debited (Rs.) Description 1991-92 (not known) Levy for use of network of DOT 1992-93 205.80 crores -do- 1993-94 270.25 crores -do- 1994-95 220.20 crores -do- 3. He noticed further that w.e.f. 1st April, 1993, the DOT levy had been withdrawn and the licence fees had been introduced. In the asst. yrs. 1992-93 and 1993-94 in which the DOT levy had been claimed as deduction as revenue expenditure, the Central Board of Direct Taxes (CBDT) had examined the allowability of the claim and had opined that it was not allowable as a deduction and, according to the AO, the assessee, accepting the opinion, had filed revised returns on 7th April, 1994, withdrawing the claim for deduction. But from the asst. yr. 1994-95, the "revenue-sharing arrangement" between the assessee-company and the DOT was revised and according to the r....
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....rom the asst. yr. 1988-89, the assessee had also to pay a levy at a fixed percentage of the gross revenue of the assessee "for utilising the telecommunication network of the DOT". The percentage was increased every year. Finally, w.e.f. 1st April, 1993 the DOT conveyed to the assessee "its new decision of revenue sharing arrangement" and as per this arrangement "the levy has been withdrawn and instead licence fee which was earlier shown as nil has been revised to Rs. 3 per minute of the telephone use". This, according to the AO, "clearly shows that as a result of revision of licence fee in the new revenue sharing formula the DOT levy has been withdrawn. In other words, the licence fee is nothing but substitute of the DOT levy in the revised revenue sharing formula". He gave the following further reasons for his decision : (1) The withdrawal of the DOT levy and the revision of licence fee from Rs. 101 per annum to Rs. 3 per minute are simultaneous which cannot be just a coincidence. (2) The earlier licence fee of Rs. 101 was not part of the Revenue sharing formula but was given effect to by a separate letter of DOT date. 31st March, 1996; but in the revised formula....
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....taxes to the appellant." The second point made by him was that the licence fee was not a statutory levy. 8. The assessee-company is in further appeal before us. We have heard the able arguments addressed before us by both the sides. We have also carefully perused the paper-books filed by them. 9. The question that falls for consideration is : what is the real nature of the payment of Rs. 282.60 crores made by the assessee-company to DOT ? To answer this question, we have to first look at some of the provisions of the Indian Telegraph Act, 1885. Sec. 4, placed in Part II of the Act under the heading "Privileges and Powers of the Government" confers the exclusive privilege of establishing, maintaining and working telegraphs within India upon the Central Government. The first proviso however says that the Central Government may grant a licence, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part of India. In other words, the privilege of establishing etc. of telegraphs can be parted with by the Central Government for a price. Sub-s. (2) which was inserted in 1914 permits the Central G....
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....). By letter dated 8th December, 1989, this was increased to 40 per cent (p. 35) for the financial years 1998-89 and 1989-90 (asst. yrs. 1989-90 and 1990-91). It would appear that upto and including the asst. yr. 1991-92 the claim of the assessee for deduction of the DOT levy was accepted in its income-tax assessments. A reference to it is found in the letter dated 5th March, 1992, written by the CBDT to DOT with copy to the CIT, Bombay-I (p. 37 of the paper-book). It is in this letter that the CBDT has expressed an opinion regarding the allowability of the claim of the assessee as under : F. No. 201/1/92/ITA-II Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, dated the 5th March, 1992. OFFICE MEMORANDUM Sub. : Videsh Sanchar Nigam Ltd. - Assessment regarding. The issue regarding the admissibility of the deduction in respect of the levy for development of rural tele-communication imposed by DOT in the tax assessment of VSNL have been carefully considered. The undersigned is directed to inform you that no deduction in respect of the levy on account of rural tele-communications would be allow....
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....0 (iii) Levy on VSNL Earnings 40% Nil (iv) License fee (payable by VSNL) Nil Rs. 30 lacs/10 lacs paid minutes (v) Surcharge on super group Nil 15% on super group Rentals of Transmission Media 14. The above revised rates shall be applicable w.e.f. the financial year 1993-94 and shall be valid for a period of 5 years, subject to review if exchange rate, ratio of incoming and outgoing traffic and accounting rates, affect revenue by more than 10 per cent, VSNL shall provide necessary information on traffic. Accounting rates etc. 15. This issues with the approval of Chairman, Telecom Commission. (A. Biswas) Director (TA-1) Copy to : 1. P. S. to Chairman Telecom Commission & Others." In col. (iv) of "items", under the head "Existing charges" it is stated as "Nil" which apparently is a mistake since the licence fee payable, as per earlier communications, was Rs. 101. It is this letter which is stated to contain the "revised revenue-sharing arrangement" which is the subject-matter of the present controversy. By letter dated 19th October, 1994, DOT withdrew the levy of 40 pe....
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....munications". The assessee being a company, the very purpose of incorporation of which is to provide, develop, operate and maintain all types of international telecom networks, systems and services, the charges which it had to pay "for the use" of the telecom network owned by the DOT should be considered and allowed as expenditure incurred for the purpose of its business under s. 37(1) of the IT Act. In allowing the levy as deduction for the asst. yrs. 1988-89 to 1991-92, the IT authorities were quite prepared to accept this position. The question of allowing the levy as deduction was reviewed during the assessment proceedings for the asst. yrs. 1992-93 and 1993-94, when the CBDT and the then Hon'ble Minister for Finance expressed opinions that the levy was only a "revenue sharing arrangement" and therefore, the same cannot be allowed as deduction. Revised returns were accordingly filed courting the disallowance of the levy for these years. It is also true that the DOT reimbursed the taxes to the assessee for these years. But the fact remains that what was described as "DOT levy" "was in truth and reality, consideration for the use by the assessee of the telecom network belongi....
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....tes is also eligible for deduction as business expenditure in the computation of the profits of the assessee, even if the argument of the AO that since the DOT levy was replaced by the licence fee, the latter should be accorded the same treatment as was given to the DOT levy, is accepted. 18. We now proceed to an independent consideration of the question as to whether the licence fee of Rs. 282.60 crores paid by the assessee for the year under appeal to DOT is allowable as business expenditure. We have already referred to the letter dated 31st March 1993, written by the DOT to the assessee (p. 41 of the paper-book), which is a letter which extended the validity of the licence from 1st April, 1993 to 31st March, 1994. Schedule "A" listed the services to be provided, maintained and worked by the assessee-company. These are as under : "SCHEDULE 'A' List of services to be provided, maintained and worked by Videsh Sanchar Nigam Limited 1 International Telephone Service Relating to the provision of International links switching centres/International Terminal Centre The National Extension and manual positions will be operated by the Department o....
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....t which may briefly be noticed. In Harshankar & Ors. vs. Dy. Excise and Taxation Commr. & Ors. AIR 1975 SC 1121, it was held that licence fee is the price for the consideration which the Government charges to the licensees for parting with its privileges and granting them to the licencee and as the State can carry on a trade or business, such a charge is the normal incident of a trading or business transaction. The amount charged to the licensees is in the nature of the price of the privilege which the purchaser has to pay in any trading or business transaction. In Pannalal & Ors. vs. State of Rajasthan AIR 1975 SC 2000, a similar question arose for consideration in connection with the Rajasthan Excise Act. It was held that the State has the exclusive right to manufacture and sell liquor and to sell the said right in order to raise revenue. The nature of the trade is such that the State confers the right to sell liquor and the rent paid by licensee is the consideration for the privilege granted by the Government for manufacturing or selling liquor. In State of Haryana & Ors. vs. Jageram & Ors. AIR 1980 SC 2018, the provisions of Punjab Excise Act came up for consideration. In this ....
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....a question of fact to be found on the relevant circumstances, having regard to business principles." 21. In Gotan Lime Syndicate vs. CIT (1966) 59 ITR 718 (SC), it was again held by Hon'ble Justice Sikri that none of the tests laid down in the various authorities to distinguish between revenue expenditure and capital expenditure is exhaustive or universal and that each case must depend on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In Travancore Sugars & Chemicals Ltd. vs. CIT (1966) 62 ITR 566 (SC). Hon'ble Justice V. Ramaswami stated the position thus : "It is often difficult, in any particular case, to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure ............. The Court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution to the question. The name which ....
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.... and the assessee has no option but to make the payments as awarded and therefore the payment is not governed by commercial or business principles. He, therefore, contended that it cannot be allowed as a deduction. It was further submitted by him that there was a special relationship between the assessee and the Government of India and that the assessee was controlled by the DOT in carrying on its business and in view of the special relationship, a part of the profits made by the assessee-company had to be transferred to the Government of India and this object was achieved by imposing a licence fee and merely because the payment was described as a licence fee, it cannot be allowed as deduction as it was in fact and truth an appropriation of the profits made by the assessee in favour of the Government of India which had ultimate control over the assessee. The argument is no doubt quite attractive, but the difficulty in accepting the same is that the assessee has been incorporated as a public limited company, subject to the IT Act and if that is so, it is not permissible for us to take cognisance of any "special relationship" between the assessee-company and the DOT which is a part o....
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....the licence fee will not be allowed because administratively it has been envisaged as a mode by which the profits of the assessee-company are to be transferred to the Government of India. The IT Act, in our opinion, is not concerned with the personalities involved or their official status in arriving at the true profits of the business for the purpose of making an assessment. The contention of Mr. Kaplla that the Government of India intended to transfer a part of the assessee's profits to itself in the guise of a licence fee so that such profits can be utilised to fulfil its social obligations cannot be countenanced as we are not concerned with the ultimate destination of the monies paid out by the assessee as licence fee. We are therefore unable to accept all these contentions of Mr. Kapila. 25. Mr. Kapila next contended that the licence fee is not a statutory payment; in fact he suggested that a licence fee can only be a matter of agreement or contract between two parties and since the present payment has been made under the Indian Telegraph Act, 1885, it would be a misnomer to call the same, a licence fee. This contention overlooks the express provisions of s. 4 of the Te....
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....ccording to him, a licence given for a period of five years till 31st March, 1999, was an enduring benefit in the "sunrise industry". In support of the contention that the payment was capital in nature, he pointed out that the payment was not in the nature of rental for utilising the telecom network, that it was not integral to the profit-making process, that it was not made for carrying on the business, but was made to create or possess a necessary condition without which the business cannot be carried on. In this connection, he strongly relied on the following judgments : (1) Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC); (2) Bombay Steam Navigation Co. (1953) Ltd. vs. CIT (1965) 56 ITR 52 (SC); and (3) Kirloskar Oil Engines Ltd. vs. CIT (1994) 206 ITR 13 (Bom). 27. Mr. Kapila next contended that even if under s. 8 of the Telegraph Act, the licence is revoked prematurely, the compensation receivable by the assessee for such premature termination would be capital and therefore, the payment of the licence fee also should be considered as capital. He submitted that the procurement of the licence under the Telegraph Act adds capital value to....
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....sessee. Thus, it is directly related to actual working of the assessee's business. The contention that because of the addition of eight new services in Schedule "A" to the licence granted on 29th March, 1994, the assessee has obtained an advantage of enduring nature cannot therefore, be accepted. 29. Similarly the contention that the licence fee relates to the very framework of the assessee's business and, therefore, cannot be allowed as a deduction is also not acceptable on the facts of the present case. As we have already seen, the assessee cannot provide the services relating to international telecommunication without making use of the network provided by the DOT. Thus, the utilisation of the network owned by the DOT is inextricably bound up with the services relating to international telecommunication provided by the assessee to the public at large from which it earns income. In Bombay Steam Navigation's case (supra), it was held that the question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be viewed in the larger context of business necessity or expediency. It was held that if the outgoing or expenditure is s....
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....y the CIT(A). He submitted that a resolution of the question would involve an investigation into facts which cannot be done at such late stage. However, since the facts have been brought on record and since Mr. Kapila did not refer to any new fact while addressing the arguments on the question, we have permitted him to raise this aspect of the case also before us. In fact, arguments on the merits of this aspect were also addressed before us by Mr. Vyas for the assessee and we have taken the arguments addressed by both the sides on the merits of the issue while arriving at the conclusion that the expenditure is not capital expenditure. 31. Mr. Kapila referred to the revised returns filed by the assessee for the asst. yrs. 1992-93 and 1993-94 and the reimbursement of the taxes by the DOT to the assessee. He however, did not put his case on the ground of any estoppel but the AO has taken it as a ground for the disallowance. But the fact that the assessee filed the revised returns in those years cannot be relied upon to support the disallowance, firstly because each year is a separate year for the purposes of an assessment under the IT Act and there is no res judicata or estoppel. E....
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....nt) are governed not by whatever view they may take of a transaction or the taxability or allowability of an item of receipt of payment, but by the true position in law [please see CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC), CIT vs. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303 (Del) and Ajit Kumar Ghose vs. Commr. of Agrl. IT (1952) 22 ITR 177 (Cal)]. Therefore, the assessee cannot be said to have given up its right to claim the deduction for all times to come by filing the revised returns for the asst. yrs. 1992-93 and 1993-94. 32. In the view we have taken on the merits of the assessee's claim, we do not consider it necessary or proper to deal with the argument raised by Mr. Vyas to the effect that inasmuch as the AO has sought to implement the opinions expressed by the CBDT and the then Hon'ble Finance Minister on the assessee's claim, his action in disallowing the expenditure is not a judicial or quasi-judicial act and hence null and void. He had also submitted that the CBDT has no powers to issue any instruction as was issued by it on 5th March, 1992 (p. 37 of the paper-book) with reference to a particular assessee viz., the VSNL, and w....