TaxTMI 
TaxTMI 
2023 (10) TMI 786
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....CIVIL APPEAL NO(S). 11145/2016 CIVIL APPEAL NO(S). 11146/2016 CIVIL APPEAL NO(S). 11147/2016 CIVIL APPEAL NO(S). 163/2018 CIVIL APPEAL NO(S). 11129/2016 CIVIL APPEAL NO(S). ________OF 2023 (@ SLP (C)__________OF 2023 DIARY NO(S). 24728/2023) B. V. NAGARATHNA] And UJJAL BHUYAN , JJ. For the Appellant : Mr. N Venkatraman, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. V. C. Bharati, Adv. Mr. Rahul Vijay Kumar, Adv. Mr. Rupesh Kumar, Adv. Mr. S A Haseeb, Adv. Mrs. Gargi Khanna, Adv. Mr. Manish Pushkarna, Adv. Mr. Vikrant Yadav, Adv. Mr. Rajesh Kumar Singh, Adv. Mr. Raj Bahadur Yadav, AOR Mrs. Anil Katiyar, AOR For the Respondent : Mr. Sachit Jolly, Adv. Ms. Anuradha Dutt, Adv. Ms. Disha Jham, Adv. Ms. Soumya Singh, Adv. Ms. B. Vijayalakshmi Menon, AOR Mr. Harpreet Singh Ajmani, AOR Mr. Arvind P. Datar, Sr. Adv. Mr. Ajay Vohra, Sr. Adv. Ms. Kavita Jha, AOR Mr. Vaibhav Kulkarni, Adv. Mr. Udit Naresh, Adv. Mr. Arvind Datar, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Mahesh Agarwal,, Adv. Ms. Sayaree Basu Mallik, Adv. Mr. Abhinav Gart, Adv. Mr. Abhinav Garg, Adv. Mr. Abhinabh Garg, Adv. Mr. E. C. Agrawala, AOR JUDGMENT NAGARATHNA, J. Delay condoned. 2. Leave granted. 3. The jud....
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....pt of TRAI's recommendation by the Government, adjustment of the dues was to be made. 6.1. Clause 7 of the Policy of 1999 stipulated that upon migration thereto, the licencees would forego the right of operating in a regime of limited number of operators as per the existing licensing agreement and would operate in a multiple licence regime, that is, additional licences without any limit could be issued in a given service area. The period of licence was stated to be twenty years from the effective date of the existing licence agreement, that is, the 1994 Agreement. Migration to the Policy of 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that the conditions should be accepted as a package in entirety and simultaneously and all legal proceedings shall be withdrawn and no dispute relating to the period upto 31 July, 1999 shall be raised at any future date. If all the terms were accepted, amendments to the existing licence agreement would be signed. The respondents herein migrated to the Policy of 1999. They had paid licence fee upto 31 July, 1999. The respondents treated the licence fee paid upto to 31 July, 1999 that is, the one-time licence fee as stipulated in the letter/communications d....
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....l expenditure and amortised over the remaining licence period of twelve years. The respondent-assessee furnished its response to the questionnaire, on 04 December, 2006. On consideration of the assessee's response, an Assessment Order was passed on 27 December, 2006 observing that the amount of Rs. 11,88,81,000/-, i.e. the licence fee paid by the assessee on revenue sharing basis, which was claimed as a revenue expense, ought to have instead been amortised over the remainder of the licence period, i.e., twelve years. Accordingly, an amount of Rs. 99,06,750/- was allowed as a deduction under Section 35ABB of the Act and the remaining amount of Rs. 10,89,74,250/- was disallowed and added back to the income of the respondent-assessee. 6.6. Being aggrieved, the respondent-assessee filed an appeal before the Commissioner of Income Tax (Appeal), New Delhi. In view of the decision of the Commissioner of Income Tax (Appeal) in the assessee's own case for the assessment year 2003-2004, it was reaffirmed vide order dated 27 September, 2007 that the annual licence fee calculated on the basis of annual gross revenue of the assessee would be revenue expenditure deductible under Section 37 of....
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....pay a one-time licence fee for entry and to start operations and in addition, yearly turn over based licence fee was payable. One-time payment of licence fee was capital expenditure in nature but yearly payable licence fee was revenue expenditure. It was a running expense for maintaining and operating the business of telecommunication and therefore, considered in the commercial sense, the yearly payment was in the nature of revenue expenditure. 6.10. Since the Tribunal had held that variable licence fee paid by the assessees was properly deductible as revenue expenditure, the substantial question of law raised by the High Court at the instance of appellant Revenue was, "whether the variable licence fee paid by the respondents under the Telegraph Act, and Indian Wireless Telegraphy Act, 1933 payable under the New Telecom Policy 1999 or 1994 Agreement, is revenue expenditure or capital expenditure which is required to be amortized under Section 35ABB of the Act?" The pertinent observations of the High Court and the salient aspects discussed in the judgment dated 19 December, 2013 are as under: i. Section 35ABB applies when expenditure of a capital nature is incurred by....
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.... ii. The licence was for initial setting up but, thereafter for maintaining and operating cellular telephone services during the term of the licence. iii. Contrary to what was stated, under the licence agreement executed in 1994 the considerations paid and payable were with the understanding that there would be only two players who would have unfettered right to operate and provide cellular telephone service in the circle. The payment, therefore, had element of warding off competition or protecting the business from third party competition. iv. Under the 1994 agreement, the licence was initially for 10 years extendable by one year or more at the discretion of the Government/authority. v. 1994 Licence was not assignable or transferable to a third party or by way of a sublicence or in partnership. There was no stipulation regarding transfer or issue of shares to third parties in the company. vi. Under the 1994 agreement, the licencee was liable to pay fixed licence fee for first 3 years. For 4th year and onwards, the licencee was liable to pay variable licence fee @ Rs. 5,00,000/- per 100 subscribers or part thereof, with a specific stipulation ....
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....was further observed that the licencees/assessees in question required a licence in order to start or commence business as cellular telephone operators; that payment of a licence fee was a precondition for the assessees to commence or set up the business. That it was a privilege granted to the assessee subject to payment and compliance with the terms and conditions. For immediate reference, paragraph Nos.31 to 36 of the said judgment are extracted as under: "31. Licence fee under the 1994 agreement ensured that there would be only two private operators in a circle and thus their limited monopoly would be protected and competition by way of third-party private players was warded off. Restricted monopoly of the licencees was ensured. The licence fee fixed included an element towards the said right of the licencees. 1994 agreement, for first three years postulated a lump-sum payment irrespective of number of subscribers. Minimum fee was also prescribed for later years. It appears that licencees were unable to make payments as per the 1994 agreement and under the 1999 policy, were required to pay lump-sum payment for past arrears before specified dates. 32. There was ....
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...., or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the 'asset' i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence. 35. The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. As observed in Empire Jute Co. Ltd. (supra), the enduring benefit test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmatic view and considerations rather than juristic classification is the determinative factor. The payment of yearly licence fee on revenue sharing basis is for carrying on business as cellular telep....
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....9 policy, the earlier policy which restricted competition, underwent a change and licencees forgo their right to operate in the regime of limited number of operators. Another reason why we feel that licence fee payable for the period on or before 31 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 ....
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....ries Ltd. (supra), royalty was to be paid on quantity of goods produced calculated per piece. However, this does not appear to be sole basis 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 v. 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 knowhow ....
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....basis from the fifth year onwards, as a percentage of the gross revenue of the assessees was treated as revenue/business expenditure. It was further contended as follows: i. That the schedule of payment cannot recharacterize the transaction under income tax law, particularly when this Court had laid down from time to time that the schedule of payment, whether lump-sum or periodical, is immaterial in determining its classification under income tax law. The payment(s) towards the same purpose, i.e., payment of licence fee, cannot be characterised partly as capital and partly as revenue in nature by artificially defining one part as an entry fee and the remainder, payable annually, when both types of payment was towards licence fees. ii. That when the respondent-assessees have duly amortised the licence fee paid annually as capital expenditure, under the 1994 licence regime as well as the entry fee under the Policy of 1999 regime, there was no basis to reclassify the same as revenue expenditure insofar as variable licence fee is concerned for the subsequent years. Variable payments made annually, based on the annual gross revenue in the relevant year were also tow....
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..... Commissioner of Income Tax, (1999) 8 SCC 97 ("Aditya Minerals Pvt. Ltd.") to assert that the law laid down therein is that as long as payment is towards a capital expenditure, it is immaterial whether it is paid in lump-sum or as periodical payments, or, as a combination of both. That the mode of payment will not be determinative in identifying the nature of the expenditure, i.e., as to whether it is capital or not. vii. That the decision of this Court in Assam Bengal Cement Co. Ltd. has clarified that the aim and object of the expenditure would determine the character thereof, while the source and manner of payment would have no consequence. viii. Referring to the cases of Jonas Woodhead and Sons, Southern Switch Gear Ltd. and Best and Co., which have been referred to by the High Court of Delhi in the impugned judgement, it was submitted that reliance on the said cases is misplaced inasmuch as the said cases did not deal with a single source/purpose towards which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, this Court held that the payments coul....
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.... the expenditure is capital in nature; b) the expenditure is incurred by an assessee on acquisition of the right to operate telecom services; c) the expenditure represents payment actually made to obtain a licence. Thus, for attracting the provisions of Section 35ABB, it is necessary that the expenditure under consideration must be capital in nature and is incurred for acquiring or obtaining a licence, which gives the right to the assessee to operate telecom services. ii. That in the present case, the respondent-assessees had obtained the licence in the year 1994 and had thereafter set up the telecommunication infrastructure and started operating telecommunication services. The payment of licence fee under the fixed regime, i.e., prior to migration to the Policy of 1999 was for obtaining the licence, thereby resulting in the acquisition of the right to operate telecommunication services. Therefore, the fixed licence fee upto 31 July, 1999 was amortised and allowed in terms of Section 35ABB of the Act. On the other hand, the variable licence fee payable w.e.f. 01 August, 1999, is a percentage of the AGR. The same is not in the nature of capital expenditure as....
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....That the provisions of Section 35ABB of the Act were introduced in the year 1996. At that time, the concept of variable licence fee did not exist. Application of the said provision to variable licence fee would give rise to absurd results, not intended by the Legislature. vi. That payment of variable licence fee from 01 August, 1999 is not for "acquiring any right to operate telecommunication services", which right vested in and was being exploited by the assessees pursuant to obtaining the licence in 1994 and setting up the requisite infrastructure. vii. Further, variable licence fee paid from 01 August, 1999 could not be regarded as payment made "to obtain a licence", so as to fall within the ambit of Section 35ABB of the Act. That Section 35ABB of the Act would not be attracted in the present case to require amortisation of the variable licence fee, because: a) payment of variable licence fee is not in the nature of capital expenditure; b) such payment is not incurred for "acquiring any right to operate telecommunication services"; c) such payment has not been made "to obtain a licence". With the aforesaid submissions, it was prayed that th....
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....ture. It was submitted in that context that the principle laid down in the said case would directly apply to the case at hand. The one-time entry fee is payed for acquiring the licence and is therefore in the nature of capital expenditure; whereas, the annual licence fee is to operate the licence and earn profits, therefore, the same is revenue expenditure. iv. That a similar view was taken in CIT vs. Sarada Binding Works, (1976) 102 ITR 187 ("Sarada Binding Works") wherein the Madras High Court considered various judgments of this Court and held that a lump-sum payment to acquire a right would be capital expenditure, whereas any amount paid as royalty based on annual earnings or profit would be revenue expenditure. That the payment of annual licence fee, in the present case, would be similar to the payment of royalty as it relates to the annual turnover and would therefore be revenue in nature. v. That it could not be axiomatically held that the nomenclature 'annual licence fee' would itself indicate that the annual variable licence fee was also incurred for the purpose of acquiring the capital asset, i.e., the licence and therefore, had to be amortised under Sec....
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....ghtly appreciated by the Delhi High Court in the impugned judgement and it was accordingly held that the interpretation proposed by the appellant would give Section 35ABB a ballooning effect with the amortised amount substantially increasing in the later years and in the last year, the entire licence fee along with the brought forward, amortised amount would be allowed as deduction. It was rightly held that after a certain point of time, deduction allowable under Section 35ABB would be more than the actual payment made by the assessee as licence fee for that year. In this context, reliance was placed on the decision of this Court in CIT, Bangalore vs. J.H. Gotla, A.I.R. 1985 SC 1698 to contend that it is settled law that an interpretation which leads to an absurd result should be avoided and such interpretation should give way to a more harmonious interpretation so that the legislation is given its desired result. iii. With the aforesaid submissions, it was stated that the impugned decision of the High Court of Delhi is detailed and well-reasoned. It is not contrary to any principle laid down by this Court and hence does not merit interference. It was prayed that ....
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....s singular, i.e., to acquire and retain the right to carry on the business of rendering telecommunication services. In light of the aforesaid submissions, Sri N. Venkataraman urged that this Bench may allow the appeals filed by the Revenue. Points for consideration : 9. Having heard the learned counsel for the respective parties and on perusal of the material on record, the following points would emerge for our consideration: i. Whether the variable annual licence fee paid by the respondentsassessees to the DoT under the Policy of 1999 is revenue in nature and is to be allowed deduction under Section 37 of the Act, or, the same is capital in nature and is accordingly required to be amortised under Section 35ABB of the Act? ii. Whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31 July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be tr....
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.... expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure. Explanation.-For the purposes of this section,- (i) "relevant previous years" means,- (A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; (B) in any other case, the previous years beginning with the previous year in which the licence fee is actually paid, and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force; (ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the total n....
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....lgamation, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian company),- (i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and (ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence. (7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),- (i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and (ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence. (8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any sub....
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.... a scheme of amalgamation, demerger, etc. as to how the provisions of sub-section (2), (3) and (4) of Section 35ABB would not apply but the provisions of this Section shall, as far as may be, apply to the amalgamated company or to the demerged company, apply to the resulting company as they would have applied to the amalgamating company if the latter had not transferred the licence or to the demerged company if the latter had not transferred the licence, as the case may be. Sub-section (8) states that where a deduction for any previous years under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under the sub-section (1) of Section 32 for the same previous year or any subsequent previous year. 11.3. The salient aspects of Section 35ABB (1) of the Act may be read as under: (i) Purpose and nature of expenditure - Capital expenditure incurred for the purpose of obtaining licence to operate telecommunication services. (ii) Mode of amortisation of expenses - For each year of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure, s....
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....e by the telegraph authority of any power so delegated shall be subject to such restrictions and conditions as the Central Government may, by the notification, think fit to impose." (3) Any person who is granted a license under the first proviso to sub-section (1) to establish, maintain or work a telegraph within any part of India, shall identify any person to whom it provides its services by-- (a) authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or (b) offline verification under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or (c) use of passport issued under section 4 of the PassportsAct, 1967 (15 of 1967); or (d) use of any other officially valid document or modes of identification as may be notified by the Central Government in thisbehalf. (4) If any person who is granted a license under the first proviso to sub-section (1) to establish, maintain or work a telegraph within any part of India is using authentication under clause (a) of sub-section (3) to identify any per....
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.... the telegraph in respect of which the offence has been committed, or any part of such telegraph, be forfeited to Government." "20A. Breach of condition of licence:- If the holder of a licence granted under section 4 contravenes any condition contained in his licence, he shall be punished with fine which may extend to one thousand rupees, and with a further fine which may extend to five hundred rupees for every week during which the breach of the condition continues." "21. Using unauthorized telegraphs:- If any person, knowing or having reason to believe that a telegraph has been established or is maintained or worked; in contravention of this Act, transmits or receives any message by such telegraph, or performs any service incidental thereto, or delivers any message for transmission by such telegraph or accepts delivery of any message sent thereby, he shall be punished with fine which may extend to fifty rupees." 12.1. The Telegraph Act is the parent legislation under which licences to establish, maintain or work a telegraph are issued. Section 4(1) of the Telegraph Act states that the Central Government shall have the exclusive privilege of establishing, main....
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....er) of the ONE PART and M/s. Bharti Cellular Ltd., registered under The Companies Act 1956 and having its registered office at 15th Floor, Devika Tower, 6 Nehru Place, New Delhi-110 019. (hereinafter called the Licensee which expression shall unless excluded by repugnant to this context be deemed to include its successor in business) of the OTHER PART. Whereas in exercise of the powers of the Central Government under Sub Section 2 of Section 4 of the Indian Telegraph Act 1885, the Central Government delegated its powers to Telegraph Authority (hereinafter referred to as Authority) by GSR 806 Gazette of India, Part II, Section 3(i) dated 24th August 1985. And whereas pursuant to the request of the Licensee the Authority has agreed to grant licence to the Licensee on the terms and conditions appearing hereinafter to establish, maintain and operate Cellular Mobile Telephone Service upto the subscriber's terminal connection (hereinafter called the Service) in the areas given in Schedule "A" annexed hereto and the Licensee has agreed to accept the same on the terms and conditions appearing hereinafter. Now this Agreement witnesseth as follows: 1. ....
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....b-leasing /partnership/third party interest shall be created. 10. In case of interruption of service lasting for more than 72 hours, an appropriate rebate shall be given to the users of the service by the Licensee. The Authority reserves the right to, in case of a default, impose any penalty as it may deem fit. 11. The Authority may at any time revoke the licence on the breach of any of the terms and conditions therein contained or in default of payment of any consideration payable thereunder by giving a 60 days notice. 12.1 The Licensee is not allowed to use any encryption in the network. 12.2 The Licensee is required to provide list of subscribers to the Authority every quarter regularly and, as and when required by the Authority. 12.3 The Authority or its representative will have an access to the MSC as well as the technical facility provided by the Licensee for monitoring, inspection etc. without giving any prior notice. 13. It is further agreed and declared by the parties that notwithstanding anything contained hereinbefore, that (i) The licence is issued on non-exclusive basis. The Authority reserves the right to ....
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....fourth year for purpose of charging the Licence fee shall be the period from the completion of the third year as defined above to the 31st day of March succeeding. The annual Licence Fee for the 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. XXX (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." The Agreement further stipulated: "19.2 On completion of three years from ....
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....LL) SANCHAR BHAWAN, 20, ASHOKA ROAD, NEW DELHI-110001 No 842-47/2000-VAS/Vol. IV Dated: January 29, 2001 To M/s Bharti Cellular Ltd. D-184, OKHLA Industrial Area, Phase-1, New Delhi-110 020. Subject:- Amendment in the Licence Agreement No 842-1893-TM Dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi Metro Service Area as a consequence to Migration to revenue sharing regime of New Telecom Policy-1999 (NTP-99) Sirs, In consideration of the acceptance by the Licensee, of the terms and conditions contained in the offered Migration Package vide No. 842-153/99-VAS (Vol. V) (Pt.) dated 22.7.1999 for migration to the revenue sharing regime under New Telecom Policy-1999, the license agreement shall stand substituted and modified as follows with effect from 1.8,1999, notwithstanding anything contained in the License Agreement: (i) The Licensee shall forego the right of operating in the regime of limited number of operators after 01.08.1999 and shall operate in a multipoly regime, that is to say that the Licensor may issue additional licenses for the Service witho....
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....e Licence Agreement No. 842-18/93-TM dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi Service Area as a consequence to Migration to revenue sharing regime of New Telecom Policy-1999 (NTP-99). In continuation of Amendment dated 29th January, 2001 of the aforesaid License Agreement and more specifically Para (ii) thereto, reserving the power to take a final decision on the quantum of license fee and WPC charges; the licensor hereby decides the following in pursuance of the said power which shall modify and supersede whatever is contained and described in the Licence Agreement or the above stated Amendment. (i) Annual License fee at the rate of 15% of Adjusted Gross Revenue (AGR) shall be payable by you, with effect from 1st August, 1999. (ii) In addition the cellular licenses shall pay spectrum charges, with effect from (1.8.1999) the cutoff date of change over to NTP-99 regime, on revenue share basis of 2% of AGR towards WPC Charges covering royalty payment of the use of cellular spectrum upto 4.4 MHz+4.4 MHz and Licence fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment ....
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....technical know-how for increasing yield of penicillin in its existing plant. While considering the nature of the said transaction, this Court indicated that "in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises," it is not possible "to formulate any general rule even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation". This Court further held that there is no single definitive criterion which by itself demarcates whether a particular outlay is capital or revenue. Therefore, the "once for all" test as well as the test of "enduring benefit" may not be conclusive. Consequently, the various terms and conditions of the agreement, the advantages derived by an assessee under the agreement, the payment made by the assessee under the agreement are all to be taken into account and then it has to be decided whether the whole or a part of the payment thus made is a capital expenditure or a revenue expenditure. This Court observed that courts have applied different tests like starting of a new business on the basis of technical know-how receive....
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....ved in the said case that a capital expenditure would be for securing an enduring benefit but when it comes to acquiring an advantage in the commercial sense, the enduring benefit test should not be applied mechanically. In the said case, another test was adopted, i.e., fixed and circulating capital test. It was observed that the purchase of loom hours was not like circulating capital (labour, raw material, power etc.) but loom hours were also not part of fixed capital. It was observed that whether an expenditure is revenue or capital should depend upon practical and business considerations rather than juristic classification of legal rights. That the test to be adopted was whether the expenditure was in view of a business necessity or expediency, i.e., was the expenditure a part of assessee's working expenditure or a part of process of profit earning; whether the expenditure was necessary to acquire a right of permanent character, the possession of which was a condition for carrying on trade was highlighted. (c) Insofar as lease agreements are concerned, this Court in Assam Bengal Cement Co. Ltd., in the context of acquiring lease of mining stone quarries for manufacture ....
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....reement, the assessee was required to give back the plans, drawings etc., which were obtained from the foreign company or could continue to manufacture the products? The assessing officer in the said case had treated 25% of the amount paid as royalty as capital and the balance amount was treated as revenue expenditure. The question that came up for consideration before this Court was, whether, on the facts and in the circumstances of the said case, the Tribunal was right in holding that 25% of the amount paid by the assessees therein as royalty to Jonas Woodhead and Sons was capital expenditure and therefore not allowable as revenue expenditure under the provisions of the Act for the Assessment years 1961-1968 and 1968-1969. It was observed that this question would depend upon several factors stated above and the cumulative effect of a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made or not so. Considering the different clauses of the agreement in the said case, it was concluded that the agreement with the foreign firm was to set up a new business by the as....
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.... a capital receipt. But for this, the previous history of the business and relative importance of the agency lost and the position of the business after the loss of the said agency have to be scrutinized by the department. While considering the said issue, on the facts of the said case, it was held that the asseessee therein was a well-established and long standing company in South India which had taken up innumerable agencies in different lines and one such agency had been taken from the Imperial Chemical Industries (Exports) Limited, Glasgow. When there was no material to show that the loss of the said agency was so large that the business of the agency was dislocated, on considering the facts of the said case, this Court observed that the loss of the said agency by the assessee was only a normal trading loss and the income it received was revenue receipt. Another question which was considered was whether compensation received by the assessee in lieu of a restrictive covenant was a capital receipt. It was observed that the non-compete clause came into operation after the termination of the agency and it was an independent obligation undertaken by the assessee therein not to compe....
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....oduction of the new bio-synthetic source required the erection and commissioning of a totally new and different type of plant and machinery. 14.4. Another case which has been discussed by the High Court in the impugned Judgment and relied upon by the appellant-Revenue is Pingle Industries Ltd. In the said case, the majority judgment stated that the payment in question therein was made with a view to acquire a long-term lease and a right to mine stones and the lease was conveyed to the assessee who had to extract the stones and convert them as a stock-in-trade. That the expenditure was incurred towards securing a capital asset from which, after extraction, stones could be converted into stock-in-trade. The payment, though periodic, in fact, was neither rent nor royalty but a lump-sum payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the High Court treated the outgoings as on capital account. On facts, it was observed that the assessee therein had made a down payment of Rs.96,000/- and for the remaining amount for the acquisition of lease had asked for easy terms. The remaining amount was paid every month but it was ....
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....ars and Chemicals Ltd. vs. Commissioner of Income-tax, (1966) 62 ITR 566 (SC) ("Travancore Sugars and Chemicals Ltd."), the facts were that three undertakings run by the Government of Travancore were taken over by a company under an agreement wherein the assets of the three undertakings were agreed to be sold by the Government to the new company. Cash consideration for the sale of the assets of the three undertakings was to be paid and also 20% of the annual net profit subject to a maximum of Rs.40,000/- was to be paid to the Government. The said 20% was later reduced to 10% by an amendment of the terms of the agreement. The question was, whether, the said payment was allowable under Section 10 of the Act. The High Court held that the amount constituted a capital expenditure. However, this Court held that the payment in question was in the nature of revenue expenditure for the following reasons: i) The payment was for an indefinite period and had no limitation of time attached to it. ii) The payment was related to the annual profits which flowed from the trading activities of the appellant-company and had no relation to the capital value of the assets and; ....
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....e company each year can be a revenue expenditure. (c) Reliance was also placed on Sarada Binding works by Sri Datar. In the said case, a registered firm carrying on business as a book binder and publisher had entered into an agreement with "B" under which it obtained the right to run the business of a publication concern for a consideration of a fixed sum of Rs.5,000/- per annum plus a sum equivalent to 10% of the net profits of each year of business. The assessee claimed the said amount as a business expenditure. The Madras High Court held that where the transaction in question amounted to a purchase of the business, the consideration paid partly as a fixed annual sum and partly a periodical payment on a certain percentage of the profits earned by the assessee from the said business could not be treated entirely as capital payment. The fixed annual sum payable was a capital payment but the periodical payments of sums which were indefinite depending upon the future profits earned could not be treated as capital in nature. In the said case, the following extract from Wheatcroft's treatise on The Law of Income Tax, Sur Tax and Profits Tax, was quoted wherein three types of c....
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....ents were fixed with reference to the profits which were indirectly related to the turnover. The payments were not related to any specified sum which was agreed upon by the parties as purchase price of the business. The decision of the Madras High Court was upheld by this Court. (d) Sri Datar has also referred to the decision of this Court in Mewar Sugar Mills Ltd. In the said case, a licence was granted by the then ruler of Udaipur State for the manufacture of sugar which was to be a monopoly enduring to the assessee's benefit for thirty two years. One of the conditions was that no permission would be granted to any other person for starting a sugar factory for a period of thirty-two years from the date of the said order. Another condition was that royalty must be charged on the sugar manufactured in the factory. No other tax was to be charged. After the grant of the monopoly, a limited company was floated called the Mewar Industries Ltd. and the company took steps to set up a factory, obtained requisite machinery and installed it. After completion of the factory, production could not be started on account of financial difficulties. As a result, an agreement was entered i....
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....ural Income Tax, Assam vs. Sindhurani Chaudurani, (1957) 32 ITR 169 (SC). Lump-sum payment (non-recurring) made by the prospective tenant to the landlord as consideration for settlement of agricultural land. Capital expenditure It was held that such payment was not in the nature of rent, but in the nature of capital expenditure as the same was incurred prior to the coming into effect of the landlord-tenant relationship. 3 Pingle Industries Ltd. vs. Commissioner of Income Tax, (1960) 40 ITR 67 (SC). Lump-sum amount, payable in instalments for acquiring exclusive monopoly rights to extract flag stones from certain quarries. Capital expenditure That the assessee had acquired through the long term lease, the right to extract stones and that the lease conveyed to the assessee a part of the land. The lease was held to be a capital asset, which could be converted into stock-in-trade. 4 Commissioner of Income Tax, U.P. vs Maheshwari Devi Jute Mills Ltd., (1965) 57 ITR 36 (SC). Receipt of the assessee on sale of loom-hours. Capital receipt That the surplus loomhours were disposed of by the assessee and no interest remained therein with the assessee. It....
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....e rent paid by mining lessee for acquiring leasehold right for extracting minerals from mineral bearing land. Capital expenditure Acquisition of a leasehold right to extract minerals 10 M/s Gotan Lime Syndicate vs. Commissioner of Income Tax, (1966) 59 ITR 718 (SC). Royalty paid by the assessee per annum in lieu of a mining lease/ rights to excavate limestone in a certain area. Revenue expenditure That the lease was for excavation of limestone alone and no other rights were created in immovable property. That the royalty paid was not a payment for securing enduring advantage but was a payment in order to obtain raw material and hence, was in the nature of a revenue expenditure. 11 Commissioner of Income Tax vs. Best and Co. (Pvt.) Ltd. (1966) 60 ITR 11 (SC). Compensation received by the assessee on account of cancellation of one of its agencies. Revenue receipt That the assessee had innumerable agencies in different lines and had given up only one, to continue business in other lines. Loss of agency was in the normal course of business and a part of normal business, therefore, the amount received as compensation was revenue in nature. 12 Tr....
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....would be unable to carry on business. Therefore, the expenditure was incurred merely for commercial expediency. 16 Devidas Vithaldas and Co. vs. C.I.T., Bombay City, (1972) 3 SCC 457. Purchase price (as a percentage of profits), paid on acquisition of a running business, as consideration for the right to use the goodwill of the business. Revenue Expenditure (Majority of 3:1; Sikri C.J. Dissenting) That the transaction did not amount to the sale of goodwill, as the duration of the payment as also the amount of consideration was indefinite as they depended on the rise and fall in the profits of the business. It was held that where the acquisition is not of the goodwill itself but for the rights to use it, the expenditure in the nature of royalty would be a revenue expenditure. 17 Mewar Sugar Mills Ltd. vs. CIT, (1973) 3 SCC 143. i. Payment made by the assessee to acquire monopoly rights to manufacture sugar in Udaipur; ii. 2% royalty paid to the ruler of Udaipur State on the price of the sugar manufactured. Payment of two percent royalty on the sugar manufacture was held to be revenue expenditure while the payment made in respect of the monopoly rights obta....
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....ion. In consideration of these amenities to be provided by the assessee company, the assessee secured immunity from payment of municipal taxes for a period of 15 years. Revenue expenditure That the advantage secured by the assessee by making the expenditure was the securing of absolution or immunity from liability to pay municipal rates and taxes for a period of fifteen years. If these liabilities had been paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital. As a result of the expenditure there was no addition to the capital assets of the assessee company and no change in its capital structure. The pipelines which came into existence as a result of the expenditure belonged to the Municipality. 21 Alembic Chemical Works Co. Ltd. vs. Commissioner of Income Tax, Gujarat (1989) 177 ITR 377 (SC). One-time payment made under an agreement with a foreign firm by the assessee to obtain technical knowhow, for incr easing yield of penicillin in its existing plant with a condition to keep the said know-how confidential. Revenue expenditure First, that the expenditure was incurred for the purpose ....
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....Details of certain decisions of various High Courts, which have also been considered are presented in the table hereinbelow: Sl. No. Cause Title and Citation Transaction in Question Classification of the Transaction in question by the High Court: Reasons for classification: 1 Mohan Meakin Breweries Ltd. vs. Commissioner of Income Tax, (1997) 220 ITR 878. (High Court of Himachal Pradesh, Shimla) Annual payment made to the State towards licence fee for working/operating of a distillery. Capital expenditure That but for the licence so obtained, the assessee could not have established the distillery. 2 Commissioner of Income Tax vs. Sarada Binding Works, (1976) 102 ITR 187 (Madras High Court) i. Payment made by the assessee, of a fixed sum of Rs. 5000/- per annum to acquire the right to run the business of 'Chandamama Publications'; ii. Royalty paid annually on sales equivalent to 10% of the annual net profits. i. The expenditure incurred towards the right to run the business of 'Chandamam a Publications' was held to be Capital expenditure; ii. Royalty was held to be in the nature of revenue expenditure. That payments calculated as a certain....
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....assessee and the know-how would only increase the assessee's profitability. Therefore, the expenditure would be in the nature of revenue expenditure. 6 Commissioner of Income Tax vs. Sharda Motors, (2009) 319 ITR 109 (High Court of Delhi) Royalty payable annually by the assessee, on the number of pieces manufactured, to a Korean Co. which had provided technical knowhow to the assessee. Revenue expenditure That since royalty was payable on the quantity of the good produced, the same would be revenue expenditure. 7 CIT vs. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 (High Court of Delhi) Royalty consideration paid by the assessee annually, as a percentage of sales price, to Revlon Mauritius Ltd. for supply of technical know-how to manufacture goods. Revenue expenditure That notwithstanding the fact that the assessee was the sole licencee of the brand within a given territory, expenditure would be revenue in nature because the ownership of the brand continued to be with Revlon Mauritius. That there was nothing in the agreement suggestive of any vesting of the know-how or part of it, or the goodwill of the brand, in the assessee. 16. We may also ref....
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....e so by permitting it to be paid by annual instalments. The payments by instalments in respect of monopoly value do not have the quality of annual payments or the grant of the annual excise licence, but are of a different character altogether. 16.5. Viscount Haldane however, in John Smith & Son vs. Moore, (1921) 12 T.C. 266, suggested another test- the test of fixed or circulating capital. Fixed capital being what the owner turns to profit by keeping in his possession; circulating capital is what the assessee makes profit from by parting or letting the product/asset change hands. However, in the said case, it was observed that 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. 16.6. It was clarified in Mallet vs. Staveley Coal and Iron Co., (1928) 2 K.B. 405 ("Mallet") that where the expenditure is to bring into the hands of the company a necessary ingredient of their existing business, which is important but still ancillary to the business, the expenditure is to be debited to the circulating capital rather than to the fixed capital, which is employed in and sunk....
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....capital but revenue. It was further observed that the determinative question would be whether the expenditure is "a part of the company's working expenses; is it expenditure laid out as part of the process of profit earning ?" Referring to the facts of the said case, the Privy Council came to the conclusion that the obligation to make the payments was undertaken by the appellants therein in consideration of their acquisition of the right and opportunity to earn profits, i.e., of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. The distinction was thus made between the acquisition of an income-earning asset and the process of the earning of the income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of the earning of the profits was revenue expenditure. It was further observed that on acquisition of a business and when a liability to pay yearly sums is taken over, those yearly sums were not deductible in computing future profits for tax purposes, as they form a part of the consideration for the acquisition of the business. 16.9. A similar guideline was expresse....
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....o be of a capital nature merely because it is payable in instalments, vide CIR vs. Adam, (1928) 14 T.C. 34. The test is therefore to determine, whether, the payment is made as a matter of such frequent recurrence that it is a part of ordinary working expenditure, Bonner vs. Basset Mines Ltd., (1912) 6 T.C. 145. ii. Object of the expenditure: The Atherton test looks to the purpose or motive of expenditure. For expenditure to be capital it must be spent for the acquisition, improvement or disposal of a capital asset, vide Rolfe vs. Wimpy Waste Management Ltd., (1989) 62 T.C. 399; Tucker vs. Granada Motorway Services Ltd., (1979) 53 T.C. 92 ("Tucker"); Mallet, respectively. However, the relationship between the expenditure and the acquisition, improvement or disposal of a capital asset must be proximate and not remote. For instance, payment made to staff could not be said to be payment made for acquisition of goodwill and hence capital in nature, although, the staff by serving well may help create the goodwill, vide Lawson vs. Johnson Matthey Plc., (1992) 65 T.C. 39. iii. Identifiable asset test: It is necessary to identify a specific capital asset for which the expe....
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.... Judges have laid down from time to time. They are as follows :- 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company (1927) 13 T.C. 1, 14). In City of London Contract Corporation v. Styles ((1887) 2 T.C. 239), at page 243, Bowen, L.J. observed as to the capital expenditure as follows : "You do not use it 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern." 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. ((1925) 10 T.C. 155). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a ....
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....he transaction involving the expenditure in question. ii. Where the expenditure is made for the initial outlay or for extension of a business, or a substantial replacement of the equipment, it is capital expenditure. If the expenditure is for running the business or working it with a view to produce profits, it is revenue expenditure, vide Assam Bengal Cement Co. Ltd. What also follows from this test is that expenditure which relates to the very framework or structure or edifice of the taxpayer's business is capital expenditure. iii. The fixed and circulating capital test provides that where the expenditure is to bring into the hands of the assessee a necessary ingredient of their existing business, which is important but still ancillary to the business, the expenditure is to be debited to the circulating capital (revenue account) rather than to the fixed capital (capital account). iv. Where there is no enlargement of the permanent structure or of capital assets and the expenditure essentially relates to the operation or working of the existing apparatus, such an expenditure would be on revenue account, vide Empire Jute Co. Ltd. v. The question a....
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....ould be capital in nature. ix. The general principle that expenditure on the creation of a capital asset is on capital account applies only where the capital asset belongs to the assessee. An amount spent by the assessee may be deductible on revenue account even if it results in the acquisition of a capital asset by a third party, vide L.H. Sugar Factory and Oil Mills Pvt. Ltd. vs. Commissioner of Income Tax, U.P., (1980) 125 ITR 293. x. Another pertinent question to consider is, whether, the expenditure is incurred towards purchase of an asset, or merely of the right to use the asset for a given period of time on payment of a certain consideration for the period of intended use, vide Devidas Vithaldas and Co. Where the asset is not purchased or is not vested with the assessee, but the assessee has simply acquired a right to use the asset, the payment would be of revenue nature, vide CIT vs. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 ("Modi Revlon Pvt. Ltd."). Payment of royalty : 20. In the present case, before considering the issue as to categorisation of the variable licence fee payable as a percentage of gross revenue, it is also necessary to unders....
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....age. No material has been placed on the record as to how any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease." The above dictum is clear on the aspect of the distinction between payment made to acquire a right and payment of royalty inasmuch as it lays down in express terms that if a payment is made, not towards securing an enduring advantage or asset, but towards a right to use an asset, the same would be royalty. It has further been stated in no unclear terms that where a payment is not referrable to the acquisition of a capital asset (particularly, mining lease in the said case), but only secures a right to use the asset, the same would be royalty and hence classifiable as a revenue expenditure. 20.2. Relying on the decision in Gotan Lime, this Court in Mewar Sugar Mills Ltd. while considering a transaction wherein the assessee therein paid: (a) Lump-sum payment to acquire monopoly rights for manufacture of sugar in Udaipur; and (b) payment to the ruler of Udaipur State, at the rate of 2% of the price of the sugar manufactured, held that the payment of the 2% royalty on the pr....
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....ounts: That an item of expenditure is debited in an entity's books of account to revenue account is by no means conclusive of its nature. Businesses frequently prefer to debit to the revenue account, payments which are in their nature to be carried to capital account. Conversely, an assessee may be entitled to a revenue deduction in respect of expenditure which is capitalised in the accounts, vide India Cements vs. Commissioner of Income Tax, 60 I.T.R. 52 (SC). 22. In considering whether an item of expenditure is of a capital or revenue nature, we reiterate that one must consider the nature of the concern, the ordinary course of business usually adopted in that concern and the object with which the expenditure is incurred, vide Assam Bengal Cement Co. Ltd. Attention must be paid not only to the form of the transaction, but also its substance. Where the transaction takes the form of a contract or other deed, it depends upon a proper construction of the terms of the contract whether a payment made thereunder is a capital disbursement or revenue expenditure. The true nature of a transaction must be gathered by placing emphasis on the business aspect of the transaction. What is an o....
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.... stones but in discharge of a singular original obligation to the jagir. These observations clearly establish the difference between a revenue expenditure on the one hand and capital expenditure incurred in instalments on the other hand. 22.3. Similarly, in Jalan Trading Co., this Court while considering the issue as to classification of periodic payments of 75% profit share, as consideration under a deed of assignment, for the right to carry on business, held that the same would be capital expenditure. It was observed that the assessee therein was a new company and it had acquired under the contract the right to carry on a business on longterm basis subject to the renewal of the agreement on payment of 75% of its annual net profits. That since the assessee had acquired a capital asset (right to carry out the business of the assignor), any payment made towards securing such a right would be capital in nature. This dictum would clearly demonstrate that when an expenditure is in its core capital in nature, neither the fact that the same was paid in instalments, nor the fact that the quantum of expenditure was dependent on the revenue or profit of the assessee, would warrant a chan....
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....sessee therein agreed to purchase a dental practice for a primary consideration of GBP15,000 subject to increase or diminution as therein provided. The primary price was to be satisfied by payment of GBP5000 on the exchange of the agreement, and as to the balance, by payment each year for ten years of a sum equal to 25% of the net profits of the practice for each year. If the amounts so paid over the ten years, were in the aggregate, more or less than the balance of the primary purchase price, that price was to be treated as correspondingly increased or diminished. The Court while considering an issue as to the classification of the payments made each year held that the annual sums paid under the agreement, were instalments of capital and were not admissible as revenue deductions. 23.3. Similarly, as discussed hereinabove, this Court in Jalan Trading Co. had the occasion to consider the issue pertaining to classification of an annual payment based on profit sharing towards the right to carry on business. This Court concluded that since the annual payment of 75% profit share was paid by the assessee in consideration of the right to carry on the business of the assignors, the paym....
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.... be held to be capital in nature, notwithstanding the fact that the variable licence fee is paid in a staggered manner. We shall consider the case law sought to be relied upon by the learned senior counsel and learned counsel for the respondents-assessees, so as to distinguish the same from the present case. 24.1. We shall first advert to the decision of this Court in Jonas Woodhead and Sons. Paragraph 2 of the said judgment, in no unclear terms captures two underlying transactions arising out of the agreement in the said case; the first transaction relating to the knowhow and technical information regarding setting up of the plant and the second transaction relating to the services to be rendered to the assessee by the foreign firm, the consideration for the second prong being in the nature of royalty. It is in that backdrop that the consolidated payment was apportioned and 25% thereof was held to be in the nature of capital expenditure while 75%, payable on services, was held to be revenue expenditure. Further, it is also relevant to note that in the said case the exercise of apportionment into the aforesaid fractions was carried out by the Madras High Court. Against the ju....
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.... Therefore, Best and Co. is a case where two independent transactions were considered, one of which was held as capital and the other as revenue. This case did not decide the expenditure towards the same right to be partly capital and partly revenue. 24.3. We shall now consider the decision of the Madras High Court affirmed by this Court in Southern Switch Gear Ltd. Paragraph 2 of the judgment of the High Court records two distinct transactions: one, for provision of technical know-how for the manufacture of switch gear products and the second, was to share modern developments and also train necessary personnel in the factory in United Kingdom. The consideration was fixed GBP20,000 payable in five instalments of GBP4000 each. Paragraph 5 of the judgement of the High Court referred to clause 6 of the agreement which dealt with know-how and clause 7 thereof, which dealt with supervision and direction, besides recommending appointment or dismissal of employees and also training them in the factory. In paragraph 6, it was held that expenditure on technical know-how is capital in nature and should be apportioned at 25% and the services rendered relatable to 75% of the consideration w....
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....ent would bolster up the respondents' case. In the said case, the grant of licence by an agreement dated 05 April, 1932 contemplated two different aspects: first, a monopoly right to cultivate sugarcane and produce sugar, and second, payment of 2% royalty on the price of the sugar manufactured. In that backdrop, this Court held that the payment of 2% royalty on the sugar manufactured was revenue expenditure while the payment made in respect of the monopoly rights obtained was of capital nature. It was observed that payment of the 2% royalty on the price of sugar manufactured by the appellant therein had no relationship with the payment referable to the monopoly conferred under the grant. In the said case, this Court's dictum is clear to the effect that royalty based on manufacture was in no way connected to the acquisition of monopoly rights. But such a finding would be erroneous in the facts of the present case since what is paid is only for acquisition of a right by way of licence fee. Further, in the said case, royalty payment had been divorced from the payment for the right to carry on business since any failure to pay royalty could not have, by any stretch, resulted in the ....
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....mmunication services. Since it is not a licence for divisible rights that conceive of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure is without any legal basis. ii. Perhaps, the decision of the High Court could have been sustained if the facts were such that even if the respondents-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right is not preserved under the scheme of the Telegraph Act which we have detailed above. Hence, the apportionment made by the High Court is not sustainable. iii. The fact that failure to pay the annual variable licence fee leads to revocation or cancellation of the licence, vindicates the legal position that the annual variable licence fee is paid towards the right to operate telecom services. Though the licence fee is payable in a staggered or deferred manner, the nature of the payment, which flows plainly from the licensing conditions, cannot be recharacterized. A single transaction cannot be split up, in an artificial manner into a capital ....
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.... The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period upto 31 July, 1999 were to be closed. If the migration to the Policy of 1999 was accepted by the assessees herein or the other service providers, then all licence fee paid upto 31 July, 1999 was declared as a one time licence fee as stated in the communication dated 22 July, 1999 which was treated to be a capital expenditure. The licence granted under the Policy of 1999 was non-transferable and nonassignable. More importantly, if there was a default in the payment of the licence fee, the entire licence could be revoked after sixty days notice. The provisions of the Telegraph Act particularly Section 8 thereof are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, we hold that the payment of entry fee as well as the variable annual licence fee paid by the respondents-assessees to the DoT under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the Act. In our view, the High Court of Delhi was not rig....