C.I.T., Delhi vs Bharti Hexacom Ltd.

Court/Forum: SC

Bench: Nagarathna, J.

Order Date: 2023-10-01

Outcome: Revenue

Sections: Section 37, Section 35ABB

Core Ratio

The variable annual licence fee paid under the New Telecom Policy of 1999 is capital in nature and should be amortised under Section 35ABB.

Outcome

The Supreme Court ruled in favor of the Revenue, holding that the variable annual licence fee paid by the respondents-assessees under the New Telecom Policy of 1999 is capital in nature and should be amortised under Section 35ABB of the Income-tax Act, 1961.

Favourability

Revenue

Core Issue

The central legal question was whether the variable licence fee paid under the New Telecom Policy of 1999 should be treated as capital expenditure or revenue expenditure.

Facts of the Case

The respondents-assessees, engaged in telecommunication services, migrated to the New Telecom Policy of 1999, which required them to pay a variable licence fee based on a percentage of their gross revenue. They claimed this fee as revenue expenditure under Section 37, but the Revenue treated it as capital expenditure under Section 35ABB.

Arguments by Assessee

The assessee argued that the variable licence fee was a running expense for maintaining and operating the business and should be treated as revenue expenditure.

Arguments by Revenue

The Revenue contended that the licence fee was capital in nature as it was paid to acquire the right to operate telecommunication services, and should be amortised under Section 35ABB.

Key Sections & Provisions

Section 37 - for claiming revenue expenditure; Section 35ABB - for amortisation of capital expenditure related to telecommunication licences.

Ratio Decidendi

The Court held that the nature of the payment, whether lump-sum or periodical, does not change its character as capital expenditure. The payment was towards acquiring a licence to operate telecommunication services, which is a capital asset.

Court Reasoning & Analysis

• The Court noted that the payment was for acquiring a licence, which is a capital asset.
• The nature of the payment, whether lump-sum or periodical, does not change its character as capital expenditure.
• The licence fee was a precondition for setting up the business and thus capital in nature.
• The Court rejected the argument that the payment schedule could recharacterize the transaction under income tax law.

Key Observations

• The payment of licence fee was capital in part and revenue in part.
• The licence fee payable upto 31 July, 1999 should be treated as capital expenditure.

Case Laws Cited

• Empire Jute Co. Ltd. vs. Commissioner of Income Tax
• Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal
• Jonas Woodhead and Sons Ltd. vs. Commissioner of Income Tax

Related Issues

• Treatment of licence fees under different tax regimes
• Distinction between capital and revenue expenditure

Important Passages

• The variable annual licence fee paid under the New Telecom Policy of 1999 is capital in nature and should be amortised under Section 35ABB.

Not Decided / Remanded

Whether the entire licence fee should be treated as capital or revenue was not explicitly decided.

Practical Takeaway

Practitioners should note that the nature of payment, whether lump-sum or periodical, does not change its character as capital expenditure if it is for acquiring a capital asset like a licence.

Contrary Judgments

• M/s. Texas Instruments (India) Private Limited vs ACIT (LTU), Bengaluru (ITAT) — Expenses incurred for software usage and IT support services, which do not result in acquisition of any asset or enduring benefit, are revenue in nature.
• AT & T Global Network Services India Private Limited vs Assistant Commissioner of Income Tax (ITAT) — Inadvertent errors in reporting should not preclude the allowance of legitimate deductions if the factual basis is verified.
• DCIT Cir-3(1) Kol. vs. M/s Narayani Ispat Pvt. Ltd. (ITAT, 2017) — Interest paid for late deposit of service tax and TDS is allowable as a deduction under Section 37(1) of the Income-tax Act, 1961.
• Allegis Services (India) Pvt. Ltd. vs Asst. Commissioner of Income Tax (ITAT, 2020) — Expenditure incurred under Section 80G cannot be denied merely because it forms part of CSR payments, leading to double disallowance.
• M/s JMS Mining Pvt. Ltd. vs PCIT, Kolkata-2 (ITAT, 2021) — The invocation of jurisdiction under Section 263 requires the order of the Assessing Officer to be both erroneous and prejudicial to the revenue.
• The Deputy Commissioner of Income Tax, LTU, Bangalore vs M/s. Biocon Limited (ITAT) — The provisions of Section 10B are exemption provisions, and profits of the eligible unit should not be set off against losses of non-eligible units.