Summary
The Supreme Court held that both the entry fee and annual variable licence fee paid to the Department of Telecommunications under the New Telecom Policy, 1999 were capital expenditure eligible for amortisation under Section 35ABB. Both payments secured the same indivisible right to establish, maintain and operate telecom services. Changing the measure or schedule of payment did not make the annual component revenue expenditure. The Revenue’s appeals were allowed.
Issues
- Whether annual AGR-linked telecom licence fees were revenue expenditure or capital expenditure subject to amortisation.
- Whether the licence consideration could be divided into capital and revenue components before and after 31 July 1999.
Provisions considered
- Section 35ABB, Income-tax Act, 1961Capital expenditure actually paid for obtaining telecom operating rights qualified for amortisation; this covered the entry and annual variable fees in issue. (¶¶ 11, 24–27)
- Sections 4 and 8, Indian Telegraph Act, 1885The licence conveyed a composite right to establish, maintain and operate services, and default in licence consideration exposed it to revocation. (¶¶ 12–13, 25–27)
Held
- Classification turns on the substance and business purpose of the expenditure. Periodic payment, revenue linkage or accounting nomenclature alone cannot turn a capital obligation into a revenue expense. (¶¶ 19, 21–23)
- The entry fee and annual variable fee were traceable to the same composite operating licence. Failure to pay the annual fee could end the licence and the ability to conduct the business; it was not independent royalty for a distinct right. (¶ 24–27)
- Authorities permitting apportionment involved distinguishable subject matters. Here, splitting the indivisible licence or treating pre-July 1999 payments as capital and later payments as revenue had no legal basis. (¶ 24–26)
- Both components were capital in nature and could be amortised under Section 35ABB. The change to the 1999 policy’s payment format did not change their essential character. (¶ 26–27)
Result
Revenue’s appeals allowed. Delhi High Court’s judgment and the challenged Delhi, Bombay and Karnataka judgments following it set aside. Parties to bear their respective costs.