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

Income Tax Act, 1961 – ss. 35ABB and 37– The New Telecom Policy, 1999 – Variable licence fee paid to DoT under the New Telecom Policy of 1999 – Revenue Expenditure or Capital Expenditure – Nature of : Held: 1. In considering whether an item of expenditure is of a capital or revenue nature, 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. Attention must be paid not only to the form of the transaction, but also its substance. What is material is the nature of right sought to be secured through the payment or transaction in question. The purpose towards which the expenditure is incurred must guide any attempt to categorise the expenditure. The structure or form of the transaction or the payment schedule is hardly suggestive of the nature of the transaction. Therefore, it cannot be axiomatically held that an expenditure which in its core, capital in nature, is actually to be treated as a revenue expenditure simply because the payment is structured in installments. The determinative test to identify whether an expenditure structured in the form of instalments is in the nature of a capital expenditure or revenue expenditure, would be to first assess whether the payment made either in lump-sum or in instalments relates to the acquisition or expansion of a capital asset, or by contrast, relates to the working of an asset to produce profits; whether the consideration payable towards the acquisition or expansion of a capital asset has simply been chopped up into smaller sums payable in instalments, for the sake of convenience. The annual payment of variable licence fee is only towards licence fees and merely because it is paid in annual instalments based on the Adjusted Gross Revenue (AGR), the payment cannot be construed as revenue. The annual payments of licence fee as also the entry fee relate to a singular purpose, i.e., the acquisition of the right to carry on the business of rendering telecommunication services. This right being in the nature of a capital asset, any payment(s) made towards the acquisition of the right, whether in lump-sum or in annual instalments dependent on the AGR, would be in the nature of capital disbursement(s). Where the periodic payments are referrable to or have a nexus with the original obligation undertaken by the assessee as consideration for acquisition of a right, the periodic payments would be in the nature of capital expenditure, notwithstanding the fact that they are payable as a percentage of profits, gross revenue or sales. In the present case, since the entry fee as well as variable licence fees are traceable to the same source, they would both have to be held to be capital in nature, notwithstanding the fact that the variable licence fee is paid in a staggered manner. [Paras 22, 22.1, 22.2, 23.3, 23.4 and 24]

2. 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. The High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services, as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31 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 treated as revenue. The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on annual basis. In the ultimate analysis, the nomenclature and the manner of payment is irrelevant. The payment post 31 July, 1999 is a continuation of the payment pre 31 July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterized as capital only. [Paras 26 and 27]

Tax / Taxation: Expenditure – Whether a given expenditure is capital or revenue in nature – Determination of – Principles and Tests – Considerations which are immaterial in determining the question – Discussed. [Paras 19 and 21]

Tax / Taxation – Classification of expenditure or receipts – Difficulty of relying on a single precedent for purpose of classification – Precedent. Held: The propositions made in earlier cases, if sought to be applied to a different case which the authors of those propositions did not have in mind, could lead to absurd results. It is trite that the words in a judgment must not be construed in the same manner as those in a legislation. Hence, it is neither wise nor suitable to extend the dictum of one case, premised on the facts of the said case, to another fact-situation which is seemingly similar but not really so. This is particularly so when there is no precedent which has been rendered in an identical fact situation, as is the case in the instant matters. [Para 23]

Tax / Taxation: Capital assets – Depreciation and Amortisation – One of the exceptions to depreciation of capital assets is amortisation – Income Tax Act, 1961 – ss.35A, 35AB, 35ABA and 35ABB. Held: Amortisation is a form of depreciation, however, the distinction between the two being that in the case of depreciation, an asset may be depreciated progressively, and may even be exhausted before the lifetime expectancy of the asset in question, whereas, in the case of amortisation, the value of the asset gets progressively depleted, matching with the expected timeframe of the right. [Para 10.3]

Royalty – Distinction between payment made to acquire a right, and payment of royalty for use of a right or asset – Discussed. [Para 20] LIST OF CITATIONS AND OTHER REFERENCES

Jonas Woodhead and Sons Ltd. v. Commissioner of Income Tax (1997)

224 ITR 342; CIT, Madras v. Best and Co. (Pvt.) Ltd. (1966) 60 ITR 11; Southern Switch Gear Ltd. v. CIT (1998) 232 ITR 359 and CIT v. Sarada Binding Works, (1976) 102 ITR 187- held inapplicable. Alembic Chemical Works Co. Ltd. v. CIT (1989) 3 SCC 329 : [1989]

2 SCR 302 and Mewar Sugar Mills Ltd. v. CIT, (1973) 3 SCC 143 : [1973]

2 SCR 429 – distinguished.

Empire Jute Co. Ltd. v. Commissioner of Income Tax (1980) 124 ITR 1; Assam Bengal Cement Co. Ltd. v. CIT, West Bengal (1955) 27 ITR 34; CIT v. Jalan Trading Co. Pvt. Ltd. (1985) 4 SCC 59 : [1985] 2 Suppl. SCR 517; Pingle Industries Ltd. v. CIT (1960) 40 ITR 67 (SC); L.H. Sugar Factory and Oil Mills Pvt. Ltd. v. Commissioner of Income Tax, U.P., (1980) 125 ITR 293; M/s. Devidas Vithaldas and Co. v. C.I.T., Bombay City (1972) 3 SCC 457 : [1972] 3 SCR 215; Commissioner of Income Tax, Bombay City I v. CIBA India Ltd., (1968) 69 ITR 692 (SC); Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax, (1966) 62 ITR 566 and India Cements v. Commissioner of Income Tax,

60 I.T.R. 52 (SC) – relied on.

Board of Agricultural Income Tax, Assam v. Sindhurani Chaudurani (1957) 32 ITR 169; Enterprising Enterprises v. Deputy Commissioner of Income Tax, (2007) 293 ITR 437; Aditya Minerals Pvt. Ltd. v. Commissioner of Income Tax (1999) 8 SCC 97 : [1999] 2 Suppl. SCR 233; Sundaram Finance Ltd. v. State of Kerala [1966] 2 SCR 828; CIT, Bangalore v. J.H. Gotla, A.I.R. 1985 SC 1698; Gotan Lime v. CIT, (1999) 239 ITR 718; and CIT v. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 – referred to. The City of London Contract Corporation Ltd. v. Styles, (1887) 2 TC 239; Vallambrosa Rubber Co. Ltd. v. Farmer (1910) 5 T.C. 529; Ounsworth (Surveyor of Taxes) v. Vickers Ltd. (1915) 3 K.B. 267; British Insulated Helsby Cables Ltd. v. Atherton, (1926) AC 205; Henriksen v. Grafton Hotel Ltd., (1942) 24 T.C. 453; John Smith & Son v. Moore, (1921) 12 T.C. 266; Mallet v. Staveley Coal and Iron Co., (1928) 2 K.B. 405; AngloPersian Oil Co. v. Dale (1932) 1 K.B. 124; Van Den Berghs, Limited v. Clark (H.M. Inspector of Taxes) (1935) 19 T.C. 390; Robert Addie & Sons Collieries Ltd. v. Commissioners of Inland Revenue (1924) 8 T.C. 671; Sun Newspapers Limited and the Associated Newspapers Limited v. The Federal Commissioner of Taxation (1938) 61 C.L.R. 337; CIR v. Adam, (1928) 14 T.C. 34; Bonner v. Basset Mines Ltd., (1912) 6 T.C. 145; Rolfe v. Wimpy Waste Management Ltd., (1989) 62 T.C. 399; Tucker v. Granada Motorway Services Ltd., (1979) 53 T.C. 92; Lawson v. Johnson Matthey Plc., (1992)

65 T.C. 39; Dale; CIR v. Carron Company, (1968) 45 T.C. 18; Heather v. PE Consulting Group Ltd., (1972) 48 T.C. 293; Walker v. The Joint Credit Card Co., (1982) 55 T.C. 617; CIR v. Nchanga Copper Mines (1964) 1 All ER 208;Commissioners of Inland Revenue v. Ramsay, 20 T.C. 79; Inland Revenue v. Williams, 11 ITR Suppl. 84; Prendergast v. Cameron, 8 I.T.R. Suppl. 75 (HL).- referred to.

Tata HydroElectric Agencies Ltd., Bombay v. Commissioner of Incometax, (1937) L.R. 64 IndAp 215; Mohanlal Hargovind of Jubbulpore v. Commissioner of Income Tax, (1949) L.R. 76 IndAp 235;S Commissioner of Income Tax, Bombay v. Century Spinning, Weaving and Manufacturing Co., (1942) 10 ITR Suppl., Benarsidas Jagannath, In re, (1946) 15 ITR 185- referred to.

Wheatcroft’s treatise on The Law of Income Tax, Sur Tax and Profits Tax – referred to.

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