# CASE DETAILS C.I.T., DELHI v. BHARTI HEXACOM LTD

- **Citation:** 2023 INSC 917
- **Court:** Supreme Court of India
- **Decided:** 2023-10-16
- **Case number:** Civil Appeal No. 11128 of 2016
- **Bench:** B.V. Nagarathna, Ujjal Bhuyan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/case-details-c-i-t-delhi-v-bharti-hexacom-ltd-36634
- **Pages:** 102

## Headnote

Issues for consideration:
Whether the variable annual licence fee paid by the respondentsassessees to the Department of Telecommunications (DoT) under the
New Telecom Policy of 1999 is revenue expenditure in nature and is to be
allowed deduction under Section 37 of the Income Tax Act, 1961, or, the
same is capital in nature and is accordingly required to be amortised under
Section 35ABB of the Act; and 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
treated as revenue.
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
SUPREME COURT REPORTS
[2023] 13 S.C.R.
372
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
fi rst 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 profi ts; 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 profi ts, 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 i

## Text

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[2023] 13 S.C.R. 371 : 2023 INSC 917
371
CASE DETAILS
C.I.T., DELHI
v.
BHARTI HEXACOM LTD.
(Civil Appeal No. 11128 of 2016)
OCTOBER 16, 2023
[B.V. NAGARATHNA AND UJJAL BHUYAN, JJ.]
HEADNOTES
Issues for consideration:
Whether the variable annual licence fee paid by the respondentsassessees to the Department of Telecommunications (DoT) under the
New Telecom Policy of 1999 is revenue expenditure in nature and is to be
allowed deduction under Section 37 of the Income Tax Act, 1961, or, the
same is capital in nature and is accordingly required to be amortised under
Section 35ABB of the Act; and 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
treated as revenue.
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
SUPREME COURT REPORTS
[2023] 13 S.C.R.
372
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
fi rst 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 profi ts; 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 profi ts, 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
373
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 diff erent
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 modifi ed 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 - Classifi cation of expenditure or receipts - Diffi culty
of relying on a single precedent for purpose of classifi cation - Precedent.
Held: The propositions made in earlier cases, if sought to be applied
to a diff erent 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
C.I.T., DELHI v. BHARTI HEXACOM LTD.
SUPREME COURT REPORTS
[2023] 13 S.C.R.
374
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.
375
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 Profi ts
Tax - referred to.
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11128 of
2016.
From the Judgment and Order dated 19.12.2013 of the High Court of
Delhi at New Delhi in ITA No.1336 of 2010.
C.I.T., DELHI v. BHARTI HEXACOM LTD.
SUPREME COURT REPORTS
[2023] 13 S.C.R.
376
With
Civil Appeal Nos.4902 of 2022, 162 of 2018, 159 of 2021, 4839 of
2017, 153 of 2021, 6897 of 2018, C.A. Diary No. 4178 of 2019, SLP (C)
Nos. 24740, 20863 of 2019, Civil Appeal Nos.158, 302, 303 of 2021, 11149,
11148, 11130, 11131, 11134, 11132, 11136, 11133, 11135, 11137, 11140,
11141, 11139, 11142, 11143, 11145, 11146, 11147 of 2016, 163 of 2018,
11129 of 2016 And C.A. Diary No. 24728 of 2023.
Appearances:
N Venkatraman, A.S.G., Arijit Prasad, Sr. Adv., V.C Bharati, Ms. Shruti
ShivKumar, Rahul VijayaKumar, Ms. Amritha C. Mouli, Raj Bahadur Yadav,
Rupesh Kumar, Mrs. Gargi Khanna, Rajesh Kumar Singh, Vikrant Yadav, S
A Haseeb, Manish Pushkarna, Mrs. Anil Katiyar, Advs. for the Appellant.
Arvind P. Datar, Ajay Vohra, Arvind Datar, Sr. Advs., Ms. Kavita
Jha, Vaibhav Kulkarni, Udit Naresh, Mahesh Agarwal, Ms. Sayaree Basu
Mallik, Abhinav Garg, Sachit Jolly, Ms. Anuradha Dutt, Ms. Disha Jham,
Ms. Soumya Singh, Ms. B. Vijayalakshmi Menon, Harpreet Singh Ajmani,
Aniket Deepak Agrawal, E. C. Agrawala, Advs. for the Respondent.
JUDGMENT / ORDER OF THE SUPREME COURT
JUDGMENT
NAGARATHNA, J.
 Delay condoned.
2. Leave granted.
3. The judgment of the Division Bench of the High Court of Delhi,
dated 19 December, 2013 in ITA No. 1336 of 2010 and connected matters,
whereby the High Court of Delhi, confi rming the decision of the Income
Tax Appellate Tribunal, New Delhi (hereinafter, "Tribunal" for short) has
held that the variable licence fee paid by the respondents-assessees under
the New Telecom Policy, 1999 ((hereinafter referred to as "Policy of 1999"
for the sake of convenience), is revenue expenditure in nature and is to be
deducted under Section 37 of the Income Tax Act, 1961 (hereinafter referred
to as "the Act" for the sake of brevity) is assailed in these appeals. Some
of these appeals also arise from judgments passed by the High Courts of
377
Bombay and Karnataka, following the judgment of the Division Bench of
the High Court of Delhi, dated 19 December, 2013.
4. Since common questions of law and facts arise in these appeals,
they have been clubbed together and heard and disposed of by this common
judgment.
Bird's eye view of the controversy:
5. The controversy in these cases revolves around the question, as to,
whether, the variable licence fee paid by the respondent-assessees to the
Department of Telecommunications (hereinafter referred to as "DoT", for
short) under the New Telecom Policy of 1999 (Policy of 1999) is revenue
expenditure in nature and is to be allowed deduction under Section 37 of the
Act, or, whether the same is capital in nature, Section 35ABB of the Act.
Brief facts of the case:
6. The National Telecom Policy of 1994 was substituted by the New
Telecom Policy of 1999 dated 22 July, 1999. The said Policy of 1999
stipulated that the licencee would be required to pay a one-time entry fee and
additionally, a licence fee on a percentage share of gross revenue. The entry
fee chargeable would be the fee payable by the existing operator upto 31
July, 1999, calculated upto the said date and adjusted upon notional extension
of the eff ective date. Subsequently, w.e.f. 01 August, 1999, licence fee
was payable on a percentage of Annual Gross Revenue ("AGR", for short)
earned. The quantum of revenue share to be charged as licence fee was to be
fi nally decided after obtaining recommendation of the Telecom Regulatory
Authority of India ("TRAI") but in the meanwhile, the Government of India
fi xed 15% of the gross revenue of the licencee as provisional licence fee.
On receipt 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 eff ective date of the existing
licence agreement, that is, the 1994 Agreement. Migration to the Policy of
C.I.T., DELHI v. BHARTI HEXACOM LTD.
[B. V. NAGARATHNA, J.]
SUPREME COURT REPORTS
[2023] 13 S.C.R.
378
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
dated 22 July, 1999, as capital expenditure.
6.2. The respondent companies which are engaged in the business of
telecommunication services have procured licences in diff erent telecom
circles. Initially, the said licences were given under a licence agreement
executed in the year 1994 for a period of ten years subject to expansion of
one year or more at the discretion of the authorities. The said licence was
non-transferable and non-assignable. In case, there was a breach of any
term of the licence or default in payment, the licence could be revoked after
providing sixty days' notice. The licence gave the right to operate the services
within a geographical area on a non-exclusive basis and the authorities
would have the right to modify the conditions of the licence as explained
in Schedule A and Schedule B of the licence agreement, in the interest of
general public or for security considerations. The schedules pertained to the
area of service, tariff ceiling etc.
6.3. In the above backdrop, for the sake of convenience, the specifi c
facts of the lead matter, Civil Appeal No. 11128 of 2016 shall be narrated
hereinunder:
Pursuant to the request of the respondent-assessee, a licence was
granted to it, inter-alia on certain terms and conditions to establish, maintain
and operate cellular mobile services. Accordingly, having accepted the
Policy of 1999 and migrated thereto, after paying the licence fee upto 31
July, 1999, i.e., the one-time licence fee as stipulated in the Communication
dated 22 July, 1999, the respondent-assesee continued in the business of
cellular telecommunication and associated value added services, under the
regime governed by the Policy of 1999.
6.4. The respondent-assessee fi led its return of income on 01 November,
2004 for the assessment year 2003-2004 declaring nil income. The same
379
was processed under Section 143(1) of the Act on 30 March, 2006. The case
was selected for scrutiny and a notice was issued to the respondent-assessee
under Section 143(2) of the Act, on 20 October, 2005.
6.5. It was noted that an amount of Rs. 11,88,81,000/-, which was
the licence fee paid by the assessee on revenue sharing basis, was claimed
by the respondent-assessee as revenue expenditure. In that regard, vide
questionnaire dated 15 November, 2006, the assessee was required to explain
as to why the said amount may, instead, be treated as capital expenditure and
amortised over the remaining licence period of twelve years. The respondentassessee 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 fi led 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 reaffi rmed 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 the Act.
6.7. Aggrieved by the said order, the appellant-Revenue preferred an
appeal before the Tribunal, New Delhi. By order dated 24 July, 2009, the
Tribunal dismissed the Revenue's appeal following its earlier order dated
29 May, 2009 in ITA No. 5335 (Del)/2003 in the case of Bharti Cellular
Ltd., for the assessment year 2000-2001, the facts of which case were held
to be identical to the facts of the case at hand. Being aggrieved, the Revenue
fi led an appeal before the High Court of Delhi.
6.8. Before the High Court, the Revenue made the following
submissions:
C.I.T., DELHI v. BHARTI HEXACOM LTD.
[B. V. NAGARATHNA, J.]
SUPREME COURT REPORTS
[2023] 13 S.C.R.
380
That the respondents were granted a licence under the agreement
executed under the Indian Telegraph Act, 1885 (hereinafter referred to as
the "Telegraph Act" for the sake of brevity). This agreement stated that the
licence was granted on certain terms and conditions to establish, maintain
and operate cellular mobile services. That the signifi cance of the words
"establish, maintain and operate" in the original licence cannot be lost
sight of under the Telecom Policy of 1999. The nature and character of the
licence fee was not changed. What was changed was only the method of
computation. That the assessees had accepted the licence fee payable under
the 1994 Agreement as a capital expenditure. They cannot now dispute
the same under the Policy of 1999. That under the Policy of 1994, from
the fourth year onwards, the assessee had to pay a fi xed sum per hundred
subscribers. The only change that was made was in the measure, namely,
that under the Policy of 1999, the amount was modifi ed to 15% of the gross
revenue, but the nature and character of the payment was the same. That
mere payment of an amount in instalments did not convert or change the
capital payment to a revenue payment. That in order to acquire the right
to operate telecom services, obtaining of licence was a sine qua non. The
term of the licence was twenty years from the date of commencement and
therefore the expenditure is in the nature of capital expenditure.
6.9. Per contra, the contention of the assessee before the High Court
was that the licence fee payable under the Policy of 1999 was in the nature
of revenue expenditure. This was because the earnings are shared and the
licence fee depends upon the gross revenue and is payable yearly. That
the new operators under the Policy of 1999 were issued licences and were
required to 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
381
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 an assessee for acquiring a right for operating
telecommunication services. It is immaterial whether the
expenditure is/was incurred before or after commencement of
the business to operate telecommunication services but what is
material is that the payment should be actually made. That Section
35ABB is not a deeming provision but comes into operation and
is eff ective when the expenditure itself is of a capital nature and is
incurred towards acquiring a right to operate telecommunication
services or for the purposes of obtaining a licence for the said
services. That Section 35ABB does not help in determining and
deciding the question, as to, whether licence fee paid under the
Policy of 1999 or under the 1994 Agreement, was/is capital or
revenue in nature.
ii. That there was no decision of the Supreme Court or any of the
High Courts directly applicable to the factual matrix of the case
and therefore, it would be useful to consider a number of decisions
of this Court including, Empire Jute Co. Ltd. vs. Commissioner
of Income Tax, (1980) 124 ITR 1 ("Empire Jute Co. Ltd.");
Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal, (1955)
27 ITR 34 ("Assam Bengal Cement Co. Ltd."); Board of
Agricultural Income Tax, Assam vs. Sindhurani Chaudurani,
(1957) 32 ITR 169 ("Sindhurani"); Enterprising Enterprises
vs. Deputy Commissioner of Income Tax, (2007) 293 ITR 437
("Enterprising Enterprises").
iii. Having referred to the aforesaid decisions, three other judgments
were noticed by the Delhi High Court which, according to learned
ASG appearing for the appellant-Revenue were wrongly applied
C.I.T., DELHI v. BHARTI HEXACOM LTD.
[B. V. NAGARATHNA, J.]
SUPREME COURT REPORTS
[2023] 13 S.C.R.
382
to the case at hand. The said judgments are, Jonas Woodhead and
Sons Ltd. vs. Commissioner of Income Tax, (1997) 224 ITR 342
("Jonas Woodhead and Sons"), Southern Switch Gear Ltd. vs.
CIT, (1998) 232 ITR 359 ("Southern Switch Gear Ltd."); CIT,
Madras vs. Best and Co. (Pvt.) Ltd., (1966) 60 ITR 11 ("Best and
Co.").
iv. After considering all of the aforesaid judgments, the Delhi High
Court in paragraph 29 discerned the facts of the present case as
under:
"29. When we turn to the facts of the present case, the following position
emerges:
i.
The licence was issued under a statutory mandate and was required
and acquired, before the commencement of operations or business,
to establish and also to maintain and operate cellular telephone
services.
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 sub-licence 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 fi xed
licence fee for fi rst 3 years. For 4th year and onwards, the licencee
383
was liable to pay variable licence fee @ Rs. 5,00,000/- per 100
subscribers or part thereof, with a specifi c stipulation on minimum
licence fee payable for 4th to 6th year and with modifi ed but similar
stipulations from 7th year onwards.
vii. The licence could be revoked at any time on breach of the terms
and conditions or in default of payment of consideration by
giving 60 days' notice.
viii. The authority also reserved the right to revoke the licence in the
interest of public by giving 60 days' notice.
 ix. Under 1999 policy, the licencee had to forego the right of
operating in the regime of limited number of operators and agreed
to multiparty regime competition where additional licences could
be issued without limit.
x.
There was lock in period on the present shareholding for a period
of 5 years from the date of licence agreement i.e. the eff ective date
and even transfer of shareholding directly or indirectly through
subsidiary or holding company, was not permitted during this
period. This had the eff ect of 'modifying' or clarifying the 1994
agreement, which was silent.
xi.
Licence fee calculated as a percentage of gross revenue was
payable w.e.f. 1 August, 1999. This was provisionally fi xed
at 15% of the gross revenue of the licensee but was subject
to fi nal decision of the Government about the quantum of
revenue share to be charged as licence fee after obtaining
recommendation of the Telecom Regulatory Authority of
India (TRAI).
xii. At least 35% of the outstanding dues including interest payable
as on 31 July, 1999 and liquidated damages in full, had to be
paid on or before 15 August, 1999. Dates for payments of arrears
were specifi ed.
xiii. Past dues upto 31 July, 1999 along with liquidated damages
had to be paid as stipulated in the 1999 policy, on or before 31
January, 2000 or earlier date as stated.
C.I.T., DELHI v. BHARTI HEXACOM LTD.
[B. V. NAGARATHNA, J.]
SUPREME COURT REPORTS
[2023] 13 S.C.R.
384
xiv. The period of licences under 1999 policy was extended to 20
years starting from the eff ective date.
xv.
Failure to pay the licence fee on yearly basis would result in
cancellation of licences. Therefore, to this extent licence fee was/
is payable for operating and continuing operations as cellular
telephone operator."
v. On a consideration of the aforesaid aspects, the Delhi High Court
held that the payment of licence fee was capital in part and revenue
in part and that it would not be correct to hold that the whole fee was
capital or revenue in nature in its entirety. It 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 fi xed included an element towards the said
right of the licencees. 1994 agreement, for fi rst 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 specifi ed dates.
32. There was restriction under the 1994 agreement, on transfer of the
licence or even grant sub-licence but there was no specifi c restriction
on change of shareholding. 1999 policy ensured that even shareholding
did not change for a period of 5 years from the eff ective date. The eff ect
of acquiring the licence has been examined in paragraph 15 above. The
licence was not assignable or transferrable as such, but induction of
share capital, transfer of shares etc. was permitted subject to conditions
385
in the 1999 policy. In commercial sense the licence constituted and
continues to be the most valuable right which the company has and
possesses. Thus, the payment made is for acquiring the licence which
is essential and mandatory, prerequisite for establishing the business
and for operations or continuance and running of business. Yet, as
observed below, it cannot be equated with one time entry fee which
a person has to pay to establish the business. It therefore, represents
composite payment, both capital and revenue.
33. The licence fee was imposed and payable under the Indian
Telegraph Act and other statutory provisions and was/is mandatory.
Failure to pay the same would/will result in discontinuance or stoppage
of business operations. Under 1999 policy, the amount payable speaks
of sharing of gross revenue earned by the service provider from the
customers. 1994 agreement as noticed did have a provision for sharing
but with minimum payment stipulation. In case of non-payment
of licence fee, the licence could be revoked and licencee was not
permitted to carry on and continue cellular telephone service. Thus,
the licence fee payable was/is equally with the objective and purpose
to maintain and operate cellular telephone services. It was also an
operating expense and non payment can lead to cancellation as one
of the consequences. Endurement requires current expenses and is
subject to payment on revenue share. It will not be correct to hold or
propound that entire payment during the term of licence, is deferred
capital payment. This was/is not the intent under the 1994 agreement
or 1999 policy. The intent is to also share the gross earning to maintain
and operate the licence.
34. The licence fee as such is similar to both prospecting fee,
acquisition of right to lease as well as leases which enabled removal
of sand/tendu leaves, etc. as nothing has to be won over, 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
C.I.T., DELHI v. BHARTI HEXACOM LTD.
[B. V. NAGARATHNA, J.]
SUPREME COURT REPORTS
[2023] 13 S.C.R.
386
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 benefi t test has
limitation and cannot be mechanically applied without considering
the commercial or business aspects. Practical and pragmatic view and
considerations rather than juristic classifi cation is the determinative
factor. The payment of yearly licence fee on revenue sharing basis is
for carrying on business as cellular telephone operator. It is a normal
business expense.
36. Read in this manner, the licence granted by the Government/
authority to the assessee would be a capital asset, yet at the same
time, the assessee has to make payment on yearly basis on the gross
revenue to continue, to be able to operate and run the business, it
would also be revenue in nature. Failure to make stipulated revenue
sharing payment on yearly basis would result in forfeiting the right
to operate and in turn deny the assessee, right to do business with the
aid of the capital asset. Non-payment will prevent and bar an assessee
from providing services."
vi. In paragraph 36, it was observed that the licence granted by the
Government or the concerned authority to the assessee would be a
capital asset and yet, since the assessee had to make the payment
on a yearly basis on the gross revenue to continue to be able to
operate and run the business, it would also be in the nature of
revenue expenditure. Having opined thus, the High Court decided
to apportion the licence fee as partly revenue and partly capital and
divided the licence fee into two periods, that is, before and after
31 July, 1999 and observed that the licence fee that had been paid
or was payable for the period upto 31 July, 1999 i.e. the date set
out in the Policy of 1999, should be treated as capital expenditure
and the balance amount payable on or after the said date should
be treated as revenue expenditure. The reasons for the same were
387
stipulated in paragraphs 43 to 46 of the said judgment which reads
as under:
"43. Licence fee was payable for establishment, maintenance and
operation of cellular telephone service. Establishment and set up took
place in the initial years and thereafter the payments made were/are
for operation or maintaining the cellular telephone service. Initial
outlay and payment, therefore, is capital in nature, whereas the
outlays and payments made subsequently are to operate and maintain
the service. 1999 policy in the form of letter dated 22 July, 1999
also refers to one time entry fee which is chargeable and had to be
calculated as licence fee dues payable upto 31 July, 1999 and licence
fee was thereafter payable on percentage share of gross revenue. The
new licences issued to others also stipulated one time entry fee and
then licence fee payment on sharing basis. In view of the new 1999
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
justifi ed 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 eff ect 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 the capital
payment is duly allowed as a deduction over the term and once the
expenditure is allowed, it would be revenue or tax neutral provided
the tax rates remain the same during this period.
C.I.T., DELHI v. BHARTI HEXACOM LTD.
[B. V. NAGARATHNA, J.]
SUPREME COURT REPORTS
[2023] 13 S.C.R.
388
44. ITA Nos. at serial Nos. 1 to 9 above primarily relate to variable
licence fee, which is to be shared under the 1999 Policy whereas,
ITA No. 417/2013 fi led against Hutchison Essar Ltd. relates to the
period of variable licence fee payable for the fourth year under the
1994 Agreement.
45. The effect thereof is that we are treating about 20% of the
expenditure in terms of the tenure as per the 1999 Policy as capital in
nature, whereas if we apply the 1994 Agreement, we would be treating
about 40% of the expenditure as per the tenure as payable towards
establishing or setting up of cellular business. By the time 1999 Policy
was implemented in the case of the respondents-assessees, the cellular
telephone business had already commenced and was in operation.
The 1999 Policy had the eff ect of extending period of licence from
10 years to 20 years, but from the eff ective date. The view, we have
taken, eff ectively means that the entire licence fee paid in the initial fi rst
four years is treated as capital in nature i.e. the expenditure incurred to
establish cellular telephone business, whereas the balance expenditure
payable on year to year basis from 5 year onwards is treated as revenue
expenditure to run and operate cellular telephone business.
46. However, we would like to discuss two judgments relied upon
by Huthison Essar Pvt. Ltd. in support of their contention that the
variable fee even prior to 31 July, 1999 should be treated as revenue
expenditure. As noted above, this was the 4 year and the contention
of the assessee is that in this year even as per the 1994 agreement,
payment had to be made on revenue sharing basis subject to the
minimum guarantee. Learned counsel for the assessee had relied upon
CIT v. Sharda Motors Industry Ltd. (supra).