C.I.T.,DELHI vs. BHARTI HEXACOM LTD

C.A. No.-011128-011128 - 2016Supreme Court2023 INSC 91716 October 2023Bench: HON'BLE MRS. JUSTICE B.V. NAGARATHNA HON'BLE MR. JUSTICE UJJAL BHUYANAuthor: HON'BLE MRS. JUSTICE B.V. NAGARATHNA127 pages
For Petitioner: ANIL KATIYARFor Respondent: KAVITA JHA
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court held that the variable licence fee paid by the respondent-assessees to the Department of Telecommunications under the New Telecom Policy, 1999, is capital in nature and should be amortised in accordance with Section 35ABB of the Act. The Court found that the High Court of Delhi was incorrect in apportioning the expenditure as partly revenue and partly capital by dividing the licence fee into periods before and after July 31, 1999. The Court reasoned that the payment post-July 31, 1999, was a continuation of the payment pre-July 31, 1999, albeit in an altered format, and was traceable to the foundational licence agreement. The Court emphasized that the nomenclature and manner of payment are irrelevant, and the payment is intrinsic to the existence of the licence and the trade itself. Therefore, such a payment must be characterized as capital only. The composite right conveyed by the licence cannot be artificially bifurcated. The Court noted that even under the 1994 Policy, both fixed and variable components of the licence fee were accepted as requiring amortisation, and there was no basis to reclassify the variable fee under the 1999 Policy as revenue expenditure. The judgment of the Delhi High Court and other High Courts following it were set aside.

What were the facts?

The appeals challenge a Delhi High Court judgment that upheld the Income Tax Appellate Tribunal's decision classifying variable licence fees paid by telecom companies under the New Telecom Policy, 1999, as revenue expenditure deductible under Section 37 of the Income Tax Act, 1961. The respondent-assessees migrated to the 1999 Policy, which replaced the 1994 Policy. Under the 1999 Policy, licencees paid a one-time entry fee and a variable licence fee based on a percentage of gross revenue. The assessees treated the one-time fee paid up to July 31, 1999, as capital expenditure and the subsequent variable licence fee as revenue expenditure. The Assessing Officer sought to amortize the variable licence fee over the licence period under Section 35ABB, treating it as capital expenditure. This led to disputes and appeals through various authorities.

What were the issues?

1. Whether the variable licence fee paid by the respondent-assessees to the Department of Telecommunications under the New Telecom Policy, 1999, is revenue expenditure deductible under Section 37 of the Income Tax Act, 1961, or capital expenditure to be amortised under Section 35ABB of the Act? Assessee's contentions: The assessees argued that the variable licence fee paid post-July 31, 1999, was revenue expenditure. They relied on the principle that payments made periodically for the use of an asset or for carrying on business are revenue in nature. They contended that the nature of expenditure should be determined by its purpose and not solely by the mode of payment or the fact that it is paid in instalments. They also argued that the High Court correctly distinguished between the one-time entry fee (capital) and the subsequent variable licence fee (revenue). Revenue's contentions: The Revenue contended that the variable licence fee was capital in nature. They argued that the entire licence fee, including the variable component, was consideration for acquiring the composite right to establish, maintain, and operate telecommunication services, which is an enduring advantage. They asserted that the payment, even if periodic, related to the same fundamental obligation and could not be artificially bifurcated. They relied on the principle that payments in instalments do not change the capital nature of an expenditure and that the composite right granted by the licence cannot be split.

Which sections of the Income-tax Act were involved?

Section 37,Section 35ABB

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2023 INSC 917

1 CIVIL APPEAL NO(S). 4902/2022 CIVIL APPEAL NO(S). 162/2018 CIVIL APPEAL NO(S). 159/2021 CIVIL APPEAL NO(S). 4839/2017 CIVIL APPEAL NO(S). 153/2021 CIVIL APPEAL NO(S). 6897/2018 CIVIL APPEAL NO(S)._ _______of 2023 (@ SLP (C)_________OF 2023 (@DIARY NO(S). 4178/2019)

CIVIL APPEAL NO(S). ________of 2023 (@ SLP(C) NO. 24740/2019) CIVIL APPEAL NO(S). ________of 2023 (@ SLP(C) NO. 20863/2019) CIVIL APPEAL NO(S). 158/2021 CIVIL APPEAL NO(S). 302/2021 CIVIL APPEAL NO(S). 303/2021 2 CIVIL APPEAL NO(S). 11149/2016 CIVIL APPEAL NO(S). 11148/2016 CIVIL APPEAL NO(S). 11130/2016 CIVIL APPEAL NO(S). 11131/2016 CIVIL APPEAL NO(S). 11134/2016 CIVIL APPEAL NO(S). 11132/2016 CIVIL APPEAL NO(S). 11136/2016 CIVIL APPEAL NO(S). 11133/2016 CIVIL APPEAL NO(S). 11135/2016 CIVIL APPEAL NO(S). 11137/

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