CIT vs. BHARTI AIRTEL LTD

+ % IN THE HIGH COURT OF DELHI AT NEW DELHI V ITA 1679/2010 Reserved on: 13"' August, 2013 Date of Decision: |1+^December, 2013 COMMISSIONER OF INCOME TAX Appellant Through: Mr.Kamal Sawhney, Sr. Standing Counsel Versus BHARTI CELLULAR LTD Respondent Through: MrAjay Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA 1680/2010 COMMISSIONER OF INCOME TAX .....Appellant Through: Mr.Kamal Sawhney, Sr. Standing Counsel Versus BHARTI CELLULAR LTD Respondent Through: Mr.Ajay Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA 114/2012 COMMISSIONER OF INCOME TAX Appellant Through: Mr.Abhishek Maratha, Senior Standing Counsel With Ms.Anshul Sharma, Adv. Versus BHARTIHEXACOM LTD Respondent Through: Mr.Ajay Voliora, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA 996/2011 COMMISSIONER OF INCOME TAX Appellant Through: Mr.Abhishek Maratha, Digitally Signed By:AMULYA Signature Not Verified

Versus Senior Standing Counsel With Ms.Anshul Sharma, Adv. BHARTIHEXACOM LIMITED Respondent Through: Mr.Ajay Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA 1328/2010 COMMISSIONER OF INCOME TAX Appellant Through: Mr.Kamal Sawhney, Sr. Standing Counsel Versus BHARTI HEXACOM LTD Respondent Through: Mr.Ajay Vohra. Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA 177/2012 COMMISSIONER OF INCOME TAX Appellant Through:Mr.Abhishek Maratha, Senior Standing Counsel with Ms.Anshul Sharma,Adv. Versus r'V' BHARTI AIRTEL LTD Respondent Tlirough: Mr.Ajay Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA No. 893/2010 Reserved on: 29"' November, 2013 Date of Decision: December, 2013 COMMISSIONER OF INCOME TAX Appellant Through: Mr.Kamal Sawhney, Sr. Standing Counsel versus BHARTI CELLULAR LTD. Respondent Through: Ms.Kavita Jha, Advocate ITA 1333/2010 COMMISSIONER OF INCOME TAX Appellant Through: Mr.KamalSawhney, Sr. Standing Counsel

Versus BHARTI TELENET LTD. Respondent Through; Ms.Kavita Jha, Advocate CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJIV KHANNA, J. For detailed order see ITA No. 1336/2010 titled Commissioner ofIncome Tax versus Bharti Hexacom Limited pronounced today. DECEMBER/f^^013 Idib/NA L (SANJIV KHANNA) JUDGE (SANJEEV SACHDEVA) JUDGE

rw TM.E IMICrH COURT OJF JLDIICLJi-iiJl AT 1I-:W li.MlCiLrjfl + , ITA No. 1336/20JO Reserved oh: B"' Augnast, 2011,3 % Date of Deeiision: H'^lDcceniibcr, 20113 COMMISSIONER OV H-ICOME TAX ..... Appclllju.it Through: Mr.Kama] oavvhncy. Sr. Slandiiig Counsel versus BHARTI JtlEXACOM LTD ..... Kespoodewt Through: Mr.Aja}/ Vohra, M.s.Kavila Jha and Mr.Kaanaii Kapur, A'dvocaLcs I.TA 1679/2010 COMMISSIONER 0).F INCOME TAX .....Appellant Through: Mj'.Kamal .'Savvliiicy, Sr. Standing Counsel Versus BIIARTI GELLULAR LTD l^.e.spoBidenil I'hrough: Mr.Ajay Vohra, Ms.Kavita .Iha and MA'.Kaanan Kapur, Advocales ITA I680I/2OJO COMMISSIONER OF INCOMJC TAX .....Appellasjl Thi'ough: M.r.Kamal Sawliney, Sr. Slanding Counsel A^'ej-sus BHARTI CELLULAR LTD ..... IRespondctit Through: Mr.A.jay Vohra, Ms.Kavila ,lha and Mr.Kaanan Kapur, AdvocaLcs ITA 114.;2m2 COMMISSIONER OF INCOM)'', TAX Appellaiul Through: Mr./Vbhishek Maralba, Senior Standing Counsel Witli, Ms.Anshul Shanria, Adv. ITA i;i.36/''.0l0 conn, ca.ses. ' "I 'lC'

BHARXraEXACOM LTD ..... RespoHck;nt Through: Mr./Vja}' Vohra, Ma.K.avila J.lia and Mr.Kaanan Kapur, Advocates ITA 996/2011 !OME TAX ..... ApptlllsHit: Tln'ough: Mr.Abhishek Maralha, Senior Standing Counsel With Ms.Anshul Sharnia, Adv. V ersus liEXACOM LIMITED Respondent Tlii'ough: Mr. A jay Vohra, Ms.Kavita, .lha and Mr.Kaanan Kapur, Advocates ITA 1328/2010 COMMISSIONER OF INCOME TAX Appellsint Thjough; Mr.Kamal Savvliney, Sr. Standing Counsel Versus BHARTI HEXACOM LTD ..... Rt^spondcHt Tlii'ough: Mr.Ajay Vohra, Ms.Kavita .lha cuid Mr.Kaanan Kapur, Advocates ITA 177/2012 ER OF INCOME TAX ..... Appelhijit Through:Mr.Abhishek Maratha, Senior Standing Counsel with Ms.Anshul Sharnia.,Adv. IS BHARTI AIRTEL LTD ..... Respondeiid: Through; Mr.Ajay Vohra, Ms.Kavit;i ,iha and Mr.Kaanan Kapur, Advoc;.ites ITA No. 893/2010 Reserved on; 29"yNovember, 20113 Dsiitc of Decision: beccinbcr, 2013 COMM.ISSIONER OF INCOME TAX ..... Appelhiml; Througlr Mr.Kamal Sawhney, Sr. Standing Counsel ITA 1336/2010 & coim. cases. I'fge 2 uf-K, V

versus BHARTI CELLULAR LTD. Through: Ms.Kavila Jha, Aclvocale 1333/2010 III OF INCOME T^ Tluough: Mr.Karaal Savvhney, Sr. Standing Counsel Versus BHARTI TELENET LTD. Tlirough; Ms.Kavila .lha, Advocalc ITA No. 417/2013 Reserved oe: 25"' ^Jcpteiralber, 2011,3 Dsite of DecisioBn:,''^ Dccerober, 2013 COMMISSIO'NER OF INCOME TAX - VI ....Appellsint Tlii-ough Mr. Amol Siaha, Sr. Standing Counsel IIUTCHINSON ESSAR TELECOM FVT. LTD. ....R« Through Mr. N.K. Kaul, Sr. Advocate with Mr. Salil Kapoor, Mr. Vikas .Iain and Mr. Sanat Kapoor, Advocates. HONM8LE MR. JUSTICE HON'BLE MR. JUSTICE SANJEEV 5 MIANNA, J. This common Judgment/order ^'Vl^ dispose of-appeals Illed by Commissioner of Income Tax, Delhi - 1/Delhi V[, as. identical question of law arise for consideration inthe following cases: SNo. ITA No. Name oFtlie Assessee 1. 1328/2010 Bharli l lexacom 2. 1336/2010 3. 114/2012 ITA 1336/2U10 & conn, cases. Assessment Year _20()3_-0fl 2004"-()5 2006^07^7 I'lij'.c j (ir4(,

respondents under Indian Telegraph Act, 1885, and Indian Wireless Fee 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 SecUon 35ABB of the Incomc I'ax Act, 1961 (Act, for short). 5. At the very outset, we would like to reproduce Section 35ABB, which reads; 1(1) In respecl of any expendilure, being in tlic naLure of capital expenditLire, incuried for acquiring an)' right to operate telecommunication services[eithcr before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year] and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each oF the relevant previous years, a deduction equal to the appropriate fraction' of tlie amount of such expenditure. Explanation.—For the purposes oFthis section,--- [(;) "relevant previous years" means,— (/!) in a case where the licence Fee is actually paid belbrc the commencement oF the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; (B) in any other case, the previous years beginning with the previous year in which the licence Fee is actually paid, and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in Force;] (;;j "appropriate fraction" means the fiaction the numeratoi" of which is one and the denominator of which is the tolal number of the relevant previous years; (Hi) "payment has actually been made" means the actual payment of expenditure irrespective of the previous year in which the liability For the expenditure was incurred according to the method of accounting regularly employed by the assessee. ITA 1336/2010 &. conn, cases. I'agc 3 ot'J?

(2) Where lhe licence is Iransrerred and the pro'ceetis of the transfer (so far as they consist of capital sums) ai e less than the expenditure incuircd remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds oF the transfer, shall be allowed in respect of the previous year in vvliich the licence is transferred. (3) Where the whole or any part of the licence is Iransfeired and the proceeds of the transfer (so fai' as they consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incui'rcd to obtain the licence and tlic amount of such expenditure remaining unallowed shall, be chargeable to income-tax as profits and gains of tlie business in the previous year in which the licence lias l.ieen transferred. Explanation.—Where the licence is transfeiied in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. (4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so fai' as they consist of capital sums) arc not less than the amouiit of expenditure incurred lemaining unallowed, no deduction for such expenditure sliall be allowed under sub-section (I) in respect of the previous year in wliich the licence is transferred or in respect of any subsequent previous yeai- or years. (5) Where a part of the licence is transferred in a pi'cvious year and sub-section (3) does not apply, the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by-- {a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and {b) dividing the remainder by tlie number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred. (6) Where, in a scheme of amalgamation, tlie amalgamating company sells or otherwise transfers lhe licence to tlie amalgamated company (being an Indian company),— !TA 1336/2010 & comi. cases. Pnge 0 or4f)

(8) Where a deduction for any previous year under sub section (1) is claimed and allowed in respect oT any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (Oof section 32 for the same previous year orany subsequent previous yeai." As IS apparent from the Section itself, it applies when expenditure of capital nature Avas/is incurred by an assessce lor acquiring a right for operating telecommunication services. It is immaterial whether the expenditure is/was incurred before or after commencing the busmess to operate telecommunication services. But, the payment should be actually made. We agree with the counsel for the respondents that the said provision does not stipulate or mandate that any expenditure for a right to operate telecommunication services or payment made for. the said liccncc as per the section is deemed to be a capital expenditure. Scction 35ABB is not a deeming provision but comes into operation and is effectlA'e when the expenditure itsell is ol a capital natuic and is incurred for acquiring a right to operate telecommunication services or is made to obtain a licence for the said services. It can be incurred ITA 1336/2010 & conn, cases. PoRC 7 ot

before commencement of business or thereafter, but should be incurred during the previous 3'ear. 1hus Section 35ABB b}' itseli does not help us in determining and deciding the question whether licence fee paid under the New Telecom Policy 1999 or under the 1994 agreement, was/is capital or revenue in nature. 7. Undisputed facts which are relevant may be now noticed. The respondent companies are engaged in business oftelecommunictition services and value added related services. Tliey have jDrocurcd licence in difterent circles. Originally the said licences Avcre awarded under licence agreement executed in 1994. The period ol, hccnce as stipulated ^vas for ten years initially, expandable for one year or more at the discretion of the authorities. The licencc could not be assigned, transferred in any manner, whatsoever to auy third party or by entering into agreement by sub-licence, partnership etc. 'fhe authorities had the right to revoke the agreement on breach of any term or on default of payment by giving sixty days notice. The licence was issued on non-exclusive basis and the authorities reserved their right to operate the same services within the geographical area and had right to modify the conditions of the licencc as stipulated in the Schedules A to D, when considered necessary or expedient in the interest of general pubhc or for proper conduct of telegraph services or for securit}' considerations. Even otherwise, the authorities had the right to terminate the licence at any time in public interest by giving sixty days notice. Schedule A, prescribed the area of service; Schedule B prescribed the tariff ceiling and stipulated that all tariff increases shall be subject to prior approval ol the autiiorities but the lower tariff could be charged from the users without prior approval. ITA 1336/2010 & conn, case.s. Page !l of'17 '

There was stipulation thai: no tree time could be given in the air time. Licence fee payable under this agreement was as under;- "PAYMENTOF LICENCE FEES 19.1 The Licence fee payable by licencee for cach service area shall be regulated as follovvs:- Licence Fee For Service Area Year Bombay Delhi Calcutta Madras I" Year 2'"' Year (Rupees in Crores) 3 6 2 ^1 1.5 3 1 2 4^'' Year and onwards 12 8 6 ^1 @ Rs. 5 lakhs (five lakhs) per 100 (one hundred) subscribers or part thereof; subject to the niinimurn shown belovv:- Minirnum Licence Fee for Fourth to Sixth Year onwards Service Area (for each year) Seventh year (for each year) • (Rs.in crores) Bombay Delhi Calcutta Madras 12 9 6 24 16 12 8 a) For purpose of charging the lump-sum Licence lee for the first three years, the year sliall be reckoned as twelve months, beginning with the date of commissioning of services or completion of 12 months from date of signing of'L.icence Agreement, whichever is earlier. b) The fourth year for purpose of charging ihc Liccnce fee shall be die period from the completion of the thii'd year as defined above to the 3P' day of March ITA 1336/2010 & conn, aises. Paj'c y ol '((i

C) succeeding. The annual Licence Fee (or the Ixuirth year will therefore, be coniputed prorale wilh reference to the actual number of days. Thereafter, the year for purpose of levy of Licence fee shall be the financial year i.e. 1''^' Api il to 31®' March and part of the year as balance period, if any. For the purpose of calculation of Licence fee from the fourth year onwards as indicated in para 19.1 above, the number of subscribers at the end of each month shall be added for ail the months oi'the year and divided by the number of completed months. (f) The rate of Rs. five lakhs per hundred subscribers or part thereof is based on the unit call rate of Rs.L10. Fourth year onwards, as defined in the clause 19.1(d), the rate of Rs. five lakhs will be revised based on the prevalent unit call rate. The revision will be limited to 75% of the overall increase in the unit rate during the period preceding such revision. Agreement further stipulated: 19.2 On completion of three years from the date of commissioning/provision of services; the Authority reserves the right to fix the share of the gross revenue from rental, air time charges for all other services provided from the cellular network of the Licensee, as additional licence lee. 19.3 I'he annual Licence fee as prescribed above docs not include Liccnce fees payable to WPC vving of Ministry of Communications (WPC) for use ol Radio Frequencies which shall be paid separately by the Licensee on the rates prescribed by the WPC and as per procedurespecified by it (condition 20)." 8. National Telccorn Policy 1999 stands recorded in communication dated 22'"' July, 1999. The said policy stipulates that licencee would be required to pay one time entry fee and licence fee on percentage share of gross revenue. 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 ol the ITA 1336/2010 & conn, cases. I'ajie 10 0147

effeclive date. Licence fee as a percentage of gross revenue under tiie licence shall be payable w.e.f. l" August, 1999. 'The quantum of revenue share to be chargcd as licence fee would be llnally decidcd after obtaining recommendation of Telecom Regulatory Authority of India (TI^I) but meanwhile the Government had fixed 15% of the gross revenue of the licencee as provisional licence fee. On j-eceipt of TRAI's recommendation by the Government, final adjustment of (he dues would be made. 9. Clause (vi) of the said letter indicates that there Avere only two cellular operators in the area/service area and it was postulated that if either of the cellular operator did not accept the package, both the existing operators would continue the earlier licence till the validity of the said licence. In clause (vii), stipulated that upon migration to National Telecom Policy 1999, the licensees would forego right of operating in the regime of limited number of operators as per existing licencing agreement and would operate in multiple licence regime i.e. additional licences without any limit might be issued in a given service area. It was further stipulated that there shall be a lock-in of the present shareholding for a period of 5 years from the date of licence agreement and the transfer of shareholding directly or indirectly through subsidiary or holding companies shall not be permitted during this period. However, issue of additional share capital by licencee companies/their holding companies, by issue o!:" private placements/ public issues would be permitted. This lock-in time would not be applicable in case of transfer of shares by enforcement of pledge by the lending financial institutions/banks due to defaults. The period of licence was stated to be 20 years tfom the effective date of the existing licence agreement i.e., the 1994 ITA 1336/2010 & conn, crises. Page 11 uf'U)

agreement. Migration to National Tclecom Polic}' 1999, was on the condition and premise that the conditions should be accepted as a pacicage in entirety and simultaneously and all legal proceedings shall be withdrawn and no dispute for the period upto 31" July, 1999, shall be raised at any future date. After the terms were accepted, amendments in the existing liccnce agreement would be signed. 10. The respondents have migrated and accepted the National Telecom Policy, 1999. Respondents herein in riA Nos. 1328/2010, 1336/2010, 114/2012, 996/2011, 893/2010, 1680/2010, 1679/2010, 177/2010, 1333/2010 have paid the licence fee upto 31'' July, 1999, i.e.- one time licence fee as stipulated in the letter/ commumcations dated 22nd .July, 1999 and have treated the said payment as capital expenditure. 11. Hutchinson Essar Telecom Pvt. Ltd., respondent in ITA No. 417/2013 has not treated the fourth year payment undcj- the 1994 agreement as capital expenditure but as revenue expenditure, and their contentions are being examined separately below. 12. hi view of the legal issue involved, Ave are not referring to the factual details in respect of each assessment year i.e. details with regard to date of filing of return, income declared under normal provisions, book profits etc. We shall concentrate, upon the legal issue raised and the facts relevant for determining the said legal issue. For the purpose ofclarity, we have recorded and set out details ofthe Avrit petitions, name of the respondent-assessee, the assessment years and the amount involved; ITA 133C/2010 & cnnn. cases. Piige 12 or 47

SNo. ITA No. Name of the Assessee Assessment Yeai' .Amount Involved Rsr8',69rr6^00b/-"" 1. 1328/2010 Bharti Mexacom Ltd. 2003-04 2. 1336/2010 2004-05 Rs. 10,89,74,250/- 3. 114/2012 2006-07 Rs.27,60,36,300/- 4. 996/201 1 2007-08 Rs.48,83,07,556/- 5. 893/2010 Bharti Cellular Ltd. 2000-01 •Rs.27,82,30,588/- 6. 1680/2010 2001-02 Rs.54,93,43,930/- 7. 1679/2010 2002-03 Rs.61,07,90,625/- 8. 177/2010 Bharti Airtcl Ltd. 2005-06 Rs.2,76,4 8,900/- "Net amount . disallowed after disallowance and amortization. 9. 1333/2010 Bharti Telenet Lid. 2000-01 Rs.4,80,67,869/- 10. 417/2013 Hutchiiison Essar Pvt. Ltd 1999-2000 Rs. 18,64,57,000/- 13. The contention and the facts highhghted b)' the Revenue are thai I'espondents Avere granted a hcence iindej- an agreement excciifed under the Indian Telegraph Act. This agreement dated 29"' MoA'ember, 1994, in the case of Bharti Cellular Ltd. (date of agreement Avith each respondents may be different but the terms are identical) states that pursuant to the lequest of the licencee i.e. the respondent assessee, the authorit)' had agreed to grant hcence to tlie assessee on the terms and conditions apjiearing hei'einafter to establish, maintain and operate cellular r:n.obile services. The said agreement further stipulates that in consideration of mutual covenants and licence fee pa3'able in advance, the licensor, i.e. the Government grants licence to the hcencee, i.e. the assessee, to establish, maintain and operate cellular mobile service. The emphasis has been laid on the words 'establish, mamtain and operate^ in the orign:ial licence and it was highlighted that it was onty pursuamt to licence agreement that the respondent assessees could establish the business. The .National Telecom Policy 1999 did modify terms of the original licence but the new policy did not change the true nature and character of the hcence fee. Only the method of computation was altered and changed. ITA 1336/2010 & conn, cases. I'iige '3 of't? G'

Therefore, the respondent assessces vvlio accept and adniil Lhat liccncc fee payable under the 1994 agrcenicui Avas capila! in natuie, cannot dispute and deny the capital nature of Lhe same payrncnl. under National Telecom Policy 1999. Even under the 1994 agrccnient for the 4^'' year, the respondent assessee had to pay the fixed sum per 100 subscribers. The nature and character of the payment was same but amount Avas modified to 15% of the gross revenue under the National Telecom Policy 1999. Further, mere payment of an amount in installments does not convert or change the capital payment to revenue in nature. The criteria of once and for all payment or installment payment co-relatable to percentage of gross-turnover was not determinative of the true character of the payment. True nature oC the payment has to be determined on the basis of the advantage or benefit procured which in the present case relates to initial set-up of business. Right to the licence had resulted in acquisilion of riglit to operate. Thus it Avas a capital payment, llie term of the liccncc Avas/is 10 or 20 years from the date of commencement and therefore, the expenditure Avas capital in nature. 14. The contention of the assessee, on the other hand, Avas that (lie licence fee payable under the National Telecom Policy 1999 Avas revenue in nature. The earnings Avere/are shared. The licence fee depends upon the gross revenue and was/is payable yearly. Licence by itself was not an asset or a right which could be sold. Under the National Telecom Policy, 1999 there Avas no limit on the number oJ' operators and the licence granted was non-exclusive. Ncav operators were issued licences and were required to pay one time licence lee lor entry and start of operations in addition to yearly turnover based licence fee. Onetime payment of licence lee was capital in nature and ITA 1336/2010 & conn, cases.

yeaL"ly pa3'able licence fee was not capita] in nature as it was essential and an annual necessit3'/obligation to continue to do business. It was u running expense. Nature of expenditure incurred A¥as not on addition to fixed capital but for maintaining and operating Ihc business of telecommunication. The nature of expenditure should be judged in commercial sense. Annual variable expenditure did not create or add to a profit making apparatus. It was not part of machinery or a plant. The appellant was wrongly assuming that the licence fee paid on yearly basis was a source of profit. The licence fee paid on yearly basis was a fee payable for continuing business activity and on non payment, licence could/can be revoked. Thus, there was/is no enduring benefit. A licence being an indivisible right and cannot be bifurcated into right to establish, operate and maintain.- 15. Before we examine the legal position, we would like to first deal with and examine the contention as to whether or not licence under the National Telecom Policy 1999 was transferable and the effect thereof The licence stands issued to the company as the operator, but behind the company are the real owners i.e. the shareholders. However, a shareholder is distinct and not synonynrous with company to whom the licence under the Telegraph Act, has been issued. Clause (viii) of the National Telccom Policy, 1999 permits transfer of shareholding by the shareholders directly or indirectly after lock-m period of 5 years. Therefore, it bars the hcencee i.e. respondents herein from registering or recording change of shareholding pattern directly or indirectly with subsidiary company within such period. However, additional equity share capital by the licencee company or their holding companies by private placement or public issues was/is permitted. We are concerned in the present case ITA 1336/2010 & conn, cases. Page 15 of 47 0 V

with the licence granted to the respondent companies and the nature and character of the licence in their hands and not the value of the shares held by the shareholders, in spite of the fact diat there was a lock in period or prohibition regarding transfer of shares for the period of 5 years and thereafter the shares were transferable. There cannot be any doubt or debate that while computing the value of the share in the hands of the shareholder, the factum and position that the respondent company has been allotted the licence was/is a relevant and important factor. However, we do not think that this can be the sound and sole basis or ground to hold that the licence in the hands ol" the respondent company was/is a capital asset. Value of a share in the hands of a shareholder may not determinatively and conclusively reflect and answer the question whether the asset held by tlic company M'as a capital asset. Market value of a share is dependent upon several factors including future prospects, nature oC trade etc. These may not be an asset for the company. We cannot on this basis alone, determine and decide whether the variable licence fee paid on annual basis is capital or revenue in nature. At the same time the license Avas/is an important and relevant aspect that determined/determines the true market value of the respondent companies. 16. At this stage, it would be appropriate to refer to relevant case la.w on the subject though we did not find or come across any decision of the Supreme Court or the High Court directly applicable to the factual matrixof the present cases. Starting point of discussion on the said question invariably begins with the decision of the Supreme Court in the case of Empire Jute Co, Ltd vs. Commissioner ofIncome Tax (1980) 124 ITR 1 (SC). Revenue in the said case ITA 1336/2010 & conn, cases. I'cioe 10 or47

relied upon an earlier decision of llic Supreme courL in CIT vs. Malieshwari Devi Jute Mills Ltd. [1965] 57 I'fR 36 (SC),' wherein sale of loom hours were held to be in nature of capital receipt and hence not taxable. The said decision was distinguished on several grounds but noticeably it Avas recorded that the said case had proceeded on a common accepted basis that loom hours was an asset. In Empire Jute Co. Ltd. (supra), on deeper elucidation of relevant facts, it was noticed that there Avas contractual agreement restricting the right of ever)' mill to work their looms to their full capacity as there was over capacity but Ioav demand. This restriction had the effect of limiting the production and consequently the profits Avhich the assessee could earn. Under the same agreement, one mill could transfer loom hours to another for consideration subject to conditions. Thus, purchase of loom hours had the effect of relaxing the restriction on operation of loom hours and enabled the purchaser to work their looms for longer duration and earn profits. The Supreme Court observed that capital expenditure Avas one made Avith a view to bring into existence an asset for enduring benefit to the trade. But this rule of enduring benefit was subject to and could break doAvn for good reasons. The nature of advantage has to be considered in commercial sense and only Avhen the advantage Avas in capital Held, tlie expenditure could be disallowed by applying the enduring benefit test. If the advantage consisted merely facilitating trading operations or enabling the management or conduct of business inore efficiently or profitably, while leaving the fixed capital untouched, the said expenditure Avould be on revenue account, though the advantage may endure for an indefinite period. Enduring benefit test, therefore, was ITA 1336/2010 & conn, cases. P;ige 17 ul'l'/

not conckisive and cannot be mechanically applied without considering the commercial aspect. 17. The second test Avhich can be applied was fixed and circulating capital test. Fixed capital being Avhat the owner tiirns to prodt by keeping it in his possession; circulating capital is whal the assesscc makes profit by parting or letting the producl/Lissct change masters/hands. This test could be applied A-vhen the acquisition of asset clearly falls Avithin one of the two categories but the lest AA'ould breakdown AA'here the expenditure does not fall easily Avithin the specified category. The demarcation line betAveen assets out of A-vhich profits Avere earned and the profit made upon assets or Avith assets, Avas thin and difficult to draAV in several cases. It was obsei'ved that purchase of loom hours Avas not like circulating capital (labour, raw material, poAA'er etc.), but "loom hours" Avere also not a part of fixed capital. ReA/enue's contention that purchase oF loom hours was for acquisition of source of profit or income and, therefore, capital expenditure, AA'as rejected on the ground that source of pi'ofit or income Avas the profit making apparatus Avhich had remained untouched. There Avas no enlargement of permanent structui'e or capital assets. Primarily and essentially the ex|:)cnditurc Avas relating to operation or Avorking of looms, Avhich constituted profit earning apparatus. The Supreme Court, hoAvever, added a Avord of cauUon that in the field of taxation, analogies could be deceptiA'c and misleading but nevertheless they referred to an example of an asscssee acquiring raAA' material regulated under a quota system lo increase his production. Money spent to acquire the quota right, it Avas observed would enfitle the assessee to acquire more raw material Lo increase profitability of theprofitmaking apparatus and would undoubtedly be ITA 1336/2010 & conn, cases. I'agc I'i ul 47

revenue expenditure as it was a part oJ" the operating cosL Howevei-, the said example relates to already existing or ongoing industry. Outgoing whether it was revenue or capita], it was highliglitcd, should depend upon practical and business point of view, rather than Juristic classification of legal rights. The question should be Judged in the context of business necessity or expediency; was the expenditure a part of assessee's working expenditure or a part of process of profit earning; whether the expenditure was necessary to acquire a right ol' permanent character, the possession of which was a condition for carrying on trade ?, etc. 18. It may be now appropriate and proper to refer to judgments of the Supreme Court relating to lease agreements as they may have some bearing and elucidate legal principles which are of relevance. In Assam Bengal Cement. Co. Ltd. vs. CIT, West Bengal (1955) 27 ITR 34 (SC), payment made by the assessee for acquiring lease of mine stone quarries for manufacture of cement for 20 years on payment of yearly rent as well as protection fee to ward olf competition, was held to be capital expenditure. In the said case, the consideration payable was per annum but was for the entire or Nvhole duration of the lease and it protected and gave right to the assessee to cari-y on business unfettered from outsiders. It >vas held that the expenditure was not apart ofthe \^'orking oroperational expenses but for acquiring a capital asset. Similarly, in .Member of the Board of Agricultural Income Tax, Assam, vs, Sindlmrani Chaudiirani and Ors. (1957) 32 ITR 169 (SC), salEirni or lump sum payment for non recurring nature made by the prospective tenant to the landlord as consideration for settlement of agricultural land and parting with certain rights paid anterior to landlord and tenant relationshi]!, .it was ITA 1336/2010 &. coiiii. cases. IVme !<) ol"4'') Ol

lielcl was not in the nature of rent, and thus, capital payment. It was emphasized that the payment was not for use of land but for the land to be put to use by the assessee. Salami was notrent paid in advance. 19. In Enterprising Enterprises vs. Income Tax (2007) 293 ITR 437, the Supreme Court affirmed the decision of Madras High Court reported in [2004] 268 ITR. 95, after referring to Pingle Industries Ltd vs. CIT [1960] 40 TTR 67 (SC); Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC) and Aditya Minerals Pvt. Ltd, vs. 'CIT [1999] 239 ITR 817 (SC), stating that distinction lies between the case of where royalty or rejit was paid and where the entire amount of lease premium was paid either at one time or in installments. Royalty or rent would be revenue expenditure, while the latter would be capital expenditure. 20. This brings us to an earlier decision of the Supreme Court in the case of Pingle Industries Ltd. vs. Commissioner ofIncome Tax, Hyderabad (supra). The majority judgment held that the quolnama which entitled the assessee to extract stones from quarries for a period of 12 years on annual payment (some amount was paid in advance to secure annual payment) was capital expenditure as the assessee was extracting stones which after dressing were sold as flag stones. It was observed that the lease was for Jong term with right to extract stones in six villages, without limit by measurement or quantity, and entitled the assessee to exclusive riglits. The majority held that the expenditure was capital in nature and cannot be equated with cases wherein assessee had acquired right to pick, up tendu leaves for manufacture of bidi, which was equivalent to purchasing of ravv material for manufacturing business. It was observed that stones in ITA 1336/2010 & conn, cases. fv Faoe 20 of 46 9f\J

situ were stock in trade of business, but lease payments were capital in nature as the stones only upon extraction became stock in trade. The payment though periodical was neither rent nor royalty, but payment was for acquiring an asset for enduring benefit i.e. right to extract stones and not stones itself. 21. In Jabbar (M.A.) vs. CJT, Andra Pradesh [1968] 68 ITR 493 (SC), the assessee had taken a short term lease of 11 months for quarrying purposes to carry away, sell and dispose oi: sand which was lying on the surface of river bed without excavation or skillful extraction. The said expenditure was held to be of revenue charactcr, in spite of fact that the interest on land Avas also conveyed, observing that this was not decisive. The decisive lactor was the object for which the lease was taken and the nature of payment, when and while obtaining the lease. This decision was distinguished by the Supreme Court in R.Ji. Sett Mooichaiul Sugastchand vs. CIT, New Delhi (1972) 86 ITR 647 as minerals in this case were pEirt oF the land and had to be won, extracted and brought to the surlace unlike the case of Jabbar (M.A,) (supra) where the minerals i.e. the sand was on surface and thus was a case relating to expenditure for acquisition of stock in trade and, revenue in nature. Similar treatment was given to the licence fee paid for one year for prospecting emeralds-which A-vas in addition to royaUy on emerald excavated and sold. The Ii.rst part i.e. the licence fee for prospecting, it Avas held ^vas capital. The contention that the licence fee was not a lease rent and did not create interest in land Avas rejected, obsei-ving that prospecting licence Avas issued before operations had started and Avas paid irrespective of the mineral obtained. This demonstrated that the object for the jDayment Avas to initiate business; though the period of licence was one year it ITA 1336/2010 & conn, cases. PngG 2( of'17

did not malce tlie payment, revenue payment. Prospecting license l.ec cannot be equated Avith payment for stock in trade. 22. In CIT vs. Bombay Burinah Trading Corporation (1986) 161 ITR 386, the Supreme Court observed that lump sum consideration paid on surrender ofexport rights in a forest lease, AA'here the assessee had right to extract and cut timber and remove them on payment of royalty, was capital payment. The payment was for sterilization of the profit making apparatus i.e. the capital asset. The forest lease was also not a stock in trade. The determining factor, it was observed was nature,of trade in which the asset was employed., [f the payment made, represented profit in a new form, it would be income, but if the money paid related to structure of assessee's profit making apparatus and affected the conduct of business, the sum received For cancellation or vairiation of agreement, would be a capital receipt. 23. In Commissioner ofIncome Tax vs. Madras Auto Services (P) Ltd. (1998) 233 ITR468 (SC), the assessee had incun'ed expenditure on demolishing the existing building and constructing a new building at their own expense. The new building belonged to the lessor and the assessee remained a lessee but at a Ioav rent. 'Term for lease was 39years butthe Supreme Court held that the expenditure was revenue in nature as the newly constructed property from the beginniiig was owned by the lessor. It was emphasized that the asset created, though of enduring nature, did not belong to the assessee (there have been statutoiy amendments but we are not required to examine the said amendments in the present decision. Ihe ratio is relevant). Reference was made to Laksbmiji Sugar Mills Co. P. Ltd. vvv. CIT (1971) 82 ITR 376 (SC), wherein expenditure incurred on ITA 1336/2010 &. conn, cases. I'iige 22 ol'47

construction and development of roads between diOcrent sugarcanc producing centers and sugar factojics was held to be revenue in nature as it was incurred for the purposes of facilitating running of assessee's motor vehicles etc. Similarly in LJ-L Sugar Factory and Oil fliills (F) Ltd. vs. CIT (1980) 125 JTR 293 (SC), amount paid as contribution for construction of roads in an area around the factory under a scheme was held to be revenue in nature. CIT vs. Associated Cement Companies Ltd. (1988) 172 tTR 257 (SC) was quoted and observed that the expenditure incurred to concrete the niain road ^'Vas revenue as the installation and accessories AverC assets of the municipality, lliis was despite the fact that the assessee had secured immunity from liability to pay municipal rates and taxes lor 15 years. In these cases, the expenditure had been incurred to bring about some kind of enduring benefit but did not bring into existence any asset for the benefit of the assessees. The expenses wci'c made for the purposes of conducting business more profitably and fruitJully and the asset created did not belong to the assessee. It was noticed that the creation of asset, resulted in saving of considerable revenue expenditure in form of lowerrent. 24. In AlemJnc Chemical Works Co. Ltd. Vs. Commissioner of Incom-e Tax, Gujarat (1989) 177 ITR 377 (SC) the .assessee had acquired know-now to produce higher yield and sub-culture ol higli yielding range of penicillin. The said expenditure was in the line oJ" existing manufacture. It was lump-sum payment but the expenditure was held to be revenue in nature primarily on tAvo grounds that it Avas incurred for the purpose of day to day business, which Avas manufacture of penicillin and, therefore, not for entirely a ncAv venture unconnected and different from existing business. Secondly, riA 1336/2010 & conn, cases.

i.t would be unrealistic to ignore rapid advances, in reseajxh in antibiotic and attribute a degree of durability and pennancnce Lo technical know-how in this fast changing area. Rtipid strides in science and technology in the field of medicines cannot be readily pigeon-holed as capital outlay. Moreover, it was not a case of exclusive acquisition. 25. Having reproduced several judgments -on the question of the decisive tests, it would be appropriate to notice one decision wherein expenditure incurred has been held to be in part capital and revenue because the tests show that expenditure incurred was for several considerations i.e. there was overlapping of capital and revenue expenditure. This aspect has been examined in detail separately below. \i\ Jonas Woodhead ami Sons (India) Ltd. vs.. Commissioner of Income Tax (1997) 224 ITR 342 (SC), question arose whether 25% of the amount paid as royalty to the foreign company for technical informationy know how relating to setting up of a plant for manufacture of products was capital expenditure. Refcri'ing to the issue in question, it was observed that the answer would depend upon several factors including whether the assessee had set u]d a completely new plant Avith a new process, new technology, or the technical knoAvhow was for betterment of the product which was already being produced; was it a part and parcel of existing business or a new business?, Whether on expiry of period of agreement, the assessee was required to give the plans, drawings etc., or could continue to manufacture the products?, etc. It Avas accordingly observed as under:- "In the case of Alembic Chemical Woiics Co. LUi. v. Commissioner of Income-Tax GuJaraL : Pcige 2'i iil'4f) rCA 1336/2010 & conn, cases.

[I989] i771TR377(SC) , Lhe queslion foi' con.siderulion was whether the himp-sum paj'iiient made b)' ihc assessee for obtaining the icnovv-how lo producc iiigher yield and sub-CLillure of high yielding strain of Penicillin would be a capital expenditure or a revenue expenditure. The Tribunal had rejected the claim oFlhe assessee holding the expenditure to be a capital expenditure. On appeal to this Court il was held: (i) It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and Lo attribute a degree of cndurabilily and permanence to the technical Icnow-hovv at any particular stage in thi.s last changhig area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requishe dcgi'ce of durability and no ephcmerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holding an outlay, such as 'this, as (ii) In the iiillnite variety of situalional diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible lo formulate any general rule, even in the generality of eases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation, However, some broad and general tests have been suggested from time to time to ascertain on which sitle of the line tlie outlay in any particular case might reasonably be held lo ftrll. These l.ests are generally efTicacious and serve as useful servants; but as masters they tend to be overexacting. (iii) The question in each case would necessarily be whether the tests relevcuit and significant in one set of circumstances are relevant and signiFicanl in the ease on hand also. .ludicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must ITA 1336/2010 & conn, cases. Page IS of 46

needs be flexible so as to respond to Uie changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved (o emphasise the element of a sulTicicnt degree oT durability appropriate lo the context." 26. At this stage, it would be releA'ant to clarify and elucidate the once and for all payment test. It is not necessary that once and for ail payment would result in an enduring benefit nor is it a firm rule that periodical payments do not show enduring benefit. The said test has its apparent limitation, if we apply the said test without eqtial importance to the questions; what was acquired and why payment was made? The real and core test is whether payment (whether once and for all or in installment) was for acquisition of capital asset or rights of enduring benefit. Quantum of payment is not relevant for determinmg the said question as it is the nature and quality of payment and not quantum or manner of payment which is decisive. Lump-sum payment can represent revenue expenditure, if it is incurred for acquiring circulating capital thougli payment is made in' one go and similarly payment made in installments can in llicL be for acquiring a capital asset, price of which is paid for over a period of time. 27. It would be relevant here to produce the tests or principles laid down in a recent decision of this court in CFT vs. J.K. Synthetics '2009] 309 ITR371 (Delhi) which are as under:- " An overall view of the Judgments of the Supreme Court, as well as of the High Courts would show that the following broad principles have been forged over the years which require to be applied to the facts of each case : (i) the expenditure incurred towards initial outlay of business would be in the nature of capital ITA l.'iae/lOlO & conn, cases. Pciac 26 of 4()

n •• (ii) expenditure, however, if the expenditure is incurred A-vhile the business is on going, it' would have to be ascertained ii'the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it with a view to produce profits it would be in the nature of revenue expenditure ; it is the aim and object of expenditure, which would determine its character and not the source and manner of its payment; (iii) the test of "once and for all" payment, i.e., a lump sum payment made, i.n respect of, a transaction is an inconclusive test. The. character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in "lump sum" or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expen.se hais been incurred to do away with, what is a recurring expense for running a business as against an expense undertaken for the benefit of the business as a whole ; (iv) an expense incurred for acquisition of a source of profit or income would in tiic absence of any contrary circumstance, be in the nature of. capital expenditure. As against this, an expenditure which enables the proFit-iriaking structure to work more efficiently leaving the source or the profit making structure untouched would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the. management to run the business cflectively, effi-ciently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or ITA 1336/2010 &roiin. cases. 27 of46

advantage could broken down ; be considered as having (a') expenditure incurred for grant oflicencc which accords "access" to tcclinical knowledge, as against, "absolu(e" transfer of technical knowledge and information would ordinarily be treated as revenue expenditui'e. In order to sift, in a manner of speaking, the grain IVom the chaff, one would have to closely look at the attendant circumstances, such as : (a) the tenure of the licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the licence to third parties without the consent of the licen-sor, (d) whether • the licence transfers the "iruits research" of the licen-soi', "once for alf. of (c) whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which "access" to knowledge was obtained during the subsistence of the licence. (f) whether any secrct or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature ; (vi) the fact that the assessee could use the lechnical knowledge obtained during the tenure of the licence for the purposes of its business after the agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The courts have held tliat this by itself cannot be decisive because knowledge by itself may last lor a long period even though due to rapid change of technology and huge strides made in the field of ITA 1336/2010 & conn, cases. Page28 of'16

science, Ihe knowledge may with passage of time bccome obsolete ; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business ; the lest enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue.'' Ill CIT VS. Saw Pipes Limited (2008) 300 ITR 35, the Delhi J-Jigh Court observed, that as the service hnes did not belong to the assessce and the expenses were incurred to enable the assessee to conduct its business more efficiently, the expenditure was revenue in nature. 28. Recently, this Bench had dealt with a similar question in the case of Oracle India Pvt. Ltd./Oracle Software India Limited , ITA Nos. 25/2012 and 797/2006 and other connected cases decided on 25"^ November, 2013 and it was elucidated that underlined purpose of differentiating capital and revenue expenditure was matching of costs with income or receipts i.e. direct association between cost incurred and earning of specific item of income to compute true and correct taxable income. In Oracle India Private Lid, (supra) it has been highlighted that while determining the question whether payment \vas capital or revenue in nature, the primary aim of the court or the authority was to determine income earned by the assessee during two points of time without impairing his capital or incurring personal debts. The concept of capital maintenance was critical in distinguishing whedier the expenditure was for capital or revenue purposes. Reference can also be made to the decision of Delhi High Court in CIT vs. Sharda Motors Industry Ltd, (2009) .319 ITR 109 (Del). ITA 1336/2010 & coan, cases. Page 29

Vlll. IX. X. XI. per 100 subscribers or parL thereof, with a specilic stipulation on minimum licence fee payable for 4"^ to 6'"' year and with modified but similar stipulations from 7^'' year onwards. vii. The licence could be revoked at any time on brcach of the terms and conditions or in default of payment of consideration by giving 60 days' notice. The authority also reserved the right to revoke the licence in the interest of public by giving 60 days' notice. Under 1999 policy, the licencee had to forego the light of operating in the regime of limited number of operators and agreed to multiparty regime competition where additional licences could be issued without limit. There was lock in pejiod on the present shareholding lor a period of 5 years from the date of licence agreement i.e. the effective date and even transfer of shareholding directly or indirectly through subsidiary or holding company, was not permitted during this period. This had- the effect oJ' 'modifying' or clarifying the 1994 agreement, which was silent. Licence fee calculated as a percentage of gross revenue was payable w.e.f. August, 1999. This was provisionally fixed at 15% of the gross revenue of the licencee but was subject to final 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). rrA 1336/2010 & com-,, auses. Pa{.',c Jl of iri

xn. Xlll. XIV. XV. At least 35% of Lhe outstanding dues including interest iiayablc as on July, 1999 and liquidated daniages iji full, had to be paid on or before 15"' August, 1999. Dates for payments of arrears were specified. Past dues upto 31®' July, 1999 along with liquidated damages liad Lo be paid as stipulated in the 1999 policy, on or before iT' .January, 2000 or earlier date as stated. The period of licences under 1999 policy was extended to 20 years starting from the effective date. Failure to pay the licence fee on yearly basis A-vould result in cancellation of licences. Therefore, to this exlent licence fee was/is payable for operating and continuing operations as cellular telephone operator. 30. ITavmg noted the aforesaid factual position, we fed that payment of licence fee Avas capital in part and revenue in part and il. would not correct to hold that the whole fee weis capital or revenue in entirety. The licencees i.e. the assessees in question requii'ed a licence in order to start or commence business as celluar telephone operator. The requirement to procure a licence or pay licence (ec was a precondition before the assssee could commence or sel up the business in question. The fee was certainly paid to the Government for permitting and allowing an assessee to set up/start cellular telephone service Avhich olhervvise was not permilted or j^rohibitcd under the Telegraph Act. In a way, it was a privilege granted lo the assessee subject to payment and compliance with the terms and conditions. ITA 1336/2010 conn, cases. 1';ikc.57, oC47

3 1. Licence fee under Llie 1994 agreement ensured that there would be only two private operators in a circle and thus their limited monopoly Avould be protected and competition by A'Vay oCtliird party private players was warded off. Restricted monopoly oC the liccncecs was ensured. The licence fee fixed included an element towards the said right of the licencees. 1994 agreement, for first three years postulated a lump-sum payment irrespective ot" number of subscribers. Minimum fee was also prescribed for Inter years. It appears that licencees Avere unable to make payments as per the 1994 agreement and under the 1999 policy, Avere required to pay lump-sum payment for past arrears before specified dates. 32. There was restrictioji under the 1994 agreement, on transfer of the licence or even grant sub-licence but there was no specific restriction on change of shareholding. 1999 policy ensured that even shareholding did not change lor a period of 5 years from the effective date. The effect of acquiring the licence has been examined in paragraph 15 Eibove. The licence was not assignable or translerrablc as such, but induction of share capital, transfer ot" shares etc. was permitted subject to conditions in the 1999 policy. In commercial sense the licence consUtuted and continues to be the most valuable right Avhich 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 confinuance and running of business. Yet, as observed' below, it cannot be equated with one time enti7 fee A-vhich a person has to pay to establish the business. It therefore, represents coifipositc j-jayment, both capital and revenue. ITA 1336/2010 & conn, cases. .13 0147

ingredients and is like lease rent which is payable from time to time to be able to use the licence. 35. The licence acquired AA/as initially for 10 years and Llie Lcrm was extended under the 1999 policy to 20 years but this itself docs notjustify 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 endui'ing bencfrt test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmatic view and considerations rather, than juristic classification is the determinative factor. The payment of yearly licence fee on revenue sharing basis is for carryingon 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 yearh' basis would result in forfeiting the iight 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 providingservices. 37. Counsel for the Revenue has relied upon decision of the flimachal Pradesh "High Court in Mohan Meakin Breiveries Ltd. f^^v. Commissioner ofIncome Tax. (1997) 220 ITR 878. In the said case the High Court has held that payment made to the State towards license fee or permit under the provisions of Punjab Excise Act and ITA 1336/201Q & conn, cases. I'lme .35 of 47 a %

Punjab Distilleries Rules applicable to the State ofHima.cha! Pradesh, was capital expenditure. The uiiposition was for construcLion, Ibr working ofdistillery and referred to manufacture ofdifferent kinds of liquor. We respectfully doubt the ratio of the said decision to the extent it obsei"ves that license fee for working ol Lhe distillery and relating to quality/kind of liquor would be capital expenditure. The expenditure incurred for operating or runnuig of distillery woukl not be capital expenditxire as it relates to and is a part of the operational expenses. These cannot be equated with capital expenditure incurred in the form of fee paid to the Registrar of Companies at Lhe time of ii-esh incorporation, the analogy draAvn in the said decision. The Division Bench of Himachal Pradesh liigh Court in the said decision has quoted the following passage from "Kanga and Palkhivala's the Law and Practice of Income-tax, Eighth Edition, Volume 1" "l.icense, permit and monopoly. — There are some early English cases on Ihis lopic which have lo be used with caution. Payment by the lessee of licensed hotel premises lo the local authorities as the 'monopoly value' on the grant of a three year license was held to be capital expenditure on the ground that the monopoly right of trading for three years as a licensed victualler attained the dignity ol a capital asset. Likewise, money expended by a brewery firm in an attempt (successful or unsuccessfuO to acquire new licensed premises or by a public carrier to obtain a license for a larger fleet of vehicles or the price of a license granted to a cartmg contractor for a period of eight years lo deposit earth, slag, etc., on the land of the licensor, was held to be capital expenditure. The law has evolved considerably as a result of acceptance of the crucial principle that the distinction between capital and revenue expenditure should be determined (rom the practical and business view point and in acco'.xlance with sound accountancy principles, eschewing the legalistic _approach; A license fee is revenue expenditure, and payments made to the State for a license or permit are none the less deductible although the license or permit may carry with it an exclusive right, where the 'monopoly' or the eKclusive cliaracter of Ihc rrA 1336/2010 & conn, cases.

righl is incidental to the license or pcrmil. Annual payments made to the Stale, in" lieu of tax on, motor vehicles per trip, for the exclusive right to plj' buses on a certain route, are revenue disbursements, and so also are royalties paid to the Stale for a monopoly right to excavate raw materials or stock-in-trade or lor an exclusive license to manufacture sugar." 38. Ill Mohan Meakin Breweries Lid (supra) the DiAMsion Bench rightly observed that that the aforesaid passage-supports l;he case of the aissessee. Thus, we observe that the expenditure incurred Jbr establishing or for setting up/construction of an}' factory/business would be capital, but the amount paid on yearly basis for running or operation of the factory/business would be normally revenue in nature. 39. The next question or issue which arises is whether (.he Court can bifurcate and divide the licence fee into capital and revenue and what percentage or ratio should be attributed to revenue and capital account. It is the conieiTtioti of the Revenue that the respondent assessee i.e. Bharti Cellular Ltd., Bharti Hexacom Ltd. and Bliarti Airtel Ltd. had themselves treated and regarded the licence fee payable under the 1994 agreement as capital expenditure. Lven in case of Llutchinson Essar Pvt. Ltd., licence fee paid under 1994 policy for first three years was treated by the assessee as capital expenditure. In the fourth year Hutchinson Essar Pvt. L-td.' has treated the variable licence fee-payable subject to minimum of @ Rs.5-,00,000/- per 100 subscribers as revenue expenditure and the other assessees have treated the revenue sharing licence fee under the 1999 policy as revenue expenditure. The 1999 policy has to be'read alongwith original agreement but it did make asubstantial dent and substantially modified the original agreement. Under tJie 1999 policy, the new I'l'A 1336/2010 & conn, cases. • Pageyi ol'^O Q

cnLrants were liable to pay entry fee A-vhich was tlie (.Dial liccnce fee payable upto 3r'' July, 1999, and Lherealier they were liable Lo pay (he variable lieenee fee. Thus, the new entrants have clearly paid Ihe "capital" entry or establishment fee and then are obliged to pay operatingor maintenance fee in form of variable licence fee. 40. In Jonas Woodhead and Sons (India) Ltd. (supra), the Assessing Officer had himself treated 25% of the amount paid as royalty as capital and the balance amount Avas treated as revenue expenditure. in Southern Switch Gear Ltd. vs. Or(1998) 232 ITR 359, the Supreme Court has aftlrmed dccision of the Madras High Court in CIT vs. Southern Switch Gear Ltd. (1984) 148 ITR 272, wherein royalty payable Avas apportioned and 25%' tliereof was treated as capital payment or expenditure on the ground that the righl to manufacture certain goods exclusively in India should be taken as an independent right secured by the assessee from the foreign company and this right was of enduring nature. The more authoritative and lucid discussion for the purpose ol~ the present controversy is in CIT, Madras vs. Best and Co. (Pvt.) Ltd. (1966) 60 ITR 11 (SC). hi the said case, the respondent assessee Avas carrying on business and had innumerable agencies. Compensation was received on account of cancellation of one agcney and the question was whether the said compensation Avas capital or revenue.in nature. Majority judgment ansAvered the said question observing that compensation and loss of agencies could be both capital and revenue depending upon facts ofeach case and Avhether the cancellation had affected the earning apparatus or structure from physical, financial, commercial and administrative point of vicAV. The ansAver required examination; how many agencies the assessee had; their nature, how ITA 1336/2010 conn, cases.

man)' agencies were lost and what was the effect on Die income as well as the structure of the entire business; whether the loss of agency was ordinary incident in the course of business etc. In the said case, compensation received was held to be revenue expenditure as the respondent assessee had innumerable agencies in different lines and had given up only one, to continue business in other hncs. l_.oss of agency, it was observed, was in normal coursc of business and being a part of normal business, the amount received as compensation v/as revenue in nature. At the same time, it was accepted thai tlje compensation paid/received was also on - account of restrictive covenant for a specified period under which Lhe assessee had undertaken not to take up competitive agency, ll: was observed that compensation attributable to the restrictive covenant Avas a capital receipt and, therefore, not taxable. It was observed "In the present case, the covenanl was an inclependcnl obligation underLaken by the assessee not to compete with the nev\' agents in the same field for a speciHed period. It came into operation only after the agency was terminated. It was wholly unconnected with' the assessee's agency termination. We, therefore, hold that that part of the compensation attributable to the restrictive covenant was a capital receipt and hencc not assessable to tax. The next questions whether the compensation paid is severable. If the compensation paid was in respect: of two distinct matters, one taking the character of a capital receipt and the other of revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the Revenue or of the assessee. Such an apportionment was sanctioned by courts in Vi'ales v. Tilley, Carter v. Wadman (H.M. and T. Sadasivam v. Commissioner of Income-tax, Madras. In the present caseapportionment of the compensation has to be fnade on a reasonable basis between the loss of the agency in ITA 1336/20,10 & conn, cases. Page of'Ki c\y V

the usual course of business and the restrictive covenant. The manner of such apportionment has perforce to be leftto die assessingauthorities 22. The answer to the question refej-recl to the High .Court is that only such part of the sums of Rs. 66,790 and Rs. 3,35,371 as is attributable to the loss of the agenc}' is assessable under section 10 of the Act for the assessment years 1951-52 and 1952-53. We accordingly modif)' the answer given by the High Court in that regard." In Tilly v. Wales (Inspector of Taxes) [19431 A.C. 386; the House ol: Lords observed that the amount paid was partly in consideration of surrender of assessee's right lo pension and partly for surrender of increased salaiy under an agreement. Pension amount Avas held to be capital and not taxable but, the sum paid for reduction in salary was taxable. The amount had to be apportioned reasonable for the two considerations. 41. Thus, it would be appropriate and proper to apportion the licence fee as partly revenue and partly capital. 42. The next obvious question is, on what basis apportionment should be done and what could be the proportion of apportionment betAveen capital and revenue expenditure. Wc have given due consideration to the said issue and felt that it Avould appropriate and proper to divide the licence fee into two periods i.e. before and after 31'' July, 1999. The licence fee paid or payable for the period upto 31"' July, 1999 i.e. the date set out in the 1999 policy should be treated as capital and the balance amount payable on or alter the said date should be treated as revenue. There are several reasons Avhy avc have taken the said date as a cut-off poiitt, rather than partly apportioning expenses through the entire term ot the licence. 1hcse reasons are elucidated in the paragraph beloAV. ITA 1336/2010 &conn, cases. ' *•'

said year. TJiis would normally happen after the raid-lerm o.l; the licencc period. Section 35ABB, therefore, ensures that Ihe eapUal payment is duly alloAved as a deduction over the term and oncc the expenditure is allowed, it A'vould be revenue or tax neutuil jjiovided thetax rates remain the same during this period. 44. ITA Nos, at serial IMos. 1 to 9 above primarily relate to variable lieense fee, whieh is to be shared under the 1999 Policy whereas, ITA No. 417/2013 filed against Hutchison Essar Ltd. relates lo the period of variable license fee payable for the foiuth year under the 1994 Agreement. 45. The effect thereof is that Ave are ti-eating about 20% of the expenditure in terms of the tenure as per the 1999 J.^olicy as ca|Dital in nature, whereas if we apply the 1994 Agreement, we would be treating about 40% of the expenditure as per the tenure as payable tOAvards establishing or setting up of cellular business. By the time 1999 Policy was implemented in the case of the rcspondcnl.s- assessees, the cellular telephone business had alread)' commenced and was moperation. The 1999 Policy had the effect of extendrng period of licence from 10 years to 20 years, but from the elTective date. The vieAV, we have taken, effectively means that the entire license fee paid in the initial first four years is treated as capital in nature i.e. the expenditure incurred to establish cellular telephone business, Avhereas 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. HoAvevcr, Ave Avould like to discuss two judgments relied upon by Huthison Essar Pvt. Ltd. in support of their contention that (.he I'agc 42 iir.Ki ITA 1336/2010 & conn, cases.

variable tee even prior to 31" July, 1999 should be treated as icvcnuc 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 iclicd upon CIT vs. Sharda Motors Industry I,M(supra). In the said case reference was made to J.K. Synthetics Ltd. (supra) to lu)lci that no substantial question of law arises. The Revenue had rched upon Southern Switch Gear Ltd vs. CIT(1998) 232 1111 359 (SC), but the said judgment Avas distinguished on the ground that lump-sum royalty was paid and 25% thereof was disallowed by the tribunal on the ground that it Avas capital payment, hi Sharda Motor Industries Ltd. (supra), royalty Avas to be paid on quantity oF goods produced calculated per piece. However, this does not appear to be sole basis • why the payment made was treated as revenue expenditure. The court had relied upon other facts Avhich are noticed in paragraph 3 of the same judgment i.e. the payment Avas made lor running business. The question of apportionment and payment Avas not made to establish busmess. In CIT vs. Modi Revlon (P.) Ltd. (2012) 26 Ta.xmann.com 133 (Delhi), a Division Bench of this High Court observed that the tests evolved over the period have disapproved the applicability of the 'once and for all' payment and more structured approach which would take into account several factors like the licence tenure; whether licence created further rights; whether there Avas restriction for use of confidential inlormation; Avhethei benelits Avere transferred once and for all; Avhether after expiry ol the licence, plans and drawings were to be returned,, etc. /Vs held and observed above, It IS nature and object for which the payment is made which ITA 1336/2010 & conn, cases. 1'iig.e43 ol' 4f)

determines the character of payment. In the said case, it A-vas observed that there Avas nothing to shovs' or to suggest vesting ot know-how in the assessee and therefore, the assessee did not derive any enduring benefit. Thus, the royalty payment Avas held to be revenue in nature. 47. hiview ofthe aforesaid findings, the substantial question mentioned above in item Nos.l to 9 is answered in the following manner; (i) The expenditure incurred toAvards licence fee is partly revenue and partly capital. Licence fee payable upto 31'^ July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after August, 1999 should be treated as revenue expenditure. (ii) Capital expenditure Avill qualify for deduction as per Section 35ABB oftlie Act. 48. The appeal ITA No. 417/2013 by the Revenue in the case ol: Hutchison Essar Pvt. Ltd., pertains to the assessment year 1999-2000 I.e. year ending 31'^ March, 1999. It is for the period prior to the period 31'^ July, 1999. As per the discussion above, the licence fee payable on or before 31=' July, 1999 should be treated as capital expenditure and the licence fee payable thereafter should be treated as revenue expenditure. In view of the aforesaid position, the question of law admitted for hearing in this appeal as recorded in the order dated 21'' August, 2013, has to be answered in favour of the revenue and against therespondent assessee. 49. In ITA Nos.893/2010 and 1333/2010, an additional issue arises for consideration. This additional issue relates to interest on.delayed payment of license fee and whether the same was capital or revenue ITA 1336/2010 & conn, cases. Page 4'l ul'40

4 expenditure. By ordcj- dated 18"' September, 2012, the Following substantial question of law was admitted for hearing and disposal:- "Whether the Tribunal fall into error in holding that the interest on the delayed payment of license tee also partook of the same nature as license fee and was deductible as revenue expenditure?" . 50. We are inclined to pass an order of remand on this question as we find that the facts on the said aspect are not lucid and clccir. In the assessment-ye£ir 2000-01, the assessment year subjecL matters of ITA 893/2010 and 1333/2010 in the case of Bharti Cellular Ltd. and Bharti Telenet Ltd.. now known as Bharti Inlbtel Ltd., tlie assessee had paid interest of P.s.1.75 crores and Rs.2.24 crores lo Ihe Department of Telecommunication for delayed payment ol license fee. The Assessing Officer disallowed the said payments observing that these were on capital account. The assessment order rccords lhat no details had been furnished and the expenses pertained to prior period. The payment Avas considered to be capital in nature because the license fee was also capital expenditure. 51. Commissioner (Appeals) in the case of Bharti Cellular Ltd. (ITA 893/2010) held that interest paid Avas capital expenditure because license fee itself v/as capital in nature, 'fhe said opinion was followed by Commissioner (Appeals) in the case of Bharti Ielenet Ltd.. now known as Bharti Infotel Ltd. Ihe answer to the question would depend upon the finding whether payment related lo license fee payable period prior to 3L'^ July, 1999 or was i(,H" the subsequent period. If interest paid was in respect ol license fee jnvyable lor Ihe period prior to 31^^ July, 1999, it will have to be capitalised. Similarly, if the interest was payable oil license ice tor the period post [TA 1336/20111 & conn, oases. I'ii[ie45 yf'K.

July, 1999, It should be treated as revenue in nalure/characlcr. The contention that it was a prior period expense docs not appeal to us and has to be rejected, as the interest was paid during Lhe year in question. 52. Learned counsel for the assessees has submitted that there cannot be any factual dispute that this interest was paid to lhe Department of Telecommunication on delayed payment of license fee under the 1999 policy and not on account of liccnsc fee payable lor period prior to 31'' July, 1999. We cannot trom the facts on rccord, decipher the exact details as this aspect has not been examined by the tribunal. The tribunal has held that interest paid was revenue in nature because the license fee payable itself was revenue in nature, irrespective of fee payable prior to 31^' ,luly, 1999. We have held to the contrary. The said question of law, therefore, is answered in favour of the Revenue and against the respondent-assessee but witli an order ofremand to decide the controversy afresh keeping in view the observations made above. 53. The appeals are accordingly disposed ol. hi tire Iacts and circumstances, there v^^ill be no orders as to costs. DECEMBER 2013 kkb/NA/VlCR ITA 1336/2010 & conn, aises. (SANJ.1V KHAMN/V) JlUBGK ...J ... (SAMJEEV S JUDGE I'u'ie -U) ol 'Ki