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

Civil Appeal · 2023 INSC 917Decided 16 Oct 2023
Civil Appeal No. 11128 of 2016
B.V. Nagarathna · Ujjal Bhuyan

Background

Under the New Telecom Policy of 1999, mobile telecom operators who migrated from the earlier 1994 licensing regime had to pay a one-time entry fee (up to 31 July 1999) plus an ongoing annual licence fee calculated as a percentage of their Annual Gross Revenue. The telecom companies treated the pre-1999 one-time fee as capital expenditure but claimed the ongoing annual (variable) licence fee as revenue expenditure, fully deductible in the year paid under Section 37 of the Income Tax Act. The tax authorities disagreed, treating the variable fee too as capital in nature (deductible only through amortisation under Section 35ABB), leading to years of litigation; the Delhi High Court had split the difference, treating the fee as capital before 31 July 1999 and revenue thereafter, and the Revenue appealed that split to the Supreme Court in this batch of over 25 connected appeals.

Decision Breakdown

The Supreme Court held that the licence granted under the Telegraph Act is a single, indivisible right to establish, maintain and operate telecom services, so the fee paid for it cannot be artificially split into "capital" and "revenue" portions just because payment is structured differently before and after a cut-off date. It reasoned that because failure to pay the variable annual fee results in revocation of the licence itself under Section 8 of the Telegraph Act, that fee is intrinsically tied to the right to continue in business, not a routine periodic business expense, and staggering payment over time does not change its essential capital character. Distinguishing precedents relied upon by the companies (where royalty payments were unconnected to any right to trade), the Court found the licence fee here has direct nexus with acquisition/continuation of the capital asset (the licence). It therefore set aside the Delhi High Court's split ruling (and the parallel Bombay and Karnataka High Court rulings that had followed it), holding that both the entry fee and the variable annual licence fee are capital expenditure, deductible only by amortisation under Section 35ABB, and allowed the Revenue's appeals.

Lesson Learnt

A payment required to keep a business licence alive, even if paid periodically like a routine expense, will be treated as capital expenditure for tax purposes if the licence itself is a single, indivisible right and non-payment would mean losing the right to operate at all; how a payment is scheduled does not change its underlying legal character.

Official source (sci.gov.in)View Judgment (PDF)

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