Commissioner Of Income Tax v. Bharti Hexacom Ltd

* IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 1336/2010 % Reserved on: 13[th] August, 2013 Date of Decision: 19[th] December, 2013 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 1679/2010 …..Appellant COMMISSIONER OF INCOME TAX 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 1680/2010 …..Appellant COMMISSIONER OF INCOME TAX 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 ITA 1336/2010 & conn. cases. Page 1 of 46 BHARTIHEXACOM LTD ..... Respondent Through: Mr.Ajay Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA 996/2011 COMMISSIONER OF INCOME TAX ..... Appellant Through: Mr.Abhishek Maratha, Senior Standing Counsel With Ms.Anshul Sharma, Adv. Versus BHARTI HEXACOM 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 BHARTI AIRTEL LTD ..... Respondent Through: Mr.Ajay Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA No. 893/2010 Reserved on: 29[th] November, 2013 Date of Decision: December, 2013 COMMISSIONER OF INCOME TAX ..... Appellant Through: Mr.Kamal Sawhney, Sr. Standing Counsel Page 2 of 46 ITA 1336/2010 & conn. cases. versus BHARTI CELLULAR LTD. ..... Respondent Through: Ms.Kavita Jha, Advocate ITA 1333/2010 …..Appellant COMMISSIONER OF INCOME TAX Through: Mr.Kamal Sawhney, Sr. Standing Counsel Versus BHARTI TELENET LTD. ..... Respondent Through: Ms.Kavita Jha, Advocate ITA No. 417/2013 Reserved on: 25[th] September, 2013 Date of Decision: December, 2013 COMMISSIONER OF INCOME TAX – VI ….Appellant Through Mr. Amol Sinha, Sr. Standing Counsel Versus ….RespondentThrough Mr. N.K. Kaul, Sr. Advocate with Mr. Salil Kapoor, Mr. Vikas Jain and Mr. Sanat Kapoor, Advocates. HUTCHINSON ESSAR TELECOM PVT. LTD. CORAM: HON’BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJIV KHANNA, J. This common judgment/order will dispose of appeals filed by –Commissioner of Income Tax, Delhi I/Delhi VI, as identical question of law arise for consideration in the following cases: Page 3 of 46 ITA 1336/2010 & conn. cases. Versus BHARTI TELENET LTD. ..... Respondent Through: Ms.Kavita Jha, Advocate ITA No. 417/2013 Reserved on: 25[th] September, 2013 Date of Decision: December, 2013 COMMISSIONER OF INCOME TAX – VI ….Appellant Through Mr. Amol Sinha, Sr. Standing Counsel Versus ….RespondentThrough Mr. N.K. Kaul, Sr. Advocate with Mr. Salil Kapoor, Mr. Vikas Jain and Mr. Sanat Kapoor, Advocates. HUTCHINSON ESSAR TELECOM PVT. LTD. CORAM: HON’BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJIV KHANNA, J. This common judgment/order will dispose of appeals filed by –Commissioner of Income Tax, Delhi I/Delhi VI, as identical question of law arise for consideration in the following cases: Page 3 of 46 ITA 1336/2010 & conn. cases. 2. The principal and core issue raised in the present appeals is similar i.e. whether licence fee payable is capital or revenue expenditure. However, there is one basic difference between appeals listed at Sl. Nos. 1 to 9 in paragraph 1 above, and the appeal in the case of Hutchison Essar Pvt. Ltd. i.e. ITA 417/2013 which should be noticed and referred to at the very outset. The said appeal relates to assessment year 1999-2000 and pertains to licence fee paid under and in terms of an agreement executed in 1994 with the Department of Telecommunications/Government of India, whereas other appeals listed at Sl. Nos. 1 to 9 above, relate to variable licence fee on revenue sharing basis paid under the new Telecom Policy, 1999. However, as the facts and issues are identical, we have deemed it appropriate to decide the appeal filed against Hutchison Essar Pvt. Ltd. along with appeals at Sl.Nos. 1 to 9. Wherever necessary, we have dealt with the issue and contentions raised in the said appeal separately. 3. Common substantial question of law required to be decided in these appeals reads:- ―1. Did the Tribunal fall into error in holding that the variable licence fee paid by the assessees was properly deductible as revenue expenditure? 4. As is apparent from the substantial question of law quoted above, the issue raised is whether the variable licence fee paid by the ITA 1336/2010 & conn. cases. Page 4 of 46 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 Section 35ABB of the Income Tax Act, 1961 (Act, for short). 5. At the very outset, we would like to reproduce Section 35ABB, which reads: “35ABB.(1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services[either 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 the amount of such expenditure. ——Explanation.For the purposes of this section, [(i) "relevant previous years" means,— (A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; ——Explanation.For the purposes of this section, [(i) "relevant previous years" means,— (A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; 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;] 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;] (ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years; which is one and the denominator of which is the total number of the relevant previous years; (iii) "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. 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. Page 5 of 46 (2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred 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 which the licence is transferred. (3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far 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 incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred. Explanation.—Where the licence is transferred 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 far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years. (5) Where a part of the licence is transferred in a previous 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 of capital sums) from the expenditure remaining unallowed; and (b) dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred. 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, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian —company), ITA 1336/2010 & conn. cases. Page 6 of 46 (a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and of capital sums) from the expenditure remaining unallowed; and (b) dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred. 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, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian —company), ITA 1336/2010 & conn. cases. Page 6 of 46 (i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and apply in the case of the amalgamating company; and (ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.] to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.] [(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the —resulting company (being an Indian company), (i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and apply in the case of the demerged company; and (ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.] to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.] (8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year.‖ 6. As is apparent from the Section itself, it applies when expenditure of capital nature was/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 commencing the business 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 licence as per the section is deemed to be a capital expenditure. Section 35ABB is not a deeming provision but comes into operation and is effective when the expenditure itself is of a capital nature 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. Page 7 of 46 before commencement of business or thereafter, but should be incurred during the previous year. Thus Section 35ABB by itself 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. ITA 1336/2010 & conn. cases. Page 7 of 46 before commencement of business or thereafter, but should be incurred during the previous year. Thus Section 35ABB by itself 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 of telecommunication services and value added related services. They have procured licence in different circles. Originally the said licences were awarded under licence agreement executed in 1994. The period of licence as stipulated was for ten years initially, expandable for one year or more at the discretion of the authorities. The licence could not be assigned, transferred in any manner, whatsoever to any third party or by entering into agreement by sub-licence, partnership etc. The 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 licence as stipulated in the Schedules A to D, when considered necessary or expedient in the interest of general public or for proper conduct of telegraph services or for security 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 of the authorities but the lower tariff could be charged from the users without prior approval. ITA 1336/2010 & conn. cases. Page 8 of 46 There was stipulation that no free time could be given in the air time. Licence fee payable under this agreement was as under:- ―PAYMENT OF LICENCE FEES 19.1 The Licence fee payable by licencee for each service area shall be regulated as follows:- Licence Fee For ----------------------------------------------------------------------- Service Area 1[st] Year 2[nd] Year 3[rd]Year ---------------------------------------------------------------------------- (Rupees in Crores) Bombay 3 6 12 Delhi 2 4 8 Calcutta 1.5 3 6 Madras 1 2 4 4[th] Year and onwards @ Rs. 5 lakhs (five lakhs) per 100 (one hundred) subscribers or part thereof; subject to the minimum shown below:- Minimum Licence Fee for Fourth to Sixth Year Seventh year onwardsService Area (for each year) (for each year) (Rs.in crores) Bombay 18 24 Delhi 12 16 Calcutta 9 12 Madras 6 8 a)For purpose of charging the lump-sum Licence fee for the first three years, the year shall be reckoned as twelve months, beginning with the date of commissioning of services or completion of 12 months from date of signing of Licence Agreement, whichever is earlier. for the first three years, the year shall be reckoned as twelve months, beginning with the date of commissioning of services or completion of 12 months from date of signing of Licence Agreement, whichever is earlier. b)The fourth year for purpose of charging the Licence fee shall be the period from the completion of the third year as defined above to the 31[st] day of March fee shall be the period from the completion of the third year as defined above to the 31[st] day of March Page 9 of 46 succeeding. The annual Licence Fee for the fourth year will therefore, be computed prorate with 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[st] April to 31[st] March and part of the year as balance period, if any. b)The fourth year for purpose of charging the Licence fee shall be the period from the completion of the third year as defined above to the 31[st] day of March fee shall be the period from the completion of the third year as defined above to the 31[st] day of March Page 9 of 46 succeeding. The annual Licence Fee for the fourth year will therefore, be computed prorate with 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[st] April to 31[st] March and part of the year as balance period, if any. c)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 all the months of the year and divided by the number of completed months. ……..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 all the months of 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.1.10. 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. part thereof is based on the unit call rate of Rs.1.10. 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 fee. 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 fee. 19.3 The annual Licence fee as prescribed above does not include Licence fees payable to WPC wing of Ministry of Communications (WPC) for use of Radio Frequencies which shall be paid separately by the Licensee on the rates prescribed by the WPC and as per procedure specified by it (condition 20).‖not include Licence fees payable to WPC wing of Ministry of Communications (WPC) for use of Radio Frequencies which shall be paid separately by the Licensee on the rates prescribed by the WPC and as per procedure specified by it (condition 20).‖ 8. National Telecom Policy 1999 stands recorded in communication dated 22[nd] 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[st] July,1999 calculated upto the said date and adjusted upon notional extension of the ITA 1336/2010 & conn. cases. Page 10 of 46 effective date. Licence fee as a percentage of gross revenue under the licence shall be payable w.e.f. 1[st] August, 1999. The quantum of revenue share to be charged as licence fee would be finally decided after obtaining recommendation of Telecom Regulatory Authority of India (TRAI) but meanwhile the Government had fixed 15% of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI‘s recommendation by the Government, final adjustment of the dues would be made. ITA 1336/2010 & conn. cases. Page 10 of 46 effective date. Licence fee as a percentage of gross revenue under the licence shall be payable w.e.f. 1[st] August, 1999. The quantum of revenue share to be charged as licence fee would be finally decided after obtaining recommendation of Telecom Regulatory Authority of India (TRAI) but meanwhile the Government had fixed 15% of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI‘s recommendation by the Government, final adjustment of the dues would be made. 9. Clause (vi) of the said letter indicates that there were 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 of 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 from the effective date of the existing licence agreement i.e., the 1994 ITA 1336/2010 & conn. cases. Page 11 of 46 agreement. Migration to National Telecom Policy 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 for the period upto 31[st] July, 1999, shall be raised at any future date. After the terms were accepted, amendments in the existing licence agreement would be signed. 10. The respondents have migrated and accepted the National Telecom Policy, 1999. Respondents herein in ITA 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[st] July, 1999, i.e. one time licence fee as stipulated in the letter/ communications 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 under the 1994 agreement as capital expenditure but as revenue expenditure, and their contentions are being examined separately below. 12. In view of the legal issue involved, we 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 of clarity, we have recorded and set out details of the writ petitions, name of the respondent-assessee, the assessment years and the amount involved: Page 12 of 46 11. Hutchinson Essar Telecom Pvt. Ltd., respondent in ITA No. 417/2013 has not treated the fourth year payment under the 1994 agreement as capital expenditure but as revenue expenditure, and their contentions are being examined separately below. 12. In view of the legal issue involved, we 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 of clarity, we have recorded and set out details of the writ petitions, name of the respondent-assessee, the assessment years and the amount involved: Page 12 of 46 13. The contention and the facts highlighted by the Revenue are that respondents were granted a licence under an agreement executed under the Indian Telegraph Act. This agreement dated 29[th] November, 1994, in the case of Bharti Cellular Ltd. (date of agreement with each respondents may be different but the terms are identical) states that pursuant to the request of the licencee i.e. the respondent assessee, the authority had agreed to grant licence to the assessee on the terms and conditions appearing hereinafter to establish, maintain and operate cellular mobile services. The said agreement further stipulates that in consideration of mutual covenants and licence fee payable in advance, the licensor, i.e. the Government grants licence to the licencee, i.e. the assessee, to establish, maintain and operate cellular mobile service. The emphasis has been laid on the words ‗establish, maintain and operate‘ in the original licence and it was highlighted that it was only pursuant 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 licence fee. Only the method of computation was altered and changed. ITA 1336/2010 & conn. cases. Page 13 of 46 Therefore, the respondent assessees who accept and admit that licence fee payable under the 1994 agreement was capital in nature, cannot dispute and deny the capital nature of the same payment under National Telecom Policy 1999. Even under the 1994 agreement for the 4[th]year, the respondent assessee had to pay the fixed sum per 100 subscribers. The nature and character of the payment was same but amount was 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 of 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 acquisition of right to operate. Thus it was a capital payment. The term of the licence was/is 10 or 20 years from the date of commencement and therefore, the expenditure was capital in nature. 14. The contention of the assessee, on the other hand, was that the licence fee payable under the National Telecom Policy 1999 was revenue in nature. The earnings were/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 was no limit on the number of operators and the licence granted was non-exclusive. New operators were issued licences and were required to pay one time licence fee for entry and start of operations in addition to yearly turnover based licence fee. Onetime payment of licence fee was capital in nature and 14. The contention of the assessee, on the other hand, was that the licence fee payable under the National Telecom Policy 1999 was revenue in nature. The earnings were/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 was no limit on the number of operators and the licence granted was non-exclusive. New operators were issued licences and were required to pay one time licence fee for entry and start of operations in addition to yearly turnover based licence fee. Onetime payment of licence fee was capital in nature and ITA 1336/2010 & conn. cases. Page 14 of 46 yearly payable licence fee was not capital in nature as it was essential and an annual necessity/obligation to continue to do business. It was a running expense. Nature of expenditure incurred was not on addition to fixed capital but for maintaining and operating the 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 synonymous with company to whom the licence under the Telegraph Act, has been issued. Clause (viii) of the National Telecom Policy, 1999 permits transfer of shareholding by the shareholders directly or indirectly after lock-in period of 5 years. Therefore, it bars the licencee 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 46 ITA 1336/2010 & conn. cases. Page 15 of 46 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 that 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 of 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 the company was a capital asset. Market value of a share is dependent upon several factors including future prospects, nature of 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 was/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 law 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 matrix of 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 of Income Tax (1980) 124 ITR 1 (SC). Revenue in the said case ITA 1336/2010 & conn. cases. Page 16 of 46 relied upon an earlier decision of the Supreme court in CIT vs. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 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 was 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 was contractual agreement restricting the right of every mill to work their looms to their full capacity as there was over capacity but low demand. This restriction had the effect of limiting the production and consequently the profits which 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 was one made with 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 down for good reasons. The nature of advantage has to be considered in commercial sense and only when the advantage was in capital field, the 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 more efficiently or profitably, while leaving the fixed capital untouched, the said expenditure would be on revenue account, though the advantage may endure for an indefinite period. Enduring benefit test, therefore, was ITA 1336/2010 & conn. cases. Page 17 of 46 not conclusive and cannot be mechanically applied without considering the commercial aspect. ITA 1336/2010 & conn. cases. Page 17 of 46 not conclusive and cannot be mechanically applied without considering the commercial aspect. 17. The second test which can be applied was fixed and circulating capital test. Fixed capital being what the owner turns to profit by keeping it in his possession; circulating capital is what the assessee makes profit by parting or letting the product/asset change masters/hands. This test could be applied when the acquisition of asset clearly falls within one of the two categories but the test would breakdown where the expenditure does not fall easily within the specified category. The demarcation line between assets out of which profits were earned and the profit made upon assets or with assets, was thin and difficult to draw in several cases. It was observed that purchase of loom hours was not like circulating capital (labour, raw material, power etc.), but ―loom hours‖ were also not a part of fixed capital. Revenue‘s contention that purchase of loom hours was for acquisition of source of profit or income and, therefore, capital expenditure, was rejected on the ground that source of profit or income was the profit making apparatus which had remained untouched. There was no enlargement of permanent structure or capital assets. Primarily and essentially the expenditure was relating to operation or working of looms, which constituted profit earning apparatus. The Supreme Court, however, added a word of caution that in the field of taxation, analogies could be deceptive and misleading but nevertheless they referred to an example of an assessee acquiring raw material regulated under a quota system to increase his production. Money spent to acquire the quota right, it was observed would entitle the assessee to acquire more raw material to increase profitability of the profit making apparatus and would undoubtedly be ITA 1336/2010 & conn. cases. Page 18 of 46 revenue expenditure as it was a part of the operating cost. However, the said example relates to already existing or ongoing industry. Outgoing whether it was revenue or capital, it was highlighted, 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 of 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 off competition, was held to be capital expenditure. In the said case, the consideration payable was per annum but was for the entire or whole duration of the lease and it protected and gave right to the assessee to carry on business unfettered from outsiders. It was held that the expenditure was not a part of the working or operational expenses but for acquiring a capital asset. Similarly, in Member of the Board of Agricultural Income Tax, Assam vs. Sindhurani Chaudurani and Ors. (1957) 32 ITR 169 (SC), salami 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 relationship, it was ITA 1336/2010 & conn. cases. Page 19 of 46 ITA 1336/2010 & conn. cases. Page 19 of 46 held 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 not rent paid in advance. 19. In Enterprising Enterprises vs. Deputy Commissioner of 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 ITR 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 rent 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 of Income 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 long term with right to extract stones in six villages, without limit by measurement or quantity, and entitled the assessee to exclusive rights. 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 raw material for manufacturing business. It was observed that stones in Page 20 of 46 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. CIT, 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 of sand which was lying on the surface of river bed without excavation or skillful extraction. The said expenditure was held to be of revenue character, in spite of fact that the interest on land was also conveyed, observing that this was not decisive. The decisive factor 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.B. Seth Moolchand Suganchand vs. CIT, New Delhi(1972) 86 ITR 647 as minerals in this case were part of the land and had to be won, extracted and brought to the surface 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 was in addition to royalty on emerald excavated and sold. The first part i.e. the licence fee for prospecting, it was held was capital. The contention that the licence fee was not a lease rent and did not create interest in land was rejected, observing that prospecting licence was issued before operations had started and was paid irrespective of the mineral obtained. This demonstrated that the object for the payment was to initiate business; though the period of licence was one year it ITA 1336/2010 & conn. cases. Page 21 of 46 did not make the payment, revenue payment. Prospecting license fee cannot be equated with payment for stock in trade. ITA 1336/2010 & conn. cases. Page 21 of 46 did not make the payment, revenue payment. Prospecting license fee cannot be equated with payment for stock in trade. 22. In CIT vs. Bombay Burmah Trading Corporation (1986) 161 ITR 386, the Supreme Court observed that lump sum consideration paid on surrender of export rights in a forest lease, where 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. If 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 variation of agreement, would be a capital receipt. 23. In Commissioner of Income Tax vs. Madras Auto Services (P) Ltd. (1998) 233 ITR 468 (SC), the assessee had incurred expenditure on demolishing the existing building and constructing a new building at their own expense.