Counsel v. Respondentthrough: Mrajay Vohra, Ms.kavita Jha Andmr.kaanan Kapur, Advocates

+ ITA 1679/2010 Reservedon: 13"'August,2013 %Date of Decision:|1+^December, 2013 COMMISSIONEROF INCOME TAXAppellantThrough: Mr.Kamal Sawhney, Sr. Standing Counsel Versus RespondentThrough: MrAjay Vohra, Ms.Kavita Jha andMr.Kaanan Kapur, Advocates BHARTI CELLULAR LTD ITA 1680/2010 COMMISSIONEROF INCOME TAX .....Appellant Through: Mr.Kamal Sawhney, Sr. StandingCounsel Versus RespondentThrough: Mr.Ajay Vohra, Ms.Kavita Jha andMr.Kaanan Kapur, Advocates BHARTI CELLULAR LTD ITA 114/2012 COMMISSIONEROF INCOME TAX Appellant Through: Mr.Abhishek Maratha,Senior Standing CounselWith Ms.AnshulSharma, Adv. Versus Respondent BHARTIHEXACOMLTD Through: Mr.Ajay Voliora,Ms.Kavita Jha andMr.Kaanan Kapur, Advocates ITA 996/2011 COMMISSIONEROF INCOME TAXAppellantThrough: Mr.Abhishek Maratha, Versus BHARTIHEXACOMLIMITEDRespondentThrough: Mr.Ajay Vohra, Ms.Kavita Jha andMr.Kaanan Kapur, Advocates ITA 1328/2010 COMMISSIONEROF INCOME TAXAppellantThrough: Mr.Kamal Sawhney, Sr. StandingCounsel VersusBHARTI HEXACOM LTDRespondent Through: Mr.Ajay Vohra. Ms.Kavita Jha andMr.Kaanan Kapur, Advocates ITA 177/2012 COMMISSIONEROF INCOME TAX Appellant Through:Mr.Abhishek Maratha, SeniorStanding Counsel withMs.AnshulSharma,Adv. Versus BHARTI AIRTEL LTD RespondentTlirough:Mr.Ajay Vohra, Ms.Kavita Jha andMr.Kaanan Kapur, AdvocatesITA No. 893/2010 Reserved on: 29"' November, 2013Date of Decision:December, 2013 COMMISSIONEROF INCOME TAX Appellant Through:Mr.KamalSawhney,Sr. StandingCounsel versus BHARTI CELLULAR LTD.Respondent Through: Ms.Kavita Jha, Advocate ITA 1333/2010 COMMISSIONER OF INCOME TAXAppellantThrough:Mr.KamalSawhney,Sr. StandingCounsel Versus BHARTI TELENET LTD. RespondentThrough; Ms.Kavita Jha, Advocate CORAM: HON'BLE MR. JUSTICE SANJIV KHANNAHON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJIV KHANNA, J. For detailedorder see ITA No. 1336/2010titled Commissioner ofIncome Tax versus Bharti Hexacom Limited pronounced today. L (SANJIV KHANNA)JUDGE DECEMBER/f^^013Idib/NA (SANJEEV SACHDEVA)JUDGE +, ITA No. 1336/20JO Reservedoh: B"' Augnast,2011,3%Date of Deeiision: H'^lDcceniibcr,20113COMMISSIONEROV H-ICOME TAX..... Appclllju.it Through: Mr.Kama] oavvhncy. Sr. SlandiiigCounsel versus BHARTI JtlEXACOMLTD ..... KespoodewtThrough: Mr.Aja}/ Vohra, M.s.Kavila Jha andMr.KaanaiiKapur, A'dvocaLcs I.TA 1679/2010 COMMISSIONER0).F INCOME TAX.....Appellant Through: Mj'.Kamal .'Savvliiicy,Sr. StandingCounsel Versus BIIARTI GELLULAR LTDl^.e.spoBidenilI'hrough: Mr.Ajay Vohra, Ms.Kavita .Iha andMA'.KaananKapur, Advocales COMMISSIONEROF INCOMJC TAX.....AppellasjlThi'ough: M.r.Kamal Sawliney, Sr. SlandingCounsel A^'ej-sus BHARTI CELLULAR LTD ..... IRespondctitThrough: Mr.A.jay Vohra, Ms.Kavila ,lha andMr.Kaanan Kapur, AdvocaLcsITA 114.;2m2 COMMISSIONEROF INCOM)'', TAXAppellaiulThrough: Mr./Vbhishek Maralba,Senior Standing CounselWitli, Ms.AnshulShanria,Adv.ITA i;i.36/''.0l0conn, ca.ses.' "I 'lC' BHARXraEXACOMLTD ..... RespoHck;nt Through: Mr./Vja}'Vohra, Ma.K.avila J.lia andMr.Kaanan Kapur, Advocates ITA 996/2011 !OME TAX..... ApptlllsHit: Tln'ough: Mr.Abhishek Maralha,Senior StandingCounselWith Ms.AnshulSharnia, Adv. V ersus liEXACOM LIMITEDRespondentTlii'ough: Mr. A jay Vohra, Ms.Kavita, .lha andMr.KaananKapur, Advocates ITA 1328/2010 COMMISSIONEROF INCOME TAXAppellsintThjough; Mr.Kamal Savvliney, Sr. StandingCounsel VersusBHARTI HEXACOM LTD..... Rt^spondcHt Tlii'ough: Mr.Ajay Vohra, Ms.Kavita .lha cuidMr.Kaanan Kapur, AdvocatesITA 177/2012 ER OF INCOME TAX..... Appelhijit Through:Mr.AbhishekMaratha, SeniorStanding Counsel withMs.AnshulSharnia.,Adv. IS BHARTI AIRTEL LTD..... Respondeiid: Through; Mr.Ajay Vohra, Ms.Kavit;i ,iha andMr.Kaanan Kapur, Advoc;.itesITA No. 893/2010 Reservedon; 29"yNovember,20113Dsiitc of Decision:beccinbcr, 2013 COMM.ISSIONEROF INCOME TAX..... Appelhiml;Througlr Mr.Kamal Sawhney, Sr. StandingCounsel Tln'ough: Mr.Abhishek Maralha,Senior StandingCounselWith Ms.AnshulSharnia, Adv. V ersus liEXACOM LIMITEDRespondentTlii'ough: Mr. A jay Vohra, Ms.Kavita, .lha andMr.KaananKapur, Advocates ITA 1328/2010 COMMISSIONEROF INCOME TAXAppellsintThjough; Mr.Kamal Savvliney, Sr. StandingCounsel VersusBHARTI HEXACOM LTD..... Rt^spondcHt Tlii'ough: Mr.Ajay Vohra, Ms.Kavita .lha cuidMr.Kaanan Kapur, AdvocatesITA 177/2012 ER OF INCOME TAX..... Appelhijit Through:Mr.AbhishekMaratha, SeniorStanding Counsel withMs.AnshulSharnia.,Adv. IS BHARTI AIRTEL LTD..... Respondeiid: Through; Mr.Ajay Vohra, Ms.Kavit;i ,iha andMr.Kaanan Kapur, Advoc;.itesITA No. 893/2010 Reservedon; 29"yNovember,20113Dsiitc of Decision:beccinbcr, 2013 COMM.ISSIONEROF INCOME TAX..... Appelhiml;Througlr Mr.Kamal Sawhney, Sr. StandingCounsel ITA 1336/2010 & coim. cases. I'fge 2 uf-K, BHARTI CELLULAR LTD. Through: Ms.Kavila Jha, Aclvocale 1333/2010 III OF INCOME T^Tluough: Mr.Karaal Savvhney, Sr. StandingCounsel Versus BHARTI TELENET LTD.Tlirough;Ms.Kavila .lha, Advocalc ITA No. 417/2013 Reservedoe: 25"' ^Jcpteiralber,2011,3Dsiteof DecisioBn:,''^Dccerober,2013 COMMISSIO'NEROF INCOME TAX - VI....AppellsintTlii-ough Mr. Amol Siaha, Sr. Standing Counsel IIUTCHINSONESSAR TELECOM FVT. LTD.....R«Through Mr. N.K. Kaul, Sr. Advocate withMr. Salil Kapoor, Mr. Vikas .Iain andMr. Sanat Kapoor, Advocates. HONM8LE MR. JUSTICEHON'BLE MR. JUSTICE SANJEEV 5 MIANNA, J. This common Judgment/order ^'Vl^ dispose of-appeals Illed byCommissionerof IncomeTax, Delhi -1/Delhi V[, as. identicalquestionof law arisefor considerationinthe followingcases: AssessmentYear_20()3_-0fl2004"-()52006^07^7I'lij'.c j (ir4(, SNo.ITA No.Name oFtlie Assessee1.1328/2010Bharli l lexacom2.1336/20103.114/2012ITA 1336/2U10& conn, cases. 2.The principal and core issue raised ur die present appeals issimilarre.whetherhcencefee payableis capitaloj' revenueexpenditure. However,thereis one basic diJferencebetweenappealslisted at SI. Nos. 1 to 9 in paragraph 1 above, and the appeal in thecase of Hutchison Essar Pvt. Ltd. i.e. ITA 417/2013which should benoticed and referred to at the very outset. The said appeal relates toassessmentyear 1999-2000and pertainsto licencefee paid under andin terms of an agreement executed in 1994 with the Department ofTelecommunications/Governmentof India,whereasotherappealslisted at SI. Nos. 1 to 9 above, rehite to variablelicence fee onrevenue sharing basis paid under the new Telecom Policy, J999.I-IoAvever, as the facts and issues are identical we have deemed itappropriateto decide the appeal filed against Hutcliison Essar Pvt.Ltd. along with appeals at Sl.Nos. 1 to 9. Wherever necessary, avchave dealt with the issue and contentions raised in the said appealseparately. 3. Common substantialquestion of Uiw required, to be dccided inthese appeals reads "1.Did the Tribunal tail into error in holding thatthe variable licence fee paid by the assessees wasdeductibleas revenueproperlyexpenditure? 4.As is apparent from the substantial question of law quotedabove, the issue raised is whetherthe variablelicence lee paid by theI'a"e4(.r.(7ITA 1336/2010 &comi. cases. respondents under Indian Telegraph Act, 1885, and Indian WirelessFee Act 1933, payable under the New Telecom Policy 1999- or 1994agreement, is revenue expenditure or capital expenditure which isrequired to be amortized under SecUon 35ABB of the Incomc I'axAct, 1961 (Act, for short).5.At the very outset, we would like to reproduce Section 35ABB,which reads; 3. Common substantialquestion of Uiw required, to be dccided inthese appeals reads "1.Did the Tribunal tail into error in holding thatthe variable licence fee paid by the assessees wasdeductibleas revenueproperlyexpenditure? 4.As is apparent from the substantial question of law quotedabove, the issue raised is whetherthe variablelicence lee paid by theI'a"e4(.r.(7ITA 1336/2010 &comi. cases. respondents under Indian Telegraph Act, 1885, and Indian WirelessFee Act 1933, payable under the New Telecom Policy 1999- or 1994agreement, is revenue expenditure or capital expenditure which isrequired to be amortized under SecUon 35ABB of the Incomc I'axAct, 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 tlicnaLure of capital expenditLire, incuried for acquiring an)'right to operate telecommunicationservices[eithcrbeforethecommencementofthebusinesstooperatetelecommunicationservicesorthereafteratanytimeduringany previousyear] and for whichpaymenthasactually been made to obtain a licence, there shall, subjectto and in accordance with the provisions of this section, beallowedforeachoF therelevantpreviousyears,adeductionequal to the appropriatefraction' of tlie amountof such expenditure.Explanation.—Forthe purposes oFthis section,---[(;) "relevant previous years" means,—(/!)in a case where the licence Fee is actually paid belbrc thecommencementoFthebusinesstooperatetelecommunicationservices, the previous years beginningwiththepreviousyearinwhichsuchbusinesscommenced;(B)in any other case, the previous years beginning with theprevious year in which the licence Fee is actually paid, andthe subsequent previous year or years during which thelicence, for which the fee is paid, shall be in Force;] [(;) "relevant previous years" means,— (;;j "appropriate fraction" means the fiaction the numeratoi" ofwhichis one and the denominatorof whichis thetolalnumber of the relevant previous years;whichis one and the denominatorof whichis thetolalnumber of the relevant previous years;(Hi) "payment has actually been made" means the actualpayment of expenditure irrespective of the previous yearin whichthe liabilityFor the expenditurewas incurredaccording to the method of accounting regularly employedby the assessee.payment of expenditure irrespective of the previous yearin whichthe liabilityFor the expenditurewas incurredaccording to the method of accounting regularly employedby the assessee. ITA 1336/2010&. conn, cases. (2) Where lhe licence is Iransrerred and the pro'ceetis ofthe transfer (so far as they consist of capital sums) ai e lessthantheexpenditureincuircdremainingunallowed,adeduction equal to such expenditure remaining unallowed,asreducedby theproceedsoF thetransfer,shallbeallowedin respect of the previousyearin vvliich thelicenceis transferred. (3) Where the whole or any part of the licenceisIransfeiredand the proceeds of the transfer (so fai' as theyconsistof capitalsums)exceedtheamountoftheexpenditureincurred remaining unallowed, so much of theexcessasdoesnotexceedthedifferencebetweentheexpenditureincui'rcd to obtain the licence and tlic amountofsuchexpenditureremainingunallowedshall,bechargeabletoincome-taxasprofitsandgainsof tliebusiness in the previous year in which the licence lias l.ieentransferred. Explanation.—Wherethelicenceistransfeiiedin apreviousyear in which the businessis no longerinexistence, the provisions of this sub-section shall apply asif the business is in existence in that previous year.(4) Where the whole or any part of the licenceistransferredand the proceeds of the transfer (so fai' as theyconsist of capital sums) arc not less than the amouiit ofexpenditure incurred lemaining unallowed, no deductionfor such expenditure sliall be allowed under sub-section(I) in respect of the previous year in wliich the licence istransferred or in respect of any subsequentprevious yeai-or years. Explanation.—Wherethelicenceistransfeiiedin apreviousyear in which the businessis no longerinexistence, the provisions of this sub-section shall apply asif the business is in existence in that previous year.(4) Where the whole or any part of the licenceistransferredand the proceeds of the transfer (so fai' as theyconsist of capital sums) arc not less than the amouiit ofexpenditure incurred lemaining unallowed, no deductionfor such expenditure sliall be allowed under sub-section(I) in respect of the previous year in wliich the licence istransferred or in respect of any subsequentprevious yeai-or years. (5) Where a part of the licence is transferred in a pi'cviousyear and sub-section (3) does not apply, the deduction tobe allowed under sub-section (1) for expenditure incurredremaining unallowed shall be arrived at by-- {a) subtracting the proceeds of transfer (so far as they consistofcapitalsums)fromtheexpenditureremainingunallowed;andofcapitalsums)fromtheexpenditureremainingunallowed;and {b) dividing the remainder by tlie number of relevant previousyears which have not expired at the beginning of theprevious year during which the licence is transferred.years which have not expired at the beginning of theprevious year during which the licence is transferred. (6)Where,inaschemeofamalgamation,tlieamalgamating company sells or otherwise transfers lhelicence to tlie amalgamated company (being an Indiancompany),— (/) Ihe provisions of sub-scctions(2), (3) and (4) sluill nolapply in llie case oFtiieamalgamaUngcompany;andapply in llie case oFtiieamalgamaUngcompany;and (//:) the provisionsofthis sectionshall, as lar as may be, applyto the amalgamatedcompany as they would have appliedto the amalgamating company if Ihe latter had nottransferred the licence.]to the amalgamatedcompany as they would have appliedto the amalgamating company if Ihe latter had nottransferred the licence.] [(7) Where, in a scheme of demerger, the demergedcompany sells or otherwise transfers the licence l,o theresultingcompany(beingan Indian company),— (;) the provisions of sub-sections (2), (3) and (4) shall notapply inthe case of thedemergedcompany;andapply inthe case of thedemergedcompany;and (;/•) the provisionsof this sectioiishall, as far as may be, applyto the resulting company as they would have applied to thedemerged company IF the latter had not translerred thelicence,]to the resulting company as they would have applied to thedemerged company IF the latter had not translerred thelicence,] (8) Where a deductionfor any previous year under subsection (1) is claimed and allowed in respect oT anyexpenditurereferred to in that sub-section,no deductionshall be allowed under sub-section (Oof section 32 for thesame previousyear orany subsequentpreviousyeai." 6.AsIS apparent from the Section itself, it applies whenexpenditure of capital nature Avas/is incurred by an assessce loracquiring a right for operating telecommunicationservices. It isimmaterialwhether the expenditure is/was incurred before or aftercommencing the busmess to operate telecommunicationservices.But, the payment should be actually made.We agree with thecounsel for the respondentsthat the said provisiondoes not stipulateormandatethatanyexpenditure forarighttooperatetelecommunicationservices or payment made for. the said liccnccas the section is deemed to be a Scction per capital expenditure.35ABB is not a deeming provisionbut comes into operation and iseffectlA'e when the expenditure itsell is ol a capital natuic and isincurredfor acquiring a right to operatetelecommunicationservicesor is made to obtaina licencefor the said services. It can be incurredPoRC 7 otITA 1336/2010 & conn, cases. before commencement of business or thereafter, but should beincurred during the previous 3'ear.1hus Section 35ABB b}' itselidoes not help us in determiningand deciding the question whetherlicence fee paid under the New Telecom Policy 1999 or under the1994 agreement,was/is capitalor revenue in nature.7.facts which are relevant be now noticed. TheUndisputedmayrespondentcompaniesare engaged in businessoftelecommunictitionservices and value added related services.Tliey have jDrocurcdlicence in difterent circles. Originally the said licences Avcre awardedunder licence agreement executed in 1994. The period ol, hccnce asstipulated^vas for ten years initially,expandablefor one year or moreat the discretion of the authorities. The licencc could not be assigned,transferred in any manner, whatsoever to auy third party or byentering into agreement by sub-licence, partnership etc.'fheauthorities had the right to revoke the agreement on breach of anyterm or on default of payment by giving sixty days notice.Thelicence was issued on non-exclusive basis and the authorities reservedtheir right to operate the same serviceswithin the geographicalareaand had to the conditionsof the licencc asin right modify stipulatedthe Schedules A to D, when considered necessary or expedient in theinterestof general pubhc or for proper conductof telegraphservicesor for securit}'considerations.Even otherwise,the authoritieshad theright to terminatethe licenceat any time in public interestby givingsixty days notice.Schedule A, prescribed the area of service;ScheduleB prescribedthe tariffceiling and stipulatedthat all tariffincreasesshall be subjectto prior approval ol the autiioritiesbut thelower tariff could be charged from the users without prior approval. 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;- "PAYMENTOFLICENCEFEES 19.1 TheLicencefee payableby licenceefor cachservice area shall be regulated as follovvs:- Licence Fee For ITA 1336/2010 4^'' Year and onwards @ Rs. 5 lakhs (five lakhs) per 100 (one hundred)subscribersor part thereof;subjectto the niinimurnshown belovv:- MinirnumLicence Fee for a) For purpose of charging the lump-sum Licence leefor the first three years, the year sliall be reckonedas twelvemonths,beginningwiththe dateofcommissioning of services or completionof 12months from date of signing of'L.icenceAgreement,whicheveris earlier. b) The fourth year for purposeof charging ihc Liccncefee shall be die period from the completion of thethii'd year as defined above to the 3P' day of March Paj'c y ol '((i & conn, aises. succeeding. The annual Licence Fee (or the Ixuirthyear will therefore, be coniputed prorale wilhreferenceto the actual number of days.Thereafter,the year for purposeof levy of Licence fee shall bethe financialyear i.e. 1''^' Api il to 31®' March and partof the year as balance period, if any. C)For the purpose of calculationof Licence fee fromthe fourth year onwards as indicated in para 19.1above, the number of subscribers at the end of eachmonth shall be added for ail the months oi'the yearand divided by the number of completed months.the fourth year onwards as indicated in para 19.1above, the number of subscribers at the end of eachmonth shall be added for ail the months oi'the yearand divided by the number of completed months. (f) The rate of Rs. five lakhs per hundredsubscribersorpart thereof is based on the unit call rate of Rs.L10.Fourthyearonwards,as definedin the clause19.1(d), the rate of Rs. five lakhs will be revisedbased on the prevalent unit call rate. The revisionwill be limitedto 75% of the overallincreasein theunit rate during the period preceding such revision. Agreement further stipulated: 19.2On completion of three years from the date ofcommissioning/provision of services; the Authorityreserves the right to fix the share of the grossrevenue from rental, air time charges for all otherservices provided from the cellular network of theLicensee, as additional licence lee. (f) The rate of Rs. five lakhs per hundredsubscribersorpart thereof is based on the unit call rate of Rs.L10.Fourthyearonwards,as definedin the clause19.1(d), the rate of Rs. five lakhs will be revisedbased on the prevalent unit call rate. The revisionwill be limitedto 75% of the overallincreasein theunit rate during the period preceding such revision. Agreement further stipulated: 19.2On completion of three years from the date ofcommissioning/provision of services; the Authorityreserves the right to fix the share of the grossrevenue from rental, air time charges for all otherservices provided from the cellular network of theLicensee, as additional licence lee. 19.3I'he annual Licence fee as prescribed above docsnot include Liccnce fees payable to WPC vving ofMinistry of Communications (WPC) for use olRadio Frequencieswhich shall be paid separately bythe Licensee on the rates prescribed by the WPCand as per procedurespecified by it (condition 20)." 8.NationalTelccornPolicy1999standsrecordedincommunicationdated22'"' July, 1999. The said policystipulatesthatlicenceewould be requiredto pay one time entry fee and licencefeeon percentageshare of gross revenue. Entry fee chargeablewould bethe fee payableby the existingoperatorupto 31''^ July,1999 calculatedupto the said date and adjusted upon notional extension ol theITA 1336/2010& conn, cases.I'ajie 10 0147 effeclive date. Licence fee as a percentageof gross revenue under tiielicence shall be payable w.e.f. l" August, 1999.'The quantum ofrevenue share to be chargcd as licence fee would be llnally decidcdafter obtainingrecommendationof TelecomRegulatoryAuthorityofIndia (TI^I) but meanwhile the Governmenthad fixed 15% of thegross revenueof the licenceeas provisionallicencefee. On j-eceiptofTRAI's recommendation by the Government, final adjustment of (hedues would be made. 9.Clause (vi) of the said letter indicatesthat there Avere only twocellular operators in the area/service area and it was postulated that ifeither of the cellular operator did not accept the package, both theexisting operators would continue the earlier licence till the validityof the said licence.In clause (vii), stipulated that upon migration toNational Telecom Policy 1999, the licensees would forego right ofoperating in the regime of limited number of operators as per existinglicencing agreement and would operate in multiple licence regime i.e.additional licences without any limit might be issued in a givenservice area.It was further stipulated that there shall be a lock-in ofthe present shareholdingfor a period of 5 years from the date oflicenceagreementandthetransferof shareholdingdirectlyorindirectlythroughsubsidiaryor holdingcompaniesshall not bepermitted during this period.However, issue of additional sharecapital by licencee companies/their holding companies, by issue o!:"private placements/ public issues would be permitted. This lock-intime wouldnot be applicablein case of transferof shares byenforcement of pledge by the lending financial institutions/banks dueto defaults. The period of licence was stated to be 20 years tfom theeffectivedateof theexistinglicenceagreementi.e., the1994ITA 1336/2010& conn, crises.Page 11 uf'U) agreement. Migrationto NationalTclecomPolic}' 1999, was on thecondition and that the conditions should be as a premise acceptedpacicagein entiretyand simultaneouslyand all legal proceedingsshallbe withdrawnand no disputefor the periodupto 31" July, 1999, shallbe raised at any future date.After the terms were accepted,amendmentsin the existingliccnceagreementwould be signed. 10.The respondents have migrated and accepted the NationalTelecom Policy, 1999. Respondentsherein in riA Nos. 1328/2010,1336/2010, 114/2012, 996/2011, 893/2010, 1680/2010, 1679/2010,177/2010, 1333/2010have paid the licence fee upto 31'' July, 1999,i.e.- one time licence fee as stipulated in the letter/ commumcationsdated 22nd .July, 1999 and have treated the said payment as capitalexpenditure. agreement. Migrationto NationalTclecomPolic}' 1999, was on thecondition and that the conditions should be as a premise acceptedpacicagein entiretyand simultaneouslyand all legal proceedingsshallbe withdrawnand no disputefor the periodupto 31" July, 1999, shallbe raised at any future date.After the terms were accepted,amendmentsin the existingliccnceagreementwould be signed. 10.The respondents have migrated and accepted the NationalTelecom Policy, 1999. Respondentsherein in riA Nos. 1328/2010,1336/2010, 114/2012, 996/2011, 893/2010, 1680/2010, 1679/2010,177/2010, 1333/2010have paid the licence fee upto 31'' July, 1999,i.e.- one time licence fee as stipulated in the letter/ commumcationsdated 22nd .July, 1999 and have treated the said payment as capitalexpenditure. 11.HutchinsonEssar Telecom Pvt. Ltd., respondentin ITA No.417/2013 has not treated the fourth year payment undcj- the 1994 asbut as revenue andagreement capital expenditure expenditure,their contentions are being examined separately below.12.hi view of the legal issue involved,Ave are not referringto thefactual details in respect of each assessmentyear i.e. details withregard to date of filing of return, income declared under normalprovisions,book profits etc.We shall concentrate,upon the legalissue raised and the facts relevant for determining the said legal issue.For theofwe have recordedand set out detailsofthe purposeclarity,Avrit petitions,name of the respondent-assessee,the assessmentyearsand the amount involved; ITA 133C/2010 & cnnn. cases. 13.The contentionand the facts highhghtedb)' the Revenueare thaiI'espondents Avere granted a hcence iindej-an agreement excciifed under theIndian TelegraphAct. This agreementdated 29"' MoA'ember, 1994, in thecase of Bharti Cellular Ltd. (date of agreement Avith each respondents maybe different but the terms are identical) states that pursuant to the lequest ofthe licencee i.e. the respondent assessee, the authorit)' had agreed to granthcence to tlie assessee on the terms and conditions apjiearing hei'einafter toestablish,maintainandoperatecellularr:n.obile services.The saidagreement further stipulates that in consideration of mutual covenants andlicence fee pa3'able in advance, the licensor, i.e. the Government grantslicence to the hcencee, i.e. the assessee, to establish, maintain and operatecellularmobileservice.The emphasishas beenlaid on the words'establish,mamtain and operate^ in the orign:ial licence and it washighlighted that it was onty pursuamt to licence agreement that therespondent assessees could establish thebusiness. The.NationalTelecom Policy 1999 did modify terms of the original licence but thenew policy did not change the true nature and character of the hcencefee.Onlythe methodofcomputationwasalteredandchanged.ITA 1336/2010 & conn, cases.I'iige '3 of't? Therefore, the respondent assessces vvlio accept and adniil Lhat liccnccfee payable under the 1994 agrcenicui Avas capila! in natuie, cannotdispute and deny the capital nature of Lhe same payrncnl. underNational Telecom Policy 1999.Even under the 1994 agrccnient forthe 4^'' year,the respondentassesseehad to pay the fixed sum per 100subscribers.The nature and character of the payment was same butamount Avas modified to 15% of the gross revenue under the NationalTelecom Policy 1999.Further,mere paymentof an amountininstallmentsdoesnotconvertor changethecapitalpaymenttorevenuein nature.The criteriaof onceand for all paymentorinstallment payment co-relatable to percentage of gross-turnover wasnot determinative of the true character of the payment.True nature oCthe payment has to be determined on the basis of the advantage orbenefit procured which in the present case relates to initial set-up ofbusiness.Right to the licence had resulted in acquisilion of riglit tooperate. Thus it Avas a capital payment, llie term of the liccnccAvas/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 (lielicence fee payable under the National Telecom Policy 1999 Avasrevenue in nature.The earnings Avere/are shared.The licence feedependsupon the gross revenue and was/is payableyearly. Licenceby itselfwas not an asset or a right which could be sold. Under theNational Telecom Policy, 1999 there Avas no limit on the number oJ'operatorsand the licencegranted was non-exclusive. Ncav operatorswere issued licencesand were requiredto pay one time licence lee lorentry and start of operations in addition to yearly turnover basedlicencefee. Onetimepaymentof licencelee was capital in natureandITA 1336/2010& conn, cases. yeaL"ly pa3'able licence fee was not capita] in nature as it was essentialand an annual necessit3'/obligationto continue to do business. It was urunning expense. Nature of expenditure incurred A¥as not on additionto fixed capital but for maintaining and operating Ihc business oftelecommunication.The nature of expenditure should be judged incommercial sense.Annual variable expenditure did not create or addto a profit making apparatus.It was not part of machinery or a plant.The appellant was wrongly assuming that the licence fee paid onyearly basis was a source of profit.The licence fee paid on yearlybasis was a fee payable for continuing business activity and on nonpayment, licence could/can be revoked.Thus, there was/is noenduring benefit.A licence being an indivisible right and cannot bebifurcated into right to establish, operate and maintain.- 15.Before we examine the legal position, we would like to firstdeal with and examinethe contentionas to whetheror not licenceunderthe NationalTelecomPolicy1999 was transferableand theeffect thereofThe licence stands issued to the companyas theoperator, but behind the company are the real owners i.e. theshareholders.However, a shareholderis distinct and not synonynrouswith company to whom the licence under the Telegraph Act, has beenissued.Clause (viii) of the National Telccom Policy, 1999 permitstransfer of shareholding by the shareholders directly or indirectlyafter lock-m period of 5 years.Therefore, it bars the hcencee i.e.respondents herein fromregistering orrecording change ofshareholding pattern directly or indirectly with subsidiary companywithin such period. However, additionalequity share capital by thelicenceecompanyor their holdingcompaniesby private placementorpublicissues was/ispermitted. We are concernedin the presentcaseITA 1336/2010& conn, cases.Page 15 of 47 with the licence granted to the respondent companies and the natureand character of the licence in their hands and not the value of theshares held by the shareholders,in spite of the fact diat there was alock in period or prohibition regarding transfer of shares for the of 5 and thereafterthe shares were transferable. Thereperiod yearscannot be any doubt or debate that while computingthe value of theshare in the hands of the shareholder, the factum and position that therespondent company has been allotted the licence was/is a relevantand important factor. However, we do not think that this can be thesound 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 inthe hands of a shareholder may not determinatively and conclusivelyreflect and answer the question whether the asset held by tliccompany M'as a capital asset. Market value of a share is dependentupon several factors including future prospects, nature oC trade etc.These may not be an asset for the company. We cannot on this basisalone, determine and decide whether the variable licence fee paid onannual basis is capital or revenue in nature. At the same time thelicenseAvas/isanimportantandrelevantaspectthatdetermined/determinesthetruemarketvalueof therespondentcompanies. 16.At this stage, it would be appropriateto refer to relevant casela.w on the subject though we did not find or come across anydecisionof the Supreme Court or the High Court directlyapplicableto the factual matrixof the presentcases. Startingpoint of discussionon the said question invariably begins with the decision of theSupremeCourtin the case of EmpireJute Co, Ltd vs. CommissionerofIncome Tax (1980) 124 ITR 1 (SC).Revenue in the said caseI'cioe10 or47ITA 1336/2010& conn, cases. relied upon an earlier decision of llic Supreme courL in CIT vs.MalieshwariDevi Jute Mills Ltd. [1965] 57 I'fR 36 (SC),' whereinsale of loom hours were held to be in nature of capital receipt andhence not taxable.The said decision was distinguishedon severalgrounds but noticeably it Avas recorded that the said case hadproceededon a commonacceptedbasis that loom hours was an asset.In Empire Jute Co. Ltd. (supra), on deeper elucidation of relevantfacts, it was noticed that there Avas contractualagreement restrictingthe right of ever)' mill to work their looms to their full capacity asthere was over capacity but Ioav demand.This restriction had theeffect of limiting the production and consequently the profits Avhichthe assessee could earn.Under the same agreement, one mill couldtransfer loom hours to another for considerationsubject to conditions.Thus, purchase of loom hours had the effect of relaxing the restrictionon operation of loom hours and enabled the purchaser to work theirlooms for longer duration and earn profits.The Supreme Courtobserved that capital expenditureAvas one made Avith a view to bringinto existence an asset for enduring benefit to the trade. But this ruleof enduring benefit was subject to and could break doAvn for goodreasons. The nature of advantage has to be considered in commercialsenseand only Avhen the advantageAvas in capitalHeld, tlieexpenditurecould be disallowed by applying the enduring benefittest. If the advantageconsistedmerely facilitatingtrading operationsor enablingthe managementor conductof business inore efficientlyor profitably,while leaving the fixed capital untouched, the saidexpenditureAvould be on revenueaccount,thoughthe advantagemayendure for an indefiniteperiod. Enduringbenefittest, therefore,was notconckisiveandcannotbemechanicallyappliedwithoutconsidering the commercial aspect.17.The second test Avhich can be applied was fixed and circulatingcapital test.Fixed capital being Avhat the owner tiirns to prodt bykeeping it in his possession; circulating capital is whal the assessccmakesprofitbypartingorlettingtheproducl/Lissctchangemasters/hands.This test could be appliedA-vhen the acquisitionofasset clearly falls Avithin one of the two categoriesbut the lest AA'ouldbreakdownAA'here the expendituredoesnot fall easilyAvithin thespecified category.The demarcation line betAveenassets out of A-vhichprofits Avere earned and the profit made upon assets or Avith assets,Avas thin and difficultto draAV in severalcases.It was obsei'vedthatpurchase of loom hours Avas not like circulating capital (labour, rawmaterial, poAA'er etc.), but "loom hours" Avere also not a part of fixedcapital.ReA/enue's contention that purchase oF loom hours was foracquisition of source of profit or income and, therefore, capitalexpenditure,AA'as rejected on the ground that source of pi'ofit orincomeAvasthe profitmakingapparatusAvhich hadremaineduntouched.There Avas no enlargementof permanentstructui'e orcapital assets. Primarily and essentially the ex|:)cnditurc Avas relatingto operation or Avorking of looms, Avhich constituted profit earningapparatus. The Supreme Court, hoAvever,added a Avord of cauUon thatin the field of taxation, analogies could be deceptiA'c and misleadingbut neverthelessthey referred to an example of an asscssee acquiringraAA'materialregulatedunderaquotasystemloincreasehisproduction. Money spent to acquire the quota right, it Avas observedwould enfitle the assessee to acquire more raw material Lo increaseprofitabilityof theprofitmakingapparatusand would undoubtedlybeITA 1336/2010 & conn, cases.I'agc I'i ul 47 revenue expenditure as it was a part oJ" the operating cosLHowevei-,the said examplerelatesto already existingor ongoingindustry.Outgoing whether it was revenue or capita], it was highliglitcd, shoulddepend upon practical and business point of view, rather than Juristicclassification of legal rights.The question should be Judged in thecontext of business necessity or expediency;was the expenditure apart of assessee's working expenditure or a part of process of profitearning; whether the expenditure was necessary to acquire a right ol'permanent character, the possession of which was a condition forcarrying on trade ?, etc. 18.It may be now appropriate and proper to refer to judgments ofthe Supreme Court relating to lease agreements as they may havesome bearing and elucidate legal principles which are of relevance.In Assam Bengal Cement. Co. Ltd. vs. CIT, West Bengal (1955) 27ITR 34 (SC), payment made by the assessee for acquiring lease ofmine stone quarries for manufacture of cement for 20 years onpayment of yearly rent as well as protection fee to ward olfcompetition,was held to be capital expenditure. In the said case, theconsiderationpayable was per annum but was for the entire or Nvholeduration of the lease and it protected and gave right to the assessee tocari-y on business unfettered from outsiders.It >vas held that thewas not a oftheorbutexpenditurepart \^'orkingoperationalexpensesfor acquiringa capital asset.Similarly,in .Memberof the BoardofAgriculturalIncome Tax, Assam, vs, Sindlmrani ChaudiiraniandOrs. (1957) 32 ITR 169 (SC), salEirnior lump sum payment for non nature made thetenant to the landlord asrecurring by prospectiveconsideration for settlement of agricultural land and parting withcertainrights paid anteriorto landlordand tenant relationshi]!,.it wasITA 1336/2010&. coiiii. cases.IVme !<) ol"4'') lielcl was not in the nature of rent, and thus, capital payment.It wasemphasizedthat the paymentwas not for use of land but for the landto be put to use by the assessee. Salamiwas notrent paid in advance.19.In EnterprisingEnterprisesvs.fvIncome Tax (2007) 293 ITR 437, the Supreme Court affirmed thedecision of Madras High Court reported in [2004] 268 ITR. 95, afterreferring to Pingle Industries Ltd vs. CIT [1960] 40 TTR 67 (SC);Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC) and AdityaMinerals Pvt. Ltd, vs. 'CIT[1999] 239 ITR 817 (SC), stating thatdistinction lies between the case of where royalty or rejit was paid andwhere the entire amount of lease premium was paid either at one timeor 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 inthe case of Pingle Industries Ltd. vs. Commissioner ofIncome Tax,Hyderabad (supra). The majorityjudgmentheld that the quolnamawhich entitled the assessee to extract stones from quarries for a periodof 12 years on annualpayment(some amountwas paid in advance tosecure annual payment) was capital expenditureas the assessee wasextractingstoneswhich afterdressingwere sold as flag stones. It wasobserved that the lease was for Jong term with right to extract stonesin six villages,withoutlimitby measurementor quantity,and entitledthe assessee to exclusive riglits.The majority held that theexpenditurewas capital in nature and cannot be equated with caseswherein assessee had acquired right to pick, up tendu leaves formanufacture of bidi, which was equivalent to purchasing of ravvmaterialfor manufacturingbusiness.It was observedthat stones in ITA 1336/2010& conn, cases. Faoe 20 of 46 situ were stock in trade of business, but lease payments were capitalin nature as the stones only upon extraction became stock in trade.The was neither rent nor but payment though periodical royalty,paymentwas for acquiringan asset for enduringbenefit i.e. right toextract stones and not stones itself. ITA 1336/2010& conn, cases. Faoe 20 of 46 situ were stock in trade of business, but lease payments were capitalin nature as the stones only upon extraction became stock in trade.The was neither rent nor but payment though periodical royalty,paymentwas for acquiringan asset for enduringbenefit i.e. right toextract 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 forquarryingpurposesto carry away, sell and disposeoi: sand which waslying on the surface of river bed without excavation or skillfulextraction. The said expenditure was held to be of revenue charactcr,in spite of fact that the intereston land Avas also conveyed,observingthat this was not decisive.The decisivelactor was the object forwhich the lease was taken and the nature of payment, when and whileobtainingthe lease. This decisionwas distinguishedby the SupremeCourt in R.Ji. Sett Mooichaiul Sugastchandvs. CIT, New Delhi(1972) 86 ITR 647 as minerals in this case were pEirt oF the land andhad to be won, extracted and brought to the surlace unlike the case ofJabbar (M.A,) (supra) where the minerals i.e. the sand was onsurface and thus was a case relating to expenditure for acquisition ofstock in trade and, revenue in nature. Similar treatment was given tothe licencefee paid for one year for prospectingemeralds-whichA-vasin additionto royaUy on emeraldexcavatedand sold. The Ii.rst parti.e. the licence fee for prospecting,it Avas held ^vas capital. Thecontention that the licence fee was not a lease rent and did not createinterest in land Avas rejected, obsei-vingthat prospectinglicence Avasissued before operationshad started and Avas paid irrespectiveof themineral obtained. This demonstrated that the object for the jDaymentAvas to initiate business;though the period of licence was one year itITA 1336/2010& conn, cases.PngG 2( of'17 did not malce tlie payment,revenuepayment. Prospectinglicense l.eccannotbe equatedAvithpaymentfor stock in trade. 22.In CIT vs. Bombay Burinah Trading Corporation (1986) 161ITR 386, the Supreme Court observed that lump sum considerationpaid on surrenderofexportrights in a forest lease, AA'herethe assesseehad right to extract and cut timber and remove them on payment ofroyalty, was capital payment. The payment was for sterilization ofthe profit making apparatusi.e. the capital asset. The forest lease wasalso not a stock in trade.The determiningfactor, it was observedwas nature,of trade in which the asset was employed., [f the paymentmade, represented profit in a new form, it would be income, but if themoney paid related to structureof assessee's profit making apparatusandaffectedtheconductofbusiness,thesumreceivedForcancellation 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 assesseehad incun'edexpenditureon demolishing the existing building and constructing a new buildingat their own expense. The new building belonged to the lessor andthe assessee remained a lessee but at a Ioav rent.'Term for lease was39years butthe SupremeCourtheld thatthe expenditurewas revenuein nature as the newly constructed property from the beginniiig wasownedby the lessor. It was emphasizedthat the asset created,thoughof enduringnature, did not belong to the assessee (there have been amendmentsbut we are not to examine the saidstatutoiy requiredamendments in the present decision. Iheratioisrelevant).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. ITA 1336/2010&. conn, cases. construction and development of roads between diOcrent sugarcanc centers and was held to be revenue inproducing sugar factojicsnature as it was incurred for the purposes of facilitating running ofassessee's motor vehicles etc. Similarly in LJ-L Sugar Factory andOil fliills (F) Ltd. vs. CIT (1980) 125 JTR 293 (SC), amountpaid ascontributionfor constructionof roads in an area around the factoryunder a scheme was held to be revenue in nature.CIT vs. AssociatedCement Companies Ltd. (1988) 172 tTR 257 (SC) was quoted andobserved that the expenditure incurred to concrete the niain road ^'VasrevenueastheinstallationandaccessoriesAverC assetsof themunicipality, lliis was despite the fact that the assessee had securedimmunity from liability to pay municipal rates and taxes lor 15 years.In these cases, the expenditure had been incurred to bring about somekind of enduring benefit but did not bring into existence any asset forthe benefit of the assessees.The expenses wci'c made for thepurposes of conductingbusiness more profitably and fruitJully andthe asset created did not belong to the assessee.It was noticed thatthe creationof asset, resultedin saving of considerablerevenueexpenditurein form of lowerrent. 24.In AlemJncChemicalWorks Co. Ltd.Vs. CommissionerofIncom-e Tax, Gujarat (1989) 177 ITR 377 (SC) the .assessee hadacquiredknow-now to produce higher yield and sub-cultureol higliyieldingrange of penicillin. The said expenditurewas in the line oJ"existingmanufacture. It was lump-sumpaymentbut the expenditurewas held to be revenue in nature primarily on tAvo grounds that it Avasincurred for the purpose of day to day business, which Avasmanufacture of penicillin and, therefore, not for entirely a ncAvventure unconnected and different from existing business. Secondly,riA 1336/2010& conn, cases. i.t wouldbe unrealisticto ignorerapidadvances, in reseajxhinantibioticand attributea degree of durabilityand pennancnceLotechnicalknow-howin this fast changingarea.Rtipid stridesinscience and technology in the field of medicines cannot be readilypigeon-holed as capital outlay.Moreover, it was not a case ofexclusive acquisition. 25.Having reproduced several judgments -on the question of thedecisive tests, it would be appropriate to notice one decision whereinexpenditure incurred has been held to be in part capital and revenuebecausethe testsshow that expenditureincurredwasfor severalconsiderationsi.e. there was overlappingof capitaland revenueexpenditure. This aspect has been examined in detail separatelybelow. \i\ Jonas Woodhead ami Sons (India) Ltd. vs.. Commissionerof Income Tax (1997) 224 ITR 342 (SC), question arose whether25% of the amount paid as royalty to the foreign company fortechnical informationy know how relating to setting up of a plant formanufacture of products was capital expenditure.Refcri'ing to theissue in question,it was observedthat the answer would dependuponseveral factors including whether the assessee had set u]d a completelynew plant Avith a new process, new technology, or the technicalknoAvhowwas for betterment of the product which was already beingwas it a and of business