SC overrules HC verdict, license fee to be regarded as CapEx

The Supreme Court of India has delivered a decisive ruling that licence fees paid by the telcos, as Bharti Airtel, Vodafone Idea and RJio after July 1999 would be treated as capital expenditure and not revenue expenditure.

A Division Bench comprising Justices BV Nagarathna and Ujjal Bhuyan said: “We hold that the payment of entry fee as well as the variable annual licence fee paid by the respondents-assessees to the DoT (Department of Telecommunication) under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the (Income Tax) Act. A single transaction cannot be split up in an artificial manner into a capital payment and revenue payments by simply considering the mode of payment,” the court said.

This implies that instead of deducting the entire expenditure all at once, the company will need to deduct a portion of the total fee over each year for tax purposes.

The apex court dismissed the arguments put forth by the telcos, affirming that the licence fee paid post-July 1999 should be recognised as capital expenditure rather than revenue expenditure. This verdict, has overturned the previous rulings of the Delhi High Court, Bombay High Court, and Karnataka High Court, representing a significant shift in the tax landscape for the telcos.

At the core of the Supreme Court’s decision lies the principle that making licence fee payments in instalments, as stipulated in the licence agreement, does not change the fundamental nature of the payment. It underscores that the instalment-based nature of payment does not convert a payment that is fundamentally a capital expense into a revenue expense. Consequently, the classification of the licence fee remains unaltered, firmly categorised as a capital payment.

The Delhi High Court’s 2013 judgment had prompted the Tax Department to challenge this verdict before the Supreme Court. With the apex court’s ruling, the appeal filed by the Tax Department has now been upheld, marking a decisive shift in how these licence fees will be treated for tax purposes.

The Income Tax (I-T) department’s argued that annual payment based on adjusted gross revenue (AGR) is toward licence fees. The fee cannot be construed as revenue expenditure merely because it is paid based on the annual gross revenue.

This ruling is poised to have far-reaching implications for the financial strategies and tax planning of telecom operators across India, particularly Airtel and Vi. As they grapple with the reclassification of licence fees as capital expenditure, these companies will need to reassess their financial structures and potentially face increased tax liabilities. Vodafone Idea’s AGR dues amount to Rs 58,254 crore, of which it has paid Rs 7,854 crore. Meanwhile, Bharti Airtel has to pay Rs 43,980 crore.

Telecom companies are required to pay a one-time entry licence fee as subsequent licence fee on yearly turnover under the National Telecom Policy of 1999. Before 1999, they were required to pay the fee all at once. The court in September 2020 gave telecom firms 10 years to clear their pending AGR dues to the central government, with 10 per cent payment to be made every year. The deadline for the first instalment of payment was March 31, 2021.

Commenting on the ruling, Mihir Gandhi, Partner, Tax & Regulatory Services with BDO India, said: “The disallowance of the expenses would impact the companies which are already suffering huge losses.”

Sandeep Sehgal, Partner- Tax, AKM Global, felt the judgment provides much-needed clarity on the classification of expenditure as capital or revenue, especially in cases where expenditure is capital at core but structured in instalment or linked with some variables.

CT Bureau