Commissioner of Income Tax-Vi v. Hutchinson Essar Telecom Pvt. Ltd

SANJIV KHANNA, J. This commonjudgment/orderAvill dispose of appeals filed by Commissioner of Income Tax, Delhi - 1/Delhi•VI, as identical questionoflaw arisefor considerationin;the followingcases,; SNo. ITA No. Name of the Assessee I. 1328/2010 Bhaili llexaconi

¶21336/2010 oJ. 114/2012 AssesMiient Year 2003-04 M04^05 ___ 2006-^'_ l'ii|\c 3 ol'4()

¶4996/2011 2007-08

¶5893/2010 Bhai ti Cellular , 2000,-01

¶61680/2010 2001-02 2002-03

¶71679/2010

¶8177/2010 Bharli Airtel Ud. 2005-06

¶91333/2010 Bharti Telenet Ltd. 2000-01

¶10417/2013 • liiitchinson Essav Pvt. Ltd 1999-2000

¶2The principal and core issue raised m the preseiU appeals is similar i.e. Avhether hcence fee payable is capital or revenue expenditure. However,thereis one basic differencebetweenappeals hsted at SI. Nos. 1 to 9 in.paragraph1 above, and the appeal in the case of HutchisonEssar Pvt. Ltd. i:e. ITA 41 //2013 which should be noticedand referredto at the very outset. The said appeal relates to assessmentyear 1999-2000and pertainsto licencefee paid under and in terms of^an agreementexecuted in 1994 with the Departmentof Telecommunications/Govern,mentof India, whereas other appeals listed at SI. Nos. 1 to 9 above, relate to variable licencc fee on revenue sharing basis paid under the new Telecom Policy, 1999. IToAvever, as the facts and issues are identicalwe have deemed it appropriateto decide the appeal filed agamst HutchisonEssar Pvt. Ltd. along with appeals at Sl.Nos. 1 to 9. Wherevernecessary,we have dealt Avith the issue and contentionsraised in the said appeal separately.

¶3Common substantialquestion of law required to be decided in these appealsreads "1. Did the Tribunalfall into error in holdingthat the variable licence fee paid by the assessees was properlydeductibleas revenueexpenditure?

¶4As IS apparent from the substantial question of law quoted above,the issueraised is whetherthe variablelicencefee paid by the Pfige 4 ol 47 respondentsunder Indian TelegrapliAct, 1885, and Indian Wireless Fee Act 1933, payable under the New TelecomPolicy 1999 or 1994 agreement, is revenue expenditureor capital expenditurewhich is requiredto be amortized under Section 35ABB ol" the Income I'ax Act, 1961 (Act, for short).

¶5• At the very outset, we would like to reproduce Section 35ABB, Avhich reads: "35ABB.(I) In respect of any expendilLire, being in tiie nature of capital expenditure, incurred for acquiring any right, to operate telecommunication services[either l^efore the commencement of the business to operate telecommunication services or thereafter at any Lime 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.—Forthe purposesof this section,— [(/) "relevant previousyears" means,— (/J) 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; {B) in any other case, the previous years beginningwith the previousyear in which the licencefee is actuallypaid, and the subsequentprevious year or years during which the licence,for whichthefee is paid, shall bein Force;] {ii) "appropriatefraction" means the fractionthe numeratorot which is one and the denominator of which is the. total number of the relevant previous years; {Hi) "payment has actually been made" means the actual payment ofexpenditureirrespectiveof the previous year in which, the liability for the, expenditure was incurred accordingto the method of accountingregularlyemployed by the assessee. ITA 1336/2010 & conn, cases. Page 3 ur47

(2) Where Ihe hcence is Iransferred and the proceeds of the transfer (so far as they consist of capital sums) ai'e less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the ti'ansfer, shall be allowed in respect of the pj-evious year in which tlie licence is transferred.

(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so fai' as they consist of capital sums) exceed the amount of the expenditureincurredremainingunallowed,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 previousyear in which the licence has been trans feri'ed. fcy/a;7d/7on.—Where the licence is transferred in a previous year in which the business is no longer in existence, the provisionsof this sub-sectionshall apply as if the business is in odstence in that previous yeai-.

(4) Where the whole or any part of the liccnce is transferred and the proceeds of the transfer (so tar as they consist of capita! sums) are not less than the amount of expenditureincurred remaining unallowed, no deduction for such expenditureshall be allowed under sub-sectiqn

(1) in respect ofthe previous year in which the licence is transferredor in respect of any.subsequent previous year or years.

(5) Where a part ofthe licence is transferredin a pievious year and sub-section(3) does not apply, the deduction to be allowed under sub-section(1) for expenditureincurred remainingunallowedshall bearrivedat by-- {a) subtractingthe proceedsoftransfer(so tar as they consist of capital sums) from the expenditure remaining unallowed; and

(b) dividingthe remainderby the numberof relevantprevious years which have not expired at the beginning pi the previousyear duringwhich the licence is transferred.

(6) Where, in a scheme of amalgamation, the amalgamatingcompany sells or otheVwise transfers the licence to tlie amalgamated company (being an Indian company),— P;iue Cl (i ' 40 (/) Lhe provisions of sub-sections(2), (3) and (4) shall not apply in the case oFtheaimalgamalingcompany;and (/';!) the provisionsofthis sectionshall,as iar as may be, apply to the amalgamatedcompany as they would have applied to the amalgamating company if !.he latter had not . transferred the licence.] [(7) Where, in a scheme of deinerger, the demerged compaliy sells or otherwise transfers the licence'to the resultingcompany(beingan Indiancompany),— (/) the provisions of sub-sections(2), (3) and (4) shall not apply in the case ofthe demergedcompany;and {ii) the provisionsofthis sectionshall, as far as may be, apply tothe resultingcompanyastheywould have appliedto tlie demerged company if the latter had not transfeiied the licence.]

(8) Where a deductionfor any previousyear under sub section (1) is claimed and allowed in respect of any expenditurereferred to in that sub-section,no deduction shall be allowedundersub-section(1) ofsection 32 foi" the same previousyear or any subsequentpreviousyear."

¶6As IS apparent from the Section itself, it applies when expenditure of capital nature was/is incurred by •an assessce loi acquiring a right for operating telecommunicationservices. It is immtiterialwhether the expenditureis/was incurred before or after commencing the business to operate telecommunicationservices. But, the payment should be actually made. We agree with the counselfor the respondentsthat the said provisiondoes not stipulate or mandate that any expenditure for a right to operate telecommunicationservices or payment made for.the said licence as per the section is deen:ied to be a capital expenditure, oection 35ABB is not a deemingprovisionbut comes into operationand is effective when the expenditureitself is ol a capital nature and is incurredfor acquiring aright to operatetelecommunicationservices or is madeto obtainalicencefor the saidservices. It can be incurred l'au,e 7 of47 ITA 1330/2010 & conn, cases. before commencement of business or thereafter, but should be incurred during the previous year. Thus Section 35ABB by itseli: does not help us in determiningand deciding the questionwhether licence fee paid under the New Telecom Policy 1999 or under the 1994 agreement,was/iscapitalor revenuein nature.

¶7Undisputedfacts which are relevantmay be now noticed. 1he respondentcompaniesare engaged in businessof telecommunication sei-vices and value added related services. They have procured licencein differentcircles. Originallythe said licenceswere awarded under hcence agreementexecuted'in1994. The period ol licence as stipulatedwas for ten years initially,expandablefor one yearor more at the discretionofthe authorities. The licencccould not be assigned, transferred in any manner, whatsoever to an}' thiid paity oi by entering into agreement by sub-licence, partneiship etc. Ihe authoritieshad the right to revoke the agreementon breach of any term or on default of payment by giving sixty days notice. The licencewas issuedon non-exclusivebasis and the authoritiesreserved their right to operate the same serviceswithin the geographicalaiea and had rightto modifythe conditionsof the licence as stipulatedin the SchedulesAto D, when considerednecessaryor expedientin tlie interestof generalpublic or for properconductof telegraphservices or for securityconsiderations.Even otherwise,the audioritieshad the rightto terminatethe liccnceat any time in publicinterestby giving sixty days notice. Schedule A, prescribed the area of service; ScheduleBprescribedthe tariffceiling and stipulatedthat all taufi increasesshah be subjectto prior approvalof the authoritiesbut tlie lower tariffcould be chargedfrom the users withoutprior approval. I'jige SI of 47 There was stipulationthat no free time could be given in the air time. •Licence fee payable under this agreementwas as under:- "PAYMENT OF LJCENCB FEES

19.1 The Licence fee paj'able b)/ licencee for cach service area shall be regulated as follows;- Licence Fee For Service Area 1" Year 2'"' Year old Year - (Rupees in Crores) Bombay Delhi Calcutta

1.5 Madras 4^'' 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. onwards Service Area ffor each vear) (for each year) (Rs.in crores) Bombay Delhi 16 • Calcutta Madras a) For purpose of chargingthe lump-sum Licence fee for the first three years, the year shall be reckoned^ as twelve months, beginning with the date ol commissioning of services or completion'of 12 months from date of signing of'Licence Agreement, whichever is earlier. b) The fourth year for purposeof chargingIhe Licence fee shall be the period from the completionof the thii-d year as definedaboveto the 31'^ day of March 9 uI ITA 1336/2010 & conn, aises. succeeding. The.annualLicence1-ee foi the fouith year will therefore, be computed prorate with reference to the actual number of days. ThereaFtei, the year for purposeof levy ofLicence fee shall be the financialyear i.e. l" April to 31'^ March arid part of the year as balance period, if any. c) For the purpose of calculationof Licence fee Ironi the fourth year onwards as indicated in para 19.1 above, the numberof subscribersatthe end of each month shall be added For all the months oFthe year, and divided bythe numberof completedmonths.

(f) The rate ofRs. five lakhs per hujidredsubscribersor part thereofis based on the unit call rate ol' 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 duringthe period precedingsuch revision. Agreementfurtherstipulated;

19.2 On completionof three years From the date of commissioning/provisionof 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 additionallicence fee.

19.3 Theannual Licencefee as prescribedabove does not include Licence fees payable to WPC wing of Ministry of Communications (WPC) for 'use ol Radio Frequencieswhich shall be paid separatelyby the Licensee on the rates prescribed by the WPC and as per procedurespecifiedby it(condition20)."

¶8National Telecom Policy 1999 stands recorded in communicationdated22"'^ July, 1999. The said policystipulatesthat licenceeWould be requiredto pay one time entry fee and licencelee on percentageshareof gross revenue. Entryfee chargeableAvould be the fee payableby the existingoperatorupto 31=^ July,1999calculated upto the said date and adjusted'upon notional extension ol the I'cU'c 10 ol 47 ITA 133-6/2010 & com^- ^^ases. effective date. Xicence fee as a percentage of gross revenue under the licence shall be payable--AA^e.f August, 1999. The quantum of revenue share to be charged as licence fee woirld be finall)/ 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.

¶9Clause (vi) of the said letter indicates that there Avere only two cellular operators in the area/service area and it was postulated that if either of the cellular operator did not accept the package, both the existing operators would continue the earlier licence till the validity of the said licence. In clause (vii), stipulated that upon migration to National Telecom Policy 1999, the licensees Avould forego right of operatinginthe regimeof limitednumberof operatorsas perexisting licencingagreementand would operatein multiplelicenceregime 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 shareholdingfor 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 ol additional share capital by licencee companies/theirholding companies, by issue of privateplacements/public issues would be permitted. This lock-in time would not be applicable in case of transfer of shares by enforcementofpledgeby the lendingiinancialinstitutions/banksduv, to defaults. The periodof licencewas stated lo be 20 years h:om the effective date of the existing licence agreement i.e., the 1994 ITA 1336/2010&conn, cases. '''' agreement. Migrationto NationalTelecomPolicy 1999, ^A'as on the condition and premise that Llie condilions should be accepted as a packagein entiretyand simultaneouslyand all legal pioceedingsshall be withdrawnand no disputefor the periodupto 31'' July, 1999, shall be raised at any future date. After the terms were accepted, amendmentsintheexistinglicenceagreementwould be signed.

¶10The respondents liaA'e migrated and accepted the National Telecom Policy, 1999. Respondentsherein in ITA Mos. 1328/2010, 1336/2010, 114/2012, 996/2011, 893/2010, 1680/2010, 1679/2010, 177/2010,1333/2010have paid the licencefee upto 31'^ July, 1999, i.e.- one time licence fee as stipulatedin the letter/ communications dated 22nd July, 1999 and have treated the said payment as" capital expenditure.

¶11HutchinsonEssar Telecom Pvt. Ltd., respondent in ITA No. 417/2013 has not treated the fourth year payment under the 1994 agreement as capital expenditurebut as revenue expenditure,and their contentionsare beingexaminedseparatelybelow.

¶12In view ofthe legal issue involved,we are not 'referringto 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 concentrateupon the legal issueraisedand the facts relevantfor determiningthe said legal issue. For the purposeof clarity,we have recordedand set out detailsofthe writ petitions,name ofthe respondent-assessee,the assessmentyeais and the amount involved; 12 ol 47 ^ # SNo. . ITANo. Name of the Assessee Assessmenl Yeai-Amount Involved

¶11328/2010 iBharti l-lexacdm'U'jcl. 2003-04 Rs.8,69,16,000/-

¶21336/2010 2004-05 lls.l 0,89,74,250/-

¶3• 114/2012 2006-07 Rs.27,60,36,300/-

¶4996/201 2007-08 Rs.48,83,07,556/-

¶5893/2010 Bharti Cellular Ltd. • 2000-01 Rs.27,82,30,588/-

¶61680/2010 2001-02 •Rs.54,93,43,930/-

¶71679/2010 2002-03 Rs.61,07,90,625/-

¶8177/2010 Bharti Airte! Ltd. 2005-06 Rs.2,76,48,900/- "Net amount-disallowed after disallowance and amortization.

¶91333/2010 Bharti Telenet Ltd. 2000r0l Rs.4,80,67,869/-

¶10417/2013 Hutchinson Essar Pvt. Ltd 1999-2000 Rs. 18,64,57,000/-

¶13The contention and the facts highhghted by the Revenue are lhat respondentswere granteda Ucenceunder an agreementexecutedunderthe IndianTelegraphAct. This agreementdated 29"' November,1994, in the case of Bharti CellularLtd. (date of agreementwitheach respondentsmay be differentbutthe terms are identica])statesthatpursuant.to therequestof the licenceei.e. the respondentassessee,the authorityhad agreed to grcint licenceto the assesseeontheterms and conditionsappearinghereinafterto establish, maintain and operate cellulai" mobile sendees. The said agreementfurtherstipulatesthat in considerationof mutual covenantsand licence fee payable in advance, the licensor, i.e. the Governmentgrants licenceto the licencee,i.e. the assessee,to establish,maintainand operate cellular mobile service. The emphasis has been laid on the woids '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 tlie business. The National TelecomPohcy 1999 did modify terms of the original licence but the .•new policydid not change the true natm"e and character of the licence fee. Only the method of computation was altered and changed. -T-ri~ Therefore,the respondentassesseesAvho acceptand admittliathcence fee payableunder the 1994 agreementAvas capital in nature, cannot dispute and deny the capital nature of the same payment under NationalTelecomPolicy 1999. Even under the 1994 agreementfor the 4"' year,the respondentassesseehad 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 TelecomPohcy 1999. Further, mere payment of an amount in installments does not convert or change the capital payment lo revenue in nature. The criteria of once and for all payment or installmentpaymentco-relatableto percentageof gross-turnoverwas not determinativeof the true characterof the payment. True natureof the payment has to be determinedon the basis ofthe adS'antageoi benefitprocuredwhich in the presentcase relatesto initialset-up ol •business. Right to the licencehad resulted in acquisitionof right to • operate. Thus it was a capital payment. The term of the liccnce was/is 10 or 20 years from the date ofcommencementand therefore, the expenditurewas capitalin nature.

¶14The contentionofthe 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 dependsupon the gross revenueand was/is payableyearly. Licence by itselfwas not an asset or aright which could be sold. Underthe NationalTelecomPolicy, 1999 there was no limit on the number of operatorsand the licencegrantedwas non-exclusive..New operators were issuedlicencesand wererequiredto pay one time licencefee for entiy and start of operations in addition to yearly turnover based licencefee. Onetimepaymentoflicencefee was capitalin natureand PiiRC 14 III IC) ITA 1336/2010& conn, cases. ^ yearlypayablelicencefee was not capitalin nature as"it was essential, and an amiual necessity/obligation to continue Lo do business. It was a runningexpense.Natureof expenditureincurredwas not on addition to fixed capital but for maintainingand 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 profitmakingapparatus. It was not partof machineryor a plant. The appellantwas wrongly assuming that the licence fee paid on yearly basis was a source of profit. The licencefee paid on yearly basis was a fee payable for continuingbusiness activity and on non payment, licence could/can be revoked. Thus, there was/is no enduringbenefit. A licencebeing an indivisibleright and cannot be bifurcated into right to establish,operate and maintain.

¶15Before 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 withcompanyto whom the licenceunder the TelegraphAct, has been issued. Clause (viii) of the National Telecom Policy, 1999 permits transfer of shareholdingby the shareholdersdirectly or indirectly after lock-in period of 5 years. Therefore, it bars the licencee i.e. respondents herein from registering or recording change ot shareholdingpattern directly or indirectlywith subsidiarycompany within such period. However,additionalequity share capitalby the licenceecompanyor theirholdingcompaniesby privateplacementoi publicissues was/ispermitted. We are concernedin the presentease with the licence grantedto the respondentcompaniesand 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 of5 years and thereafterthe shares ^vere transferable. There cannotbe any doubt or debatethat while computingthe value of the share in the hands of the shareholder, the factum and position that the respondentcompany has been allottedthe licence was/is a relevant and importantfactor. However,Ave do not think that this can be the sound and sole basis or groundto hold that the licence in the hands of the respondentcompanyAvas/is a capital asset. Value of a share in the hands of a shareholder may not deterniinativelyand conclusively reflect and answer the question whether the asset held by the company'was a capital asset. Market value ol a share is dependent - upon several factors includingfuture prospects,nature of trade etc. These may not be an asset for the company. We cannot on this basis alone, determineand decide whetherthe variablelicencefee 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/determinesthe true market value ot the respondent companies.

¶16At this stage, it would be appropriateto refer to relevantcase law on the subject though we did not find or come acioss any decisionof the SupremeCourt or the High Court directlyapphcable to the factualmatrixofthe presentcases. Startingpointo!discussion on the said question invariably begins with the decision of the SupremeCourtin the caseof.EmpireJute Co. Ltd vs. Commissioner ofIncome Tax (1980) 124 ITR 1(SC). Revenue in the said case ITA 1336/2010&conn, cases, Page K, or47 relied upon an earlier decision of the Supreme court in CIT vs. Maheshwari Devi Jute Mills Ltd [1965] 57 ITR 36.(80), wherein sale of loom hours were held to be in nature of capital receipt and hence not taxable. •The said decisionwas distinguishedon several grounds but noticeably it was recorded that the said case had proceededon acommonacceptedbasisthat loom hours was'anasset. In Empire Jute Co. Ltd, (supra), on deeper elucidationof relevant facts, it was noticedthat there was contractualagreeinentrestricting the right of every miU to work their loohis to their full capacity as there was over capacitybut low demand. This restrictionhad the effect of limitingthe productionand consequentlythe profits which the assesseecould earn. Under the same agreement,one mill could transfer loomhours to anotherfor considerationsubject to conditions. Thus,purchaseof loom hours had the effectofrelaxingthe restriction on operationof loom hours and enabledthe purchaserto work their looms for longer duration and earn profits. Ihe Supreme Couit obsei-vedthat capitalexpenditurewas one made with aview to bring into existencean asset for enduringbenefitto the trade. But this rule of enduringbenefitwas subjectto and could break doAvn for good reasons. The natureofadvantagehas. to be consideredin commercial sense and only when the advantage was m capital field, the expenditurecould be disallowedby applying the enduring benefit test. Ifthe advantageconsistedmerely facilitatingtradingoperations or enablingthe managementor conductof businessmore etficiently or profitably,while leaving the fixed capital untouched, the said expenditurewouldbe on revenueaccount,thoughthe advantagemay endurefor an indefiniteperiod. Enduringbenefittest, therefore,was Piiae 17 oT'l? ITA 1336/2010 & ooiin. cases. not conclusive and cannot be mechanically applied without considering the commercial aspect.

¶17The second test Avhich can be applied was fixed and circulating capitaltest. Fixed capital being what the owner turns to profit by keeping it in his possession;circulatingcapital 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 Avithin the specifiedcategory. Thedemarcationlinebetweenassetsoutofwhich 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 purchaseof loom hours was not like circulatingcapital(labour,raw material,power etc.), but "loomhours" Avere also not a part of fixed capital. Revenue'scontentionthat purchaseof loon;! hours was for acquisition of source of profit or income and, therefore, capital expenditure, Avas rejected on the ground that source of profit or income Avas the profit making apparatus which had remained untouched. There Avas no enlargement of permanent structure or capitalassets. Primarilyand essentiallythe expenditureAvas relating to operationor AA'orking of looms, Avhich constitutedpiofit earning apparatus.The SupremeCourt,however,addedawordofcautionthat in the field of taxation,analogiescould be deceptive'andmisleading but neverthelessthey referredto an exampleof an assesseeacquiring raw material regulated under a quota system to increase his production. Money spentto acquirethe quota right, it Avas obseived would entitle the assesseeto acquire more raAv material to increase profitabilityofthe profitmakingapparatusand wouldundoubtedlybe ITA 1336/2010&conn, cases. Page Idol'17 h revenue expenditure as it was a part of the operating cost. However, the said example relates to already existing or ongoing industr)'. Outgoingwhetherit was revenueor capital,itwas highlighted,should dependupon practicaland businesspointof view, ratherthanJuristic classification of legal rights. The question should be judged in the context of business necessity or expediency; was the expenditure a part of assessee'sworking expenditureor a part o.rproccssof profit earning;whetherthe expenditurewas necessaryto acquire a right ol' permanentcharacter, the possession of which was a condition for carrying on trade ?, etc.

¶18It may be now appropriateand proper to refer to Judgmentsof the Supreme Court relating to lease agreements as they may have . some bearing and.elucidatelegal principleswhich are of relevance. li\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 lor 20 years on payment of yearly rent as well as protection fee to ward off •competition,was held to be capitalexpenditure. In the said case, the considerationpayablewas per annumbut was for the entireor whole durationof the lease and it protectedand gave right to' the assesseeto carry on business unfetteredfrom outsiders. It was held that the expenditurewas not apartofthe workingor operationalexpensesbut for acquiring.a capitalasset. Similarly,in Memberofthe Boardof AgriculturalIncome Tax, Assam vs. SindlmraniOumduramand Ors. (1957) 32 ITR 169 (SC), salamior lump sum paymentfor non recurringnature made by the prospectivetenant to the landlord as considerationfor settlementof agricultural land and parting with certainrights paid anteriorto landlordand tenantrelationship,it was rrA 133.6/2010&. conn, rases. ol 4) emphasizedthat the payilientwas not ibr use of land but for the land to be put to use by the assessee. Salamiwas not rentpaid in advance.

¶19In Enterprising Enterprises vs. Income Tax (2007) 293 ITR 437, the SupremeCourt affirmed the decisionofMadras High Court reportedin [2004] 268 ITR 95, after referringto FingleIndustriesLtd vs. CIT [1960] 40 ITR 67 (SC), Gotan Lime Syndicatev. CIT [1966] 59 ITR 718 (SC) and Aditya MineralsPvt. Ltd. vs. 'CIT [1999] 239 ITR 817 (SC), stating that distinctionlies betweenthe caseofwhereroyaltyor rentwas paid and wherethe entireamountof leasepremiumAvas paid eitherat one tune or in mstallments. Royalty or rent would be revenue expenditure, whilethe latterwouldbe capitalexpenditure.

¶20This brings us to an earlier decisionof the SupremeCourt in the case ofPingleIndustriesLtd. vs. CommissionerofIncome Tax, Hyderabad(supra). The majorityjudgmentheld that the quolnama whichentitledthe assesseeto extractstonesfi:om quarriesfor aperiod of 12 years on annualpayment(someamountwas paid madvance,to secure annual payment)was capital expenditureas the assesseewas extractingstoneswhichafterdressingwere sold as flag stones. It was observedthat the leasewas for long term with right to extractstones in six villages,withoutlimitby measurementor quantity,and entitled the assessee to exclusive rights. The majority held' that the . expenditurewas capital in nature and cannot be equated with cases wherein assessee had acquired right to pick up tendu leaves for manufa-ctureof bidi, which was equivalentto purchasing of raw materialfor manufacturingbusmQSS. It was observedthat stones in Page 20 01'-16 situ were stotlcin trade of business,but lease paymentswere capital in nature as the stones only upon extractionbecame stock in trade. The pa^'ment though periodical was neither rent nor royalty, but paymentwas for acquiringan asset for enduringbenefit i.e. right to extract stones and not stones itself.

¶21In Jabbar (M.A.) vs. CIT, Amdra Pradesh [1968j-68ITR 493

(SC), the assessee had taken a short term lease of 11 months for quarr^'ingpurposesto carry away, sell and disposeofsand which was lymg on the surface of river bed without excavation or skilllul extraction. The said expenditurewas held to be ofrevenuecharacter, in spiteoffact that the intereston land Avas also conveyed,observing that this was not decisive. The decisive factor was the object for whichthe leasewas takenand the natureofpayment,when and while -obtainingthe lease. This decisionwas distinguishedby the Supreme Court in R,B. Setk MoolclumdSuganchandvs. CIT, New Delhi

(1972) 86 ITR 647 as mineralsin this case were part of the land and had to be won, extractedand broughtto the surfaceunlikethe case of Jabbar (M.A.) (supra) where the minerals 'i.e. the sand was on surfaceand thus was a case relatingto expenditurefor acquisitionol stock in trade and, revenuein nature. Similartreatmentwas given to the licencefee paid for one year for prospectmgemeraldswhich was •in addition:to royalty on emeraldexcavatedand sold. •Ihe first part •i.e. the licence fee for prospecting,it was held was capital. The contentionthatthe licencefee was not aleaserent and did not create interestin land was rejected,obsei-vingthat prospectinglicencewas issuedbeforeoperationshad startedand was paid irrespectiveof the mineralobtamed. This demonstratedthat the object'forthe payment • was to initiatebusiness;thoughthe periodof licencewas one year it Page 21 oM7 did not make tlie payment,revenuepayment. Prospectinglicenseice cannotbe equatedwithpaymentfor sl.ockin trade.

¶22In CIT vs, BombayBurmah TradingCorporation(1986) 161 ITR 386, the SupremeCourt obsei-vedthat lump sum consideration paid on surrenderofexportrights in aforestlease,Avherethe assessee had right to extractand cut timber and remove them on paymentol royalty, was capital payment. The paymentwas for sterilizationof the profitmakingapparatusi.e. the capitalasset. Ihe forest lease AA'as also not a stock in trade. The determining factor, it was.observed was nature,of trade in which the asset Avas employed. If the payment made, representedprofitin anew form, itwouldbe income,but ifthe • money paid relatedto structureofassessee'sprofitmakingapparatus and affected the conduct of business, the sum received for cancellationorvariationof agreement,wouldbe a capitalreceipt.

¶23In CommissionerofIncome Tax vs, MadrasAuto Services(P) (|^ Ltd. (1998)233 ITR 468 (SC),the assesseehad incurredexpenditure on demolishingthe existingbuildingand constructinga new building at their own expense. The neAV buildingbelongedto the lessoi and the assesseeremaineda lesseebut at a low rent. Term for lease was 39 years buL the SupremeCourtheldthatthe expenditurewas revenue in nature as the newly constructedpropert)/from the beginningwas ownedby the lessor. It was emphasizedthatthe assetcreated,though of endurmg nature, did not belong to the assessee(there have been statutory amendmentsbut Ave are not requiredto examine the said amendments in the present decision. The' ratio is relevant). Hp Referencewas made to LahshmijiSugarMills Co. P. Ltd. vs. CIT

(1971) 82 ITR 376 (SC), wherem expenditure incurred on Page 22 0147 riA 1336/2010 & conn, cases. constructionand developmentof roads between differentsugarcane producing centers and sugar factories was held to be revenue m nature as it Avas incurred for the purposes of facilitatingrunning of assessee'smotor vehiclesetc. Similarlyin ]LH. Sugar Factoryand • • 1-Oil Mills (P) Ltd. vs. C/r(1980)125 ITR 293 (SC), amountpaid as contributionfor constmctionof roads in an area around the factory undera schemewas held to be revenueinnature. CIT vs. Associated Cement CompaniesLtd. (1988) 172 ITR 257 (SC) was quoted and obseiVedthat the expenditureincurredto concretethe mam road was revenue as the installation and accessories were, assets of the municipality. This was despitethe fact that the assesseehad secured immunityfrom liabilityto pay.municipalrates.andtaxes i:or 15 years. In these cases, the expenditurehad been incurredto bring aboutsome kind ofenduringbenefitbut did not bring into existenceany assetfor the benefit of the assessees. The expenses were made for the purposes of conductingbusiness more profitablyarid fruitfully and the asset createddid not belong to the assessee. It was noticedthat •the creation of asset, resulted in saving of considerable revenue expenditurein form oflowerrent.

¶24In Alembic Chemical Works Co. Ltd Vs. Commissionerof Income Tax, Gujarat (1989) 177 ITR 377 (SC) the assessee had acquired]aiow-nowto producehigher yield and sub-cultuieof higli yieldingrange of penicillin. The said expenditurewas in the line of existingmanufacture. It was lump-sumpaymentbut the expenditure was held to be revenuein natureprijuariiyon two groundsthat it was inculTed for the purpose of day to day busmess, which was manufacture of penictllm and, therefore, not for entirely a new ventureunconnectedand differentfrom existingbusiness. Secondly. Page 23 ol 'l? ITA 1336/2010 conn, cases. it would be unrealistic to ignore rajDid advances.^in research in antibiotic and attribute a degree of durability and jDerraanence to teclinical know-how in this fast, changing area. Rapid strides m science and technology in the field of medicines cannot be readily pigeon-holed as capital outlay. Moreover, it was. ,not a case of exclusive acquisition.

¶25Having reproducedseveralJudgments-on the question of the decisive tests, it would be appropriate to notice one decision wherein expenditureincurredhas been held to be in part capital and revenue because the tests show ,that expenditure incurred was for several considerations i.e. there was overlapping of capital and revenue expenditure, This aspect has been ^examined in detail separately. below. In Jonas Woodhead and Sons (India) Ltd. vs. Commissioner of Income Tax (1997) 224 ITR 342 (SC), question arose whether 25% of the amount paid as royalty to the foreign company for technical information/laiow how relating to setting up of a plant for manufactureof products was capital expenditure. Referringto the issue in question,itwas observedthat the answerwould dependupon severalfactorsincludingwhetherthe assesseehad set up a completely new plant with a new process, new technology, or the technical laiowhowwas for bettermentof the productwhich w^is alreadybeing produced; was it a part and parcel of existingbusiness or a new business?, Whether on expiry of period of agreement,the assessee was requiredto give the plans, drawings etc., or could continueto •manufacture the' products?, etc. It was accordingly observed as under :- "In the case of Alembie Chemical Works Co. Ltd. v. Commissioner of Income-Tax Gujarat ITA 1336/2,010& conn, cnses. ^ []989]177ITR377(SC), the question for consideraLion was whether the lump-sum payment made by the assessee for obtaining the know-how to produce'higher yield and sub-culture of high yielding strain of Penicillin would be a capital expenditure or a revenue expenditure.The Tribunal had rejected the claim of the assessee holding the expenditure to be a capital expenditure.On appealto this Court it was held:

(i) ]t would be unrealisticto ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurabilityand permanenceto the technical know-how at any particular stage in this last changingarea of medical science.The state of the art in some of these areas of high prioi-ily research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and no ephemcrality to shai-e the requirementsand qualificationsof an enduring.capital asset. The rapid strides in scienceand technologyin. the field should make us a little slow and circumspect in too readily pigeon-holding an ouLlay, such as •this, as capital,

(ii) In the infinite variety of situational diversiities in which the concept of what is capital expenditureand what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive,to draw any clear line ol denialcation. However, some broad and general tests have been suggested from time to time to ascertainon which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters theytend to be overexacting.

(iii) The question in each case would necessarily be whetherthe tests relevantand significantin one set oi circumstancesare relevantand significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslavingit. The idea of "once for all" payment and "enduring benefit" are not to be h'cated as something akin to statutoryconditions;nor are the notions of "capital or "revenue"ajudicialfetish. What is CLspital expenditure and what is revenue are not eternai verities but must 25 ol'4(i needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the' element of a sufficient degree of durability appropriate 1:0 the context."

26.. At this Stage, it Avould be relevantto clarify and elucidatethe once and for ail paymenttest. It is not necessarythat once and for ail paymentwould resultin an enduringbenefitnor is it a firm rule that periodicalpaymentsdo not show enduringbenefit. I'hc said test has its apparent limitation, if we apply the said test ^'Vithout equal importanceto the questions;Avhat was acquired and why payment was made? The real and core test is whether payment (whether once and for all or in installment) was tor acquisition of capital asset oi" rights of enduringbenefit. Quantum of payment is not relevantfor determinijigthe said question as it is the nature and quality o( payment,and not quant-um or manner of paymentAvhich is decisive. Lump-sum payment can represetit revenue expenditure, rt it is ^ incurredfor acquiringcirculatingcapitalthoughpayn^cntis made iiV • one go and similarlypaymentmade in installmentscan in lact be loi acquiringa capital asset, price of which is paid for over a period o1 time.

¶27It wouldbe relevanthere to producethe tests or principleslaid down in a recentdecisionofthis court in CITvs. J.IL Synthetics [2009] 309 ITR 371 (Delhi)whichare as under;- " An overall view of the Judgments of the Supreme Court, as well as of the High Courts would show that the followingbroad principles have been forged over the years which require ^ to be appliedto the factsofeachcase;

(i) the expenditureincurred towards initial outlay of business would be in the nature of capital Paee2f)oi'46 ITA 1336/2010 & conn. case.s. expenditure, however, iF the expenditure is incurred Avhile the business is on going, it' . would have to be asccriaincd if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit , for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it with a view to produce profits it would be in the nature of revenue expenditure ;

(ii) it is the aim and object of expenditure,which would determine its character and not the source and manner of its payment;

(iii) the test of "once and for all" payment, i.e., a lump sum payment made, i.n respect of", a transaction is an inconclusive test. The. character of payment can be determined by looking at what is the true nature of the asset which is acquiredand not by the fact whether it is a paymentin "lump sum" or in an instalment. In applying the test of an advantage of an enduringnature, it would not be proper to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whetherthe expensehas been incurredto do away with, what is a recurring expense for running a business as against an expense undertaken for the benefit of the business as a whole ;

(iv) an expense incurred for acquisitionof a source of profitor incomewould in the absenceofany contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit-niaking structure to work more efficiently leaving the sourceor the profit makingstructureuntouched would be in the nature of revenue expenditure.. In other words, expenditure incurred to fine, tune trading operations to enable the management to run the business eflectively,' effi-ciently and profitably leaving the fixed assets untouchedwould be an expenditureof a revenue nature even though the advantage obtained may last for an indefiniteperiod. To • that extent, the test of enduring benefit or 27 o( 46 (g/ advantage could be considered as having • broken down ;

(v) expenditureincurredfor grant of licencewhich accords "access" to technical knowledge, as against, "absolute" transfer of technical • knowledge and informationwould ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the ' attendant circumstances, such as :

(a) the tenure of the licence.

(b) the right, ifany, in the licenseeto create further, rights in favour of third parties,

(c) the prohibition, if any, in parting with a - confidential information received under the licence to third parties without the consent of the licen-sor,

(d) whether the licence transfers the "fruits of' research" of the licen-sor, "once for ail",

(c) whetheron expiry ofthe licencethe licenseeis' required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which' "access" to knowledgewas obtainedduringthe subsistence of the licence.

(f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditureon obtainingaccess to such secret ' processwould ordinarilybe construedas capital in nature ;

(vi) the fact that the assesseecould use the technical knowledge obtained during the tenure of the licencefor the purposesof its businessafter the. agreement has expired, and in that sense, resulting in an enduring advantage, has been categoricallyrejected by the courts. The courts have held that this by itselfcannot be decisive becauseknowledgeby itself may last for a long period even though due to rapid change of technoiogyand hugestridesmade in the field of ITA 1336/2010&coim. cases. ' science, Ihe knowledge inay with passage of time become obsolete ;

(vii) while determining the nature of expenditure,. given the diversity of human affairs and complicated nature of business ; the test enunciated by courts have to be applied from a business point of view and on a fair appreciationof the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue."' In CIT VS. Saw Pipes Limited (2008) 300 Il'R 35, the Delhi High Court observed, that as the service lines did not belong to the assessee and the expenseswere incurredto enablethe assesseeto conductits business more efficiently, the expenditure was revenue in nature.

¶28' Recently, this Bench had dealt with a similar quesvion in the case of Oracle India Pvt. Ltd./Oracle SoftAvare India Limited , ITA Nos. 25/2012 and 797/2006 and other connected cases decided on 25"' November,2013 and it was elucidatedthatunderlinedpurposeof differentiatingcapitaland revenueexpenditurewas matchingofcosts with income or receipts i.e. direct associationbetween cost incurred and earning of specificitem of income to compute true and correct taxable income. In Oracle India Private Ltd. (supra).it has been highlightedthatwhiledetenaiiningthe questionwhetherpaymentwas capital or revenue in nature, the primary aim of the court or the authoritywas to determineincomeearnedby the assesseeduiingtwo points of time without impairinghis capital or incurringpersonal debts. The concept of capital maintenance Avas critical in distinguishingwhether the expenditurewas for capital or revenue purposes. Referencecan also be made to the decisionof Delhi High Court in CIT vs. ShardaMotorsIndustryLtd. (2009) 319 ITR 109 (Del.). 6v

¶29When we turn to the facts of the present ease, the following/n^ position emerges: i. The licence was issued under a statutory mandate and was requiredand acquired,beforethe commencementof operations or business, to establish and also to maintain and operate cellular telephone services. ii. The licence Avas for initial setting up but, thereafter for maintainingand operating cellular telephone services during the term of the licence. iii. Contrary to what was stared, under the licence agj-eemcnt executed in 1994 the considerations paid and payable were with the understanding that there would be only two players who Avouldhaveunfetteredright to operateand providecellular telephoneservice in the circle. The payment,therefore,had elementof warding off competitionor protectingthe business from thirdparty competition. iv. Under the 1994 agreement, the licence Vv'as initially for 10 years extendableby one year or more at the discretionol the Government/authoiit}'. • V. 1994 Licence was not assignable or transferableto a third party or by way of asub-licenceor In partnership.There was no stipulationregarding transler or Issue ol shares to thlid parties In the company. vl. Underthe 1994 agreement,the licenceeAA^asliableto pay hxcd . licence fee for first 3 years. For 4'' 5'ear and onwards, the licenceewas liableto,payvariablelicencefee @Rs.5,00,000/-- l'ci"c 30 ol 'tO per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee: pa3'able for 4"^ to 6''' 3'ear aind with modifiedbutsimilarstipulationsfrom 7^'' year onwards. . vii. The licence could be revoked at any time on breach of the terms and conditions or in default of payment of consideration by giving 60 days' notice. viii. The authority also reserved the right to revoke the licence in the interest of public by giving 60 days' notice. ix. Under 1999 policy, the licencee had to forego the right of operating in the regime of limited number,of operators and agreed to multiparty regime competition where additional licences could be issued without limit. X. There was lock in period on the present shareholding for a period of 5 years from the date of licence-agreement i.e. the effective date and even transfer of shareholding dijrectly or indirectly through subsidiary or holding company, was not permitted during this period. Tliis had the effect of 'modifying' or clarifying the 1994 agreement, Avhich was silent. xi. Licence fee calculated as a percentage of gross revenue Avas payablew.e.f. f August, 1999. This was provisionallyfixed at 15% of the gross revenueof the licenceebut was subjectto final decision of the Government,about the quantum of revenue share to be charged as licence fee after obtaining recommendationof the TelecomRegulatoryAuthorityof hidia

(TRAI). ITA 1336/2010&conn, cases. Page 31 ol -Ifi xii. At least 35% of the outstandingdues includinginterestpayable as on 31®^ July, 1999 and liquidateddamages in full had to be paid on or before 15^'^ August, 1999. Dates for payments of arrears were specified. xiii. Past dues upto 31'^ July, 1999 along with liquidateddamages had to be paid as stipulatedin the 1999policy,on or before31 January,2000 or earlierdate as stated. xiv. The period of licencesunder 1999 policy was extended to 20 years startingfrom the eftectlA'edate. XV. Failure to pay the licence fee on yearly basis would result in cancellation of licences. Therefore, to this extent licence fee was/is payable for operating and continuing operations as cellular telephone operator.

¶30Having noted the aforesaid Victual position, we feel that paymentof licencefee was capitalin part and revenue in part and it •would not correctto hold that the whole fee was capitalorrevenuein entirety. The licencees i.e. the assessees in question required a licence in order to start or commence business as celluar telephone operator. The requirementto procurealicenceor pay licencefee was a preconditionbefore the assssee could commence or set up the business in question.The fee was certainlypaid to the Government for permitting and allowing an assessee to set up/sLart cellular telephoneservice which otherwi^sewas not permittedor prohibited under the TelegraphAct. hi away, it was aprivilegegranted to the assessee subject to payment and compliance with the terms and conditions. Page: 32 of 47 1 St ,

¶31Licence fee under the 1994 agreementensured that there would be only two private operators in a circle and thus their limited monopolywould be protectedand competitionby way of third party privateplayerswas wardedoff. RestrictedmonopolyofLhe licencees was ensured. The licence fee fixed included an element towards the said right of the licencees. 1994 agreement, for first three years postulated a lump-sum payment irrespective of number of subscribers. Minimum fee was also prescribed for later years. It appearsthat licenceeswere unableto make paymentsas per the 1994 agreementand underthe 1999policy,were requiredto pay lump-sum' paymentfor pastarrearsbeforespecifieddates. .

¶32There was restrictionunder the 1994 agreement, on transfer of the licence or even grant sub-licence but there was no specific . restrictionon changeofshareholding. 1999 policy ensuredthat even shareholdingdid not changefor aperiodof5years from the effective date. The effect of acquiring the licence has been examined in paragraph15 above. The licencewas not assignableor transferrable as such, but inductionof share capital, transfer of shares etc. was permittedsubjectto conditionsin the 1999 policy. In commercial sense the licence constitutedand continuesto be the most valuable rightwhichthe companyhas and possesses.Thus, the-paymentmade is for acquiring the licence which is essential and mandatory, prerequisite for establishing the business and for operations or continuanceand running of business. Yet, as observed belov/, it cannotbe equatedwith one time enti7 fee which apersonhas to pay to establishthe business.Ittherefore,representscohipositepayment, both capital and revenue.

¶33• The hcence fee was imposed and payable under Uie Indian TelegraphAct and other statutoryprovisionsand was/is mandatory. Failure to pay the same would/will result in discontinuance or stoppage of business operations. Under 1999 policy, the amount payable speaks of sharing of gross revenue earned by the service providerfrom the customers. 1994 agreementas noticed did have a provisionfor sharingbut with minimumpaymentstipulation. In case of non-paymentof hcence fee, the licence could be ievoked and licenceewas not permittedto carryon and continuecellulaitelephone sei-vice. Thus, the licence fee payable was/is equally with the objective and purpose to maintain and operate cellukir telephone sei-vices. Itwas also an operatingexpenseand non paymentcan lead to cancellationas one of the consequences. Endurcmentrequires currentexpensesand is subjectto paymenton revenueshare.^It will notbe correctto hold or propoundthat entirepaymentduringthe term of licence, is deferred capital payment. This Avas/is not the intent underthe 1994 agreementor 1999 policy. The intentis to also shar the gross earningto maintainand operatethe licence.

¶34The hcence fee as such is similar to both prospecting ;f:ee, acquisitionof right to lease as well as leases which enabledremoval •ofsand/tenduleaves,etc. as nothinghas to be won over, or extracted. Partpaymentwas towardsan initialinvestment.whicban assesseehad to make to establishthe business. It was a preconditionto settingup ofbusiness. It has elementand includespaymentmadeto acquirethe 'asset' I.e. the right to establishcellulartelephoneservice. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain Page 34 or47 ITA 1336/2010-& conn, cases. 'C ingredients and is like lease rent which is payable from time to time to be able to use the licence.

¶35The licence acquired was initially for 10 years' and Lhe term was extended under the 1999 policy to 20 years but this itself does notjustify treatingthe licencefee paid on revenuesharingbasis under the 1999 policy as a capital expense made to acquire an asset. As observed in Empire Jute Co, Ltd, (supra), the enduring benefit test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmaticview and considerationsratherthanjuristicclassificationis the determinative factor. The payment of yearly licence lee on revenuesharingbasis is for carryingon businessas cellukirtelephone operator.It is a normalbusinessexpense.

¶36Read in this manner, the licence granted by the Government/ authorityto the assessee would be a capital asset, yet at the same time, the assesseehas to make paymenton yearly basis on the gross revenue to continue, to be able to operate and run the business, it Vi'ould also be revenue in nature. Failure to make stipulated revenue sharingpaymenton yearlybasiswouldresultin forfeitingthe rightto operateand in turn denythe assessee,rightto do businesswith the aid ofthe capital asset. Non-,paymentwill preventand bar an assessee from providingservices.

¶37Counsel for the Revenue has relied upon decision of the HimachalPradeshHigh Court in MohanMeakinBreweriesLtd. Fs'. CommissionerofIncomeTax, (1997)220 ITR 878. In the sakl case the High Court has held that payment made to the State towards licensefee or permitunderthe provisionsof Punjab Excise Act and Puiie35ol47 . ^ V PunjabDistilleriesRules applicableto the StateofHimachalPradesh, was capital expenditure. The impositionwas for construction,lor workingofdistilleryand referredto manufactureofdifferentkinds of liquor. We respectfullydoubt the ratio of the said decision to the extent it obsei-ves that license.feefor working of the distilleryand relatingto quality/kindof liquorwould be capital expenditure. The expenditureincuiTedfor operatingor running of distilleryAvould not be capitalexpenditiireas it relatesto and is apart of the operational expenses. These cannotbe equatedwith capitalexpenditureincurred in the form of fee paid to the Registraro! Companiesat the time ol fresh incorporation,the analogy drawn in the said decision. The DivisionBench ofHimachalPradeshHigh Court in the said decision has' quoted the followingpassagefrom "Kanga and Palkhivala'sthe Law and Practiceof Income-tax,EighthEdition,'Volume1" "l/icense, permit and monopoly. — There are some early English cases on this topic which have lo be used v/ith caution. Payment by the lessee of licensed hotel premises to the local authoritiesas the 'monopolyvalue' on the grant of a three year license was held to be capital expenditureon the ground that the monopolyright oftrading for three years as a licensed victualler attained the dignity of a capital asset. • Likewise, money expended by'a brewery firm in an attempt (successfulor unsuccessful)to acquirenew licensedpremises or by a public carrierto obtain a license for a larger fleet,of vehicles or the price of a license granted to a carting contractorfor a period of eight years to deposit eaith, slag, etc., on the land of the licensor, was held, to be capital expenditure. The law has evolvedconsiderablyas a resultofacceptanceof the crucial principlethat the distinctionbetween capital and revenue expenditureshould be determined Irom the piactical and business view point and in accordance with .sound accountancyprinciples,eschewingthe legalisticappioach. A licensefee is revenueexpenditure,and paymentsmade to the State for a license or permit are none the less deductible althoughthe licenseor permit may carry with it an exclusive right, where the 'monopoly'or the exclusivecliaracterof the Pnae jG oI ^7 right is incidental" to the license or permil:. Annual payments'^made to the State, in lieu of tax on, motor vehicles per trip, for the exclusive right to ply buses on a certain, route, are revenue disbursements, and so also are royalties paid to the State for a monopoly right to excavate raw materials or stock-in-trade or for an exclusive license to manufacture sugar."

¶38In Mohan Meakin Breweries Ltd (supra) the Division Bench righU}' observedthat that the aforesaiidpassage supports the case of the assessee. Thus, Ave observe that the expenditure incurred for estabhshing or for setting up/construction of an}.' factory/business would be capital, but the amount paid on yearly basis for running or operation of the factory/business "vvould be normally revenue in natxire.

¶39The next question or issue which arises is whether the Court can bifurcate and divide the licence fee into capital and revenue and what percentage or ratio should be attributed to revenue and capital account. It is the conterition of the Revenue that the respondent assessee i.e. Bharti Cellular Ltd., Bharti Hexacom Ltd. and Bharti Airtel Ltd. had themselves treated and regarded the licence fee payable under the 1994 agreementas capital expenditure.. Even in case of Hutchinson Essar Pvt. Ltd., licence fee paid under 1994 policy for first three years was treated by the assessee as capital expenditure. In the fourdi year HutchinsonEssar Pvt. I.td. has treated the variable licence fee^payablesubjectto mitumum of @ Rs.5-,00,000/-per 100 subscribers as revenue expeiiditure and the other assessees have treated the revenue sharing licence fee under the 1999 policy as revenue expenditure. The 1999 policy has to be, read alongwith originalagreementbut it did make asubstantialdent md substantially modified the original agreement. Under the 1999 policy, the new rrA ITi.'ie/lOlO&conn, cases. I'iigeHVor-if, entrants were liable to pay ejitry fee which was the total liccncc fee payableupto 31'^ July, 1999, and thereafterthey A-vere liable to pay the variable licence fee. Thus, the new entrants have clearly paid the' "capital" entry or establishmentfee and then are obliged to pay operatingor maintenancefee in form ofvariablelicencefee.

¶40In Jonas Woodhead and Sons (India) Ltd, (supra), the Assessing Officer had himself treated 25% of the amount paid as royalty as capital and the balance amount was treated as revenue expenditure. SimilarlyinSouthern Switch Gear Ltd. vs. CIT{\99'&) 232 ITR 359, the Supreme Court has affirmed decision of the Madras High Court in CIT V5'. Southern Switch Gear Ltd. (1984) 148 TFR 272, wherein royalty payable was apportionedand 25% thereofwas treated as capitalpaymentor expenditureon the ground that the right to manufacture certain goods exclusively in India should be taken as an independent right secured by the assessee from the tbreigir company and this right was of enduring nature. The more authoritative and lucid discussion for the purpose of die present controA'ersyis in CIT, Madras vs. Best and Co. (Pvt.) Lid. (1966) 60 ITR 11(SC). In the said case, the respondentassesseewas carrying on business and had innumerable agencies. Compensation was received on account of cancellation of one agency and the question was Avhetherthe said compensationAvas capital or revenuein nature. Majority judgment ansAvered the said question observing that-compensationand loss ofagenciescould be both capitaland revenue depenclingupon facts of each case and Avhetherthe cancellationhad ^ affectedthe earning apparatus or structurefrom physical, financial, commercialand administrativepoint of vIcav. Fhe ansAver requited examination;how many agencies the assesseehad; their natuie, how many agencies, were lost and what was the effect on the income as well as the structure of the entire business; whether the loss of agency was ordinary incident in the course of business etc. In the said case, compensation received was held to be revenue expenditure as the respondent assessee had innumerable agencies in different lijies and had given up only one, to continue business in other lines. Loss of agency, it was observed, was in normal course of business and being a part of normal business, the amount received as compensation was revenue in nature. At the same time, it was accepted that tlie compensation paid/received was also on - account of restrictive covenant for a specified period under which the assessee had undertaken not to take up competitive agency. It v\'as observed that compensatioii attributable to the restrictive covenant was a capital receiptand, therefore,not taxable. It was observed;- • "In the present case, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operationonly after the agency was terminated. It was wholly unconnected with the assessee's agency termination. We, therefore, hold that ; that part of the compensation attributable to the . restrictive covenant was a capital receipt and hencc not assessable to tax. The next questions whether the compensationpaid is severable. If the compensation paid was in resp.ect of two distinct matters, one taking the character of a ' capital receipt and the other of revenue receipt, we do not see any principlewhich preventsthe apportionment of the income between the two matters. The difficulty in apportionmentcannot be a ground for rejecting the claim either of the Revenue or of the assessee. Such an apportionmentwas sanctioned by courts in Wales v. Tilley, Carter v. Wadman (H.M. and T. Sadasivam V. Commissioner of Income-tax, Madras. In the present case apportionmentofthe compensationhas to be made on a reasonable basis bet\veen the loss of the agency in ITA 1336/20.10 & conn, cases. the usual course of business and the restrictive - r covenant. The manner of such apportionment has ' . perforceto beleft to the assessingauthorities

¶22The answer to the question referred to the Higli .Court is that only such part of the sums of Rs. 66,790 • and Rs. 3,35,371 as is attributableto the loss of the agency is assessableunder section 10 ofthe Act for the assessmentyears 1951-52and 1952-53.We accordingly modi5' the answer given by the High Court in 'ihat regard." ' • ' In Tilly v. Wales (Inspectorof Taxes) [1943] A.C. 386, the House o.t Lords obsei-vedthat the amount paid was partly in considerationof surrenderof assessee'sright to pension and partly for surrenderof increasedsalaiyunder an agreement.Pensionamountwas held to be ' capitaland not taxablebut, the sum paid for reductionmsalary was taxable. The amount had to be apportionedreasonable for the two consideratio,ns.

¶41Thus, it would be appropriate and proper to apportion the licencefee as partlyrevenueand partly capital.

¶42The next obvious question is, on what basis apportionment should be done and What could be the proportionof qDportionrnent between capital and revenue expenditure. We have given due considerationto the said issue and felt that it would appj-opriateand properto dividethe licencefee into two periods i.e. before and after "^1^' July, 1999. The hcence fee paid or payable for the period upto 3ist 1999 i.e. the date set out in the 1999 pohcy should be treatedas capitaland the balanceamountpayableon or alter the said date shouldbe treatedas revenue. There are severalreasonswhy we have taken the said date as a cut-off point, rather than partly apportioningexpensesthroughthe entireterm ot the hcence., Ihese reasonsare elucidatedin the paragraphbelow. l'a|;e 40 or46 rrA 1336/2010 & conn, cases. •,

¶43Licence fee was payable for establishment,mainLenanceand operationofcellulartelephoneservice. Establishmentand set up took place in the initial years and thereafterthe payments made were/are for operation or maintainingthe cellular telephone service. Initial outlay and payment, therefore, is capital in nature, whereas the outlaysand paymentsmade subsequentlyare to operateand maintain the sei-vice. 1999 policy in the form of letter dated 22'!'' July, 1999 also refers to one time entry fee which is chargeable and had to be calculatedas licencefee dues payableupto 31''July, 1999 and licence fee Avas thereafterpayableon percentageshareof gross revenue. The neAA' licences issued to others also stipulated one lime entiy fee and then licencefee paymenton sharingbasis. 'In view of the new 1999 policy,the earlierpolicy which restrictedcompetition,underwenta change and licencees forgo their right to operate m the regime of limitednumberofoperators, /-motherreasonwhy Ave feel that lisence fee payable for the period on or before 31 July, 1999 should be treated as capital and the amount payable thereafteras levenue, is justifiedand appropriatein view ofSection35ABB. We,havealready quotedthe saidsectionaboA^e. The provisionprovidesthat licencelee of capital nature shall be amortized by dividing the amount by numberofremainderyears of licences. Thus, the capitalizedamount of licence fee is to be apportionedas a deduction in the unexpired periodofthe licence. The provisionAvill have ballooningeflectwith tmiortizedamountsubstantiallyincreasingmthe lateryears and in the last year the entire licence fee alongwith the brought forward amortizedamountAvould be alloAvedas deduction. Alter aparticular point of time, deductionallowableunder Scction 35ABB Avould be more than the actual paymentby the assessec as Ucence lee for the Paie 4! said year. This would normally happen licence period. Section 35ABB, therefore,ensures that the'capital ' paymentis duly allowed as adeductionover the term and once the expenditureis allowed, it would be reven thetaxrates remainthe same duringthis period.

¶44• ITANos. at serial Nos. 1 to 9 above licensefee, which is to be sharedunderthe No. 417/2013filed againstHutchisonEssar Ltd. relates to the period of variable license fee payable for the fourth year under the 1994 Agreement.

¶45The effect thereof is that we are expenditurein terms ofthe tenure as pert, nature, whereas if we apply the 1994 treating about 40% of the expenditurea; after the mid-term of the AC or tax neutrEil provided primarilyrelateto variable 1999 Policy whereas, ITA treating about 20% ol the le 1999 Policy as capital in Agreement, we would be per the tenure as payable towards establishingor settmgup of celljilarbusiness. 'By the lime 1999 Policy was implemented in the case of the respondents-assessees, the' cellular telephone business had alread}' commenced and was in operation. The 1999 Policy had the eflect of extending period of licencefrom 10 years to 20 years, but from the eflective date. The view, we have taken, effec license fee paid in the initial first four nature i.e. the expenditure incurred to business, whereas the balance expendit basis from 5'^'^ 3'ear onwards is treated a and operatecellulartelephonebusiness. ively means that the entire• /ears is treated as capital in establish cellular telephone Lire payable on year to year revenue expenditure to run 5S two Judgmentsrelied upon

¶46Plowever,we'wouldlike to discu by HuthisonEssar Pvt. Ltd. in support of their contentionthat the Page 42 ol'-tO variablefee cA'enprior to.S 1999 should be treatedas revenue expenditure. As noted above\»ithiswas the 4 yeai and the eontention of the assessee is that in this year even as per the 1994' agreement, payment had to be made on revenue sharing basis subject to the minimum guarantee. Learned counsel for the assessee had lelied upon CIT vs, ShardaMotorsIndustry£M.'(supra).In the said case reference was made to J.K. Synthetics Ltd. (supra) to hold that no substantial question of law arises. The Revenue had relied upon Southern Switch GearLtd. vs. CIT (1998)2321FR359 (SC), but the saidjudgmentwas distinguishedon the groundthat lump-sumroyalty was paid and 25% thereofwas disallowedby the tribunal on the groundthat it was capitalpayment. In ShardaMotorIndustriesLtd. (supra), royalty was to be paid on quantity of goods produced calculatedper piece. However,this does not appearto.be sole basis • why the-paymentmade was treated as revenue expenditure. The courthad reliedupon other facts which are noticedin paragraph3 of the samejudgmenti.e. the paymentAvas made for runningbusiness. The question of apportionment and payment was not made to establishbusiness. In CIT 'vs. Modi Revlon (P.) Ltd, (2012) 26 Taxmann.com 133 (Delhi), a Division Bench of this High Court observedthat the tests evolvedover the period have disapprovedthe applicabilit)^of the 'once and for all' payment and more structured • approach which would take into account several factors like the licencetenure; whether licence created flirther rights; whethertheie was restrictionfor use of confidentialinformation;whether benefits were transferredonce and for all; whetherafter expiry ol the licence, plans and drawingswere to be returned,etc. A.s held and obseived above, it is nature and object for which the paymentis made which Page 43 oT4(1 determines the character of payment. In the said case, it was observed that there Avas nothing to show or to suggest vesting of know-how in the assesseeand therefore,the assesseedid not derive any enduring benefit. Thus, the royalty payment-was held to be revenue in nature.

¶47hi-viewofthe aforesaidfindings,the substantialqueslionmentioned abovein itemNos.l to 9 is answeredin thefoiloAvingmanner:.

(i) The expenditureincurredtowards hcence fee is partly revenue and partlycapital. Licencefee payableupto 31''July, 1999 shouldbe treated as capital expenditure and licence fee on revenue sharing basis after August,1999 shouldbe treatedas revenueexpenditure.

(ii) Capital expenditurewill qualify lor deduction as-pei Section 3 5ABB of the Act.

¶48The appeal ITA No. 417/2013 by the Revenue in the case of HutchisonEssarPvt. Ltd., pertainsto the assessmentyear 1999-2000 I.e. year ending 31^' March, 1999. It is for the period prior to the period 31®^ July, 1999. As per the discussionabove, the licencefee payable on or before 31'' July, 1999 should be treated as capital expenditureandthe licencefee payablethereaftershouldbe treatedas revenueexpenditure. In view of the aforesaidposition,the question of law admitted for hearing in this appeal as recorded in the order dated21'' August,2013, has to be ansAveredin favour oi the revenue and againsttherespondentassessee.

¶49In ITA Nos.893/2010and 1333/2010,an additionalissue arises for consideration. This additionalissuerelatesto intereston.delayed paymentof licensefee ajid whetherthe same was capitalor revenue Page 44 ol'46 expenditure. By order dated 18"' September, 2012, Ihe following substantialquestionof law was admittedfor hearingand disposal:- "Whether the Tribunal fall into error in holding that the interest on tlie delayed payment of license fee also partook of the same nature as license fee . and was deductible as revenue expenditure?" 50, We are inclinedto pass an order of remand on this questionas we find that the facts on the said aspect are not lucid and clear. In the assessment-year2000-01,the assessmentyear subject matlers ol ITA 893/2010 and 1333/2010in the case of Bharti Cellular Ltd, and Bharti Telenet Ltd. now ImoAvn as Bharti Infotel Ltd., the assessee had paid interest of P.s.1.75 crores and Rs.2.24 crores to the Departmentof Telecommunicationtor delayed payment ol license fee. The AssessingOfficer disalloAvedthe .said payments observing that these were on capitalaccount.The assessmentorder recordsIhcit no details had been furnished and the expenses pertained to prioi" period. The paymentwas consideredto be capital in nature because the license fee Avas also capital expenditure.

¶51Commissioner(Appeals) in the case of Bharti Cellular Ltd. (ITA 893/2010) held that interest paid Avas capital expenditure becauselicensefee itselfwas capitalin nature. The said opinionwas folloAved by Commissioner(Appeals) in the case of Bharti Telenet Ltd., now laioAvn as BhartiInfotelLtd. The answerto the question would depend upon the Ending whether payment related to license fee payableperiodprior to 31'^^ July, 1999 or was lor the subsequent period. If interestpaid was in respectof licensefee ]iayablelor Ihe period prior to 31^^ July, 1999, it will have to be capitalised. Similarly,ifthe interestwas payableon licensefee for the periodpost l'a.!,e45yl'40 rrA 1336/201(1 & conn, oases. 0,1^^ July, 1999, it should be treated as revenue in nature/character. The contentionthat it was a prior period expensedoes not appeal to us and has to be rejected,as the interestwas paid during/theyear in question.

¶52Learned counsel for the assessees has submitted that there cannot be, any factual dispute that this interest was paid to the DepartmentofTelecommunicationon delayedpaymentoi: licensefee under the 1999 pohcy and not on accountof licensefee payablelor periodpriorto July, 1999. We cannot from the fcicts on record, decipherthe exactdetailsas this aspecthas not been examinedby the tribunal. The tribunal has held that interest paid was revenue in nature becausethe license fee payable itselt was revenue in nature, irrespectiveof fee payableprior to 31-^^' July, 1999. We have held to the contrary. The said question of law, therefore, is answered in favour of the Revenue and againstthe respondent-assesseebut with an order of remandto decidethe controversyafresh keeping in view the observations made above.

¶53The appeals are accordinglydisposed of. In the tacts and circumstances,therewill be no ordersas to costs. DECEMBER/^,'2013 kkb/NA/VlCR ^1) U I • (SANJEEVSACHDEVA) Piige40 oT'lf)

* IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 417/2013 Reservedon: 25*''September,2013 DateofDecision:I'J^ecember, 2013 COMMISSIONER OF INCOME TAX - VI ... .Appellant ThroughMr. Amol Sinha,Sr. StandingCoiinsel Versus HUTCHINSON ESSAR TELECOM PVT. LTD Respondent ThroughMr. N.K. Kaul, Sr. Advocatewith Mr. SalilKapoor,Mr. Vikas Jain and Mr. Sanat Kapoor, Advocates. CORAM: HON'BLE MR. JUSTICE SANJTV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA SAN.nV KHANNA, J. For detailed order see ITA No. 1336/2010 titled Commissioner ofIncomeTax versusBhartiHexacomLimited pronouncedtoday. • •II (SANJIV KHANNA) JUDGE i. L (SANJEEV SACHDEVA) ^ , JUDGE DECEMBER/f,2013 kkb/NA JiN THE fU.GI-I COURT OF mUlMl AT M IE-VV OJICLIIJI. .+ ITA No. 1336/2010 Reservedohi: J.3"' Augusi,2013 % DsitcofDecision: n^lDccember,200 COMMISSIONER OF INCOME Ti Tln'ough; Mr.Kama] Sawluicy. Sr. Siandiiig Counsel versus BHARTI HEXACOM LTJD Respojideafi Through: Mr.Ajay Vol:u"a,Ms.Kavjla Jha and Mr.rCaananKa|iuj",-Advocales ITA 1679/2040 COMMISSIONER OF INCOME TAX .....Appellanr Tlii-ough:Mi.Kamal Savvhwey,Sr. Standing Counsel V ersuts BHARTI C.FXLULAR LTD Rc.?poni!c,i,Til Tk-ough; Mr.Ajay Volua, Ms.Kavjta Jha and Mr.Kaanan Kapur, Advocates ITA 1680/2010 COMMISSIOMER OF INCOME TAX .....AppellaBit Thi'ough:Mr.KaraalSavvhncy,Sr. Slanding Counse] V ersus BHARTI CELLULAR I/FD — l^csp« Through:Mr.AjayVohra,Ms.KavitaJha and Mx.Kaanan Kapur, Advocates ITA ll-f./2012 . COMMISSIONEROF INCOM}!',TAX • ..... Appcliawt Through:Mx.AbhishckMaratha, Senior Standing Counsel WithMs.Anshul Sharma, y\,dv. ITA 1336/2010 conn, cases. BHARTIHEXACOM LTD ..... Respondent Through: Mr.Aja)' Vohra, Ms.Kavita Jha and Mr.Kaanan Kapur, Advocates ITA •996/2011 COMMISSIONER OF INCOME TAX ..... Appellant Tluough; Mr.Abhishek Maratha, Senior Standing Counsel With Ms.Anshul Sharma, Adv. Versus BHARTI HEXACOM LIMITED Respoimdeet Tln'ough: Mr.Ajay Volira, Ms.Kavita .Tha and Mr.Kaanan Kapur, Advocates ITA 1328/2010 COMMISSIONER OF INCOME TAX ..... Appellant Tln'ough;Mr.Kamal Sawiiney, Sr. Standing Counsel Versus BHARTI HEXACOM LTD ..... Rcspondcjit Tk-ough: Mr.Ajay Volua, Ms.Kavita .!ha and Mr.Kaanan Kapur, Advocates ITA 177/2012 OF INCOME TAX ..... AppelSan^t Tlu-oughMr.AbhishekMaratha, Senior Standing Counsel with Ms.Anshul Sharma,Adv. BHARTI AIRTEL LTD Respondent Tlii-ough;Mr.AjayVolua, Ms.Kavita.Tha and Mr.ICaanan l5C.apur,Advocates ITA No. 893/2010 Reservedon; 29 '^^November,2013 Dsite offDedsiion: iDecember,2013 ETAX AppellsMst Through;Mr.KamalSawlmey,Sr.. Standing Counsel Pii^e 2 ol'-iG versms BHARTI CELLULAR LTD. . .... Through: Ms.Kavita Jha, Advocate ITA 1333/2010 COMMISSIONER OF INCOME TAX Tlu'ough; Mr.Kamal Sawhney, Sr. Standmg Counsel BHARTI TELENET LTD. Tlii'ough: Ms.Kavita .Iha, Advocate ITA No. 417/2013 rsHS • Reservedoiiii: 25"'^^epitcimbcr,2013 Date ofDecilsioE:''^ December, 2013 COMMISSIONER OF INCOME TAX - VI ' ... AppeMsimt • ' Tlii-QughMr. Amol Siaha, Sr. Standing Counsel I-IUTCHINSON ESSAR TELECOM PVT. LTD. .. Tln-oughMr. N.K. Kaul, Sr. Advocate with Mr.;SahlKapoor,Mr. Vikas Jain and Mr. Sanat Kapoor, Advocates. HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDE