CASE DETAILS C.I.T., DELHI v. BHARTI HEXACOM LTD.

appellant therein had no relationship with the payment referable to the monopoly conferred under the grant. In the said case, this Court’s dictum is clear to the effect that royalty based on manufacture was in no way connected to the acquisition of monopoly rights. But such a finding would be erroneous in the facts of the present case since what is paid is only for acquisition of a right by way of licence fee. Further, in the said case, royalty payment had been divorced from the payment for the right to carry on business since any failure to pay royalty could not have, by any stretch, resulted in the withdrawal of the right to carry on trade. The right to carry on trade would have remained unaffected whether or not royalty payment was made. Failure to make royalty payment, could have at the most, led to civil consequences, but not a revocation of the right to carry on trade, whereas, in this batch of matters, the position is not the same. Admittedly, any failure to pay the annual variable licence fee will inevitably lead to revocation of the licence under Section 8 of the Telegraph Act. Further, the respondents will be disabled from carrying on the business of offering telecommunication services, even for a day in the absence of a valid licence. Continuation of the right to carry on the said business is contingent on the payment of both, entry fee, as well as variable licence fee. Therefore, we are unable to rely upon the dictum in Mewar Sugar Mills Ltd. to hold in favour of the respondent-assessees in this batch of cases.

25Copy pinpoint25. In light of the aforesaid discussion and having regard to the tests and principles forged by this Court from time to time, as detailed in paragraphs hereinabove, we shall proceed to consider whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i.e. before and after 31 July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31 July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. We answer the said question in the negative, against the assesses and in favour of the Revenue for the following reasons: i. Reliance placed by the High Court on the decisions of this Court in Jonas Woodhead and Sons and Best and Co. and the decision

C.I.T., DELHI v. BHARTI HEXACOM LTD. 469 [B. V. NAGARATHNA, J.]

of the Madras High Court in Southern Switch Gear Ltd. as approved by this Court appear to be misplaced inasmuch as the said cases did not deal with a single source/purpose to which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, this Court held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act is a single licence to establish, maintain and operate telecommunication services. Since it is not a licence for divisible rights that conceive of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure is without any legal basis. ii. Perhaps, the decision of the High Court could have been sustained if the facts were such that even if the respondents-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right is not preserved under the scheme of the Telegraph Act which we have detailed above. Hence, the apportionment made by the High Court is not sustainable. iii. The fact that failure to pay the annual variable licence fee leads to revocation or cancellation of the licence, vindicates the legal position that the annual variable licence fee is paid towards the right to operate telecom services. Though the licence fee is payable in a staggered or deferred manner, the nature of the payment, which flows plainly from the licensing conditions, cannot be recharacterized. 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. Such a characterisation would be contrary to the settled position of law and decisions of this Court, which suggest that payment of an amount in instalments alone does not convert or change a capital payment into a revenue payment. iv. It is trite that where a transaction consists of payments in two parts, i.e., lump-sum payment made at the outset, followed up

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by periodic payments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the assessee. However, in the present case, the successive instalments relate to the same obligation, i.e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunication services as a composite whole. This is because in the absence of a right to establish, maintenance and operation of telecommunication services is not possible. Hence, the cumulative expenditure would have to be held to be capital in nature. v. Thus, the composite right conveyed to the respondents-assessees by way of grant of licences, is the right to establish, maintain and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999. vi. Further, it is to be noticed that even under the 1994 Policy regime the payment of licence fee consisted of two parts: a) A fixed payment in the first three years of the licence regime; b) A variable payment from the fourth year of the licence regime onwards, based on the number of subscribers. Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime must be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure insofar as variable licence fee is concerned.

26Copy pinpoint26. As per the Policy of 1999, there was to be a multi-licence regime inasmuch as any number of licences could be issued in a given service area. Further, the licence was for a period of twenty years instead of ten years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period upto 31 July, 1999 were to be closed. If the migration to the Policy of 1999

C.I.T., DELHI v. BHARTI HEXACOM LTD. 471 [B. V. NAGARATHNA, J.]

was accepted by the assessees herein or the other service providers, then all licence fee paid upto 31 July, 1999 was declared as a one time licence fee as stated in the communication dated 22 July, 1999 which was treated to be a capital expenditure. The licence granted under the Policy of 1999 was non-transferable and non-assignable. More importantly, if there was a default in the payment of the licence fee, the entire licence could be revoked after sixty days notice. The provisions of the Telegraph Act particularly Section 8 thereof are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, we hold that the payment of entry fee as well as the variable annual licence fee paid by the respondents- assessees to the DoT under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the Act. In our view, the High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services, as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31 July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31 July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on annual basis.

27Copy pinpoint27. Therefore, in the ultimate analysis, the nomenclature and the manner of payment is irrelevant. The payment post 31 July, 1999 is a continuation of the payment pre 31 July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterized as capital only.

28Copy pinpoint28. In the result, the judgment of the Division Bench of the High Court of Delhi, dated 19 December, 2013 in ITA No. 1336 of 2010 and connected matters, is hereby set aside. The judgments passed by the High Courts of Delhi, Bombay and Karnataka, following the judgment of the

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Division Bench of the High Court of Delhi, dated 19 December, 2013, are also consequently set aside. The appeals filed by the appellant(s)-Revenue are allowed. Parties to bear their respective costs. Pending applications, if any, stand disposed of in the aforesaid terms.

Headnotes prepared by: Appeals allowed. Bibhuti Bhushan Bose Assisted by: Shubhanshu Das, LCRA