ACIT, CIRCLE-10(1), NEW DELHI V. HUGHES COMMUNICATION INDIA LTD., NEW DELHI

ITA 77/DEL/2022

AI Insights

The case involves an appeal by the Revenue against the decision of the CIT(A) which had deleted the addition made by the Assessing Officer (AO) regarding the capitalization of license fee expenses claimed by Hughes Communication India Ltd. The AO had treated the license fee as capital expenditure, while the CIT(A) reversed this decision, treating it as revenue expenditure based on previous similar cases. However, the Tribunal, referencing a Supreme Court decision, overturned the CIT(A)'s decision, categorizing the license fee as capital expenditure.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 30364 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2025
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Other Referred Cases: CIT Vs. Bharti Hexacom Ltd. 458 ITR 593 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: TAVISH VERMA
• Keywords: Revenue expenditure; Depreciation; Capital expenditure
• Section: 143(3)

Judgement Text

"1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’, NEW DELHI BEFORE SH. MAHAVIR SINGH, VICE PRESIDENT AND SH. BRAJESH KUMAR, ACCOUNTANT MEMBER ITA No.77/Del/2022 Assessment Year: 2012-13 ACIT Circle – 10 (1) New Delhi Vs Hughes Communication India Ltd. 1, Shivaji Marg, Westend Greens National High way- 08 New Delhi – 10037 PAN No.AAACH0765L (APPELLANT) (RESPONDENT) Appellant by Sh. Surender Pal, CIT DR Respondent by Sh. Tavish Verma, Advocate Date of hearing: 22/01/2025 Date of Pronouncement: 29/01/2025 ORDER PER MAHAVIR SINGH, VP: This appeal by the revenue is arising out of the order of CIT(A), Delhi in Appeal No.CIT(A), Delhi-36/10064/2018-19 vide order dated 31.07.2020. The assessment was framed by DCIT, Circle- 11(2), New Delhi for the A.Y.2012-13 u/s. 143(3) of IT Act, 1961 (herein after referred as “the Act”) vide his order dated 25.03.2015. 2 2. The only issue in this appeal of revenue is as regard to the order of the CIT(A) deletion the addition made by the AO by holding the license fee as capital in nature. For this revenue has raised following ground No.1:- “1. Whether on the facts and in the circumstances of the case the CIT(A) erred in deleting the addition of Rs.11,99,37,347/- made by the AA on account of capitalization of license fee.” 3. We have heard the rival contentions and gone through the facts and circumstances of the case. The brief facts of the case are that the assessee company is engaged in the business of inter alia, marketing of Very small Apparatus terminals (VSATs) and providing satellite communication services through its HUB earth station at Gurgaon. The assessee also provides broadband, internet, other tele-communication services, high end education programmes imparted by premium institute in India and overseas. 4. During the assessment proceedings, the AO noted that assessee has claimed license fee expenses amounting to Rs.159,916,462/- in lieu of rights to use telecommunication spectrum license. The assessee claimed the same as revenue expenditure. The AO after considering the submissions of the 3 assessee noted that the assessee itself admitted the payment of this license was in nature of royalty and according to him which is payment in the nature of capital because it give enduring benefits and it is in lieu of long term benefits obtained by the assessee. The AO observed as under:- “The fact remains that the aforesaid license has given the assessee a long term right to use the telecommunication spectrum and thus, the expenditure amounting to Rs.159,916,462/- is in the nature of capital expenditure which would bring enduring benefit to the assessee. Thus, this amount of Rs.159,916,42/- is hereby capitalized. However, depreciation @ 25% amounting to Rs. 39,979115/- is allowed to the assessee and the remaining amount of Rs.119,937,347/- (Rs.159,916,462-Rs.39,979,115) is hereby disallowed and added back to the income of the assessee.” Aggrieved, revenue preferred appeal before CIT(A). 5. The CIT(A) after going through the submissions of the assessee and noting that the similar additions were made in A.Ys. 2011-12, 2013-14 and 2015-16 and the same were deleted by his predecessor’s orders and the facts is noted by CIT(A) in paras 6.3.1. and 6.3.2 as under:- “6.3.1 In its submissions dated 11.04.2019, the AR of the appellant has submitted that:- 4 “It may be pointed out that during the assessment year 2011- 12 and 2013-14 similar addition was made by the assessing officer in the appellant’s own case. Your Honor’s predecessor has vide order dated 12.06.2017 and 20.10.2017 respectively deleted the disallowance of license fee made by the assessing officer. The AR of the appellant has also filed copies of the appellate orders for A.Y. 2011-12 & 2013-14, which have been considered and are placed on record. 6.3.2. It is seen from the submissions of the appellant that Ld. CIT(A)-39, Delhi, in its appellate order dated 12.06.2017 & Ld. CITA-22, Delhi in its appellate order dated 20.10.2017, have allowed the appeals of the appellant on similar issue. Therefore, maintaining judicial discipline and respectfully following the decisions of Ld. CIT(A)-39, Delhi, & Ld. CIT(A)-22, the appeal on this ground is allowed.” Accordingly, the CIT(A) taking a consistent view and relying on earlier years held that the expenditure claimed by the assessee is revenue in nature. Aggrieved, revenue preferred appeal before Tribunal. 6. After hearing both the parties and going through the facts of the case, we noted that this issue stands covered by Hon’ble Supreme Court decision in the case of assessee sister concern CIT Vs. Bharti Hexacom Ltd. 458 ITR 593 (SC) wherein the Hon’ble Supreme Court held that the license fee paid under 1994 policy 5 regime must be amortized as there is no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure. The Hon’ble Supreme Court observed in this para 25 of the judgment as under:- 25. In the light of the aforesaid discussion and having retard 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 license fee into two periods, i.e. before and after 31 July, 1999 and accordingly holding that the license 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. (supra) and the decision of the Madras High Court in Southern Switch Gear Ltd. (supra) 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 6 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. 7 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 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 assesse. 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. 8 Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue. [ 10. As the issue is covered by the judgment of Hon’ble Supreme Court in the case of CIT vs. Bharti Hexacom Ltd: 458 ITR 593 (SC) in favour of the Revenue and against assessee wherein it is held that the payment of licence fee to DTO under Telecom Policy, 1999 was capital in nature, respectfully following the same, we reverse the order of CIT(A) and allowed this appeal of Revenue. 11. In the result, the appeal of Revenue is allowed. Order pronounced on 29th January, 2025. Sd/- Sd/- (BRAJESH KUMAR) (MAHAVIR SINGH) ACCOUNTANT MEMBER VICE PRESIDENT *NEHA, Sr. PS/ Pk/sps Date:-29/01/2025 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(Appeals) ` 5.DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 9 "