Licensing Fees Will Be Recorded As Capex Rather Than Revenue Expenditure: Supreme Court

The division bench of Justice BV Nagarathna and Justice Ujjal Bhuyan upheld the plea of Department of Telecommunications regarding the taxation of license fees that telecom businesses must pay.

According to a recent ruling by the Supreme Court, license fees and royalties will be considered capital expenditures rather than revenue expenditures. The annual variable licence fee cannot be categorized as an ad revenue expense, the court decided.

The court clarified that making an installment payment does not change the status of a payment from capital to revenue.

The Supreme Court further ruled that the license’s composite right could not be artificially divided into two categories: the right to create and establish telecommunication services (which requires a lump sum payment) and the right to maintain and run such services (which requires a variable fee). 

In deciding whether the High Court of Delhi was correct to allocate the license fee as partially capital and partially revenue, the top court divided the license fee into two periods: before and after July 31, 1999. As a result, it held that any license fee paid or payable for the period ending on July 31, 1999—that is, the date specified in the Policy of 1999—should be treated as capital, and any remaining amount payable on or after that date should be treated as revenue.

A Delhi High Court ruling from 2013 is overturned by the apex court’s decision. The Delhi High Court ruled in 2013 that it would not be accurate to conclude that the entire charge was either capital or revenue.

The facts of the case are that the license was initially granted for ten years, with the possibility of an additional year at the discretion of the government or authority. It was not assignable or transferable to a third party, through a sublicence, or in partnership. The license agreement was executed in 1994, and the considerations paid and payable were with the understanding that there would be only two players who would have an unrestricted right to operate and provide cellular telephone service.

However, under the 1999 policy, the licensee consented to multiparty regime competition, where additional licenses could be issued without limit, and gave up the right to operate in the regime of a limited number of operators.

The court stated that, “it cannot be automatically hold that an expenditure which in its core, capital in nature, is actually to be treated as a revenue expenditure simply because the payment is structured in instalments.” The fact that the variable licensing cost is paid in installments shall be irrelevant because both the entry fee and the variable licence fee must be deemed capital in nature because they can be traced back to the same source.