{"id":47761,"date":"2023-10-27T22:53:25","date_gmt":"2023-10-27T17:23:25","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?p=47761"},"modified":"2025-07-13T19:11:19","modified_gmt":"2025-07-13T13:41:19","slug":"telecom-sector-faces-trouble-due-to-license-fees-decision","status":"publish","type":"post","link":"https:\/\/www.5paisa.com\/finschool\/telecom-sector-faces-trouble-due-to-license-fees-decision\/","title":{"rendered":"Telecom Sector faces trouble Due to License Fees Decision"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"47761\" class=\"elementor elementor-47761\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-2ca4a5e elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"2ca4a5e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-a94af5d\" data-id=\"a94af5d\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-cc7d404 elementor-widget elementor-widget-text-editor\" data-id=\"cc7d404\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>The Supreme Court on October 16 said that the license fee paid by telecom companies to the Department of Telecom (DoT) after July 1999 would be treated as capital expenditure and not revenue expenditure. Now how would this decision impact the Telecom Sector In India???\u00a0<\/p><h2><strong>Let us understand few concepts before we move ahead with the topic<\/strong><\/h2><h3><strong>What is Capital Expenditure??<\/strong><\/h3><p><a href=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/Untitled-design-14.svg\"><img fetchpriority=\"high\" decoding=\"async\" class=\"size-medium wp-image-47778 aligncenter\" role=\"img\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/Untitled-design-14.svg\" alt=\"\" width=\"300\" height=\"300\" \/><\/a><\/p><ul><li>Capital Expenditure is the money an organization or corporate entity spends to buy, maintain or improve its fixed assets such buildings, vehicles, equipment or land.\u00a0 When a newly purchased asset or money is used towards extending the useful life of an existing asset such as repairing the machines\/<\/li><\/ul><h3><strong>What is Revenue Expenditure??<\/strong><\/h3><p><img decoding=\"async\" class=\"size-medium wp-image-47779 aligncenter\" role=\"img\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/Untitled-design-15.svg\" alt=\"\" width=\"300\" height=\"300\" \/><\/p><ul><li>Revenue expenditures are short term expenses used in the current period or typically one year. Revenue expenditures include expenses which are required to meet the ongoing operational costs of running a business.<\/li><\/ul><h3><strong>Capital expenditures v\/s Revenue Expenditures<\/strong><\/h3><ul><li>Capital Expenditure and Revenue expenditures are two types of spending that business have to keep operations going. But they are different.\u00a0 A capital expenditure refers to money spent by a business for expenses that will be used in the long term while revenue expenditures are\u00a0 used for short term expenses.<\/li><\/ul><h2><strong>License Fee Paid By Telecom Companies <\/strong><\/h2><ul><li>Telecom operators are\u00a0liable to\u00a0pay\u00a0around 3-5% and 8% of the Adjusted Gross Revenue (AGR) as spectrum usage\u00a0charges\u00a0and\u00a0licence fees, respectively, to DoT. The National Telecom Policy, 1994 was replaced by the\u00a0New Telecom Policy, 1999. Under the new policy, telecom operators were required to pay one time entry fee and a variable license fee based on a percentage share of Annual Gross Revenue (\u201cAGR\u201d). Telecom operators claim variable license fee, payable annually, as a revenue expenditure.<\/li><\/ul><h2><strong>Telecom company Bharti Hexacom Limited and the Income Tax (IT) Department\u00a0<\/strong><\/h2><p><a href=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/Untitled-design-13.svg\"><img decoding=\"async\" class=\"size-medium wp-image-47775 aligncenter\" role=\"img\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/Untitled-design-13.svg\" alt=\"\" width=\"300\" height=\"300\" \/><\/a><\/p><ul><li>Bharti Hexacom Ltd., (\u201cBharti Hexacom\u201d), adopted the new Telecom Policy 1999 by paying a one-time license fee up to July 31, 1999. Then telecom license was granted to the company to establish, maintain, and operate cellular mobile services.<\/li><li>Now When the Company filed the return of income for the Financial Year 2002-03, it claimed a tax deduction of INR 11.88 crores towards payment of variable licence fees, as a revenue expenditure. The primary contention of Bharti Hexacom was that the license fee paid on a revenue sharing basis should be classified as a revenue expenditure, and consequentially the company is eligible for a tax deduction while computing the taxable income.<\/li><li>Tax authorities rejected Bharti Hexacom\u2019s argument and categorised the variable license fee as capital expenditure and allowed a proportionate deduction under section 35ABB of the Income-tax Act, 1961 (\u201cITA\u201d) &#8211; where a deduction can be claimed over the license period<\/li><li>However, the Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal ruled in favor of Bharti Hexacom by holding that annual license fee, calculated on the basis of annual gross value, and said that the variable license fee should be considered as revenue expenditure and deductible under section 37 of the ITA.<\/li><li>The issue was put up \u00a0before the Hon\u2019ble Delhi HC, wherein the High Court divided the license fee into two periods. The fee paid for the period up to 31 July 1999, was considered as capital expenditure, while the amount payable on or after this date was classified as revenue expenditure. This categorization was based on the premise that the payment would be made annually, as a percentage of gross revenue, to continue to be able to operate and run the business.<\/li><li>Now Revenue approached the\u00a0Supreme Court of India\u00a0against the judgment of the Delhi High Court in a batch of appeals. Some of the appeals before the Supreme Court also arose from judgments passed by the High Courts of Bombay and Karnataka, which followed the Delhi HC judgment dated 19 December 2013.<\/li><\/ul><h2><strong>Why Supreme Court Said License Fee is Capital Expenditure and Not Revenue Expenditure<\/strong><\/h2><ul><li>The main issue which arose before the Supreme Court was whether the variable license fee paid by these telecom companies to the\u00a0Department of Telecommunications\u00a0under the New Telecom Policy is a revenue expenditure or is of capital nature. At the outset, the SC primarily held that the payment of license fee for an indivisible license cannot be apportioned as partly capital and partly revenue expenditure without any legal basis.<\/li><li>The SC further stated that failure to pay licence fee would lead to revocation and cancellation of the licence and therefore the annual variable license fee is towards the right to operate telecom services. The mode of payment of license fee, in a staggered or deferred manner, cannot be characterized and split-up in an artificial manner into a capital and revenue payments.<\/li><li>Lastly, the SC stated that the nature of payments would be distinct only when the periodic payments have no nexus with the original obligation, which is not the case in present case. Considering the above, the Hon\u2019ble SC held that the payment of one-time entry fee as well as variable annual fee are capital in nature; that these payments are not allowed for deduction as revenue expenditure and should instead be amortized in accordance with the provisions of section 35ABB of the ITA.<\/li><\/ul><h2><strong>How Telecom Sector is going to get effected??<\/strong><\/h2><p><a href=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/2.svg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-47777 aligncenter\" role=\"img\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2023\/10\/2.svg\" alt=\"\" width=\"300\" height=\"300\" \/><\/a><\/p><ul><li>The various telecom operators who have incurred substantial expenses to obtain \u00a0licence will have to revisit the position taken with respect to the deductibility of the expense. The disallowance of the expenses would adversely impact the companies which are already suffering huge loss.<\/li><li>This ruling will undoubtedly result in higher tax payments by the telecom companies. Considering that this legal dispute, of classifying variable license fee as revenue expenditure or capital expenditure, concluded after almost 24 years from the introduction of new telecom policy, the interest liability could be equivalent to or even more than the tax amount itself. Besides, there could also be potential penalty implications on the taxpayers.<\/li><li>The classification of expenditure into capital or revenue has always been a contentious issue and despite several ruling of the SC on this matter, this issue is far from being resolved. It is pertinent to note that this ruling will not only impact the <a href=\"https:\/\/www.5paisa.com\/stocks\/sector\/telecomm-service\"><u>companies in the telecom sector<\/u><\/a> but also companies engaged in any other sectors \u00a0who may have adopted similar licensing model.<\/li><li>It is advisable for the taxpayers to assess the applicability and impact of this ruling on their respective business models and to adopt the correct legal position in a timely manner to prevent any prolonged future litigation and tax outgo.<\/li><\/ul>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>The Supreme Court on October 16 said that the license fee paid by telecom companies to the Department of Telecom (DoT) after July 1999 would be treated as capital expenditure and not revenue expenditure. Now how would this decision impact the Telecom Sector In India???\u00a0 Let us understand few concepts before we move ahead with &#8230; <a title=\"Telecom Sector faces trouble Due to License Fees Decision\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/telecom-sector-faces-trouble-due-to-license-fees-decision\/\" aria-label=\"Read more about Telecom Sector faces trouble Due to License Fees Decision\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":47774,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[17],"tags":[],"class_list":["post-47761","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-whats-brewing"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/posts\/47761","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=47761"}],"version-history":[{"count":24,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/posts\/47761\/revisions"}],"predecessor-version":[{"id":73495,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/posts\/47761\/revisions\/73495"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media\/47774"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=47761"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=47761"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/tags?post=47761"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}