Two Landmark Supreme Court Judgements

In one, the apex court said licence fee paid by telecos was capital expenditure. In another, it said the MFN clause doesn't come into effect immediately after a treaty is signed

- DINESH KANABAR

THE SUPREME COURT recently delivered two landmark judgements that will have ramifications for taxpayers. The first is whether licence fees paid by telecom operators are capital or revenue expenditure. The second concerns the Most Favoured Nation (MFN) clause that appears in the Double Taxation Avoidance Agreements entered into by India.

In the case of licence fees, the issue was whether the revenue share telecom operators paid to the government was capital expenditure. The operators were granted licences under the National Telecom Policy of 1994. It had two components: a lump sum and an amount calculated depending on the number of subscribers. Telecom operators had accepted that the payment of such licence fees was a capital expenditure under the Income Tax Act (I-T Act), 1961, which could be amortised under Section 35ABB of the I-T Act.

In 1999, the government came out with a new policy under which telecom operators could pay a revenue share computed as a percentage of their annual gross revenues (AGR), if they had paid lump sum fees under the old policy until August 1999.

Telecom operators contended that revenue share paid constituted revenue expenditure, which was tax deductible. The tax authorities treated it as capital expenditure covered by Section 35ABB of the I-T Act. The operators' contention was upheld by the Commissioner (Appeals), the Income Tax Appellate Tribunal, and the Delhi High Court. The revenue department carried the matter to the Supreme Court. Apart from the Delhi High Court, the Bombay High Court and the Karnataka High Court, too, held it as revenue expenditure.