Recently, the Supreme Court held that payment of entry fee as well as variable annual licence fee under New Telecom Policy of 1999 is to be regarded as capital expenditure and amortised in accordance with Section 35ABB of the Income Tax Act.
- This essentially means that instead of deducting the entire expenditure all at once, the company will need to deduct a portion of the total fee over each year for tax purposes.
Key highlights of decision
- As part of its judgement, the top court also set aside a Delhi High Court order that categorised licence fees before and after July 31, 1999, differently, as capital expense and revenue expense, respectively.
- Currently, telecom companies treat licence fees as an expense, claiming deductions on account of variable licence fees on a year-to-date basis for computing their tax liability.
- The Delhi High Court in 2013 had said that the licence fee expenditure cannot be construed as capital expenditure since it is paid as a part of the revenue according to the AGR scheme.
- The apex court said that annual payment based on adjusted gross revenue (AGR) is towards licence fees. The fee cannot be construed as revenue expenditure merely because it is paid based on the annual gross revenue.
- 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.
Capital expenditure and Revenue expenditure
- Capital expenditure is the money a corporate entity spends to buy, maintain or improve its fixed assets such as buildings, vehicles, equipment or land.
- Revenue expenditure implies administrative expenses such as rent, utilities, property taxes and business travel incurred to meet the operational costs of running a business.
