Licence Fee For Telecom Companies To Be Treated As Capital Expenditure, Says Supreme Court

In a major setback for telecom companies, the Supreme Court held on Monday that the payment of licence fees will be classified as capital expenditure and not revenue expenditure.

The dispute involved telecom majors such as Vodafone Idea Ltd. and Bharti Airtel Ltd.

At the heart of the issue lay the question of whether the licence fee, which is payable in a staggered or deferred manner every year, should be re-characterised as a revenue expenditure.

According to the National Telecom Policy of 1999, telecom companies were required to pay a one-time licence fee for entry, along with a licence fee that was payable based on their yearly turnover.

This was in contrast to the earlier policy of paying the licence fee in one go.

Therefore, it was the contention of telecom companies that one-time payment of the licence fee was capital in nature, and the yearly payable licence fee was not capital in nature as it was essential and an annual necessity for the continuation of business.

The court ruled that the variable licence fee, which is paid yearly, cannot be reclassified as a revenue expenditure.

"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," the top court said.

The court explained that payment of an amount in installments does not convert the nature of a capital payment into a revenue payment.

It was also said that the manner of payment is irrelevant and that the variable licence fee payments made after July 1999 are a continuation of the licence fee payment, which is a mandatory payment intrinsic to the trade itself.

This judgement of the court overturns a 2013 judgement of the Delhi High Court.

In 2013, the Delhi High Court held the payment of the licence fee to be partly capital in nature and party revenue in nature. It held the one-time payment as capital in nature and the variable yearly payments as revenue.

The high court observed that the licence granted by the government to the telecom companies would be a capital asset, and hence, payment for the same would be a capital expense.

At the same time, the company had to make payments on a yearly basis on the gross revenue to continue its business operations, which would be revenue in nature, it said.