The judgment, thus, disallows licence fees as an expense for the calculation of taxes. Revenue expenses are deducted from the revenue of the company to arrive at the profit for a period.
NEW DELHI: In a major setback to telecom companies, the Supreme Court on Monday ruled that telecom licence fee is capital in nature and rejected the Delhi High Court decision that classified such fee as both revenue and capital expenditure.
A Division Bench of the Supreme Court presided over by Justice BV Nagarathna and Justice Ujjal Bhuyan, held that telecom licence fees be capital in nature and rejected the recharacterisation of licence fee as partly revenue and partly capital, where a composite right granted was for providing telecom services.
The judgment, thus, disallows licence fees as an expense for the calculation of taxes. Revenue expenses are deducted from the revenue of the company to arrive at the profit for a period. However, capital expenditure is not immediately deducted from the revenues of the company, instead, it is shown as an asset in the balance sheet and deducted over several years as depreciation.
As a result of this judgement, telecom companies like Airtel and Vodafone will have to report higher taxable profits, thus increasing their immediate tax outgo. The Supreme Court emphasised that terminology and payment methods are irrelevant in determining the payment’s nature. The apex court disapproved the Delhi HC’s artificial division, which categorised fees before and after 31 July 1999, differently. The SC stated that fees remain capital regardless of instalment payments after this date, and that such division is not acceptable.
Mihir Gandhi, partner, Tax & Regulatory Services, BDO India, said: “Various telecom operators who have incurred substantial expenses to obtain a licence 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 losses.”
Source : New Indian Express