R.V. Easwar, J.M.
1. The assessee is a company owned by the Government of India. It functions as the international telecommunication carrier in India. It was incorporated in the year 1986 with the main object of taking over the entire management, control, operations and maintenance of the overseas communication service of the Department of Telecommunication, Government of India, with all its assets and liabilities with a view to establishing, developing, providing, operating and maintaining all types of international telecommunication networks, systems and services.
2. While completing the assessment for the asst. yr. 1995-96, for the previous year ended 31st March, 1995, under s. 143(3) of the IT Act, the AO noticed from Schedule 18 of the accounts (network cost) that the assessee had debited a sum of Rs. 282.60 crores as licence fees to the Department of Telecommunications (DOT). The amount was debited to the P&L a/c for the year. He noticed that similar amounts were debited in the accounts of the earlier years as under :
———————————————————————— Asst. yr. Amount debited (Rs.) Description ———————————————————————— 1991-92 (not known) Levy for use of network of DOT 1992-93 205.80 crores -do- 1993-94 270.25 crores -do- 1994-95 220.20 crores -do- ————————————————————————
3. He noticed further that w.e.f. 1st April, 1993, the DOT levy had been withdrawn and the licence fees had been introduced. In the asst. yrs. 1992-93 and 1993-94 in which the DOT levy had been claimed as deduction as revenue expenditure, the Central Board of Direct Taxes (CBDT) had examined the allowability of the claim and had opined that it was not allowable as a deduction and, according to the AO, the assessee, accepting the opinion, had filed revised returns on 7th April, 1994, withdrawing the claim for deduction. But from the asst. yr. 1994-95, the “revenue-sharing arrangement” between the assessee-company and the DOT was revised and according to the revised formula, the DOT levy which was 40 per cent of the earnings of the assessee-company was withdrawn and simultaneously the licence fee payable to the DOT (which, according to the AO was “nil” earlier) was revised to Rs. 30 lakhs for 10 lakhs of paid minutes or part thereof. The AO referred to the earlier position with regard to the DOT levy and the licence fee and compared the same with the revised arrangement and observed that the effect of the revised arrangement simply was that the licence fee calculated on the basis of the paid minutes is nothing but a replacement of the DOT levy and “since the DOT levy was itself offered for taxation by the assessee-company in the revised returns of income filed in April, 1994, for the asst. yrs. 1992-93 and 1993-94”, he asked the assessee to show-cause why the licence fee of Rs. 282.60 crores payable to DOT should not be disallowed.
4. By various written explanations and submissions, the assessee pointed out that the revised returns for the asst. yrs. 1992-93 and 1993-94 were filed “under protest”, that they did not prejudice the assessee’s claim for the year under consideration that the licence fee payable to DOT was an allowable deduction, that the DOT levy was imposed as a fixed percentage of the gross revenue whereas the licence fee under the revised arrangement was payable on an entirely different basis, that the “levy” was a form of tax or exaction while licence fee is paid to DOT under the Indian Telegraph Act, 1885 for services rendered by DOT by permitting the use of the communication network which was essential for the assessee’s business, that even in the asst. yrs. 1992-93 and 1993-94 the licence fee, though nominal (Rs. 101 p.a.), was allowed by the AO as revenue expenditure, that the licence fee under the revised arrangement was thus not in replacement of the DOT levy, that both were substantially different in nature and character and therefore, the licence fee cannot be accorded the same treatment as the DOT levy.
5. The AO considered the contentions of the assessee. He noticed that the DOT had issued a licence to the assessee under s. 4 of the Indian Telegraph Act, 1885 on 27th March, 1986 and that the licence was “subject to the payment of annual token licence fee of Rs. 101 payable by VSNT to DOT”. He noticed that there were further conditions attached to the grant of the licence. From the asst. yr. 1988-89, the assessee had also to pay a levy at a fixed percentage of the gross revenue of the assessee “for utilising the telecommunication network of the DOT”. The percentage was increased every year. Finally, w.e.f. 1st April, 1993 the DOT conveyed to the assessee “its new decision of revenue sharing arrangement” and as per this arrangement “the levy has been withdrawn and instead licence fee which was earlier shown as nil has been revised to Rs. 3 per minute of the telephone use”. This, according to the AO, “clearly shows that as a result of revision of licence fee in the new revenue sharing formula the DOT levy has been withdrawn. In other words, the licence fee is nothing but substitute of the DOT levy in the revised revenue sharing formula”. He gave the following further reasons for his decision :
(1) The withdrawal of the DOT levy and the revision of licence fee from Rs. 101 per annum to Rs. 3 per minute are simultaneous which cannot be just a coincidence.
(2) The earlier licence fee of Rs. 101 was not part of the Revenue sharing formula but was given effect to by a separate letter of DOT date. 31st March, 1996; but in the revised formula for revenue sharing w.e.f. 1st April, 1993, the licence fee has been made part of the formula and “this brings licence fee on footing of DOT levy”.
(3) The assessee’s contention, supported by calculations, that the DOT levy and the licence fee are different in nature and character and hence cannot be equated, cannot be accepted because for the year under appeal, the difference, amount wise, between the two calculations, is Rs. 92 crores which is “insignificant”. For other years also, the difference is only “marginal”.
6. The AO also referred to the CBDT’s letter and the letter of the then Hon’ble Finance Minister, dated 31st March, 1994, with regard to the allowability of the licence fees and held that “the position highlighted in the CBDT’s and Finance Minister’s letters will apply in determining the allowability of the licence fee”. So saying, the AO came to the conclusion that the payment of the licence fee was “not a case of diversion of income by overriding title” but was a case of “income accruing to the assessee directly and it was merely applied upon such accrual to discharge the assessee’s obligation”. The amount of Rs. 282.60 crores was nothing but a substitute for the DOT levy, it has been given the nomenclature of licence fees though the nature thereof remains the same as in the asst. yrs. 1992-93 and 1993-94 and earlier years, viz., sharing of revenue between VSNL (assessee) and DOT and therefore, it has to be given the same treatment. Thus, the AO held that the said sum was not an allowable expenditure. He, therefore, disallowed and added back the same.
7. The assessee appealed to the CIT(A) and made detailed submissions both orally and in writing. The CIT(A), however, over-ruled all of them and sustained the disallowance. The reasons given by him are substantially the same as those given by the AO. Only two points made by him need be noted. The first is that he adverted to the fact that when for the asst. yrs. 1992-93 and 1993-94 the assessee filed revised returns offering the DOT levy for disallowance and paid the taxes accordingly, the taxes so paid were reimbursed to it by DOT. The CIT(A) was inclined to view this as a fact which “sufficiently underlines and demonstrates the nature of relationship between DOT and appellant” and that in normal circumstances “there is no reason for DOT to reimburse the taxes to the appellant.” The second point made by him was that the licence fee was not a statutory levy.
8. The assessee-company is in further appeal before us. We have heard the able arguments addressed before us by both the sides. We have also carefully perused the paper-books filed by them.
9. The question that falls for consideration is : what is the real nature of the payment of Rs. 282.60 crores made by the assessee-company to DOT ? To answer this question, we have to first look at some of the provisions of the Indian Telegraph Act, 1885. Sec. 4, placed in Part II of the Act under the heading “Privileges and Powers of the Government” confers the exclusive privilege of establishing, maintaining and working telegraphs within India upon the Central Government. The first proviso however says that the Central Government may grant a licence, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part of India. In other words, the privilege of establishing etc. of telegraphs can be parted with by the Central Government for a price. Sub-s. (2) which was inserted in 1914 permits the Central Government, by notification, to delegate to the “Telegraph Authority” all or any of its powers under the first proviso to sub-s. (1). Sec. 3(1), as substituted in 1961, defines “telegraph” to mean any appliance, instrument, material or apparatus used or capable of use for transmission or reception of signs, signals, writings, images and sounds or intelligence of any nature by wire, visual or other electro-magnetic emissions, radio waves or hertzian waves, galvanic, electric or magnetic means. In exercise of the powers of the Central Government under s. 4(2) of the Telegraph Act, which were delegated to the Telegraph Authority by gazette notification dated 24th August, 1985, the said authority, by letter dated 27th March, 1986 (p. 23 of the paper-book), granted a licence to the assessee-company to establish, maintain and work telegraphs within India in respect of the services which were detailed in Schedule “A” of the licence. Initially the licence was granted for a period of 5 years from 1st April, 1986 for “a token licence fee” of Rs. 101 per annum payable in advance. The letter further stated that the renewal will be considered at the end of the 4th year of its operation. The terms and conditions of the licence were given in Schedule “B”. As per cl. (4) of the Schedule, the rates or tariffs would be prescribed only by the Telegraph Authority and the assessee shall have no such power. Clause (5) referred to “revenue sharing” and provided that the revenue from the overseas communication service will be shared between VSNL (assessee) and the DOT as decided by the Telegraph Authority.
10. On 5th July, 1988, an award was given by the DOT, in modification of the earlier award dated 27th October, 1984. This award became operative from 1st April, 1987, (p. 31 to 33 of the paper-book). The award provided for sharing of terminal charges in respect of International Telecommunication Services between DOT and VSNL.
11. By letter dated 2nd March, 1989, DOT informed the assessee that “in consideration for the use of the telecommunication network of the Department of Telecommunications by the Videsh Sanchar Nigam Ltd., the President is pleased to impose on the said Nigam a levy of 18 (eighteen) per cent on the gross amount of revenue by way of charges for telecommunication services, derived by the said Nigam during the financial year 1987-88” (p. 34 of the paper-book). By letter dated 8th December, 1989, this was increased to 40 per cent (p. 35) for the financial years 1998-89 and 1989-90 (asst. yrs. 1989-90 and 1990-91). It would appear that upto and including the asst. yr. 1991-92 the claim of the assessee for deduction of the DOT levy was accepted in its income-tax assessments. A reference to it is found in the letter dated 5th March, 1992, written by the CBDT to DOT with copy to the CIT, Bombay-I (p. 37 of the paper-book). It is in this letter that the CBDT has expressed an opinion regarding the allowability of the claim of the assessee as under :
F. No. 201/1/92/ITA-II Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, dated the 5th March, 1992. OFFICE MEMORANDUM Sub. : Videsh Sanchar Nigam Ltd. - Assessment regarding. The issue regarding the admissibility of the deduction in respect of the levy for development of rural tele-communication imposed by DOT in the tax assessment of VSNL have been carefully considered. The undersigned is directed to inform you that no deduction in respect of the levy on account of rural tele-communications would be allowed as a deduction for the financial year 1991-92 and onwards." Sd/- (Archana Ranjan) Dy. Secretary (ITA-IX) Shri C. Sosha Rao, Asstt. Director General (TA), Department of Telecommunication, Sanchar Bhavan, New Delhi - 110001. Copy to the CIT, Bombay City-I, with reference to his letter D.O. No.BC.1 SR 43/VSN/1991-92, dated 17th February, 1992. The above decision will hold good from the current financial year i.e., asst. yr. 1992-93 onwards. The claims in regard to the levy for development of rural network made by VSNL upto asst. yr. 1991-92 may be accepted. Sd/- Dy. Secretary (ITA-II)"
12. On 31st March, 1993 the Director (Phones-E) of the Department of Telecom, wrote a letter to the Chairman-cum-Managing Director of the assessee-company (p. 41 of the paper-book). The subject-matter of the letter was “Extension of validity of licence to VSNL”. It may be recalled that the licence was originally granted for a period of 5 years from 1st April, 1986. The licence would have expired on 31st March, 1991, but apparently it had been extended upto 31st March, 1993. Be that as it may, by this letter the licence was extended from 1st April, 1993 to 31st March, 1994. It was stated that the amount of licence fee payable would be intimated separately and that the general conditions stipulated in Schedule “B” of the original licence will continue to hold good. The services to be provided were listed in Schedule “A” to the letter (pp. 41-42 of the paper-book).
13. On 1st February, 1994, DOT wrote a letter to the assessee-company which is reproduced as under :
“The Chairman & Managing Director,
Videsh Sanchar Nigam Limited,
Videsh Sanchar Bhavan,
Mahatma Gandhi Road,
No. 10/86 TA-1 Vol. IV dated at New Delhi 110 001 the 1/2/1994.
Sub : Revenue sharing arrangement between DOT and VSNL
I am directed to convey to you the decision on revenue sharing arrangement between DOT & VSNL as shown below :
Items Existing Charges Revised Charges (i) Outgoing calls per Rs. 16.00 (Slab I | Rs. 41.60 paid minute (DOT to countries) | VSNL) Rs. 30.00 (Slab II | & III countries) | (ii) Incoming calls per Rs. 11.00 Rs. 21.60 paid minutes (VSNL to DOT) (iii) Levy on VSNL 40% Nil earnings (iv) License fee Nil Rs. 30 lacs/10 (payable by lacs paid minutes VSNL) or part thereof (v) Surcharge on super Nil 15% on Rentals of group Transmission Media 14. The above revised rates shall be applicable w.e.f. the financial year 1993-94 and shall be valid for a period of 5 years, subject to review if exchange rate, ratio of incoming and outgoing traffic and accounting rates, affect revenue by more than 10 per cent, VSNL shall provide necessary information on traffic. Accounting rates etc. 15. This issues with the approval of Chairman, Telecom Commission. (A. Biswas) Director (TA-1) Copy to : 1. P. S. to Chairman Telecom Commission & Others." In col. (iv) of "items", under the head "Existing charges" it is stated as "Nil" which apparently is a mistake since the licence fee payable, as per earlier communications, was Rs. 101. It is this letter which is stated to contain the "revised revenue-sharing arrangement" which is the subject-matter of the present controversy. By letter dated 19th October, 1994, DOT withdrew the levy of 40 per cent on the gross revenue as a result of the revised revenue sharing formula arrived at between VSNL and DOT. This became effective from 1st April, 1993 (p. 44 of the paper-book). In accordance with the arrangements given effect to by the aforesaid documents, the following position relating to the payment of the DOT levy or licence fee and the treatment accorded to the same in the assessments emerges (vide chart filed by the learned counsel for the assessee before us) : ------------------------------------------------------------------------ Asst. yr. Financial Year Licence fee DOT Treatment in the Rs. levy % assessment ------------------------------------------------------------------------ 1987-88 1986-87 101 p.a. Nil Allowed as deduction. 1988-89 1987-88 101 p.a. 18 Both allowed as 1989-90 1988-89 101 p.a. 40 -do- 1990-91 1989-90 101 p.a. 40 -do- 1991-92 1990-91 101 p.a. 40 -do- *1992-93 1991-92 101 p.a. 40 -do- *1993-94 1992-93 101 p.a. 40 -do- 1994-95 1993-94 Rs. 30 Nil Allowed under s. 143(1) lakhs/10 (a) s. 148 notice lakhs paid issued. minutes 1995-96 1994-95 Rs. 30 Nil Disallowed-Present lakhs/10 appeal. lakhs paid minutes ------------------------------------------------------------------------ (*Revised returns filed by the assessee later withdrawing the claim).
16. A perusal of the relevant provisions of the Telegraph Act, 1885 and the documents referred to above shows that the payment of what was called “DOT” levy” and the payment of “licence fee” are for the use of the network made available to the assessee by DOT. Strictly speaking, we are not in this appeal concerned with the nature of payments made earlier as DOT levy but it has become necessary for us to examine the nature of the “levy” also, because of the view taken by the IT authorities that the levy is only an application of the assessee’s income (revenue sharing) and since the licence fee merely replaced or substituted for the levy w.e.f. 1st April, 1993, the licence fee would also partake of the same character. The levy, as seen earlier, was first brought about by letter of the DOT written to the assessee-company on 2nd March, 1989 (p. 34 of the paper-book). The language used therein is quite simple and unequivocal. According to the letter, the levy was imposed on the assessee “by way of charges” for telecom services derived by the assessee and “in consideration for the use of the telecommunication network of the Department of Telecommunications”. The assessee being a company, the very purpose of incorporation of which is to provide, develop, operate and maintain all types of international telecom networks, systems and services, the charges which it had to pay “for the use” of the telecom network owned by the DOT should be considered and allowed as expenditure incurred for the purpose of its business under s. 37(1) of the IT Act. In allowing the levy as deduction for the asst. yrs. 1988-89 to 1991-92, the IT authorities were quite prepared to accept this position. The question of allowing the levy as deduction was reviewed during the assessment proceedings for the asst. yrs. 1992-93 and 1993-94, when the CBDT and the then Hon’ble Minister for Finance expressed opinions that the levy was only a “revenue sharing arrangement” and therefore, the same cannot be allowed as deduction. Revised returns were accordingly filed courting the disallowance of the levy for these years. It is also true that the DOT reimbursed the taxes to the assessee for these years. But the fact remains that what was described as “DOT levy” “was in truth and reality, consideration for the use by the assessee of the telecom network belonging to the DOT. Not only in the letter of the 2nd March, 1989, but also in the subsequent letters whereunder the “levy” was enhanced to 40 per cent, was the payment described as “consideration for the use of the telecommunication network of the Department of Telecommunication by the Videsh Sanchar Nigam Limited” (letter dated 8th December, 1989 at p. 35 and letter dated 18th February, 1992, at p. 36 of the paper-book). The parties to the arrangement, namely the VSNL (the assessee) and the DOT have understood the payment as one for services rendered, which if found to have been incurred for the purpose of the business, must be allowed as a deduction under s. 37(1) of the Act. The payment is closely linked to the business carried on by the assessee, namely, the provision of international telecom services, and unless such services are made available to the assessee, it cannot provide the same to the public in general and that would frustrate the very object for which the assessee was incorporated. The assessee does not own or possess the telecom network; it has perforce to make use of the network owned by the DOT and the payment made by the assessee, by whatever name given to it by the parties to the arrangement, is in truth payment made for making use of the network. That the payment was prescribed as a percentage of the gross revenue of the assessee (VSNL) does not ipso facto signify that the payment represents only an appropriation of profits after they have accrued to the assessee, for, it is quite normal for parties to a commercial transaction to fix the remuneration or consideration as a percentage of the turnover or the profits; all that it means is that the parties have arrived at one of the various modes of fixing the remuneration for services rendered or goods sold. Therefore, payment for services utilised for the purpose of the business can never be, in our opinion, considered as non-business expenditure. The DOT levy, irrespective of the opinions expressed by the CBDT and in the letter of the then Hon’ble Finance Minister, with due respect to those opinions, was therefore, allowable, and was rightly allowed in the asst. yrs. 1988-89 to 1991-92, as business expenditure as a charge against the profits and rightly not considered as an appropriation or diversion of profits.
17. It follows that the licence fee of Rs. 30 lakhs per 10 lakhs paid minutes is also eligible for deduction as business expenditure in the computation of the profits of the assessee, even if the argument of the AO that since the DOT levy was replaced by the licence fee, the latter should be accorded the same treatment as was given to the DOT levy, is accepted.
18. We now proceed to an independent consideration of the question as to whether the licence fee of Rs. 282.60 crores paid by the assessee for the year under appeal to DOT is allowable as business expenditure. We have already referred to the letter dated 31st March 1993, written by the DOT to the assessee (p. 41 of the paper-book), which is a letter which extended the validity of the licence from 1st April, 1993 to 31st March, 1994. Schedule “A” listed the services to be provided, maintained and worked by the assessee-company. These are as under :
"SCHEDULE 'A' List of services to be provided, maintained and worked by Videsh Sanchar Nigam Limited 1. International Telephone Service | Relating to the provisions of 2. International Telegram Service | International links, switching, 3. International Telex Service | centres/International Terminal including SFT | Centre. The National Extension and | manual positions will be operated | by the Department of Teleco- | mmunications. 4. International Leased Data | Service | 5. International Leased Voice | Grade Service | 6. International Leased Telep- | As far as the provision of the rinter Service | international links is concerned. 7. International Television (TV) | Transmission Services | 8. International Programme Trans- | missio (Voice cast) facility | to Press Correspondents, | News Agencies and Broadcast | Organisations | | 9. International Facsimile | Service | 10. Inmersat Services except | land mobile. | 11. (a) International Video Conferencing Services and (b) Domestic Video Conferencing Services (limited to VSNL Gateways at Bombay, Delhi, Madras and Calcutta). For this purpose domestic leased links will be utilised and VSNL would make a separate proposal to CS Cell of Department of Telecommunications giving complete technical details of the project. 12. Any new international service with the specific approval of the Telegraph Authority."
19. In order to provide the aforesaid services, it is essential that the assessee makes use of the Telecom network owned by DOT. It may be recalled that under s. 4 of the Indian Telegraph Act, 1885, the exclusive privilege of establishing, maintaining and working telegraphs remains with the Central Government which under the first proviso may be parted with by granting a licence to any person on such conditions, and in consideration of such payments, as it thinks fit. It is only in accordance with this proviso that the assessee was given a licence to make use of the Telecom network owned by DOT and provide international Telecom services to the public in general. It is for acquiring the use of the network that the assessee has been required to pay consideration in the name of licence fee. The letter dated 31st March, 1993, expressly states that the validity of licence was extended in exercise of the powers conferred upon the Director General, Telecommunications (Telegraph authority) under s. 4 of the Indian Telegraph Act. Our attention in this connection was drawn by Mr. Vyas to certain decisions expounding the nature and character of such payments made to the Central Government which may briefly be noticed. In Harshankar & Ors. vs. Dy. Excise and Taxation Commr. & Ors. AIR 1975 SC 1121, it was held that licence fee is the price for the consideration which the Government charges to the licensees for parting with its privileges and granting them to the licencee and as the State can carry on a trade or business, such a charge is the normal incident of a trading or business transaction. The amount charged to the licensees is in the nature of the price of the privilege which the purchaser has to pay in any trading or business transaction. In Pannalal & Ors. vs. State of Rajasthan AIR 1975 SC 2000, a similar question arose for consideration in connection with the Rajasthan Excise Act. It was held that the State has the exclusive right to manufacture and sell liquor and to sell the said right in order to raise revenue. The nature of the trade is such that the State confers the right to sell liquor and the rent paid by licensee is the consideration for the privilege granted by the Government for manufacturing or selling liquor. In State of Haryana & Ors. vs. Jageram & Ors. AIR 1980 SC 2018, the provisions of Punjab Excise Act came up for consideration. In this judgment also, it was held that the amount which the bidders at the auction of country liquor vends agree to pay to the State Government is neither fee nor excise duty, but represents price paid for the privilege which the State parted in favour of the bidders. In Government of Andhra Pradesh vs. Anabeshahi Wine & Distilleries (P) Ltd. AIR 1988 SC 771, the Andhra Pradesh Excise Act came up for consideration. It was held that the establishment charges payable by the licensees under the Act constitute a price or consideration which the Government charges to the licensees for parting with the privilleges and granting them to the licensees. All these judgments were considered by the Calcutta High Court in CIT vs. Varas International Ltd. (1997) 225 ITR 831 (Cal) in the context of s. 43B of the IT Act. After referring to the aforesaid four judgments of the Supreme Court, the Calcutta High Court held that the licence fee which an assessee was required to pay to the West Bengal Government under the Bengal Excise Act, for getting the licence for the manufacture of country liquor is not a tax or cess or fee and, therefore, cannot be disallowed on the ground of non-payment, under s. 43B of the Act. These authorities show that the amount paid by the assessee for the grant of the licence under the first proviso to s. 4 of the Indian Telegraph Act, is a price paid in consideration for the privilege granted to it and is, therefore, part of the business or trading expenditure.
20. Before we proceed further to examine the objections raised by Mr. Kapila to the allowance of the licence fee, we wish to briefly refer to a few authorities which have laid down guidelines as to how such a matter has to be approached under the IT Act. In Pune Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC), Hon’ble Justice Subba Rao [as His Lordship then was] explained the concept of real income for the purposes of income-tax assessment in the following manner :
“Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads, is a question of fact to be found on the relevant circumstances, having regard to business principles.”
21. In Gotan Lime Syndicate vs. CIT (1966) 59 ITR 718 (SC), it was again held by Hon’ble Justice Sikri that none of the tests laid down in the various authorities to distinguish between revenue expenditure and capital expenditure is exhaustive or universal and that each case must depend on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In Travancore Sugars & Chemicals Ltd. vs. CIT (1966) 62 ITR 566 (SC). Hon’ble Justice V. Ramaswami stated the position thus :
“It is often difficult, in any particular case, to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure …………. The Court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution to the question. The name which parties may give to the transaction which is the source of the receipt and the characterisation of the receipt by them are of little consequence. The Court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances.”
22. In CIT vs. Travancore Sugars & Chemicals Ltd. (1973) 88 ITR 1 (SC) Hon’ble Justice Jaganmohan Reddy observed as under :
“In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer way of arriving at a just conclusion would be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts. Judicial statements on the facts of a particular case can never assist Courts in the construction of an agreement or a statute which was not considered in those judgment or to ascertain what the intention of the legislature was. What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was entered into.”
23. Bearing these guidelines set out for our guidance by the highest Court of the land, we now proceed to consider the agreements of Mr. Kapila for the Department.
24. He first contended that the revenue sharing agreement was not based on any business considerations, that it merely implemented the policy of the Government and the award made by the Telegraph authority does not implement any business proposition and therefore, the so-called licence fees cannot be considered as business expenditure. He pointed out that the assessee had no say in the fixation of the charges for the use of the Telecom network owned by DOT which depended on the ipse dixit of the Telegraph authority and the assessee has no option but to make the payments as awarded and therefore the payment is not governed by commercial or business principles. He, therefore, contended that it cannot be allowed as a deduction. It was further submitted by him that there was a special relationship between the assessee and the Government of India and that the assessee was controlled by the DOT in carrying on its business and in view of the special relationship, a part of the profits made by the assessee-company had to be transferred to the Government of India and this object was achieved by imposing a licence fee and merely because the payment was described as a licence fee, it cannot be allowed as deduction as it was in fact and truth an appropriation of the profits made by the assessee in favour of the Government of India which had ultimate control over the assessee. The argument is no doubt quite attractive, but the difficulty in accepting the same is that the assessee has been incorporated as a public limited company, subject to the IT Act and if that is so, it is not permissible for us to take cognisance of any “special relationship” between the assessee-company and the DOT which is a part of the Government of India. For purposes of administrative convenience or for purposes of policy matters, it may be true to say that a certain amount of control or supervision is exercised by the Government of India over the assessee through the DOT. But when it comes to a question of making an assessment of the profits of the assessee-company under the IT Act, we are afraid, we cannot permit such considerations as the “special relationship” between the DOT and the assessee-company to cloud the principles that have to be borne in mind. As has been repeatedly pointed out by the Supreme Court in the judgments referred to by us in the earlier paragraph, we have to look at the documents and surrounding circumstances in the light of the business or commercial principles to decide the allowability of a particular expenditure as business expenditure. Nothing further requires to be taken notice of. We have before us a company which has been entrusted with the object of providing international telecommunication services by the Government of India. The very purpose of incorporation of the company is that. The company does not have a telecom network of its own; that is owned by the DOT. Obviously, the object of incorporating the company is to establish and run it as a commercial venture. In order to provide services to the general public, the company has been permitted to use the telecom network for payment of a price. The price may have been fixed unilaterally and the assessee-company, by virtue of the fact that it works under the administrative control and supervision of the Government of India, may not have had any say in the matter, but to these considerations we cannot attach undue importance when it comes to a question of an assessment of the profits which have to be ascertained on the basis of business or commercial principles under the IT Act. The parties to the arrangement, viz., the Government of India through the DOT on the one side and the assessee-company on the other side, have understood the payment as a licence fee as shown by the documentation. The payment undisputedly has been made for the use of the facilities provided by the DOT. The payment is therefore, inextricably bound up with the very business of the assessee and when it comes to the question of taxing the profits of that very business, it cannot be said that the claim to deduct the payment of the licence fee will not be allowed because administratively it has been envisaged as a mode by which the profits of the assessee-company are to be transferred to the Government of India. The IT Act, in our opinion, is not concerned with the personalities involved or their official status in arriving at the true profits of the business for the purpose of making an assessment. The contention of Mr. Kaplla that the Government of India intended to transfer a part of the assessee’s profits to itself in the guise of a licence fee so that such profits can be utilised to fulfil its social obligations cannot be countenanced as we are not concerned with the ultimate destination of the monies paid out by the assessee as licence fee. We are therefore unable to accept all these contentions of Mr. Kapila.
25. Mr. Kapila next contended that the licence fee is not a statutory payment; in fact he suggested that a licence fee can only be a matter of agreement or contract between two parties and since the present payment has been made under the Indian Telegraph Act, 1885, it would be a misnomer to call the same, a licence fee. This contention overlooks the express provisions of s. 4 of the Telegraph Act and the first proiviso thereto. In fact, there is a reference to the powers conferred upon the Director General – Telecommunications (Telegraph authority) under s. 4 of the Indian Telegraph Act, 1885, in the letter written by the DOT on 31st March, 1993, to the assessee-company (p. 41 of the paper-book). The licence fee paid by the assessee derives its authority only from the statute. It may also be noticed that in the four judgments of the Supreme Court to which we have referred to in the earlier part of our order, wherein the nature of the licence fee has been considered, the licence fee had been paid only under the provisions of the relevant statutes such as Rajasthan Excise Act, Punjab Excise Act, Andhra Pradesh Excise Act, etc. Therefore, it cannot be contended as a proposition of law that a licence fee can never be paid under a statute and can only be paid under an agreement. Therefore, the fact that in the present case, the licence fee is referable to the provisions of s. 4 of the Telegraph Act cannot be canvassed to defeat the claim for deduction.
26. Mr. Kapila thereafter took up the contention that under the licence given to the assessee in 1994 (pp. 48 to 54 of the paper book), eight new items were added to the list of services to be provided, maintained and worked by the assessee-company which were not there in the earlier licence dated 31st March, 1993; that these new services conferred upon the assessee an advantage of enduring nature and therefore the licence fee cannot be allowed as revenue expenditure. He further contended that a total new information technology was given by this licence to the assessee and that this licence cannot be considered as a continuation of the old licence because of the additional facilities or services. He further argued that the licence thus secured new businesses which resulted in enduring advantage to the assessee. He also drew our attention to the view expressed by the learned authors Kanga & Palkhivala in p. 479 of the 7th Edition (1976) of their Treatise on Income-tax Law under the head “Expenses relating to framework”. Relying on the opinion of the learned authors, Mr. Kapila submitted that the character of the payment in question is that of securing a business to the assessee and the payment is a precondition to commence business and therefore, it must be considered as capital expenditure. According to him, a licence given for a period of five years till 31st March, 1999, was an enduring benefit in the “sunrise industry”. In support of the contention that the payment was capital in nature, he pointed out that the payment was not in the nature of rental for utilising the telecom network, that it was not integral to the profit-making process, that it was not made for carrying on the business, but was made to create or possess a necessary condition without which the business cannot be carried on. In this connection, he strongly relied on the following judgments :
(1) Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC);
(2) Bombay Steam Navigation Co. (1953) Ltd. vs. CIT (1965) 56 ITR 52 (SC); and
(3) Kirloskar Oil Engines Ltd. vs. CIT (1994) 206 ITR 13 (Bom).
27. Mr. Kapila next contended that even if under s. 8 of the Telegraph Act, the licence is revoked prematurely, the compensation receivable by the assessee for such premature termination would be capital and therefore, the payment of the licence fee also should be considered as capital. He submitted that the procurement of the licence under the Telegraph Act adds capital value to the assessee and hence confers an enduring advantage. Reference in this connection was made to the judgment of the Gujarat High Court in the case of Mihir Textiles (1994) 206 ITR 112 (Guj) and the observations of the Bombay High Court in the case of CIT vs. Menora Hosiery Works (P) Ltd. (1977) 109 ITR 714, at 720 (Bom).
28. The aforesaid contentions of Mr. Kapila cannot be accepted. Firstly, the assessee has been carrying on the business of providing international telecom services since incorporation from 1986. Its first assessment was for the asst. yr. 1987-88. There is no change in the nature of the services rendered by the assessee since then. Since the assessee is already in the business of providing international telecom services to the public, the grant of the licence by letter dated 29th March, 1994, to which reference was made by Mr. Kapila, does not confer any enduring advantage. In fact, by this letter, the licence granted earlier has only been “renewed”. Mr. Kaplla did however submit that it is not a mere renewal but is the grant of new licence for more facilities provided to the assessee, but this statement cannot be upheld for the simple reason that the licence was originally granted in terms of s. 4 of the Telegraph Act and the first proviso thereto and the same licence has been renewed for a further period of five years upto 31st March, 1999. The fact that certain additional services have been incorporated in Schedule ‘A’ does not make the licence a new or first licence. We further find that what have been listed in Schedule ‘A’ to this licence are the services to be provided, maintained and worked by the assessee-company. The list is not the list of what the assessee would obtain in consideration of the licence fees paid by it. Further, the licence fee is for granting the assessee permission to make use of the telecom network owned by the DOT. Further, the licence fee is not a flat or fixed fee, but is linked to the number of paid calls made and the duration thereof and for the year under consideration, the charge is Rs. 30 lakhs for every 10 lakhs of paid minutes or in other words Rs. 3 per paid minute. The more the duration of the calls, the more the assessee will have to pay as licence fee. Thus, the payment is directly related to the actual utilisation of the network facilities or services provided by the DOT to the assessee. Thus, it is directly related to actual working of the assessee’s business. The contention that because of the addition of eight new services in Schedule “A” to the licence granted on 29th March, 1994, the assessee has obtained an advantage of enduring nature cannot therefore, be accepted.
29. Similarly the contention that the licence fee relates to the very framework of the assessee’s business and, therefore, cannot be allowed as a deduction is also not acceptable on the facts of the present case. As we have already seen, the assessee cannot provide the services relating to international telecommunication without making use of the network provided by the DOT. Thus, the utilisation of the network owned by the DOT is inextricably bound up with the services relating to international telecommunication provided by the assessee to the public at large from which it earns income. In Bombay Steam Navigation’s case (supra), it was held that the question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be viewed in the larger context of business necessity or expediency. It was held that if the outgoing or expenditure is so related to the carrying on or the conduct of the business, that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure. The payment made by the assessee in the present case satisfies this test. The payment is related to the carrying on or of the conduct of the business. As we have already seen unless the network is utilised by the assessee, the assessee in turn cannot provide the international telecommunication services to the public at large. Thus, the utilisation of the network of the DOT is closely related to the actual carrying on or the conduct of the business. The payment does not secure for the assessee any asset or right of a permanent character. The licence which Mr. Kapila described as one conferring an enduring advantage to the assessee does not in our opinion confer any such advantage because under s. 8 of the Indian Telegraph Act, the Central Government may at any time, revoke any licence granted under s. 4 on the breach of any of the conditions subject to which it was issued or any default of payment of any consideration payable for the licence. Further, the licence is a non-exclusive licence and it is open to the Government of India to grant similar licences to other persons as well by virtue of powers conferred upon it under s. 4 of the Telegraph Act. Thus, there is no monopoly right conferred upon the assessee. It just happens that for certain special reasons such as security, the Government of India has perhaps thought it fit not to grant too many licences under the Telegraph Act and has got a company (i.e., the VSNL, the assessee herein) incorporated for the special purpose of providing international telecommunication services. But there is nothing in the said Act to prevent the Government of India from permitting several other companies to operate and to which similar licences may be granted.
30. In fairness to Mr. Vyas for the assessee, it must be stated that he took up a preliminary objection to the effect that the Department cannot object to the allowance of the licence fee on the ground that it represented capital expenditure for the first time before the Tribunal, since such an objection was not taken by the AO or by the CIT(A). He submitted that a resolution of the question would involve an investigation into facts which cannot be done at such late stage. However, since the facts have been brought on record and since Mr. Kapila did not refer to any new fact while addressing the arguments on the question, we have permitted him to raise this aspect of the case also before us. In fact, arguments on the merits of this aspect were also addressed before us by Mr. Vyas for the assessee and we have taken the arguments addressed by both the sides on the merits of the issue while arriving at the conclusion that the expenditure is not capital expenditure.
31. Mr. Kapila referred to the revised returns filed by the assessee for the asst. yrs. 1992-93 and 1993-94 and the reimbursement of the taxes by the DOT to the assessee. He however, did not put his case on the ground of any estoppel but the AO has taken it as a ground for the disallowance. But the fact that the assessee filed the revised returns in those years cannot be relied upon to support the disallowance, firstly because each year is a separate year for the purposes of an assessment under the IT Act and there is no res judicata or estoppel. Even apart from that, it appears to us that the filing of the revised returns was not a step taken after bestowing contemplation and consideration as to the allowbaility of the claim. It is not as if the assessee-company reviewed or reconsidered – at least there is no material to which we were referred to show that – its decision to claim the payment as business or revenue expenditure and came to the conclusion, on merits, that the claim was not admissible. Certain doubts had been expressed by the Ministry of Finance regarding the allowability of the DOT levy and this was made known to the assessee by the DOT by letter dated 29th March, 1994 (p. 39 of the paper-book). The assessee, by the same letter, was also informed that “in the event of decision of the Ministry of Finance being not supportive of the treatment of the levy as a tax deductible item for 1991-92 and 1992-93, the extra liability will be borne by DOT and not VSNL” and that the “Department of Telecommunications will discharge this liability in the financial year 1994-95 as early as possible”. The revised returns were filed within a few days on 7th April, 1994. The close proximity between the receipt of the letter and the filing of the revised return permits the inference that they were filed merely on the basis of the letter which raised apprehensions that the Ministry of Finance may take an adverse view of the claim and that in such an eventuality, the taxes payable by the assessee would be reimbursed to it by DOT. To be more precise, the assessee perhaps thought that so long as the taxes are reimbursed to it, it does not matter whether the claim is allowed or rejected and hastened to file revised returns. But that is far different from saying that the assessee applied its mind to the merits of the claim, realised that it was not allowable and therefore withdrew the same by filing revised returns. The filing of the revised returns cannot therefore be viewed as cogent evidence of the non-allowability of the claim on merits. Even assuming to the contrary, for the sake of argument, it is open to the assessee to resile from a return, even in the course of the proceedings for the same year to which it relates and claim an item of income included therein to be non-taxable or claim an item of expenditure omitted to be claimed therein as allowable, for the rights of the assessee (as well as the Department) are governed not by whatever view they may take of a transaction or the taxability or allowability of an item of receipt of payment, but by the true position in law [please see CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC), CIT vs. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303 (Del) and Ajit Kumar Ghose vs. Commr. of Agrl. IT (1952) 22 ITR 177 (Cal)]. Therefore, the assessee cannot be said to have given up its right to claim the deduction for all times to come by filing the revised returns for the asst. yrs. 1992-93 and 1993-94.
32. In the view we have taken on the merits of the assessee’s claim, we do not consider it necessary or proper to deal with the argument raised by Mr. Vyas to the effect that inasmuch as the AO has sought to implement the opinions expressed by the CBDT and the then Hon’ble Finance Minister on the assessee’s claim, his action in disallowing the expenditure is not a judicial or quasi-judicial act and hence null and void. He had also submitted that the CBDT has no powers to issue any instruction as was issued by it on 5th March, 1992 (p. 37 of the paper-book) with reference to a particular assessee viz., the VSNL, and with reference to the manner in which a particular claim made by VSNL should be dealt with in the assessment proceedings, all of which is opposed to the proviso (a) to sub-s. (1) of s. 119 of the IT Act. He had also referred to several authorities in support of his contention that an assessment made on the instructions of an authority different from the AO or made without application of mind by the AO is null and void. Since we have disposed of the matter on the merits of the assessee’s claim, we do not consider it necessary to examine these arguments of Mr. Vyas.
33. Mr. Vyas had also relied on the following authorities in support of the contention that no enduring benefit was obtained by the assessee by incurring the expenditure in question.
(1) Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC);
(2) Associated Stone Industries (Kotah) Ltd. vs. CIT (1971) 82 ITR 896 (SC);
(3) CIT vs. Hindustan Gum & Chemicals Ltd. (1990) 182 ITR 396 (Cal);
(4) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC);
(5) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC);
(6) CIT vs. Telco (P) Ltd. (1980) 123 ITR 538 (Bom); and
(7) Electro Medicals vs. CIT (1987) 163 ITR 807 (MP).
34. The facts in each of the decided cases are peculiar to that particular case, but we have taken note of, as we are respectfully bound to, the guidelines laid down in these decisions in arriving at our own conclusions.
35. Mr. Vyas prayed for award of costs on account of the inconvenience caused to the assessee by the adjournments taken by the Department, which was opposed by Mr. Kapila. After considering the matter, we reject the prayer.
36. Mr. Vyas also prayed that the words “complicity” and “conspiracy” used by the AO in his comments filed before the CIT(A) in reply to the assessee’s written submissions, and appearing in para (iv) of p. 20 and para (vi) of p. 21 of the order of the CIT(A) should be expunged. We do not see how we can do that since the words are not part of the orders that are in appeal before us, in which case we could have perhaps done that. They are part of the comments filed by the AO before the CIT(A). But we do share the sentiment that the use of such words was not warranted because one of the parties to the transaction was the Government of India, through the DOT.
37. In the result, we hold that the amount of Rs. 282.60 crores paid by the assessee to DOT as licence fees is an allowable expenditure under s. 37(1) of the Act in computing the profits of the assessee’s business. The appeal is allowed.