In a big relief to telecom companies, the Supreme Court has waived off the interest on income tax dues payable by these companies pursuant to its judgment from October 2023, holding that licence fee payable by telcos should be treated as capital expenditure for the purpose of Income Tax act.

The relief came after a miscellaneous application was filed to seek clarification about the Court’s October 16, 2023 ruling in the matter of Bharti Hexacom vs Commissioner of Income Tax. The apex court held that the entry fee and variable annual licence fee under New Telecom Policy of 1999 that the telcos pay every year as a percentage of their profit should not be treated as revenue expenditure. That ruling held that payment of this fee is to be regarded as capital expenditure and amortised in accordance with Section 35ABB of the Income Tax Act.  

Revenue expenditures are expenses companies incur operationally during the normal course of business. India’s income tax law permits the deduction of revenue expenditure from total profits. Capital expenditures are those that businesses incur to acquire an asset or upgrading themselves, which are not deductible from income. Since the Supreme Court ruled that licence fee is a capital expenditure, the telcos may not be able to deduct the licence fee from their annual taxable income.

Two issues

Subsequently, a miscellaneous application was filed in which two issues were raised. First, whether, there should be a waiver of interest on the dues payable by the telecom companies and the second, whether October 16 judgment may be given prospective effect.

The Court, in its order dated May 17, said: “We find that since the judgment of this Court is dated 16.10.2023, and having regard to the Telecom Policy, which commenced from the year 1999, the payment of interest for the period for which the tax demand is now to be met in respect of these cases stands waived.”

Further, it clarified that this order shall not be cited as precedent as order is passed on account of peculiar facts of the case. It also advised that all foras including HC, ITAT etc. while disposing of appeals, shall keep in mind the apex court order.

Commenting on the ruling, Vishwas Panjiar, Partner at Nangia Andersen LLP, said that the fallout of the apex court’s decision, dated October 16, 2023, was that telcos were required to reverse the accounting entries passed over the past two decades (from 1999 onwards), for tax purposes, leading to higher income in the year of expenditure. As a result, telcos were required to recompute taxes for all these years and also became liable for accrued interest on the delay in payment of taxes. As per some estimates, the interest bill itself could run into millions of dollars.

“Considering the ramifications of its earlier order on telcos, it appears that the Supreme Court has exercised its extraordinary jurisdiction while passing the present order and has directed lower Courts to keep this decision in mind while deciding on pending appeals. Further, the Supreme Court has made it abundantly clear that the present decision should not be used as a precedent and rightly so,” he said.