The Supreme Court on Monday 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.

The apex court concluded that the Delhi High Court was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services as partly revenue and partly capital.

The decision, said experts, is a setback for telecom players as they will have to rework their position regarding disallowance of expenses which, in turn, will impact taxability.

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Disposing an appeal by the Income Tax Department clubbed with 33 similar petitions, a Division Bench comprising Justices BV Nagarathna and Ujjal Bhuyan said: “We hold that the payment of entry fee as well as the variable annual licence fee paid by the respondents-assessees to the DoT (Department of Telecommunication) under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the (Income Tax) Act.”

This implies 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.

Experts’ views

Commenting on the ruling, Mihir Gandhi, Partner, Tax & Regulatory Services with BDO India, said: “The disallowance of the expenses would impact the companies which are already suffering huge losses.”

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Sandeep Sehgal, Partner- Tax, AKM Global, felt the judgment provides much-needed clarity on the classification of expenditure as capital or revenue, especially in cases where expenditure is capital at core but structured in instalment or linked with some variables.