SC waives interest on Income Tax dues payable by Telcos pursuant to holding license fee as capex

The Supreme Court on May 17 waived the interest on income tax dues payable by telecommunication companies (Telcos) pursuant to its judgment from October 2023, holding that license fee payable by these companies should be treated as capital expenditure for the purpose of income tax act.

On October 16, 2023, the SC ruled that the license fee that telcos pay every year as a percentage of their profit should not be treated as revenue expenditure. The taxable income of telcos is likely to increase owing to this judgment.

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 SC ruled that license fee is a capital expenditure, the telcos may not be able to deduct the license fee from their annual taxable income.

Telecos’s argument

After the judgment, Telcos filed an application asking for a recall of the judgment or waive the interest on the income tax demand that will arise in consequence of the judgment or make the judgment apply prospectively.

According to the application, reviewed by Moneycontrol, the companies argued that, “Implementing the judgment passed by this Hon’ble Court has a ballooning effect on the taxable income of the assessee (Telcos), as in the initial years, taxable income of assessee will substantially increase on account of disallowance of the major portion of variable license fee paid in those years.”

The Telcos contended that since the income tax payable has increased substantially because of the judgment, it would attract interest under the provisions of the IT act. As the judgment has unsettled the position that existed for over 20 years, the Telcos would have to pay interest for the same period.

“The interest payable by the assessee, in most assessment years, will be in multiples of the tax that the assessee will be liable to pay. This will cause grave prejudice and hardship to the assessee,” the plea said.

What is the issue?

This issue can be traced back to the NTP 1999, which permitted telecommunication companies to pay their license fee and spectrum fee to the government as a percentage of their yearly income. Telcos started classifying their annual license fee as revenue expenditure, since it pertains to the operation of the company. However, the I-T department contended that it would be a capital expenditure under the Income Tax Act.

The High Courts of Bombay, Karnataka, and Delhi ruled in favour of the telcos. However, the Supreme Court held 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.