The Supreme Court, on May 17, decided to waive the interest on income tax dues payable by telecommunication companies (Telcos) in accordance with its October 16, 2023 judgment. The court ruled that the license fee paid by these companies should be considered as capital expenditure for the purpose of the income tax act.
In its October 16, 2023 ruling, the Supreme Court stated that the annual license fee paid by telcos as a percentage of their profit should not be classified as revenue expenditure. Consequently, the taxable income of telcos is expected to rise due to this judgment.
Revenue expenditures are operational expenses incurred by companies during their normal course of business, and they are deductible from the total profits as per India’s income tax law. On the other hand, capital expenditures are incurred for acquiring assets or upgrades, and they are not deductible from income. With the SC’s ruling that license fee is a capital expenditure, telcos may not be able to deduct the license fee from their annual taxable income.
Telecos’ Argument
Following the judgment, Telcos submitted an application requesting the recall of the judgment, waiver of interest on the income tax demand resulting from the judgment, or prospective application of the judgment.
As per the application reviewed by Moneycontrol, the companies argued that the implementation of the court’s judgment would significantly impact the taxable income of the assessee (Telcos). They stated, “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 the income tax payable had substantially increased due to the judgment, which would attract interest under the provisions of the IT act. They also highlighted that due to the unsettled position that existed for over 20 years, they 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 stems from the NTP 1999, which allowed telecommunication companies to pay their license fee and spectrum fee to the government as a percentage of their yearly income. Telcos began categorizing their annual license fee as revenue expenditure, considering it to be part of their operational costs. However, the I-T department argued that it should be considered a capital expenditure under the Income Tax Act.
The High Courts of Bombay, Karnataka, and Delhi ruled in favor of the telcos. Nevertheless, the Supreme Court held that the manner of payment is irrelevant, and the variable license fee payments made after July 1999 are a continuation of the license fee payment, which is a mandatory payment intrinsic to the trade itself.