Case Number: ITA 447/DEL/2019
Appellant: DCIT, Circle- 11(1), New Delhi
Respondent: HCL Comnet Systems & Services Ltd., New Delhi
Assessment Year: 2015-16
Case Filed On: 2019-01-22
Order Type: Final Tribunal Order
Date of Order: 2022-05-11
Pronounced On: 2022-05-11
The case of DCIT vs HCL Comnet Systems & Services Ltd. revolves around the classification of license fees paid by the assessee to the Department of Telecommunication (DOT). The central issue is whether the license fees should be treated as capital expenditure or revenue expenditure. The appellant, DCIT, Circle- 11(1), New Delhi, contended that the license fees were capital in nature, while the respondent, HCL Comnet Systems & Services Ltd., argued that they were revenue expenses.
HCL Comnet Systems & Services Ltd. is engaged in the business of Remote Infrastructure Management Services & Telecommunication Services. For the assessment year 2015-16, the company paid a significant amount to the Government of India, Department of Telecommunication (DOT) as a license fee to operate and provide telecommunication services. The company treated these payments as revenue expenditure in its tax filings. However, during the assessment proceedings, the Assessing Officer (AO) reclassified these expenses as capital expenditure, leading to additional tax liability for the company.
The appellant argued that the license fees paid by HCL Comnet Systems & Services Ltd. were capital in nature because they were made for acquiring the right to operate telecommunication services, which provided an enduring benefit to the company. The appellant contended that these payments should be amortized under section 35-ABB of the Income Tax Act, which deals with expenditure for obtaining a license to operate telecom services. The appellant further argued that the shift from a fixed license fee regime to a revenue-sharing regime only changed the methodology of calculating the license fee but did not alter its character as a capital expenditure.
The respondent, represented by its legal counsel, contended that the license fees were paid under a revenue-sharing regime effective from 01.08.1999 under the New Telecom Policy and should be treated as revenue expenditure. The respondent argued that these payments were recurring in nature and did not result in the creation of any capital asset. The respondent cited several judicial precedents, including decisions from the Co-ordinate Bench of ITAT in the assessee’s own case for earlier assessment years, where similar payments were classified as revenue expenditure.
The Income Tax Appellate Tribunal (ITAT) considered the submissions of both parties and reviewed the relevant judicial precedents. The Tribunal noted that the issue of the classification of license fees had been consistently held as revenue expenditure by the CIT(A) in earlier assessment years, starting from 2006-07 to 2014-15. Furthermore, the Tribunal referred to its own decision in the assessee’s case for A.Y. 2007-08, where it held that license fees paid under the new revenue-sharing regime should be allowed as revenue expenditure.
The Tribunal observed that the license fees were paid for the right to use telecom services and did not confer any enduring benefit or result in the creation of a capital asset. The Tribunal distinguished the nature of the expenditure from capital expenditure and upheld the CIT(A)’s order, classifying the license fees as revenue expenditure.
Based on these observations, the Tribunal dismissed the appeal of the Revenue.
In a separate appeal (ITA No. 8168/Del/2018), the assessee challenged the disallowance of TDS credit amounting to Rs.4,51,895/- on deferred revenue. The assessee argued that it recognized revenue on a percentage completion method and that TDS credit should be allowed in proportion to the revenue recognized during the year. The Tribunal, referring to section 199(3) of the Income Tax Act and Rule 37BA(3)(ii), directed the Assessing Officer to allow the proportionate credit of TDS for the income declared during the year under consideration.
The ITAT’s decision in the case of DCIT vs HCL Comnet Systems & Services Ltd. underscores the importance of the nature of license agreements in determining the classification of license fees. The ruling clarifies that license fees paid under a revenue-sharing regime, without resulting in the creation of a capital asset, should be treated as revenue expenditure.
This decision has significant implications for companies engaged in telecommunication services. It emphasizes the need for clear documentation of the terms of license agreements and the nature of payments made. Companies must ensure that the agreements explicitly state the nature of the license fees to avoid disputes with tax authorities.
The ITAT’s decision in this case provides valuable guidance for the classification of license fees in tax filings. It highlights the importance of analyzing the terms of license agreements and the nature of the benefits derived from such arrangements. Companies should carefully review their agreements and consult with tax professionals to ensure proper classification of expenses in their tax returns.
DCIT vs HCL Comnet Systems & Services Ltd: Classification of License Fee – ITA 447/DEL/2019
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