TMI Blog2000 (9) TMI 1053X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 282.60 crores as licence fees to the Department of Telecommunications (DOT). The amount was debited to the P L a/c for the year. He noticed that similar amounts were debited in the accounts of the earlier years as under : Assessment year Amount debited (Rs.) Description 1991-92 (not known) Levy for use of network of DOT 1992-93 205.80 crores -do- 1993-94 270.25 crores -do- 1994-95 220.20 crores -do- 3. He noticed further that w.e.f. 1st April, 1993, the DOT levy had been withdrawn and the licence fees had been introduced. In the asst. yrs. 1992-93 and 1993-94 in which the DOT levy had been claimed as deduction as revenue expenditure, the Central Board of Direct Taxes (CBDT) had examined the allowability of the claim and had opined that it was not allowable as a deduction and, according to the AO, the assessee, accepting the opinion, had filed revised returns on 7th April, 1994, withdrawing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the payment of annual token licence fee of ₹ 101 payable by VSNT to DOT . He noticed that there were further conditions attached to the grant of the licence. From the asst. yr. 1988-89, the assessee had also to pay a levy at a fixed percentage of the gross revenue of the assessee for utilising the telecommunication network of the DOT . The percentage was increased every year. Finally, w.e.f. 1st April, 1993 the DOT conveyed to the assessee its new decision of revenue sharing arrangement and as per this arrangement the levy has been withdrawn and instead licence fee which was earlier shown as nil has been revised to ₹ 3 per minute of the telephone use . This, according to the AO, clearly shows that as a result of revision of licence fee in the new revenue sharing formula the DOT levy has been withdrawn. In other words, the licence fee is nothing but substitute of the DOT levy in the revised revenue sharing formula . He gave the following further reasons for his decision : (1) The withdrawal of the DOT levy and the revision of licence fee from ₹ 101 per annum to ₹ 3 per minute are simultaneous which cannot be just a coincidence. (2) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a fact which sufficiently underlines and demonstrates the nature of relationship between DOT and appellant and that in normal circumstances there is no reason for DOT to reimburse the taxes to the appellant. The second point made by him was that the licence fee was not a statutory levy. 8. The assessee-company is in further appeal before us. We have heard the able arguments addressed before us by both the sides. We have also carefully perused the paper-books filed by them. 9. The question that falls for consideration is : what is the real nature of the payment of ₹ 282.60 crores made by the assessee-company to DOT ? To answer this question, we have to first look at some of the provisions of the Indian Telegraph Act, 1885. Sec. 4, placed in Part II of the Act under the heading Privileges and Powers of the Government confers the exclusive privilege of establishing, maintaining and working telegraphs within India upon the Central Government. The first proviso however says that the Central Government may grant a licence, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy of 18 (eighteen) per cent on the gross amount of revenue by way of charges for telecommunication services, derived by the said Nigam during the financial year 1987-88 (p. 34 of the paper-book). By letter dated 8th December, 1989, this was increased to 40 per cent (p. 35) for the financial years 1998-89 and 1989-90 (asst. yrs. 1989-90 and 1990-91). It would appear that upto and including the asst. yr. 1991-92 the claim of the assessee for deduction of the DOT levy was accepted in its income-tax assessments. A reference to it is found in the letter dated 5th March, 1992, written by the CBDT to DOT with copy to the CIT, Bombay-I (p. 37 of the paper-book). It is in this letter that the CBDT has expressed an opinion regarding the allowability of the claim of the assessee as under : F. No. 201/1/92/ITA-II Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, dated the 5th March, 1992. OFFICE MEMORANDUM Sub. : Videsh Sanchar Nigam Ltd. - Assessment regarding. The issue regarding the admissibility of the deduction in respect of the levy for development of rural tele-communication imposed by D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Outgoing calls per paid minute (DOT to VSNL ₹ 16.00 (Slab I countries)/ ₹ 30.00 (Slab II III countries) Rs.41.60 (ii) Incoming calls per paid minutes (VSNL to DOT) ₹ 11.00 ₹ 21.60 (iii) Levy on VSNL Earnings 40% Nil (iv) License fee (payable by VSNL) Nil ₹ 30 lacs/10 lacs paid minutes (v) Surcharge on super group Nil 15% on super group Rentals of Transmission Media 14. The above revised rates shall be applicable w.e.f. the financial year 1993-94 and shall be valid for a period of 5 years, subject to review if exchange rate, ratio of incoming and outgoing traffic and accounting rates, affect revenue by more than 10 per cent, VSNL shall provide necessary information on traffic. Accounting rates etc. 15. This issues with the approval of Chairman, Teleco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised returns filed by the assessee later withdrawing the claim). 16. A perusal of the relevant provisions of the Telegraph Act, 1885 and the documents referred to above shows that the payment of what was called DOT levy and the payment of licence fee are for the use of the network made available to the assessee by DOT. Strictly speaking, we are not in this appeal concerned with the nature of payments made earlier as DOT levy but it has become necessary for us to examine the nature of the levy also, because of the view taken by the IT authorities that the levy is only an application of the assessee's income (revenue sharing) and since the licence fee merely replaced or substituted for the levy w.e.f. 1st April, 1993, the licence fee would also partake of the same character. The levy, as seen earlier, was first brought about by letter of the DOT written to the assessee-company on 2nd March, 1989 (p. 34 of the paper-book). The language used therein is quite simple and unequivocal. According to the letter, the levy was imposed on the assessee by way of charges for telecom services derived by the assessee and in consideration for the use of the telecommunication network ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tever name given to it by the parties to the arrangement, is in truth payment made for making use of the network. That the payment was prescribed as a percentage of the gross revenue of the assessee (VSNL) does not ipso facto signify that the payment represents only an appropriation of profits after they have accrued to the assessee, for, it is quite normal for parties to a commercial transaction to fix the remuneration or consideration as a percentage of the turnover or the profits; all that it means is that the parties have arrived at one of the various modes of fixing the remuneration for services rendered or goods sold. Therefore, payment for services utilised for the purpose of the business can never be, in our opinion, considered as non-business expenditure. The DOT levy, irrespective of the opinions expressed by the CBDT and in the letter of the then Hon'ble Finance Minister, with due respect to those opinions, was therefore, allowable, and was rightly allowed in the asst. yrs. 1988-89 to 1991-92, as business expenditure as a charge against the profits and rightly not considered as an appropriation or diversion of profits. 17. It follows that the licence fee of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational Video Conferencing Services and (b) Domestic Video Conferencing Services (limited to VSNL Gateways at Bombay, Delhi, Madras and Calcutta). For this purpose domestic leased links will be utilised and VSNL would make a separate proposal to CS Cell of Department of Telecommunications giving complete technical details of the project. 12. Any new international service with the specific approval of the Telegraph Authority. 19. In order to provide the aforesaid services, it is essential that the assessee makes use of the Telecom network owned by DOT. It may be recalled that under s. 4 of the Indian Telegraph Act, 1885, the exclusive privilege of establishing, maintaining and working telegraphs remains with the Central Government which under the first proviso may be parted with by granting a licence to any person on such conditions, and in consideration of such payments, as it thinks fit. It is only in accordance with this proviso that the assessee was given a licence to make use of the Telecom network owned by DOT and provide international Telecom services to the public in general. It is for acquiring the use of the network that the assessee has been required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 831 (Cal) in the context of s. 43B of the IT Act. After referring to the aforesaid four judgments of the Supreme Court, the Calcutta High Court held that the licence fee which an assessee was required to pay to the West Bengal Government under the Bengal Excise Act, for getting the licence for the manufacture of country liquor is not a tax or cess or fee and, therefore, cannot be disallowed on the ground of non-payment, under s. 43B of the Act. These authorities show that the amount paid by the assessee for the grant of the licence under the first proviso to s. 4 of the Indian Telegraph Act, is a price paid in consideration for the privilege granted to it and is, therefore, part of the business or trading expenditure. 20. Before we proceed further to examine the objections raised by Mr. Kapila to the allowance of the licence fee, we wish to briefly refer to a few authorities which have laid down guidelines as to how such a matter has to be approached under the IT Act. In Pune Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC), Hon'ble Justice Subba Rao [as His Lordship then was] explained the concept of real income for the purposes of income-tax assessment in the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the facts and circumstances of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer way of arriving at a just conclusion would be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts. Judicial statements on the facts of a particular case can never assist Courts in the construction of an agreement or a statute which was not considered in those judgment or to ascertain what the intention of the legislature was. What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was entered into. 23. Bearing these guidelines set out for our guidance by the highest Court of the land, we now proceed to consider the agreements of Mr. Kapila for the Department. 24. He first contended that the revenue sharing agreement was not based on any business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples to decide the allowability of a particular expenditure as business expenditure. Nothing further requires to be taken notice of. We have before us a company which has been entrusted with the object of providing international telecommunication services by the Government of India. The very purpose of incorporation of the company is that. The company does not have a telecom network of its own; that is owned by the DOT. Obviously, the object of incorporating the company is to establish and run it as a commercial venture. In order to provide services to the general public, the company has been permitted to use the telecom network for payment of a price. The price may have been fixed unilaterally and the assessee-company, by virtue of the fact that it works under the administrative control and supervision of the Government of India, may not have had any say in the matter, but to these considerations we cannot attach undue importance when it comes to a question of an assessment of the profits which have to be ascertained on the basis of business or commercial principles under the IT Act. The parties to the arrangement, viz., the Government of India through the DOT on the one side an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be contended as a proposition of law that a licence fee can never be paid under a statute and can only be paid under an agreement. Therefore, the fact that in the present case, the licence fee is referable to the provisions of s. 4 of the Telegraph Act cannot be canvassed to defeat the claim for deduction. 26. Mr. Kapila thereafter took up the contention that under the licence given to the assessee in 1994 (pp. 48 to 54 of the paper book), eight new items were added to the list of services to be provided, maintained and worked by the assessee-company which were not there in the earlier licence dated 31st March, 1993; that these new services conferred upon the assessee an advantage of enduring nature and therefore the licence fee cannot be allowed as revenue expenditure. He further contended that a total new information technology was given by this licence to the assessee and that this licence cannot be considered as a continuation of the old licence because of the additional facilities or services. He further argued that the licence thus secured new businesses which resulted in enduring advantage to the assessee. He also drew our attention to the view expressed by the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce by letter dated 29th March, 1994, to which reference was made by Mr. Kapila, does not confer any enduring advantage. In fact, by this letter, the licence granted earlier has only been renewed . Mr. Kaplla did however submit that it is not a mere renewal but is the grant of new licence for more facilities provided to the assessee, but this statement cannot be upheld for the simple reason that the licence was originally granted in terms of s. 4 of the Telegraph Act and the first proviso thereto and the same licence has been renewed for a further period of five years upto 31st March, 1999. The fact that certain additional services have been incorporated in Schedule 'A' does not make the licence a new or first licence. We further find that what have been listed in Schedule 'A' to this licence are the services to be provided, maintained and worked by the assessee-company. The list is not the list of what the assessee would obtain in consideration of the licence fees paid by it. Further, the licence fee is for granting the assessee permission to make use of the telecom network owned by the DOT. Further, the licence fee is not a flat or fixed fee, but is linked to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business. The payment does not secure for the assessee any asset or right of a permanent character. The licence which Mr. Kapila described as one conferring an enduring advantage to the assessee does not in our opinion confer any such advantage because under s. 8 of the Indian Telegraph Act, the Central Government may at any time, revoke any licence granted under s. 4 on the breach of any of the conditions subject to which it was issued or any default of payment of any consideration payable for the licence. Further, the licence is a non-exclusive licence and it is open to the Government of India to grant similar licences to other persons as well by virtue of powers conferred upon it under s. 4 of the Telegraph Act. Thus, there is no monopoly right conferred upon the assessee. It just happens that for certain special reasons such as security, the Government of India has perhaps thought it fit not to grant too many licences under the Telegraph Act and has got a company (i.e., the VSNL, the assessee herein) incorporated for the special purpose of providing international telecommunication services. But there is nothing in the said Act to prevent the Government of India from permitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance being not supportive of the treatment of the levy as a tax deductible item for 1991-92 and 1992-93, the extra liability will be borne by DOT and not VSNL and that the Department of Telecommunications will discharge this liability in the financial year 1994-95 as early as possible . The revised returns were filed within a few days on 7th April, 1994. The close proximity between the receipt of the letter and the filing of the revised return permits the inference that they were filed merely on the basis of the letter which raised apprehensions that the Ministry of Finance may take an adverse view of the claim and that in such an eventuality, the taxes payable by the assessee would be reimbursed to it by DOT. To be more precise, the assessee perhaps thought that so long as the taxes are reimbursed to it, it does not matter whether the claim is allowed or rejected and hastened to file revised returns. But that is far different from saying that the assessee applied its mind to the merits of the claim, realised that it was not allowable and therefore withdrew the same by filing revised returns. The filing of the revised returns cannot therefore be viewed as cogent evidence of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC); (2) Associated Stone Industries (Kotah) Ltd. vs. CIT (1971) 82 ITR 896 (SC); (3) CIT vs. Hindustan Gum Chemicals Ltd. (1990) 182 ITR 396 (Cal); (4) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC); (5) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC); (6) CIT vs. Telco (P) Ltd. (1980) 123 ITR 538 (Bom); and (7) Electro Medicals vs. CIT (1987) 163 ITR 807 (MP). 34. The facts in each of the decided cases are peculiar to that particular case, but we have taken note of, as we are respectfully bound to, the guidelines laid down in these decisions in arriving at our own conclusions. 35. Mr. Vyas prayed for award of costs on account of the inconvenience caused to the assessee by the adjournments taken by the Department, which was opposed by Mr. Kapila. After considering the matter, we reject the prayer. 36. Mr. Vyas also prayed that the words complicity and conspiracy used by the AO in his comments filed before the CIT(A) in reply to the assessee's written submissions, and appearing in para (iv) of p. 20 and para (vi) of p. 21 of the order of the CIT(A) should be expunged. We do not see how ..... X X X X Extracts X X X X X X X X Extracts X X X X
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