Revisiting the Scope of Section 35ABB of the Income Tax Act

The Supreme Court (SC), on 16 October 2023, observed that licence fees paid by telecom companies under the New Telecom Policy 1999 would be a capital expenditure under section 35ABB of the Income Tax Act, 1961. Quashing the judgments of high courts of Delhi, Bombay and Karnataka, the SC ruled that the nomenclature and mode of payment have no relevance as such payment relates to the licence fee, an integral part of the licence agreement to remain in the business. It ruled under the New Telecom Policy 1999 that there is no basis to reclassify the variable portion of the licence fee as revenue expenditure; instead, both fixed and variable fees are homogeneous and are capital expenditures. Moreover, a single transaction cannot be artificially bifurcated into capital and revenue components by mere consideration of payment mode, posing a challenge for the sector already confronting significant financial stress. However, the Telecommunication Act enacted in December 2023 attempts to address multiple challenges of the sector, but grey areas still need to be addressed, which could lead to future litigation. Against those backdrops, the study attempts to assess the impact of the ruling connecting with the New Act on the sector.