Supreme Court ruling gives telcos around ₹3,000 crore of savings

The apex court has waived off the interest levy on tax arising from its October 2023 ruling that said annual licence fees paid by telcos would be treated as capital expenditure, which are not tax deductible. The SC had overturned a 2013 Delhi High Court ruling that had said licence fees comprised revenue expenditure and were not taxable.

While the tax will still have to be paid, the interest component on the tax has been waived off by the Supreme Court in its latest order. That is significant, considering that the interest portion would have been higher than the tax demand, since the tax outgo on licence fee would be calculated since 1999, when the new telecom policy was issued, executives aware of the details said.

“We have given our thoughtful consideration to the submissions advanced at the Bar. We find that since the judgment of this Court is dated 16.10.2023, and having regard to the Telecom Policy, which commenced from the year 1999, the payment of interest for the period for which the tax demand is now to be met in respect of these cases stands waived," Justices B.V. and Ujjal Bhuyan said in the order seen by Mint.

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“This is a very good judgement which would reduce interest liability substantially for the industry. A very welcome move and a huge respite," said Prashant Singhal, EY’s global telecom, media and technology leader for emerging markets.

According to estimates, the interest would have been in the range of ₹3,000-3,500 crore, which would not be payable now. Following the October 2023 order, telcos had made provisions against the higher tax outgo. Airtel had made an additional tax provision of ₹226.3 crore, Vodafone Idea provisioned ₹820 crore and Tata Communications provisioned around ₹200 crore, as per the telcos’ quarterly reports.

“This is a welcome decision by the Hon’ble Supreme Court," said S.P. Kochhar, director general, Cellular Operators Association of India, which represents all carriers in the country.

Not a precedent: SC

The order also stated that the order shall not be cited as a precedent as it was passed on account of peculiar facts of the case and that appeals related to the matter in all fora including the High Court, the income tax appellate tribunal and others would keep in mind this SC order, while disposing of the appeals.

“Considering the ramifications of its earlier order on telcos, it appears that the Supreme Court has exercised its extraordinary jurisdiction while passing the present order and has directed lower Courts to keep this decision in mind while deciding on pending appeals," said Vishwas Panjiar, Partner, Nangia Andersen LLP.

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The background

The Supreme Court’s latest ruling was on an appeal filed by Bharti Hexacom, which had asked the Court for waiving off the interest on tax that would have to be recomputed from 2000-2001, following the Apex Court’s October 2023 ruling, as the period of the demand ranged from the commencement of the new Telecom Policy of the year 1999.

The October 2023 ruling stated that annual licence fee was not revenue expenditure and, therefore, not deductible as a business expense. It was a capital expenditure that had to be amortised over a period of years under the Income Tax Act, 1961. After the judgment, the licence fee would have to be treated as a capital expense, with a provision for amortization of the licence fee over the licence period, and would hence lead to a higher tax outgo.

Currently, telcos treat licence fees as an expense that is tax deductible. The court’s ruling meant that telcos were required to reverse the accounting entries passed over the past two decades (from 1999 onwards), for tax purposes, leading to higher income in the year of expenditure. Telcos were, hence, required to recompute taxes for all these years and had become liable to pay up accrued interest on the delay in payment of taxes.

“It was submitted that a heavy burden would now be on the Assessees as from the Assessment year 2000-2001 onwards the tax demand would have to be recomputed and met. Therefore, the Assessees have in fact sought for waiver of interest for the said period," the order issued Sunday stated.