2023 INSC 917

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Service Area as a consequence to Migration to revenue sharing regime of New Telecom Policy-1999 (NTP-99).

In continuation of Amendment dated 29th January, 2001 of the aforesaid License Agreement and more specifically Para (ii) thereto, reserving the power to take a final decision on the quantum of license fee and WPC charges; the licensor hereby decides the following in pursuance of the said power which shall modify and supersede whatever is contained and described in the Licence Agreement or the above stated Amendment.

(i) Annual License fee at the rate of 15% of Adjusted Gross Revenue (AGR) shall be payable by you, with effect from 1st August, 1999.

(ii) In addition the cellular licenses shall pay spectrum charges, with effect from (1.8.1999) the cut-off date of change over to NTP-99 regime, on revenue share basis of 2% of AGR towards WPC Charges covering royalty payment of the use of cellular spectrum upto 4.4 MHz+4.4 MHz and Licence fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination Wing (WPC). Any additional band width, if allotted subject to availability and justification shall attract additional License fee as revenue share (typically) 1% additional revenue share if Bandwidth allocated is upto 6.² MHz + 6.² MHz is place of 4.4 MHz+4,4 MHz).”

(Emphasis supplied)

13.6. The pertinent qualitative changes effected in the licence conditions, following migration into the Policy of 1999 regime, may be presented in a tabular form, as under:

C.I.T., DELHI v. BHARTI HEXACOM LTD. 421 [B. V. NAGARATHNA, J.]

Sl. No. Parameters for National New Telecom Distinction Telecom Policy, Policy, 1999 1994

1. Details of the payment i. Fixed licence i. One-time entry to be made by the fee for the first fee paid by existing operator: three years; telecom operators and entry fee that ii. From the was paid by all the fourth year new entrants; onwards, the a m o u n t o f ii. Variable annual licence fees to licence fee paid b e p a id , w as as a percentage of depe nde nt on AGR. the number of subscribers, irrespective of the revenue account by the licencee f rom such subscribers, subject to the prescribed minimum

2. Maximum number of Two No restriction operators permissible in a circle

3. Validity of the licence 10 years, subject 20 years, subject to to extension. extension.

4. Right of the operator/ Licence was non- R e s t r i c t i o n o n licencee to assign/ assignable and a s s i g n m e n t / transfer the licence non-transferable. transfer of licence was relaxed.

14. The discussion on the points set out above, in our view, must begin with a detailed review of relevant case law detailing the nature and

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characteristics of capital expenditure and revenue expenditure and the tests to identify the same. 14.1. In the impugned order, the High Court of Delhi found that there was no decision of the Supreme Court or any of the High Courts directly applicable to the factual matrix of the case and therefore, considered a number of decisions of this Court which we shall refer to as under: (a) At the outset, we preface our discussion by the observations of this Court in Alembic Chemical Works Co. Ltd. vs. CIT, (1989) 3 SCC 329 (“Alembic Chemical Works Co. Ltd.”) wherein the transaction in question was with regard to the one-time payment made under an agreement with a foreign firm, by the assessee, to obtain technical know-how for increasing yield of penicillin in its existing plant. While considering the nature of the said transaction, this Court indicated that “in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises,” it is not possible “to formulate any general rule even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation”. This Court further held that there is no single definitive criterion which by itself demarcates whether a particular outlay is capital or revenue. Therefore, the “once for all” test as well as the test of “enduring benefit” may not be conclusive. Consequently, the various terms and conditions of the agreement, the advantages derived by an assessee under the agreement, the payment made by the assessee under the agreement are all to be taken into account and then it has to be decided whether the whole or a part of the payment thus made is a capital expenditure or a revenue expenditure. This Court observed that courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm; exclusive right of the company to use the patent or trademark which it receives from the foreign firm; the payments made by the company to the foreign firm whether, a definite one or dependent upon certain contingencies; right to use the technical know-how for production even after the completion of the agreement; obtaining enduring benefit for a considerable part on account of the technical information received from a foreign firm, payment whether made “once for all” or in different installments co-relatable to the percentage of gross turnover of the product,

C.I.T., DELHI v. BHARTI HEXACOM LTD. 423 [B. V. NAGARATHNA, J.]

etc. to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset(s) and after the court comes to the conclusion that it does, then, has to be held to be a capital expenditure. It was further observed that no single definitive criterion by itself would be determinative and therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities, the various clauses of the agreement are to be examined. On fact, as regards the question as to whether “once for all” payment made under an agreement with a foreign firm by the assessee to obtain technical knowhow, for increasing yield of penicillin in its existing plant with a condition to keep the said know-how confidential, constituted business expenditure allowable for deduction, this Court held in the affirmative. M.N. Venkatachalia, J. (as the learned Chief Justice then was) held that in computing the income chargeable under the head “Profits and Gains of Business or Profession”, Section 37 of the Act enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. (b) In Empire Jute Co. Ltd., the question which arose was whether the sale of loom hours was to be held to be in the nature of capital receipt and hence not taxable. he transaction involved one jute mill transferring loom hours to another for consideration, subject to certain conditions. It was observed in the said case that a capital expenditure would be for securing an enduring benefit but when it comes to acquiring an advantage in the commercial sense, the enduring benefit test should not be applied mechanically. In the said case, another test was adopted, i.e., fixed and circulating capital test. It was observed that the purchase of loom hours was not like circulating capital (labour, raw material, power etc.) but loom hours were also not part of fixed capital. It was observed that whether an expenditure is revenue or capital should depend upon practical and business considerations rather than juristic classification of legal rights. That the test to be adopted was whether the expenditure was in view of a business

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C.I.T., DELHI v. BHARTI HEXACOM LTD. 425 [B. V. NAGARATHNA, J.]

information/know-how relating to setting up of a plant for manufacture of products, was capital expenditure. The issue depended upon several factors including whether the assessee had set up an entirely new business, or whether the technical knowhow was for the betterment of the product which was already being produced; whether it was a part and parcel of the existing business or a new business?; whether on expiry of the period of agreement, the assessee was required to give back the plans, drawings etc., which were obtained from the foreign company or could continue to manufacture the products? The assessing officer in the said case had treated 25% of the amount paid as royalty as capital and the balance amount was treated as revenue expenditure. The question that came up for consideration before this Court was, whether, on the facts and in the circumstances of the said case, the Tribunal was right in holding that 25% of the amount paid by the assessees therein as royalty to Jonas Woodhead and Sons was capital expenditure and therefore not allowable as revenue expenditure under the provisions of the Act for the Assessment years 1961-1968 and 1968-1969. It was observed that this question would depend upon several factors stated above and the cumulative effect of a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made or not so. Considering the different clauses of the agreement in the said case, it was concluded that the agreement with the foreign firm was to set up a new business by the assessee and the foreign firm had not only furnished information and technical know-how but had also rendered valuable services in setting up of the factory itself and even after the expiry of the agreement, there was no embargo on the assessee to continue to manufacture the product in question. Therefore, it was difficult to hold that the entire payment made was a revenue expenditure merely because the payment was required to be made on a certain percentage of the rates of the gross turnover of the products of the income as royalty. That alone did not make it a revenue expenditure. Therefore, the question raised was answered in favour of the Revenue and the appeals filed were dismissed. b) In Southern Switch Gear Ltd., this Court affirmed the decision of the Madras High Court, wherein royalty payable was apportioned and 25%

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thereof was treated as capital payment or expenditure on the ground that the right to manufacture certain goods exclusively in India should be taken as an independent right secured by the assessee from the foreign company and this right was of enduring nature. (c) In Best and Co., the respondent assessee therein was carrying on business and had innumerable agencies and compensation was received on account of cancellation of one agency and the question was, whether, the said compensation was capital or revenue receipt in nature; whether by the termination of an agency the asseessee therein had lost an earning asset and the compensation paid for the destruction of such an asset was a capital receipt and therefore not liable to tax. K. Subba Rao. J. (as the learned Chief Justice then was) speaking for a three-Judge Bench observed that the question, as to, whether, the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends upon the circumstances of each case. This is because many questions have to be asked and answered, particularly, whether the loss of an agency was an ordinary incidence in the course of business or did it amount to loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure. It was held that if a loss of a particular agency was incidental to the business, compensation received would be a revenue receipt but if it was compensation received for the loss of an enduring asset, then it would be a capital receipt. But for this, the previous history of the business and relative importance of the agency lost and the position of the business after the loss of the said agency have to be scrutinized by the department. While considering the said issue, on the facts of the said case, it was held that the asseessee therein was a well-established and long standing company in South India which had taken up innumerable agencies in different lines and one such agency had been taken from the Imperial Chemical Industries (Exports) Limited, Glasgow. When there was no material to show that the loss of the said agency was so large that the business of the agency was dislocated, on considering the facts of the said case, this Court observed that the loss of the said agency by the assessee was only a normal trading loss and the income it received was revenue receipt.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 427 [B. V. NAGARATHNA, J.]

Another question which was considered was whether compensation received by the assessee in lieu of a restrictive covenant was a capital receipt. It was observed that the non-compete clause came into operation after the termination of the agency and it was an independent obligation undertaken by the assessee therein not to compete with the new agent in the same field for a specified period and therefore, the compensation received was attributable to the restrictive covenant and was a capital receipt and hence not assessable to tax. The majority judgment answered the said question by observing that compensation on cancellation of an agency could be both capital and revenue depending upon facts of each case and whether, the cancellation had affected the earning apparatus or structure from a physical, financial, commercial and administrative point of view. In the said case, compensation received was held to be revenue receipt as the respondent assessee had innumerable agencies in different lines and had given up only one to continue business in other lines. Loss of an agency, it was observed, was in the normal course of business and a part of normal business, therefore, the amount received as compensation was revenue in nature. At the same time, it was accepted that the compensation paid/ received on account of a restrictive covenant for a specified period on which the assessee had undertaken not to take up competitive agency was a capital receipt and therefore, not taxable. 14.³. In Alembic Chemical Works Co. Ltd., on facts, it was observed that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. That the further circumstance that the agreement pertained to a product already in the line of the established business of the assessees and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee. In the above context, it was held that the expenditure was in the nature of a revenue expenditure and not capital expenditure. It was further observed that there was no material before the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire existing

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manufacturing operations for the commercial production of penicillin in the assessees existing plant had become obsolete or inappropriate in relation to the exploitation of the new sub-cultures of the high-yielding strains of penicillin supplied by a company, Meiji and that the mere introduction of the new bio-synthetic source required the erection and commissioning of a totally new and different type of plant and machinery. 14.4. Another case which has been discussed by the High Court in the impugned Judgment and relied upon by the appellant–Revenue is Pingle Industries Ltd. In the said case, the majority judgment stated that the payment in question therein was made with a view to acquire a long-term lease and a right to mine stones and the lease was conveyed to the assessee who had to extract the stones and convert them as a stock-in-trade. That the expenditure was incurred towards securing a capital asset from which, after extraction, stones could be converted into stock-in-trade. The payment, though periodic, in fact, was neither rent nor royalty but a lump-sum payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the High Court treated the outgoings as on capital account. On facts, it was observed that the assessee therein had made a down payment of Rs.96,000/- and for the remaining amount for the acquisition of lease had asked for easy terms. The remaining amount was paid every month but it was not for acquisition of the right from month to month. According to this Court “it was really the entire sum chopped into small payments for his convenience.” Hence, the amount could not be described as a business expense, because the outgoings every month were not to be taken as spent over purchase of stones but in discharge of the entire liability to the jagir. This was because the lease was taken to excavate stones from certain quarries in six villages from the quarry situated therein. The assessee had undertaken not to manufacture cement and not to allow any other person to excavate stones in the area of those six villages. The lease was in the nature of exclusive right and a monopoly. In case of any default of the instalment, the contract would be re-auctioned after one month’s notice to the contractor, who would be responsible for any shortfall but would not have the benefit of any extra amount. 14.⁵. Learned ASG also relied upon the judgment in Jalan Trading Co. In the said case, a manufacturing company gave its sole selling agency

C.I.T., DELHI v. BHARTI HEXACOM LTD. 429 [B. V. NAGARATHNA, J.]

to a firm, namely, Jalan Trading Company for two years with a right to renew by an agreement under a deed of assignment. The benefit of the agreement was assigned to the assessee on its payment of 75% of its profit and commission, remuneration and other moneys received under the said agreement or any further agreement. The assessees therein claimed the payment of 75% of their profits in the relevant assessment year as a business deduction. The question was, whether, the payment was a revenue expenditure or a capital expenditure. It was observed, on facts, that the assessee therein was a new company and it had acquired under the contract the right to carry out a business on a long-term basis subject to the renewal of the agreement on payment of 75% of its annual net profits. The question was whether the assessee had acquired a capital asset and therefore, the payment was not admissible as a deduction under Section 10(2)(vii) of the Act. On perusing the clauses of the deed of assignment, this Court held that the payment of 75% of the profits and commission paid under the said agreement was in the nature of a capital expenditure and the same was not allowable as a deduction under the Act. 14.6. Learned senior counsel Sri Datar relied upon four decisions which we shall discuss as under: (a) In Travancore Sugars and Chemicals Ltd. vs. Commissioner of Income-tax, (1966) 62 ITR 566 (SC) (“Travancore Sugars and Chemicals Ltd.”), the facts were that three undertakings run by the Government of Travancore were taken over by a company under an agreement wherein the assets of the three undertakings were agreed to be sold by the Government to the new company. Cash consideration for the sale of the assets of the three undertakings was to be paid and also 20% of the annual net profit subject to a maximum of Rs.⁴⁰,000/- was to be paid to the Government. The said 20% was later reduced to 10% by an amendment of the terms of the agreement. The question was, whether, the said payment was allowable under Section 10 of the Act. The High Court held that the amount constituted a capital expenditure. However, this Court held that the payment in question was in the nature of revenue expenditure for the following reasons: i) The payment was for an indefinite period and had no limitation of time attached to it.

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ii) The payment was related to the annual profits which flowed from the trading activities of the appellant-company and had no relation to the capital value of the assets and; iii) The payment was not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings. This Court held that the real nature of the transaction had to be gathered not only from concerned documents but also from the surrounding circumstances. (b) In M/s. Devidas Vithaldas and Co. vs. C.I.T., Bombay City, (1972) 3 SCC 457, (1972) 184 ITR 277 (SC) (“Devidas Vithaldas and Co.”) this Court was dealing with the question regarding acquisition of a running business and whether, the acquisition of goodwill of the business would amount to an acquisition of a capital asset and the purchase price will be a capital expenditure. This Court also considered the question whether, it would make any difference whether, the consideration is paid in lump-sum, or at one time, or in instalments, distributed over a definite period. It was held that where the acquisition is not of the goodwill itself but for the right to use it, the expenditure would be a revenue expenditure. It was further observed that if the payment is in the nature of royalty it has to be treated as a revenue expenditure. The main reason for holding that the transaction did not amount to the sale of goodwill was that the duration of the payment as also the amount of consideration was indefinite as they depended on the rise and fall in the profits of the business. In the said case, it was observed by a majority of 3:1 that “in distinguishing between capital and revenue expenditure, the courts have applied in different cases different tests. Nonetheless, it is recognised that none of them by itself is conclusive and the determination one way or the other has to be made on the facts and circumstances of each case. However, Sikri, C.J. in his dissenting opinion reasoned that the mode of payment of purchase price of any capital asset cannot convert the capital payment into a revenue payment in

C.I.T., DELHI v. BHARTI HEXACOM LTD. 431 [B. V. NAGARATHNA, J.]

the hands of the vendee. The mode of payment may affect the character of the receipt in the hands of the vendor but as far as the vendee is concerned, what is obviously a capital payment cannot be converted to a revenue payment. However, the majority held that the transaction did not amount to a sale and that the payment of consideration for the use of the goodwill of the business which is indefinite and depends on the profits earned by the company each year can be a revenue expenditure. (c) Reliance was also placed on Sarada Binding works by Sri Datar. In the said case, a registered firm carrying on business as a book binder and publisher had entered into an agreement with “B” under which it obtained the right to run the business of a publication concern for a consideration of a fixed sum of Rs.⁵,000/- per annum plus a sum equivalent to 10% of the net profits of each year of business. The assessee claimed the said amount as a business expenditure. The Madras High Court held that where the transaction in question amounted to a purchase of the business, the consideration paid partly as a fixed annual sum and partly a periodical payment on a certain percentage of the profits earned by the assessee from the said business could not be treated entirely as capital payment. The fixed annual sum payable was a capital payment but the periodical payments of sums which were indefinite depending upon the future profits earned could not be treated as capital in nature. In the said case, the following extract from Wheatcroft’s treatise on The Law of Income Tax, Sur Tax and Profits Tax, was quoted wherein three types of cases where the purchase price may be paid periodically or in instalments and the points of distinction between them were quoted: “First, there are cases where all the payments must be treated as income of the recipient and the payer is entitled to deduct tax on payment and to a deduction in computing his total income. Secondly, there are cases where the payments are all treated as capital and are neither taxable to the recipient nor deductible in computing the payer’s total income. Thirdly, there are cases where

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the payments must be dissected into an income content and a capital content so that the former part is taxable and deductible whilst the latter is not.” On facts, the case before was classified as falling under the third category and it was held that the question, whether, the payment is capital or revenue has to be considered in relation to the facts of each case and the true nature of the payment has to be ascertained from the documents and all the surrounding circumstances with the important features to consider being the nature of the original obligation, the period of time during which the payments are to continue, whether or not they are expressed in the form of instalments of some capital sum and what provisions, if any, are made for commutation. Further, four tests in deciding the question, whether, a particular expenditure is allowable or not were also quoted from the same treatise. The said extract is as under: “In general, however, in order to decide whether some particular expenditure of a trader should be brought into account, four tests, similar to those considered in relation to receipts, should be applied. First, is the expenditure wholly and exclusively laid out for the purposes of the trade? If not, it will be excluded. Secondly, is the expenditure of a revenue, and not of a capital nature ? Unless it is of a revenue nature it will be excluded. Thirdly, may tax be deducted and retained on payment ? If so, it will be excluded. Finally, is there some other special provision of the Income-tax Act which permits, or requires, the payment to be brought in, or left out of account ?” Therefore, in the said case, the Madras High Court held that the payments were of revenue character and that there were no elements present which would justify the court in attributing to the payments a capital character. The payments were fixed with reference to the profits which were indirectly related to the turnover. The payments were not related to any specified sum which was agreed upon by the parties as purchase price of the business. The decision of the Madras High Court was upheld by this Court. (d) Sri Datar has also referred to the decision of this Court in Mewar Sugar Mills Ltd. In the said case, a licence was granted by the then

C.I.T., DELHI v. BHARTI HEXACOM LTD. 433 [B. V. NAGARATHNA, J.]

ruler of Udaipur State for the manufacture of sugar which was to be a monopoly enduring to the assessee’s benefit for thirty two years. One of the conditions was that no permission would be granted to any other person for starting a sugar factory for a period of thirty-two years from the date of the said order. Another condition was that royalty must be charged on the sugar manufactured in the factory. No other tax was to be charged. After the grant of the monopoly, a limited company was floated called the Mewar Industries Ltd. and the company took steps to set up a factory, obtained requisite machinery and installed it. After completion of the factory, production could not be started on account of fi nancial difficulties. As a result, an agreement was entered into with two other persons to acquire from the company all the rights and assets held by it for the unexpired period of twenty-eight years and to run the business in consideration of the payment of 10% of the net profits. Before this Court, two controversies arose, namely, i) relating to the deduction of the payments made by the appellant therein for monopoly rights and ii) concerning the payment to the State of the royalty of the price of sugar manufactured by the company. The challenge to the question as to the disallowance of the payments made by the assessee in respect of the monopoly rights was given up. The only other question being that the payment of 2% royalty on the price of sugar manufactured by the appellant therein was relatable to the monopoly rights and therefore was capital expenditure was considered. It was found that the payment of the 2% royalty on the price of sugar manufactured by the appellant therein had no relationship with the payment referable to the monopoly conferred under the grant. It was observed that on the facts and circumstances of the said case, the expenditure incurred, that is, payment of 2% royalty payment on the sugar manufactured was a revenue expenditure while the payment made in respect of the monopoly rights obtained was of a capital nature.

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The applicability of the judgments discussed hereinabove to the case at hand, shall be examined at a later juncture.

15. A tabular representation outlining the classification of different transactions by this Court in various cases, is as under: S l . Citation Transaction In Classification R e a s o n s f o r No. Question o f t h e classification: Tr a n s a c t i o n in Question by this Court:

1. Assam Ben gal Pa ym e nt m a d e C a p i t a l It was held that the Cement Co. Ltd. vs. by the assessee expenditure expenditure was not Commissioner of for acquiring a part of working or Income Tax, West a lease of mine operational expenses, Bengal, (1955) 27 stone quarries for but was for acquiring ITR 34 (SC). the manufacture a capital asset. The of cement, for a e x p e n di t u r e w a s We s t B e n g a l , period of twenty held to be a capital (1955) 217 ITR 34 years, on payment expenditure although (SC). of yearly rent as it was payable per well as a protection annum, as it protected fee to ward off and gave the right to competition. the assessee to carry on business unfettered by outsiders.

2. Member of L u m p - s u m C a p i t a l It was held that such the Board of pa yme nt ( no n- expenditure payment was not in Agricultural recurring) made the nature of rent, Income Tax, Assam by the prospective but in the nature of v s. Si n d h ur a ni tenant to the capital expenditure Chaudurani, landlord as a s t he sa me w a s (1957) 32 ITR 169 consideration incurred prior to the (SC). for settlement of coming into effect of agricultural land. the landlord-tenant relationship.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 435 [B. V. NAGARATHNA, J.]

3. Pingle Industries L u m p - s u m C a p i t a l That the asse ssee L t d . v s . amount, payable expenditure had acquired through Commis sioner i n i ns t a l m e nt s the long term lease, of Income Tax, for acquiring the right to extract (1960) 40 ITR 67 e x c l u s i v e stones and that the (SC). monopoly rights lease conveyed to the to ex trac t fl ag assessee a part of the stones from land. The lease was certain quarries. held to be a capital asset, which could be converted into stock- in-trade.

4. Commissioner of Re ce i p t of t he Capital receipt Tha t t he su r p lu s Income Tax, U.P. assessee on sale l oom- h our s we r e v s Ma he sh wa ri of loom-hours. disposed of by the Devi Jute Mills assessee and n o Ltd., (1965) 57 ITR intere st rema ine d 36 (SC). t h e r e i n w it h t h e assessee. It was not a case of exploitation of the loom hours by pe rm i tt in g a n additional user, while retaining ownership. Therefore, receipt by sale of loom hours must be regarded as a capital receipt.

5. R.B. Seth P r o s p e c t i n g Capital That 1/20th of the Moolchand licence fee and expenditure licence fee could not Suganchand vs. tender money be claimed as revenue Commissioner of for mica mining ex p en dit ure on a Income Tax, Delhi, rights for a period yearly basis. That the (1973) 3 SCC 257. of twenty years. lease in question was for a long period; the amount paid was for acquiring a right of enduring nature to extract and remove the Mica and bring it to the surface.

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6. CIT, Bombay vs. 7 5 % p r o f i t C a p i t a l T h a t w h a t w a s Jalan Trading Co., sh a r e , p a id a s expenditure conveyed was the (1985) 4 SCC 59. c o n s i d e r a t i o n right to carry on the under a deed of whole business and assignment, for what was agreed to be the right to carry paid was a profit share on business. of 75% every year, as consideration to acquire this right. The fact that the payments were made annually would have no bearing on the nature of the transaction.

7. Commis sioner L u m p - s u m C a p i t a l That the payment of In co m e Tax consideration paid expenditure was for sterilisation vs. Bombay by the assessee of the profit-making Burmah Trading for surrender of apparatus, i.e., the Corporation, export rights in a capital asset. The (1986) 161 ITR forest lease, where pa ym e nt wa s no t 386 (SC). the assessee had only with a view the right to extract to earn profit in a and cut ti mbe r new form, but was and remove them made to structure on pa yme nt of the assessee’s profit- royalty. making apparatus and affected the conduct of business.

8. Aditya Minerals Advance rent for C a p i t a l That the rent paid by Pvt. Ltd. vs. fifteen years to be expenditure the assessee was in Commis sioner paid, calculated the nature of a deposit of Income Tax, at the rate of Rs. and was adjustable (1999) 239 ITR 35/- per month, against the rent of

817. for lease of land each month. Since for ex ca va t ion the rent for the entire of minerals period of lease was a nd s ub sidi a ry paid in advance, the purposes. expenditure would be capital expenditure. Reliance was placed on Pingle Industries Ltd.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 437 [B. V. NAGARATHNA, J.]

9. Enterprising P r o p o r t i o n a t e C a p i t a l A c qui s it i o n of a Enterprises le ase rent paid expenditure leasehold right to vs. Deputy by mining lessee extract minerals. Commis sioner for acquiring of Income Tax, le asehold right (2007) 293 ITR for extracting 437 (SC). m i ne r a l s f r om mineral bearing land.

10. M/s Gotan Lime Royalty paid by R e v e n u e That the lease was Syndicate vs. the assessee per expenditure for excavation of Commis sioner annum in lieu of limestone alone and of Income Tax, a mining lease/ no other rights were (1966) 59 ITR 718 rights to excavate created in immovable (SC). li m es to ne in a property. That the certain area. royalty paid was not a payment for securing enduring advantage but was a payment in order to obtain raw material and hence, was in the nature of a revenue expenditure.

11. Commissioner C o m p e n s a t i o n R e v e n u e That the assessee had of In co m e Tax r e c e i v e d b y receipt innumerable agencies vs. Best and Co. the assessee in different lines and (Pvt.) Ltd. (1966) o n a c c ou nt o f had given up only 60 ITR 11 (SC). cancellation of one on e , t o c o nt i nue of its agencies. busine ss in other lines. Loss of agency was in the normal course of business and a part of normal business, therefore, the amount received as compensation was revenue in nature.

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12Copy pinpoint12. Travancore Sugars Payment of 20% R e v e n u e That the payment and Chemicals Ltd. of the annual net expenditure was to be made for vs. Commissioner profits subject to an indefinite period of In c o m e - t ax , a ma ximum of and had no limitation (1966) 62 ITR 566 Rs.⁴⁰,000/- which of time attached to (SC). was to be paid to it; The payment was the Government related to the annual by the assessee, profits which flowed in addition to a fr om the t r a di n g o ne - t i m e c a s h a c t i v i ti e s o f t he consideration, on appellant-company taking over three and had no relation undertakings run to the capital value of by the Government the assets. of Travancore.

13Copy pinpoint13. Commis sioner C o n t r i b u t i o n R e v e n u e That the assessee did of Income Tax, payab le by the expenditure not become entitled, Bombay City I vs. assessee at the rate even for the period of CIBA India Ltd., of 6% of the net the agreement to the (1968) 69 ITR 692 selling price, to the patents and trademark (SC). Swiss Company, of the Swiss on receiving the Company. That the formula, scientific assessee merely had data, working rules a licence to trade and and prescriptions access to the patents pertaining to the and trademark of the m a nu f a c t ur i n g Swiss Company for and proce ssing the limited period of products of the agreement. discovered and That the asse ssee developed in the did not acquire any Swiss Company’s asset or advantage of laboratories. enduring nature.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 439 [B. V. NAGARATHNA, J.]

14Copy pinpoint14. Jabbar (M.A.) vs. Payment made for R e v e n u e That the lease was for Commis sioner a short term lease expenditure a short period and the of Income Tax, of eleven months expenditure incurred Andhra Pradesh, for quarrying and by the assessee was (1968) 68 ITR 493 to c ar r y awa y, not related to the (SC). sell and dispose ac qu isiti on of a n of s a nd w hi ch asset or of a right was lying on the of enduring nature, surface of a river but merely to obtain bed. stock-in-trade in the form of sand.

15Copy pinpoint15. Lakshmiji Sugar Ex pe nd itu re R e v e n u e That the said Mills Co. Pvt. Ltd. i n c u r r e d o n expenditure e x p e n di t u r e w a s vs. Commissioner construction and incur red for the of Income Tax, development of purpose of providing (1972) 82 ITR 376 ro ad s b e t we en ease of transportation (SC). different sugarcane to the assessee and p ro d uc i ng facilitating the centres and sugar assessee’s business. factories. There was no evidence to show that without such roads, the assessee would be unable to carry on business. Therefore, the expenditure was incurred merely for commercial expediency.

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16Copy pinpoint16. Devidas Vithaldas Purchase price (as R e v e n u e That the transaction and Co. vs. C.I.T., a percentage of Expenditure did not amount to B o m b a y C i t y, profits), paid on the sale of goodwill, (1972) 3 SCC 457. acquisition of a as the du rat ion running business, of the payment as as consideration also the amount of for the right to use consideration was the goodwill of the indefinite as they business. depended on the rise and fall in the profits of the business. It was held that where the acquisition is not of the goodwill itself but for the rights to use it, the expenditure in the nature of royalty would be a revenue expenditure.

17Copy pinpoint17. Mewar Sugar Mills i. Payment made Payment of two That payment of the Ltd. vs. CIT, (1973) by the assessee percent royalty two per cent royalty 3 SCC 143. to acquire on t he sugar on the price of sugar monopoly rights manufacture manufactured by the to manufacture was held to a pp el l ant the rei n sugar in Udaipur; be reve nue had no relationship ex pendit ure with the payment i i. 2% r oya l ty while the in reference to the paid to the ruler payment made monopoly conferred of Udaipur State in respect of under the grant on the price the monopoly of the sugar rights obtained manufactured. was held to be of capital nature.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 441 [B. V. NAGARATHNA, J.]

18Copy pinpoint18. Empire Jute Payment made by R e v e n u e The payment made Co. Ltd vs. the assessees for Expenditure by the assessees for Commis sioner purchase of loom purchase of loom of Income Tax, hou rs , a nd f o r hours was held to be (1980) 124 ITR 1 allotment of hours expenditure incurred (SC). of work per week, as part of the process under a contractual of profit earning. The agreemen t said e xpe nse was between various ca tegorise d as a n mills, restricting outlay of a business the right of every in order to carry it mill to work at full on and to earn profit capacity. out of the expense. It was concluded that the expense was a part of the cost of operating the profi t earning apparatus and was clearly in the nature of revenue expenditure.

19Copy pinpoint19. L.H. Sugar i A s s e s see ’s i. Merely ani. That the assessee’s Factory and Oil contribution contribution towards ac t o f g oo d Mills Pvt. Ltd. vs. towards the citizenship and the constructio n Commissioner of construction of a of a dam, carried not deductible Income Tax, U.P., dam, pursuant to no a dva nta ge for expenditure”. (1980) 125 ITR the request of the the business of the

293. ii. Revenue Collector; assessee. The same expenditure was contributed ii. Exp enditure without any incurred by the obligation to do so assessee towards and was simply an act the construction of good citizenship of roads in the area and hence not around its factory, deductible. under a Sugarcane Development ii. That construction of Scheme floated around the assessee’s by the State factory would Government. be c onsi derabl y advantageous to the business of the assessee as it would facilitate transport

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of sugarcane into th e facto ry and manufactured su ga r ou t of t he f a c t o r y. H e n c e , suc h exp end iture was i ndu bi tabl y connected with the business activity of the assessee.

20Copy pinpoint20. Commis sioner E x p e n d i t u r e R e v e n u e That the advantage of Income Tax incurred by the expenditure secured by the vs. Associated as s ess ee unde r assessee by making C e m e n t a tripartite the ex penditure Companies Ltd., agreement with the wa s the s ec uri ng (1988) 172 ITR State Government of a b s ol ut i o n o r 257 (SC). and Municipality immunity from of Shahabad, liabil ity to pay to supply water municipal rates and and electricity to taxes for a period of Shahabad and to fifteen years. If these concrete the road liabilities had been from the factory to paid, the payments the railway station. would have been on In consideration of revenue account and these amenities to hence the advantage be provided by the secured was in the assessee company, field of revenue and the assessee not capital. As a result secured immunity of the expenditure from payment for there was no addition a pe ri od of 15 to the capital assets of years. the assessee company and no change in its ca p it a l st ruc ture . The pipelines which came into existence as a result of the expenditure belonged to the Municipality.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 443 [B. V. NAGARATHNA, J.]

21Copy pinpoint21. Alembic Chemical One-time payment R e v e n u e F i r s t , t h a t t h e Works Co. Ltd. made unde r an expenditure e x p e n di t u r e w a s vs. Commissioner agreement with incur red for the of Income Tax, a foreign firm by purpose of existing Gujarat (1989) the assessee to day-to-day business, 177 ITR 377 (SC). obtain technical i.e., manufacture of know how, for penicillin and not increasing yield for an entirely new of penicillin in its venture unconnected existing plant with or different from the a condition to keep existing business; the said know-how Second, that given the confidential rapid advancements in the field of medicine, a degree of du rab ility and permanence cannot be attributed to the technical knowhow, particularly when it is not a case of exclusive acquisition.

22Copy pinpoint22. Jonas Woodhead i. Payment T h e Under the agreement and Sons. made towards consol idated w i t h the f or e ig n India Ltd. vs. accessing the payments company, what was Commis sioner know-how made were set up by the assessee of Income Tax, and technical ap p or t i o n e d was a new business (1997) 224 ITR in for ma ti on and 25% an d the foreign 342 (SC). regarding the t h e r e o f w as company had not only setting up of a held to be in furnished information plant; the nature and technical know- of capital how but had also ii. Pa y m e nt i n ex pendit ure rendered valuable the f orm of while 75%, services in the setting royalty for the payable on up of the fac tory services to be services, it s el f. Tha t e ve n re nder e d to w as h e l d t o after expiry of the the assessee be re venue agreement there was by the foreign expenditure. no embargo on the firm. assessee to continue to manufacture the product.

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23Copy pinpoint23. Commissioner E x p e n d i t u r e R e v e n u e That the asset of Income Tax incurred by expenditure created, though of vs. Madras Auto the assessee on an enduring nature, Services Pvt. Ltd., demolishing an did not belong to the (1998) 233 ITR existing building assessee. 468 (SC). and constructing a new building, during the subsistence of a 39 year lease, whereafter, the assessee continued to be a lessee in the building which belonged to the lessor.

24Copy pinpoint24. Honda Siel Cars Lump-sum fee Revenue That the payment India Ltd. vs. payable by the expenditure was made by the Commissioner assessee to M/s assessee, not to of Income Tax, Honda Motors set up the plant to Ghaziabad, (2017) Company Ltd., manufacture Honda 8 SCC 170. Japan in five cars but so as to continuous obtain the licence instalments after to manufacture commencement Honda cars in India, of commercial which were its stock production of in trade. That the Honda cars by agreement was the assessee, framed in a manner under a licensing as to give licence and technical for a limited period, assistance having no enduring agree ment nature. between the parties.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 445 [B. V. NAGARATHNA, J.]

Details of certain decisions of various High Courts, which have also been considered are presented in the table hereinbelow: S l . Cause Title and Transaction in Classification of Reasons for No. Citation Question the Transaction classification: in question by the High Court:

1. Mohan Meakin Annual payment C a p i t a l That but for the Breweries made to the State expenditure licence so obtained, Ltd. vs. towards licence the assessee could Commissioner fee for working/ not have established of Income operating of a the distillery. Tax, (1997) distillery. 220 ITR 878. (High Court of Himachal P r a d e s h , Shimla)

2. Commissioner i. Payment made i. The That payments of Income by the assessee, expenditure calculated as a Tax vs. Sarada of a fixed sum of i n c u r r e d certain percentage Binding Works, Rs. 5000/- per towards the of profits of a (1976) 102 ITR annum to acquire right to run business for an 187 (Madras the right to run the business of indefinite period High Court) the business of ‘Chandamama of time cannot be ‘Ch an da mama Publications’ treated as payments Publications’; was held to by instalments of ii.Royalty paid be Capital a capital sum. The annually on sales expenditure; payment of royalty equivalent to 10% ii. was related to the of the annual net Royalty was future profits of the profits. held to be in assessee and had the nature no nexus with the of revenue capital sum. expenditure.

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3. Commissioner i. Payment of i. T e c h n i c a l That by making of Income Tax technical collaboration a payment of vs. Southern collaboration/ fee was held royalty, the assessee Switch Gear technical to be capital had acquired an Ltd., (1984) aid fees by expenditure; exclusive privilege 148 ITR 272 the assessee ii. 25% of the to manufacture and (Madras High to a foreign royalty was sell the products. Court) company; held to be Therefore, the said D e c i s i o n ii. Royalty capital in expenditure was to affirmed by payable in five nature, while be treated partly as this Court instalments for 75% was capital and partly in Southern the acquisition stated to revenue. The value Switch Gear of an exclusive be revenue of the royalty related Ltd. vs. CIT, privilege of expenditure. to the acquisition (1998) 232 ITR manufacturing of the right of 35 (SC). and selling the enduring nature products. was estimated at 25% and treated as capital expenditure, while the rest was stated to be revenue expenditure.

4. CIT vs. Saw Service charges Revenue That the service Pipes Ltd., paid by the expenditure lines did not (2008) 300 assessee to belong to the ITR 35 (High Maharashtra assessee but to the Court of State Electricity MSEB and were Delhi) Board (MSEB) laid out to enable to set up a the assessee service line to conduct its for supplying business more e l e c t r i c i t y, effectively. Hence, as part of an the same was arrangement to be regarded wherein the as revenue ownership of expenditure. the cables would remain with the MSEB.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 447 [B. V. NAGARATHNA, J.]

5. CIT vs. J.K. Payment made R e v e n u e That the assessee Sy n th e ti c s , by the assessee expenditure only acquired (2009) 309 under an “access” to ITR 371 agreement to the technical (High Court access technical information of Delhi) informat ion which related of a foreign to the process co mpa ny, of manufacture, whereby there which was not would be no related to any transfer of secret process ownership of or intellectual the know-how property rights. in favour of the The products in assessee, and question were the access was already being granted on a manufactured non- exclusive by the assessee basis. and the know- how would only increase the assessee’s p r o f i t a b i l i t y. Therefore, the expenditure would be in the nature of revenue expenditure.

6. Commis- Royalty pay- R e v e n u e That since royal- sioner of In- able annually by expenditure ty was payable on come Tax vs. the assessee, on the quantity of the Sharda Mo- the number of good produced, tors, (2009) pieces manufac- the same would be 319 ITR 109 tured, to a Ko- revenue expendi- (High Court rean Co. which ture. of Delhi) had provided technical know- how to the as- sessee.

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7. CIT vs. Modi R o y a l t y Revenue expen- That notwith- Revlon Pvt. cons i de rat i on diture standing the fact Ltd., 2012 paid by the that the assessee SCC OnLine a s s e s s e e was the sole licen- Del 4463 annually, as cee of the brand (High Court a percentage within a given of Delhi) of sales price, territory, expen- to Revlon diture would be Mauritius Ltd. revenue in na- for supply ture because the of technical ownership of the know-how to brand continued manu fa cture to be with Revlon goods. Mauritius. That there was nothing in the agreement suggestive of any vesting of the know-how or part of it, or the good- will of the brand, in the assessee.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 449 [B. V. NAGARATHNA, J.]

453. In the said case, Lord Greene stated that if the sum payable is not in the nature of revenue expenditure, it cannot be made so by permitting it to be paid by annual instalments. The payments by instalments in respect of monopoly value do not have the quality of annual payments or the grant of the annual excise licence, but are of a different character altogether. 16.⁵. Viscount Haldane however, in John Smith & Son vs. Moore, (1921) 12 T.C. 266, suggested another test- the test of fixed or circulating capital. Fixed capital being what the owner turns to profit by keeping in his possession; circulating capital is what the assessee makes profit from by parting or letting the product/asset change hands. However, in the said case, it was observed that the demarcation line between assets out of which profits were earned and the profit made upon assets or with assets, was thin and difficult to draw in several cases. 16.6. It was clarified in Mallet vs. Staveley Coal and Iron Co., (1928) 2 K.B. 405 (“Mallet”) that where the expenditure is to bring into the hands of the company a necessary ingredient of their existing business, which is important but still ancillary to the business, the expenditure is to be debited

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to the circulating capital rather than to the fixed capital, which is employed in and sunk in the permanent assets of the business. 16.7. The test of fixed or circulating capital was also adopted by Lord Hanworth, M.R. in Anglo-Persian Oil Co. vs. Dale, (1932) 1 K.B. 124 (“Dale”) wherein it was observed: “I am inclined to think that the question whether the money paid is provided from the fixed or the circulating capital comes as near to accuracy as can be suggested.” In further elucidation of the principle, it was laid down as follows: a) The expenditure is to be attributed to capital if it be made “with a view” to bringing an asset or advantage into existence, however, it is not necessary that it should always achieve the intended result in order to be held to be capital in nature. Thus the sum spent in trying to procure an agency agreement or a licence, may be capital expenditure though the intended agency or licence may not be ultimately secured. b) By ‘enduring’, it is meant “enduring in the way that fixed capital endures” and it does not connote a benefit that endures in a sense that for a good number of years it relieves the assessee of a revenue payment. However, in Van Den Berghs, Limited vs. Clark (H.M. Inspector of Taxes), (1935) 19 T.C. 390, Lord Macmillan veered round to the test of enduring benefit and expressed reservations regarding the test of fixed and circulating capital. That “where the character of the expenditure shows that what has resulted is something which is to be used in the way of business, the test may be useful; but in cases close to the dividing line, the test seems useless.” 16.8. A third test was propounded in Robert Addie & Sons Collieries Ltd. vs. Commissioners of Inland Revenue, (1924) 8 T.C. 671, while determining whether a given expenditure is capital or revenue in nature: “Is it part of the Company’s working expenses, is it expenditure laid out as part of the process of profit-earning? or, on the other hand, is it a capital outlay, is it expenditure necessary for the acquisition of

C.I.T., DELHI v. BHARTI HEXACOM LTD. 451 [B. V. NAGARATHNA, J.]

property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all?” The said test was adopted by the Privy Council in Tata Hydro- Electric Agencies Ltd., Bombay vs. Commissioner of Income-tax, (1937) L.R. 64 IndAp 215 wherein it was stated that the expenditure which is part of the working expenses in ordinary commercial trading was not capital but revenue. It was further observed that the determinative question would be whether the expenditure is “a part of the company’s working expenses; is it expenditure laid out as part of the process of profit earning ?” Referring to the facts of the said case, the Privy Council came to the conclusion that the obligation to make the payments was undertaken by the appellants therein in consideration of their acquisition of the right and opportunity to earn profits, i.e., of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. The distinction was thus made between the acquisition of an income- earning asset and the process of the earning of the income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of the earning of the profits was revenue expenditure. It was further observed that on acquisition of a business and when a liability to pay yearly sums is taken over, those yearly sums were not deductible in computing future profits for tax purposes, as they form a part of the consideration for the acquisition of the business. 16.9. A similar guideline was expressed in Sun Newspapers Limited and the Associated Newspapers Limited vs. The Federal Commissioner of Taxation, (1938) 61 C.L.R. 337, wherein it was stated that the expenditure incurred towards establishing, replacing and enlarging the profit yielding subject must be contrasted with the continual flow of working expenses, which ought to be supplied continually out of the returns of revenue. While the former category of expenditure would be capital in nature, the latter would be revenue. It was further held that while applying the ‘enduring benefit’ test the words, ‘permanent’ or ‘enduring’ are not to be understood to mean ever-lasting. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole.

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16.10. Certain supplementary tests have been laid down by the Judicial Committee in Mohanlal Hargovind of Jubbulpore vs. Commissioner of Income Tax, (1949) L.R. 76 IndAp 235 wherein the assessee had paid for purchasing tendu leaves from the forest, which right included the right of entry and coppicing and pollarding. The said expenditure was for acquiring the raw materials for the manufacturing business and thus a capital expenditure. In the said case, the assessee was a paid manufacturer who had obtained short-term contracts with the Government and other forest owners to obtain tendu leaves from the forests. The Judicial Committee held that these contracts were, in a business sense, for the purpose of securing supplies to the manufacturers of one of the raw materials of his business. They granted no interest in land or the plants or trees and therefore, the expense incurred in this regard was not a capital expenditure.

17. A study of the aforesaid decisions of the Courts of England would reveal that the following factors have guided the Courts in the said jurisdiction in determining the nature of transactions: i. Periodicity of payments: In the broadest sense, capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which will incur every year. However, expenditure which is not ‘once and for all’ may nevertheless be capital. Expenditure of a recurring nature on the acquisition of assets which are clearly fixed rather than circulating capital, remains capital. Moreover, an outgoing does not cease to be of a capital nature merely because it is payable in instalments, vide CIR vs. Adam, (1928) 14 T.C. 34. The test is therefore to determine, whether, the payment is made as a matter of such frequent recurrence that it is a part of ordinary working expenditure, Bonner vs. Basset Mines Ltd., (1912) 6 T.C. 145. ii. Object of the expenditure: The Atherton test looks to the purpose or motive of expenditure. For expenditure to be capital it must be spent for the acquisition, improvement or disposal of a capital asset, vide Rolfe vs. Wimpy Waste Management Ltd., (1989) 62 T.C. 399; Tucker vs. Granada Motorway Services Ltd., (1979) 53 T.C. 92 (“Tucker”); Mallet, respectively. However, the relationship between the expenditure and the acquisition,

C.I.T., DELHI v. BHARTI HEXACOM LTD. 453 [B. V. NAGARATHNA, J.]

improvement or disposal of a capital asset must be proximate and not remote. For instance, payment made to staff could not be said to be payment made for acquisition of goodwill and hence capital in nature, although, the staff by serving well may help create the goodwill, vide Lawson vs. Johnson Matthey Plc., (1992) 65 T.C. 39. iii. Identifiable asset test: It is necessary to identify a specific capital asset for which the expenditure is incurred, vide Tucker. When the asset is an intangible benefit (licences, trading agreements etc.) it will be necessary to ask whether the identifiable asset is of a sufficiently substantial and enduring nature to count as capital, vide Dale; CIR vs. Carron Company, (1968) 45 T.C. 18; Heather vs. PE Consulting Group Ltd., (1972) 48 T.C. 293. iv. Expenditure on commercial advantages generally: Expenditure on commercial advantages dependent on a particular trading relationship is likely to be capital only if a permanent advantage, such as the closing down of a potentially damaging competitor, is secured by the payment, Walker vs. The Joint Credit Card Co., (1982) 55 T.C. 617. However, expenditure which is incurred towards general business convenience (such as to facilitate transport, supply-chain management, obtain temporary advantage over a competitor etc.) is of revenue nature, CIR vs. Nchanga Copper Mines, (1964) 1 All ER 208 (“Nchanga Copper Mines”). v. Effect, if any, of the expenditure on the profit-making structure: The question to consider is, whether, the payment was made with a view to earn profit in a new form, or to structure the assessee’s profit making apparatus. While the former category of expenditure would be revenue in nature, the latter would be capital.

18. The test that was adopted, almost universally, in the early decisions in India, is akin to the one laid down by Viscount Cave L.C. in Atherton. 18.1. In Commissioner of Income Tax, Bombay vs. Century Spinning, Weaving and Manufacturing Co., (1942) 10 ITR Suppl., M.C. Chagla J. observed that the legal touchstone which is most familiarly applied in the Indian context is that of Viscount Cave in Atherton’s case.

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18.². In Benarsidas Jagannath, In re, (1946) 15 ITR 185, a Full Bench of the Lahore High Court attempted to reconcile the tests referred to hereinabove and deduced the following broad tests for distinguishing capital expenditure from revenue expenditure: “It is not easy to define the term ‘capital expenditure’ in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. They are as follows :-

1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company (1927) 13 T.C. 1, 14). In City of London Contract Corporation v. Styles ((1887) 2 T.C. 239), at page 243, Bowen, L.J. observed as to the capital expenditure as follows : “You do not use it ‘for the purpose of’ your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.”

2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. ((1925) 10 T.C. 155). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. The expressions ‘enduring benefit’ or ‘of a permanent character’ were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 455 [B. V. NAGARATHNA, J.]

3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.”

19. It may be useful at this juncture, to attempt to cull out the broad principles/tests that have been forged and adopted by this Court from time to time, while determining whether a given expenditure is capital or revenue in nature: i. Capital expenditure is one met with a view to bring into existence an asset for the enduring benefit of the trade. However, this rule is not applicable in every case. The nature of the advantage acquired has to be considered in the commercial sense and only when the advantage is in the capital field, deduction on the said expenditure could be disallowed by applying the enduring benefit test. If the advantage consists merely of facilitating trading operations or enabling the management or conduct of business more effectively or profitably, while leaving the fixed capital untouched, the said expenditure would be on revenue account, though the advantage may endure for an indefinite period, vide Empire Jute Co. Ltd. Therefore, the enduring benefit test is not conclusive and cannot be mechanically applied without considering the commercial aspect of the transaction involving the expenditure in question. ii. Where the expenditure is made for the initial outlay or for extension of a business, or a substantial replacement of the equipment, it is capital expenditure. If the expenditure is for running the business or working it with a view to produce profits, it is revenue expenditure, vide Assam Bengal Cement Co. Ltd. What also follows from this test is that expenditure which relates

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to the very framework or structure or edifice of the taxpayer’s business is capital expenditure. iii. The fixed and circulating capital test provides that where the expenditure is to bring into the hands of the assessee a necessary ingredient of their existing business, which is important but still ancillary to the business, the expenditure is to be debited to the circulating capital (revenue account) rather than to the fixed capital (capital account). iv. Where there is no enlargement of the permanent structure or of capital assets and the expenditure essentially relates to the operation or working of the existing apparatus, such an expenditure would be on revenue account, vide Empire Jute Co. Ltd. v. The question as to whether an expenditure is capital or revenue in nature is to be judged in every case in the context of business necessity or expediency. The first aspect to be considered is whether, the expenditure is a part of the assessee’s working expenditure or a part of profit earning. Further, an inquiry must be made as to, whether, the expenditure was necessary to acquire a right of permanent character, the possession of which is a condition precedent for carrying on a particular trade. In the event that the answer to the first question is in the negative and the second question is in the affirmative, the expenditure is inarguably capital in nature. In this context, we are of the view that the decision of this Court in Alembic Chemical Works Co. Ltd. must turn on its own peculiar facts. vi. Thus, the aspect to be considered is whether the expenditure is incurred for the purpose of the existing day-to-day business of the assessee, or with a view to commence an entirely new venture. Where the expenditure incurred is merely to enhance the productivity or profitability of an existing business, without making significant changes to the structure of the assessee’s profit making apparatus, the same is revenue in nature. Alembic Chemical Works Co. Ltd. was decided on the above premise.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 457 [B. V. NAGARATHNA, J.]

vii. It is not necessary that in all cases, once and for all payment would result in an enduring benefit, nor it is a firm rule that periodical payment would not carry with it an enduring benefit. viii. Mere payment of an amount in instalments does not convert or change a capital payment into a revenue payment. Similarly, lump-sum payment can represent revenue expenditure if it is incurred for acquiring circulating capital though payment is made once and for all. Likewise, payment made in instalments can be for acquiring a capital asset, the price of which is paid over a period of time. Therefore, what is relevant is the nature of the original obligation and whether the subsequent payment made in instalments relates to or has a nexus with such original obligation or not. Where the subsequent payments, are towards a purpose which is identifiably distinct from the original obligation of the assessee, the same would constitute revenue expenditure. However, where each of the successive instalments relate to the same obligation or purpose, the cumulative expenditure would be capital in nature. ix. The general principle that expenditure on the creation of a capital asset is on capital account applies only where the capital asset belongs to the assessee. An amount spent by the assessee may be deductible on revenue account even if it results in the acquisition of a capital asset by a third party, vide L.H. Sugar Factory and Oil Mills Pvt. Ltd. vs. Commissioner of Income Tax, U.P., (1980) 125 ITR 293. x. Another pertinent question to consider is, whether, the expenditure is incurred towards purchase of an asset, or merely of the right to use the asset for a given period of time on payment of a certain consideration for the period of intended use, vide Devidas Vithaldas and Co. Where the asset is not purchased or is not vested with the assessee, but the assessee has simply acquired a right to use the asset, the payment would be of revenue nature, vide CIT vs. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 (“Modi Revlon Pvt. Ltd.”).

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Payment of royalty:

20. In the present case, before considering the issue as to categorisation of the variable licence fee payable as a percentage of gross revenue, it is also necessary to understand the distinction between a payment made to acquire a right, and payment of royalty in a broad sense. Stated in the most simplistic manner, acquisition of a right would mean purchase of an asset, tangible or intangible, for the enduring advantage of the purchaser. When a right is said to be acquired, it means that the ownership of the said right vests with the purchaser. By contrast, payment of royalty is to use a right or asset. The right or asset is not per se acquired by the person or entity authorised to use it but continues to vest with the owner of the right. In case of royalty, payment is made merely to secure the right to use an asset for a stipulated duration. When the payment of royalty ceases, in most cases, the right to use the asset also ceases. Most often, the amount of royalty to be paid is dependent on the annual sales vide Commissioner of Income Tax, Bombay City I vs. CIBA India Ltd., (1968) 69 ITR 692 (SC) (“CIBA India Ltd.”); Modi Revlon Pvt. Ltd.; annual profits vide Travancore Sugars and Chemicals Ltd.; or such other variable. Further, in order to qualify as royalty, the payment must have no nexus with the acquisition of a capital asset, vide Travancore Sugars and Chemicals Ltd.; Mewar Sugar Mills Ltd. 20.1. The decision of this Court in Gotan Lime is highly instructive while attempting to draw a distinction between payment made to acquire a right, and payment of royalty for use of a right or asset. In the said case, this Court considered the issue as to the classification of the annual payment made by the assessee therein, in lieu of the right to excavate limestone in a certain area. This Court, while holding that the payment in question therein was revenue expenditure, reasoned that the payment was not for securing an enduring advantage but was a royalty payment in order to obtain raw material and hence, a revenue expenditure. The pertinent observations of this Court are extracted hereinunder: “We are of the opinion that in the present case the royalty payment is not a direct payment for securing an enduring advantage; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment; but the fact that there is no lumpsum payment here cannot by itself lead to the conclusion that

C.I.T., DELHI v. BHARTI HEXACOM LTD. 459 [B. V. NAGARATHNA, J.]

yearly payments to be made under the mining lease have relation to the acquisition of the advantage. No material has been placed on the record as to how any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease.” The above dictum is clear on the aspect of the distinction between payment made to acquire a right and payment of royalty inasmuch as it lays down in express terms that if a payment is made, not towards securing an enduring advantage or asset, but towards a right to use an asset, the same would be royalty. It has further been stated in no unclear terms that where a payment is not referrable to the acquisition of a capital asset (particularly, mining lease in the said case), but only secures a right to use the asset, the same would be royalty and hence classifiable as a revenue expenditure. 20.². Relying on the decision in Gotan Lime, this Court in Mewar Sugar Mills Ltd. while considering a transaction wherein the assessee therein paid: (a) Lump-sum payment to acquire monopoly rights for manufacture of sugar in Udaipur; and (b) payment to the ruler of Udaipur State, at the rate of 2% of the price of the sugar manufactured, held that the payment of the 2% royalty on the price of sugar manufactured by the appellant therein had no relationship with the payment referable to the monopoly conferred under the grant and hence, it was in the nature of revenue expenditure. 20.³. Another ingredient of payment as royalty is that in most cases, it relates to and is dependent on the profit earned or sales made by working an asset, rather than the acquisition of the asset itself. Such periodic payments, particularly those which are based on turnover of profit and which are not related to any predetermined lump-sum are towards royalty and correctly deductible as revenue expenditure. 20.4. In CIBA India Ltd., this Court held that payments made for the right to have access to technical knowledge and the fruits of continuing research and experience of a foreign company and to use its patents and trademarks would be chargeable on revenue account. This would demonstrate that even where technical know-how is a capital asset, amounts paid for its mere use, or for the use of a trademark, trade name or the right to manufacture and sell certain goods, are allowable as revenue expenditure

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in the nature of royalty as the payment is made for the use of the asset and not for its acquisition. In such cases, the payment of royalty, has no relation to the capital value of the asset authorised to be used.

21. In our view, the following considerations are immaterial in determining the question, as to, whether, a payment is a capital disbursement or in the nature of a revenue expenditure: i. Lump-sum and periodical payment: Lord Greene in Inland Revenue vs. Williams, 11 ITR Suppl. 84 famously remarked, “There is no magic in the distinction between a lump-sum and periodic sums”. That the expense is a periodic expense or a lump-sum payment is immaterial for the purpose of determining its nature. A lump-sum payment may be revenue expenditure, for instance, when it represents the commutation of a series of annual revenue payments; and a recurring periodic payment may be capital expenditure, for instance when it represents the payments by instalments of a capital sum, vide Assam Bengal Cement Co. Ltd. ii. Magnitude of payment: The magnitude of a disbursement is immaterial for the purpose of determining its nature, for, magnitude is a relative term, vide Prendergast vs. Cameron, 8 I.T.R. Suppl. 75 (HL). iii. Entries in books of accounts: That an item of expenditure is debited in an entity’s books of account to revenue account is by no means conclusive of its nature. Businesses frequently prefer to debit to the revenue account, payments which are in their nature to be carried to capital account. Conversely, an assessee may be entitled to a revenue deduction in respect of expenditure which is capitalised in the accounts, vide India Cements vs. Commissioner of Income Tax, 60 I.T.R. 52 (SC).

22. In considering whether an item of expenditure is of a capital or revenue nature, we reiterate that one must consider the nature of the concern, the ordinary course of business usually adopted in that concern and the object with which the expenditure is incurred, vide Assam Bengal Cement Co. Ltd. Attention must be paid not only to the form of the transaction, but also its

C.I.T., DELHI v. BHARTI HEXACOM LTD. 461 [B. V. NAGARATHNA, J.]

substance. Where the transaction takes the form of a contract or other deed, it depends upon a proper construction of the terms of the contract whether a payment made thereunder is a capital disbursement or revenue expenditure. The true nature of a transaction must be gathered by placing emphasis on the business aspect of the transaction. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from the practical and business point of view. This aspect of the transaction is then, to be reconciled with juristic classification of the legal rights, if any, secured, employed, or exhausted in the process. 22.1. Therefore, what is material is the nature of right sought to be secured through the payment or transaction in question. The purpose towards which the expenditure is incurred must guide any attempt to categorise the expenditure. The structure or form of the transaction or the payment schedule is hardly suggestive of the nature of the transaction. Therefore, it cannot be axiomatically held that an expenditure which in its core, capital in nature, is actually to be treated as a revenue expenditure simply because the payment is structured in instalments. 22.². The determinative test to identify whether an expenditure structured in the form of instalments is in the nature of a capital expenditure or revenue expenditure, would be to first assess whether the payment made either in lump-sum or in instalments relates to the acquisition or expansion of a capital asset, or by contrast, relates to the working of an asset to produce profits; whether the consideration payable towards the acquisition or expansion of a capital asset has simply been chopped up into smaller sums payable in instalments, for the sake of convenience. The dictum of this Court in Pingle Industries Ltd., is relevant in this regard. In the said case, the majority judgment stated that the payment in question therein was made with a view to acquire a long-term lease and a right to mine stones, and the lease was conveyed to the assessee who had to extract the stones and convert them as a stock-in-trade. That the expenditure was incurred towards securing a capital asset from which, after extraction, stones could be converted into stock-in-trade. The payment, though periodic, in fact, was neither rent nor royalty but a lump-sum payment in instalments for acquiring a capital asset of enduring benefit to the assessee’s trade. According to this Court “it was really the entire sum chopped into small payments for his

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convenience.” Hence, the amount could not be described as a business expense, because the outgoings every month were not to be taken as spent over purchase of stones but in discharge of a singular original obligation to the jagir. These observations clearly establish the difference between a revenue expenditure on the one hand and capital expenditure incurred in instalments on the other hand. 22.³. Similarly, in Jalan Trading Co., this Court while considering the issue as to classification of periodic payments of 75% profit share, as consideration under a deed of assignment, for the right to carry on business, held that the same would be capital expenditure. It was observed that the assessee therein was a new company and it had acquired under the contract the right to carry on a business on long- term basis subject to the renewal of the agreement on payment of 75% of its annual net profits. That since the assessee had acquired a capital asset (right to carry out the business of the assignor), any payment made towards securing such a right would be capital in nature. This dictum would clearly demonstrate that when an expenditure is in its core capital in nature, neither the fact that the same was paid in instalments, nor the fact that the quantum of expenditure was dependent on the revenue or profit of the assessee, would warrant a change in the classification of the transaction.

23. Before proceeding to consider the facts of the present case in light of the precedents discussed hereinabove, it is necessary to preface our views by stating that it is perhaps one of the most familiar arguments in Courts (particularly in matters involving an issue as to classification of expenditure or receipts), that the case at hand bears close resemblance to another case falling on one or the other side of the line, and must therefore be decided in the same manner. This thought was conveyed by Lord Radcliffe in Nchanga Copper Mines wherein it was pointed out that “in considering allocation of expenditure between capital and income accounts, it is almost unavoidable to argue from analogy.” In that context, we must highlight the difficulty of relying on any single precedent in search for the true classification, and attempting to draw similarities between the facts of the said case and the facts of the case at hand. We think that the propositions made in earlier cases, if sought to be applied to a different case which the authors of those propositions did not have in mind, could lead to absurd results.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 463 [B. V. NAGARATHNA, J.]

Further, it is trite that the words in a judgment must not be construed in the same manner as those in a legislation. Hence, it is neither wise nor suitable to extend the dictum of one case, premised on the facts of the said case, to another fact-situation which is seemingly similar but not really so. This is particularly so when there is no precedent which has been rendered in an identical fact situation, as is the case in the instant matters. 23.1. In such situations, the solution may not be found in any one precedent. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, while some to the other. It is an appreciation of all guiding factors, premised in common business sense, which must provide the ultimate answer, rather than mere analogy or comparison. It is with such an approach that we shall proceed to consider the facts of the case at hand in light of certain precedents referred to or/and relied upon by the High Court of Delhi as well as those cited at the Bar. 23.². We also wish to refer to the dictum of the King’s Bench Division in Commissioners of Inland Revenue vs. Ramsay, 20 T.C. 79. The facts of the said case were that the assessee therein agreed to purchase a dental practice for a primary consideration of £15,000 subject to increase or diminution as therein provided. The primary price was to be satisfied by payment of £5000 on the exchange of the agreement, and as to the balance, by payment each year for ten years of a sum equal to 25% of the net profits of the practice for each year. If the amounts so paid over the ten years, were in the aggregate, more or less than the balance of the primary purchase price, that price was to be treated as correspondingly increased or diminished. The Court while considering an issue as to the classification of the payments made each year held that the annual sums paid under the agreement, were instalments of capital and were not admissible as revenue deductions. 23.³. Similarly, as discussed hereinabove, this Court in Jalan Trading Co. had the occasion to consider the issue pertaining to classification of an annual payment based on profit sharing towards the right to carry on business. This Court concluded that since the annual payment of 75% profit share was paid by the assessee in consideration of the right to carry on the business of the assignors, the payment would be capital in nature. In doing so, this Court examined the contention of the assessee therein that, since what was

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paid as consideration was not a pre-determined lump-sum amount but an annual payment out of profits, such a payment should be held to be revenue in nature. The three-Judge Bench of this Court rejected the said contention suggesting that when an expenditure is in its core capital in nature, neither the fact that the same was paid in instalments, nor the fact that the quantum of expenditure was dependent on the revenue or profit of the assessee, would warrant a change in the classification of the transaction. This judgment will apply on all fours in deciding the case at hand, since the annual payment of variable licence fee is only towards licence fees and merely because it is paid in annual instalments based on the AGR, the payment cannot be construed as revenue. The annual payments of licence fee as also the entry fee relate to a singular purpose, i.e., the acquisition of the right to carry on the business of rendering telecommunication services. This right being in the nature of a capital asset, any payment(s) made towards the acquisition of the right, whether in lump-sum or in annual instalments dependent on the AGR, would be in the nature of capital disbursement(s). 23.4. This conclusion is also consistent with the view of this Court in Pingle Industries Ltd., wherein by a majority of 2:1 held that the payment, towards acquisition of a long-term lease to win mine stones, though periodic, was neither rent nor royalty but a lump-sum payment in instalments for acquiring a capital asset of enduring benefit to trade. This Court refused to hold that the periodic payments were towards purchase of stones, but instead opined that the payments were in discharge of a singular original obligation to the jagir. Therefore, it emerges that where the periodic payments are referrable to or have a nexus with the original obligation undertaken by the assessee as consideration for acquisition of a right, the periodic payments would be in the nature of capital expenditure, notwithstanding the fact that they are payable as a percentage of profits, gross revenue or sales.

24. Hence, we are of the considered view that in the present case, since the entry fee as well as variable licence fees are traceable to the same source, they would both have to be held to be capital in nature, notwithstanding the fact that the variable licence fee is paid in a staggered manner. We shall consider the case law sought to be relied upon by the learned senior counsel and learned counsel for the respondents-assessees, so as to distinguish the same from the present case.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 465 [B. V. NAGARATHNA, J.]

24.1. We shall first advert to the decision of this Court in Jonas Woodhead and Sons. Paragraph 2 of the said judgment, in no unclear terms captures two underlying transactions arising out of the agreement in the said case; the first transaction relating to the know-how and technical information regarding setting up of the plant and the second transaction relating to the services to be rendered to the assessee by the foreign firm, the consideration for the second prong being in the nature of royalty. It is in that backdrop that the consolidated payment was apportioned and 25% thereof was held to be in the nature of capital expenditure while 75%, payable on services, was held to be revenue expenditure. Further, it is also relevant to note that in the said case the exercise of apportionment into the aforesaid fractions was carried out by the Madras High Court. Against the judgment of the High Court, the Revenue did not prefer an appeal before this Court on the findings pertaining to apportionment of 75% towards services. What was appealed against by the assessee was with regard to categorisation of 25% of the consolidated expenditure as capital expenditure. The assessee alone was the appellant before this Court. Therefore, the question as to apportionment of 75% towards services, was not considered and decided by this Court in the said case. We are of the view that the judgment of this Court in Jonas Woodhead and Sons would not come to the aid of the respondent-assessees because the issue before this Court in the said case did not relate to a single right wherein the payment made towards the same was held to be partly capital and partly revenue. The purpose of payments in the said case was traceable to two different subject matters and therefore apportionment between capital and revenue expenditure. However, in the present case, the entry fee as well as variable licence fees are traceable to the same source. 24.². Similarly, in Best and Co., this Court decided the nature of expenditure on two separate transactions, though payments made were consolidated in nature. The first transaction related to the compensation paid by the principal for the termination of agency business, while the second was with respect to the payment made towards the non-compete clause. On the first aspect, namely, the compensation received for the loss of agency, it was held that what would be determinative was whether loss of agency would affect the entire business structure, resulting in a loss of

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enduring nature, or, whether it was a loss due to an ordinary incident in the course of business. If it was the former, it would be capital, and if it was the latter, it would be revenue in nature. It was concluded vis-à- vis the first transaction that the loss of the said agency by the assessee was only a normal trading loss and therefore the income received in this regard was a revenue receipt. As regards the non-compete clause it was held that the same was a restrictive covenant and was therefore, capital in nature. In paragraph 14 of the judgment of this Court, it was recorded in unequivocal terms that the “compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt.” Therefore, Best and Co. is a case where two independent transactions were considered, one of which was held as capital and the other as revenue. This case did not decide the expenditure towards the same right to be partly capital and partly revenue. 24.³. We shall now consider the decision of the Madras High Court affirmed by this Court in Southern Switch Gear Ltd. Paragraph 2 of the judgment of the High Court records two distinct transactions: one, for provision of technical know-how for the manufacture of switch gear products and the second, was to share modern developments and also train necessary personnel in the factory in United Kingdom. The consideration was fixed £20,000 payable in five instalments of £4000 each. Paragraph 5 of the judgement of the High Court referred to clause 6 of the agreement which dealt with know-how and clause 7 thereof, which dealt with supervision and direction, besides recommending appointment or dismissal of employees and also training them in the factory. In paragraph 6, it was held that expenditure on technical know-how is capital in nature and should be apportioned at 25% and the services rendered relatable to 75% of the consideration was revenue in nature. When the assessee therein filed an appeal before this Court against the finding that technical know-how is capital in nature and should be apportioned at 25%, the appeal was dismissed. Therefore, it is clear that the said case also did not pertain to one source of expenditure being split, partly as capital and partly as revenue in nature. In the said case, the Courts have examined two different constituents of expenditure and held one component to be capital in nature while the other to be revenue in nature.

C.I.T., DELHI v. BHARTI HEXACOM LTD. 467 [B. V. NAGARATHNA, J.]

24.4. Next, we advert to the facts in Sarada Binding Works on which heavy reliance was placed by learned senior counsel Mr. Datar. The agreement relevant to the said case envisaged conveyances of two aspects: first, the right to run the business of ‘Chandamama Publications’ on payment of a fixed sum of Rs. 5000/- per annum; second, royalty to be paid annually on sales equivalent to 10% of the annual net profits. The High Court held that the right to run the business is capital in nature, whereas, the sharing of 10% profit per annum is revenue in nature. In the concluding paragraph, the High Court made the following firm conclusions as to why 10% profit sharing would constitute a revenue expenditure: i. That payments calculated as a certain percentage of profits of a business for an indefinite period of time as royalty cannot be treated as payments by instalments of a capital sum; ii. The payment of royalty was related to the future profits of the assessee and had no nexus with the capital sum. In the said case, there are clear findings to the effect that the payment of royalty in instalments, in the absence of any definitive duration, cannot be linked to the right to carry on trade. That the payment of royalty had no nexus with the capital sum. However, in the present case, it cannot be said that the variable licence fee payable annually has no nexus with the acquisition of the capital asset, i.e., the licence to render telecom services, as, it is the payment of entry fee as well as the variable licence fees which together enable the assessees to carry on the said business. Hence the aforesaid case would not apply to the present case having regard to its distinct facts. 24.⁵. Sri Datar has also sought to rely upon the decision of this Court in Mewar Sugar Mills Ltd. However, we do not see how this judgment would bolster up the respondents’ case. In the said case, the grant of licence by an agreement dated 05 April, 1932 contemplated two different aspects: first, a monopoly right to cultivate sugarcane and produce sugar, and second, payment of 2% royalty on the price of the sugar manufactured. In that backdrop, this Court held that the payment of 2% royalty on the sugar manufactured was revenue expenditure while the payment made in respect of the monopoly rights obtained was of capital nature. It was observed that payment of the 2% royalty on the price of sugar manufactured by the

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