Deduction for Telecom License Fees

Introduction

Every assessee is entitled to claim the deduction in respect of capital expenditure incurred to acquire a license or spectrum to operate telecommunication services. The deduction is allowed on actual payment basis and in equal installments over the term of the license or the spectrum, as the case may be.

1. Deduction for Spectrum Fees

1.1. Who can claim the deduction?

Any assessee, who incurs any capital expenditure on acquisition of any right to use spectrum for telecommunication services by paying spectrum fee, will be allowed deduction for such spectrum fees.

1.2. How much deduction is available?

1.2-1. In case of upfront payment

The deduction for the spectrum fees shall be allowed in equal installments starting from the year in which the amount is actually paid (or year of commencement of business, whichever is later) and ending with the year in which term of spectrum comes to an end. The deduction shall be allowed irrespective of the tax year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.

1.2-2. In case of deferred payment

If assessee has opted and been allowed by the DoT

Where a deduction is claimed and allowed under this provision, then no deduction of the same expenditure shall be allowed as depreciation under Section 32 for the same tax year or any subsequent tax year.

1.3. Withdrawal of deduction

If assessee has been allowed to opt for deferred payment of spectrum fees and he failed to comply with any of the conditions specified by DoT and DOT terminates the allotment or assignment of spectrum, then the deduction shall be deemed to have been wrongly allowed. In such a case, the Assessing Officer shall re-compute the total income of the assessee for the tax year (in which deduction was claimed and granted) and make the necessary rectification. Such rectification can be done within 4 years from the end of the tax year in which failure takes place. In such case the spectrum fee paid upto the date of termination shall be deemed as the ‘actually paid’ and no reversal shall be made in respect of such payment. The year of transfer shall be deemed as the year in which term of spectrum come to end.

Example, X ltd. has acquired rights to use spectrum in year 00, for a term of 10 year, by opting for deferred payment. It was required to make payment of Rs. 1 cr. in 5 equal annual instalments of Rs. 20 lakh each. After the payment of 2 installments i.e. after the end of year 01, X ltd. fails to comply with the conditions prescribed by the DOT.

Solution:  As per rule 6A of the Income-tax rules, 1962, X ltd. was entitled to claim the deduction for Rs. 1 cr. in 10 equal instalments i.e. Rs. 10 lakhs per year. Since X ltd. fails to comply with the conditions of DOT, provisions regarding rectification will come into force.

As per the clause (a) of section 35ABA(3), the deduction shall be deemed to have been wrongly allowed, i.e. Rs. 10 lakhs for each of the year 00 and 01 will be disallowed.

Clause (b) of the said section prescribes that the Assessing officer shall re-compute the total income of the assessee for said tax year. The manner of such computation is prescribed under the sub rule 2 of the rule 6A.

This rule provides that the payment made upto the termination shall be deemed as the actually paid. Since X ltd. has paid 2 instalments, thus Rs. 40 lakh shall be deemed as the actually paid.

Further the year of failure shall be deemed as the year of termination of the term of spectrum, thus Rs. 20 lakhs will be allowed as deduction in both the year 00 and 01.

Re-computation of income of each year will be made as follows:

2. Deduction for Telecommunication License Fees

2.1. Who can claim the deduction?

Any assessee, who incurs any capital expenditure on acquisition of any license to operate telecommunication services, will be allowed deduction for such license fees.

2.2. How much deduction is available?

The deduction for the license fees shall be allowed in equal installments starting from the year in which the amount is actually paid (or year of commencement of business, whichever is later) and ending with the year in which term of license comes to an end. The deduction shall be allowed irrespective of the tax year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.

Where a deduction is claimed and allowed under this provision, then no deduction of the same expenditure shall be allowed as depreciation under Section 32 for the same tax year or any subsequent tax year.

3. Transfer of License or spectrum

Where a spectrum or license is transferred, whether in whole or in part, following taxability provisions will apply.

3.1. Entire license or spectrum is transferred

If entire license is transferred and proceeds of the transfer are less than the expenditure yet to be amortized, a deduction equal to the expenditure remaining unamortized as reduced by the proceeds of transfer, shall be allowed in the tax year in which the license has been transferred.

If license is transferred and proceeds of the transfer exceed the amount of unamortized expenditure, the excess amount (to the extent it does not exceed deduction claimed under this provision) shall be chargeable to tax as business profits in the tax year in which the license has been transferred. If the business of the assessee is not existing in the year of transfer, such excess shall be taxable as if the business of the assessee is in existence in that tax year.

Further, where proceeds from transfer are equals to or more than the amount of unamortized expenditure, no deduction shall be allowed in the year of transfer or in any subsequent year.

3.2. Part of license or spectrum is transferred

If part of the license is transferred and proceeds from such transfer is less than the expenditure yet to be amortized, the unamortized expenditure as reduced by the sale proceeds shall be allowed as deduction in equal installments over the unexpired period.

If part of the license is transferred but proceeds of such transfer exceed the amount of unamortized expenditure, the excess amount (to the extent it does not exceed deduction claimed under this provision) shall be chargeable to tax as business profits in the tax year in which the license has been transferred.

Further, where proceeds from transfer are equals to or more than the amount of unamortized expenditure, no deduction shall be allowed in the year of transfer or in any subsequent year.

3.3. Business restructuring of Companies

If an amalgamating company (or a demerged company) transfers the telecom license or spectrum in a scheme of amalgamation (or demerger) to Indian amalgamated company (or Indian resulting company), the provisions of amortization of deficiency or deemed profit or capital gains, as the case may be, apply to Indian amalgamated company (or Indian resulting company) in the same manner as they would have applied to the amalgamating company (or demerged company).

References

Department of Telecommunications, Government of India

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.