By TIOL News Service

MUMBAI, JAN 18, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether when the bid price paid by cellular company in an auction for allottment of 3G spectrum band license, has been capitalized as an "Intangible Asset", then the same will be eligible for depreciation u/s 32(1). YES IS THE ANSWER.

Facts of the case:

The assessee company, engaged in the business of Providing Cellular mobile services and trading of handsets and accessories, had filed its return declaring Nil income after set-off of brought forward business losses and unabsorbed depreciation of Rs. 1,27,32,60,976/- under the normal provisions of the Act and Rs. 7,94,64,25,489/-income u/s 115JB of the Act and claiming TDS credit of Rs. 1,56,89,92,736/-. Thereafter, the assessee revised it return declaring Nil taxable income after set-off of brought forward business losses / unabsorbed depreciation of Rs. 1,27,3240,974/- and Rs. 7,94,64,25,489/- income u/s 115JB of the Act and claiming TDS credit of Rs. 2,73,76,67,734/-. The AO thereafter assessed the total income at Rs. 10,78,68,58,038/- allowing TDS credit of Rs. 1,67,70,59,052/-. The Pr.CIT, subsequently, issued show cause notice u/s 263 stating that the claim of depreciation @25% on the amount paid being 3G-Spectrum Band License Fee allowed by the AO was erroneous in so far as it was prejudicial to the interest of Revenue.

Tribunal held that,

++ it is found that assessee company has paid an amount of Rs.3366.09 crores on account of 3G Spectrum Band License fee for six circles, which were put into operation during the previous year and assessee claim depreciation on the same at the rate of 25%. The CIT(A)'s charge in his revision order is that the 3G Spectrum Bank License fee has been paid for a period of 20 years and accordingly, It should be amortized over a period of 20 years and only 1/20th of the license fee should be allowed as deduction for the year under consideration. It is clear that AO has applied his mind to the facts on the issue and allowed depreciation on the 3G Spectrum Band License fee paid by assessee while framing assessment u/s 143(3). According to this court, this is one of the permissible view, which is taken by the AO during assessment proceedings. It is to be noted that, pursuant to the NTP-99, the Government separated Cellular Licenses from spectrum. Accordingly, in addition to the licenses, the operators had to separately acquire spectrum from the Government. With the objective of Spectrum Management, the Department of Telecommunication invited applications to allot the rights to use certain specified radio spectrum frequencies in the 3G Spectrum band and in the BWA Spectrum band by means of auctions in various telecom service areas in India. The Notice inviting Applications specified that under the auction process, the Successful Bidders would be granted the right to use spectrum at specified frequencies for 20 years from the date of award of right to commercially use the allocated spectrum block. However, it also directed that mere awarding of spectrum did not confer a right to provide mobile telephone services on the awardee, successful bidders also needed to acquire UAS/CMTS license for the awarded service areas;

++ coming to merits of the case, the counsel stated that the AO after going through the facts and the audited financial statements, gave the disclosure on the accounting treatment of the 3G spectrum charges. Also, in note 2 to the explanatory letter filed before AO during assessment proceedings explains the tax treatment adopted by assessee in respect of the said charges. He argued, on merits, that the assessee has rightly claimed the depreciation being beneficial owner of the spectrum allotted and it is entitled to use it for the purpose of its business under the Act. It is settled that the owner of an asset is the beneficial owner who has domain over the asset and is in the enjoyment of the asset. The assessee became the beneficial owner of the spectrum allotted under the auction process, as it could use it for the purpose of its business and, hence, the test of ownership is satisfied. This fact is also evident from the LOI for the respective circles, under which frequencies are earmarked for the use of the assessee and makes it available to the assessee to render services. There is no ambiguity on the fact that it is used for the purpose of the business of the assessee which is to provide cellular mobile services in the respective telecom circles in which it was allotted spectrum. The assessee successfully bid for 11 telecom circles in 3G auction held during the financial year 2010-I1 and launched 3G services in Gujarat, Himachal Pradesh and Madhya Pradesh including Chhattisgarh, Haryana, Maharashtra and Uttar Pradesh West during the financial year 2010-11. The bid price paid for the allotted spectrum, which is a one-time cost, has been capitalised as an "Intangible Asset" since such cost satisfies the conditions of section 32(1). Any additional cost incurred on successful bidding in the auction of spectrum is also added to the WDV of the said block and claimed depreciation on WDV subject to the conditions of section 32. This is in compliance with the method of charging depreciation under the Block of Asset concept. The spectrum allotted for 20 years does not change its nature under the Act and once an asset qualifies to be an "Intangible Asset", depreciation is to be allowed u/s 32, regardless of the period for which it is owned by the assessee. The assessee claimed that the telecom license and the spectrum are independent of each other and there is no case to allow deduction in respect of the spectrum cost over 20 years period, in the absence of any specific provision under the Act that permits such amortisation;

++ from the decision of Supreme Court in case of CIT vs. Smifs Securities Ltd and the facts of the present case, it is clear that the assessee has rightly claimed depreciation u/s 32 on 3G spectrum. It means that the expenditure towards 3G Spectrum is not expenditure for acquiring any right to operate telecommunications services. Out of the service areas in which 3G spectrum was won by the assessee, it had acquired the rights to operate telecommunication services in the year 1995-1997 for Maharashtra, Gujarat, Uttar Pradesh West, Madhya Pradesh, Haryana. Andhra Pradesh, Kerala, Punjab telecom circles. In year 2001-02 it acquired rights for Himachal Pradesh, Uttar Pradesh East and thereafter in the year 2007-08 for Jammu & Kashmir. Even if 3G Spectrum was not applied or allotted, assessee could have still continued providing telecommunication services under existing license. The license to operate telecom services is issued u/s 4 of the Indian Telegraph Act, which provide rights to establish and operate telecom services. As stated, without such license, one is not ever eligible to bid for 3G Spectrum. 3G Spectrum fees are merely for right to use a particular frequency/spectrum while providing telecommunication services. In view of the above, even the provisions of section 35ABB are not applicable to such payment. In view of these facts, we are of the view that the assessee is entitled for claim of depreciation on merits also and AO has rightly allowed the claim while framing assessment u/s 143(3) and the revision order of CIT u/s 263 is bad in law.

(See 2018-TIOL-108-ITAT-MUM)