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License fee for Telecommunication Services – Sec 35ABB

U.C Date : 25 Feb 2015

Eligible expenditure – Any capital expenditure incurred for acquiring any right to operate telecommunication services.

Expenditure can be incurred before commencement of business or after commencement of business.

Payment has to be actually made for obtaining license.

Period of deduction – Such expenditure is allowed as a deduction over the period for which the license remains effective.  Calculation is made on yearly basis, therefore date of payment or date of effectiveness of license in a year doesn’t matter.

If the expenditure is incurred before the commencement of business, then deduction starts from the year of commencement of the business. Such expenditure is allowed for the remaining time for which the license remains effective.

Transfer of license –

If whole of license is transferred

  • Where proceeds are less than the expenditure remaining unallowed –

Expenditure remaining unallowed as reduced by the amount of sale proceeds is allowed as a deduction in the year of transfer.

  • Where proceeds are more than the expenditure remaining unallowed –

Amount of sale proceeds or amount of expenditure incurred to obtaining license (whichever is less)  as reduced by the expenditure remaining unallowed shall be taxable as business profits in the year of transfer, whether business exists or not in that year.

If the sale proceeds is more than the expenditure incurred to obtain license, then such excess is taxable as Capital Gain under Section 45.

If part of the license is transferred

  • Where proceeds are less than the expenditure remaining unallowed –

In this case the deduction allowed under this section for remaining period will be calculated as follows:

(Expenditure remaining unallowed less sale proceeds)/No. of years remaining for effectiveness of license

  • Where proceeds are more than the expenditure remaining unallowed –

Amount of sale proceeds or amount of expenditure incurred to obtaining license (whichever is less)  as reduced by the expenditure remaining unallowed shall be taxable as business profits in the year of transfer, whether business exists or not in that year.

If the sale proceeds is more than the expenditure incurred to obtain license, then such excess is taxable as Capital Gain under Section 45.

In case of amalgamation or demerger, provisions apply to amalgamated/demerged company as they would applies to amalgamating/demerging company.

Bare Act for Sec 35ABB

Bare Act for Sec 35ABB

(1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services [either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year] and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.

Explanation.—For the purposes of this section,—

(i)  “relevant previous years” means,—

(A)   in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced;

(B)   in any other case, the previous years beginning with the previous year in which the licence fee is actually paid,

and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force;

(ii)  “appropriate fraction” means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years;

(iii)  “payment has actually been made” means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.

(2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is transferred.

(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred.

Explanation.—Where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years.

(5) Where a part of the licence is transferred in a previous year and sub-section (3) does not apply, the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by—

(a)  subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and

(b)  dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred.

(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian company),—

(i)  the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and

(ii)  the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.]

(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),—

(i)  the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and

(ii)  the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.

(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year.

One comment

  1. What would be the nature of the Capital Gain? Will it be STCG or LTCG?

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