1.1 Query: Treatment of expenditure on licence fees payable by a company to Department of Telecommunications to set up and operate a radio paging business.
1. A company has been given licence by Department of Telecommunications (DoT) to set up and operate paging services in 10 cities, viz., Delhi, Bombay, Calcutta, Madras, Bangalore, Ahmedabad, Hyderabad, Pune, Lucknow and Kanpur. As per the terms of the Licence Agreement (a copy of which has been submitted) the company has to pay a “Licence Fee” of Rs.3,571.80 lakhs to DoT during first three years as under: -
2. The querist has stated that as per a recent clarification in the press, it was mentioned that this licence fees is of capital nature and should be capitalised. It may be noted that the subscription rental of Rs.150/-p.m. charged from the subscriber for giving this pager service against the licence granted by the DoT is a revenue income.
3. The querist has sought the opinion of the Expert Advisory Committee on the following issues (a) Whether the licence fees payable by the company to Department of Telecommunications (DoT) is a capital expenditure or revenue for the purpose of provisions of Companies Act as well as for Income-tax Act.
(b) If the fees is to be charged off as revenue expenditure in profit and loss account, whether it will be as per the schedule given by the DoT or equal amount being 1/3rd of Rs.3, 571.80 lakhs each year.
Opinion April 19,1996
1. The opinion of the Committee given hereafter is purely for the purpose of preparation of financial accounts of the company. The Committee does not offer any opinion on the query for income-tax purposes, since it is beyond the purview of the Committee in view of Rule 2 of the Advisory Service Rules.
2. The Committee is of the view that right to set up and operate a radio paging service in limited areas for a limited period of time is a valuable right. The cost incurred to acquire such a valuable right should be capitalised. Accordingly, the licence fee of Rs.3571.80 lakhs payable to Department of Tele-communications (DoT), during first three years, should be capitalised at that value in the first year itself and shown as a fixed asset. The instalments payable in the second and third year should be shown as a liability.
3. The Committee notes clause 18.2 (a) of the ‘License Agreement for Radio Paging Service’ which provides as below:
“On completion of three years from the date of commissioning/provision of services, the authority reserves the right to:
(a) review and refix the paging levy/licence fee (The paging levy/licence fee may relate to ‘turnover’)
(b) review the tariff structure after completion of three years.”
From the above, it seems that the licence fees payable after the first three years would not be a nominal amount and would be more or less a similar proportion of the turnover as in the first three years.
4. The Committee is of the view that the aforesaid cost of the right paid in the first three years should be amortised over the three years in proportion to the estimated revenue receivable from subscriptions every year keeping in view the matching concept. However, if it is not possible to make a reasonable estimate of the revenue to be received, then it should be amortised on the basis of licence fee payable, i.e., 1/6th in the first year, 1/3rd in the second year and 1/2 in the third year which appears to have been fixed keeping in view the pattern of anticipated subscriptions.
5. Based on the above, the Committee is of the following opinion on issues raised at para 3 of the query.
(a) Please see paras 1, 2 & 4 above.
(b) In view of (a) above, the fees is not to be charged as revenue expenditure. ________________________________ |