Tax Benefits in Telecommunication Services (Sec 35ABB)

Tax Benefits are available to the assessee in form of deduction

under section 35 ABB. Following conditions need to be
satisfied in order to avail such deduction:
Condition 1 The expenditure is capital in nature.
Condition 2 The expenditure is incurred for acquiring any
right to operate telecommunication services.
Condition 3 The expenditure is incurred either before the
commencement of business or thereafter at
any time during any previous year.
Condition 4 The payment has actually been made to obtain
license.

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Amount and Time of Deduction
The payment will be allowed as deduction in
equal installments over the over the period of
license starting from the year in which such
payment has been made. If the license fee is
actually paid before the commencement of the
business to operate telecommunication services,
such payment is deductible from the previous
year in which the business is commenced. Such
deductions would continue till the license comes
at end.
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Case Study 1
A company X Ltd. is providing telecommunication
services. The company obtains telecom license on April
20, 2018 for a period of 10 years which ends on March
31st 2028 and the license fee is Rs 18 lakh. Find out the
amount of deduction under section 35ABB in the
following situations:
a) The entire amount is paid on May 6th 2018; or
b) The entire amount is paid on April 1st 2019; or
c) The entire amount is paid in three equal installments
on April 30th 2018, April 30th 2019 and April 30th
2020.
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Analysis of Case
Situation (a):
The payment of Rs 18 lakh is deductible in 10
installments over a period of 10 years from the previous
year 2018-19 till 2027-28. The amount deductible from
the profit of the company is Rs 18/10= Rs 1.8 lakh each
year.
Situation (b):
The payment is deductible in 9 years starting from the
year of payment i.e. the previous year 2019-20 and
ending with the previous year 2027-28. the amount
deductible from the company is Rs 18/9= 2 lakh each
year.
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Analysis of Case (Contd..)
Situation (c):
1st Installment 2nd Installment 3rd Installment Total
Deduction (Rs)
Date of Payment 30th April, 30th April, 2019 30th April, 2020 --
2018
Period during 10 years 9 years 8 years --
which deduction is (2018-19 to (2019-20 to (2020-21 to 2027-28)
available 2027-28) 2027-28)
Amount of Rs 6 lakh Rs 6 lakh Rs 6 lakh --
payment as
License Fee
Amount deductible 6 lakh/10 = -- -- 60,000
in 2018-19 60,000
2019-20 60,000 6 lakh/9 -- 1,26,667
= 66, 667
2020-21 to 2027-28 60,000x8= 66,667x8 6 lakh/8 2,01,667
(for 8 years) 4,80,000 =5,33,333 = 75,000
Total Deductions Rs 6 lakh Rs 6 lakh Rs 6 lakh 18,00,000

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 Consequences on the transfer of Telecom License
Different situations of Transfer
1. When Entire Telecom License is
transferred:
a) When sale consideration is less
than the WDV
b) When sale consideration is
more than the WDV
2. When a part of Telecom License is
transferred:
a) When sale consideration is less
than the WDV
b) When sale consideration is
more than the WDV
Tax Treatment
-This difference of loss is allowed as
deduction us 35ABB in the same
year.
-This difference of profit is taxable
as business income in the same year.
-This difference of loss is allowed as
deduction us 35ABB in the same
year.
-This difference of profit is taxable
as business income in the same year.
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Case Study 2
X Limited provides telecom services. It acquires a
telecom license on April 5, 2018 for a period of
15 years which ends on 31st March, 2033. It paid
license fee of Rs 15 lakh on 6th May, 2018. The
license was transferred by X Limited on 20th
December, 2020. Analyze the tax consequences in
the following cases:
a) If the license was transferred for Rs 6,92,000
b) If the license was transferred tor Rs 13,70,000
c) If the license was transferred for Rs 15,60,000
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 Computation of Written Down Value
(WDV) of License
Cost of license paid on 6th
May 2018 Rs15,00,000
Less: Amount Written off
during the previous years
2018-19 and 2019-20 (2,00,000)
Written Down Value on
1st April, 2020 Rs13,00,000

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 Analysis of Tax Consequences when Telecom
License is Transferred
Sale consideration Rs 6,92,000 Rs 13,70,000 Rs 15,60,000

WDV on 1st April, 2020 (13,00,000) (13,00,000) (13,00,000)

Surplus/Deficit (6,08,000) 70,000 2,60,000
Amount Deductible U/S 35ABB in
previous year 2020-21 6,08,000 -- --
Amount Chargeable to tax U/S
35ABB in previous year 2020-21 as
notional business income, it can not
exceed the amount of deduction
claimed in earlier years. -- 70,000 2,00,000
Short Term Capital Gain/loss:
Sale Proceeds 6,92,000 13,70,000 15,60,000
Less cost of acquisition (15,00,000) (15,00,000) (15,00,000)
Short term capital gain/loss (8,08,000) (1,30,000) 60,000
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Explanatory Notes:
1. It can be noted from the above analysis that
where telecom license is transferred for Rs
6,92,000 the tax payer can claim short term
capital loss of Rs 6,08,000 apart from claiming
deduction U/S 35ABB. To avoid double tax
deduction it is suggested to the Government to
incorporate necessary amendments in Section
35ABB.
2. Where a deduction is claimed u/s 35ABB then
no deduction on the same is allowed u/s 32
relating to depreciation.
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