Telecom License Fees: How to Amortise for Tax Deductions

Every time a telecom operator wins a licence to operate in India, it pays the government a hefty sum, sometimes running into thousands of crores. Naturally, everyone assumes this gets written off as a business expense in the same year. It does not work that way. The Income Tax Act treats this payment as a long-term investment in a valuable right, and the deduction has to be spread across the years the licence stays valid. This is exactly what Section 35ABB of the Income Tax Act, 1961 governs, and it is a favourite exam topic precisely because it blends accounting logic with a real commercial story involving India’s biggest telecom brands.

Why licence fees don’t behave like a regular business expense
What Section 35ABB actually allows
How the amortisation period and yearly deduction are calculated
When the fee is paid before the business commences
When the fee is paid after the business has already started
No double benefit: the mutual exclusivity rule
What happens if the licence is sold before the period ends
Consequences of not complying with the conditions
Why the Bharti Hexacom ruling is worth remembering

Why licence fees don’t behave like a regular business expense

Under normal rules, a business expense that is revenue in nature gets deducted in full in the year it is incurred. But a telecom licence is different. It gives the company the right to operate for years, sometimes two decades. Because the benefit lasts so long, tax law treats the payment as capital expenditure, an investment in an enduring asset rather than a day-to-day cost of running the business.

This distinction is not just theoretical. In 2023, the Supreme Court settled a long-running dispute involving Bharti Hexacom (part of the Bharti Airtel group) and ruled that the annual variable licence fee telecom companies pay, calculated as a percentage of their adjusted gross revenue, is capital expenditure and not a one-time deductible cost. The company had wanted to claim the entire annual payment as a revenue expense in the year it was paid. The court disagreed and confirmed it must be amortised under Section 35ABB instead.

What Section 35ABB actually allows

Section 35ABB permits a business to claim a deduction for capital expenditure incurred to acquire the right to operate telecommunication services, but only if certain conditions are met:

Nature of expense: The expenditure must be capital in nature, not a routine operating cost.
Purpose: It must be incurred specifically to obtain a licence to operate telecom services.
Timing: The expenditure can be incurred either before the business starts or at any point afterwards.
Actual payment: The deduction is available only once payment has actually been made, not merely when the liability arises on paper.

That last point matters a lot. Most business expenses in India are computed on an accrual basis, meaning the liability is recognised when it arises, regardless of when cash actually changes hands. Section 35ABB breaks from this by working strictly on a cash basis. The clock for claiming the deduction only starts ticking in the year the payment is genuinely made.

How the amortisation period and yearly deduction are calculated

The law uses two specific terms here worth remembering for exams: relevant previous years and appropriate fraction.

The relevant previous years depend on when the payment was made relative to the start of business:

When the fee is paid before the business commences

The amortisation period begins from the previous year in which the telecom business actually commences, and continues until the licence expires.

When the fee is paid after the business has already started

The period begins from the previous year in which the payment is actually made and runs until the licence comes to an end.

The appropriate fraction is simply one divided by the total number of relevant previous years. So if a company pays a licence fee with 10 years of validity remaining from the year of payment, it can deduct exactly one-tenth of the expenditure every year for those 10 years.

Scenario	Licence fee paid	Years of licence remaining	Annual deduction
Fee paid after business starts	₹50 crore	10 years	₹5 crore per year
Fee paid before business starts	₹20 crore	5 years from year of commencement	₹4 crore per year

This structured, equal-instalment approach ensures the tax deduction mirrors the period over which the business actually benefits from holding the licence, a concept confirmed in the government’s own bare text of the amortisation provisions, which apply an identical mechanism to spectrum fees under the related Section 35ABA.

No double benefit: the mutual exclusivity rule

One condition students often miss is that once an expense is claimed under Section 35ABB, it cannot be claimed anywhere else in the Act. Specifically:

The amount allowed as deduction under Section 35ABB cannot also be claimed as depreciation under Section 32, even though licences are otherwise treated as intangible assets eligible for depreciation.
Capital licence expenditure covered here cannot be separately claimed as a business expense under Section 37.

However, if part of the payment to the telecom department is genuinely revenue in nature and not linked to acquiring the licence itself, that portion is not eligible under Section 35ABB but may still be claimed under Section 37(1) as an ordinary business expense. The Bharti Hexacom dispute arose precisely because the company tried to route its entire annual fee through Section 37, and the Supreme Court held that the payment could not be artificially split into capital and revenue components just because it was structured as an annual, revenue-linked payment rather than a lump sum.

What happens if the licence is sold before the period ends

Telecom licences sometimes get transferred, whether through a sale, a merger, or a demerger. Section 35ABB lays out precise rules for what happens to the remaining, unclaimed deduction in such cases:

Situation	Tax treatment
Sale proceeds are less than the unallowed (remaining) expenditure	The shortfall can be claimed as a deduction in the year of transfer
Sale proceeds exceed the unallowed expenditure but not the original cost	The excess, up to the amount already deducted, is taxed as business income in that year
Sale proceeds exceed the original cost of the licence	The extra amount is taxed separately as a capital gain

These rules, laid out in the bare provisions of Section 35ABB, prevent companies from either double-claiming a deduction or escaping tax on a profitable sale. Where a licence is transferred through amalgamation or demerger involving Indian companies, there is continuity built into the law: the amalgamated or resulting company can keep claiming the deduction for whatever period remains, exactly as if no transfer had taken place.

Consequences of not complying with the conditions

The law is fairly strict once a deduction has been claimed. If a business is later found to have failed to comply with any of the section’s conditions, for example, misreporting the actual payment date or the licence terms, the consequences follow a defined process, mirrored in the related Section 35ABA of the Act:

The deduction already allowed is deemed to have been wrongly allowed.
The Assessing Officer is empowered to recompute the total income for that previous year.
The correction is carried out through a rectification under Section 154, with the usual four-year time limit counted from the end of the year in which the non-compliance occurred, rather than the year the deduction was originally claimed.

This gives the tax department a fairly long window to revisit and correct a wrongly claimed deduction, which is an important safeguard given how large these amounts can be.

Why the Bharti Hexacom ruling is worth remembering

Beyond the textbook mechanics, this section recently made real financial headlines. When the Supreme Court ruled that variable annual licence fees under the New Telecom Policy, 1999 must be treated as capital expenditure amortisable under Section 35ABB, it overturned years of favourable tax treatment that telecom companies had relied on. Analysts estimated the ruling could add roughly ₹8,000 crore in additional tax liability across major telecom operators like Bharti Airtel and Vodafone Idea. It is a useful reminder that a single classification decision in tax law, capital versus revenue, can have consequences worth thousands of crores for an entire industry.

What do you think? If you were advising a telecom start-up bidding for a new circle licence, would you structure the payment as a lump sum or a revenue-linked annual fee, given how each is treated under Section 35ABB? And do you think spreading large capital costs over many years, rather than allowing an immediate write-off, gives a fairer picture of a company’s real profitability?

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Table of Contents

Why licence fees don’t behave like a regular business expense 🔗

What Section 35ABB actually allows 🔗

How the amortisation period and yearly deduction are calculated 🔗

When the fee is paid before the business commences 🔗

When the fee is paid after the business has already started 🔗

No double benefit: the mutual exclusivity rule 🔗

What happens if the licence is sold before the period ends 🔗

Consequences of not complying with the conditions 🔗

Why the Bharti Hexacom ruling is worth remembering 🔗