Honourable Delhi High Court in a recent decision [see End Note No. 1] has held that the deduction under Section 80-IA(2A) for telecommunication companies is also available with respect to various ancillary income such as liquidated damages, interest, sale of directories and extra-ordinary items of income. The High Court interpreted sub-section (2A) as a stand-alone provision and held that the narrow phrase ‘derived from’ present in sub-section (1) cannot be imported therein. This article seeks to analyse the provisions under consideration and evaluate as to how the taxpayers should position themselves in the light of this decision.
Legislative framework governing the issue
From a plain reading of Section 80-IA, following points can be noticed:
- Subsection (1) is the main provision granting deduction and provides as under:
- A deduction of an amount equal to hundred per cent of the profits and gains is available from Gross Total Income
- Such deduction is available for ten consecutive Assessment Years
- The deduction shall be allowed in accordance with and subject to the provisions of this section
- The business eligible for the deduction are as per subsection (4)
- Subsection (4) of Section 80A specifies following businesses (broadly)
- Infrastructure facility
- Telecommunication services
- Development etc., of industrial park or Special Economic Zone
- Power generation
- Laying and operating a cross-country natural gas distribution network
- Sub-section (2) of section 80IA deals with infrastructure and telecom companies in following terms:
- This subsection gives an option to the assessee
- The option is to claim deduction for any ten consecutive assessment years out of fifteen years
- Fifteen year window begins from the year in which the undertaking or the enterprise
- develops and begins to operate any infrastructure facility
- starts providing telecommunication service
- develops an industrial park
- develops a special economic zone referred to in clause (iii) of sub-section (4)
- generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines or lays and begins to operate a cross-country natural gas distribution network
- Sub-section (2A) deals with deduction available to telecommunication service provider
- This sub-section starts with non-obstante clause and overrides subsection (1) and (2)
- It pertains only to deduction from total income of an undertaking providing telecommunication services
- It provides two tier rates for the deduction (i.e. 100% for first five years and 30 % thereafter for further five years)
- First five years to commence at any time during the periods as specified in sub-section (2)
The following table captures some of the areas where subsections (1), (2) & (2A) overlap and give rise to the issue before hand:
|Subject||Subsection (1)||Subsection (2)||Subsection (2A)|
|Eligible business||As per subsection (4)||Same as subsection (4)||Only telecommunication services [ as per clause (ii) of subsection (4)|
|Percentage of profits eligible for deduction||100 %||Not discussed||Two tier rate
100% - first five years
30% - further five years
|Period of deduction:|
|Overall effective period of deduction||Ten consecutive years||Ten consecutive years||Five years plus further five years (in effect 10 years)|
|Commencement of tax holiday period||Not specified||From commencement of respective business||At any time during the periods as specified in sub-section (2)|
|Expiry of tax holiday period||Not specified||Fifteen years from commencement||Not specified|
As is evident from the above, sub-section (2A) overlaps with subsection (1) and (2) with respect to two factors namely, rate of tax holiday and period. While rate of tax holiday as per subsection (1) is hundred percent for ten years for all eligible businesses, the rate for telecommunication business has been specifically curtailed by subsection (2A). Further, as regards the period of tax holiday, the expiry of tax holiday period has been mentioned as fifteenth year in subsection (2), while subsection (2A) does not provide any such timeline.
Author’s Interpretation of sub-section (2A)
The issue before the Court was whether the tax holiday as per sub-section (4)(ii) read with sub-section (2A) can be claimed for all kinds of income earned by the taxpayer or it needs to be derived from the relevant business.
The sustainability of such an extended claim has been analysed hereunder to ascertain whether subsection (2A) being a non-obstante provision could override subsection (1) on all aspects.
Sub-section (2A) has been reproduced hereunder for ease of reference:
“(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), the deduction in computing the total income of an undertaking providing telecommunication services, specified in clause (ii) of sub-section (4), shall be hundred per cent of the profits and gains of the eligible business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter, thirty per cent of such profits and gains for further five assessment years.” [emphasis supplied]
For appreciating the true import and effect of a provision with non-obstante clause useful reference can be made to following judicial precedents:
- Union of India v. G. M. Kokil, AIR  SC 1022 (SC)
“A non obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment ; that is to say to avoid the operation and effect of all contrary provisions”
Close observation of above would reveal that the overriding effect of non-obstante clause may have a very limited implication i.e. only with respect to contradicting provisions. Thus it would not have effect in the absence of an ‘inconsistency’ in the two provisions. The following ruling of Hon’ble Supreme Court is worth noting in this regard:
- R. S. Raghunath vs State Of Karnataka And Another  79 AIR 81 [SC (3JB)]
“13. As already noted, there should be a clear inconsistency between the two enactments before giving an overriding effect to the non obtains clause but when the scope of the provisions of an earlier enactment is clear the same cannot be cut down by resort to non-obstante clause.”
Based on the above decision it can be concluded that as regards the profits eligible for deduction, the same continue to be governed by sub-section (1) even in case of telecom companies because sub-section (2A) despite being non-obstante in nature, falls short of providing anything contrary to sub-section (1).
This view can further be supported by another argument. One may notice that the expression used in the opening phrase of this sub-section is ‘the deduction’ and not ‘deduction’. That expression can be reasonably understood as referring to the expression earlier used in the provision, thus it can be understood as referring to the deduction previously talked about i.e. deduction referred to in sub-section (1) and (2) [see End Note No. 2]. The deduction referred to in sub-section (1) is based on profits derived by industrial undertaking from an eligible business. Sub-section (2A) uses the expression ‘profits and gains of the eligible business’ which does not create any clear departure from sub-section (1) rather needs to be interpreted harmoniously therewith.
Another interesting issue that emerges on this interpretation is that the period of deduction referred to in sub-section (2A) makes a clear departure from previous sub-sections. It clearly mentions that total period consists of two sets of five years wherein the first set needs to commence within the overall window of fifteen years. This would mean that the overall window of deduction can be as long as 24 years from the initial year [see End Note No. 3].
The decisions of Apex court in the case of R S Raghunath and Vegetable Products (supra) were apparently not cited before the Hon’ble Delhi High Court. It is therefore doubtful whether the decision wold have been the same even after referring to these binding precedents. Considering this, it is likely that the decision of Hon’ble Delhi High Court might not get affirmed by Apex Court in further appeal. Taxpayers thus should be conscious of this while discharging their tax liability. Further, taxpayers can take a relook at their total eligible period in case a part of the ten years period falls outside the 15 year window provided in sub-section (2).
[The author is a Director, Direct Tax Practice, Lakshmikumaran & Sridharan, Bangalore]