India: Supreme Court's Decision On AGR: The Final Nail In The Coffin For The Telecom Industry?

A three judge bench of the Supreme Court (SC) in its ruling in Union of India v Association of Unified Telecom Service Providers of India and other connected matters (AGR Case) has put an end to a dispute spanning nearly two decades regarding the interpretation of adjusted gross revenue (AGR) by the Department of Telecommunications, Government of India (DoT). Significantly, the SC has upheld DoT's interpretation that AGR would include revenue generated by licensees from both licensed and unlicensed activities, bringing a major setback to the industry that is already languishing in debt and is currently undergoing possibly its worst phase.

Background

In consideration of being granted a license by DoT on behalf of the Central Government, telecom service providers (TSPs) are required to pay a license fee to DoT. Initially, DoT introduced a fixed license fee regime, whereby a predefined lump sum was required to be paid by TSPs. After several representations were made by TSPs regarding financial viability and sustainability of this model, the fixed license fee regime was proposed to be done away with and substituted by a revenue-sharing based regime under the National Telecom Policy, 1999 (NTP). It was conceptualised that amounts collected in the form of license fees could be used for development and welfare measures for the telecom sector.

Telecom licenses (Licenses) were amended pursuant to the revenue-sharing based regime as suggested under the NTP and resultantly, TSPs were obligated to share a percentage (presently capped at 8%) of their AGR with the Government as licensee fee. According to the Licenses, AGR is determined by excluding certain explicitly specified items from 'Gross Revenue' (Gross Revenue). Gross Revenue is a defined term under the Licenses and some items (such as revenue on account of interest, dividend, value added services etc.) are explicitly included in the ambit of Gross Revenue. This concept of AGR was finalised and implemented in 2001 and demands for license fees based on this definition were raised on TSPs.

First round of litigation

A petition was filed in the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) by an industry association of telecom licensees or TSPs. In this matter, the stand taken by the Government that license fee was payable on overall revenue of the TSP (including revenue realized on account of non-telecom activities carried out by TSPs) was challenged. The TDSAT held that license fee should only be related to such revenue which is traceable to activities under the License. Subsequently, the Telecom Regulatory Authority of India (TRAI) issued recommendations in this regard along similar lines and finally the TDSAT too largely agreed with the recommendations of the TRAI and held that license fee should not be payable in respect of revenue earned from non-licensed activities.

TDSAT's order was challenged by the Government before SC. In its judgment dated 11 October 2011 (SC Judgment-1), the SC held that the TDSAT had no jurisdiction to decide on the validity of terms and conditions of the License (including the issue of interpretation of the definition of AGR) and consequently the portions of the TDSAT's order holding that revenue realized from non-licensed activities would be excluded from AGR, was without jurisdiction and a nullity. Further, the SC held that if the wide definition of AGR included revenue beyond the licenced activities, then it was open for the Licensees to not undertake activities for which they did not require Licence and transfer these activities to any other person or firm or company. Accordingly, several TSPs hived off divisions that were carrying out non-telecom activities to mitigate the impact of SC Judgment-1.

Second round of litigation

After SC Judgment-1, various TSPs filed petitions in different fora (i.e. High Court, TDSAT) for correct interpretation of the heads of Gross Revenue mentioned in the License, which resulted in a second round of litigation.

The issue concerning the definition of AGR was again agitated before the TDSAT. The TDSAT in its ruling dated 23 April 2015 inter alia held that the term 'revenue' in the License was no different from its corresponding definition in the Accounting Standard 9 (AS-9). The Tribunal also noted that Gross Revenue for the purpose of determining license fee would include inflow from all its business activities, whether under license or beyond license.

In another case, the High Court of Tripura held that definitions of Gross Revenue and AGR under the License were ultra vires to Section 4(1) of the Telegraph Act, as even non-licensed activities were sought to be included within the embrace of Gross Revenue, which was arbitrary, and an exercise of dominant position enjoyed by the Government and contrary to the intent of the formation of the License.

In another set of matters before the High Court of Kerala, it was held that as TSPs had entered into Licenses with the Government at their will and had availed the benefits of such Licenses, it was now not open to them to contend that levy of license fees was arbitrary or beyond the scope of the Indian Telegraph Act, 1885.

Snapshot of the present judgment

The present proceeding before SC is a culmination of the second round of litigation described above. In its judgment in the AGR case, SC has upheld the interpretation of AGR which has been adopted by DoT from the inception. SC has based its decision on a variety of factors, but mainly on the ground that the TSP's obligation to pay license fee in accordance with the terms and conditions of the License is nothing but a contractual obligation, which needs to be honoured by TSPs.

SC has observed that the Government, while implementing the revenue-sharing regime, consciously sought the inclusion of a definition of 'revenue' which was "broad, comprehensive and inclusive" in the 'Migration Package' for migration from fixed license fee regime to revenue-sharing regime (Migration Package) to ensure fewer problems of interpretation (and consequently disputes and litigation) and to safeguard against accounting jugglery. Importantly, the SC has noted that the terms and conditions of the Migration Package, which also contained a stipulation that no dispute would be raised by TSPs as to working out of the revenue-share, was voluntarily and unconditionally accepted by the TSPs at that stage and led to substantial growth of the sector in subsequent years. In other words, since TSPs had taken advantage of the terms of the License, they are now bound to discharge their corresponding obligations.

While responding to the arguments made by TSP's that Gross Revenue should be interpreted in accordance with AS-9 (pursuant to which only gross inflow of cash, receivables that arise in the course of ordinary activities of TSPs could be included in the definition of revenue), the Court has noted that this is not permissible since a specific definition of Gross Revenue has been explicitly stipulated in the License and that this definition cannot be substituted by another definition from an external source.

With respect to the arguments advanced by TSPs that the contra proferentum rule would be attracted in the present circumstances as the license conditions were drafted by DoT, SC held that there was no element of ambiguity in the definition and therefore the occasion for applicability of this rule does not arise.

The Court has also indicated that this issue had already been finally determined in the SC Judgment-1 and thus attempts to re-open the same were barred by res judicata. Based on the stipulations in the License and referring to the Government's intent to include a broad, comprehensive and inclusive definition of 'revenue', the Court has held that the rule of ejusdem generis should be implemented while construing the heads set out in the definition of Gross Revenue and therefore, it would also include revenue generated from activities of TSPs beyond the License.

Determination regarding various heads of revenue under Gross Revenue

The Court has separately examined the validity of inclusion of specific revenue heads (as challenged by TSPs) under the definition of Gross Revenue. The determination made by the SC with respect to such revenue heads and the reasoning is captured below in Table 1.

Table 1

Revenue Head

Included in Gross Revenue (Yes/ No)

Reasoning

Discounts and Commissions

Yes

The definition of Gross Revenue as specified in the License cannot be diluted in any manner. Since such definition does not exclude discounts, commissions rebates etc. from the computation of Gross Revenue, exclusion of such amounts (including trade discounts, discounts on international roaming commission, discounts allowed to distributors on sale of prepaid vouchers and cash discounts) from the computation of Gross Revenue cannot be sought.

Gains from foreign exchange fluctuations

Yes

Gains from foreign exchange fluctuations form part of the actual revenue. Since the definition of Gross Revenue, also includes "any other miscellaneous revenue" such gains cannot be excluded from the computation of Gross Revenue.

Monetary gains on sales of shares

Yes

Given the definition of Gross Revenue in the License, every amount that is more than the book value of current assets of TSPs and which comes to TSPs, must be considered for calculation of Gross Revenue without netting off. This would also include any monetary gains obtained by TSPs on sale of capital assets (such as shares).

Insurance claim in respect of capital assets

Yes

Insurance claims over and above the book value of a capital asset results in an inflow of cash and must be accounted for in computation of Gross Revenue.

Negative balance of prepaid customer

Yes

For computing Gross Revenue, number of calls at full value have to be measured without any discounts or incentives provided by TSPs (including negative talk time) Consequently, this revenue head cannot be excluded from calculation of Gross Revenue.

Reimbursement of infrastructure operating expenses

Yes

Revenue from permissible sharing of infrastructure by TSPs is explicitly included in the definition of Gross Revenue under the License. Therefore, the same cannot be excluded from the computation of Gross Revenue.

Waiver of late fees

Yes

Late fee is explicitly included in the definition of Gross Revenue under the License. Consequently, the same cannot be excluded from the computation of Gross Revenue.

Gains from roaming charges and Public Switched Telephone Network (PSTN) pass through charges

No

Deduction of roaming charges and PSTN passthrough charges from Gross Revenue on actually paid basis is permissible under the License and therefore such charges can be excluded while computing Gross Revenue. However, such charges must be actually passed over to Licensees in different services areas for such deductions to be permissible.

Non-refundable deposits

Yes

Non-refundable deposits are revenue received by TSPs in advance from customers and consequently cannot be excluded from the computation of Gross Revenue.

Licensee fee demand where spectrum is not granted

No

When the spectrum itself has not been issued, licensed activity cannot commence. Merely on the basis that the license has been issued (with no revenue earned) sharing of revenue cannot be demanded.

Income from interest and dividend

Yes

Income from interest and dividend is explicitly included in the definition of Gross Revenue under the License. Consequently, the same cannot be excluded from the computation of Gross Revenue.

Bad debts written off

Yes

Bad debts written off by TSP cannot be deducted during the computation of Gross Revenue. However, such debts if are recovered subsequently they cannot be brought to charge for a second time for computing license fee.

Liability-written of

No

Liability would be treated as expense for the TSP, however under the prevailing License conditions such amount cannot be excluded from computation of Gross Revenue. If such liability is written off in the future, it cannot be brought to charge for a second time for computing license fee.

Interest from Inter corporate loan

Yes

Income from interest is explicitly included in the definition of Gross Revenue under the License. Consequently, the same cannot be excluded from the computation of Gross Revenue.

Revenue under IP-1 Registration

Yes

Under the definition of Gross Revenue, income from licensed activities, non-licensed activities and other miscellaneous revenue has to be included in the computation of Gross Revenue. Consequently, income of TSPs from IP registration under the CUG license is required to be included in such computation.

Income from management consultancy services

Yes

Income from management support and consultancy services provided by a licensee cannot be excluded from the computation of Gross Revenue. Further, income from cable landing stations operated by TSPs is also required to be included in Gross Revenue.

Computation of interest and penalty

With respect to the question of quantum and computation of interest, SC has upheld the claim of interest made by DoT, while relying on the provisions of the Licenses that lay down the consequences for delay in payment of license fees. Similarly, on the question of penalty, SC has inter alia held that TSPs have deliberately acted in an unfair manner by deferring payment of the disputed amount of licensee fees despite SC Judgment-1, and therefore cannot contend that payment has been delayed on account of a bona fide dispute. Consequently, the Respondents are required to cumulatively pay within a period of three months, an amount which, according to several news reports, is in excess of INR 900 billion or 90,000 crores.

Khaitan comment

The issue relating to definition and scope of AGR has been finally put to rest by the SC vide its judgement in the AGR Case. While this has undoubtedly brought a degree of finality to this aspect, it will have far-reaching ramifications as far as the sustainability of the sector is concerned. It must be borne in mind that the telecom sector in India is perhaps witnessing its worst phase in history and therefore, the SC's decision in the present case is expected to have an amplified effect due to its timing.

In any case, the telecom sector currently is comprised of a select number of players, who are also finding it difficult to sustain themselves amidst steep competition, unfavorable policy changes and heavy debts. On the other hand, costs of operations are mounting, and profitability seems distant. Under these circumstances, this significant liability is likely to set back many TSPs, and even drive some of them out of existence. The debilitating financial impact of this judgment may also become a considerable roadblock in implementing technology-driven policy reforms being planned by the Government.

As a next course of action, TSPs could consider approaching the SC for a review of its judgement in the AGR Case. However, despite any potential relief which may be obtained by TSPs in such proceedings, a case for governmental intervention is becoming increasingly clear to ensure the sustainability of the Indian telecom industry as a whole. While the Government is expending some efforts towards reviving the telecom industry and it is also one of the main objectives enshrined under the National Digital Communications Policy, 2018, suitable action is warranted on part of the Government, especially in wake of this decision of the SC. If adequate steps are not taken to mitigate the impact of this decision, the industry will most certainly cripple under this financial burden, which will be disastrous not only for the economy but also the public at large as the provisioning of services will be impacted. It is ironic that the demand for license fees, the objective of which was to further the development and welfare of the sector in the first place, may eventually lead to its potential downfall.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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