Introduction
In the telecom sector, the Central Government has the exclusive privilege of establishing, maintaining, and working telegraphs.Section 4of the Indian Telegraph Act, 1885 enables the Central Government to part with the exclusive privilege in favour of any other person by granting a licence on such conditions and considering such terms as it thinks fit. The licences granted to the service providersstipulates a fixed licence fee, which is payable by the service providers every year. Currently, every service provider is required to pay license fee calculated at the rate of 8% of the Adjusted Gross Revenue ("AGR") generated by it every financial year.
For over two decades, the interpretation of the term AGR had been a bone of contention between the telecom service providers and the Department of Telecommunication ("DOT"). On one hand, it was contended by the DOT that the AGR should not be limited to the revenue generated by the licensees from licensed activities but should also include revenue generated by the licensees from non-licensed activities (including but not limited to dividends, interests and sale of assets). However, on the other hand, it was contested by the telecom service providers that AGR can only relate to the revenue directly arising out of licensed activities and revenues not directly attributable to licensed telecom activities should be excluded from the definition of AGR.
This disagreement led to a legal battle that culminated in the Supreme Court ruling in Union of India v Assn. of Unified Telecom Service Providers of India, (2020) 3 SCC 525 ("AGR Judgment") in favour of the DOT. The Apex Court upheld DOT's interpretation of AGR, ruling that it includes revenue generated by licensees from both licensed and unlicensed activities. Consequently, the DOT issued Demand Notices to licensees, requiring them to pay substantial dues, along with exorbitant penalties and interest on the outstanding amounts.
However, subsequent developments, such as Union of India Vs M/s Netmagic Solutions Pvt. Ltd, Civil Appeal9012/2022 ("Netmagic Judgment") by the Telecom Dispute Settlement Appellate Tribunal ("TDSAT") and the 2021 Telecom Reforms introduced by DOT, carved out several exceptions to the broad interpretation to the scope and purview of the term "AGR." These exceptions provide critical relief, particularly for Internet Service Provider ("ISP") licensees and non-telecom revenue streams, underscoring the importance of distinguishing between different revenue categories when responding to the Demand Notices issued by DOT.
The objective of this article is to highlight the critical considerations and suggested strategy that corporations must keep in mind while dealing with the Demand Notices issued by the DOT. These considerations are essential for protecting the financial and operational interests of corporations, particularly in light of the complexities introduced by varying interpretations of the term AGR:
- Leveraging the Netmagic Judgment: Safeguarding ISP Licensees from AGR Judgment:
After the AGR Judgment, the DOT faced significant pressure from non-telecom Public Sector Undertakings ("PSUs") such as GAIL and Power Grid, who argued that their ISP licenses were distinct from telecom licenses covered under the AGR Judgment as:
- The non-telecom PSUs are involved in provisioning services such as power transmission, oil and gas exploration, refining, Metrorail services, etc. and they are not into business of providing mobile services to general public;
- The license obtained by most of these non-telecom companies is ISP license, which is different from the license analysed and interpreted by the Supreme Court in the AGR Judgment; and
- The revenue received by the non-telecom sector undertakings under the head of the telecom services forms a very negligible and small part of their total revenue [e.g. 0.02% for GAIL, 0.00028% for DMRC etc.].
The DOT, acknowledging the above distinction, withdrew Demand Notices issued to PSUs, citing the negligible telecom revenue in their overall earnings and the nature of their licenses. Consequently, Netmagic Solutions Private Limited ("Netmagic"), an internet service licensee, approached the TDSAT seeking quashing of 13 (thirteen) Demand Letter issued by the DOT between 09 December 2019 and 20 Match 2020. It was contended by Netmagic that the DOT had withdrawn the Demand Notices issued to PSUs primarily on the ground that PSUs had obtained ISP License, (which is different from telecom license analysed and interpreted by the Hon'ble Apex Court in AGR Judgment). Given that Netmagic holds a similar license as the PSUs, the AGR Judgment could be read to also exclude Netmagic from the scope and ambit of AGR Judgment by giving similar treatment as the PSUs.
On 28 February 2022, the TDSAT ruled in favor of Netmagic, holding that ISP licensees—whether private or public—cannot be treated differently. The Tribunal set aside DOT's demands that included revenue from non-licensed activities and directed the issuance of revised demands excluding such revenue. This principle has been reinforced through subsequent orders1 by the TDSAT, staying the enforcement of Demand Notices where DOT has arbitrarily included the entire revenue of ISP licensees, contrary to Netmagic Judgment.
Although an appeal against the TDSAT Judgment in the Netmagic case was filed before the Supreme Court, the appeal is still pending, and no stay has been granted by the Hon'ble Supreme Court on the TDSAT's decision as on date. As such, in the absence of any stay, the Netmagic Judgment continues to remain valid and binding on the DOT.
Considering the above, the Netmagic Judgment, as it stands today, is a crucial precedent that can be relied upon by the ISP licensees in the event revenue from non-licensed activities is also included while computing AGR and license fees is levied upon the same.
- DOT's Telecom Reform 2021:
On 25 October 2021, the DOT released a series of notifications for reforming the telecom sector and bringing much-needed reforms. These notifications were compiled in abooklet titled "Telecom Reforms 20212" and released by the DoT ("Reforms").
One of the significant amendments introduced by DOT was exclusion ofnon-telecom revenue for the purposes of calculation of AGR. Other than revenue from non-telecom operations, revenue from activities under a licence by the Ministry of Information and Broadcasting, receipts from the Universal Service Obligation Fund and other income including income from dividends, interest, property sale and rent, gains from foreign exchange rate fluctuations etc. were also excluded from the purview of calculation of AGR.
The Reforms introduced Applicable Gross Revenue ("ApGR") forall services, which would be calculated after deducting the exempted sources of revenue from the gross revenue. Subsequently, deductions already allowed to be excluded for arriving at the AGR (prior to the introduction of the Reforms (which vary for different services), namely, (i) access charges paid to other eligible/entitled Telecom Service Providers ("TSPs"), (ii) roaming revenues passed on to other eligible/entitled TSPs, and (iii) Goods and Service Tax ("GST") paid to the government would be deducted from the ApGR to arrive at the final AGR of which a percentage is to be paid as licence fee.
The aforesaid amendment came into effect from 01 October 2021 and was made applicable to the dues which arise from the operations of the licensee after the said date.
Considering the above, it may be advisable for corporations examine that Demand Notices carefully to assess if the same are in line with the current AGR framework outlined in the Telecom Reforms 2021. These reforms explicitly exclude non-telecom revenue from AGR calculations, and Demand Notices failing to reflect this must be challenged promptly.
- Exclusion of revenue from Pure Internet Services in AGR Calculations
Under the older ISP licensing scheme, revenue from pure internet services was excluded from the calculation of AGR. However, under the Unified License Agreement, which came into effect on 02 August 2013, this exclusion was removed by a corrigendum dated 29 August 2013. Aggrieved by the differential treatment between the ISPs under the old and new licensing regime, the ISP licensees approached TDSAT in the case ofInternet Service Providers Association of India v. Union of India [Telecom Petition No. 169 of 2014].
The TDSAT held that the differential treatment violates Article 14 of the Constitution, as there was no rational basis for exempting one class of ISP licensees from license fees while imposing it on another. The Tribunal found the classification arbitrary and unreasonable and concluded that revenue derived from pure internet services cannot be included in the computation of AGR for license fee calculations.
Although an appeal had been preferred against the above judgement by Union of India and the same is pending before the Apex Court, no stay has been granted. However, vide its Order dated 05 January 2021, the Apex Court granted a limited protection to the Union of India that it shall not be required to refund any amounts till the disposal of the matter
In absence of stay by the Apex Court, the TDSAT has subsequently passed orders in cases Internet Ly Pvt. Ltd. v. Union of India [Telecom Petition No. 42 of 2021] and Aerocast Network Pvt. Ltd. v. Union of India [Telecom Petition No. 48 of 2021] staying the Demand Notices issued by the DOT and directed DOT not to take any coercive action as the revenue generated even from pure internet services was included while computing AGR and levying license fees.
Recently, the Hon'ble Karnataka High Court passed a judgment dated 18 July 2024 in the case M/S Micronova Network Solutions Private Limited V. Union, 2024 SCC OnLine Kar 72, setting aside the Demand Notice issued by the DOT whereby DOT had included revenue generated from pure internet services while computing AGR. It has been held by Karnataka High Court that it is incumbent upon the licensor government to treat the similarly situated contractual ISP licensees equally, and to not charge higher license fees arbitrarily. State action demands fairness and equality of treatment, and the principle of reasonableness inheres the principles of equality and non-arbitrariness. However, the Demand Notice issued by the DOT clearly violates the Constitutional guarantees provided under Articles 14 and 19(1)(g) of the Constitution.
In light of the above, it may be advisable for corporations to carefully scrutinize the Demand Notices they receive to identify any improper inclusion of revenue from pure internet services in the AGR computation. If such inclusions are found, objections should be promptly raised with the DoT. By doing so, corporations can safeguard their interests and potentially mitigate financial liabilities arising from unjustified license fee demands.
Concluding Thoughts
The Demand Notices issued by DOT, particularly those involving substantial amounts, can impose significant financial strain on corporations. Accordingly, corporations need to diligently review the Demand Notices to ensure they accurately reflect the applicable revenue streams as per the prevailing laws and regulations. This involves identifying whether revenue streams, such as those derived from pure internet services or other non-telecom activities, have been improperly included in the AGR calculation. Subject to the final outcome of the Netmagic appeal before the Supreme Court, by leveraging legal precedents, such as the Netmagic Judgment by the TDSAT and amendment introduced by DOT, corporations can effectively challenge excessive or arbitrary demands.
Furthermore, it is crucial for corporations to promptly raise objections before the DOT (supported by robust documentation and legal reasoning) and to proactively approach TDSAT for seeking relief if their objections remain unaddressed. This is significant as these notices are issued with strict timelines for compliance, and failure to adhere to them may result in encashment of Bank Guarantee furnished by corporations, as per license terms to secure performance. Additionally, given that these Demand Notice can severally prejudice the financial interest of corporations, it is essential for corporations to maintain accurate financial records and consult with legal and regulatory experts while responding to the Demand Notices. By taking these steps, the corporations can achieve a balance between regulatory compliance and financial prudence along with formulating litigation strategy at an appropriate stage to pre-empt any coercive action, ensuring their long-term sustainability in the competitive telecom sector.
Footnotes
1 Devas Multimedia Private Limited v Union of India [Telecom Petition No. 913 of 2012]; Hcl Comnet Systems & Services Ltd. v Union of India [Telecom Petition No. 138 of 2015]; M/s Primenet Global Ltd. v Union of India [Telecom Petition No. 20 of 2024]; and Pioneer Elabs Ltd Vs Union Of India And Anr [Telecom Petition No. 39 of 2024].
2 Chapter 9: Adjusted Gross Revenue (AGR) Reforms
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