Knowledge

On 23 April 2015, the Telecom Dispute Settlement and Appellate Tribunal (“TDSAT”) passed a judgement on the issue of computation of revenue on the basis of which telecom operators are required to pay license fee. This is a dispute which has been ongoing for more than a decade and due to the fact that certain issues are still pending before various High Courts, it seems that the battle is not over yet. Let us take a step back and understand the cause and reasons of this dispute.

Telecom operators are granted a license by the Department of Telecommunication (“DoT”) to establish, maintain and work telegraph under Section 4 of the Indian Telegraph Act, 1885 (“Telegraph Act”). In 1999, the DoT offered existing licensees a migration package. The telecom operators by exercising this option could share a certain percentage of their revenue annually with DoT instead of payment of a fixed amount (determined through auction) as license fee. All telecom operators accepted this offer. The license agreements were amended by incorporating the definition of Adjusted Gross Revenue (“AGR”).

However, the telecom operators and their association challenged the validity of the definition of AGR before TDSAT as it included incomes from business activities not covered by or having no connection with the Telegraph Act. TDSAT passed a judgement in July 2006 upholding the telecom operators’ contention.   It also referred the matter to the Telecom Regulatory Authority of India (“TRAI”) for proper consideration.

The matter was taken to the Hon’ble Supreme Court in appeal. In the meantime, TRAI submitted its report in September 2006. The Supreme Court dismissed the appeal in view of TRAI’s recommendation and directed that all questions be heard by TDSAT. TDSAT again heard the matter in view of TRAI’s recommendation and in August 2007 accepted the TRAI recommendation on most of the heads of revenue while declining otherwise on few other heads.

The Union of India again filed an appeal against the TDSAT judgement of 2007 before the Hon’ble Supreme Court. Pending the judgement of the Supreme Court, DoT conducted an audit and found certain revenue items that were allegedly not reported by licensees. The Supreme Court in its judgement of October 2011 upheld the validity of the definition of AGR as proposed by DoT. Thereafter, DoT issued demand notices with penalty, interest and interest on penalty for the years 2006-2007 after hearing the telecom operators.The Supreme Court also held that TDSAT does not have jurisdiction to decide the validity of the terms and conditions of the license agreement but it recognized that TDSAT has jurisdiction to decide any disputes between telecom operators and DoT on interpretation of terms and conditions of the license agreement.

Almost all telecom operators filed parallel proceedings in various High Courts as well as with TDSAT challenging the validity of the definition of AGR. The telecom operators are protected from DoT’s demand notice by interim orders of the High Courts in their favour. TDSAT has taken a lead in providing its stand on the matter as it considers that the issue of AGR, if pending any longer, would be harmful for the growth of the telecom industry.

Basis of the TDSAT judgement

• TDSAT has the jurisdiction to decide any dispute between licensor and licensee on interpretation of terms and conditions of the license agreement.
• One such dispute can be computation of AGR made by DoT and whether the demand raised by it is in accordance with the license agreement or not.
• In this round of litigation the sources of revenue are not under consideration but the nature of inflow that may come under AGR as defined in the license agreement is being considered.
• The reason provided by DoT in its demand notice that “revenue” and “income” are analogous is not correct.
• DoT in one of its affidavits of 2003 had taken a stand that revenue from non-telecom business which is entirely different from telecom business of the licensee is not included in the definition of gross revenue.
• The interpretation of AGR can be based on Accounting Standard 9 (i.e.,AS-9) which defines revenue as the gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise from sale of goods, from rendering services and from the use by others of enterprise resources yielding interest, royalties and dividend.
• AGR can include items specifically identified in the license agreement. Any inflow from business activities apart from providing telecom services in view of Supreme Court judgement can also form part of AGR.

The principles relied upon by TDSAT are as follows:

• Capital receipts are different from revenue receipts and receipts of capital nature cannot be added to the gross revenue.
• The same revenue cannot be subject to double charge.
• No one can earn revenue from oneself.
• One cannot treat someone else’s revenue as one’s own.

Highlights of the TDSAT Judgement

• Any interest, penalty and interest on penalty imposed by DoT should not be charged by DoT under the demand notice and even if it is to be charged in a particular case it can never be the maximum prescribed and should be a nominal amount.
• DoT is required to rework the license fees in light of the findings of TDSAT and issue a fresh demand which licensees will pay.

Key outcome of the judgement

DoT may issue a fresh demand notice on telecom operators on the basis of the TDSAT judgement or it may choose to challenge the TDSAT judgement. The telecom operators may also challenge the judgement.

The telecom operators may be negatively impacted as TDSAT has included certain non-telecom revenue streams in calculation of AGR which is not in line with the TRAI recommendation. While the silver lining on the cloud is that if DoT raises a fresh demand it will likely have a nominal amount of interest, penalty and interest on penalty. It will also necessarily exclude those items from AGR as identified by TDSAT (set out in the table above).

The outcome of cases pending before the High Courts may also change the impact of the TDSAT judgement.