Introduction
The fundamental question to be answered by the Supreme Court in the case was innocuous enough [2019 (14) SCALE 513]. It had to decide upon the ambit of the definition of “adjusted gross revenue’, but the result seems to have put the entire telecom industry and other sections of the economy under substantial financial burden.
The case relates to a dispute in the computation of the license fee owed by the Telecom Service Providers to the Department of Telecommunications. A fee can be defined as a charge for a particular service provided by the Government or its agencies. Here, the license fee is charged by the Government for allowing the licensees or the Telecom Service Providers to carry on telecommunication activities. The Central Government derives this power from the Telegraph Act, 1885, which grants exclusive rights upon the Government to establish and run telecommunication activities in the country.
The case marks the finality of nearly two decades of litigation over a provision which was designed to discourage litigation and disputes. The paper has been split into several sections. The first will give the background facts of the case. The next will contain the arguments put forth by both sides and the judgement of the Court itself. The analysis of the judgement will majorly focus on the practical implications of the judgement on the economy and what such a decision may hold for the future.
Brief Facts
The case is an appeal in the Supreme Court, bringing finality to a longstanding dispute. Pre 1999, the telecom industry functioned on a fixed license fee model by virtue of the National Telecom Policy, 1994. Due to the unreasonably high license fee per subscriber, the industry suffered from high call charges, thus disincentivising consumers.
In 1999, a new policy, namely, the National Telecom Policy, 1999 was introduced which established a new revenue sharing model wherein the Telecom Service Providers could agree to a license agreement with the Government to share a part of its ‘Adjusted Gross Revenue’ at a rate stipulated by the Government.
The rate was initially at 15% but was eventually dropped to 8%. The Telecom sector migrated to the new model and signed license agreements, but disputes arose in 2003 about the definition of ‘gross revenue’. The policy of 1999 had a stipulation that its clauses were to be accepted in their entirety and that the licensees were not at liberty to dispute them or litigate upon the meaning of the clauses.
In the agreement, the definition of revenue was arrived upon post consultation with accountants and was defined widely to avoid problems of interpretation and dispute. The same was defined under clause 19.1 of the Draft License Agreement, which the prospective licensees would have to sign. The Telecom Operators raised issues with defining revenue widely enough to cover non-operational revenue and include revenue generated outside the use of the license, such as the sale of handsets and sale of scrap.
The same was raised before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) which sent the case for recommendations from the TRAI or the Telecommunications Regulatory Authority of India. The recommendations from TRAI were sent to the TDSAT upon which it based its ruling in 2007. The same was appealed to the Supreme Court in Union of India and Anr. v. Association of Unified Telecom Service Providers of India.
The Court went into whether the TDSAT was bound by the TRAI recommendations and came to the conclusion that it was not. It finally gave the licensees leave to appeal any demand notices that they may receive to the TDSAT.
The present appeal arises from the dispute taken up at the TDSAT post the Supreme Court ruling questioning the wide scope of gross revenue given in the demand notice. The licensees contended that only revenue directly arising from using the license, that is, telecommunication activities should be included within the definition of gross revenue. The Department of Telecommunication, representing the Central Government, wanted to include the entire revenue of the licensees within the ambit of revenue. The Court framed issues to look at multiple heads of revenue and decide whether each of them would fall within the ambit of revenue.
Arguments & Judgements
The most important question before the court was in relation to the definition of gross revenue. The court noted that since the licensees had agreed to the definition of gross revenue within the license agreement when signing up for it, they should not be allowed to dispute it at a later stage. The term revenue as defined under clause 19.1 of the agreement included “installation charges, late fees, sale proceeds of handsets (or any other terminal equipment etc.), revenue on account of interest, dividend, value-added services, supplementary services, access or interconnection charges, roaming charges, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, without any set-off for related item of expense, etc.”
The licensees, on the other hand, claimed that while gross revenue had been defined in the license, the term revenue itself was not defined. They sought to import the same from the provisions of Accounting Standards – 9, which had a more restrictive definition of revenue. They claimed that since the Accounting Standards are mandatory, the definition of revenue from the same would prevail. They relied upon the doctrine of subsequent conduct to argue that they had maintained since the beginning that their definition of gross revenue was based on the Accounting Standards.
The licensees also argued that since the fee was on the license alone, the Adjusted Gross Revenue should only be calculated on the revenue that the Telecom Service Providers earned from using the license itself. To push for a more beneficial interpretation, the licensees asked for a contra-preferendum interpretation wherein any ambiguity in any terms will be read to prefer the party that did not draft it.
The court held with finality that since the term gross revenue had been defined within the contract itself, the same will prevail over a more general definition of revenue under the Accounting Standard – 9. The Accounting Standards are mandatory in preparing accounts, but when a term has been defined within the license agreement, the same will prevail. The Court ruled that there was no ambiguity in the terms of the contract and the same was known to the Telecom operators before they signed the contract. The Court also found that there had been consensus ad idem about the definition of gross revenue at the time of signing the agreement and once the contract had been reduced to writing, all interpretation would have to be made from the written document itself.
The Court also stressed upon the fact that since the Telecom Service Providers had been benefitting from the new revenue sharing model since 1999, they should not dispute the definition of terms in the contract at this stage. The Court observed that this agreement was very favourable to the licensees from the fact that their gross revenue rose year upon year. Moreover, the Court held that further arguments on the definition of gross revenue were barred by res judicata as they had been litigated in the previous Supreme Court judgement regarding the same facts in 2011.
For interpreting the term revenue, the Court ruled that the only stipulation was that it needed to be in conformity with the Accounting Standards – 9 and need not be the same as it. As for what would fall within the definition, the Court used the principle of noscitur a sociis to hold that the definition of gross revenue and the process of arriving at were clearly defined in the license agreement. Therefore, for the purpose of sharing revenue with the Government, the gross revenue will include all the heads under 19.1 of the License Agreement.
As for discounts offered to consumers, the Court refused to make a distinction that was made by the TDSAT between trade discount and cash discount and held that all discounts given to the consumers were part of a commercial strategy and hence are like expenses and part of gross revenue.
The Court recognised that the gross revenue was based on accrual mode of accounting and therefore, any amount receivable will also be a part of gross revenue, irrespective of whether it was actually received. The Court also refused to make the distinction between profit made over book value and profit over actual value made by the TDSAT. The Court held that any capital gain over book value was liable to be a part of gross revenue. The same applied for an insurance claim and any receipt over book value was held to be part of gross revenue.
The Court held that the entire amount that the Telecom Service Providers receive for sharing infrastructure with other Providers also forms part of the gross revenue. Non-refundable deposits accepted from subscribers were also deemed to be a part of gross revenue. All interest and dividends earned from all sources would also form part of gross revenue.
Finally, the Court recognised that there had been wilful abstention on the part of the licensees from complying with demand notices and paying their fees on time. Therefore, it levied interest, penalty for late payment and interest on the penalty, all compounded monthly on the licensees.
Analysis
While the Court kept reiterating that its findings were only based upon the license agreement entered into by the Telecom Service Providers, it is argued in this paper that the Court did not take into account the economic ramifications of the findings and the judgement itself. Firstly, by holding that it was valid on the part of the Government to demand a percentage of the total revenue of the licensee and not only the revenue derived from the license, but it could also have set a difficult precedent.
Multiple sectors in India are regulated by licenses. In fact, this case itself referred to another case where it was held that the State is the trustee of all the natural resources, but the same must be shared equitably with the citizens and not exploited. The worrying aspect is that the Court held that taking a share of the total revenue of the company will not fall foul of the exploitation that was barred by the natural resources case.
Since the Court refused to apply the doctrine of contra preferendum, it reaffirmed that the Government and the licensees were at an equal footing at the time of signing the agreement. The Court repeatedly held that if the licensees did not want to share the revenue, they should not have signed the agreement. This is worrying because the State being the sole licensor of multiple sectors can now start demanding a share in the total revenue of the licensors by introducing new agreements and the licensees will have to agree or vacate the sector.
Secondly, the implications of this in the telecom sector are huge. Prior to the judgement, only three private entities operated in the sphere: Vodafone-Idea, Bharti Airtel and Reliance Jio. The fourth-placed entity was the State-owned BSNL. Now because Jio was the newest player in the market, it had the least amount of fines to pay, letting it consolidate its position at the top of the market. Second-placed Airtel and third-placed Vodafone Idea are faced with a burden of around twenty-one thousand crores and nineteen thousand crores, respectively.
The senior executives of Vodafone-Idea have mentioned to the press that if the government does not provide any relief, it would have to wind up in order to pay its liabilities. BSNL, on the other hand, has been having its own share of financial difficulties. This might shift the nature of the industry into an effective duopoly. When there are only two equally matched players in a market, the chance of a price hike and gamification increases. Duopolies have been historically regarded as bad for the consumers, and the same may become the case in India.
Thirdly, the liability has hit not only the telecom sector but other government-run companies as well. These companies were licensed out small parts of the spectrum for their usage, and they had in turn leased out a part of that for additional income. For example, Oil India Limited, India’s second-largest hydrocarbon product company was hit with a forty-eight thousand rupees demand even while it had earned only around one crore, forty-seven lakhs from its leasing out spare capacity. The Government arrived at this figure by taking its total revenue into account, which included its oil exploration and gas revenue.
This judgement has ended up imposing a severe burden on a company to pay a share of its revenue to the Government except the company was not even related to the telecom industry. The judgement should have been cognizant of its effect on such actors. Since there is no appeal left to any licensee, the demand notice on OIL is effectively creating a liability for it that is in no way could have incurred, and that is just another illustration of the Supreme Court being unaware of the ramifications of its decisions.
Conclusion
Post the decision, review petitions were filed by the licensees asking the Court to re-examine the matter. The Court dismissed all the petitions filed asking for relief in this matter, signalling the finality of the issue. The economic fallout of the decision has not been felt yet. How the markets might react to the upheaval of the telecom sector might be something to watch out for in the future.
But currently, this case may have opened the proverbial can of worms, if one may say so, by validating the definition of revenue within the license agreement. Such overbroad agreements lead to an imbalance in the power structure of the economy. When the licensor can wield such bargaining power by virtue of being the sole licensor, the Court should step in to protect the interest of the licensees.
A possible remedy for the same can be the Government itself dropping part of its claim in order to facilitate ease of business and to prevent the telecom sector from becoming a duopoly. Or at the least, the Government should at least protect its own companies who have been slapped with the fine but have been engaged in a different business all along.
If the Government does not intervene and claims the full amount, it could be an important point in the Indian economy which will have to be dissected only in retrospect.
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