Adjusted Gross Revenue: Background of the Supreme Court judgment

Adjusted Gross Revenue: Background of the Supreme Court judgment

Murali Krishnan

On October 24, the Supreme Court delivered a significant judgment in relation to the licensing agreement between telecom companies and the Department of Telecom (DoT). In its judgment, the Court accepted the interpretation given to Adjusted Gross Revenue by the DoT and ruled against the telecom companies. By its judgment, various revenue heads were included within the net of gross revenue, thereby imposing a burden of around Rs. 92,000 crores on the telecom companies. 

The appeals in question were filed by both the DoT and the telecom companies against an order of the Telecom Disputes Settlement and Appellate Tribunal (TDSAT). The case pertained to the definition of gross revenue in clause 19.1 of the licence agreement between the Government of India and the telecom service providers.   

But what exactly was the case about? To explain, we turn the clock back more than two decades ago.

The telecom sector was liberalized under the National Telecom Policy, 1994 and various licenses were   issued to companies under Section 4 of the Indian Telegraph Act, 1885. However, as the fixed license fee was very high and the telecom service providers consistently defaulted in making the payments, the latter made a representation to the Government of India for relief against the steep license fee.

After considering this representation, the National Telecom Policy of 1999 was formulated. It gave an option to the licensees to migrate from a fixed licence fee to a revenue-sharing fee and was made applicable in the year 1999.

The 1999 Policy was so designed that the government becomes a partner or sharer of “gross revenue.” From out of money received under the head of “Adjusted Gross Revenue,” the Central Government took a conscious decision to spend money on remote and uncovered areas.

Fifteen percent AGR was fixed as the license fee under “revenue sharing,” which was first reduced to 13 per cent, and finally to 8 per cent in 2013.

Importantly, the Draft Licence Agreement provided clause 18.2, which pertains to an annual license fee payable as a percentage of Adjusted Gross Revenue (AGR).

Gross Revenue, defined under clause 19 of the Draft Licence Agreement, reads as under: 

“19.1 Gross Revenue:

The Gross Revenue shall be inclusive of 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 set­off for related item of expense, etc.

19.2 For the purpose of arriving at the “Adjusted Gross Revenue (AGR)”, the following shall be excluded from the Gross Revenue to arrive at the AGR:

I. PSTN/PLMN related call charges (Access Charges) actually paid to other eligible/entitled telecommunication service providers within India;

I. Roaming revenues actually passed on to other eligible/entitled telecommunication service providers and;

II. Service Tax on the provision of service and Sales Tax actually paid to the Government if gross revenue had included as a component of Sales Tax and Service Tax.

19.3 Applicable AGR in respect of Spectrum usage charge shall be as given under Part VII of this agreement.”

After that, the licenses were issued in favour of telecom operators who availed the benefit of the migration package. 

Thereafter, when the DoT raised demands from the service providers, in the year 2003, the Association of Basic Telecom Operators and respective telecom operators filed a petition before the TDSAT under Section 14(a)(i) read with Section 14(A) (1) of the Telecom Regulatory Authority of India Act, 1997 (TRAI Act).  

It was a case of the telecom operators that the department was supposed to determine the quantum based on the recommendations of the TRAI. According to the telecom operators, the department had illegally included various elements of income in the definition of the term “AGR” which do not accrue from the operations under the license viz., dividend income, interest income on short term investment, discounts on calls, revenues from other activities separately licensed, reimbursements under the Universal Service Fund (USF) etc.   

The telecom operators heavily relied upon the recommendations issued by the TRAI on August 31, 2000, making detailed recommendations on the terms and conditions for issuance of licenses to new basic operators. 

In an order passed on July 7, 2006, the TDSAT remitted the matter to TRAI, observing that there was no adequate consultation with TRAI before finalising the AGR and the components which form the AGR. While remitting the matter to the TRAI, the TDSAT made some observations regarding the inclusion revenue derived from non-­licensed activities within the ambit of the gross revenue of the licensee. The TDSAT directed listing of the matter for further directions/hearing after the recommendations of the TRAI are received.

However, the TDSAT in its order also rejected the contentions of the Union of India and held that under Section 4 of the Indian Telegraph Act, 1885, the Central Government can take a percentage of the share of gross revenue of a licensee realised from activities of the licensee under the licence. Therefore, revenue received by a licensee from activities beyond licence activities would be outside the purview of Section 4 of the Telegraph Act. 

The TDSAT further held that Section 11(1)(a) of the TRAI Act mandates the Central Government to seek recommendations from the TRAI on the licence fee payable by the licensee and as the TRAI has made no effective consultation, the matter should be remitted to the TRAI.

The Centre challenged this order of July 7, 2006, before the Supreme Court. However, during the pendency of the appeal, TRAI sent its recommendations on AGR,  as sought by the TDSAT. Therefore, when the appeal came up for hearing before the Supreme Court on January 19, 2007, the Supreme Court dismissed the same, granting the liberty to the Centre to urge all contentions raised in the civil appeal before the TDSAT. 

Accordingly, the Union of India submitted before the TDSAT that it is entitled to reopen the issue of whether the validity of the definition of AGR in the licence agreement could be questioned before the Tribunal, as well as the submission that AGR shall also include the revenue from activities outside the license. 

In another order dated August 30, 2007, the TDSAT did not permit the Union of India to raise the aforesaid issues. It held that its earlier order dated July 07, 2006 having become final, cannot be reopened after the disposal of the civil appeal by the Supreme Court. It, therefore, ruled that its finding in the earlier order of July 7, 2006, that the AGR will include only revenue arising from licence activities and not revenue from activities outside the licence, cannot be re-agitated by the Union of India. 

Meanwhile, TRAI had sent its recommendations to TDSAT and the same were considered by TDSAT in its order regarding the heads of the revenue to be included and the heads of the revenue to be excluded from the AGR.

The order passed by the TDSAT was again appealed against before the Supreme Court. The Supreme Court framed six questions and held that the Union of India could urge before the TDSAT all contentions under six grounds which the Supreme Court set out in its order. This included the assertion that the definition of Adjusted Gross Revenue as given in the licence could not be challenged by the licensees before the TDSAT and will include all items of revenue mentioned in the definition of Adjusted Gross Revenue in the licence.

The Supreme Court allowed the appeals preferred by the Union of India and set aside the order dated August 30, 2007, passed by the TDSAT. It also clarified that:

“when a particular demand is raised on a licensee, the licensee can challenge the demand before the Tribunal and the Tribunal will have to go into the facts and materials on the basis of which the demand is raised and decide whether the demand is in accordance with the licence agreement and in particular the definition of adjusted gross revenue in the licence agreement and can also interpret the terms and conditions of the licence agreement.”

After that, the respective telecom operators again approached the TDSAT, challenging the demand notices/demand. The TDSAT then passed an order considering the specific head of items to be included or excluded under the definition of AGR.

This order was challenged in the Supreme Court in the present batch of appeals.

Bar and Bench - Indian Legal news