The Government should be well advised not to fall into the vortex and enforce the law of the land to protect the taxpayers' and exchequer's money and in compliance with the Hon'ble Supreme Court Judgment, Central Government must recover its dues within the time specified by the Hon'ble Supreme Court...
When the Hon. Supreme Court on 24th October, 2019 upheld the stand taken by the Department of telecommunications ("DoT") in a long protracted legal battle for payment of Dues to the Government in terms of "License Fee (LF) & Spectrum Usage Charge (SUC)", it finally set to rest all contentions and counter-contentions surrounding outstanding dues and liabilities of telecom service providers (TSPs) to the Government. These liabilities till 2016-17 comes to around '50000 crores for Airtel and '40000 crores for Vodafone-Idea Ltd with more liability of erstwhile Vodafone group of companies. In case of Airtel, around '13000 crores are liability of Tatas and Telenor which is covered by a back-to-back agreement with them at the time of merger. There must be similar agreement of Vodafone group of companies with Idea as well. In fact, the gross revenues in the case of Airtel stands at about '735000 crores for the financial year 2010-11 to 2018-19 alone, against which it had to pay approximately '90000 crores, a substantial part of which remains unpaid.
Some interesting observations of the Hon'ble Court need to be highlighted here to understand the unfolding of events prior to 24th October, 2019 and thereafter.
"189. Further, the conduct of the licensees has also to be considered in the backdrop of the fact that the regime of revenue sharing was extremely beneficial than the previous regime of the fixed license fee, and they have tremendously benefited by it as is apparent from the statistics of the revenue earned under the revenue sharing regime. When Government has parted with the privilege as to revenue on sharing basis under the license, and an agreement entered into, it ought to have been precisely followed…"
Basis the hue and cry raised by some of the TSPs on sustainability and inability to meet license fee obligations, Government let its claim on the fixed license fee and moved into a migration package (as referred in para 189 stated above) providing for revenue sharing on contractual terms to partner the growth of the sector, allow the TSPs to rise and shine, and thereafter pay as they earned.
It is necessary to mention that initially, the TSPs had to pay fixed license fee. The Government offered a new package, known as "Migration Package" giving an option to the licensees to migrate from fixed license fee to revenue sharing fee in the year 1999 with a principle of "Pay as you Earn". This was accepted by the operators unconditionally. License fee and interest till date of migration i.e. 31st July, 1999 was paid by them and no dues were waived off.
The "revenue sharing" regime, was so designed that the Central Government becomes a partner or sharer of "gross revenue of the company." An annual license fee is payable as a percentage of Adjusted Gross Revenue "AGR". In order to arrive at the "Adjusted Gross Revenue (AGR)", only PSTN/PLMN related call charges (Access Charges) actually paid to other service providers within India and Roaming revenues actually passed on to other service providers need to be deducted from the Gross Revenue of the company. Initially, 15% of AGR was fixed as license fee under "revenue sharing," which was progressively reduced to 8% in 2013.
The said "revenue sharing" package turned out to be very beneficial to the telecom service sector, which is evident from the continuing rise in the gross revenue and earning huge profits rapidly, i.e. in some cases the gross revenues rose from '60,000 crores to about '100,000 crores. So year-on-year, the TSPs earned handsomely - and if they meant what they had bargained for, were obliged to pay the agreed revenue share to the Government basis the agreed terms. Remember, some even secured fresh licenses on the same terms!
Way back in the year 2010, Hon'ble Supreme Court had held that "to question the demand raised under the migration package would amount to permitting the TSPs to accept what was favorable to it and reject what was not and TSPs were not entitled to question the terms of the migration package after unconditionally accepting and acting upon the same."
In another Judgment in 2010, Hon'ble Supreme Court had ruled that "it was not open to a TSP to turn around and agitate any dispute after availing of the migration package. A party which has unconditionally accepted the package cannot after such acceptance reject the conditions subject to which the benefits were extended to it under the package. It cannot reject what is inconvenient and onerous while accepting what is beneficial to its interest."
In October 2011, in a matter pertaining to definition of AGR, Hon'ble Supreme Court had, inter alia, held that "TDSAT has no jurisdiction to exclude certain items of revenue, which were included in the definition of AGR. TRAI and TDSAT had no jurisdiction to decide on the validity of the definition AGR in the license agreement. Both Income from licensing and non-licensing activities are in the ambit of gross revenue. TSPs could not have approached TDSAT to question the validity of the definition of adjusted gross revenue mentioned in the license agreement on the ground that the adjusted gross revenue cannot include revenue from activities beyond the license."
After the Judgment of Hon'ble Supreme Court dated 11.10.2011, neither the TSPs had paid any outstanding LF and SUC amount to the DoT and nor they created any provisions in their books of accounts for past and future payment of LF and SUC on the basis of law laid down by Hon'ble Supreme Court. In the given circumstances, TSPs should have created a contingent liability in their books of accounts.
Despite having availed the benefit of migration package, year on year, the TSPs joyfully avoided payments and instead disputed the computations of their liabilities. In fact, to make matters worse for themselves, their shareholders, creditors and the Government, one tiger TSP analysed by us even avoided recognising the existence of potential liabilities which were rapidly accumulating with accumulating disputes year-on-year, as an amount for which it needed to make provisions from the gross revenues earned, so that in case the liability does become payable, it uses the provisioned amounts to meet their obligations.
Moreover, after the Hon'ble Supreme Court Judgment dated 11.10.2011, TSPs have been aware of the fact, that Courts have no jurisdiction to interfere with the definition of AGR and revenue realized by the licensee from activities beyond the license is included in Adjusted Gross Revenue. However, TSPs seem to have been illadvised to do forum shopping and filed various petitions before TDSAT and High Courts resulting in delays in payment of dues to the Central Government and thus continuing to use such amounts for operations and expansions.
In fact, the recklessness is amazingly noticeable in the said tiger TSP contentions that on one hand it insisted that the demands could be only worked out only after the Hon'ble Supreme Court decides the disputes and on the other hand it didn't recognize the liabilities for maintaining provisions. The rap by the SC is telling enough:
"189… The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment. It passes comprehension how they have contended that the demand has to be worked out after this Court renders its decision. Demand had been raised way-back in the year 2003, which is ultimately the subject matter of the lis. As the objections are baseless and wholly untenable, it cannot be said that there was a bona fide dispute concerning various items. The disputes raised could not be termed to be bona fide at all."
The cows ...tigers amongst the TSPs had to come home one day. On October 24, they have!
The provisions set out in the Indian Accounting Standards 37 make it obligatory on companies to recognize a present obligation, legal or constructive, arising out of a past event to make a provision in their books to cover such an obligation in future.
The test laid down is if there is more than 0.5 probability of such an obligation, provision must be made for the same. It is also necessary that a reliable estimate of such estimate can be made. Was the probability more than 0.5? Was it possible to estimate the obligations by the TSPs? Going by the assessment of the conduct of the TSPs, the answer appears more in the affirmative.
Are the pending liabilities arising out of actual gross turnovers: Yes
If liability was disputes, was the corresponding amount from the gross turnover parked aside as part/full provision pending resolution of disputes: No
Were the said corresponding amounts converted into business assets/ventures by the TSPs: Yes
For the period between financial year 2010-11 to 2018-19, TSPs achieved approximate gross revenues of '733600 crores, on which the license fees and spectrum charges would come to approximately '90,000 crores.
In fact the latest balance sheet for the financial year 2018-2019, one of the tiger TSP under analysis shows it was maintaining a miniscule provision of about '2050 crores towards DoT dues till December 2018 and thereafter downgraded and reversed even that by shifting the obligations from being recognized as an obligation for provision to an un-provisioned contingent liability, based on external opinion.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.
Dr. Manoj Kumar
Founder and Managing Partner, Hammurabi & Solomon Partners
Dr. Manoj Kumar is the founder and Managing Partner of Hammurabi & Solomon law firm. Dr. Kumar has been representing various leading Indian and International Corporates, Government Bodies and International Law Firms. An alumnus of prestigious world class institutions such as the Harvard Business School and the National Law School (NLSIU), Bengaluru, Dr. Kumar received his professional andleadership skills from distinguished & globally renowned Professors such as Padma Shri (Dr.) NR MadhavaMenon and Prof. Nitin Nohria, presently the Dean of the Harvard Business School. He is a recipient of theprestigious Mahatma Gandhi Samman 2017; was awarded at the House of Lords, London; he is included inthe A- List Lawyers rankings 2017 by India Business Law Journal (IBLJ) recognizing him as one of the top100 private practice lawyers in India. Dr. Kumar has been named as one of the 100 Legal Luminaries of India,published by LexisNexis in 2016. Known as the Best lawyer in the Corporate M&A, Strategy and Policy &Regulation Practice space in India, Dr. Kumar is known for his innovative, out-of-the box strategies pertainingto most critical and complex matters related to FDI, Cross-Border Transaction, Negotiations, Structuring, Restructuringand advising on the multitude of international agreements. Lawyer, Policy Expert, IndependentDirector, Author, Strategist, Columnist, Philanthropist, Thought Leader and Guest Faculty (at top of the lineLaw School & the prestigious Indian Institute of Management (IIM), Dr. Manoj Kumar has many introductions