October 28, 2019

Waiving of Government dues against Hon Supreme Court Order

- Dr. Manoj Kumar, Founder & Managing Partner [ Hammurabi & Solomon Partners ]


Recently Hon. Supreme Court on 24th Oct, 2019 upheld the stand taken by the Department of Telecommunications in a long protracted legal battle for payment of Dues to the Government in terms of “License Fee (LF) & Spectrum Usage Charge (SUC)”. On being asked by the Hon Court for time required to make payments, six months were asked and Hon Court was pleased to grant 3 months’ time.

The liability till 2016-17 comes to around Rs. 50000 crores for Airtel and Rs. 40000 crores for Vodafone -Idea Ltd with more liability of erstwhile Vodafone group of companies. In case of Airtel around Rs 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.

Initially, Telecom Service providers (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 licence 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 "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. Despite being availing the benefit of migration package the telecom service providers disputed the terms which resulted in non-payment of the requisite licence fee and spectrum charges to the public exchequer based on agreed “AGR”. Such amounts with-held from the government from time to time were obviously used in business operations and expansions within and outside the country. TSPs such as Airtel & Vodafone for instance have made investments, inter-alia, in Infratel, DTH & tower businesses after the migration package apart from expansions in many other countries.

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 favourable 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 licence agreement. Income from both - 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 licence agreement on the ground that the adjusted gross revenue cannot include revenue from activities beyond the licence.”

Nevertheless, 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.

Non-disclosure of known contingent liability and outstanding dues pertaining to LF and SUC in the statement of accounts and balance sheet is an economic offence. TSPs have risked to being accused of playing fraud upon the investors and shareholders by continuously not disclosing the actual liabilities in their books of accounts. SEBI may well find it difficult to refrain from intervening and initiating investigation, and thereafter, taking necessary action against such TSPs.

Moreover, after the Hon’ble Supreme Court Judgment dated 11th October 2011, TSPs have been aware of the fact, that Courts have no jurisdiction to interfere with the definition of AGR and revenue realised by the licensee from activities beyond the licence is included in Adjusted Gross Revenue. However, TSPs seem to have been ill-advised 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.

Supreme Court in the judgement of 24th October 2019 has mentioned that “No litigant can be permitted to reap fruits on such inconsistent and litigate for decades in several rounds which is not so uncommon but is disturbing scenario projected in many cases. We have examined the matter upon merits and the aforementioned conclusions indicate the frivolous nature of objections.” With the TSPs being perceived as having dishonestly used the legal process to delay payment of Government revenue share, could the Government have any justification to provide any support at all now?

After the recent judgement, TSPs have started thumping their chests claiming that they do not have money to pay. It was their considered and commercial decision not to pay the demands raised by the government when due and litigate to avoid or delay payments. In a market driven economy, is there any place for the Government to intervene to help individual operators by changing certain rules and disturb the level playing field? The major demand of outstanding dues is only on two operators and not the entire sector. Can the Government be then involved in this matter risking to be seen as favouritism?

These TSPs are backed by strong promoters and thus have capacity and capability to raise funds to pay these long standing government dues. While one i.e Bharti has been running profitable telecom business in 18 other countries as well with a market cap of over Rs. 250000 crores , another i.e Aditya Birla entity has a market cap of is around Rs 2.3 lakh crores and Vodafone itself, the other Principal of VIL has a market cap of USD 54.88 Billion. Should the “Principals” not step in to make payment, in line with the repeated assertions of such a principle by the Honb’le Supreme Court in many recent cases? Can the promoters shirk their responsibilities from payment of dues or non-disclosure in balance sheet which in itself is a serious offence? The market caps of the promoters’ equity holdings in some cases is much higher than the dues, and thus the promoters can well have dilution of equity or arrange loans for payment of the dues.

With such strong “Principals”, is there any case at all for the government to intervene for non-implementation of Hon’ble Supreme Court judgement. The Government should be well advised to follow precedents of non-intervention as in the case of Aircel and Reliance Communications merger when their outstanding demands were actively pursued. In fact, not only in the Telecom sector, in other sectors too, the Government does not intervene to help an individual operator. The Civil Aviation Ministry watched the downfall of Jet, India’s one of the largest Airline, from a distance.

The Government should be well advised not fall into vortex and enforce the law of the land to protect the tax payers and exchequers’ money and in compliance of Hon’ble Supreme Court Judgment, Central Government must recover its dues within the time specified by Hon’ble Supreme Court.

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