In Union of India v. Assn. of Unified Telecom Service Providers of India[1] (AGR case), when the telecom service providers (TSPs) knocked the doors of the Supreme Court, the Supreme Court whilst acting as an executive court overlooked the economic impact of its decision and forced the TSPs to suffer an unconscionable bargain at the hands of the executive. Though the judiciary had the opportunity to remedy the wrongs of the State in this case, it is respectfully submitted that the judiciary failed to do so. The Court not only forced the TSPs to suffer in the unconscionable bargain but also modified the payment plan to the further detriment of the TSPs than what was proposed by the Union of India.
In this article, the author seeks to present a critique of the Supreme Court’s decision in AGR case[2] through author’s own analogy of the adjusted gross revenue (AGR) with income tax.
The case
In the erstwhile licence regime, the TSPs were forced to pay a fixed licence fee based on irrationally exorbitant bids; however, the New Telecom Policy of 1999[3] (NTP) introduced a revenue sharing regime, whereby the TSPs were to pay a fixed percentage of their AGR to the Department of Telecommunications, Government of India (DoT) along with an entry fee.[4] The NTP of 1999 was introduced by the Government of India in order to provide some relief to the TSPs. This fixed percentage was initially fixed at 15% and was subsequently reduced to 8%. In order to arrive at the licence fee payable by the TSP, the AGR as per the licence agreement would include revenue generated by licensees from both licensed and unlicensed activities (i.e. revenue from activities for which the telecom licence is not required, for instance, leasing out infrastructure, returns earned on investments).
As per Section 4(1)[5] of the Telegraph Act, 1885, the Union of India owns the exclusive privilege of establishing, maintaining and working telegraphs and may grant a licence to any person to establish, maintain or work a telegraph. In order to expand telecom services, private enterprises were invited to participate in the telecom sector. It is against this backdrop that the TSPs were granted licences to operate in the telecom sector.
The terms and conditions contained in the licence agreement under the NTP defines AGR in Cl. 19.1 read with Cl. 3.2 in Part II[6] thereof, in an inclusive manner and covers within its ambit revenue from licensed as well as non-licensed activities. For instance, it covers revenue on account of sale proceeds of handsets, interest, dividend, revenue from sharing infrastructure and any other miscellaneous revenue. Such a wide definition of revenue for computation of licence fees is unwarranted. When the NTP was introduced, the TSPs reasonably expected to pay a percentage on the revenue generated from licensed activities i.e. activities for which the licence is obtained.
In AGR case[7], the Supreme Court on 24-10-2019 ordered the TSPs to pay the AGR levies along with interest and penalty based on its interpretation of definition of AGR as per DoT within a period of three months. The Union of India after taking into consideration various factors including the adverse impact on the economy submitted before the Supreme Court a payment plan wherein the AGR dues would be recovered over a period of twenty years, and to that end, filed a miscellaneous application seeking extension of time to the TSPs for making the payment.
By its order of 1-9-2020 in Union of India v. Assn. of Unified Telecom Service Providers of India[8] (order in miscellaneous application), the Supreme Court of India without much deliberation granted a period of ten years (i.e. half of the period sought by Union of India) to the TSPs to clear their AGR dues.[9] When the payee (in this case the Government) proposed twenty years for recovery of the dues, there is no reason why a constitutional court must intervene to reduce it to ten years. The Supreme Court overstepped its duty to interpret the law and instead acted like an executive court.[10]
AGR alike income tax
TSPs pay corporate tax at around 30% on their total income (comprising of the gross revenue after allowing various deductions) in the form of income tax to the Government of India and in addition are liable to pay licence fee at 8% to the DoT on the very same revenue generated. Income tax is levied on their total income after allowing various deductions and exemptions from the gross total income, whereas, the licence fee is a levy on their AGR without exemptions and negligible deductions. Thus, these TSPs are liable to pay levy twice on the same income.
In the author’s opinion, the wide definition of AGR seems to have been inspired by the widest definition of income under the Income Tax Act, 1961[11]. It resembles an attempt to include nearly every possible revenue within its ambit, just like the definition of income endeavours to do. The TSPs raised an objection to the definition of AGR as it included income/revenue even from the non-operational activities for computation of licence fees. The irrationality of the wide scope of definition is comprehensible by any man of commercial wisdom.
In the author’s view, on the pretext of licence fee, a form of tax is levied on the income earned by TSPs. Though this tax is levied at a lower rate compared to the corporate tax rate, however, it is levied on a much wider base because unlike the computation of taxable income,[12] while computing AGR, there are negligible deductions and no exemptions available.
AGR — From the standpoint of the Supreme Court
The TSPs inter alia contended before the Supreme Court that the definition of AGR must be understood as per Accounting Standard 9[13] and that revenue from non-licensed activities must not be a part of AGR.
The Supreme Court examined various heads of revenue mentioned in the definition of AGR and came to the conclusion that the definition must be interpreted in its literal sense to include them while computing the AGR. Astonishingly, the TSPs are expected to pay licence fees even on various discounts given to the users. Gains from foreign exchange rate fluctuations are also to be included within AGR for computation of licence fees. The wide definition also includes late fees. It may be contended that the objective behind including late fees within the definition of AGR is that it is also revenue received by the TSPs. However, late fees for delayed payments by the users which have been waived by the TSPs for goodwill, are also included in the computation of AGR. Thus, amount which is not received by the TSPs has also been included in the computation of AGR. It is humbly submitted that these inclusions are unreasonable and prima facie arbitrary.
The Court’s reasoning is based on the premise that there has been a paradigm shift in the telecom policy which is extremely beneficial to TSPs. The TSPs having taken the advantage under the beneficial policy are bound by the terms of the licence agreement, and thus the definition of AGR should be interpreted without any reference to any Accounting Standards which in author’s opinion is sans commercial wisdom. The Supreme Court overlooked the well-settled legal principles of interpretation of commercial contracts and Lord Diplock’s observations in Antaios Compania Navieras SA v. Salen Rederierna, “… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.[14]
Unconscionable bargain
A simple analogy of the Supreme Court’s interpretation is that of a tenant occupying a flat in the building being asked to pay a percentage of her total income and expenses as rent for the flat. There is no rational connection between the two.
The TSPs are embroiled in an unconscionable bargain due to the widely worded definition of “AGR” in the licence agreement. Expecting the TSPs to pay a percentage of their gross revenue for a licence to operate telecom services is unreasonable. The terms and conditions of the licence must have nexus to the licensed activities.[15]
Although the Supreme Court observed that the Central Government has the exclusive privilege to carry on telecommunication activities and must get the best price for parting from it, it further noted that the State is a trustee of natural resources and is obliged to hold it for the benefit of its citizens. In effect the Supreme Court observed that the State is a trustee of the natural resources and is duty-bound to hold it for the benefit of the citizens. It remains to be seen which principle of trusteeship would allow the trustee State to make whopping profits for performing its duties. It must be understood, that the objective of introducing the NTP was to create an environment which enables continued attraction of investment in the sector and facilitates the creation of communication infrastructure by leveraging technological development,[16] not revenue generation.
The State has imposed a partnership on the TSPs. The DoT has demanded a certain percentage of the revenue that these TSPs generate from operational and non-operational income. This makes one wonder, why should the TSPs pay a percentage even on their passive income to use a licence to generate operational income?
Economic impact of judicial decisions
In Vodafone International Holdings BV v. Union of India[17] (Vodafone case), the Supreme Court was dealing with a case wherein the Tax Department had made demands worth nearly Rs 12,000 crores from Vodafone International as capital gains tax under the Income Tax Act, 1961. The Supreme Court rightly interpreted the law as it stood on the date of the transaction and arrived at the conclusion that Vodafone International was not liable to pay the demand of nearly Rs 12,000 crores. The judgment was met with appreciation from the investor community around the world. It instilled confidence in the Indian justice system for domestic and foreign investors. It paved the way for believing that even though the executive arm of the State may want to unreasonably extract taxes from the corporates, the judicial arm will undo the wrongs and deliver justice. Nevertheless, this appreciation was short spanned, because the Finance Act of 2012[18] overturned the effect of the judgment and reassured the masses that Indian authorities would not leave any stone unturned for extracting maximum taxes from corporations. However, this episode left an indelible impression in the minds of the investor masses about the Supreme Court.
Per contra, in the present case, the Union of India by the miscellaneous application brought to the notice of the Supreme Court the plausible adverse impact on the telecom sector if sufficient time was not granted to the TSPs to clear the AGR dues. The Union of India took notice of the ramifications of the Supreme Court’s order arising out of its own interpretation of the AGR definition, it accordingly submitted a plan for recovery of the AGR dues. However, the Supreme Court reduced the time period by half without substantiating it with any reason whatsoever. It is respectfully submitted that when the revenue collector (in this case the DoT) had sought a time-frame of twenty years for collection of the AGR dues, the Supreme Court, by reducing the period to ten years has performed an act of judicial encroachment. A reasoned order is one of the most fundamental principles of law, it is humbly submitted that in AGR case[19] the Supreme Court has failed to adhere to the same.
In 2017, in Shivashakti Sugars Ltd. v. Shree Renuka Sugar Ltd.[20] the Supreme Court was dealing with a case wherein the High Court had ordered the closure of a sugar factory for violating the minimum distance requirement. The Supreme Court while quashing the order of closure succinctly highlighted the interplay between economics and law and the need to keep economic considerations in mind while pronouncing judicial decisions. It observed that “… the Court needs to avoid that particular outcome which has a potential to create an adverse effect on employment, growth of infrastructure or economy or the revenue of the State. It is in this context that economic analysis of the impact of the decision becomes imperative.”[21] This judgment is considered as a paradigm case for law and economics in the judicial sphere for considering the economic impact of judicial decisions.
However, while delivering the judgment in AGR case[22], the Supreme Court seems to have ignored the aforesaid observation in its holistic form and seems to have considered only the last factor stated therein, namely, “adverse effect on revenue of the State”.
While hearing the plea of the TSPs disputing the calculation of the AGR dues, the Supreme Court observed that there can be no going back on AGR dues and held that the calculation of the DoT is to be treated as final, adding that there is no scope for any reassessment or recalculation of the said dues.[23] Notwithstanding the analogy between the AGR dues and income tax, even the taxation laws allow the assessees to challenge the demand orders and dispute the calculation of the tax dues. Assessees are heard before the tax demand is finally adjudicated. However, the resistance and the obdurate stand taken by the Supreme Court for not hearing the parties on the disputes for calculation of the AGR dues is in the author’s humble opinion incomprehensible and blatantly in denial of their right to be heard on the issue of computation.
As discussed above, in 2012, when the Supreme Court delivered the judgment in Vodafone case[24], the Government proactively introduced in the Finance Act, 2012 amendments to the Income Tax Act, 1961 to nullify the effect of the Court’s ruling. This was done to enable collection of revenue from Vodafone International. However, when the judgment in AGR case[25] was delivered in late 2019 enabling the Government to collect revenue, the Union of India took cognizance of the economic impact and brought before the Court the huge repercussions of its order and proposed to grant the TSPs some relief by providing them twenty years to make the payment of the AGR dues. However, in this case, the Supreme Court diluted the State’s attempt to ease the situation and granted a half-hearted “relief” to the TSPs.
Conclusion
Although it may be contended that the DoT has a right to maximise its revenue from the collection of licence fees, the manner in which the DoT may levy, demand and collect the licence fees must be reasonable and equitable. The most apt quote to draw guidance from for the aforesaid in context of taxes is,
“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”[26]
Besides the DoT’s role, the indulgence shown by Supreme Court in the matter, as regards the determination of method of calculation of the AGR and also, as regards the determination of the timeline for the clearing of the AGR dues has left legal minds pondering over the rationale of the Supreme Court behind the same. The Supreme Court interpreted the definition of AGR not only without considering its economic impact but also without taking into account the lack of equitable considerations. Further, the Supreme Court frustrated the Union of India’s attempt to give some relief to the TSPs from the burden which it itself had inflicted and offered to aid the State to quickly recover its dues, so to say by aggressively gathering revenue. The foregoing culminates in one conclusion, that is, the process of transformation of the constitutional court into an executive court[27] has progressed over the years.
† Advocate and Licentiate Company Secretary.
[3] New Telecom Policy, 1999. <http://www.scconline.com/DocumentLink/nyJLbz00>.
[4]License Agreement for Unified License, Cl. 18 <https://dot.gov.in/sites/default/files/Unified%20Licence_0.pdf> accessed on 14-6-2021.
[5] Telegraph Act, 1885. <http://www.scconline.com/DocumentLink/zjzpZh69>.
[6]License Agreement for Unified License, Cl. 18. <https://dot.gov.in/sites/default/files/Unified%20Licence_0.pdf> accessed on 14-6-2021.
[8] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703.
[9] The arrears accumulated for a period spanning over twenty years.
[10] See Gautam Bhatia, The Fear of Executive Courts (The Hindu, 14-12-2018). <https://www.thehindu.com/opinion/lead/the-fear-of-executive courts/article25735185.ece#:~:text=By%20an%20executive%20court%2C%20I%20mean%20a%20court,compunctions%20in%20navigating%20only%20according%20to%20that%20compass> accessed on 27-11-2020.
[11] Income Tax Act, 1961. <http://www.scconline.com/DocumentLink/7VAV83wS>.
[12] Taxable income under the Income Tax Act, 1961 allows various deductions of expenses and expenses.
[13] As prescribed by the Institute of Chartered Accountants of India.
[14] 1985 AC 191 : (1984) 3 WLR 592 : (1984) 3 All ER 229.
[15] Bharati Hexacom Ltd. v. Union of India, 2017 SCC OnLine Tri 125.
[16] New Telecom Policy, 1999, para 3. <http://www.scconline.com/DocumentLink/nyJLbz00>
[18] Finance Act of 2012. <http://www.scconline.com/DocumentLink/83JFSs1j>.
[19] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703.
[20] (2017) 7 SCC 729 : 2017 SCC OnLine SC 602.
[21] (2017) 7 SCC 729 : 2017 SCC OnLine SC 602, para 44.
[22] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703.
[23] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703, para 38.2.
[26]Jean-Baptiste Colbert, Louis XIV’s Finance Minister famously declared this quote which meant that, “the largest possible amount of revenue with the smallest possible amount of economic and political damage.”
[27] See Gautam Bhatia, The Fear of Executive Courts (The Hindu, 14-12-2018). https://www.thehindu.com/opinion/lead/the-fear-of-executive courts/article25735185.ece#:~:text=By%20an%20executive%20court%2C%20I%20mean%20a%20court,compunctions%20in%20navigating%20only%20according%20to%20that%20compass> accessed on 27-11-2020.