Opinion SC ruling in telecom dues case softens a crippling blow
The welcome direction of the SC will now enable reconsideration of the AGR dues, and waiver of interest and penalty
From 1999, the New Telecom Policy made a shift to a revenue sharing model. This model is credited for the huge growth of the sector. 
The decision of the Supreme Court permitting reconsideration of Adjusted Gross Revenue (AGR) dues of Vodafone is a welcome step and will set right the damage done by the judgment in Union of India vs Association of United Telecom Service Providers of India that was delivered in October 2019. When the telecom sector was opened to private operators in 1994, a fixed licence fee had to be paid. From 1999, the New Telecom Policy made a shift to a revenue sharing model. This model is credited for the huge growth of the sector.
The definition of the word “gross revenue” was very wide and included interest, dividend, and other miscellaneous revenue. The AGR reduced the gross revenue by certain items, including service tax and sales tax. Telecom operators had to share 15 per cent of AGR as licence fees with the Union of India; this was later reduced to 8 per cent.
A major area of dispute was whether AGR represented only the actual revenue and not the notional revenue. Most telecom operators had a tariff rate but would grant discounts and rebates to customers to promote sales. Thus, a pre-paid voucher that had a maximum retail price of Rs 100, was sold at a 25 per cent discount and the customer paid only Rs 75. While the Department of Telecommunications insisted that the telecom operator had to pay 8 per cent of Rs 100, the telecom operators claimed that this liability was only on the actual revenue.
Initially, when the matter came up before the Telecom Disputes Settlement Appellate Tribunal (TDSAT), Justice Aftab Alam, retired Supreme Court Judge and Chairperson, held that the licence fee was payable only on the actual revenue, and not the notional revenue. In other words, whatever discounts, commissions, and rebates that were given had to be deducted and only the net amount realised by the telecom operators would be the “adjusted gross revenue”.
This ruling was made in 2015 and TDSAT noted that the practice of granting discounts and rebates had continued from 2003 onwards. In October 2019, the Supreme Court reversed this view and held that the gross revenue would mean income from all possible sources. But what was disastrous to the telecom companies was that the fee of 8 per cent was held payable on the published tariff of Rs 100, making them liable to pay 8 per cent on revenue that was never earned.
It is an elementary principle of accounting that the word “revenue” refers to the actual inflow that accrues or arises to a company. If a hotel has a tariff rate of Rs 5,000 per night, but actually rents the room at Rs 3,000, all taxes are payable only on Rs 3,000. Accounting Standards (AS-9) also mandate that revenue would only mean the consideration that is received or receivable after granting discounts, rebates and deductions. Indeed, the Companies Act, 2013 makes it mandatory that these accounting standards are followed.
In complete contrast to settled law, the Supreme Court observed that accounting standards are in the nature of guidelines, they are not comprehensive and do not supersede the practice of accounting. The Court went on to hold that these accounting standards would not prevail over the licence agreement. The net result of this erroneous decision was the liability towards licence fees amounted to Rs 23,000 crore for the telecom companies.
But the near fatal blow to the telecom operators was the levy of interest, penalty and interest on penalty. Clause 20.5 of the agreement stipulated that delay in payment of licence fees would attract interest of 2 per cent per month above the prime lending rate of the State Bank of India. This was to be levied by compounding it monthly. Thus, if the SBI rate was 12 per cent, the interest was payable at 14 per cent compounded monthly. A further penalty was leviable for non-payment, and this was further increased by interest on penalty. The net result was that out of the total demand of Rs 93,000 crore on all telecom companies, the principal amount was just Rs 23,000 crore; the balance of Rs 70,000 crore represented the interest, penalty and interest on penalty — a staggering 75 per cent of the claim against the telecom sector.
Indeed, the Supreme Court ought to have noted that telecom operators conducted their business in terms of the orders passed by the TDSAT. The licence fee of Rs 23,000 crore was not paid because of the orders of the Tribunal and represented a levy on amounts that were never received. This order was in force till the Supreme Court verdict in October 2019. The least that the Court could have done was to waive the interest, penalty and interest on penalty. Even though these staggering figures were shown, the Court refused to relent in subsequent applications. It was also strange that despite the Union government’s willingness to grant a 20-year repayment period, the Court reduced it to 10 years.
The welcome direction of the SC will now enable reconsideration of the AGR dues, and waiver of interest and penalty. In 2016, the SC had highlighted the need for courts to reckon the economic impact of their judgments. In 1970, almost 50 years earlier, the SC had held that a penalty could be levied only when a person had consciously disregarded his statutory obligations. These salutary safeguards could have reduced the financial burden on the telecom sector. Mercifully, this is an opportunity to undo the crippling blow of the 2019 judgment.
The writer is a senior advocate. He had appeared for a telecom company in the 2019 case
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