Adjusted Gross Revenue: What the Supreme Court judgment heldOctober 30 2019
Definition of Gross Revenue
The definition of gross revenue was the first aspect considered by the Supreme Court in its judgment.
It noted that Gross revenue has been defined to be inclusive of specific items mentioned in clause 19.1 and any other miscellaneous revenue, without any set-off for related items of expense, etc. All the licensees accepted the migration package and signed the agreements.
When under a contract signed by the parties, gross revenue and AGR have been given the meaning coupled with the format and the annexures which form part of the contract, the meaning in clause 19 of the gross revenue and the format given in the contract has to prevail, the Court held.
The submission of the telecom operators to define revenue in terms of Accounting Standard 9 (AS-9) was turned down by the court. It held that the definition given in the contract has to prevail and not what is generally “revenue” as per AS-9.
“No doubt about it that the accounts have to be maintained as per the AS9 regime prevalent at the relevant time. The definition of the contract has to prevail and not what is generally revenue, as defined in AS9.”
The Court also noted that the question as to what constitutes Gross Revenue had been agitated earlier and was concluded in the decision in 2011.
The definition of ‘gross revenue’ in clause 19.1 is inclusive, and it includes explicitly:
- installation charges;
- Late fees;
- sale proceeds of handsets;
- sale proceeds of any other terminal equipment, etc.
- revenue on account of interest;
- revenue on account of dividend;
- value-added services;
- supplementary service as fixed charges;
- access or interconnection charges;
- roaming charges;
- revenue from permissible sharing of infrastructure; and
- any other miscellaneous revenue.
No set-off can be claimed for related items of expense etc. on any of the items mentioned above of the inclusive definition and on the miscellaneous revenue, the Court made it clear.
The Court also held that Clause 19.2 of the agreement excludes certain items from gross revenue to arrive at the figure of AGR, which are (a) PSTN/ PLMN related charges (access charges) actually paid to other eligible service providers within India; (b) roaming revenue passed on to the TSPs through service tax paid to the Government, if gross revenue had included the component of service tax and sales tax.
The next aspect discussed in this context was about TRAI recommendations.
Regarding the same, the court held that the Central Government alone has the right to define revenue and has parted with the privilege under section 4 of the Telegraph Act. A licence granted under section 4(1) of the Telegraph Act is in the nature of the contract between the Central Government and the licensee. The provisions of the TRAI Act do not affect the specific exclusive privilege of the Central Government to carry on telecommunication activities, nor do they alter the contractual nature for the licence granted under the proviso to section 4(1) of the Telegraph Act.
After TRAI makes the recommendation, the Central Government shall take a final decision under section 11(1)(a)(ii) of the TRAI Act. The TRAI shall have the function to make a recommendation. In case of difference between TRAI and Central Government with regard to particular terms or conditions of the licence, the recommendation of TRAI cannot prevail, and it is the decision of the Central Government, which is to be final and binding. Thus, the Court held that the TDSAT has no jurisdiction to decide upon the validity of terms and conditions incorporated in a licence.
In the instant case, the licensee had accepted that the licence fee would be a percentage of the gross revenue, which should be the total revenue of the licensee company. The licensee agreed that the Government has to take a final decision not only concerning the percentage of revenue share but also the definition of revenue for this purpose. The licensee could, therefore, not have approached the TDSAT to question the validity of the definition of adjusted gross revenue in the licence agreement on the ground that the adjusted gross revenue cannot include revenue from activities beyond the licence.
The Court also adverted to its 2011 decision in Union of India v. AUSPI as per which the licensing company had accepted in the letter dated July 22, 1999 that the licence fee would be a percentage of the gross revenue, which should be the total revenue of the licensee company. The licensee agreed that the Government has to take a final decision not only concerning the percentage of revenue share but also the definition of revenue for this purpose. Therefore, the decision would act as a res judicata against the licensees, the Supreme Court held.
Even otherwise, on merit, the Court held that the submission raised by the Telecom operators is baseless. The contractual definition of gross revenue is binding. They cannot avoid the consequences of the contractual definition which has been accepted by the parties, and they are bound to make payment of licence fee on the basis of gross revenue, which would be the total revenue of the licensing company. As the Government has not accepted the TRAI’s recommendations, the decision of the Central Government on the point of definition of adjusted gross revenue was final and binding, the Supreme Court ruled.
Discount and Commissions
The Court held that as per the definition of “gross revenue” in clause 19.1 of the licence agreement, it is apparent that the gross revenue has to be taken into consideration without any set off for related items of expense.
“Gross amount, as per the definition, is the gross revenue, without setoff, is to be taken into consideration including the discounts given.’
It noted that the parties understood right from the beginning that the gross revenue does not exclude discounts, commissions, rebate etc. and specific challenge made to the same had not been accepted in 2011.
Importantly, the Court also held that the definition of ‘gross revenue’ is independent of Accounting Standard 9 (AS-9) as the definition of revenue in AS-9 cannot govern the definition in Clause 19.1 of the licence agreement.
What has been defined in AS-9 is revenue, whereas, for a licence fee, gross revenue is the revenue.
“It would be greatest fallacy to say that while gross revenue has been defined in Clause 19.1 of agreement, revenue has not been defined in the licence agreement. What has been defined as gross revenue is in fact broader definition of revenue and has to be taken as definition of revenue for licence agreement. An attempt has made to wriggle out of the rigour of the definition of gross revenue by banking upon the definition of revenue in AS9.”
Calling this an attempt to scuttle the effect of the previous decision in Union of India v. AUSPI, the Court held that Gross revenue as defined in the agreement cannot be diluted in any manner whatsoever based on AS-9 as AS-9 is only for method of accounting and specific definition of revenue
A submission was raised on behalf of the licensees relying upon JK Industries that fair value has to be taken into consideration to reduce discounts etc. The Court, however, held that the concept of fair value is not the basis of AS-9.
Fair value is the operating concept of IND AS-18. In AS-9, revenue recognition is at nominal value and that is the fundamental difference between the two accounting standards. Thus, the nominal value has to be taken as the one which is relevant for AS-9.
Thus, the Court rejected the claim for various forms of discounts, commissions, prepaid vouchers, goodwill waiver etc. raised on behalf of the licensees. It set aside the finding of the TDSAT to the extent it was contrary to the stand taken by DOT, and held that all discounts and commission etc. form part of the gross revenue for the purpose of payment of licence fee.
Gains arising out of Foreign Exchange Fluctuations
The telecom service providers have transactions of purchasing equipment or settling roaming charges etc. in foreign currency. The change in exchange rate vis-à-vis a foreign currency from the date of transaction to the time of settlement may cause gain or loss based upon the fluctuations in the exchange rate of rupee. The TDSAT in its 2007 judgment had held that the fluctuations in the foreign exchange rate have nothing to do with the licensed activities of the telecom service providers.
The TDSAT in the impugned judgment of 2015 had held that foreign exchange gains are of two types. The reduction in liability towards payment for the purchase of capital goods from prepaid and payment of charges or outroamers and secondly in receipt from inroamer.
In the first case, there is a decrease in cost, which cannot be taken as revenue for the purpose of determining AGR. In case of reduction, payment of charges for outroaming the reduction is allowed only on payment basis. Therefore, the difference between accrual and paid basis cannot be taken as revenue for AGR calculation, and in the second case, revenue is recorded on accrual basis. Any charges till payment is made, are notional income, which cannot be taken as revenue for AGR basis. On actual payment since no discount is given and the actual receipt is less, no licence fee should be charged if the same is more. Thus, any gain or loss due to foreign exchange fluctuations will have no bearing on the licence fee, the TDSAT had held.
The Supreme Court held that it was apparent that there can be realised as well as unrealised foreign exchange gains/losses which may differ depending on whether or not the transaction has been completed by the end of the accounting period. The realised gains or losses are the gains or losses that have been achieved. It means that the customer has already settled the invoice before the close of the accounting period. The unrealised gain or loss is recorded in the balance sheet.
When preparing the actual financial statement, companies are required to report the transaction in the home currency to make it easy to understand all the financial reports. It means that all transactions carried out in foreign currency must be converted to the home currency at the current exchange rate when the business recognises the transaction. The exchange difference which arises on reporting the mandatory items at the rate different from the ones at which they are recorded initially, must be recognised rate as an income or an expense.
Thus, the Court concluded that gain from foreign exchange fluctuation is to be taken in the calculation of AGR, and that is the actual revenue and cannot be ignored.
Moreover, in the definition of gross revenue, any other miscellaneous revenue is included, and when once the item has to be shown in the balance sheet or profit and loss account, it has to be accounted for gross revenue, even as a notional figure. When loss can be claimed as an expenditure, profit or gain due to fluctuations in the rate of foreign exchange has also to be accounted for towards gross receipt, which is gross revenue.
The finding to the contrary recorded by the TDSAT was, therefore, set aside.
Monetary Gains on Sale of Shares
It was submitted on behalf of the Tata Teleservices Ltd. and other licensees that gains from sale of shares should not be included in the inclusive definition of gross revenue. The gains on the sale of capital assets and receipt from the sale of scrap.
The issue that arose was when an asset/scrap is sold for more than its book value, then whether the difference between net sale proceeds and book value should form part of the gross revenue?
The TDSAT had held that capital gains are of two types. (i) Gain over and over the gross book value (cost) of the assets, that is when sale proceeds are more than the original purchase cost of the assets; and (ii) gain over and above the net book value, i.e. when the sale proceeds are less than the initial purchase cost but more than the net worth of the asset.
It had held that the gain on sale of capital assets as per the first case, i.e., when the increase is over and above the book value of the asset, it will form part of calculation of gross revenue.
The Supreme Court, however, held that given the definition of gross revenue in the licence agreement, every amount which is more than the book value of the current asset and comes to licensee company, has to be considered for calculation of gross revenue without netting off. Thus, it ruled that the reasons given by the tribunal that any gain over and above the net book value, that is, when the sale proceeds are less than the original purchase cost but more than the net worth of the assets, has to be excluded from the gross revenue, cannot be accepted.
Insurance claim in respect of capital assets
Where an asset is destroyed, and the insurance claim is received for more than its book value, the difference between the insurance claim received and the book value was treated as revenue by the DOT for computing AGR.
This was not contested by the licensees initially when the order in the year 2007 came to be passed. It was raised after the Supreme Court remitted the case to the TDSAT in the year 2011.
The TDSAT had held that if the asset destroyed is replaced immediately and the claim received is more than the actual cost of replacing the equipment, the difference would be taken as income. In case the asset destroyed is not replaced immediately, the gain to the extent more than the gross book value is considered as income. If the asset has appreciated over time, then insurance claim received over and above the total cost, though being real gain, is not to be treated as revenue for clause 19.1 of the licence agreement, the TDSAT had ruled.
The Supreme Court, however, turned down the argument of the licensees holding that insurance claim over and above the book value is considered as revenue and not the value of the capital asset as there is an inflow of cash received. It is accounted for in the profit and loss account. It has to form part of the gross revenue as defined in clause 19.1, the Supreme Court held.
The Court also ruled that the artificial bifurcation of insurance claim made by the TDSAT cannot be accepted and is contrary to the contractual definition of gross revenue. The finding of TDSAT to the extent it was contrary to revenue was, therefore, set aside.
Amount of negative balance of prepaid customer
Negative balance occurs when a prepaid customer exhausts the available talktime. Telecom Service Providers as a matter of policy, sometimes provides the customer with a small amount of loan talktime as it may deem fit, to the tune of Rs. 10 or Rs. 20. The utilisation of this talktime results in negative balance in the account of the prepaid customer.
The balance is recovered from the subsequent recharge made by the customer. In case the customer fails to recharge the fresh top-up amount, the balance remains negative in the prepaid account of the customer.
The TDSAT had held that the negative balance cannot be taken into account for computation of gross revenue as it is notional revenue, which is neither billed nor received. It is not due to the fault of the licensee, and the licensee does not gain anything from such usage beyond the permitted duration for the amount received by it.
The Supreme Court, however, held that the amount of negative balance is a business strategy, and the amount is adjusted in case recharge is opted for. Even otherwise, it is billed and reflected on an accrual basis in the account of the customer. It is a part of revenue and cannot be deducted from the gross revenue to be worked out as per the definition of gross revenue.
Thus, it was held that the finding of the TDSAT does not align with the meaning of gross revenue in factual aspects of the case and is liable to be set aside.
Reimbursement of the infrastructure operating expenses
The telecom service provider needs infrastructure like towers to operate. To achieve economies of scale, two or more companies many times share one such passive infrastructure.
The licensees had submitted that setting up of passive infrastructure like towers is not an activity that requires licence. The tower structure is sometimes erected by independent parties and is offered to service providers on rent. Similar activity, when carried out by a service provider, should not be treated as part of licensed activity. Therefore, it was their case that revenue earned by licensee from rent/leasing out passive infrastructure should not form part of adjusted gross revenue.
It was also submitted that renting/leasing of dark fibre towers etc. is carried out by IP1 operators. These operators do not require any licence. It was a nonlicensed activity and should be out of the purview of adjusted gross revenue.
However, the Supreme court noted that in the definition of gross revenue, the item ‘sharing of infrastructure facility’ is explicitly mentioned.
In the format in Appendix 2 to Annexure II also, the entire amount is required to be shown. It has been specifically mentioned that there cannot be any set-off of the amount of gross revenue, and the entire money received has to be treated as the gross revenue for the determination of licence fee, the Court observed.
“It is not the determination of profit. The gross revenue carries a different definition, and the intendment is clear to prevent disputes.”
Thus, the entire amount received by the licensee on account of sharing of passive infrastructure has to be counted in the gross revenue while working out AGR, the Court held. The finding to the contrary recorded by the TDSAT was, therefore, set aside.
Waiver of late fee
Late fee is a penalty charged by the licensee in case the customer fails to pay the bill before the due date. Sometime late fee is waived off by the licensee as a goodwill gesture at the time of payment. The submission raised on behalf of the licensee was that the licence fee should be payable on the realised revenue. What has not been realised, cannot form part of revenue.
The TDSAT had held that the late fee is a penalty and the penalty that has been waived off cannot be added to the revenue.
However, the Supreme Court disagreed. It held that mere non-realisation of late fee for any reason, cannot be a ground to exclude it from gross revenue as per its definition. Late fee is explicitly included in the definition of gross revenue. Gross revenue has to be taken whether it is received or not, and netting off is not allowed under clause 19.1. Once the amount has been billed, it is for the licensee to realise it, the Court said.
“There cannot be any justification for excluding late fee from the gross revenue. In case money is lost by the service provider, the same losses cannot be excluded from the AGR for the determination of licence fee.”
Thus, merely by waiver, it cannot be ousted from the purview of gross revenue once it becomes leviable. Thus, the Court concluded that the finding of the TDSAT is not sustainable and set it aside.
Gains from roaming charges and PSN passthrough charges
Roaming charges apply when the customer leaves the home network area and roams into the network or coverage area of another service area. Passthrough charges are charges paid by the licensee to the licensor for allowing their subscribers' calls to be carried on their networks. Clause 19.2 of the licence agreement provides for certain deductions of roaming charges and PSTN passthrough charges from gross revenue on actually paid basis.
The TDSAT considered grievance on behalf of the licensees that many a time it happens that the licensee to whom such charges to be paid, happens to be the same company. It was stated that officers of the respondent do not allow deduction of such charges on the ground that there is no such actual payment as the company making as well as receiving the payment is the same. But the revenue was counted under both the licences to compute the gross revenue, and the tribunal has observed that irrespective of the company being the same, passthrough charges shall be allowed to be deducted as soon as the same are accounted as revenue under the different licence held by the company.
DOT submitted that merely because one company has a licence of more than one circle, there will not be common accounts of that company. The licence fee is realised as per the separate account. In case both the licences are different, accounts are different, and payment of licence fee for each circle is different, Idea (Delhi Circle) would pay to Idea (Bombay Circle) on actual basis as against on accrual basis, becomes revenue in the accounts of Idea (Bombay Circle).
The Court held that Clause 19.2 made it clear that detailed call charges paid to other eligible telecommunication service providers within India shall be excluded from gross revenue. Similarly, roaming revenues passed on to other eligible/ineligible service providers are also excluded. In that case, they must be actually passed over to the licensees in different service areas. Only then it can be excluded from gross revenue and not otherwise.
It is permissible for the licensee to accept deposits from its customers, which at times are nonrefundable but are used to provide discounts on the bills raised. Concerning nonrefundable deposits, the claim was not pressed by the DOT before the TDSAT. However, the Supreme Court went into the same despite the counsel for the government not raising it and concluded that the concession given by the counsel on behalf of DOT concerning nonrefundable deposits is “palpably incorrect”.
The Court noted that item no. 5 in Section D in Appendix II to AnnexureII of the licence agreement is an entry concerning nonrefundable deposits from subscribers. It has to be included as per the format in the statement of the gross revenue. The definition of gross revenue is wide enough to cover nonrefundable deposits as nonrefundable deposits are revenue earned from licensed activities. Nonrefundable deposits are to be treated as accrued in the profit and loss account as per Annexure III of the licence agreement, the Court observed.
Thus, it held that the finding recorded by the TDSAT concerning non-refundable deposits not being part of the revenue was based upon wrong concession made by the counsel appearing for the DOT and is, therefore, liable to be set aside.
The Court also had a word of advice for TDSAT stating that it is expected of the TDSAT to consider the concession following law and cases should not be decided “on the basis of prima facie incorrect concession of the counsel, it has to be legally tested”. In case any admission is made, its correctness has to be examined, the Court cautioned.
Licence fee demand where spectrum is not granted
When the spectrum itself has not been issued, licence activity has not come into play and no revenue is generated. TDSAT had held that, in such a case, demands of licence fee based on other activities, are bad, unreasonable, invalid, and unsustainable.
The Court concurred with the same and held that the finding recorded by the TDSAT is appropriate.
“…there is no activity under the licence, i.e., based on non-licensed activities, the revenue sharing could not have been asked. It would be an unreasonable and unconscionable bargain to pass on such a liability.”
Income from interest and dividend
Argument was raised by licensees concerning interest income and dividend income.
The Court ruled that since these items are expressly included in the definition of gross revenue in clause 19.1, there is no scope to entertain the submission concerning the exclusion of interest and dividend from gross revenue. Thus, it held that interest and dividend earned from the licensing and nonlicensing activities have to form part of gross revenue for determination of licence fee.
Bad debts written off
The bad debts written off were not allowed as a deduction by the DOT while computing adjusted gross revenue. The TDSAT had declined the submission of licensees to allow bad debts as deductions but it had stated that if bed debts were subsequently recovered, it may not be charged to license fee again as that would result in double charging of license fee on the same revenue.
The Supreme Court concurred with this and held this finding of TDSAT to be appropriate.
Liability written off
The Court noted that TDSAT has rightly held that if it is to be considered as an expenditure, liability has to be treated as an expense, and no discount on the income will be allowed for the sum for determining the licence fee. It cannot be charged for the second time for computation of licence fee.
In Rajputana Trading Co. Ltd. v. Commissioner of Income Tax, West BengalI [(1982) 2 SCC 775], it has been observed that once liability is written off, it has to be added as income from the business under section 10(2A) and such income should be given some local habitation or name.
Hence, the Court held that it is to be treated as an expense, and discount cannot be allowed for determining the licence fee.
Certain licensees being holding companies had raised loans for the subsidiaries from various banks and financial institutions. In turn, this amount was given to the subsidiaries for their day-to-day operations. On this amount, the subsidiaries paid interest at the SBI Prime Lending Rates (PLR) every quarter, which in turn was paid by the holding company to the banks/financial institutions.
DOT sought to include the interest received from the subsidiary companies in the revenue of the holding company. The TDSAT had included the income from interest on intercorporate loan as part of gross revenue. It was submitted on behalf of licensees that as the holding company only performs the function for the subsidiary company and the interest amount is only a reimbursement of the amount paid to the bank. Hence, it was their argument that it cannot be included in the gross revenue.
The Supreme Court turned down the same holding that the definition of gross revenue in clause 19.1 made it clear that income from interest has to be included in gross revenue.
“The submission has no legs to stand, and it is apparent from the definition of gross revenue in clause 19.1 that income from interest is to be included in the gross revenue. Thus, the submission is baseless. By the fact that the holding company gives loan to the subsidiary company and recovers interest from subsidiaries, is good enough to make it a part of gross revenue.”
Thus, the Court held that interest income from intercorporate loan has to be included in the gross revenue for working out the licence fee.
Revenue under IP1 Registration
The question was whether it can be claimed/clubbed under revenue under CUG licence?
The court held that it was apparent from the definition of gross revenue that income from licensed activities and even from nonlicensing activities and any other miscellaneous revenue of the licensee has to be included. Thus, DOT rightly included the income of the licensee from IP registration under the CUG licence, the Court concluded.
Income from management consultancy services
Relying on the definition of gross revenue, the Court held that income from management consultancy services has to be included in the adjusted gross revenue to work out the licence fee.
“The income from management support and consultancy of the licensee cannot be excluded. Submission to the contrary cannot be accepted and is as a result of this rejected.”
The Court also held that TDSAT has rightly held in the case of Bharti Airtel that the revenue from Cable Landing Station has to be included in the gross revenue.
Levy of interest, penalty, and interest on penalty
Levy of licence fee is provided in clause 20.2. In case of any delay in payment of licence fee beyond the stipulated period would attract penalty at the rate, which would be 2% above the Prime Lending Rate (PLR) of the State Bank of India.
The interest shall be compounded monthly. Under clause 20.8, in case the total amount paid as quarterly licence fee falls short by more than 10% of the payable licence fee, it shall attract a penalty of 50% of the entire amount of short payment.
The TDSAT had held that it would not be appropriate to levy interest as well as the penalty. In case interest has to be levied, it has to be collected at a nominal amount, the TDSAT had ruled. However, it had not specified the amount.
Resultantly, the Supreme Court held that interest and penalty have rightly been levied. Once an amount of shortfall has not been paid, it has to carry 50% of the penalty on defaulted amount, as agreed. Thus, there is no substance in the submission that interest, penalty, and interest on penalty cannot be realised, the Court ruled.
[Read the Judgment]
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