The recent judgment of the Supreme Court in Union of India v. Association of Unified Telecom Service Providers of India (October 24, 2019), referred to as “AGR judgment”, requires to be reconsidered by a larger Bench. This is necessary as the existing judgments of the Supreme Court, which serve as precedents on the matter, can only be effectively addressed by reference to a larger Bench. Such a definitive assessment is required for the Government to be able to address the other fallouts arising from the case.

The AGR judgement has held as follows:

The licence fee for grant of licence to build, maintain and operate telegraphs issued under Section 4 of the Indian Telegraph Act (ITA) need not be limited to revenue from the licensed operations but would cover all revenue of the licensee even from operations and sources not licensed under Section 4 of the ITA;

Once licence is granted under the section, it governs the relationship between the Government and the licensee; TRAI recommendations are not binding on the Central Government;

The 2011 apex court judgment in Union of India v. Association of Unified Telecom Service Providers of India was a binding precedent on the scope of AGR (adjusted gross revenue) and it had only permitted disputes to be raised in relation to each demand and not challenge the scope of “gross revenue”;

The revenue of separate legal entities such as a subsidiary will not be taken into account for determination of “gross revenue” and it is open to licensees to undertake business operations that do not require a telecom licence in separate subsidiaries. Revenue of branches, even those outside India, will be taken into account for “gross revenue” since a branch is part of the same legal entity;

A telecom service provider’s (TSP’s) gross revenue includes: (i) the proceeds from sale of shares; (ii) any gain over and above the book value for the year in question based on assessment of the opening statement and closing statement at the end of the year; (iii) all interest and dividend earned by a TSP; (iv) income from consultancy and management services; (v) interest from inter-corporate loans; and (vi) non-refundable deposits; and

No licence fee can be charged in areas for which spectrum has not been allocated as no licence activity came into play.

The issues arising from the AGR judgment that need further consideration are explained below:

The AGR judgment has held that the grant of licence under Section 4 of the ITA is also in the nature of a resource that is covered by the in pronouncement in the Natural Resource Allocation case, thereby making it equivalent to a natural resource that the state is bound to hold for the benefit of the citizens and ensure equal distribution to sub-serve the common good. This is highly problematic not only for the licensees but also for potential investors and the Government itself.

By covering even the grant of licence under Section 4 of the ITA as being equivalent to a natural resource, the AGR judgment has limited the inherent right vested with the Central Government over the telecom sector. It also imposes an obligation on the Centre to ensure that each licensee implements its telecom operations in a manner to sub-serve the common good.

A Constitutional Bench of five judges in the Natural Resource Allocation case held “spectrum” to be a natural resource. The three-judge Bench in the AGR case could not have expanded or interpreted the scope of the judgment to include grant of licences under Section 4 of the ITA, as equivalent to a natural resource such as spectrum or coal. The equating of the licences under the section to natural resources, such as spectrum itself, should be a cause of concern for all telecom operators, including those presently calling for its enforcement, because if this position is allowed to remain as the law, the same can be used to potentially argue that telecom services should be provided for free or at less than cost.

The wording of Section 4 of the ITA is clear that the licence may be granted on such conditions “and in consideration of such payments as it thinks fit”. Thus, the section makes it clear that the licence fee is in the nature of a “consideration” for the licence granted. The AGR judgment reaffirms the position that the licence granted under Section 4 is in the nature of a contract.

Hence, it is clear that the term “consideration” used in Section 4 would relate to the “consideration” for a contract under the general law governing contracts and clearly means that there is a direct linkage between the licence provided and the consideration for the same in the licence agreement. However, even though the AGR judgment reaffirms that the licence under Section 4 is in the nature of a contract, it proceeds to hold that it is up to the Government itself to unilaterally determine the extent of “gross revenue”, therefore, striking at the root of the need for consensus on the consideration between the Government and the TSP and the fact that a party cannot unilaterally determine the scope and extent of the consideration.

The reasoning by the Supreme Court in the AGR judgment has effectively converted the consideration for the licence into a tax/levy, since the ruling holds that it is the exclusive right of the Government to define revenue; the scope of what the Government can claim is not limited to revenue from the licensed operations but would cover any and all revenues of the TSP.

This converts the “consideration” stipulated under Section 4 of the ITA from being limited to the telecom service for which the licence is granted, to a unilateral levy for the grant of the licence. It is a settled principle of law that any imposition of a tax/levy would require an underlying law authorising the same. Clearly, there is no such authority under the ITA for the same. The AGR judgment has failed to consider the distinction between “consideration of a contract” and law developed through multiple case laws by the Supreme Court relating to taxes, including judgments of the Constitutional Bench. This issue too needs to be re-examined by a larger Bench.

The AGR judgment could also potentially again raise the spectre of claims by foreign investors under bilateral investment treaties (BITs) in view of loss of shareholder value. The AGR judgment by holding that even income from sale of shares will be covered by the scope of “gross revenue” to be shared with the Government, further adds to potential grounds for BITs against India. This again calls for review by a larger Bench so that the case laws that have been overlooked can be considered.

The AGR judgment draws attention once again to the fact that critical infrastructure sectors should not be open to such large-scale impact by court judgments and instead there is a case for establishing a more consolidated stable statutory regime governing critical infrastructure sectors, which can reduce the scope for courts or tribunals in exercising their discretion.

The Indian telecom sector has faced seismic events from multiple, varied and conflicting judgments since its opening for private sector investment in 1994. In Delhi Science Forum v. Union of India , it was held that courts would not interfere in matters of policy.

Subsequently, the 2012 judgment in Centre For Public Interest Litigation & Ors v. UOI (more commonly referred to as the “2G Judgement”), the court proceeded to hold that the first-come-first-serve policy was arbitrary and quashed 122 telecom licencs and shifted the method of allocation of spectrum. This resulted in the consolidation in the telecom industry to effectively six operators. Now, the AGR judgment has resulted in an aggregate payment requirement of more than ₹1.4 lakh crore on the surviving telecom companies, with the only telecom company escaping its full impact being a more recent entrant.

For all the aforesaid reasons, the AGR judgment requires a detailed review.

The writer is Partner, Clarus Law Associates, New Delhi