UNION OF INDIA versus ASSOCIATION OF UNIFIED TELECOM SERVICE PROVIDERS OF INDIA ETC.ETC. on 24 October 2019

[2019] 16 S.C.R. 672

SUPREME COURT REPORTS

[2019] 16 S.C.R.

A

UNION OF INDIA

v.

ASSOCIATION OF UNIFIED TELECOMSERVICE PROVIDERS OF INDIA ETC.ETC.

(Civil Appeal Nos. 6328-6399 of 2015)

B

OCTOBER 24, 2019

[ARUN MISHRA, S. ABDUL NAZEERAND M. R. SHAH, JJ.]

Indian Telegraph Act, 1885 – Licence Agreement granted byCthe Govt. of India to the Telecom Service Providers – Definitionof gross revenue– Telecom sector liberalized in 1994– Licensesissued to the service providers stipulated fixed licence fee payableevery year – Since, fixed license fee was very high an option wasgiven to the licensees to migrate from fixed licence fee to revenueDsharing fee in 1999 – 15% Adjusted Gross Revenue (AGR) wasfixed as license fee which was reduced to 8% in 2013 – Serviceproviders ensured that they do not pay the licence fee based oneven an agreed “AGR”– Department raised demands – In 2003,telecom operators filed petition before the Telecom DisputesESettlement and Appellate Tribunal (TDSAT) challenging the same– Eventually, TDSAT by order dated. 30.08.2007 inter alia heldthat AGR would include only the revenue from licence activities –Challenged before Supreme Court in Union of India and anotherv. Association of Unified Telecom Service Providers of Indiareported as [2011] 14 SCR 657 wherein appeals by the Union ofFIndia were allowed and the order dated. 30.08.2007 was set aside– Telecom operators again approached TDSAT challenging thedemands – TDSAT by the impugned order considered the specifichead of items to be included/excluded under the definition of AGR– Held: Contractual definition of gross revenue is binding – GrossGamount, as per the definition, is the gross revenue, without set-off,is to be taken into consideration including the discounts given –Licensees made futile attempt to submit that the revenue to beconsidered would be derived from the activities under the licence;whereas the aforesaid 2011 judgment between the parties holdingthat the revenue from activities beyond the licence have to be H

H

included in adjusted gross revenue, is binding – Submission is alsothat the contract recognises the applicability of accountingstandards – It is only to maintain books of accounts – When thefinancial terms in the agreement are clear in the form of definitionof gross revenue governed by Clause 19.1 of the agreement, thedefinition of Accounting Standard-9 (AS-9) cannot supersede itwhich is a general one – Stand of Department ofTelecommunications (DoT) is apparent that the gross revenue hasbeen clearly defined in the agreement – Further, all discounts andcommission etc. form part of the gross revenue for the purpose ofpayment of licence fee– Forex gain is also to be accounted for aspart of gross revenue – Further, stand of TDSAT is approved inregard to assets/scrap, shares etc. – However, artificial bifurcationof insurance claim made by the TDSAT cannot be accepted and iscontrary to contractual definition of gross revenue – Finding ofTDSAT to the extent it is contrary to revenue, set aside– Further,amount of negative balance is a part of revenue and cannot bededucted from the gross revenue to be worked out as per thedefinition of gross revenue u/AS-9– Finding of TDSAT set aside –Also, the entire amount received by the licensee on account ofsharing of passive infrastructure has to be counted in the grossrevenue while working out AGR – Contrary finding recorded byTDSAT, set aside – Late fee is also included explicitly in thedefinition of gross revenue and as such, it has to be computed asits part – Finding of TDSAT, set aside – With respect to gains fromroaming charges and PSTN pass-through charges, the findingrecorded by TDSAT, to the extent it is contrary to the DOT, basedupon certain conditions, is set aside– Further, definition of grossrevenue is wide enough to cover non-refundable deposits –Finding recorded by the TDSAT concerning non-refundabledeposits not being part of the revenue, set aside – With respect tolicence fee demand where spectrum is not granted, the findingrecorded by TDSAT in the case of Videocon & S. Tel is agreed with– Interest and dividend earned from the licensing and non-licensingactivities also have to form part of gross revenue for determinationof licence fee – Further, in respect of the bad-debts written off,the findings by TDSAT are appropriate – Interest income from inter-corporate loan has to be included in the gross revenue for workingout the licence fee – Also, DOT has rightly included the income of A

B

CDE

F

G

H

Athe licensee from IP registration under the CUG licence – TDSAThas also rightly held in the case of Bharti Airtel that the revenuefrom Cable Landing Station has to be included in the gross revenue– Further, all the submissions raised on merits again have beenexamined, uninfluenced by the plea of res judicata/constructive resjudicata and no merit is found in the submissions raised – InterestBand penalty have rightly been levied – National Telecom Policy,1994 – National Telecom Policy, 1999 – Telecom RegulatoryAuthority of India Act, 1997 – ss.11(1)(a), 14(a)(i) r/w 14(A)(1),18 – Companies Act, 1956 – ss. 3, 211(3A)-(3C) – Interpretationof Statutes – noscitur a sociis; ejusdem generis – Principle ofCconstructive res judicata – Constitution of India – Arts. 14 and 39– Service Tax Act, 1994 – s.67 – Income Tax Act, 1961 – s.80 IA(2a).

Telecommunication Laws – National Telecom Policy, 1999 –Objectives of – Discussed.DIndian Telegraph Act, 1885 – s.4 – Telecom ServiceProviders granted Licence Agreement by the Govt. of India –Definition under, of Gross Revenue – Plea of licensees that revenuehas not been defined under license and thus, insisted on the fairvaluation method relying on J.K Industries Ltd. case – Held:ESubmission raised on fair valuation method based on the decisionin J.K. Industries case cannot be accepted as the decision is onconsideration of different accounting standard which adopts fairvaluation method i.e., Ind AS-18 and not relevant for the AS-9accounting standard – Companies Act, 1956 – ss. 211(3A) & (3C)– Chartered Accountants Act, 1949.F

Companies Act, 1956 – ss. 211(3A) & (3C) – Accountingstandards recommended by the Institute of Chartered Accountantsof India constituted – Relevance of and fundamental differencebetween AS-9 and AS-18 – Discussed – Chartered Accountants Act,1949.G

Telecom Regulatory Authority of India Act, 1997 –ss.11(1)(a) – Recommendations from the TRAI on the licence feepayable by the licensees – Consideration of, by the CentralGovernment – Discussed.

Companies Act, 1956 – s. 211 – Obligation under, of theHcompanies – Held: s.211 deals with the obligation of the company to comply with accounting standards – In case they do not comply,it has to be disclosed in its profit and loss account, the deviation,reasons for such deviation, and financial effect.

–Doctrines/Principles – Rule of Contra proferentum Commercial Contracts – Telecom Service Providers granted LicenceAgreement by the Govt. of India – Plea of licenses that all receiptswould not form part of Adjusted Gross Revenue (AGR) and thatrevenue from non-licensed activities was not part of AGR at all andthat the contra proferentum rule requires clauses 19.1 and 19.2 ofthe license agreement to be interpreted against the maker andprefer the interpretation which is favourable to the licensees –Held: Rule of contra proferentem does not apply to the present caseas there is no ambiguity or doubt in the definition of gross revenuein the agreement.

Doctrines/Principles – Doctrine of unconscionablebargaining – Telecom sector – Applicability of in commercialcontracts – Licences granted to the service providers stipulated afixed licence fee payable by the service providers every year –Migration from fixed licence fee to revenue sharing fee – Held:After the introduction of the migration package policy, 1999, thereis an exponential growth of the telecom sector – Terms andconditions cannot be said to be oppressive as submitted on behalfof the licensees – It cannot be said that DOT was in a dominantposition, or possessed wholly disproportionate and unequalbargaining power– In the matter of commercial contracts, thedoctrine of unconscionable bargaining is not applicable – Oncebenefit has been drawn, the licensees cannot deny validity orbinding effect of contract.

Dismissing the appeals of the licensees while allowing thatof the DoT, the Court HELD: 1.1 In Re: Definition of Gross Revenue There was a paradigm shift in Telecom Policy of 1999 fromthe fixed licence fee to the revenue sharing basis regime, whichwas advantageous to the Telecom Service Providers. Under thenew regime, the Central Government shared the privilege undersection 4 of the Indian Telegraph Act, 1885 with the TSPs. Itcame as a relief against the high licence fee, which used to be A

BC

DEF

GH

Acharged under the 1999 policy. The migration package containedthe stipulation as to no dispute to be raised as to working outsharing of revenue. Experts were consulted in the field ofaccountancy, and it was their advice that the actual figures shouldbe simple and objective to evolve a system of revenue sharingthat does not become as arduous one and litigative, had beenBevolved. Revenue has been defined in a broad, comprehensive,and inclusive manner not to pose problems of interpretation andto protect from the accounting jugglery. Gross revenue has beendefined to be inclusive of specific items mentioned in clause 19.1and any other miscellaneous revenue, without any set-off forCrelated items of expense, etc. All the licensees accepted themigration package and have signed the agreements. It hasturned out to be a substantial financial booster in favour of thelicensees as is apparent from figures of the gross revenueearned by them mentioned above. When under a contract signedby the parties, gross revenue and AGR have been given theDmeaning coupled with the format and the annexures which formpart of the contract. Format is contained in appendix toAnnexure-II which is part of the agreement in which requisiteinformation has to be furnished. The meaning in clause 19 of thegross revenue and the format mentioned above have to prevail.E[Para 44] [726-F-H; 727-A-B]

1.2 The submission raised for adopting fair valuationmethod relying on S.K. Synthetics is based upon misconceptionof method applicable to A.S-9. The argument is crafted to getrid of AS-9 and the definition of gross revenue in the agreement.FThe ICAI issued the AS-9 revenue recognition standard in theyear 1985. In the initial years, it was recommendatory for onlyLevel-I enterprises but was made mandatory for all enterprisesfrom 1.4.1983. The meaning of enterprise is as defined in section3 of the Companies Act, 1956. The IND AS-18 regime has beenintroduced later on. In AS-9, revenue recognition is at “nominal”Gvalue; whereas IND AS-18, the revenue recognition is at a “fair”value. The barter transactions are included in Ind AS-18,whereas this aspect is not covered in AS-9. In AS-9 revenuerecognition, interest income is recognised on a time proportionbasis, whereas in Ind AS-18, interest income is recognised usingHan effective interest rate method. AS-9 recognises revenue as

per the completed service method or percentage completionmethod, whereas Ind AS-18 only recognises revenue as per thepercentage of completion method. Thus, there is a fundamentaldifference. The fair value concept has no place in AS-9 as perwhich the accounts are to be maintained and submitted fordetermination of gross revenue. AS-9 revenue recognitionregime states that the amount of revenue shall be measured bythe gross inflow of cash, receivables, or other considerationreceived. There is no concept of fair valuation. Thus, thesubmission raised based on a fair valuation method based on thedecision in J.K. Industries v. Union of India cannot be acceptedas the decision is on consideration of different accountingstandard which adopts fair valuation method i.e., Ind AS-18 andnot relevant for the AS-9 accounting standard. The submissionis wholly devoid of substance. It is not only barred by theprinciple of constructive res judicata but also indicates that thelicensees are raising the similar objections which they haveraised earlier and were not entertained by this Court and wererejected. Again precisely, the same attempt is made bysubmitting; revenue should be taken as defined in AS-9, not inClause 19.1 of the agreement, submission runs contrary to thedecision of the Court, as held in para 48 of the 2011 judgment,which operates as res judicata inter se parties. The meaning ofrevenue is apparent that it has to be gross revenue, and thelicence fee would be a percentage of the same. Thus, thelicensees have made a futile attempt to submit that the revenueto be considered would be derived from the activities under thelicence; whereas it has been held in 2011 that the revenue fromactivities beyond the licence have to be included in adjustedgross revenue, is binding. Even otherwise, on merit, thesubmission raised is baseless. The contractual definition of grossrevenue is binding. When there is a contractual definition as towhat would be the gross revenue that would be the revenue andalso the total revenue, the revenue as mentioned in the modeof accounting AS-9 cannot govern the definition. The generaldefinition of revenue in the mode of accounting cannot governthe contractual definition of gross revenue. The accountingstandard AS-9 makes it clear that same is in the form ofguidelines, it is not comprehensive and does not supersede the A

B

C

D

EF

GH

Apractice of accounting. It only lays down a system in whichaccounts have to be maintained. Accounting standards make itclear that it does not provide for a straight-jacket formula foraccounting but merely provide for guidelines to maintain theaccount books in systematic manner. Section 211 of theBCompanies Act, 1956 deals with the obligation of the companyto comply with accounting standards. In case they do not comply,it has to be disclosed in its profit and loss account, the deviation,reasons for such deviation, and financial effect. [Paras 61, 65,67] [736-H; 737-A-H; 738-A-H; 739-A-C-E; 740-C-D]

C1.3 The definition of gross revenue is crystal clear in theagreement. How the adjusted gross revenue to be arrived at isalso evident. It cannot be submitted that the revenue has notbeen defined in the contract. Once the gross revenue is defined,one cannot depart from it and the very meaning is to be givento the revenue for the agreement. Overall revenue, has to beDtaken into account for determination of licence fees without setoff, as provided in the agreement. The same was defined tosimplify it to rule out the litigation, disputes, and accountingmyriads. The submission raised that the term revenue has tobe interpreted as the consideration payable in keeping withEcommercial and financial parlance is what is intended to beavoided. Raising of such submission is a futile attempt that hasbeen made to wriggle out of the definition of gross revenue,which has been held to be binding in the previous judgment inUnion of India v. AUSPI (2011). The submission is that thecontract recognises the applicability of accounting standards. ItFis only to maintain books of accounts. To a certain extent, itcannot be disputed that to have clarity, uniformity, anddefinitiveness; the accounting standards lay down guidelines withrespect to financial terms. However, when the financial termsin the agreement are clear in the form of definition of grossrevenue governed by Clause 19.1 of the agreement, theGdefinition of Accounting Standard-9 cannot supersede it whichis a general one. Submission though attractive, but is again anattempt by taking a rigmarole to get rid of the definition of ‘grossrevenue’. Earlier the validity of definition was questioned toconfine the meaning of gross revenue how the revenue is soughtHto be confined to activities under the licence by way of AS-9. The reliance has been placed on statement made by DOT in thereply filed in 2003 that the definition of gross revenue is in linewith AS-9, it is by way of explaining and cannot have the effectof changing the definition of gross revenue given in theagreement. The definition in agreement is unambiguous, clear,and beyond the pale of doubt, and there is no confusion in thedefinition of gross revenue, which is the basis for realisation ofthe licence fee. Licensees have made a futile attempt to wriggleout of the definition in an indirect method, which was rejecteddirectly in the decision of 2011 between the parties and it washeld that these very heads form part of gross revenue. [Paras76, 79] [748-F-H; 749-A-B; 752-C-E]

General Assurance Society Ltd. v. Chandmull Jain,AIR 1966 SC 1644 : [1966] SCR 500 ; M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009)

7 SCC 696 : [2009] 10 SCR 373 – referred to.

1.4 It cannot be said that DOT has taken inconsistentstands at different stages of the same litigation. Their stand isapparent that the gross revenue has been clearly defined in theagreement. Parties have agreed to various inclusions in theagreement and have willingly switched over to revenue- sharingregime under the 1999 policy and same is apparent from thestand and the reliefs prayed in the petitions filed in 2003 and2005. The licensees were aware of items specifically includedin the agreement. TSPs agreed to interpretation and acceptedit as held by this Court in 2011 judgment. Licensees are takinginconsistent stands, earlier they have taken the stand that allthese items concerning which disputes have been raised, hadbeen included illegally in the definition of gross revenue, thedefinition may be declared ultra vires, invalid, and be struckdown. They have also contended that revenue from activitiesunder the licence cannot be included in gross revenue, whichsubmission has been negated by this Court in 2011, it was heldthat the gross revenue would include the revenue generated fromnon-licensing activities. Licensees cannot be permitted toapprobate and reprobate and to take inconsistent stands that theyare not included in gross revenue as per AS-9. The stand takenrather than buttressing the submissions raised by them, countersand militates against their own interest and paves the way in A

B

C

D

E

F

G

H

Afavour of DOT. The submission raised that the definition is notwide, cannot be accepted, and stands repelled. Clauses 22.1,22.2 and 22.3 cast obligation upon the licensee to draw, keepand furnish independent accounts for the service. Under clauses22.1 and 22.2, the licensee has to maintain records quarterly.Accounts have to be audited and can be called for by the licensorBor the TRAI, as provided in Clause 22.3. The format of grossrevenue is supportive of definition of gross revenue as definedin the agreement. Clause 22 is a rider upon the licensee tomaintain the records of activities and other matters such asfinancial position as enumerated therein. Clause 18.1 of theCagreement has also been pressed into service. The submissionraised that a single company may hold 5 licences for 5 differentservice areas; the AGR as suggested by the DOT, cannot befollowed as it may end up in paying the licence fee at the rate of5 times. As the licence fee cannot be charged more than once,there is no room to entertain the submission. It is not what isDcontemplated in the definition. While computing the licence fee,the gross revenue has to be taken into consideration under aparticular licence for which it is being determined. The argumenthad been raised on a hypothetical basis without foundational factsto raise the same is thus, liable to be and is rejected at thethreshold. There is no doubt that the State is a trustee of theEnatural resources and is obliged to hold it for the benefit of thecitizens but also to ensure equal distribution to sub-serve thecommon good as observed under Article 39 of the Constitutionof India. The Government being the sole repository of all theresources in the country, also has the exclusive power toFdetermine the licence conditions at which it parts with theexclusive right to the resources. Government has to make aneffort to get the best price for its valuable rights and cannotthrow them away, and there would be no arbitrariness in thesame. [Paras 83-86] [754-G-H; 755-A-C-F-H; 756-A-F]

GSuzuki Parasrampuria Suitings Private Limited v.Official Liquidator of Mahendra PetrochemicalsLimited (2018) 10 SCC 707 : [2018] 12 SCR 906 ;Jal Mahal Resorts Private Limited v. K.P. Sharma(2014) 8 SCC 866 ; A.P. Dairy DevelopmentCorporation Federation v. B. Narasimha Reddy (2011)H9 SCC 286 : [2011] 14 SCR 1 ; In Re : Natural

UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOMSERVICE PROVIDERS OF INDIA

Resources Allocation (2012) 10 SCC 1 : [2012] 9 SCR311 ; State of Orissa & Ors. v. Harinarayan Jaiswal& Ors. (1972) 2 SCC 36 : [1972] 3 SCR 784 ; HarShankar v. Excise & Taxation Commissioner (1975) 1SCC 737 : [1975] 3 SCR 254 ; Government of A.P. v.Anabeshahi Wine & Distilleries (P) Ltd. (1988) 2 SCC25 : [1994] 2 SCR 67 ; State of Orissa v. NarainPrasad (1996) 5 SCC 740 : [1996] 5 Suppl. SCR465 ; State of M.P. v. KCT Drinks Ltd. (2003) 4 SCC748 : [2003] 2 SCR 574 ; State of Punjab v. DevansModern Breweries Ltd. (2004) 11 SCC 26 : [2003] 5Suppl. SCR 930 referred to.

1.5 A licence granted under section 4(1) is in the natureof a contract. As to the provisions of gross revenue there hadbeen consensus ad idem between the parties. The licensees arebound by it as they have executed the licence agreement. Thelicensees who have taken the advantage under the licence, carrycertain obligations. The licensee is bound to discharge theobligation while taking benefit under the licence of migrationpackage, for this purpose. After the introduction of the migrationpackage policy, 1999, there is an exponential growth of thetelecom sector. The terms and conditions cannot be said to beoppressive as submitted on behalf of the licensees. It cannot besaid that DOT was in a dominant position, or possessed whollydisproportionate and unequal bargaining power. In the matterof commercial contracts, the doctrine of unconscionablebargaining is not applicable as held with respect to migrationpackage. Once benefit has been drawn, the licensees cannot denyvalidity or binding effect of contract. [Paras 88, 89, 90, 91, 92][757-H; 758-B; 759-A; 760-B-F-G; 761-C-D]

Assistant Excise Commissioner & Ors. v. Issac Peters& Ors. (1994) 4 SCC 104 : [1994] 2 SCR 67 ; ShyamTelelink Ltd. v. Union of India (2010) 10 SCC 165 :[2010] 12 SCR 927 ; Bharti Cellular Ltd. v. Union ofIndia (2010) 10 SCC 174 : [2010] 12 SCR 725 ; S.K.Jain v. State of Haryana (2009) 4 SCC 35 : [2008]17 SCR 1378 ; Cauvery Coffee Traders, Mangalorev. Hornor Resource 67 s (International) Co. Ltd. (2011)10 SCC 420 : [2011] 12 SCR 473 ; R.N. Gosain v.

A

B

C

D

E

F

G

H

682SUPREME COURT REPORTS

[2019] 16 S.C.R.

AYashpal Dhir AIR 1993 SC 352 : [1992] 2 Suppl. SCR257 – relied on.

Khardah Company Ltd. v. Raymond & Co. (India) Pvt.Ltd. [1963] 3 SCR 183; Central Inland Water TransportCorproation v. Brojo Nath Ganguly (1986) 3 SCCB156 : [1986] 2 SCR 278 – referred to.

2.1 In re: Discount and Commissions:

When the definition of “gross revenue” in clause 19.1 ofthe licence agreement is pon- dered upon, it is apparent thatthe gross revenue has to be taken into consideration withoutCany set-off for related items of expense. Thus, the gross amount,as per the definition, is the gross revenue, without set-off, is tobe taken into consideration including the discounts given.Parties understood right from the beginning that the grossrevenue does not exclude discounts, commissions, rebate etc.Dand specific challenge made to the same had not been acceptedin 2011. Now once again by the circuitous method, impermissibleattempt has been made to re-write the definition of grossrevenue. The definition of ‘gross revenue’ is independent of AS-9 as the definition of revenue in AS-9 cannot govern the definitionin Clause 19.1 of the licence agreement. What has been definedEin AS-9 is revenue, whereas, for a licence fee, gross revenue isthe revenue. It would be greatest fallacy to say that while grossrevenue has been defined in Clause 19.1 of agreement, revenuehas not been defined in the licence agreement. What has beendefined as gross revenue is in fact broader definition of revenueFand has to be taken as definition of revenue for licenceagreement. An attempt has made to wriggle out of the rigour ofthe definition of gross revenue by banking upon the definitionof revenue in AS-9 is to scut- tle the effect of the previousdecision in Union of India v. AUSPI (2011). Gross revenue asdefined in agreement cannot be diluted in any mannerGwhatsoever based on the submission mentioned above, as AS-9is only for method of accounting and specific definition ofrevenue i.e., gross revenue under the licence agreement has toprevail. ‘Gross revenue’ is the revenue has been held in 2011judgment finding is binding on parties for determination ofHlicense fees under the licence agreement and the definition of

revenue in AS-9 cannot govern. Reliance upon the affidavit filedon behalf of DOT is wholly misconceived. What is the meaningof the definition of gross revenue has been finally settled interparties vide 2011 judgment. Thus, there is no scope to entertainthe miscon- ceived submission. The concept of fair value is notthe basis of Accounting Standard-9. Fair value is the operatingconcept of IND AS-18. In AS-9, revenue recognition is at nominalvalue and that the fundamental difference between the twoaccounting standards. Thus, the nominal value has to be takenas the one which is relevant for AS-9. Under the AS-9 regime,the revenue recognition shall be measured as the gross inflowof cash, receivables, or other consideration received. There isno concept of fair valuation under AS-9. The question of servicetax liability has no relevance for determination of licence fee forwhich definition has been worked out by the Government ofIndia, which has been agreed to by the licensees also as thatwas beneficial to them as compared to the fixed fee regime whichprevailed earlier. They have switched over to the new regimeof sharing the revenue earned by them on a percentage basis.The definition of gross revenue has the purpose behind it andwas the outcome of prolonged exercise and has already beenupheld, and the question cannot be reopened once over againby an indirect method. The trade discounts cannot be deductedfrom the gross revenue merely on the ground that they representa reduction of cost. The reliance by the licensees on theGuidance Note filed that discounts are reduction granted by asupplier from the list price of goods or services is of no availowing to the definition of the gross revenue. Set off of tradediscounts is not permissible under Clause 19.1 of agreementagainst revenue as expenses are not permitted to be netted up.Concerning cash discount, it is apparent that cash discount maybe used in various methods. It is an incentive for customers.The customer makes payment after deducting amount of cashdiscount, if eligible for availing of the same as per the agreementbetween the entity and the customer. Under AS-9, revenue isrecognised at the gross amount and cash discount is regardedas an expense when the seller receives the payment net offdiscount is not permissible. For example, if A has sold goods toZ for Rs.1000 on 90 days’ credit period, but if Z pays within 50

A

B

CD

E

F

GH

684SUPREME COURT REPORTS

Adays, a cash discount of 10% shall be provided by A. It isreasonably sure that Z to pay the amount within 15 days. In theAS regime, the revenue has to be recorded at Rs.1000, andwhen Z pays Rs.900, the amount of cash discount of Rs.100 willbe recognised as an expense. That is the effect of the revenueto be recognised as a gross amount under AS-9. Concerning theBvolume-based discount, under the AS-9 regime, revenue isrecognised at the gross amount received or receivable from thecustomers. However, the value of trade discounts and volumerebates received cannot be deducted from the gross revenueowing to the definition in clause 19.1. The subscriber’s discountCcan also be in the form of free calls, some free minutes SMSvalue. DOT has rightly asked for the licence fee on the no- tionalrevenue of free calls, SMS, VAS minutes/data. When theseamounts admittedly are reflected in the invoice raised on thesubscriber as memorandum, it is the gross revenue. It formspart of the gross revenue and cannot be deducted. That is whatDwas intended by carving out the definition to make it free fromlitigation and accounting jugglery and to free determination oflicence fee from the clutches of accounting jugglery. Thediscounts allowed on international roaming, commission, anddiscount allowed to distributors on sale of pre-paid vouchersEform part of the gross revenue and cannot be deducted byplacing reliance on the definition of revenue and certain notesof AS-9 standards; whereas they are explicitly included in thedefinition of gross revenue. [Paras 107-108, 113-117] [765-F-H;766-A-F; 768-F-H; 769-A-H]

FUnion of India v. Bombay Tyres International Pvt. Ltd.(2005) 3 SCC 787 ; Deputy Commissioner of Sales Tax(Law), Board of Revenue (Taxes), Ernakulam v. M/s.Advani Oorlikon (P) Ltd. (1980) 1 SCC 360 : [1980]1 SCR 931 ; M/s. United Exports v. Commissioner ofIncome Tax, Delhi (2009) SCC Online Del 2566 ; IFBGIndustries Ltd. v. State of Kerala (2012) 4 SCC 618 :[2012] 4 SCR 802 ; Commissioner of Central Excise,Madras v. Addison & Co. Ltd. (2016) 10 SCC 56 :[2016] 9 SCR 591 ; Southern Motors v. State ofKarnataka & Ors. (2017) 3 SCC 467 ; MayaHAppliances Pvt. Ltd. v. Additional Commissioner of Commercial Taxes & Ors. (2018) 2 SCC 756 : [2018]2 SCR 250 – held inapplicable.

2.2 As to pre-paid options, the format of statement ofrevenue and licence fee contained in Appendix II to Annexure-II provides in the case of prepaid options, sale of pre-paid SIMcards including full value of components charged therein.Revenue from mobile community phone service including fullvalue of all components charged therein has to be considered,revenue from franchisees/re-sellers including all commissionsand discounts, etc. have to form part of the gross revenue. Howthe parties have understood and agreed to pay the gross revenueis apparent from the correspondence and letter dated 22.7.2001and the ultimate definition mentioned in the licence agreementClause 19.1 and rejection of TRAI’s recommendations by theGovernment. The TDSAT has erred in holding that if thediscounts are in the form of reduced billing, no addition to bemade in the gross revenue. It would mean violating thedefinition of gross revenue where no set-off is permitted. It isrightly submitted by DOT that discounts over and above theagreed charges are part of overall commercial strategy toenhance the business, and hence, these discounts are likeexpenses. Expenses are not permitted to be net off under clause19.1 from the gross revenue under the licence agreement.Similarly, the TDSAT has erred in holding and giving a findingconcerning commission and discounts if the invoice is at adiscounted price, which is at Rs.90 instead of Rs.100. For thesame reason, the finding of TDSAT is not sustainable. TheTDSAT has rejected the case of the licensees. Where the billis for a higher amount and the discount is in the form of volumediscount given separately, the billed amount should be taken asthe revenue, and the discount may be treated as an expense.That part of the finding is not disturbed. However, for alldiscounts and commissions allowed on international roaming, andto distributors on sale of pre-paid vouchers, trade discounts,subscribers’ discounts, and volume rebates form part of grossrevenue. It has also been submitted on behalf of the licenseesthat offering discounts is frequently used to increase businessin the long run/term. These are inevitable as there were 8 to10 operators operating in the same geography at highly A

B

C

D

E

F

GH

Acompetitive prices. Discounts help to survive and grow businessand augment revenue. Thus it is in the nature of expense forearning the profit and by this method it is admitted that businesshas grown and there is an increase in revenue, hence the samebeing part of the commercial strategy to enhance the business,it has to be treated in the nature of expense and cannot beBdeducted from gross revenue. Thus, the claim for various formsof discounts, commissions, pre-paid vouchers, goodwill waiveretc., raised on behalf of the licensees are rejected and the findingof the TDSAT to the extent it is contrary to the stand taken byDOT is set aside, and it is held that all discounts andCcommission etc. as discussed form part of the gross revenue forthe purpose of payment of licence fee. [Paras 118, 119, 120-122][770-A-H; 771-A-B]

3. In re: Gains arising out of Foreign ExchangeFluctuations:D

3. In re: Gains arising out of Foreign ExchangeFluctuations:D

Gain from foreign exchange fluctuation is to be taken inthe calculation of AGR, and that is the actual revenue and cannotbe ignored. Similarly, gain from foreign exchange fluctuationshould be added on accrual basis. If later on, the amount has tobe spent on the purchase of equipment or settling roamingEcharges in foreign currency, that is also a gain and results ineconomic benefit and has to be accounted for while working outthe gross revenue as a decrease in liability would be gain.Whatever may be the expenditure, whether it has increased ordecreased, must be accounted for as it forms part of the grossFrevenue. In the definition of gross revenue, any othermiscellaneous revenue is included, and when once the item hasto be shown in the balance-sheet or profit and loss account,obviously, it has to be accounted for gross revenue, even as anotional figure. Once the amount is receivable, it has to be takenas part of gross revenue. The finding to the contrary recordedGby the TDSAT is thus liable to be set aside. Whether the amountis paid for the purchase of equipment, it has to be accountedfor and must be accounted for as per the value spent on the dateof the banking transaction, which cannot be ignored. Thus, thegains from foreign exchange fluctuations have to be added in theHcomputation of gross revenue, otherwise, the benefit which is accruing will be ignored. Where profit or loss arises on accountof appreciation of foreign currency, such gain or loss has to formpart of profit from the business or loss. Whether it is profit orloss on account of trading or on account of asset, it has to formpart of profit and loss account, thus, it has to account for grossrevenue. The fluctuation in the foreign currency has to beaccounted for in the account at the time when the amount isreceived or at the end of the accounting year. Thus, there is noescape from the conclusion that forex gain has to be accountedfor as part of gross revenue. When loss can be claimed as anexpenditure, profit or gain due to fluctuations in the rate offoreign exchange has also to be accounted for towards grossreceipt, which is gross revenue. [Paras 128-129] [773-E-H; 774-A-C]

4. In re: Monetary Gains on Sale of Shares:

Given the definition of gross revenue in the licenceagreement, every amount which is more than the book value ofthe current asset and comes to licensee company, has to beconsidered for calculation of gross revenue without netting off.Thus, the reasons given by the tribunal that any gain over andabove the net book value, that is, when the sale proceeds areless than the original purchase cost but more than the net worthof the assets, has to be excluded from the gross revenue, cannotbe accepted. The gross revenue for the current year has to beworked out based on the value of the capital assets. Grossrevenue for any year is considered in light of the openingstatement and also closing statement at the end of the year. Whatis gain over and above the book value in the year in question,has to be taken into consideration towards gross revenuereceived. Submission to the contrary raised on behalf of thelicensees cannot be accepted. Unable to accept the submissionthat the money collected on the sale of shares etc. is not likerevenue receipt but is a capital receipt. The gain from the saleof capital asset including increase over and above net book valueand scrap and not the entire proceeds are to be taken as revenuein calculation of the gross revenue without netting off and shouldbe on accrual basis, is unobjectionably within the ken of definitionof gross revenue. To say in case e.g., gain for AGR will accruewhen the sale proceeds or the current disposition value of the A

B

C

D

E

F

GH

A

B

C

D

E

F

GH

Agoods is Rs.60, and if it is sold at Rs.70, in that case, there willbe a gain of Rs.10. That shall be taken as a gain for AGRcalculation. The result would be the same in case the value ofan asset worth Rs.100 has depreciated to book value worthRs.60 and is sold at Rs.70, as urged on behalf of DOT, Rs. 10will form part of gross revenue. Again, a futile attempt has beenBmade to get rid of the definition of gross revenue, and confusionis sought to be created by ordinary business activity, which isthe expression used in Para 4.1 of AS-9. In contrast, thedefinition of gross revenue in clause 19.1 includes grossrevenue from non-licensed activities also. Thus, the submissionCis wholly sans substance and stands repelled. Finding to thecontrary recorded by TDSAT considering the initial cost is setaside. It has to be seen as book value as on date of sale. Thestand of TDSAT is approved in this regard in regard to assets/scrap, shares etc. [Paras 131, 132] [774-F-H; 775-A-F]D5. In re: Insurance claim in respect of capital assets:

The submission raised on behalf of the licensees cannotbe accepted as the insurance claim over and above the bookvalue is considered as revenue and not the value of the capitalasset as there is an inflow of cash received. It is accounted forEin the profit and loss account. It has to form part of the grossrevenue as defined in clause 19.1. The artificial bifurcation ofinsurance claim made by the TDSAT cannot be accepted and iscontrary to contractual definition of gross revenue. The findingof TDSAT to the extent it is contrary to revenue is set aside.[Paras 136] [777-B-C]F

6. In re: Amount of negative balance of pre-paid customer:

It is apparent that the amount of negative balance is abusiness strategy, and the amount is adjusted in case re-chargeis opted. Otherwise also, it is billed and reflected on accrual basisGin the account of the customer. Though it has to form part ofgross revenue for determination of licence fee under clause19.1, the number of calls at the full value have to be measuredwithout any discounts or incentive of such business strategy. Itis a part of revenue. It cannot be deducted from the grossrevenue to be worked out as per the definition of gross revenueHunder AS-9. Thus, the finding of the TDSAT cannot be said to UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOMSERVICE PROVIDERS OF INDIA

align with the meaning of gross revenue in factual aspects of thecase and is set aside. [Para 139] [778-B-C]

7. In re: Reimbursement of the infrastructure operatingexpenses In the definition of gross revenue, the item sharing ofinfrastructure facility is explicitly mentioned. In the format inAppendix 2 to Annexure-II also, the entire amount is requiredto be shown. It has been specifically mentioned that therecannot be any setting off of the amount of gross revenue, andthe entire money received has to be treated as the grossrevenue for the determination of licence fee. It is not thedetermination of profit. The gross revenue carries a differentdefinition, and the intendment is clear to prevent disputes. Thusthe entire amount received by the licensee on account of sharingof passive infrastructure has to be counted in the gross revenuewhile working out AGR. Thus, the finding to the contraryrecorded by the TDSAT is set aside. [Para 145] [779-E-G]

8. In re: Waiver of late fee

Late fee is included explicitly in the definition of grossrevenue. As such, it has to be computed as part of grossrevenue. Merely by waiver, it cannot be ousted from the purviewof gross revenue once it becomes leviable. Thus, the finding ofthe TDSAT is not sustainable and is set aside. [Para 150] [780- F-G]

9. In re: Gains from roaming charges and PSTN pass-through charges

Para 49 of the judgment of 2011 takes care of thesubmission. Once there is a branch, maybe based abroad, itsincome and the activity of the branch may not require any licencesince licensee is undertaking the activity, and the definition ofadjusted gross revenue activities includes revenue beyond thelicence. The same has to be included in the gross revenue. Thesubmission stands concluded by the previous decision, and nomerit is found in the submission. The finding recorded by theTDSAT, to the extent it is contrary to the DOT, based uponcertain conditions, is set aside. [Paras 158, 159] [783-C-D]

A

B

C

D

E

F

G

H

A10. In re: Non-refundable Deposits

The definition of gross revenue is wide enough to covernon-refundable deposits as non-refundable deposits are revenueearned from licensed activities. Non-refundable deposits are tobe treated as accrued in the profit and loss account as perBAnnexure III of the licence agreement. It is apparent thatnon-refundable deposits are in fact revenue received in advancefrom the subscribers. Even if they are used for discount etc. inthe bills, they form part of revenue. Licensees themselves treatnon-refundable deposits as income under section 80 IA (2a) ofCthe Income-tax Act. Be that as it may. The finding recorded bythe TDSAT concerning non-refundable deposits not being partof the revenue based upon wrong concession made by thelearned counsel appearing for the DOT, is as a result of this isliable to be set-aside. It was expected of the TDSAT to considerDthe concession following law, as such cases cannot be decidedand ought not to be decided on the basis of prima facie incorrectconcession of the counsel, it has to be legally tested. In caseany admission is made, its correctness has to be examined. [Para162] [783-H; 784-A-C]E11. In re: Licence fee demand where spectrum is notgranted TDSAT has held that the demands of licence fee based onother activities, are bad, unreasonable, invalid, andFunsustainable. During the period in question, the UAS licencecame bundled with the spectrum, and it is evident that withouta spectrum, the licensee could not work out the licence. Thefinding recorded by the TDSAT is appropriate. Once there is noactivity under a licence, merely on the basis that the licence hasGbeen issued, no revenue earned, it cannot be shared. Still, thereis no activity under the licence, i.e., based on non-licensedactivities, the revenue sharing could not have been asked. Itwould be an unreasonable and unconscionable bargain to passon such a liability. Finding recorded by TDSAT in the case ofVideocon & S. Tel is agreed with. [Para 163] [784-D-F]H

12. In re: Income from interest and dividend There is no scope to entertain the submission concerningthe exclusion of interest and dividend from gross revenue.Whatever, interest and dividend earned from the licensing andnon-licensing activities, have to form part of gross revenue fordetermination of licence fee. [Para 164] [784-G-H]

13. In re: Bad-debts written off

The bad debts written off are not allowed as a deductionby the DOT while computing adjusted gross revenue, bad debtis written off when recovered subsequently, it cannot be addedto the gross revenue. The TDSAT in the impugned order.TDSAT has not accepted the submission of the licensees.However, at the same time, it has safeguarded the interest ofthe licensees. In case it is realised later on, it may not becharged again. It should be charged only once. The finding isfound to be appropriate. No case for interference in the findingsrecorded by the TDSAT is made out. [Paras 165, 166] [785-A-B-D]

Hindustan Machines Ltd. v. Union of India (1985) 2SCC 197 : [1985] 2 SCR 686 – referred to.

14. In re: Liability written off

TDSAT rightly held that if it is to be considered as anexpenditure, liability has to be treated as an expense, and nodiscount on the income will be allowed for the sum fordetermining the licence fee. It cannot be charged for the secondtime for computation of licence fee. Hence, it is to be treatedas an expense, and discount cannot be allowed for determiningthe licence fee. Hence, it is held that it is to be treated as anexpense, and discount cannot be allowed for determining thelicence fee. [Paras 168, 170] [786-A-C]

Rajputana Trading Co. Ltd. v. Commissioner of Inco67 me Tax, West Bengal-I (1982) SCC 775 – relied on.

15. In re: Inter-corporate loan

Interest income from inter-corporate loan has to beincluded in the gross revenue for working out the licence fee.[Para 173] [786-H]

A

B

CD

E

F

G

H

A16. In re: Revenue under IP-1 Registration It is apparent from the definition of gross revenue thatincome from licensed activities and even from non-licensingactivities and any other miscellaneous revenue of the licenseehas to be included. Thus, DOT has rightly included the incomeBof the licensee from IP registration under the CUG licence. [Para174] [787-A-B]

17. In re: Income from management consultancy services:

When the definition of gross revenue is considered, it hasto be included in the adjusted gross revenue to work out theClicence fee. The income from management support andconsultancy of the licensee cannot be excluded. Submission tothe contrary cannot be accepted and is rejected. The TDSAThas also rightly held in the case of Bharti Airtel that the revenuefrom Cable Landing Station has to be included in the grossDrevenue. [Paras 175, 176] [787-C-D]

18. In re: Res Judicata

All the submissions which have been raised on meritsagain have been examined, uninfluenced by the plea of resEjudicata/constructive res judicata, and no merit is found in thesubmissions which have been raised. [Para 181] [793-C]

Lohia Machines Ltd. & Anr. v. Union of India & Ors.(1985) 2 SCC 197 : [1985] 2 SCR 686; HindustanSteel Ltd. v. State of Orissa (1969) 2 SCC 627 : [1970]F1 SCR 753 ; Akbar Badrudin Giwani v. Collector ofCustoms (1990) 2 SCC 203 : [1990] 1 SCR 369 ;Jaiprakash Industries Ltd. v. Commissioner of CentralExcise, Chandigarh, (2003) 1 SCC 67 ; TecumsehProducts India Ltd. v. Commissioner of Central Excise,Hyderabad (2004) 6 SCC 30 : [2004] 2 Suppl. SCRG202 ; J. K. Synthetics Ltd. v. Commercial Taxes Officer(1994) 4 SCC 276 : [2015] 1 SCR 627 ; Kailash NathAssociates v. Delhi Development Authority & Anr.(2015) 4 SCC 136 : [2015] 1 SCR 627 ; Central Bankof India v. Ravindra & Ors. (2002) 1 SCC 367 : [2001]H4 Suppl. SCR 323 – referred to.

19. In re: Levy of interest, penalty, and interest onpenalty:

19. In re: Levy of interest, penalty, and interest onpenalty:

It is not levy of penal interest, which is involved in theinstant case. When there is contractual stipulation, the interestcan be levied and compounded. Resultantly, interest and penaltyhave rightly been levied. Once an amount of shortfall has notbeen paid, it has to carry 50% of the penalty on defaulted amount,as agreed. Thus, there is no substance in the submission thatinterest, penalty, and interest on penalty cannot be realised. Itis as per the agreement. In the facts and circumstances, noground is found to reduce the same, considering the nature ofuntenable objections raised on behalf of the licensees, whichwere in fact either barred by res judicata or constructive resjudicata but as this Court had remitted the matter to TDSATto find that demand was based on proper interpretation oflicence. Matter was remitted after giving finding on inclusion ofthe various heads in the definition of gross revenue. Even asper the case of licensees they were not validly included indefinition, now reprobating that, stand has been taken that theydid not form part of revenue which is not permissible. No litigantcan be permitted to reap fruits on such inconsistent anduntenable stands and litigate for decades in several rounds whichis not so uncommon but is disturbing scenario projected in verymany cases. [Paras 197, 198] [809-G-H; 810-A-C]

J.K. Industries Limited v. Union of India (2007) 13SCC 673 : [2007] 12 SCR 136 – distinguished.

Union of India and another v. Association of UnifiedTelecom Service Providers of India (2011) 10 SCC 543: [2011] 14 SCR 657 – relied on.

M/s. Everest Industrial Corporation & Ors. v. GujaratState Financial Corporation (1987) 3 SCC 597 :[1987] 3 SCR 607 ; Punjab Financial Corporation v.Surya Auto Industries (2010) 1 SCC 297 : [2009] 15SCR 1187 ; Maharashtra University of Health Sciencesv. Satchikitsa Prasarak Mandla (2010) 3 SCC 786 :[2010] 3 SCR 91 ; Godhra Electricity Co. Ltd. v. Stateof Gujarat (1975) 1 SCC 199 : [1975] 2 SCR 42 ;United India Insurance Co. Ltd. v. Pushpalaya Printers

A

B

C

D

E

F

G

H

694SUPREME COURT REPORTS

A(2004) 3 SCC 694 : [2004] 2 SCR 631 ; IndustrialPromotion & Investment Corporation of Orissa Ltd. v.New India Assurance Co. Ltd. (2016) 15 SCC 315 –referred to.

Legh-Jones, Longmore et al (Eds.) MacGillivray onBInsurance Law (9[th] Edn., Sweet and Maxwell, London1997) at p.280; Robert and Me 67 rkin (Eds.), Colinvaux’s;Law of Insurance (6[th] Edn., 1990) at p.42 – referred to.

Case Law Reference

UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOMSERVICE PROVIDERS OF INDIA

G

From the Judgment and Order 23.04.2015 of the TelecomDisputes Settlement and Appellate Tribunal in Petition No. 7 of 2003,P. Nos. 82 of 2005, 57 of 2006, 284, 289, 290, 291, 292 of 2007, 33, 34,42, 249, 256 of 2008, 69, 151, 201, 233, 234, 235, 244 of 2009, 106 of2010, 388, 474, 475, 476, 477, 478, 480 of 2011, 43, 97, 98, 99, 100, H

A101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 115,116, 117, 118, 150, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180,181, 198, 199, 200, 201, 202, 203, 204, 205 of 2012

With

Civil Appeal Nos. 6183-6255, 5832-5852, 5909, 6009, 5996, 5957,B5997, 5998, 6011, 6002, 6010, 6012, 8496-8505, 8493-8495, 5929, 5911,5882, 5931, 5934, 5930, 6888-6895, 6003, 6004, 8506-8530, 8009-8017,14624, 13550, 13705-13711, 13590, 13587, 13586, 13585, 13591, 13538,13588, 13593, 13595-13596, 13584, 13574, 13681, 13581-13582, 13592,13699, 13697, 13698, 13680 of 2015, 344, 498, 497, 493, 6022-6044 ofC2016, 8646-8648 of 2018, 8275 of 2019.

Tushar Mehta, SG, Vikramjit Banerjee, ASG, Arijit Prasad, ArvindDatar, Ramji Srinivasan, Ms. Pinaki Misra, C. A. Sundaram, TarunGulati, Shyam Divan, Gopal Jain, Kavin Gulati, Ritin Rai,B. Adinaraynan Rao, Dr. A. M. Singhvi, U. Hazarika, Chetan Sharma,DSiddhartha Dave, Sr. Advs., Dhruv Tamta, H. Raghavendra Rao, Ms.Shardha Deshmukh, Ms. Binu Tamta, Ms. Swati Ghildiyal, G. S.Makker, Rajat Nair, Sarthak Raizada, Mansoor Ali Shokat, Ms. NitinKala, Ms. Manali Singhal, Santosh Sachin, Ms. Vinita Sasidharan,P. Ramesh Kumar, Abhijat P. Medh, Deepak Singh Rawat, BirjeshKumar Sinha, Hitesh Kumar Sharma, Ms. Meetali Ptolia, MaheshEAgarwal, Ms. Shally Bhasin, Chaitanya Safaya, Ms. Sayaree BasuMalik, Vaibhav Niti, Ms.Surabhi Limaye, Ms. Vaishali Kalara,Ms. Madhvi Agrawal, Ms. Ambika Mathur, E. C. Agrawala, ShashwatBajpai, Manjul Bajpai, Arjun Singh, Ms. Sugadha, K.R. Sasiprabhu,Vishnu Sharma, Tushar Bhardwaj, Bhavuk Agarwal, Ms. SylonaFMahapatra, Nikhil Ramdev, Abhas Kshetrapal, Ms. Kritika Bhardwaj,Somiran Sharma, Biju P. Raman, Jagjeet Sahani, Ms. Palak Verma, Ms.B. Vijayalakshmi Menon, Rohit Choudhry, Ms. Preeti Kohli,Pukhrambam Ramesh Kumar, Ms. Vibha Dhawan, Ms. Alvia Ahmed,Harsh Kaushik, Percvial Billimoria, Amit Bhandari, V. P. Singh, AtulN., Pridyumna Sharma, Nikhar Luthra, Prashanti Rao, Aamir Khan,GMs. Anvi Sood, Shaurya S. Vardhan, Rohit Saroj, Paul Roy Pashe,Ms. Dharitry Phookan, Mrs. Anjani Aiyagari, Mrs. M. V. Rama,Ms. Sumita Hazarika, Mohit D. Ram, Ms. Monisha Handa, AbhishekGupta, Ms. Shikha Sarin, Rahul Narayan, B. Krishna Prasad, GautamNarayan, Ms. Asmita Singh, Ms. Shivani Vij, Adithya Nair, D. S. Mahra,HJayant Kumar Mehta, Ms. Drishti Harpalani, Sajal Jain, Praveen Kumar, UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOMSERVICE PROVIDERS OF INDIA

Saumyen Das, Rajan Narain, Naveen Kumar, Punit Dutt Tyagi, NavnitKumar, M/s. Corporate Law Group, Gurmeet Singh Makker, Mrs. AnilKatiyar, Faisal Sherwani, Gurpreet Singh Kahlon, Achal Gupta, MayankGrover, Gaurav Kejriwal, Mrs. Bina Gupta, Birjesh Kumar Sinha, HiteshKumar Sharma, Arvind Kumar Sharma, Swetank Shantanu, RaviChauhan, Pratap Shankar, Sanjeev Kr. Choudhary, Sunil Kumar Jain,Kishore Kunal, Mohit Paul, Ms. Maneesha Dhir, Ms. Sunaina Phul,Abhishek Kumar, Saransh Gupta, Rameshwar Prasad Goyal, DevashishBharuka, Ms. Pratyusha Priyadarshini, Ishan Nagar (for M/s. Parekh& Co.). Rohit Mahajan, Rohit Tripathy, Pranav (for M/s. DuaAssociates), Advs. for the appearing parties.

The Judgment of the Court was delivered by ARUN MISHRA, J.

1. In the appeals, the question involved is with respect to thedefinition of gross revenue as defined in clause 19.1 of the licenceagreement granted by the Government of India to the Telecom ServiceProviders. The case has a chequered history and the scenario projectedis that even after the licensees agreeing with the revenue sharing regimeunder the Telecom Policy of 1999 for the last two decades, definitionof gross revenue has been litigated upon, though the intendment wasto keep it free from the same and various disputes. Notwithstandingthe fact that disputes have been raised, and despite the fact what isthe meaning to be given to gross revenue, was agreed upon betweenthe parties.The telecom sector was liberalized under the NationalTelecom Policy, 1994 and various licenses were issued to companiesunder Section 4 of the Indian Telegraph Act, 1885. The licences grantedto the service providers stipulated a fixed licence fee, which waspayable by the service providers every year.

2. However, as the said fixed license fee was very high and thetelecom service providers consistently defaulted in making the payments,the telecom service providers made a representation to the Governmentof India for relief against the steep license fee. The said representationwas considered and keeping the interest of the country, and the telecomsector in mind, a new package, known as “the National Telecom Policy,1999 Regime” giving an option to the licensees to migrate from fixedlicence fee to revenue sharing fee was made applicable in the year1999. The National Telecom Policy, 1999 was devised after holding AB

C

D

EF

G

H

Adetailed deliberations and consultations with the telecom serviceproviders and the telecom industry. Clause III of the migration packagereads as under:

“(iii) The Licence fee as a percentage of gross revenue underthe license shall be payable w.e.f. 1.8.1999. The Government willBtake a final decision to charge the quantum of the revenue shareas licence fee after obtaining recommendations of the TelecomRegulatory Authority of India (TRAI). Meanwhile, theGovernment decided to fix 15% of the gross revenue of thelicensee as a provisional license fee. The gross revenue for thisCpurpose would be the total revenue of the Licensee companyexcluding the PSTN related call charges paid to DOT/MTNL andservice tax collected by the licensee on behalf of the Governmentfrom their subscribers. On receipt of TRAI’s recommendationand Government’s final decision, the final adjustment ofprovisional dues will be effected depending upon the percentageDof revenue share and the definition of revenue for this purposeas may be finally decided.”

3. As mentioned, in the new Telecom Policy, 1999, the purposeand objects for the shift to “Revenue Sharing Regime,” which, as such,was more beneficial to the telecom service providers were:E

Make available telephone on demand by the year 2002 andsustain it after that to achieve a teledensity of 7 by the year2005 and 15 by the year 2010.

Encourage the development of telecom in rural areas makingFit more affordable by suitable tariff structure and makingrural communication mandatory for all fixed serviceproviders.

Increase rural teledensity from the current level of 0.4 to 4by the year 2010 and provide reliable transmission mediaGin all rural areas.

Achieve telecom coverage of all villages in the country andprovide reliable media to all exchanges by the year 2002.

Provide Internet access to all district headquarters by theHyear 2000.

Provide high-speed data and multimedia capability usingtechnologies including ISDN to all towns with a populationhigher than 2 lakh by the year 2002.

A

4. Considering the objectives and targets of the new TelecomPolicy, 1999, it appears that:

B

i. The Central Government gave a liberalised mode ofpayment by “revenue sharing” regime, which was the pricefor parting with the exclusive privilege the CentralGovernment had.

ii. The Telecom Policy, 1999, was so designed that theGovernment becomes a partner or sharer of “grossCrevenue.”

iii. From out of money received under the head of “AdjustedGross Revenue,” the Central Government took a consciousdecision to spend money to remote and uncovered areas,rural areas, tribal areas, and hilly areas to ensure maximumtele-connectivity.

D

iv. The said objective was achieved, inter alia, by givingsubsidies for the establishment of telecom infrastructure insuch areas

5. Fifteen percent AGR was fixed as license fee under “revenuesharing,” which was reduced to 13 percent and lastly to 8 percent in2013. It appears that the “revenue sharing” package turned out to bevery very beneficial to the telecom service providers, which is evidentfrom the continuing rise in the gross revenue, which is as follows:

E

G

H

A6. However, the telecom service providers in spite of the financialbenefits of the package started to ensure that they do not pay the licencefee to the public exchequer based on even an agreed “AGR”.

7. To arrive at the formula of “AGR,” the Draft LicenceAgreement was circulated to the telecom operators. It is pertinent toBnote that the Draft Licence Agreement provided clause 18.2, whichpertains to an annual license fee payable as a percentage of adjustedgross revenue “AGR.” Gross Revenue defined under clause 19 of theDraft Licence Agreement, reads as under:

“19.Definition of ‘Adjusted Gross Revenue’:C19.1 Gross Revenue:

The Gross Revenue shall be inclusive of installation charges, latefees, sale proceeds of handsets (or any other terminal equipmentetc.), revenue on account of interest, dividend, value-addedservices, supplementary services, access or interconnectionDcharges, roaming charges, revenue from permissible sharing ofinfrastructure and any other miscellaneous revenue, without anyset-off for related item of expense, etc.

19.2 For the purpose of arriving at the “Adjusted Gross Revenue(AGR)”, the following shall be excluded from the Gross RevenueEto arrive at the AGR:

I. PSTN/PLMN related call charges (Access Charges)actually paid to other eligible/entitled telecommunicationservice providers within India;

II. Roaming revenues actually passed on to other eligible/entitled telecommunication service providers and; F

III. Service Tax on provision of service and Sales Taxactually paid to the Government if gross revenue hadincluded as component of Sales Tax and Service Tax.

19.3 Applicable AGR in respect of Spectrum usage charge shallbe as given under Part VII of this agreement.”

G

8. Along with the Draft Licence Agreement, all annexures to thelicense, including the format of Statement of Revenue and Licence Fee(Appendix-II to Annexure-II) were circulated. As per the form of theHStatement of Revenue and Licence Fee, the telecom operators were required to submit the relevant data/revenue earned by them so thatthe ultimate AGR/license fee can be determined.

9. That vide communication dated 01.03.2001, the Associationof Basic Telecom Operators submitted their comments on Draft LicenseAgreement for basic service licenses. The comments on the revenueto levy the license fee were as under:

“For ascertaining the Revenue, income is proposed to beconsidered on an accrual basis while deductible expenses areproposed to be considered on an actual or pass-through basis.Also, logically, the LICENSEE should be required to pay licensefee only on that income which he has actually obtained. In viewof this, the above mode of revenue is inequitable. Hence, boththe income as well as deductible expenses should be computedon actual basis to arrive at an equitable and fair figure of revenueon which the License Fee can be levied.

Income from interest, dividend, etc. are also proposed to beincluded while computing the Revenue. Such income is purelynon-operational income as it is earned from sources other thanthe provision of SERVICE and is recognised to be so by allstatutory authorities including the ICAI, SEBI and the StockExchanges. Hence, no license fee should be levied on suchincome, and accordingly, such income should not be included forcomputing the figure of REVENUE.

All such deposits as are credited to the P&L Account areproposed to be covered in REVENUE. This is irrational sincethese ....... Further, all bad debts recovered and write-back ofprovisions and other debits for earlier years are also proposedto be included in REVENUE. However, no deduction on accountof bad debts provisions, etc. for the current year is allowed towhile computing REVENUE. This is both inequitable, irrational,and against the fundamental accounting concepts. Such additionson account of write-back should be allowed only in licensees aregiven the corresponding benefit of the very same expenses fromthe current period’s income for computing REVENUE.

Lastly, the definition should be a comprehensive one comprisingan exhaustive (and not indicative) list of items which will beincluded in the expression REVENUE. Any indicative list is A

B

C

D

E

F

G

H

Abound to give rise to unnecessary disputes in the future, whichwill be detrimental to the LICENSEES in most cases.”

10. It appears that after that the licenses were issued in favourof the respective telecom operators. As observed hereinabove, thetelecom operators availed the benefit of migration package. However,Bthereafter when the department raised the demands on the serviceproviders, in the year 2003 the Association of Basic Telecom Operatorsand respective telecom operators filed a petition before the TelecomDisputes Settlement and Appellate Tribunal, New Delhi (hereinafterreferred to as the ‘TDSAT’) under Section 14(a)(i) read with Section14(A) (1) of the Telecom Regulatory Authority of India Act, 1997C(hereinafter referred to as the “TRAI Act”) being Petition No. 07 of2003. It was a case of the telecom operators that the department wassupposed to determine the quantum based on the recommendations ofthe TRAI. According to the telecom operators, the department hadillegally included various elements of income in the definition of the termD“AGR” which do not accrue from the operations under the license viz.,dividend income, interest income on short term investment, discountson calls, revenues from other activities separately licensed,reimbursements under the Universal Service Fund (USF) etc. Thetelecom operators heavily relied upon the recommendations issued bythe TRAI on 31.08.2000, making detailed recommendations on the terms Eand conditions for issuance of licenses to new Basic Operators, moreparticularly the recommendations made by the TRAI with the revenuesharing of 12%, 10% and 8% for categories A, B and C Circlesrespectively ought to be levied on the Basic Operators.

11. On merits and components of the AGR, the telecom operatorsFsubmitted the following grounds:

“48) BECAUSE logically the LICENSEE should be requiredto pay licence fee only on that income which he hasactually obtained;

50) BECAUSE income from interest, dividend, etc., whichare proposed to be included while computing theRevenue are purely non-operational income as it isearned from sources other than the provision ofSERVICE and is recognized to be so by all statutoryauthorities including the ICAI, SEBI and the StockExchange.

G

H

51) BECAUSE no licence fee should be levied on suchincome and accordingly such income should not beincluded for computing the figure of REVENUE;

52) BECAUSE all such deposits as are credited to the P&LAccount are proposed to be covered in REVENUEwhich is irrational;

53) BECAUSE further, all bad debts recovered and write-back of provisions and other debits for earlier years arealso proposed to be included in REVENUE;

54) BECAUSE no deduction on account of bad debts,provisions, etc. for the current year are allowed to bemade while computing REVENUE;

57) BECAUSE the definition should be a comprehensiveone comprising an exhaustive (and not indicative) list ofitems which will be included in the expressionREVENUE;”

12. It appears that no other grounds were raised. The telecomoperators in Petition No.7 of 2003 prayed as under:

“a) declare that Adjusted Gross Revenues can only relateto revenues directly arising out of telecom operationslicensed under Section 4 of the Indian Telegraph Act,1885 (after adjustment of expenses and write-offs andrevenues not directly attributable to the licensed telecomactivities and miscellaneous and other items indicatedin the DoT letter dated 26.7.01, including interest incomeand dividend income, value of rebates, discounts, freecalls and reimbursement from the USO fund etc., oughtnot be included in the Adjusted Gross Revenues for thepurposes of computation License Fee;

b) set aside the DoT letters dated 7.5.03, attempting toadjust/set off their claims relating to Adjusted GrossRevenue from out of the amounts due and refundableto the Petitioners consequent to the Judgements of thisHon’ble Tribunal and the Hon’ble Supreme Court;

c) set aside the DoT demand letters inter alia dated 21.8.02,9.8.02, 14/21.1.03, 23.1.03, 7.3.03 and similar demands A

B

C

D

EF

G

H

A

raised against the BSOs claiming Revenue Share oninterest income and other miscellaneous heads which arecontrary to the Recommendations of the TRAI;

d) direct the DoT to implement the recommendations ofthe TRAI dated 31.8.00 and 31.10.00; B

e) direct the DoT to refund the BSOs all such excessamounts together with interest @ 12% per annum thatmay have been collected by it under its letter dated26.7.01 or 7.5.03 or otherwise, contrary to therecommendations of the TRAI dated 31.10.00.”

C

13. The objections described above can be said to be the firstset of the grounds by the telecom operators raised at the first instanceand the earliest. It appears that after TDSAT remitted the matter tothe TRAI by observing that there was no adequate consultation withthe TRAI before finalising the AGR and the components which formDthe AGR. While remitting the matter to the TRAI, the TDSAT madesome observations regarding the inclusion in gross revenue of thelicensee revenue derived from non-licensed activities. The TDSATdirected listing for further directions/hearing after the recommendationsof the TRAI are received or in the first week of October 2006,whichever is earlier (Order dated 07.07.2006, Coram: Justice N.ESantosh Hegde, Chairperson, and D.P. Sehgal, Member).

14. That in the order dated 07.07.2006, the Tribunal rejected thecontentions of the UOI and held that under Section 4 of the IndianTelegraph Act, 1885, the Central Government can take percentage ofthe share of gross revenue of a licensee realised from activities of theFlicensee under the licence and therefore revenue received by a licenseefrom activities beyond licence activities would be outside the purviewof Section 4 of the Telegraph Act. The Tribunal further held that Section11(1)(a) of the TRAI Act mandates the Central Government to seekrecommendations from the TRAI on the licence fee payable by theGlicensee and as the TRAI has made no effective consultation, the mattershould be remitted to the TRAI and the TRAI can consider the issueand send its recommendations to the Tribunal. At this stage, it is requiredto be noted that the Union of India challenged the order dated07.07.2006 of the Tribunal before this Court in Civil Appeal No. 84 of2007 under Section 18 of the TRAI Act. During the pendency of theHcivil appeal, the TRAI sent its recommendations as to the AGR which have been sought by the Tribunal vide its order dated 07.07.2006.Therefore, when Civil Appeal No.84/2007 came up for hearing beforethis Court on 19.01.2007, this Court dismissed the said appeal with theliberty to the Union of India to urge all contentions raised in the civilappeal before the Tribunal.

15. It appears that after that the TRAI sent its recommendationsto the TDSAT. At this stage, it is required to be noted that though inview of the order passed by this Court dated 19.01.2007 passed in CivilAppeal No. 84/2007, a liberty was reserved in favour of the Union ofIndia to urge all contentions raised in the civil appeal and accordinglythe Union of India submitted that the Union of India is entitled to reopenthe issue whether the validity of the definition of AGR in the LicenceAgreement could be questioned before the Tribunal including thesubmission that the AGR shall also include the revenue from activitiesoutside the license, the TDSAT in its fresh order dated 30.08.2007 didnot permit the Union of India to raise the aforesaid issues, and theTribunal held that its earlier order dated 07.07.2006 having become final,it cannot be reopened after the disposal of Civil Appeal No. 84/2007.The Tribunal held that it’s finding in the earlier order dated 07.07.2006that the adjusted gross revenue “AGR” will include only revenue arisingfrom licence activities and not revenue from activities outside the licencecannot be re-agitated by the Union of India. Therefore, the TDSATheld that the AGR would include only the revenue from licence activities.After that the Tribunal in its fresh order dated 30.08.2007 consideredthe recommendations of the TRAI regarding the heads of the revenueto be included and the heads of the revenue to be excluded from theAGR and decided as follows:

“(i) The Tribunal accepted the recommendation of TRAI thatincome from dividend even though part of the revenuedoes not represent revenue from licensed activity and,therefore, cannot be included in the adjusted grossrevenue.

(ii) The Tribunal accepted the recommendation of TRAI thatinterest earned on investment of savings made by alicensee after meeting all liabilities including liability onaccount of the share of the Government in the grossrevenue cannot be included in the adjusted grossrevenue, but, interest on investment of funds received A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

by a licensee by way of deposits from customers onaccount of security against charges and on account ofconcessions given in the charges payable for using thetelecom services have to be included in the adjustedgross revenue as these are related to telecom service,which is part of the licensed activity.

(iii) The Tribunal did not fully accept the recommendationof TRAI on capital gains and held that sale of assets ofa licensee such as immovable properties, securities,warrants or debt instruments are not part of the licensedactivity and, therefore, capital gains earned by a licenseeon such sale of assets cannot form part of the adjustedgross revenue.

(iv) The Tribunal accepted the recommendation of TRAI thatgains from foreign exchange rate fluctuations are alsonot part of the licensed activity of telecom serviceproviders and, therefore, cannot constitute part of theadjusted gross revenue.

(v) The Tribunal did not fully accept the recommendationof TRAI on the reversal of provisions like bad debts,taxes and vendors’ credits and held that all thesereversals have to be excluded from the adjusted grossrevenue.

(vi) The Tribunal also accepted the recommendation ofTRAI that rent from property owned by the licenseeshould be excluded from the adjusted gross revenue,provided it is established that the property is not in anyway connected with establishing, maintaining andworking of telecommunication.

(vii) The Tribunal accepted the recommendation of TRAI thatincome from renting and leasing of passiveinfrastructures like towers, dark fiber, etc. should be partof the adjusted gross revenue as they are parts of thelicensed activity of the licensee.

(viii) The Tribunal accepted the recommendation of TRAI thatrevenue from sale of tenders, directories, forms,forfeiture of deposits/earnest money in relation to telecom service should form part of the adjusted grossrevenue, but held that management fees, consultancyfees and training charges from telecom service shouldnot form part of the adjusted gross revenue as theseactivities do not require a licence.

(ix) The Tribunal held that payments received on behalf ofthe third party should not form part of the adjusted grossrevenue and did not accept the recommendation ofTRAI in this regard.

(x) The Tribunal did not accept the recommendation ofTRAI that the revenue from TV uplinking and internetservice should form part of the adjusted gross revenueas these activities are under a separate licence.

(xi) The Tribunal accepted the recommendation of TRAI thatsale of handsets or telephone equipment bundled withtelecom service should be part of the adjusted grossrevenue because such sale comes within the licensedactivity.

(xii) The Tribunal accepted the recommendation of TRAI thatreceipts from USO fund will not form part of theadjusted gross revenue.

(xiii) The Tribunal accepted the recommendation of TRAI thatrevenue receipts on account of ADC (access deficitcharge) should form part of the adjusted gross revenue.

(xiv) The Tribunal accepted the recommendation of TRAI thatcosts on account of port charges, interconnection set-up charges, leased lines, sharing of infrastructure,roaming signalling charges and content charges shouldform part of the adjusted gross revenue.

(xv) The Tribunal did not accept the recommendation ofTRAI that bad debts, waivers, and discounts should formpart of the adjusted gross revenue and held that suchlosses incurred by a licensee should be excluded fromthe adjusted gross revenue.

(xvi) The Tribunal accepted the recommendation of TRAI thatservice tax payable by the licensee should be included A

B

C

D

E

F

G

H

A

or excluded from the adjusted gross revenue on anaccrual basis and also accepted the recommendation ofTRAI that interconnection usage should also be includedor excluded from the adjusted gross revenue on anaccrual basis.

(xvii) Tribunal did not accept recommendation of TRAI thatits recommendations with regard to items, which are tobe included or excluded from the gross revenue, shouldbe effective from a prospective date and instead heldthat the findings of the Tribunal with regard to items,which are included or excluded from the adjusted grossrevenue, will be effective from the date the licenseeapproached the Tribunal.”

B

C

16. A fresh final order passed by the TDSAT dated 30.08.2007was the subject matter of appeal before this Court in the case of Unionof India and another v. Association of Unified Telecom ServiceDProviders of India, (2011) 10 SCC 543. This Court formulated thefollowing substantial questions of law:

“(i) Whether after dismissal of Civil Appeal No. 84 of 2007of the Union of India against the order dated 7-7-2006of the Tribunal, by this Court by order dated 19-1-2007[Union of India v. Assn. of Unified Telecom ServiceProviders of India, Civil Appeal No. 84 of 2007decided on 19-1-2007 (SC)] , the Union of India canagitate the question decided in the order dated 7-7-2006that the adjusted gross revenue will include only revenuearising from licensed activities and not revenue fromactivities outside the licence of the licensee.

E

F

(ii) Whether TRAI and the Tribunal have the jurisdiction todecide the validity of the terms and conditions of thelicence which had been finalised by the CentralGovernment and incorporated in the licence agreementincluding the definition of adjusted gross revenue.

G

(iii) Whether as a result of the Union of India not filing anappeal against the order dated 7-7-2006 of the Tribunalpassed in favour of some of the licensees, the said orderdated 7-7-2006 had not become binding on the Union H

of India with regard to the issue that revenue realisedfrom activities beyond the licensed activities cannot beincluded in the adjusted gross revenue.

A

(iv) Whether the licensee can challenge the computation ofadjusted gross revenue, and if so, at what stage and onwhat grounds.”

B

17. While answering issue No.1, this Court took note of theexpressed language of the order dated 19.01.2007 passed in Civil AppealNo.84 of 2007 and held that it was open for the Union of India to raiseall contentions which were raised in Civil Appeal No.84 of 2007 includingthe following grounds:

C

“1. Because the judgment and order dated 7-7-2006 passedby the TDSAT are wrong, erroneous, contrary to lawand deserves to be set aside.

2. Because the TDSAT failed to appreciate that themigration package accepted and acted upon by therespondents herein itself provided for the definition ofgross revenue and adjusted gross revenue.

D

3. Because the TDSAT failed to appreciate that thelicensees unconditionally accepted the migrationpackage, exploited the licence on the terms andEconditions mentioned therein and after that challengedthe definition of adjusted gross revenue.

4. TDSAT failed to appreciate that it had no jurisdiction orpower to examine the correctness of terms of the licencewhich had been unconditionally accepted and acted uponby the licensees.

F

5. Because the TDSAT failed to appreciate that in fact,some licensees obtained a new licence which containsthe definition of ‘gross revenue’ and ‘adjusted grossrevenue’ which has been unconditionally accepted bythe appellants (sic respondents).

G

6. Because the TDSAT failed to appreciate that underSection 4 of the Telegraph Act, 1885 it is the exclusiveprivilege of the Central Government to establish,maintain and work telegraph/telecom and this privilege H

A

can be given to the private parties by granting licenceson such terms and conditions as the Central Governmentthinks fit and appropriate.”

18. This Court specifically observed and held that the Union ofIndia could urge before the Tribunal all contentions under the GroundsB1 to 6, extracted above, including the assertion that the definition ofadjusted gross revenue “AGR” as given in the licence could not bechallenged by the licensees before the Tribunal and will include all itemsof revenue mentioned in the definition of adjusted gross revenue in thelicence.

19. While answering second substantial question of law, namely,whether TRAI and the Tribunal have the jurisdiction to decide thevalidity of the terms and conditions of the licence including the definitionof adjusted gross revenue finalised by the Central Government andincorporated in the licence, this Court observed and held as under:

C

“37. A bare perusal of sub-section (1) of Section 4 of theTelegraph Act shows that the Central Government has theexclusive privilege of establishing, maintaining, and workingtelegraphs. This would mean that only the Central Government,and no other person, has the right to carry on telecommunicationactivities.

D

E

39. The proviso to sub-section (1) of Section 4 of the TelegraphAct, however, enables the Central Government to part with thisexclusive privilege in favour of any other person by granting alicence in his favour on such conditions and in consideration ofsuch payments as it thinks fit. As the Central Government ownsFthe exclusive privilege of carrying on telecommunication activitiesand as the Central Government alone has the right to part withthis privilege in favour of any person by granting a licence in hisfavour on such conditions and in consideration of such terms asit thinks fit, a licence granted under the proviso to sub-sectionG(1) of Section 4 of the Telegraph Act is in the nature of a contractbetween the Central Government and the licensee.

40. A Constitution Bench of this Court in State ofPunjab v. Devans Modern Breweries Ltd. [(2004) 11 SCC 26]relying on Har Shankar case [(1975) 1 SCC 737] and PannaLal v. State of Rajasthan [(1975) 2 SCC 633] has held in para H

121 at p. 106 that issuance of liquor licence constitutes a contractbetween the parties. Thus, once a licence is issued under theproviso to sub-section (1) of Section 4 of the Telegraph Act, thelicence becomes a contract between the licensor and thelicensee. Consequently, the terms and conditions of the licence,including the definition of adjusted gross revenue in the licenceagreement are part of a contract between the licensor and thelicensee. We have to, however, consider whether the enactmentof the TRAI Act in 1997 has in any way affected the exclusiveprivilege of the Central Government in respect of thetelecommunication activities and altered the contractual natureof the licence granted to the licensee under the proviso to sub-section (1) of Section 4 of the Telegraph Act.

41. Section 2(e) of the TRAI Act quoted above defines “licensee”to mean any person licensed under sub-section (1) of Section 4of the Telegraph Act for providing specified publictelecommunication services and Section 2(ea) defines “licensor”to mean the Central Government or the telegraph authority whogrants a licence under Section 4 of the Telegraph Act. Sub-section 2(k) defines “telecommunication service” very widely soas to include all kinds of telecommunication activities. Theseprovisions under the TRAI Act do not affect the exclusiveprivilege of the Central Government to carry ontelecommunication activities nor do they alter the contractualnature of the licence granted under the proviso to sub-section(1) of Section 4 of the Telegraph Act.

43. These provisions in the TRAI Act show that notwithstandingsubsection (1) of Section 4 of the Telegraph Act vesting exclusiveprivilege in the Central Government in respect oftelecommunication activities and notwithstanding the proviso tosub-section (1) of Section 4 of the Telegraph Act vesting in theCentral Government the power to decide on the conditions oflicence including the payment to be paid by the licensee for thelicence, TRAI has been conferred with the statutory authorityto make recommendations on the terms and conditions of thelicence to a service provider and the Central Government wasbound to seek the recommendations of TRAI on such terms andconditions at different stages, but the recommendations of TRAIare not binding on the Central Government, and the final decision AB

C

D

E

F

G

H

A

B

C

D

E

F

G

H

on the terms and conditions of a licence to a service providerrested with the Central Government. The legal consequence isthat if there is a difference between TRAI and the CentralGovernment with regard to a particular term or condition of alicence, as in the present case, the recommendations of TRAIwill not prevail and instead the decision of the Central Governmentwill be final and binding.

44. In contrast to this recommendatory nature of the functionsof TRAI under clause (a) of sub-section (1) of Section 11 ofthe TRAI Act, the functions of TRAI under clause (b) of sub-section (1) of Section 11 of the TRAI Act are notrecommendatory. This will be clear from the very language ofclause (b) of sub-section (1) of Section 11 of the TRAI Act whichstates that TRAI shall discharge the functions enumerated undersub-clauses (i), (ii) and (ix) under clause (b) of sub-section (1)of Section 11 of the TRAI Act. Under clause (c) of sub-section(1) of Section 11 of the TRAI Act, TRAI performs the functionof levying fees and other charges in respect of different servicesand under clause (d) of sub-section (1) of Section 11, the CentralGovernment can entrust to TRAI other functions. Thesefunctions of TRAI under clauses (c) and (d) of sub-section (1)of Section 11 of the TRAI Act are also not recommendatory innature. That the functions of TRAI under clause (a) arerecommendatory while the functions of TRAI under clauses (b),(c) and (d) are not recommendatory will also be clear fromprovisos first to fifth which refer to the recommendations of TRAIunder clause (a) of sub-section (1) of Section 11 of the TRAIAct and not to clauses (b), (c) and (d) of sub-section (1) ofSection 11 of the TRAI Act.

45. The scheme of the TRAI Act therefore is that TRAI beingan expert body discharges recommendatory functions underclause (a) of sub-section (1) of Section 11 of the TRAI Act anddischarges regulatory and other functions under clauses (b), (c)and (d) of sub-section (1) of Section 11 of the TRAI Act. TRAIbeing an expert body, the recommendations of TRAI under clause(a) of sub-section (1) of Section 11 of the TRAI Act have to begiven due weightage by the Central Government, but therecommendations of TRAI are not binding on the CentralGovernment. On the other hand, the regulatory and other

functions under clauses (b), (c) and (d) of sub-section (1) ofSection 11 of the TRAI Act have to be performed independentof the Central Government and are binding on the licensee subjectto only appeal in accordance with the provisions of the TRAIAct.

46. A reading of Section 14(a)(i) of the TRAI Act would showthat the Tribunal has the power to adjudicate any dispute betweena licensor and a licensee. A licensor, as we have seen, has beendefined under Section 2(ea) of the TRAI Act to mean the CentralGovernment or the Telegraph Authority who grants a licenceunder Section 4 of the Telegraph Act and a licensee has beendefined in Section 2(e) of the TRAI Act to mean any personlicensed under sub-section (1) of Section 4 of the Telegraph Actproviding specified telecommunication services. The word“means” in Sections 2(e) and 2(ea) of the TRAI Act indicatesthat the definitions of licensee and licensor in Sections 2(e) and2(ea) of the TRAI Act are exhaustive and therefore would nothave any other meaning. As Justice G.P. Singh puts it in hisbook Principles of Statutory Interpretation, 12th Edn., at pp.179-80:

“… When a word is defined to ‘mean’ such and such, thedefinition is prima facie restrictive and exhaustive;”

47. A dispute between a licensor and a licensee referred to inSection 14(a)(i) of the TRAI Act, therefore, is a dispute after aperson has been granted a licence by the Central Governmentor the Telegraph Authority under sub-section (1) of Section 4 ofthe Telegraph Act and has become a licensee and not a disputebefore a person becomes a licensee under the proviso to sub-section (1) of Section 4 of the Telegraph Act. In other words,the Tribunal can adjudicate the dispute between a licensor and alicensee only after a person had entered into a licence agreementand become a licensee and the word “any” in Section 14(a) ofthe TRAI Act cannot widen the jurisdiction of the Tribunal todecide a dispute between a licensor and a person who had notbecome a licensee. The result is that the Tribunal has nojurisdiction to decide upon the validity of the terms and conditionsincorporated in the licence of a service provider, but it will havethe jurisdiction to decide “any” dispute between the licensor and A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

the licensee on the interpretation of the terms and conditions ofthe licence.

48. Coming now to the facts of the cases before us, Clause (iii)of the Letter dated 22-7-1999 of the Government of India,Ministry of Communications, Department of Telecommunications,to the licensees quoted above made it clear that the licence feewas payable with effect from 1-8-1999 as a percentage of grossrevenue under the licence and the gross revenue for this purposewould be total revenue of the licensee company excluding thePSTN related call charges paid to DoT/MTNL and service taxcalculated by the licensee on behalf of the Government from thesubscribers. It was also made clear in the aforesaid Clause (iii)that the Government was to take a final decision after receiptof TRAI’s recommendation on not only the percentage ofrevenue share but also the definition of revenue. In accordancewith this Clause (iii), the Government took the final decision onthe definition of adjusted gross revenue and incorporated thesame in the licence agreement. Once the licensee had acceptedClause (iii) of the Letter dated 22-7-1999 that the licence feewould be a percentage of the gross revenue which would be thetotal revenue of the licensee company and had also accepted thatthe Government would take a final decision not only with regardto the percentage of revenue share but also the definition ofrevenue for this purpose, the licensee could not have approachedthe Tribunal questioning the validity of the definition of adjustedgross revenue in the licence agreement on the ground thatadjusted gross revenue cannot include revenue from activitiesbeyond the licence.

49. If the wide definition of adjusted gross revenue so as toinclude revenue beyond the licence was in any way going toaffect the licensee, it was open for the licensees not to undertakeactivities for which they do not require licence under Section 4of the Telegraph Act and transfer these activities to any otherperson or firm or company. The incorporation of the definitionof adjusted gross revenue in the licence agreement was part ofthe terms regarding payment which had been decided upon bythe Central Government as a consideration for parting with itsrights of exclusive privilege in respect of telecommunication activities and having accepted the licence and availed theexclusive privilege of the Central Government to carry ontelecommunication activities, the licensees could not haveapproached the Tribunal for an alteration of the definition ofadjusted gross revenue in the licence agreement.

50. Regarding the recommendations of TRAI under Section11(1)(a)(i) of the TRAI Act, we find that the Tribunal in its orderdated 7-7-2006 has held that the opinion of the renowned experton Accountancy that any other definition of adjusted grossrevenue would lead to reduction of licence fee liability by wayof accounting jugglery was not placed before TRAI and as aresult there was no proper and effective consultation with TRAIand the weightage that was due to the recommendations of TRAIwas not given effect to. In our considered opinion, if the Tribunalfound that there was no effective consultation with TRAI on theopinion of the expert on accountancy, the Tribunal could have atbest, if it had the jurisdiction to decide the dispute, directed TRAIto consider the opinion of the expert on accountancy and sendits recommendations to the Central Government and directed theCentral Government to consider such fresh recommendations ofTRAI as provided in the provisos to Section 11(1) of the TRAIAct. Instead, the Tribunal has considered the recommendationsof TRAI and passed the impugned fresh order dated 30-8-2007contrary to the very provisions of Section 11(1)(a) of the TRAIAct and the provisos thereto. At any rate, as the CentralGovernment has already considered the fresh recommendationsof TRAI and has not accepted the same and is not agreeable toalter the definition of adjusted gross revenue, the decision of theCentral Government on the point was final under the first provisoand the fifth proviso to Section 11(1) of the TRAI Act, 1997.

53. In State of U.P. v. Devi Dayal Singh [(2000) 3 SCC 5] atruck owner, Devi Dayal Singh, challenged the right of the StateGovernment to recover by way of toll under Section 2 of theTolls Act, 1851, an amount for the actual construction of thebridge. This Court held that Section 2 of the Tolls Act, 1851 whichenables the State Government to levy toll at such rates “as itthinks fit” and the only restriction is latent in the word “toll” itself.This was therefore not a case of a dispute between the A

B

C

D

E

F

GH

A

B

C

D

E

F

G

H

Government and the contractor where the contractor hadchallenged a stipulation of the contract. In the present case, onthe other hand, the licensees had accepted the terms of thelicence and after having taken the benefits of the licence are nowtrying to wriggle out from the terms of the licence and in particularthe definition of the adjusted gross revenue.

55. On the other hand, we find from the long line of decisionsin Har Shankar v. Excise & Taxation Commr. [(1975) 1 SCC737], Govt. of A.P. v. Anabeshahi Wine & Distilleries (P)Ltd. [(1988) 2 SCC 25 : 1988 SCC (Tax) 147], ExciseCommr. v. Issac Peter [(1994) 4 SCC 104], State ofOrissa v. Narain Prasad [(1996) 5 SCC 740], State ofM.P. v. KCT Drinks Ltd. [(2003) 4 SCC 748], State ofPunjab v. Devans Modern Breweries Ltd. [(2004) 11 SCC26], Shyam Telelink Ltd. v. Union of India [(2010) 10 SCC 165: (2010) 4 SCC (Civ) 99] and in Bharti Cellular Ltd. v. Unionof India [(2010) 10 SCC 174 : (2010) 4 SCC (Civ) 108], thatthis Court has consistently taken a view that once a licensee hasaccepted the terms and conditions of a licence, he cannot questionthe validity of the terms and conditions of the licence before thecourt. We, therefore, hold that TRAI and the Tribunal had nojurisdiction to decide on the validity of the definition of adjustedgross revenue in the licence agreement and to exclude certainitems of revenue which were included in the definition of adjustedgross revenue in the licence agreement between the licensor andthe licensee.”

20. While considering the substantial question of law no.3, thisCourt observed and held in paragraph 59 as under:

“59. Thus, the Tribunal in its order dated 7-7-2006 has not justdecided a dispute on the interpretation of adjusted gross revenuein the licence agreement but has decided on the validity of thedefinition of adjusted gross revenue in the licence agreement. Aswe have already held, the Tribunal had no jurisdiction to decideon the validity of the terms and conditions of the licence, includingthe definition of adjusted gross revenue incorporated in the licenceagreement. Hence, the order dated 7-7-2006 of the Tribunalinsofar as it decides that revenue realised by the licensee fromactivities beyond the licence will be excluded from adjusted gross revenue dehors the definition of adjusted gross revenue in thelicence agreement is without jurisdiction and is a nullity, and theprinciple of res judicata will not apply.”

21. While answering and considering the fourth substantialquestion of law, namely, whether the licensee can challenge thecomputation of adjusted gross revenue, and if so, at what stage and onwhat grounds, this Court observed and held in paragraph 63 as follows:

“63. Section 14(a)(i) of the TRAI Act, as we have seen, providesthat the Tribunal can adjudicate any dispute between the licensorand the licensee. One such dispute can be that the computationof adjusted gross revenue made by the licensor and the demandraised on the basis of such computation is not in accordance withthe licence agreement. This dispute, however, can be raised bythe licensee, after the licence agreement has been entered intoand the appropriate stage when the dispute can be raised is whena particular demand is raised on the licensee by the licensor.When such a dispute is raised against a particular demand, theTribunal will have to go into the facts and materials on the basisof which the demand is raised and decide whether the demandis in accordance with the licence agreement and in particular thedefinition of adjusted gross revenue in the licence agreement andcan also interpret the terms and conditions of the licenceagreement. We, however, find from the order dated 7-7-2006 thatinstead of challenging any demands made on them, the licenseeshave questioned the validity of the definition of adjusted grossrevenue in the licences given to them and the Tribunal has finallydecided in its order dated 30-8-2007 as to what items of revenuewould be part of adjusted gross revenue and what items ofrevenue would not be part of adjusted gross revenue withoutgoing into the facts and materials relating to the demand on aparticular licensee.”

22. Ultimately, this Court allowed the appeals preferred by theUnion of India and set aside the order dated 30.08.2007 passed by theTDSAT. Thereafter, in paragraph 67, this Court clarified as under:

“67. We have delivered today the judgment in these cases(supra paras 1-66) and while answering the last substantialquestion of law, we have held that when a particular demand israised on a licensee, the licensee can challenge the demand A

B

C

D

E

F

G

H

Abefore the Tribunal and the Tribunal will have to go into the factsand materials on the basis of which the demand is raised anddecide whether the demand is in accordance with the licenceagreement and in particular the definition of adjusted grossrevenue in the licence agreement and can also interpret the termsand conditions of the licence agreement.”

B

23. After that, the respective telecom operators again approachedthe TDSAT challenging the demand notices/demand. The TDSAT bythe impugned order has considered the specific head of items to beincluded or excluded under the definition of AGR. The TDSAT examinedthe following heads:

C

“1. Gain on sale of Capital Assets and receipt from the saleof scrap.

2. Insurance claim in respect of Capital Assets.

3. Discounts and Commissions.

D

Discounts allowed on international roaming.

Commission and discount allowed to distributors on saleof pre-paid vouchers.

4. Waiver of Late Fee.

E

5. Amount of negative balance of the pre-paid customer.

6. Roaming Charges and PSTN pass-through charges (PSTN – Public Switch Telephone Network)

7. Reimbursement of Infrastructure operating expenses.

F

8. Gain from foreign exchange fluctuation.

9. Revenue from 214 FCC License, USA (in the case ofBharti BILGO)

10. Proceeds from divestment of investment in a company G

(Example, case of Sistema Shyam in Hexacom)

11. The demand for License fee in a circle where theLicensee is not granted spectrum (in the case ofVideocon & S. Tel)

H

12. Interest, Penalty, and Interest on Penalty

13. Non-refundable deposits and notional interest on interest-free loans.”

24. TDSAT in the impugned order has held that the Gain on saleof Capital assets and receipt from the sale of scrap cannot be includedin gross revenue for computation of licence fee. However, it is requiredto be noted that the said issue was raised earlier and considered bythe TDSAT in its earlier order dated 30.08.2007 and held in favour ofthe telecom operators. However, this Court, in the case of AUSPI(supra) – expressly set aside the order passed by the TDSAT.Therefore, subsequently it was not open for the TDSAT to again holdcontrary by the impugned order on the head as mentioned earlier andit can be said to be barred by res judicata because of the specificorder of AUSPI (supra).

25. Various questions arise for consideration as under:

(i) In re: Definition of gross revenue.

(ii) In re: Discount and commissions.

(iii) In re: Gains arising out of foreign exchange fluctuations.

(iv) In re: Monetary gains on sale of shares.

(v) In re: Insurance claim in respect of capital assets.

(vi) In re: Amount of negative balance of pre-paid customer.

(vii) In re: Reimbursement of the infrastructure operatingexpenses.

(viii) In re: Waiver of late fee.

(ix) In re: Gains from roaming charges & PSTN pass-through charges.

(x) In re: Non-refundable deposits.

(xi) In re: Licence fee demand where spectrum is notgranted.

(xii) In re: Income from interest & dividend.

(xiii) In re: Bad-debts written off.

(xiv) In re: Liability written off.

(xv) In re: Inter-corporate loan.

A

B

C

D

E

F

G

H

A(xvi) In re: Revenue under IP-1 Registration.

(xvii) In re: Income from management consultancy services.

(xviii) In re: Res Judicata.

(xix) In re: Levy of interest, penalty and interest on penalty.

BIn Re: Definition of Gross Revenue

26. A new package, namely “the National Telecom Policy 1999Regime,” gave an option to the licensees to migrate from fixed licencefee to revenue sharing fee, which was to the advantage of TelecomService Providers (for short, ‘the TSPs’). The objective of theCGovernment was to achieve social and economic goals to provide theservice to all uncovered area including rural areas, remote, hilly andtribal areas and to create an efficient infrastructure thereby propellingIndia into an IT superpower and to increase teledensity from 0.4 to 4by the year 2010 and to provide internet access to all districtDHeadquarters by the year 2000. Human resource development training,telecom equipment manufacturer, and remote area telephony were theother objectives.

27. The Central Government has given a liberalised mode ofpayment by revenue sharing regime, which was the price parting withEthe exclusive privilege which the Central Government had. Theintendment was to make the Government partner or sharer of grossrevenue. Out of the existing gross revenue, the Central Governmentdecided to spend money on remote and uncovered areas, rural, tribal,and hilly areas. The Government incurred a colossal amount ofRs.49.120 crores under the Universal Service Obligation Fund (for short,F‘the USOF’) and incurred a committed liability of Rs.59,774 crores forongoing projects including laying of optical fiber cables up to GramPanchayat areas under “Digital India Mission.” Initially, 15 percentAdjusted Gross Revenue (for short, ‘the AGR’) was fixed as licensefee under revenue sharing, which was reduced to 13 percent and lastlyGto 8 percent in 2013. Out of the 8 per cent, a substantial portion of 5per cent is spent by the Central Government under the USOF.

28. The Sector is benefited immensely under the Scheme asapparent from the gross revenue trend from 2004 to 2015. Clause 19.1defines gross revenue. It came as relief against the high license fee.HThe gross revenue for this purpose would be the total revenue of the

licensee company with certain exceptions provided in Clause 19.2 toarrive at the figure of AGR. The Policy of 1999 contained the stipulationthat the conditions are to be accepted in its entirety, and no disputeconcerning the license agreement shall be raised at any future date.The acceptance of the package be deemed full and final settlement,and after that amendment to the license agreement has to be signed.Following stipulations were mentioned explicitly in the MigrationPackage:

“2. Migration to the NTP-99 on the conditions mentioned abovewill be permitted on the premise that the aforesaid conditions areaccepted as a package in its entirety and simultaneously all legalproceedings in Courts, tribunals or in Arbitration instituted by thelicense and Associations of Cellular and Basic Service Operators(COAI) & ABTO) against DoT or UOI shall be withdrawn.Further, any dispute with regard to the license agreement for theperiod up to 31.07.1999 shall not be raised at any future date.The acceptance of the package will be deemed as full and finalsettlement of all existing disputes whatsoever irrespective ofwhether they are related with the present package or not.

3. After the terms and conditions of the package are accepted,amendments to the existing license agreement will be signedbetween the licensor and the licensee.”

29. To avoid the accounting jugglery, the Department ofTelecommunications (for short, ‘the DoT’) sought the advice of expertsin the field of accountancy to decide upon the broad definition of thegross revenue. The relevant portion of the experts’ opinion is extractedhereunder:

“1.1 The question of what should constitute ‘revenue’ in thecontext of the ‘revenue sharing’ policy of thegovernment is a vexed one. Accounting principles seekto measure economic transactions and events in adynamic and open environment and, therefore, do notalways provide as definitive guidance as one wouldwish. While keeping these inherent limitations ofaccounting as a measurement discipline in view, anattempt has been made in this note to articulate a basicset of propositions that may assist in dealing with theissue on hand. Needless to add, these propositions are A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

presented only as a starting point for discussions andfurther refinement.

1.2 As far as possible, our definition of ‘revenue’, theprinciples for its measurement and the procedure forestablishing the authenticity of actual figures shouldbe simple and objective.While it is recognised thatthis is a difficult proposition given the inherent natureof accounting and the diversity in the telecom scenario(which it is recognised that this is a difficult propositiongiven the inherent nature of accounting and the diversityin the telecom scenario (which is likely to grow at a fastpace), our attempt should be to evolve a systemof revenue sharing that does not become as-arduous and litigative as some other revenuegenerating activities of the government, e.g.,income tax, excise duty etc.

1.3Defining ‘revenue in a broad, comprehensive andinclusive manner is likely to pose fewer problemsof interpretation (and consequently lesserdisputes and litigation) than would be the caseotherwise. Further, exclusion of certain items fromthe definition of ‘revenue’ may sometimesencourage companies to design their tariff andpayment schemes in such a manner that theirlicense fee liability is reduced to the minimum. Ofcourse, the comprehensiveness of definition of revenuewould need to be duly considered in determining thepercentage of revenue to be charged as license fee, sothat the amount of license fee is appropriate in thecontext of the present stage of evolution of telecomcompanies.

1.4 To ensure consistency, we may lay down uniformaccounting policiesto be followed by telecomcompanies for presenting their annual accounts as wellas periodical statements of revenue to be sent to thegovernment supporting their payments.”

30. The definition of revenue has been taken in a broad,comprehensive, and inclusive manner to pose fewer problems ofinterpretation, and exclusion of certain items was avoided.

31. On 21.5.2001, the Government of India finalised the conceptof gross revenue and AGR.

32. The format of the statement of revenue and license feepayable by the TSPs is appended to the license agreement, whichreflected the various heads and components, including any other income/miscellaneous receipts from the wireline subscribers, which was to beincluded for the computation of AGR. Provision in Clause 20.2 wasmade for payment of license fee by the licensee on the basis of actualrevenue (on accrual basis). The accrual was necessary irrespective ofits realisation at a subsequent date or even its non-realisation.

33. Shri Tushar Mehta, learned Solicitor General of India,appearing on behalf of Union of India submitted that the definition ofgross revenue has to prevail over the mode of accounting. Under Clause20.4 of the agreement, the licensee must state in the prescribed formas Annexure-II. The format is a part of the license under the title of“Format of Statement of Revenue and Licensee Fee.” It has noconnection with the accounting standards prescribed under theCompanies Act. The format is the basis for the calculation of the licensefee in revenue sharing. The licensees provide the details as per theformat Annexure-II along with the certificate of Auditors. The TSP hasto provide all the details of gross revenue as per the definition. Theaccounting standards deal with the broad principles to be followed whilemaintaining accounts and can never override the definition of grossrevenue. Accounting Standard (AS-9) deals with the definition ofrevenue, but that cannot prevail over the definition of Gross Revenueas defined in the agreement. The provisions of Section 211 (3B) ofCompanies Act makes it clear that accounting standards are notsacrosanct.

34. The profit and loss account and balance-sheet have to complywith the accounting standards, as provided in Section 211(3A). In casethey do not comply, for any deviation, the reasons, and the economiceffect have to be disclosed. In Petition No.7 of 2003 filed by AUSPI,the declaration was sought that AGRs can only be related to revenuesdirectly arising out of the telecom operations licenced under Section 4of the Indian Telegraph Act, 1885. A prayer was made to set aside A

B

C

D

E

F

GH

Athe demand letter issued in 2002 and 2003, claiming revenue share oninterest income and other miscellaneous heads. In Petition No.82 of2005, a prayer was made to re-compute and modify the demands asper demand notes dated 28.3.2003 and 13.7.2004 on account of thewrongful entry of gross revenue and AGR, the DoT cannot levy licensefee, which result in charge of the license fee twice on the same revenueBin the hands of two or more operators/circles. DoT be directed tocalculate AGR on realisation basis, not on an accrual basis, and not toinclude notional revenue income in AGR.

35. Prayer was made to direct DoT to modify the definition of gross revenue and AGR for license fee as also WPC charges underCSection 4 of the Indian Telegraph Act, 1885. Prayers were also madeto direct DoT to modify the Format of Statement of Gross Revenue,Adjusted Gross Revenue, and License Fee and strike down the definitionof gross revenue and AGR. This Court in Union of India v. AUSPI(2011) held that Tribunal has no jurisdiction to exclude certain items ofDrevenue, which were included in the definition of AGR. The licenseecould not have approached the Tribunal for the alteration of the definitionof AGR in the license agreement. TRAI and Tribunal had no jurisdictionto decide on the validity of the definition AGR in the licence agreement.The licensees are not only precluded to challenge the definition of grossErevenue/AGR, but also by the meaning the Government may chooseto put to the definition. The Tribunal has travelled beyond its jurisdictionto act contrary to the specific findings and decision in AUSPI v. Unionof India.

36. Shri Arvind Datar, Shri C.A. Sundaram, Shri Shyam Divan,FShri Gopal Jain, Shri Ramji Srinivasan, Dr. Abhishek Manu Singhvi, ShriKavin Gulati, Shri B. Adinaraynan Rao, Shri U. Hazarika, Shri ChetanSharma and Shri Siddhartha Dave, learned senior counsel appearingon behalf of TSPs submitted that the meaning of gross revenue has tobe determined in accordance with the provisions of AS-9 which onlyincludes gross inflow of cash, receivables that arise out of ordinaryGactivities of the telecom companies. In the definition of gross revenue,only revenue cash inflow as revenue can be included; not all theincomes which is recorded in profit and loss account and non-revenueitems cannot be included in the definition of gross revenue within theambit of accounting standards. Clause 18.2 of the license agreementHprovides only license fee of 10 per cent of AGR excluding the spectrum charges. The gross revenue under Clause 19.1 is not gross income orgross inflow or gross receipts.

37. It is further submitted on behalf of the licensees that revenuehas not been defined under the license. Clauses 20.6 and 22 of thelicense agreement provided as to how the licensees are obliged toprepare their accounts. Section 211(3A) read with Section 211(3C) ofthe Companies Act, 1956, casts an obligation on companies to maintaintheir books of account following accounting standards recommendedby the Institute of Chartered Accountants of India constituted underthe Chartered Accountants Act.

38. They have insisted to adopt fair valuation method relying ondecision in J.K. Industries Limited v. Union of India, (2007) 13 SCC673.

39. It is further submitted that accounting standards have beenmade mandatory. The DoT has admitted in their counter affidavit dated11.7.2003 in Petition No.7 of 2003 that definition of term revenue is inline with AS-9. The Government cannot resile from the stand thatrevenue definition is in line with AS-9 and cannot take a contradictorystand at different stages of the case. The party cannot be permittedto approbate and reprobate on the same aspect.

40. It is submitted on behalf of licensees. that in order to computethe adjusted gross revenue would constitute (a) it must be revenue; (b)it is gross and not net revenue; and (c) it would be adjusted revenue,but adjustment can be made only by deductions as provided under Clause19.2. Revenue has to be interpreted in keeping with commercial andfinancial parlance. The contract itself recognise the applicability of theaccounting standards as apparent from Clauses 20.6 and 22.7. Theaccounts have to be maintained as per the accounting standards. Thepurpose of accounting standards is to ensure that there is clarity,uniformity in dealing with the financial terms to give definitiveness andclarity to such financial expressions. Accounting standards aremandatory. Revenue had not been defined in the commercial licenseagreement and this being a commercial contract and the accountingstandards having been incorporated by reference in the licenseagreement as such the basis on which the license fee has to be decided,the same would prevail.

41. It is further submitted that all receipts would not form part ofAGR. The use of the word inclusive under Clause 19.2 does not make A

B

C

D

EFG

H

Athe definition of AGR expansive though the definition is not exhaustiveas the provision of value-added services is different and provided inother clauses and service is to mean service in a licensed service area.Thus, license fee has to be confined in respect of business carried onto provide the services under the license. A single company may holdfive licenses for five different service areas. The license fee at 10Bpercent cannot be levied on the same revenue cannot be charged tolicense fee more than once, as apparent from Clause 20.4 of the licenseread with Appendix-II to Annexure-II to it, which is the prescribedformat by the licensor indicating the streams of revenue required by alicensee to be disclosed. The miscellaneous receipts provided under eachChead are not meant to include any and every receipt received by thecompany.

42. It should be held that such revenue from non-licensed revenuewas not part of AGR at all. Contra proferentum rule requires clauses19.1 and 19.2 to be interpreted against the maker and to prefer theDinterpretation which is favourable to the licensees.

43. The service providers submitted that basic principles to decidewhat constitutes revenue have to be followed. The receipt must behaving the nature of revenue, and it cannot be subjected to doublecharge. No one can generate revenue from oneself, and someone else’sErevenue cannot be treated as that of others.

44. When we consider the submissions as observed there was aparadigm shift in Telecom Policy of 1999 from the fixed licence fee tothe revenue sharing basis regime, which was advantageous to theTelecom Service Providers. Under the new regime, the CentralFGovernment shared the privilege under section 4 of the Indian TelegraphAct with the TSPs. It came as a relief against the high licence fee,which used to be charged under the 1999 policy. The migration packagecontained the stipulation as to no dispute to be raised as to working outsharing of revenue. Experts were consulted in the field of accountancy,and it was their advice that the actual figures should be simple andGobjective to evolve a system of revenue sharing that does not becomeas arduous one and litigative, had been evolved. Revenue has beendefined in a broad, comprehensive, and inclusive manner not to poseproblems of interpretation and to protect from the accounting jugglery.Gross revenue has been defined to be inclusive of specific itemsHmentioned in clause 19.1 and any other miscellaneous revenue, without any set-off for related items of expense, etc. All the licensees acceptedthe migration package and have signed the agreements. It has turnedout to be a substantial financial booster in favour of the licensees as isapparent from figures of the gross revenue earned by them mentionedabove. When under a contract signed by the parties, gross revenue andAGR have been given the meaning coupled with the format and theannexures which form part of the contract. Format is contained inappendix to Annexure-II which is part of the agreement in whichrequisite information has to be furnished. The meaning in clause 19 ofthe gross revenue and the format mentioned above have to prevail.

45. No doubt about it that the accounts have to be maintainedas per the AS-9 regime prevalent at the relevant time. The definitionof the contract has to prevail and not what is generally revenue, asdefined in AS-9.

46. The question as to what constitute Gross Revenue has beenagitated, though concluded in earlier decision in 2011, by the TSPs. againby raising the submission that we have to follow the definition of revenueas defined in AS-9, it would be the revenue as generated by activitiesunder the licence; whereas the definition of gross revenue includes theincome from non-licensing activities also as part of the gross revenue,which we have to discard.

47. The definition of ‘gross revenue’ in clause 19.1 is inclusive,and it includes explicitly:

(i) installation charges;

(ii) Late fees;

(iii) sale proceeds of handsets;

(iv) sale proceeds of any other terminal equipment, etc.

(v) revenue on account of interest;

(vi) revenue on account of dividend;

(vii) value-added services;

(viii) supplementary service as fixed charges;

(ix) access or interconnection charges;

(x) roaming charges;

A

B

C

D

E

F

G

H

A(xi) revenue from permissible sharing of infrastructure; and

(xii) any other miscellaneous revenue.

48. No set-off can be claimed for related items of expense etc.on any of the items mentioned above of the inclusive definition and onthe miscellaneous revenue.B

49. Clause 19.2 of the agreement excludes certain items fromgross revenue to arrive at the figure of AGR, which are (a) PSTN/PLMN related charges (access charges) actually paid to other eligibleservice providers within India; (b) roaming revenue passed on to theCTSPs through service tax paid to the Government, if gross revenue hadincluded the component of service tax and sales tax.

50. In Union of India v. AUSPI (2011), this Court has held thatthe terms and conditions of the licence, including the definition of grossrevenue in the licence agreement, are part of the contract. The CentralDGovernment alone has the right to define revenue and has parted withthe privilege under section 4 of the Telegraph Act. A licence grantedunder section 4(1) of the Telegraph Act is in the nature of the contractbetween the Central Government and the licensee. The provisions ofthe TRAI Act do not affect the specific exclusive privilege of theECentral Government to carry on telecommunication activities, nor dothey alter the contractual nature for the licence granted under theproviso to section 4(1) of the Telegraph Act. After TRAI makes therecommendation, the Central Government shall take a final decisionunder section 11(1)(a)(ii) of the TRAI Act. The TRAI shall have thefunction to make a recommendation. In case of difference betweenFTRAI and Central Government with regard to particular terms orconditions of the licence, the recommendation of TRAI cannot prevail,and it is the decision of the Central Government, which is to be finaland binding. The tribunal has no jurisdiction to decide upon the validityof terms and conditions incorporated in a licence; it has jurisdiction toGdecide any dispute between the licensor and the licensee on theinterpretation. It has also been observed to make a final decision onthe definition of the gross revenue in the licence agreement, theGovernment has the competence. The licence fee would be apercentage of gross revenue, which would be the total revenue of theHlicensee company.

51. This Court has held in Union of India v. AUSPI (2011) thatthe licensing company had accepted in the letter dated 22.7.1999 thatthe licence fee would be a percentage of the gross revenue, whichshould be the total revenue of the licensee company. The licenseeagreed that the Government has to take a final decision not onlyconcerning the percentage of revenue share but also the definition ofrevenue for this purpose. The licensee could not have approached thetribunal to question the validity of the definition of adjusted gross revenuein the licence agreement on the ground that the adjusted gross revenuecannot include revenue from activities beyond the licence.

52. It is submitted on behalf of the licensees that the termrevenue has nowhere been defined under the licence. As such, it wouldbe necessary to find out what is the meaning of revenue in AS-9. Thesubmission that revenue has to be related to the activities of the licenseecompany, a reference has been made to the definition of revenue asgiven in clause 4.1 of AS-9, which reads as under:

“4.1 Revenue is the gross inflow of cash, receivables, or otherconsideration arising in the course of the ordinary activities ofan enterprise from the sale of goods, from the rendering ofservices, and from the use by others of enterprise resourcesyielding interest, royalties, and dividends. Revenue is measuredby the charges made to customers or clients for goods suppliedand services rendered to them and by the charges and rewardsarising from the use of resources by them. In an agencyrelationship, the revenue is the amount of commission and notthe gross inflow of cash, receivables, or other consideration.”

53. The explanation contained in clause 5 of AS-9 relating torevenue recognition is extracted hereunder:

“Explanation

Revenue recognition is mainly concerned with the timing ofrecognition of revenue in the statement of profit and loss of anenterprise. The amount of revenue arising on a transaction isusually determined by agreement between the parties involvedin the transaction. When uncertainties exist regarding thedetermination of the amount or its associated costs, theseuncertainties may influence the timing of revenue,”

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

54. Clauses 20.6, 20.7, and 22 of the licence agreement havealso been referred. They are extracted hereunder:

“20.6 Final adjustment of the Licence Fee for the year shall bemade based on the gross revenue figures duly certified by theAUDITORS of the LICENSEE in accordance with the provisionof Companies Act, 1956.

20.7 A reconciliation between the figures appearing in thequarterly statements submitted in terms of the clause 20.4 of theagreement with those appearing in annual accounts shall besubmitted along with a copy of the published annual accountsaudit report and duly audited quarterly statements, within 7(seven) Calendar days of the date of signing of the audit report.The annual financial account and the statement as prescribedabove shall be prepared following the norms as prescribed inAnnexure.

x x x

22. Preparation of Accounts.

22.1 The LICENSEE will draw, keep and furnish independentaccounts for the SERVICE and shall fully comply orders,directions, or regulations as may be issued from time to time, bythe LICENSOR or TRAI as the case may be.

22.2 The LICENSEE shall be obliged to:

a) Compile and maintain accounting records, sufficient toshow and explain its transactions in respect of eachcompleted quarter of the Licence period or of suchlesser periods as the LICENSOR may specify, fairlypresenting the costs (including capital costs), revenueand financial position of the LICENSEE’s business underthe LICENCE including a reasonable assessment of theassets employed in and the liabilities attributable to theLICENSEE’S business, as well as, for the quantificationof Revenue or any other purpose.

b) Procure in respect of each of those accountingstatements prepared in respect of a completed financialyear, a report by the LICENSEE’s Auditor in the formatprescribed by the LICENSOR stating inter alia whether in his opinion the statement is adequate for the purposeof this condition and thereafter deliver to theLICENSOR a copy of each of the accountingstatements not later than three months at the end of theaccounting period to which they relate.

c) Send to the LICENSOR a certified statement on anaffidavit by authorised representative of the company,containing full account of Revenue as defined incondition 19 for each quarter separately along with thepayment for the quarter.

22.3 (a) The LICENSOR or the TRAI, as the case may be, shallhave a right to call for and the LICENSEE shall beobliged to supply and provide for examination any booksof accounts that the LICENSEE may maintain in respectof the business carried on to provide the service(s)under the Licence at any time without recording anyreasons thereof.

22.3 (b) LICENSEE shall invariably preserve all billing and allother accounting records (electronic as well as hardcopy for a period of THREE years from the date ofpublishing of duly audited & approved Accounts of thecompany and any dereliction thereof shall be treated asa material breach independent of any other breach,sufficient to give a cause for cancellation of theLICENCE.

22.4 The records of the LICENSEE will be subject to suchscrutiny as may be prescribed by the LICENSOR so as tofacilitate independent verification of the amount due to theLICENSOR as its share of the revenue.

22.5 The LICENSOR may, on forming an opinion that thestatements or accounts submitted are inaccurate or misleading,order Audit of the accounts of the LICENSEE by appointingauditor at the cost of the LICENSEE and such auditor(s) shallhave the same powers which the statutory auditors of thecompany enjoy under Section 227 of the Companies Act, 1956.The remuneration of the Auditors, as fixed by the LICENSOR,shall be borne by the LICENSEE.

A

B

C

D

E

F

G

H

A

22.6 The LICENSOR may also get conducted a Special Auditof the LICENSEE company’s accounts/records by “SpecialAuditors,” the payment for which at a rate as fixed by theLICENSOR shall be borne by the LICENSEE. This will be inthe nature of auditing the audit described in para 22.5 above. TheSpecial Auditors shall also be provided the same facility and havethe same powers as of the companies’ auditors as envisaged inthe Companies Act, 1956.

B

22.7 The LICENSEE shall be liable to prepare and furnish thecompany’s annual financial accounts, according to the accountingprinciples prescribed and the directions given by the LICENSORor the TRAI, as the case may be, from time to time.”

C

55. The clauses mentioned above provided as to how thelicensees are obliged to prepare the accounts. There is a statutoryobligation cast under the Companies Act. Section 211(3A) read withsection 211(3C) of the Companies Act provides to maintain their booksDof accounts following the accounting standards and for which reliancehas been placed upon J & K Industries v. Union of India (supra) inwhich the Court has emphasised upon the fair valuation principles. Theyhave relied upon the following observations:

“124. On the other hand, fair valuation principles are importantEin the context of valuing derivatives and other investments. Ifone were to describe one single change in accounting practiceover the last few years, it would be the use of fair valuationprinciples. Today, the object behind the enactment of AS, whichare now made mandatory under Section 211(3-A) of theFCompanies Act, is to shift from historical method of accountingto fair valuation. In the case of mergers and acquisitions, whichis common today in the world of globalisation, fair valuationprinciples have important role to play. Mergers and acquisitionsare sometimes undertaken to defer revenue expenditure overfuture years by invoking the matching concept, which resultsGin putting fictitious assets on the balance sheet. This is onereason why fair valuation principles are accepted.

125. AS are established rules relating to recognition,measurement, and disclosures, thereby ensuring that allenterprises that follow them are comparable and that theirfinancial statements are “true and fair.” Measurements and H

disclosures based on fair value are becoming increasinglyimportant. Fair valuation is generally used in valuation anddisclosure of financial instruments, derivatives, conversions,auctions in a bond, business combinations, impairment of assets,retirement obligations, transactions involving exchange of assetswithout monetary consideration, transfer pricing, etc.”

56. The accounting standards are mandatory to be followed bythe companies, and DOT has admitted in the counter affidavit of11.7.2003 in Petition 7 of 2003 that the definition of the term revenuein the agreement is in line with AS-9 under the accounting standards.Thus, they cannot approbate and reprobate. Thus, identification ofrevenue would come within the purview of gross revenue, is the soletest that it should conform with the definition of revenue as provided inAS-9, and the golden thread is the phrase arising in the course of theordinary activities of the enterprise.

57. Revenue is a ‘Term of Art’ as per Chapter 4.08 KimLewison, the Interpretation of Contract, Sweet & Maxwell, 1997,wherein it has been observed as under:

“Where a document contains a legal term of art, the court shouldgive it its technical meaning in law, unless there is something inthe context to displace the presumption that it was intended tocarry its technical meaning.”

(emphasis added)

58. The Technical meaning as to the gross expression revenuedoes not mean inflows that are not revenue and other miscellaneousrevenue cannot have a broader meaning. It must qualify as revenue.It is not miscellaneous inflow and miscellaneous receipts. The itemsof the revenue must be interpreted as per the doctrine of ejusdemgeneris, as observed in Maharashtra University of Health Sciencesv. Satchikitsa Prasarak Mandla, (2010) 3 SCC 786. Followingobservations have been made:

“27. The Latin expression “ejusdem generis” which means “ofthe same kind or nature” is a principle of construction, meaningthereby when general words in a statutory text are flanked byrestricted words, the meaning of the general words are taken tobe restricted by implication with the meaning of the restrictedwords. This is a principle which arises “from the linguistic A

B

C

D

E

F

G

H

A

Aimplication by which words having literally a wide meaning (whentaken in isolation) are treated as reduced in scope by the verbalcontext.” It may be regarded as an instance of ellipsis, or relianceon implication. This principle is presumed to apply unless thereis some contrary indication [see Glanville Williams, The Originsand Logical Implications of the Ejusdem Generis Rule, 7 ConvB(NS) 119].”

59. Thus, as per licensees the miscellaneous revenue has to berevenue as defined in AS-9. The miscellaneous revenue only servesthe purpose of capturing such other revenue that satisfies commoncharacteristics of the preceding word.

C

60. As per licensees, the revenue pertained only to the licensedactivities and was specific to activities under the licensing agreementin the designated area on the services rendered to the customers. Therule of interpretation of a commercial contract is that when the provisionis not exclusively defined, it is to look at how the parties wouldDunderstand the same by their subsequent conduct as observed inGodhra Electricity Co. Ltd. v. State of Gujarat, (1975) 1 SCC 199thus:

“11. In the process of interpretation of the terms of a contract,the court can frequently get great assistance from the interpretingstatements made by the parties themselves or from their conductin rendering or in receiving performances under it. Parties can,by mutual agreement, make their own contracts; they can alsoby mutual agreement remake them. The process of practicalinterpretation and application, however, is not regarded by theparties as a remaking of the contract; nor do the courts so regardit. Instead, it is merely a further expression by the parties of themeaning that they give and have given to the terms of theircontract previously made. There is no good reason why the courtsshould not give great weight to these further expressions by theparties, in view of the fact that they still have the same freedomof contract that they had originally.The American Courts receivesubsequent actings as admissible guides in interpretation. It is truethat one party cannot build up his case by making aninterpretation in his own favour. It is the concurrence therein thatsuch a party can use against the other party. This concurrencemay be evidence by the other party’s express assent thereto, by E

F

G

H

his acting in accordance with it, by his receipt without objectionof performances that indicate it, or by saying nothing when heknows that the first party is acting on reliance upon theinterpretation (see Corbin on Contracts, Vol. 3, pp.249 & 254-56).

12. The rule that obtains in other jurisdictions is also the same:

“In France construction of a contract is within the sole provinceof the judges of fact who are entirely free to use whatevermaterial seems relevant to them... The rule is the same inGermany, where since 1888, it is established that even statementsmade by one of the contracting parties to a third person aboutthe content of the contractual intentions are admissible guides tointerpretation... In Italy, Article 1362(2) provides in impressivelysuccinct language... The Vienna Convention on the law ofTreaties of 1969 (which to a large extent merely codifies earlierinternational practice) enjoins the interpreter of a treaty to takeinto account ‘any subsequent practice in the application of thetreaty which establishes the agreement of the parties regardingits interpretation’: Article 31(3)(b) [see Notes by P.A. Mann onL. Schuler A.G. v. Wickman Machine Tool Sales Ltd., (1973)2 WLR 683, Law Quarterly Review, Vol. 89, pp. 464-65].

The real reason against taking into account the subsequentconduct of the parties is the rule which excluded extrinsicevidence in the construction of a written contract.

16. We are not certain that if evidence of subsequent acting undera document is admissible, it might have the result that a contractwould mean one thing on the day it is signed, but by reason ofsubsequent event, it would mean something a month or year later.Subsequent “interpreting” statements might not always changethe meaning of a word or a phrase. A word or a phrase is notalways crystal clear. When both parties subsequently say thatby the word or phrase which, in the context, is ambiguous, theymeant this, it only supplies a glossary as to the meaning of theword or phrase. After all, the inquiry is as to what the intentionof the parties was from the language used. And, why is it thatparties cannot clear the latent ambiguity in the language by asubsequent interpreting statement? If the meaning of the wordor phrase or sentence is clear, extrinsic evidence is not A

B

C

D

E

F

G

H

A

admissible. It is only when there is latent ambiguity that extrinsicevidence in the shape of interpreting statement in which bothparties have concurred should be admissible. The partiesthemselves might not have been clear as to the meaning of theword or phrase when they entered into the contract.Unanticipated situation might arise or come into the contemplationof the parties subsequently which would sharpen their focus andany statement by them which would illuminate the darknessarising out of the ambiguity of the language should not be shutout. In the case of an ambiguous instrument, there is no reasonwhy subsequent interpreting statement should be inadmissible.

B

C

“The question involved is this: Is the fact that the parties to adocument, and particularly to a contract, have interpreted itsterms in a particular way and have been in the habit of actingon the document in accordance with that interpretation, anyadmissible guide to the construction of the document? In thecase of an unambiguous document, the answer is ‘No.’ (SeeOdgers’ Construction of Deeds and Statutes, 5th Edn. byG. Dworkin, pp. 118-19).”

D

But, as we said, in the case of an ambiguous one, the answermust be “yes.” In Lamb v. Goring Brick Co., a selling agencycontract contained the words “the price shall be mutually agreed.”Documents showing the mode adopted for ascertaining the pricewere put in evidence without objection. In the court of appealGreer, L.J. said:

E

“In my opinion, it is not necessary to consider how this contractwas acted on in practice. If there had been an ambiguity, andthe intention of the parties had been in question at the trial, Ithink it might have been held that the parties had placed theirown construction on the contract and, having acted upon acertain view, had thereby agreed to accept it as the true viewof its meaning.””

F

G

61. The submission raised for adopting fair valuation methodrelying on S.K. Synthetics (supra) is based upon misconception ofmethod applicable to A.S-9. The argument is crafted to get rid of AS-H9 and the definition of gross revenue in the agreement. We have to consider valuation method of accounting standards which are laid timeto time to find an answer to the submission. The ICAI issued the AS-9 revenue recognition standard in the year 1985. In the initial years, itwas recommendatory for only Level-I enterprises but was mademandatory for all enterprises from 1.4.1983. The meaning of enterpriseis as defined in section 3 of the Companies Act, 1956. The IND AS-18 regime has been introduced later on. In AS-9, revenue recognitionis at “nominal” value; whereas IND AS-18, the revenue recognition isat a “fair” value. The barter transactions are included in Ind AS-18,whereas this aspect is not covered in AS-9. In AS-9 revenuerecognition, interest income is recognised on a time proportion basis,whereas in Ind AS-18, interest income is recognised using an effectiveinterest rate method. AS-9 recognises revenue as per the completedservice method or percentage completion method, whereas Ind AS-18only recognises revenue as per the percentage of completion method.Thus, there is a fundamental difference. The fair value concept has noplace in AS-9 as per which the accounts are to be maintained andsubmitted for determination of gross revenue. AS-9 revenue recognitionregime states that the amount of revenue shall be measured by the grossinflow of cash, receivables, or other consideration received. There isno concept of fair valuation. Thus, the submission raised based on afair valuation method based on the decision in J.K. Industries v. Unionof India (supra) cannot be accepted as the decision is on considerationof different accounting standard which adopts fair valuation method i.e.,Ind AS-18 and not relevant for the AS-9 accounting standard.

62. The submission is wholly devoid of substance. It is not onlybarred by the principle of constructive res judicata but also indicatesthat the licensees are raising the similar objections which they haveraised earlier and were not entertained by this Court and were rejected.Again precisely, the same attempt is made by submitting; revenue shouldbe taken as defined in AS-9, not in Clause 19.1 of the agreement,submission runs contrary to the decision of the Court, as held in para48 of the 2011 judgment, which operates as res judicata inter se parties.The meaning of revenue is apparent that it has to be gross revenue,and the licence fee would be a percentage of the same. Thus, thelicensees have made a futile attempt to submit that the revenue to beconsidered would be derived from the activities under the licence;whereas it has been held in 2011 that the revenue from activities beyondthe licence have to be included in adjusted gross revenue, is binding.

AB

C

DE

F

G

H

AB

C

DE

F

G

H

A63. Even otherwise, on merit, the submission raised is baseless.The contractual definition of gross revenue is binding. This Court hasobserved that it was open for the licensee not to undertake activitiesfor which they do not require licence under section 4 of the TelegraphAct and transfer these activities to any other firm or company. However,they cannot avoid the consequences of the contractual definition whichBhas been accepted by the parties, and they are bound to make paymentof licence fee on the basis of gross revenue, which would be the totalrevenue of the licensing company. As the Government has not acceptedthe TRAI’s recommendations, the decision of the Central Governmenton the point of definition of adjusted gross revenue was final andCbinding. This Court has also held that TRAI and tribunal had nojurisdiction to decide on the validity of the definition of adjusted grossrevenue under the licence agreement and to exclude certain items ofrevenue which were included in the definition of gross revenue in thelicence agreement between the licensor and licensee. The tribunal hadno jurisdiction to exclude certain items on the ground of the validity ofDthe definition of adjusted gross revenue. The finding of the tribunal inthe order dated 7.7.2006 insofar as it decided that the revenue realisedby the licensee from activities beyond the licence to be excluded fromadjusted gross revenue in the licence agreement is without jurisdictionand is a nullity. The matter was sent back to TDSAT for computationEof adjusted gross revenue. It was also observed if a dispute is raisedthat computation is not following licence agreement, the tribunal has togo into facts and material on which demand is raised and to decidedemand is following the licence agreement and in particular, the definitionof adjusted gross revenue. It can also interpret the terms and conditionsof the licence agreement. The tribunal did not go into the facts andFmaterial relating to the demand as to the particular licence. The tribunalcan go into the question of whether the demand is under the licenceagreement and in particular, the definition of adjusted gross revenue.

64. Under clause 20.6, certification of accounts by auditorsappointed under the Companies Act is stipulated under the licence. TheGpreparation of accounts under clause 22 of the licence agreement isan independent head. The definition of gross revenue given under theagreement in Clause 19.1 and that is the total revenue. In our consideredopinion, when there is a contractual definition as to what would be thegross revenue that would be the revenue and also the total revenue,Hthe revenue as mentioned in the mode of accounting AS-9 cannot govern the definition. The general definition of revenue in the modeof accounting cannot govern the contractual definition of gross revenue.

65. As per clause 20.4, a licensee must make quarterly paymentin the prescribed format as Annexure-II showing the computation ofrevenue and licence fee payable. The Format is part of the licence andis independent of accounting standards and is in tune with the definitionof gross revenue, and is the basis for the calculation of licence fee. Itis only for uniformity that the account has to be maintained as peraccounting standards AS-9 which are prescribed from time to time.Once the licensee provides the details to the Government in formatAnnexure-II along with accounts certified by the auditor, thereconciliation has to take place. The accounting standard AS-9 isrelevant only for whether the figure given by the licensee as to grossrevenue is maintained in proper manner once gross revenue isascertained, then after certain deductions, adjusted gross revenue hasto be worked out. The accounting standard provided in AS-9 cannotoverride the definition of gross revenue, which is the total revenue forlicence and the finding in Union of India v. AUSPI (2011) in this regardis final, binding, and operative. The accounting standard AS-9 makes itclear that same is in the form of guidelines, it is not comprehensiveand does not supersede the practice of accounting. It only lays down asystem in which accounts have to be maintained. Accounting standardsmake it clear that it does not provide for a straight-jacket formula foraccounting but merely provide for guidelines to maintain the accountbooks in systematic manner.

66. Though the definition of revenue given in clause 4.1 of AS-9 cannot govern the contract, the contractual definition of gross revenuewhich is the gross revenue under Clause 19.1 and total revenue forthe purpose of the agreement for which an independent definition hasbeen carved out under the statutory power while parting with theprivilege under section 4 by the Central Government, once the contracthas been entered into, the definition of gross revenue is binding, andthe licensees cannot try to wriggle out of the decision by makingimpermissible attempts to depart from it. The plea is barred by resjudicata, and on merits the objection is wholly untenable. The definitionof revenue in clause 4.1 of AS-9 provides that the revenue is the grossinflow of cash, receivables, or other consideration arising in the courseof the ordinary activities. When the revenue in AS-9 is the gross inflow A

B

C

D

E

F

G

H

Aof cash and the amount which is receivable, not the amount received,which is realised or other consideration arising, can also be taken intoconsideration as per accounting standard AS-9. The definition of revenuein AS-9 rather than supporting the cause of the licensees defeats thesame. They cannot bank upon the expression in clause 4.1 in the courseof ordinary activities of an enterprise is only to be included in grossBrevenue as that is what has been expressly negated in Union of Indiav. AUSPI (2011). Given the definition of gross revenue, the sameincludes revenue from activities beyond the licence. Explanation toclause 5 of AS-9 also makes it clear that the agreement between theparties would determine the amount of revenue arising on a transaction.C67. Section 211 of the Companies Act, 1956 deals with theobligation of the company to comply with accounting standards. In casethey do not comply, it has to be disclosed in its profit and loss account,the deviation, reasons for such deviation, and financial effect. Sections211(3A) and 211(3B) are quoted hereunder:D“211 (3A) Every profit and loss account and balance-sheet ofthe company shall comply with the accounting standards.

(3B) Whether the profit and loss account and the balance-sheetof the company do not comply with the accounting standards,such companies shall disclose in its profit and loss account andEbalance-sheet, the following, namely:- (a) the deviation from the accounting standards;

(a) the reasons for such deviation; and

(b) the financial effect, if any, arising due to such deviation.”

F68. Thus, it is apparent that accounting standard AS-9 is a methodto maintain accounts and, deviation if made, has to be reflectedseparately.

69. Prayer made in Petition No.7/2003 filed by AUSPI v. Unionof India was to declare that ‘gross revenue’ can only relate to revenueGdirectly arising out of telecom operations licensed under section 4 ofthe Indian Telegraph Act, and items indicated in the DOT letter dated26.7.2001 including interest income and the dividend income, value ofrebates, discounts, free calls and reimbursement from the USO fund,etc. ought not to be excluded in the adjusted gross revenues. It wasalso prayed that revenue share on interest income and other incomesHbe set aside.

70. In Petition No.82/2005, demand was dated 28.3.2003 and13.7.2004, etc. and refund on account of wrongful application andimplementation of gross revenue and adjusted gross revenue was soughtalong with interest. Prayer was made that licence fee or WPC chargeson any non-telecom revenue, i.e., the revenues which are not derivedfrom the licensed activities under the licence/revenues which do notrelate to or do not have a direct nexus to the establishment, maintenanceand working of Telegraph, cannot be levied. DOT cannot collect whatis not revenue. Prayer was also made to direct DOT to calculateadjusted gross revenue on a realisation basis and not accrual basis, andnot to include any notional revenue/income in the adjusted gross revenue.Prayer was made to direct DOT to modify the definitions of grossrevenue and also adjusted gross revenue, bring them in conformity withthe migration package. Prayer was also made to suitably modify theformat of statement of gross revenue, adjusted gross revenue andlicence fee in accordance with the correct definitions, and to strikedown the definitions of gross revenue, and adjusted gross revenuecontained in DOT’s licence amendment dated 11.4.2001 as being unfair,unjust, unreasonable and arbitrary.

71. Thus, it is apparent that right from the beginning, the licenseeswere aware of the precise terms and conditions and their obligationsas contained in the letter dated 26.7.2001and purport of the definitionsof gross revenue and adjusted gross revenue. Notional revenue has tobe charged. The order of TDSAT excluding certain items of revenue,which were included in the definition of AGR by declaring the definitionof gross revenue to be invalid, was set aside by this Court in Union ofIndia v. AUSPI (supra) and this Court held that items are to be includedin definition of gross revenue.

72. The rule of interpretation of contra proferentum has alsobeen pressed into service. As observed in United India Insurance Co.Ltd. v. Pushpalaya Printers, 2004 (3) SCC 694 thus:

“6. ….If the word “impact” is interpreted narrowly, the questionof impact by any rail would not arise as the question of a railforcibly coming to the contact of a building or machinery wouldnot arise. In the absence of specific exclusion and the word“impact” having more meanings in the context, it cannot beconfined to forcible contact alone when it includes the meanings“to drive close”, “effective action of one thing upon another” and A

B

C

D

EF

G

H

A“the effect of such action”, it is reasonable and fair to hold inthe context that the word “impact” contained in clause 5 of theinsurance policy covers the case of the respondent to say thatdamage caused to the building and machinery on account of thebulldozer moving closely on the road was on account of its“impact”. It is also settled position in law that if there is anyBambiguity or a term is capable of two possible interpretations,one beneficial to the insured should be accepted consistent withthe purpose for which the policy is taken, namely, to cover therisk on the happening of certain event. Although there is noambiguity in the expression “impact,” even otherwise applyingCthe rule of contra preferentem, the use of the word “impact” inclause 5 in the instant policy must be construed against theappellant. Where the words of a document are ambiguous, theyshall be construed against the party who prepared the document.This rule applies to contracts of insurance, and clause 5 of theinsurance policy, even after reading the entire policy in theDpresent case, should be construed against the insurer. AConstitution Bench of this Court in General Assurance SocietyLtd. v. Chandmull Jain AIR 1966 SC 1644 has expressed that(AIR p. 1649, para 11)

“in a contract of insurance there is requirement of uberrimaEfides, i.e., good faith on the part of the assured and thecontract is likely to be construed contra proferentem, that is,against the company in case of ambiguity or doubt.”

73. As observed in Industrial Promotion & InvestmentFCorporation of Orissa Ltd. v. New India Assurance Co. Ltd., (2016)15 SCC 315 thus:

“10. We proceed to deal with the submission made by the counselfor the appellant regarding the rule of contra proferentem. TheCommon Law rule of construction “verba chartarum fortiusGaccipiuntur contra proferentem” means that ambiguity in thewording of the policy is to be resolved against the party whoprepared it. MacGillivray on Insurance Law[1] deals with the ruleof contra proferentem as follows:

1 Legh-Jones, Longmore et al (Eds.) MacGillivray on Insurance Law (9th Edn., SweetHand Maxwell, London 1997) at p.280.

“The contra proferentem rule of construction arises only wherethere is a wording employed by those drafting the clause whichleaves the court unable to decide by ordinary principles ofinterpretation which of two meanings is the right one. ‘One mustnot use the rule to create the ambiguity — one must find theambiguity first.’ The words should receive their ordinary andnatural meaning unless that is displaced by a real ambiguity eitherappearing on the face of the policy or, possibly, by extrinsicevidence of surrounding circumstances.”

(footnotes omitted)

11. Colinvaux’s Law of Insurance[2] propounds the contraproferentem rule as under:

“Quite apart from contradictory clauses in policies, ambiguitiesare common in them, and it is often very uncertain what theparties to them mean. In such cases, the rule is that the policy,being drafted in language chosen by the insurers, must be takenmost strongly against them. It is construed contra proferentes,against those who offer it. In a doubtful case, the turn of thescale ought to be given against the speaker because he has notclearly and fully expressed himself. Nothing is easier than forthe insurers to express themselves in plain terms. The assuredcannot put his own meaning upon a policy, but, where it isambiguous, it is to be construed in the sense in which he mightreasonably have understood it. If the insurers wish to escapeliability under given circumstances, they must use words admittingof no possible doubt.

But a clause is only to be contra proferentes in cases of realambiguity. One must not use the rule to create an ambiguity. Onemust find the ambiguity first. Even where a clause by itself isambiguous if, by looking at the whole policy, its meaning becomesclear, there is no room for the application of the doctrine. So alsowhere if one meaning is given to a clause, the rest of the policybecomes clear, the policy should be construed accordingly.”

2 Robert and Merkin (Eds.), Colinvaux’s Law of Insurance (6th Edn., 1990) at p.42.

A

B

C

D

EF

G

H

A

74. In our opinion, the rule mentioned above of contraproferentem does not apply to the present case as there is no ambiguityor doubt in the definition of gross revenue in the agreement.

75. It is further submitted that for identifying the revenue, thesole test is that it should conform with the definition of revenue asBprovided in AS-9. For interpreting the scope of the provisions, theprinciple of noscitur a sociis has to be applied which provides thatwhen definition includes various heads and while they may not beexhaustive as a rule of interpretation, what is being included within thedefinition, would be an aid to interpreting the scope of the provisions.For applying the said principle, reliance has been placed on,C

(A) Vania Silk Mills v. C.I.T., Ahmedabad, 1991 (4) SCC 22,on observation:- “11. It is true that the definition of “transfer” in Section 2(47)of the Act is inclusive, and therefore, extends to events andtransactions which may not otherwise be “transfer” accordingto its ordinary, popular and natural sense. It is this aspect of thedefinition which has weighed with the High Court and, therefore,the High Court has argued that if the words “extinguishment ofany rights therein” are substituted for the word “transfer” inSection 45, the claim or compensation received from theinsurance company would be attracted by the said section. TheHigh Court has, however, missed the fact that the definition alsomentions such transactions as sale, exchange etc. to which theword “transfer” would properly apply in its popular and naturalimport. Since those associated words and expressions imply theexistence of the asset and of the transferee, according to therule of noscitur a sociis, the expression “extinguishment of anyrights therein” would take colour from the said associated wordsand expressions, and will have to be restricted to the senseanalogous to them. If the legislature intended to extend thedefinition to any extinguishment of right, it would not haveincluded the obvious instances of transfer, viz., sale, exchangeetc. Hence the expression “extinguishment of any rights therein”will have to be confined to the extinguishment of rights onaccount of transfer and cannot be extended to mean anyextinguishment of right independent of or otherwise than onaccount of transfer.”

D

E

F

G

H

(B) Swiss Ribbons v. Union of India, 2019 (4) SCC 17,

D

E

F

G

H

(B) Swiss Ribbons v. Union of India, 2019 (4) SCC 17, “109. We are of the view that persons who act jointly or inconcert with others are connected with the business activity ofthe resolution applicant. Similarly, all the categories of personsmentioned in Section 5(24-A) show that such persons must be“connected” with the resolution applicant within the meaning ofSection 29-A(j). This being the case, the said categories ofpersons who are collectively mentioned under the caption“relative” obviously need to have a connection with the businessactivity of the resolution applicant. In the absence of showingthat such person is “connected” with the business of the activityof the resolution applicant, such person cannot possibly bedisqualified under Section 29-A(j). All the categories in Section29-A(j) deal with persons, natural as well as artificial, who areconnected with the business activity of the resolution applicant.The expression “related party,” therefore, and “relative”contained in the definition sections must be read noscitur a sociiswith the categories of persons mentioned in Explanation I, andso read, would include only persons who are connected with thebusiness activity of the resolution applicant.”

(C) South Gujarat Roofing Tiles Manufacturers v. State ofGujarat, 1976 (4) SCC 601,

3. The question turns on a true construction of the explanationto entry 22 which says that for the purpose of this entry potteriesindustry “includes” the manufacture of the nine “articles ofpottery” specified therein. Pottery in a wide sense will take inall objects that are made from clay and hardened by fire, fromcrude earthen pots to delicate porcelain. Mr Patel appearing forthe respondent, State of Gujarat, contends that the explanationindicates that potteries industry in Entry 22 is intended to coverall possible articles of pottery including Mangalore pattern roofingtiles. Referring to the well-known use of the word ‘include’ ininterpretation clauses to extend the meaning of words andphrases occurring in the body of the statute, Mr. Patel submitsthat the explanation, when it says that potteries industry “includes”the nine named objects, what is meant is that it includes not onlythese objects but other articles of pottery as well. It is true that“includes” is generally used as a word of extension, but the A

BCD

E

FGH

A

B

C

D

E

F

G

H

meaning of a word or phrase is extended when it is said toinclude things that would not properly fall within its ordinaryconnotation. We may refer to the often quoted observation ofLord Watson in Dilworth v. Commissioner of Stamps that whenthe word “include” is used in interpretation clauses to enlargethe meaning of words or phrases in the statute “these words or phrases must be construed as comprehending,not only such things as they signify according to their naturalimport but also those things which the interpretation clausedeclares that they shall include.”

Thus where “includes” has an extending force, it adds to the wordor phrase a meaning which does not naturally belong to it. It isdifficult to agree that “includes” as used in the explanation toEntry 22 has that extending force. The explanation says that forthe purpose of Entry 22, potteries industry includes themanufacture of the nine “articles of pottery” specified in theexplanation. If the objects specified are also “articles of pottery”,then these objects are already comprised in the expression“potteries industry”. It hardly makes any sense to say thatpotteries industry includes the manufacture of articles of pottery,if the intention was to enlarge the meaning of potteries industryin any way.

4. We are also unable to agree with Mr Patel that the articlesspecified in the explanation may have been mentioned out ofabundant caution to emphasize the comprehensive character ofthe entry, to indicate that all varieties of pottery are includedtherein. This argument, though more plausible, does not also seemacceptable. It is possible that one might have doubts whetherthings like refractories or electrical or textile accessories wouldpass under the description pottery as that word is used incommon parlance, but the explanation also mentions crockery andtoys regarding which there could be hardly any doubt. Theinclusion in the list of objects which are well-recognised articlesof pottery makes it plain that the explanation was added to theentry not by way of abundant caution.

5. The contention of Mr. Tarkunde for the appellants is that thearticles mentioned in the explanation were intended to beexhaustive of the objects covered by Entry 22. According to Mr, Tarkunde if the legislature wanted to bring within the entry allpossible articles of pottery then there was hardly any point inmentioning only a few of them by way of explanation. To thisMr Patel’s reply is that it is well-known that where the legislaturewants to exhaust the significance of the term defined, it uses theword “means” or the expression “means and includes”, and thatif the intention was to make the list exhaustive, the legislaturewould not have used the word “includes” only. We do not thinkthere could be any inflexible rule that the word ‘include’ shouldbe read always as a word of extension without reference to thecontext. Take for instance Entry 19 in the schedule which alsohas an explanation containing the word “includes”. Entry 19 isas follows:

“Employment in any tobacco processing establishment, notcovered under Entry 3.

Explanation.—For the purpose of this entry, the expression‘processing’ includes packing or unpacking, breaking up,sieving, threshing, mixing, grading, drying, curing or otherwisetreating the tobacco (including tobacco leaves and stems) inany manner.”

Entry 3 to which Entry 19 refers reads:

“Employment in any tobacco (including bidi making)manufactory.”

It is clear from the explanation to Entry 19 that there could beno other way or manner of “processing” besides what is statedas included in that expression. Though “include” is generally usedin interpretation clauses as a word of enlargement, in some casesthe context might suggest a different intention. Pottery is anexpression of very wide import, embracing all objects made ofclay and hardened by heat. If it had been the legislature’sintention to bring within the entry all possible articles of pottery,it was quite unnecessary to add an explanation. We have foundthat the explanation could not possibly have been introduced toextend the meaning of potteries industry or the articles listedtherein added ex abundanti cautela. It seems to us thereforethat the legislature did not intend everything that the potteriesindustry turns out to be covered by the entry. What then could A

B

C

D

E

F

G

H

A

Abe the purpose of the explanation. The explanation says that, forthe purpose of Entry 22, potteries industry “includes” manufactureof the nine articles of pottery named therein. It seems to us thatthe word “includes” has been used here in the sense of ‘means’;this is the only construction that the word can bear in the context.In that sense it is not a word of extension, but limitation; it isBexhaustive of the meaning which must be given to potteriesindustry for the purpose of Entry 22. The use of the word“includes” in the restrictive sense is not unknown. Theobservation of Lord Watson in Dilworth v. Commissioner ofStamps which is usually referred to on the use of “include” as aCword of extension, is followed by these lines:

“But the word ‘include’ is susceptible of another construction,which may become imperative, if the context of the Act issufficient to show that it was not merely employed for thepurpose of adding to the natural significance of the words orDexpressions defined. It may be equivalent to ‘mean andinclude’, and in that case it may afford an exhaustiveexplanation of the meaning which, for the purposes of the Act,must invariably be attached to these words or expressions.”

It must therefore be held that the manufacture of MangaloreEpattern roofing tiles is outside the purview of Entry 22.”

76. The definition of gross revenue is crystal clear in theagreement. How the adjusted gross revenue to be arrived at is alsoFevident. It cannot be submitted that the revenue has not been definedin the contract. Once the gross revenue is defined, one cannot departfrom it and the very meaning is to be given to the revenue for theagreement. Overall revenue, has to be taken into account fordetermination of licence fees without set off, as provided in theagreement. The same was defined to simplify it to rule out the litigation,Gdisputes, and accounting myriads. The submission raised that the termrevenue has to be interpreted as the consideration payable in keepingwith commercial and financial parlance is what is intended to be avoided.Raising of such submission is a futile attempt that has been made towriggle out of the definition of gross revenue, which has been held toHbe binding in the previous judgment in Union of India v. AUSPI (2011).

The submission that the contract recognises the applicability ofaccounting standards, in our opinion, it is only to maintain books ofaccounts. To a certain extent, it cannot be disputed that to have clarity,uniformity, and definitiveness; the accounting standards lay downguidelines with respect to financial terms. However, when the financialterms in the agreement are clear in the form of definition of grossrevenue governed by Clause 19.1 of the agreement, the definition ofAccounting Standard-9 cannot supersede it which is a general one.

77. The submission has been made that the accounting standardsthemselves make it clear what should be included as revenue andaccounting standards have been incorporated in the agreement andincorporated by reference in the licence agreement. For this, reliancehas been placed on General Assurance Society Ltd. v. ChandmullJain, AIR 1966 SC 1644, wherein it is observed:

“11. A contract of insurance is a species of commercialtransactions, and there is a well-established commercial practiceto send cover notes even prior to the completion of a properproposal or while the proposal is being considered or a policy isin preparation for delivery. A cover note is a temporary and limitedagreement. It may be self-contained, or it may incorporate byreference the terms and conditions of the future policy. Whenthe cover note incorporates the policy in this manner, it does nothave to recite the term and conditions, but merely to refer to aparticular standard policy. If the proposal is for a standard policyand the cover note refers to it, the assured is taken to haveaccepted the terms of that policy. The reference to the policyand its terms and conditions may be expressed in the proposalor the cover note or even in the letter of acceptance, includingthe cover note. The incorporation of the terms and conditions ofthe policy may also arise from a combination of references intwo or more documents passing between the parties. Documentslike the proposal, cover note, and the policy are commercialdocuments, and to interpret them, commercial habits and practicecannot altogether be ignored. During the time the cover noteoperates, the relations of the parties are governed by its termsand conditions, if any, but more usually by the terms and conditionsof the policy bargained for and to be issued. When this happens,the terms of the policy are incipient, but after the period of AB

C

DEFG

H

A

B

C

D

E

F

G

AB

C

DEFG

H

A

B

C

D

E

F

G

H

temporary cover, the relations are governed only by the termsand conditions of the policy unless insurance is declined in themeantime. Delay in issuing the policy makes no difference. Therelations even then are governed by the future policy if the covernotes give sufficient indication that it would be so. In otherrespects there is no difference between a contract of insuranceand any other contract except that in a contract of insurancethere is a requirement of uberrima fides i.e. good faith on thepart of the assured and the contract is likely to be construedcontra proferentem that is against the company in case ofambiguity or doubt. A contract is formed when there is anunqualified acceptance of the proposal. Acceptance may beexpressed in writing, or it may even be implied if the insureraccepts the premium and retains it. In the case of the assured,a positive act on his part by which he recognises or seeks toenforce the policy amounts to an affirmation of it. This positionwas clearly recognised by the assured himself, because he wrote,close upon the expiry of the time of the cover notes, that eithera policy should be issued to him before that period had expiredor the cover note extended in time. In interpreting documentsrelating to a contract of insurance, the duty of the court is tointerpret the words in which the contract is expressed by theparties because it is not for the court to make a new contract,however reasonable if the parties have not made it themselves.Looking at the proposal, the letter of acceptance and the covernotes, it is clear that a contract of insurance under the standardpolicy for fire and extended to cover flood, cyclone etc. had comeinto being.”

78. In M.R. Engineers & Contractors Pvt. Ltd. v. Som DattBuilders Ltd., (2009) 7 SCC 696, the Court held:

“24. The scope and intent of Section 7(5) of the Act maytherefore be summarised thus:

(i) An arbitration clause in another document, would getincorporated into a contract by reference, if thefollowing conditions are fulfilled:

(1) the contract should contain a clear reference to thedocuments containing arbitration clause,

(2) the reference to the other document should clearlyindicate an intention to incorporate the arbitrationclause into the contract,

(3) the arbitration clause should be appropriate, that iscapable of application in respect of disputes underthe contract and should not be repugnant to any termof the contract.

(ii) When the parties enter into a contract, making a generalreference to another contract, such general referencewould not have the effect of incorporating the arbitrationclause from the referred document into the contractbetween the parties. The arbitration clause from anothercontract can be incorporated into the contract (wheresuch reference is made), only by a specific referenceto arbitration clause.

(iii) Where a contract between the parties provides that theexecution or performance of that contract shall be interms of another contract (which contains the terms andconditions relating to performance and a provision forsettlement of disputes by arbitration), then, the terms ofthe referred contract in regard to execution/performancealone will apply, and not the arbitration agreement in thereferred contract, unless there is special reference tothe arbitration clause also.

(iv) Where the contract provides that the standard form ofterms and conditions of an independent trade orprofessional institution (as for example the standardterms and conditions of a trade association or architectsassociation) will bind them or apply to the contract, suchstandard form of terms and conditions including anyprovision for arbitration in such standard terms andconditions, shall be deemed to be incorporated byreference. Sometimes the contract may also say thatthe parties are familiar with those terms and conditionsor that the parties have read and understood the saidterms and conditions.

A

B

C

D

E

F

G

H

A

A

B

C

D

E

F

G

H

A

(v) Where the contract between the parties stipulates thatthe conditions of contract of one of the parties to thecontract shall form a part of their contract (as forexample the general conditions of contract of theGovernment where the Government is a party), thearbitration clause forming part of such general conditionsof contract will apply to the contract between theparties.”

B

79. Submission though attractive, but is again an attempt by takinga rigmarole to get rid of the definition of ‘gross revenue’. Earlier thevalidity of definition was questioned to confine the meaning of grossCrevenue how the revenue is sought to be confined to activities underthe licence by way of AS-9. The reliance has been placed on statementmade by DOT in the reply filed in 2003 that the definition of grossrevenue is in line with AS-9, it is by way of explaining and cannot havethe effect of changing the definition of gross revenue given in theDagreement. The definition in agreement is unambiguous, clear, andbeyond the pale of doubt, and there is no confusion in the definition ofgross revenue, which is the basis for realisation of the licence fee.Licensees have made a futile attempt to wriggle out of the definition inan indirect method, which was rejected directly in the decision of 2011between the parties and it was held that these very heads form part ofEgross revenue.

80. The submission has been raised on the ground of approbationand reprobation relying on Suzuki Parasrampuria Suitings PrivateLimited v. Official Liquidator of Mahendra Petrochemicals Limited,(2018) 10 SCC 707. The observations made are extracted hereunder:

F

“12. A litigant can take different stands at different times butcannot take contradictory stands in the same case. A party cannotbe permitted to approbate and reprobate on the same facts andtake inconsistent shifting stands. The untenability of aninconsistent stand in the same case was considered in AmarGSingh v. Union of India, (2011) 7 SCC 69, observing as follows:(SCC p. 86, para 50)

“50. This Court wants to make it clear that an action at lawis not a game of chess. A litigant who comes to court andinvokes its writ jurisdiction must come with clean hands. Hecannot prevaricate and take inconsistent positions.”

H

13. A similar view was taken in Joint Action Committee of AirLine Pilots’ Assn. of India v. DGCA, (2011) 5 SCC 435,observing: (SCC p. 443, para 12)

“12. The doctrine of election is based on the rule ofestoppel—the principle that one cannot approbate andreprobate inheres in it. The doctrine of estoppel by-electionis one of the species of estoppels in pais (or equitableestoppel), which is a rule in equity. … Taking inconsistentpleas by a party makes its conduct far from satisfactory.Further, the parties should not blow hot and cold by takinginconsistent stands and prolong proceedings unnecessarily.”

81. In Jal Mahal Resorts Private Limited v. K.P. Sharma,(2014) 8 SCC 866, the Court observed:

“4. However, in spite of withdrawal of the special leavepetitions, if the petitioner State is taking a diametricallyopposite stand which it had taken before the High Courtas also before this Court when the arguments wereconcluded, we surely have reservations in permitting thelearned Senior Counsel to take an opposite stand nowand advance arguments exactly the opposite of whatwas submitted in the High Court as also before thisCourt through the earlier counsel being the AttorneyGeneral.

5. However, the learned Senior Counsel submitted that theState is a respondent in other special leave petitions alsowhich have been preferred by the other petitioners and,therefore, as a respondent therein, they are eligible toadvance their arguments.

6. There is no doubt that the impleaded respondent mayadvance his arguments before the Court as he has beenimpleaded as a party-respondent but under the garb ofadvancing arguments a stand which was taken beforethe High Court earlier is changed at the stage of specialleave petition, cannot be permitted especially when thecounsel, as already stated, has withdrawn the specialleave petitions preferred by the State. He may, however,advance submissions as a respondent in other matters, A

B

C

D

E

F

G

H

SUPREME COURT REPORTS

A

which he is at liberty to make within a period of twoweeks, which, however, shall be subject to itsacceptance.”

82. In A.P. Dairy Development Corporation Federation v. B.Narasimha Reddy, (2011) 9 SCC 286, the following observations wereBmade:

“40. In the matter of the Government of a State, the succeedingGovernment is duty-bound to continue and carry on the unfinishedjob of the previous Government, for the reason that the action isthat of the “State”, within the meaning of Article 12 of theCConstitution, which continues to subsist and therefore, it is notrequired that the new Government can plead contrary to the Stateaction taken by the previous Government in respect of a particularsubject. The State, being a continuing body can be stopped fromchanging its stand in a given case, but where after holding enquiryit came to the conclusion that action was not in conformity withDlaw, the doctrine of estoppel would not apply. Thus, unless theact done by the previous Government is found to be contrary tothe statutory provisions, unreasonable or against policy, the Stateshould not change its stand merely because the other politicalparty has come into power. “Political agenda of an individual orEa political party should not be subversive of rule of law.” TheGovernment has to rise above the nexus of vested interest andnepotism, etc. as the principles of governance have to be testedon the touchstone of justice, equity and fair play. The decisionmust be taken in good faith and must be legitimate. (Vide OnkarLal Bajaj v. Union of India, (2003) 2 SCC 673, State ofFKarnataka v. All India Manufacturers Organisation, (2006)4 SCC 683 and State of T.N. v. K. Shyam Sunder, (2011) 8 SCC737.)”

C

D

E

83. In our considered opinion, it cannot be said that DOT hastaken inconsistent stands at different stages of the same litigation. TheirGstand is apparent that the gross revenue has been clearly defined inthe agreement. Parties have agreed to various inclusions in theagreement and have willingly switched over to revenue- sharing regimeunder the 1999 policy and same is apparent from the stand and thereliefs prayed in the petitions filed in 2003 and 2005 extracted above.HThe licensees were aware of items specifically included in the agreement. TSPs agreed to interpretation and accepted it as held bythis Court in 2011 judgment. Licensees are taking inconsistent stands,earlier they have taken the stand that all these items concerning whichdisputes have been raised, had been included illegally in the definitionof gross revenue, the definition may be declared ultra vires, invalid, andbe struck down. They have also contended that revenue from activitiesunder the licence cannot be included in gross revenue, which submissionhas been negated by this Court in 2011, it was held that the grossrevenue would include the revenue generated from non-licensingactivities. Licensees cannot be permitted to approbate and reprobateand to take inconsistent stands that they are not included in grossrevenue as per AS-9. The stand taken rather than buttressing thesubmissions raised by them, counters and militates against their owninterest and paves the way in favour of DOT.

84. A submission has been raised that the definition of grossrevenue is not exhaustive. It only includes those streams which arespecifically included in the definition of AGR. If it is an inclusivedefinition of AGR, and all receipts were ipso facto part of AGR, thenthere was no occasion to further provide in clause 2.2 (b)(ii) that therevenue from value-added services was to be treated as part of AGR.Further, the licensee was obliged to maintain separate account forservice defined in Annexure 1 to the licence in clause 55 to meanservice in a licensed service area. By the fact that separate provisionis made for value-added services, a separate account has to bemaintained as per clauses 22.1, 22.2 and 22.3 that is for arriving at thefigure of revenue and step in aid, to clarify how the licensee has tooperate, that would not change the definition of gross revenue whichis the meaning of revenue itself is apparent, same is gross inflow ofthe cash, and the amount which is receivable as provided in AS-9 also.Thus, the submission raised that the definition is not wide, cannot beaccepted, and stands repelled. Clauses 22.1, 22.2 and 22.3 cast obligationupon the licensee to draw, keep and furnish independent accounts forthe service. Under clauses 22.1 and 22.2, the licensee has to maintainrecords quarterly. Accounts have to be audited and can be called forby the licensor or the TRAI, as provided in Clause 22.3. The formatof gross revenue is supportive of definition of gross revenue as definedin the agreement. Clause 22 is a rider upon the licensee to maintainthe records of activities and other matters such as financial position asenumerated therein.

A

B

C

D

E

F

G

H

A

A85. Clause 18.1 of the agreement has also been pressed intoservice. The submission raised that a single company may hold 5licences for 5 different service areas; the AGR as suggested by theDOT, cannot be followed as it may end up in paying the licence fee atthe rate of 5 times. As the licence fee cannot be charged more thanonce, there is no room to entertain the submission. It is not what isBcontemplated in the definition. While computing the licence fee, thegross revenue has to be taken into consideration under a particularlicence for which it is being determined. The argument had been raisedon a hypothetical basis without foundational facts to raise the same isthus, liable to be and is rejected at the threshold.

C

86. DOT has urged that the Central Government has exclusiveprivilege under section 4 of the Telegraph Act; thus, it is bound to getthe best price for natural resources. To part with the exclusive privilegeunder the revenue sharing regime is extremely beneficial to thelicensees. Thus, the State must get the price for its valuable right asDmandated under Article 14. In our opinion, there is no doubt that theState is a trustee of the natural resources and is obliged to hold it forthe benefit of the citizens but also to ensure equal distribution to sub-serve the common good as observed under Article 39 of the Constitutionof India in Re : Natural Resources Allocation, 2012 (10) SCC 1.The Government being the sole repository of all the resources in theEcountry, also has the exclusive power to determine the licence conditionsat which it parts with the exclusive right to the resources. Governmenthas to make an effort to get the best price for its valuable rights andcannot throw them away, and there would be no arbitrariness in thesame as observed in State of Orissa & Ors. v. Harinarayan JaiswalF& Ors., (1972) 2 SCC 36, thus:

“13. Even apart from the power conferred on the Governmentunder Sections 22 and 29, we fail to see how the power retainedby the Government under clause (6) of its order, dated January6, 1971, can be considered as unconstitutional. As held by thisCourt in Cooverjee B. Bharucha case, one of the importantGpurpose of selling the exclusive right to sell liquor in wholesaleor retail is to raise revenue. Excise revenue forms an importantpart of every State’s revenue. The Government is the guardianof the finances of the State. It is expected to protect the financialinterest of the State. Hence quite naturally, the Legislature hasHempowered the Government to see that there is no leakage in

its revenue. It is for the Government to decide whether the priceoffered in an auction sale is adequate. While accepting orrejecting a bid, it is merely performing an executive function. Thecorrectness of its conclusion is not open to judicial review. Wefail to see how the plea of contravention of Article 19(1)(g) orArticle 14 can arise in these cases. The Government’s power tosell the exclusive privileges set out in Section 22 was not denied.It was also not disputed that those privileges could be sold bypublic auction. Public auctions are held to get the best possibleprice. Once these aspects are recognised, there appears to beno basis for contending that the owner of the privileges in questionwho had offered to sell them cannot decline to accept the highestbid if he thinks that the price offered is inadequate. There is noconcluded contract till the bid is accepted. Before there was aconcluded contract, it was open to the bidders to withdraw theirbids — see Union of India v. Bhimsen Walaiti Ram, (1970) 2SCR 594. By merely giving bids, the bidders had not acquiredany vested rights. The fact that the Government was the sellerdoes not change the legal position once its exclusive right to dealwith those privileges is conceded. If the Government is theexclusive owner of those privileges, reliance on Article 19(1)(g)or Article 14 becomes irrelevant. Citizens cannot have anyfundamental right to trade or carry on business in the properties—or rights belonging to the Governmentnor can there be anyinfringement of Article 14, if the Government tries to get the bestavailable price for its valuable rights.….”

87. Similar is the case law laid down in Har Shankar v. Excise& Taxation Commissioner, 1975 (1) SCC 737; Government of A.P.v. Anabeshahi Wine & Distilleries (P) Ltd., (1988) 2 SCC 25; ExciseCommissioner v. Issac Peter, (1994) 4 SCC 104; State of Orissa v.Narain Prasad (1996) 5 SCC 740, State of M.P. v. KCT Drinks Ltd.,(2003) 4 SCC 748 and State of Punjab v. Devans Modern BreweriesLtd., (2004) 11 SCC 26.

88. A licence granted under section 4(1) is in the nature of acontract. DOT has relied upon Khardah Company Ltd. v. Raymond& Co. (India) Pvt. Ltd., 1963 (3) SCR 183 in which it has beenobserved that once a contract has been reduced to writing, terms have A

B

C

D

E

F

G

H

Ato be ascertained from the agreement. It may be relevant to look intothe circumstances in case need arises, which resulted in the inclusionof the definition of AGR in the licence agreement. The deliberationswere held with the licensees, experts, and then finally migration package,revenue sharing regime is being consented to, was worked out in whichthe definition of adjusted gross revenue as a part of the financialBcondition of the licence is mentioned. As to the provisions of grossrevenue there had been consensus ad idem between the parties. Thelicensees are bound by it as they have executed the licence agreement.A party is free to enter into a contract with a State, there is nocompulsion, it is voluntary on both sides and binding and cannot beCtermed to be unfair as observed in Assistant Excise Commissioner &Ors. v. Issac Peters & Ors. (1994) 4 SCC 104, thus:

“26. …..We are, therefore, of the opinion that in case ofcontracts freely entered into with the State, like the present ones,there is no room for invoking the doctrine of fairness andreasonableness against one party to the contract (State), for thepurpose of altering or adding to the terms and conditions of thecontract, merely because it happens to be the State. In suchcases, the mutual rights and liabilities of the parties are governedby the terms of the contracts (which may be statutory in somecases) and the laws relating to contracts. It must be rememberedthat these contracts are entered into pursuant to public auction,floating of tenders or by negotiation. There is no compulsion onanyone to enter into these contracts. It is voluntary on both sides.There can be no question of the State power being involved insuch contracts. It bears repetition to say that the State does notguarantee profit to the licensees in such contracts. There is nowarranty against incurring losses. It is a business for thelicensees. Whether they make a profit or incur a loss is no concernof the State. In law, it is entitled to its money under the contract.It is not as if the licensees are going to pay more to the State incase they make substantial profits. We reiterate that what wehave said hereinabove is in the context of contracts entered intobetween the State and its citizens pursuant to public auction,floating of tenders or by negotiation. It is not necessary to saymore than this for the purpose of these cases. What would bethe position in the case of contracts entered into otherwise thanby public auction, floating of tenders or negotiation, we need notexpress any opinion herein.”

D

E

F

G

H

89. The licensees who have taken the advantage under thelicence, carry certain obligations. The licensee is bound to dischargethe obligation while taking benefit under the licence of migrationpackage, for this purpose as held in Shyam Telelink Ltd. v. Union ofIndia, 2010 (10) SCC 165, thus:

“21. The unconditional acceptance of the terms of the packageand the benefit which the appellant derived under the same willestop the appellant from challenging the recovery of the duesunder the package or the process of its determination. No disputehas been raised by the appellant and rightly so in regard to thepayment of outstanding licence fee or the interest due thereon.The controversy is limited to the computation of liquidateddamages of Rs. 8 crores out of which Rs. 7.3 crores was paidby the appellant in the beginning without any objection followedby a payment of Rs. 70 lakhs made on 29-5-2001.

22. Although the appellant had sought waiver of the liquidateddamages yet upon rejection of that request it had made thepayment of the amount demanded which signified a clearacceptance on its part of the obligation to pay. If the appellantproposed to continue with its challenge to demand, nothingprevented it from taking recourse to appropriate proceedings andtaking the adjudication process to its logical conclusion beforeexercising its option. Far from doing so, the appellant gave upthe plea of waiver and deposited the amount which clearlyindicates acceptance on its part of its liability to pay especiallywhen it was only upon such payment that it could be permittedto avail of the migration package. Allowing the appellant at thisstage to question the demand raised under the migration packagewould amount to permitting the appellant to accept what wasfavourable to it and reject what was not. The appellant cannotapprobate and reprobate.

23. The maxim qui approbat non reprobat (one who approbatescannot reprobate) is firmly embodied in English common law andoften applied by courts in this country. It is akin to the doctrineof benefits and burdens which at its most basic level providesthat a person taking advantage under an instrument which bothgrants a benefit and imposes a burden cannot take the formerwithout complying with the latter. A person cannot approbate andreprobate or accept and reject the same instrument.

A

B

C

D

E

F

G

H

A28. For the reasons set out by us hereinabove, we have nohesitation in holding that the appellant was not entitled to questionthe terms of the migration package after unconditionally acceptingand acting upon the same.”

90. After the introduction of the migration package policy, 1999,Bthere is an exponential growth of the telecom sector. In Bharti CellularLtd. v. Union of India, 2010 (10) SCC 174, this Court held thatacceptance of benefits under the package precluded them fromquestioning the terms of the same. The Court observed:

“8. There is, in our opinion, no legal infirmity in the view takenCby the Tribunal. Once the appellant-petitioner had specifically andunconditionally agreed to accept the migration package and givenup all disputes relating to licence agreement for the period up to31-7-1999, it was not open to it to turn around and agitate anysuch dispute after availing of the migration package. A partywhich has unconditionally accepted the package cannot after suchDacceptance reject the conditions subject to which the benefitswere extended to it under the package. It cannot reject what isinconvenient and onerous while accepting what is beneficial toits interests. The package having been offered subject to theconditions that all disputes relating to the licence agreement forEthe period ending 31-7-1999 shall stand abandoned by theoperators, there was no room for going back on thatrepresentation.”

91. The terms and conditions cannot be said to be oppressive asFsubmitted on behalf of the licensees on the strength of Central InlandWater Transport Corporation v. Brojo Nath Ganguly, 1986 (3) SCC156, it cannot be said that DOT was in a dominant position, orpossessed wholly disproportionate and unequal bargaining power. In thematter of commercial contracts, the doctrine of unconscionableGbargaining is not applicable as held with respect to migration packagein S.K. Jain v. State of Haryana, 2009 (4) SCC 35, thus:

“8. There is, in our opinion, no legal infirmity in the view taken-by the Tribunal. Once the appellantpetitioner had specifically andunconditionally agreed to accept the migration package and givenHup all disputes relating tolicence agreement for the period up to

31-7-1999, it was not open to it to turn around and agitate anysuch dispute after availing of the migration package. A partywhich has unconditionally accepted the package cannot after suchacceptance reject the conditions subject to which the benefitswere extended to it under the package. It cannot reject what isinconvenient and onerous while accepting what is beneficial toits interests. The package having been offered subject to theconditions that all disputes relating to the licence agreement forthe period ending 31-7-1999 shall stand abandoned by theoperators, there was no room for going back on thatrepresentation.”

92. Once benefit has been drawn, the licensees cannot denyvalidity or binding effect of contract. In Cauvery Coffee Traders,Mangalore v. Hornor Resources (International) Co. Ltd., (2011) 10SCC 420) it was observed:

“A party cannot be permitted to “blow hot and cold”, “fast andloose” or “approbate and reprobate”. Where one knowinglyaccepts the benefits of a contract or conveyance or an order, isestopped to deny the validity or binding effect on him of suchcontract or conveyance or order. This rule is applied to do equity,however, it must not be applied in a manner as to violate theprinciples of right and good conscience.”

93. In R.N. Gosain v. Yashpal Dhir, AIR 1993 SC 352, it washeld:

“10. Law does not permit a person to both approbate andreprobate. This principle is based on the doctrine of election whichpostulates that no party can accept and reject the same instrumentand that ‘a person cannot say at one time that a transaction isvalid and thereby obtain some advantage, to which he could onlybe entitled on the footing that it is valid, and then turn round andsay it is void for the purpose of securing some other advantage’.”

94. Submissions have been raised in respect of various revenueheads not being revenue cannot be included within the purview of grossrevenue. We propose to deal with each of them under separate heads.

A

B

C

D

E

F

G

H

AIn re: Discount and Commissions:

95. The Tribunal has dealt with discounts, and commissions under3 heads : (i) discounts allowed on international roaming; (ii) commissionand discount allowed to distributors on sale of pre-paid vouchers; (iii)goodwill waiver, discount and rebates.

B

96. The Tribunal held with respect to discounts allowed oninternational roaming that if the discounts are in the form of reducedbilling and the amount booked in the profit and loss account is on thebasis of the invoices raised and no deduction was shown on accountof discount, no addition may be made in the same on the ground thatCthe billing was on a discounted price. The tribunal has further held thatif the amount billed is for a higher amount and the discount is in theform of volume discount given separately, the billed amount should betaken as revenue, and the discount may be treated as an expense whichis not open to deduction under clause 19.1. A credit note given afterDthe billing may also be treated as an expense. If the revenue booked inthe profit and loss account shows netting off on account of any discount,the amount netted off may also be added up for computation of grossrevenue.

97. The tribunal has adopted two different criteria concerningEdiscounts on international roaming. With respect to commission anddiscount allowed to distributors on sale of pre-paid vouchers, the tribunalhas held that if the sale and invoicing is on Maximum Retail Price (MRP)and if any discount is given separately then in terms of clause 19.1,such discount is not deductible even if the revenue booked in the profitand loss account is after netting off the discount. On the other hand, ifFthe sale is on a stated/agreed price, invoiced at that agreed price andbooked under the revenue in the profit and loss account accordingly,without netting off any discount, then the actual selling price would bethe revenue and the difference between the MRP and this selling pricecannot be added to gross revenue.G

98. Concerning goodwill waiver, discount, and rebates, the tribunalhas held that under clause 19.1, the items shall form part of grossrevenue without netting off any expenses. The case of licensees onthis score has not been accepted. In the case of wrong billing and itsrevision, the correct differential amount cannot be taken as part of grossHrevenue.

99. It has been urged on behalf of licensees that the discountsare not like expenses. The treatment of discount as expenditure iscontrary to the fundamental principle of accounting. Expenses arealways in the form of outflow of cash. In the telecom sector, discountsare given to the customers to get the advantage of the much lesseramount. The same induce gross inflow of cash to a telecom company.Therefore, discounts can never be treated as an expenditure.

100. It is further submitted on behalf of the licensees that as perbinding and mandatory principle of AS-9, the ICAI has declareddiscounts, rebates, deductions, lesser realisation of cost price are notto be treated as an expenditure. It is further submitted that an agreementbetween the parties determines the revenue arising on a transaction. Itis measured at the fair value of the consideration received or receivableconsidering the amount of consideration. The amount of any discountor volume-based discount and volume rebates are not considered asrevenue.

101. It is further submitted that the licensees have been giventhe discount that is transparently reflected in its invoice. The appellantonly receives the discounted amount, which is the realised revenue orthe cash inflow in their hands. The licence fee is paid on this realisedamount.

102. It is further submitted that the licensees gives “tradediscounts” and “subscriber’s discount,” and both are exempted fromrecognition as revenue for the reason that firstly as per AS-9, tradediscounts are not included within the definition of revenue since theyrepresent a reduction of cost. Guidance Note 5 on terms used in financialstatements verifies that the trade discount is a reduction granted by asupplier from the list price of goods or services and the DOT in para47 of the affidavit dated 11.7.2003 has mentioned that trade discountsshown in the invoice should not be included in gross revenue. Thesediscounts are transparently reflected in the invoice raised on thedistributor.

103. Concerning the “subscriber’s discount,” it is submitted onbehalf of the licensees that these discounts offered to the customersor subscribers are part of the tariff plan. Subscriber has a choice ofdifferent rental plans offered by the appellants, where certain discountsare offered by way of some free minutes/calls/SMS/VAS/value. Oncea subscriber selects a plan, he is entering into a contract with the AB

C

D

E

F

G

H

Aoperator, is entitled to services and discounts, as indicated in the plan.Usually, these are in the form of free calls or additional data, and norevenue is collectible. Hence it cannot be taken into account fordetermining licence fee. DOT is asking for licence fee on the notionalrevenue for these free calls/SMS/VAS minutes/data when the appellantscollect no amount on this account. These amounts of discounts areBtransparently reflected in the invoice raised on the subscriber asmemorandum.

104. It is further submitted on behalf of the licensees that servicesare offered by the licensees and not goods. For payment of servicetax, the licensees consider the gross amount charged as derived andCmandated under section 67 of the Service Tax Act, 1994, which includesonly the amount realised by the licensees and not the notional amount.Circular No.23/3/97/-S.T. dated 13.10.1997, mandates that the servicetax liability is only concerning the discounted price so received by theCellular companies. The licensees frequently offer discounts as theyDare used as competitive tools to increase business in the long run. Thosewere inevitable as there were 8 to 10 operators operating in the samegeography, and the licensees had to match highly competitive pricesoffered, especially by new entrants. Discounts help to survive and growbusiness and increase revenue, which is to the advantage of DOT.E105. On behalf of the DOT, it has been submitted that discounts

105. On behalf of the DOT, it has been submitted that discountsover and above the agreed charges are part of the overall commercialstrategy to enhance business. Hence, these discounts are like expenses.As per definition of “gross revenue” in clause 19.1 of the agreement,it is not permissible to set off these volume-based discounts against theFrevenue as expenses are not permitted to be netted off, such amountsform part of revenue; otherwise, it would lead to accounting jugglery,which is very consciously avoided by purposefully drafting the AGRdefinition in “inclusive” terms. Otherwise, the discounts may be usedby the company to reduce its costs, and the profitability of the companymay remain unaffected, but the gross revenue for the computation ofGAGR may be reduced. As the company may make contracts withdistributors and provide them with huge discounts in the form of reducedbilling. To say this (i), the company may make contracts with thedistributors to sell pre-paid vouchers of Rs.100 for Rs.70. Against thediscount, the company may make with the distributors further agreementHreducing the company’s cost, such as the supply of contractual workforce, the printing of paper vouchers, etc. Thus, it would causeevade of the licence fee without affecting the profitability of thecompany. The commissions thus form part of the income. Thecommission is nothing but “expenses” for growth in the business of thelicensees, it cannot be netted off while computing the gross revenue.The finding, to the extent it is contrary, recorded by TDSAT isderogatory to the contractual definition of gross revenue. DOT alsosubmits that the question of discount was raised earlier in the orderdated 30.8.2007 by TDSAT. This Court did not accept it; as such, it isbarred by res judicata and the question as to discount on internationalroaming, and questions as to other discounts, were not raised beforeTDSAT. As such, these objections concerning discounts allowed todistributors on sale of pre-paid vouchers are barred by the principle ofconstructive res judicata.

106. When we consider the rival submissions it has beenmentioned in the communication dated 26.7.2001 that the interestincome, dividend income, value of rebates, discounts, free calls, andreimbursement from the USO funds have to be included in the adjustedgross revenue. Consequently, a prayer was made to set aside thecommunication dated 26.7.2001 in Petition No.7 of 2003. Prayer hasnot been granted on the ground that the Government has not acceptedthe recommendations of TRAI and the decision of the Government isfinal, binding and conclusive as has been held by this Court in AUSPI(2011). Finding has been recorded that parties have agreed to aforesaidposition as reflected in communication dated 26.7.2001.

107. When we ponder on the definition of “gross revenue” inclause 19.1 of the licence agreement, it is apparent that the grossrevenue has to be taken into consideration without any set-off forrelated items of expense. Thus, the gross amount, as per the definition,is the gross revenue, without set-off, is to be taken into considerationincluding the discounts given. Parties understood right from the beginningthat the gross revenue does not exclude discounts, commissions, rebateetc. and specific challenge made to the same had not been acceptedin 2011. Now once again by the circuitous method, impermissible attempthas been made to re-write the definition of gross revenue. The definitionof ‘gross revenue’ is independent of AS-9 as the definition of revenuein AS-9 cannot govern the definition in Clause 19.1 of the licenceagreement. What has been defined in AS-9 is revenue, whereas, for a A

B

C

D

E

FG

H

Alicence fee, gross revenue is the revenue. It would be greatest fallacyto say that while gross revenue has been defined in Clause 19.1 ofagreement, revenue has not been defined in the licence agreement.What has been defined as gross revenue is in fact broader definitionof revenue and has to be taken as definition of revenue for licenceagreement. An attempt has made to wriggle out of the rigour of theBdefinition of gross revenue by banking upon the definition of revenuein AS-9 is to scuttle the effect of the previous decision in Union ofIndia v. AUSPI (2011). Gross revenue as defined in agreement cannotbe diluted in any manner whatsoever based on the submission mentionedabove, as AS-9 is only for method of accounting and specific definitionCof revenue i.e., gross revenue under the licence agreement has toprevail. In our considered opinion, ‘gross revenue’ is the revenue hasbeen held in 2011 judgment finding is binding on parties for determinationof license fees under the licence agreement and the definition of revenuein AS-9 cannot govern. Reliance upon the affidavit filed on behalf ofDDOT is wholly misconceived. What is the meaning of the definition ofgross revenue has been finally settled inter parties vide 2011 judgment.Thus, there is no scope to entertain the misconceived submission.Though artistically designed with ingenuity, however, the same ismisconceived one on in-depth scrutiny.

E108. The submission was raised on behalf of the licensees relyingupon J.K. Industries (supra) that fair value has to be taken intoconsideration to reduce discounts etc. The concept of fair value is notthe basis of Accounting Standard-9. Fair value is the operating conceptof IND AS-18. In AS-9, revenue recognition is at nominal value andthat the fundamental difference between the two accounting standards.FThus, the nominal value has to be taken as the one which is relevantfor AS-9. Under the AS-9 regime, the revenue recognition shall bemeasured as the gross inflow of cash, receivables, or other considerationreceived. There is no concept of fair valuation under AS-9.

109. With the advent of modern technology, the mode of businessGtransactions has changed. The number of online purchases and saleshas been continually growing, and the techniques to retain clients onlineare being utilised. Unlike sales promotion schemes in the case of off-line transactions, the online transactions of sales carry cash backrewards, discount coupons, and reward points. The incentives mayHinclude cash coupons, discount coupons, cash discounts, cash-back and credit points, etc. The various incentives affect the amount of revenueto be recognised. Under IND AS-18 Revenue or IND AS-115, Revenuefrom Contracts with Customers states that revenue shall be measuredat the fair value of the consideration received or receivable after takinginto account the number of various incentives provided to the customers.

110. Reliance has been placed on Union of India v. BombayTyres International Pvt. Ltd., (2005) 3 SCC 787, wherein this Courthas observed that trade discount should be allowed to be deducted fromthe sale price. The decision is in the context of the Central Excise &Salt Act, 1944. The decision has no relevance to consider the conceptof gross revenue under the licence agreement. Reliance has also beenplaced on the decision of this Court in Deputy Commissioner of SalesTax (Law), Board of Revenue (Taxes), Ernakulam v. M/s. AdvaniOorlikon (P) Ltd., (1980) 1 SCC 360, in which this Court consideredthe question of taxable turnover and the concept of sale price underthe Sales Tax Act. It was held that the trade discount on catalogueprice allowed by the wholesaler to the retailer is not includible in thetaxable turnover. Trade discount is distinct from cash discount. A cashdiscount is a discount granted in consideration of prompt payment. Atrade discount is a deduction from the catalogue price of goods allowedby wholesalers to retailers engaged in the trade. Reliance has also beenplaced on the decision of Delhi High Court in M/s. United Exports v.Commissioner of Income Tax, Delhi (2009) SCC Online Del 2566rendered in the context of the provisions of section 40-A(2)(b) of theIncome-tax Act, 1961. Certain trade discount was given. The High Courtheld that the provision pertained to disallowance to an expenditure, anamount spent by the assessee as an expenditure. For that, actualpayment must be made. There has to be an expenditure incurred beforethe provision can be said to be applicable. Trade discount was held notto be an expenditure as it is incurred for which allowance could havebeen claimed under section 40(A)(2). Above mentioned decisions arewholly inapplicable, given the definition of gross revenue and have beenrendered in context of concerning provisions of different statutes.

111. Reliance has also been placed on IFB Industries Ltd. v.State of Kerala, (2012) 4 SCC 618. The question coming up forconsideration was the discount on qualifying for deduction under Rule9(a) of 1963 Rules. The trade discount was given for dealers onachieving a pre-set sales target. It was held that for the discount on A

B

C

D

E

F

G

H

Aqualifying for deduction under Rule 9(a) of the said Rules must be shownin invoice, itself and that it would not be good enough to show itemploying a credit note issued after the sale. The decision is on themethod of computation when discount can be allowed on sales-tax andVAT under the Kerala General Sales Tax Rules, 1963, and has norelevance. In Commissioner of Central Excise, Madras v. AddisonB& Co. Ltd., (2016) 10 SCC 56, the question of turnover discount cameup for consideration under section 11-B of the Central Excise Act, 1944.It was held that trade discounts should not be disallowed because theyare not payable at the time of each invoice or deducted from the invoiceprice. In Southern Motors v. State of Karnataka & Ors., (2017) 3CSCC 467, a question arose of trade discount given post-issuance of tax/sale invoice, a deduction from the sale price for computing taxableturnover when the discount was not reflected in the tax invoice or billof sale. It was held that it has to be proved that such discounts were given. The decision was in the context of Karnataka Value Added TaxDRules, 2005. Yet in Maya Appliances Pvt. Ltd. v. AdditionalCommissioner of Commercial Taxes & Ors., (2018) 2 SCC 756 hasalso been relied upon where the question of computation of taxableturnover came up for consideration in the context of Karnataka ValueAdded Tax Act, 2003, with respect to all regular trade discounts andthey are allowable as permissible deductions, if proper proof is shown.E112. The decisions have no relevance having been rendered underthe provisions of different statutes and for construing the definition ofgross revenue under the licence agreement, which has to prevail.

113. Reliance has been placed on service tax Circular datedF13.10.1997, which provides that service tax liability is only in respectof the discounted price so received by the Cellular companies. Thequestion of service tax liability has no relevance for determination oflicence fee for which definition has been worked out by the Governmentof India, which has been agreed to by the licensees also as that wasGbeneficial to them as compared to the fixed fee regime which prevailedearlier. They have switched over to the new regime of sharing therevenue earned by them on a percentage basis. The definition of grossrevenue has the purpose behind it and was the outcome of prolongedexercise and has already been upheld, and the question cannot beHreopened once over again by an indirect method.

114. The trade discounts cannot be deducted from the grossrevenue merely on the ground that they represent a reduction of cost.The reliance by the licensees on the Guidance Note filed that discountsare reduction granted by a supplier from the list price of goods orservices is of no avail owing to the definition of the gross revenue. Setoff of trade discounts is not permissible under Clause 19.1 of agreementagainst revenue as expenses are not permitted to be netted up.

115. Concerning cash discount, it is apparent that cash discountmay be used in various methods. It is an incentive for customers. Thecustomer makes payment after deducting amount of cash discount, ifeligible for availing of the same as per the agreement between the entityand the customer. Under AS-9, revenue is recognised at the grossamount and cash discount is regarded as an expense when the sellerreceives the payment net off discount is not permissible. For example,if A has sold goods to Z for Rs.1000 on 90 days’ credit period, but if Zpays within 50 days, a cash discount of 10% shall be provided by A. Itis reasonably sure that Z to pay the amount within 15 days. In the ASregime, the revenue has to be recorded at Rs.1000, and when Z paysRs.900, the amount of cash discount of Rs.100 will be recognised asan expense. That is the effect of the revenue to be recognised as agross amount under AS-9. Concerning the volume-based discount, underthe AS-9 regime, revenue is recognised at the gross amount receivedor receivable from the customers. However, the value of trade discountsand volume rebates received cannot be deducted from the gross revenueowing to the definition in clause 19.1. The subscriber’s discount canalso be in the form of free calls, some free minutes SMS value.

116. DOT has rightly asked for the licence fee on the notionalrevenue of free calls, SMS, VAS minutes/data. When these amountsadmittedly are reflected in the invoice raised on the subscriber asmemorandum, it is the gross revenue. It forms part of the gross revenueand cannot be deducted. That is what was intended by carving out thedefinition to make it free from litigation and accounting jugglery and tofree determination of licence fee from the clutches of accountingjugglery.

117. The discounts allowed on international roaming, commission,and discount allowed to distributors on sale of pre-paid vouchers formpart of the gross revenue and cannot be deducted by placing relianceon the definition of revenue and certain notes of AS-9 standards;whereas they are explicitly included in the definition of gross revenue.

AB

C

D

E

F

G

H

A

A118. As to pre-paid options, the format of statement of revenueand licence fee contained in Appendix II to Annexure-II provides inthe case of pre-paid options, sale of pre-paid SIM cards including fullvalue of components charged therein. Revenue from mobile communityphone service including full value of all components charged thereinhas to be considered, revenue from franchisees/re-sellers including allBcommissions and discounts, etc. have to form part of the gross revenue.How the parties have understood and agreed to pay the gross revenueis apparent from the correspondence and letter dated 22.7.2001 andthe ultimate definition mentioned in the licence agreement Clause 19.1and rejection of TRAI’s recommendations by the Government.

C

C

119. The TDSAT has erred in holding that if the discounts are inthe form of reduced billing, no addition to be made in the gross revenue.It would mean violating the definition of gross revenue where no set-off is permitted. It is rightly submitted by DOT that discounts over andabove the agreed charges are part of overall commercial strategy toDenhance the business, and hence, these discounts are like expenses.Expenses are not permitted to be net off under clause 19.1 from thegross revenue under the licence agreement. Similarly, the TDSAT haserred in holding and giving a finding concerning commission anddiscounts if the invoice is at a discounted price, which is at Rs.90 insteadof Rs.100. For the same reason, the finding of TDSAT is not sustainable.

E

120. The TDSAT has rejected the case of the licensees. Wherethe bill is for a higher amount and the discount is in the form of volumediscount given separately, the billed amount should be taken as therevenue, and the discount may be treated as an expense. That part ofthe finding is not disturbed. However, for all discounts and commissionsFallowed on international roaming, and to distributors on sale of pre-paidvouchers, trade discounts, subscribers’ discounts, and volume rebatesform part of gross revenue.

121. It has also been submitted on behalf of the licensees thatoffering discounts is frequently used to increase business in the longGrun/term. These are inevitable as there were 8 to 10 operators operatingin the same geography at highly competitive prices. Discounts help tosurvive and grow business and augment revenue. Thus it is in the natureof expense for earning the profit and by this method it is admitted thatbusiness has grown and there is an increase in revenue, hence the sameHbeing part of the commercial strategy to enhance the business, it has to be treated in the nature of expense and cannot be deducted fromgross revenue.

122. Thus, we have no hesitation to reject the claim for variousforms of discounts, commissions, pre-paid vouchers, goodwill waiveretc., raised on behalf of the licensees and set aside the finding of theTDSAT to the extent it is contrary to the stand taken by DOT, and wehold that all discounts and commission etc. as discussed form part ofthe gross revenue for the purpose of payment of licence fee.

In re: Gains arising out of Foreign Exchange Fluctuations:

123. The telecom service providers have transactions ofpurchasing equipments or settling roaming charges etc. in foreigncurrency. The change in exchange rate vis-à-vis a foreign currencyfrom the date of transaction to the time of settlement may cause gainor loss based upon the fluctuations in the exchange rate of rupee.TDSAT in the 2007 judgment held that the fluctuations in the foreignexchange rate have nothing to do with the licensed activities of thetelecom service providers. The TDSAT in the impugned judgment andorder in 2015 has held that foreign exchange gains are of two types.The reduction in liability towards payment for purchase of capital goodsfrom pre-paid and payment of charges or outroamers and secondly inreceipt 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 reductionis allowed only on payment basis. Therefore, the difference betweenaccrual and paid basis cannot be taken as revenue for AGR calculation,and in the second case, revenue is recorded on accrual basis. Anycharges till payment is made, are notional income, which cannot be takenas revenue for AGR basis. On actual payment since no discount is givenand the actual receipt is less, no licence fee should be charged if thesame is more. Thus, any gain or loss due to foreign exchange fluctuationswill have no bearing on the licence fee.

124. The DOT submits that the mandate of the definition of grossrevenue has been ignored. The gain from foreign exchange fluctuationis to be taken into the calculation of adjusted gross revenue, the incomeis understood as an increase in economic benefits in the form of inflowsfrom the enhancement of assets or decreases in liability that result inincrease in equity. The definition of income covers both revenue andgains. The gains from foreign exchange fluctuations should be added A

B

C

D

EF

GH

Awithout any net off against the losses, and these should be on accrualbasis.

125. It is submitted on behalf of licensees that DOT is trying toconfuse the revenue with income. The foreign exchange fluctuation gainis unrealised gain and is purely notional, and no flow of revenue takesBplace. AS-11 mandates the reporting of foreign currency in the balance-sheet at the prevailing foreign exchange rate. The difference inexchange variation between the transaction date and the year-end ratesis booked as an unrealised exchange of gain or loss. The transactionsdenominated in foreign currency are recorded at the exchange rateprevailing at the time of transaction and realised. As such, gain or lossCresults when there is a change in the exchange rate between thetransaction date and date of settlement of items.

126. It is further submitted on behalf of the licensees that notionalgains are not inflows of cash and do not represent revenue. When thereis neither accrual nor receipt of income, no revenue can be said to haveDresulted. A higher cost of an asset shown in the books on account of ahigher foreign exchange rate may be reduced to reflect the currentforeign exchange rate and does not result in any revenue received orreceivable by the appellant. If forex gain is on any item of expenditure,then it should not enter calculation of gross revenue as expenses areEnot deductible while calculating gross revenue. It is further submittedthat Para 3(iii) of AS-9 expressly excludes the realised or unrealisedgains resulting from changes in foreign exchange rates and adjustmentarising on the transaction of foreign currency financial statements.

127. When we consider the rival submissions, it is apparent thatFthere can be realised as well as unrealised foreign exchange gains/losseswhich may differ depending on whether or not the transaction has beencompleted by the end of the accounting period. The realised gains orlosses are the gains or losses that have been achieved. It means thatthe customer has already settled the invoice before the close of theaccounting period. For example, to say a customer purchased itemsGworth $1000 from a foreign seller based abroad, and the invoice is valuedat $1100 at the invoice rate. When customer settles the invoice after afew days, say four weeks, after the date invoice was sent, and theinvoice is valued at $1200 when converted to US dollars at the currentexchange rate. It means that the seller will have a realised gain of $100.HThe foreign currency gain is recorded in the income section of the

income statement. Unrealised gain or loss results when the invoice issettled, but in case the customer fails to pay the invoice by the closeof the accounting period. The seller calculates the gains or losses thatwould be earned if the customer paid the invoice at the end of theaccounting period. While preparing a financial statement, a transactionwill be recorded as an unrealised loss of $100 in case the value of theinvoice was $200. On the last date of the accounting period, the invoiceis valued at $100. Thus, the unrealised loss will be of $100. Theunrealised gain or loss is recorded in the balance-sheet. When preparingthe actual financial statement, companies are required to report thetransaction in the home currency to make it easy to understand all thefinancial reports. It means that all transactions carried out in foreigncurrency must be converted to the home currency at the currentexchange rate when the business recognises the transaction. Theexchange difference which arises on reporting the mandatory items atthe rate different from the ones at which they are recorded initially,must be recognised rate as an income or an expense. Thus, gain fromforeign exchange fluctuation is to be taken in the calculation of AGR,and that is the actual revenue and cannot be ignored.

128. Similarly, gain from foreign exchange fluctuation should beadded on accrual basis. If later on, the amount has to be spent on thepurchase of equipment or settling roaming charges in foreign currency,that is also a gain and results in economic benefit and has to beaccounted for while working out the gross revenue as a decrease inliability would be gain. Whatever may be the expenditure, whether ithas increased or decreased, must be accounted for as it forms part ofthe gross revenue.

129. In the definition of gross revenue, any other miscellaneousrevenue is included, and when once the item has to be shown in thebalance-sheet or profit and loss account, obviously, it has to beaccounted for gross revenue, even as a notional figure. Once the amountis receivable, it has to be taken as part of gross revenue. The findingto the contrary recorded by the TDSAT is thus liable to be set aside.Whether the amount is paid for the purchase of equipment, it has to beaccounted for and must be accounted for as per the value spent onthe date of the banking transaction, which cannot be ignored. Thus, thegains from foreign exchange fluctuations have to be added in thecomputation of gross revenue, otherwise, the benefit which is accruing AB

C

D

E

F

G

H

Awill be ignored. Where profit or loss arises on account of appreciationof foreign currency, such gain or loss has to form part of profit fromthe business or loss. Whether it is profit or loss on account of tradingor on account of asset, it has to form part of profit and loss account,thus, it has to account for gross revenue. The fluctuation in the foreignBcurrency has to be accounted for in the account at the time when theamount is received or at the end of the accounting year. Thus, there isno escape from the conclusion that forex gain has to be accounted foras part of gross revenue. When loss can be claimed as an expenditure,profit or gain due to fluctuations in the rate of foreign exchange hasalso to be accounted for towards gross receipt, which is gross revenue.C

In re: Monetary Gains on Sale of Shares:

In re: Monetary Gains on Sale of Shares:

130. It is submitted on behalf of the Tata Teleservices Ltd. andother licensees that gains from sale of shares should not be included inthe inclusive definition of gross revenue. The gains on the sale of capitalassets and receipt from the sale of scrap. The issue has arisen whenDan asset/scrap is sold for more than its book value, then the differencebetween net sale proceeds and book value is the amount of gain onsale of capital assets. Whether it has to form part of the gross revenue?The tribunal has held that capital gains are of two types. (i) Gain overand over the gross book value (cost) of the assets, that is when saleEproceeds 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 proceedsare less than the initial purchase cost but more than the net worth ofthe asset. The tribunal has held that the gain on sale of capital assetsas per the first case, i.e., when the increase is over and above the bookvalue of the asset, it will form part of calculation of gross revenue.F

131. Given the definition of gross revenue in the licenceagreement, every amount which is more than the book value of thecurrent asset and comes to licensee company, has to be considered forcalculation of gross revenue without netting off. Thus, the reasons givenby the tribunal that any gain over and above the net book value, that is,Gwhen the sale proceeds are less than the original purchase cost butmore than the net worth of the assets, has to be excluded from thegross revenue, cannot be accepted. The gross revenue for the currentyear has to be worked out based on the value of the capital assets.Gross revenue for any year is considered in light of the openingHstatement and also closing statement at the end of the year. What is gain over and above the book value in the year in question, has to betaken into consideration towards gross revenue received. Submissionto the contrary raised on behalf of the licensees cannot be accepted.We are not able to accept the submission that the money collected onthe sale of shares etc. is not like revenue receipt but is a capital receipt.The gain from the sale of capital asset including increase over and abovenet book value and scrap and not the entire proceeds are to be takenas revenue in calculation of the gross revenue without netting off andshould be on accrual basis, is unobjectionably within the ken of definitionof gross revenue. To say in case e.g., gain for AGR will accrue whenthe sale proceeds or the current disposition value of the goods is Rs.60,and if it is sold at Rs.70, in that case, there will be a gain of Rs.10.That shall be taken as a gain for AGR calculation. The result would bethe same in case the value of an asset worth Rs.100 has depreciatedto book value worth Rs.60 and is sold at Rs.70, as urged on behalf ofDOT, Rs. 10 will form part of gross revenue. For what purpose andhead the income tax would be leviable, is not the question for ourconsideration.

132. The submission raised that the sale of shares is not anordinary business activity, as provided in Para 4.1 of AS-9. Even Para3(i) of AS-9 which excludes from the ambit of ‘revenue’ any realisedor unrealised gains resulting from disposal of non-current assets, i.e.appreciation in the value of fixed assets. Again, a futile attempt hasbeen made to get rid of the definition of gross revenue, and confusionis sought to be created by ordinary business activity, which is theexpression used in Para 4.1 of AS-9. In contrast, the definition of grossrevenue in clause 19.1 includes gross revenue from non-licensedactivities also. Thus, the submission is wholly sans substance and standsrepelled. Finding to the contrary recorded by TDSAT considering theinitial cost is set aside. It has to be seen as book value as on date ofsale. The stand of TDSAT is approved in this regard in regard to assets/scrap, shares etc.

In re: Insurance claim in respect of capital assets:

In re: Insurance claim in respect of capital assets:

133. Where an asset is destroyed, and the insurance claim isreceived for more than its book value. The difference between theinsurance claim received and the book value is treated as revenue bythe DOT for computing AGR. The dispute was not raised initially bythe licensees, while the order in the year 2007 came to be passed. It A

B

CD

E

F

G

H

Ahas been raised after this Court has remitted the case to the TDSATin the year 2011. The TDSAT has held that if the asset destroyed isreplaced immediately and the claim received is more than the actualcost of replacing the equipment, the difference would be taken asincome; and in a case where the asset destroyed is not replacedimmediately, the gain to the extent more than the gross book value isBconsidered as income. The asset has appreciated over time, theninsurance claim received more than the total cost, though being realgain, is not treated as revenue for clause 19.1 of the licence agreement.

134. On behalf of DOT, it is submitted that the tribunal has erredin making the classification of the revenue. In case the insurance claimCreceived is more than the book value, it is to be treated as revenue.According to the definition in clause 19.1, the gross inflow of cash forthe current year, over and above the book value, is to be treated grossrevenue. There is no need to make any classification as to when anasset is destroyed and replaced later on. The insurance claim receivedDmore than depreciated book value has to be recorded in the profit andloss account under any other income, that too constitutes a gain,therefore, it will form part of the gross revenue in the calculation withoutnetting off and on accrual basis. To say if the revenue to form part ofgross revenue will be treated only when the insurance claim received Eis more than the book value. Therefore, the excess amount receivedover and above the book value shall be taken as revenue for calculationof gross revenue. For the use of accounting, the gain from the insuranceclaim, the bifurcation made by the contingencies, was uncalled for andcannot be culled out from the definition of gross revenue, which wasto simplify the procedure of assessment of licence fee. What is theFmeaning to be given to the word ‘immediately’ would differ from caseto case and determination of licence fee. The cost of replacement alsodepends upon various factors. An old asset may be replaced by a brandnew one of the higher prices. For an accounting of gain from theinsurance claim, the methodology classification adopted by DOT is notGfound to be proper and is not in tune with the definition of grossrevenue.

135. It is submitted on behalf of the licensees that the amountreceived towards insurance claim is for indemnification towards lossof capital asset to compensate for the loss. The decision in Vania SilkHMills v. C.I.T. Ahmedabad, (supra) has been pressed into service wherein it has been held that while paying for the loss, the insurancecompany compensates for the loss. The insurance claim is not the valueof the damage to property but only takes into consideration the amountrequired to restore it to its original condition. Insurance contracts arefor indemnification. Therefore, it is submitted that the claims are notas revenue.

136. The submission raised on behalf of the licensees cannot beaccepted as the insurance claim over and above the book value isconsidered as revenue and not the value of the capital asset as thereis an inflow of cash received. It is accounted for in the profit and lossaccount. It has to form part of the gross revenue as defined in clause19.1. The artificial bifurcation of insurance claim made by the TDSATcannot be accepted and is contrary to contractual definition of grossrevenue. The finding of TDSAT to the extent it is contrary to revenueis set aside.

-In re: Amount of negative balance of prepaid customer:

-In re: Amount of negative balance of prepaid customer:

137. The negative balance occurs when a pre-paid customerexhausts the available talk-time. TSPs as a matter of policy, sometimesprovides the customer with a small amount of loan talk-time as it maydeem fit, say of the value of Rs.10 or Rs.20. The utilisation of this talk-time results in negative balance in the account of the pre-paid customer.The balance is recovered from the subsequent re-charge made by thecustomer. In case where the customer fails to re-charge the fresh top-up amount, the balance remains negative in the pre-paid account of thecustomer. The pre-paid vouchers are sold for a price for which thecustomer gets a fixed duration of talk-time/usage of the service. Whenit is exhausted, and long talk-time is used, it results in a negative balance.The TDSAT has held that the negative balance cannot be taken intoaccount for computation of gross revenue as it is notional revenue, whichis 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 thepermitted duration for the amount received by it.

138. The case set up by DOT is that the negative balance iscommunicated to the customer and also shown in the account. It is billedon accrual basis and becomes part of gross revenue. In case it is notrealised, the same has the effect of bad debt, which is not allowed asa deduction as per the definition of gross revenue. In case it is notcounted towards the gross revenue, it may encourage the licensee to A

B

C

D

E

F

G

H

Agive discounts increasing their gross revenue by such incentive and notpaying the licence fee to the public exchequer.

139. It is apparent that the amount of negative balance is abusiness strategy, and the amount is adjusted in case re-charge is opted.Otherwise also, it is billed and reflected on accrual basis in the accountBof the customer. Though it has to form part of gross revenue fordetermination of licence fee under clause 19.1, the number of calls atthe full value have to be measured without any discounts or incentiveof such business strategy. It is a part of revenue. It cannot be deductedfrom the gross revenue to be worked out as per the definition of grossrevenue under AS-9. Thus, the finding of the TDSAT cannot be saidCto align with the meaning of gross revenue in factual aspects of thecase and is set aside.

In re: Reimbursement of the infrastructure operatingexpenses D140. The telecom service provider needs infrastructure like towersto operate. To achieve economies of scale, two or more companies mayshare one such passive infrastructure.

141. The licensees have submitted that setting up of passiveinfrastructure like towers is not an activity which requires licence. TheEtower structure is sometimes erected by independent parties and isoffered to service providers on rent. Similar activity, when carried outby a service provider, should not be treated as part of licensed activity.Therefore, the revenue earned by licensee from rent/leasing out passiveinfrastructure should not form part of adjusted gross revenue. It is alsosubmitted that renting/leasing of dark fibre towers etc. is carried outFby IP-1 operators. These operators do not require any licence. It is anon-licensed activity and should be out of the purview of adjusted grossrevenue.

142. The TRAI recommended that renting and leasing of thepassive infrastructures by service providers is a regular telecom activityGand should, therefore, be part of AGR.

143. The TDSAT has observed that in case A has one tower ata particular building, the same tower can be permitted to be used byB. B would pay rent to A for the use of this tower. In case B paysRs.100 as rent to A, A will have to incur operating expenses for keepingHthe equipment in the tower, functional, which may inter alia, require

diesel generator. If monthly expenses for such operating expenses isRs.10, then A and B would divide it in equal proportions. Thus, Rs.5paid by B to A would be a revenue for A (Airtel). The TDSAT hasdeducted Rs.5 from the gross revenue on a notional logic that the rentof Rs.100 should be treated as rent of Rs.95 plus Rs.5 towardsreimbursement of expenditure. Thus, according to TDSAT, usage offacility like rent has to be included in the gross revenue, andreimbursement of spending should not be included in the gross revenueprovided it is shown separately in the invoice and not shown in the profitand loss account as revenue.

144. The stand of DOT is that the interpretation is expresslycontrary to clause 19.1, which categorically includes “revenue frompermissible sharing infrastructure”. The definition of gross revenue doesnot permit differentiation between the reimbursement of expenses andrent for the usage of the facility. By the interpretation of TDSAT,accounting jugglery would take place, and the licensee will try to derivemaximum reimbursement of infrastructure operating expenses under thecategory of “reimbursement of expenditure” rather than under the “rentcategory”. The company may form cartel and put up a commonexpenditure in the type of reimbursement of the cost it would give achance for netting off the expenditure against revenue, which isprohibited in clause 19.1.

145. In the definition of gross revenue, the item sharing ofinfrastructure facility is explicitly mentioned. In the format in Appendix2 to Annexure-II also, the entire amount is required to be shown. Ithas been specifically mentioned that there cannot be any setting off ofthe amount of gross revenue, and the entire money received has to betreated as the gross revenue for the determination of licence fee. It isnot the determination of profit. The gross revenue carries a differentdefinition, and the intendment is clear to prevent disputes. Thus the entireamount received by the licensee on account of sharing of passiveinfrastructure has to be counted in the gross revenue while workingout AGR. Thus, the finding to the contrary recorded by the TDSAT isset aside.

In re: Waiver of late fee

146. Late fee is a penalty charged by the licensee in casecustomer fails to pay the bill within the due date. Sometime late fee iswaived off by the licensee as a goodwill gesture at the time of payment.

AB

C

D

E

FG

H

AThe submission raised on behalf of the licensee is that the licence feeshould be payable on the realised revenue. What has not been realised,cannot form part of revenue.

147. The TDSAT in the order passed in 2007 held that theamount of waiver of late fee has to be excluded from the gross revenue.BThe recommendation to the contrary made to the TRAI was set aside.The TDSAT in the impugned order passed in 2015 has held that thelate fee is a penalty and the penalty that has been waived off, cannotbe added to the revenue. In the first place, penalty cannot be said tobe revenue, and if the penalty which is waived off, is added to revenue,it would be a case of notional income being subjected to charge.C

148. DOT submits that if the operator bills the late fee, it wouldbe taken as part of gross revenue, whether it is realised or not.

149. In case the late fee is attracted, it has to be counted towardsgross revenue without setting off, and if the operator waives it off, itDhas the same effect of discount being given to the customer whichcannot be allowed as no deduction (net off) is allowed under clause19.1. When once the late fee amount is billed and the amount is notpaid within the due date, and the late fee is attracted, merely non-realisation of the same for any reason, cannot be excluded from thepart of gross revenue as per its definition. Gross revenue has to beEtaken whether it is received or not, and netting off is not allowed underclause 19.1. Once the amount has been billed, it is for the licensee torealise it. There cannot be any justification for excluding late fee fromthe gross revenue. In case money is lost by the service provider, thesame losses cannot be excluded from the AGR for the determinationof licence fee.F

150. Late free is included explicitly in the definition of grossrevenue. As such, it has to be computed as part of gross revenue.Merely by waiver, it cannot be ousted from the purview of grossrevenue once it becomes leviable. Thus, the finding of the TDSAT isnot sustainable and is set aside.G

-In re: Gains from roaming charges and PSTN passthroughcharges

151. Roaming charges apply when the customer leaves the homenetwork area and roams into the network or coverage area of anotherHservice area. Pass-through charges are charges paid by the licensee to the licensor for allowing their subscribers’ calls to be carried on theirnetworks. Clause 19.2 of the licence agreement provides for certaindeductions of roaming charges and PSTN pass-through charges fromgross revenue on actually paid basis. The TDSAT considered grievanceon behalf of the licensees that many a time it happens that the licenseeto whom such charges to be paid, happens to be the same company. Itis stated officers of the respondent do not allow deduction of suchcharges on the ground that there is no such actual payment as thecompany making as well as receiving the payment is the same. Butthe revenue is counted under both the licences to compute the grossrevenue, and the tribunal has observed that irrespective of the companybeing the same, pass-through charges shall be allowed to be deductedas soon as the same are accounted as revenue under the differentlicence held by the company.

152. DOT submits that merely because one company has alicence of more than one circle, there will not be common accounts ofthat company. The licence fee is realised as per the separate account.In case both the licences are different, accounts are different, andpayment of licence fee for each circle is different, Idea (Delhi Circlewould pay to Idea (Bombay Circle) on actual basis as against on accrualbasis, becomes revenue in the accounts of Idea (Bombay Circle).

153. In this regard, the definition is apparent as to what deductionhas to be made from gross revenue. Thus, it is more or less a problemof particular calculation. How calculation is to be made?

154. Clause 19.2 makes it clear that detailed call charges paidto other eligible telecommunication service providers within India shallbe excluded from gross revenue. Similarly, roaming revenues passedon to other eligible/ineligible service providers are also excluded. In thatcase, they must be actually passed over to the licensees in differentservice areas. Only then it can be excluded from gross revenue andnot otherwise.

155. Revenue from operating FCC 214 licence, USA, theproblem arises in the case of Bharti BILGO which is an isolated casewhere it has a branch of Bharti Airtel in U.S. The submission of BhartiAirtel is that since the income generated by the branch is a separateincome, it cannot be included in the income of Bharti Airtel in India. Inthe year 2007, the TDSAT has observed that the VSNL had themonopoly for ILD service before 1.4.2002. VSNL ceased to be a AB

C

D

E

F

GH

AGovernment-owned company. The old ILD licence permitted VSNLto carry both the activities, i.e., ILD service as well as TV uplinking.Under the new regime, a separate licence had to be obtained. Licencefor TV uplinking service was obtained from the Ministry of Informationand Broadcasting Ltd. while DOT issued the ILD licence. TV uplinkingservice cannot be rendered in the ILD licence due to the definition ofBthe word service in that licence. Since for TV uplinking facility, aseparate licence is required, such service could not be rendered underan ILD licence. The ILD licence issued by DOT carries a revenue-sharing scheme out of the gross revenue, which is not there in case ofTV uplinking licence issued by the Ministry of Information &CBroadcasting. The said licence is practically free. Therefore, otherservice providers of TV uplinking service do not have to pay almostany licence fee. The TDSAT had rejected the recommendation of TRAIaccording to which revenue from TV uplinking and Internet service isto form part of AGR as it was held to be a form of AGR. It was heldby TDSAT that revenue from these services is to be excluded fromDAGR.

156. In the impugned order, the tribunal has held that the revenuefrom operating FCC 214 licence arises not from the licence grantedby DOT but by FCC. Hence, this inflow cannot be taken as part ofAGR unless the DOT can establish that there is technical, managerialEand financial interconnection interlacing and synergy between company’soperations in the USA and India the gross revenue from the servicesof 214 FCC licence is reflected in the company’s accounts.

157. The stand of the DOT is that if this is permitted, every TSP/licensee in India would have branch offices in other parts of the worldFand would treat majority of the international income of the licensee ashaving been generated in the branch office outside the country andwould not take it into account from calculation of gross revenue forpayment of licence fee. It could not be said that the situation wouldnot affect the profitability of the company since the revenue is generatedGin the branch office of the company but will affect the calculation ofgross revenue as only a repatriated amount would be taken forcalculation. Relying on the observations made by this Court in Unionof India v. AUSPI (2011) at Para 49 in which this Court has held thatin such a scenario, the business can be transferred to a separate legalentity to avoid the branch office’s revenue to be clubbed with the mainHoffice. The income of the subsidiaries has to be included in the case of Bharti Airtel, it has separate subsidiaries, which are separate legalentities in and outside India, and the income generated from suchsubsidiaries are not considered or included while computing the adjustedgross revenue of Bharti Airtel. Since BILGO is a branch of Bharti Airteland not a separate legal entity, because of the previous decision of 2011,the business for which no licence is required, should be transferred toa separate legal entity to avoid computation of gross revenue, if notdue it has to be part of gross revenue.

158. In our opinion, para 49 of the judgment of 2011 takes careof the submission. Once there is a branch, maybe based abroad, itsincome and the activity of the branch may not require any licence sincelicensee is undertaking the activity, and the definition of adjusted grossrevenue activities includes revenue beyond the licence. The same hasto be included in the gross revenue. The submission stands concludedby the previous decision, and we find no merit in the submission.

159. The finding recorded by the TDSAT, to the extent it iscontrary to the DOT, based upon certain conditions, is set aside.

In re: Non-refundable Deposits

160. It is permissible for the licensee to accept deposits from itscustomers, which at times are non-refundable but are used to providediscounts on the bills raised. Concerning non-refundable deposits, theclaim was not pressed by the learned counsel appearing on behalf ofDOT before the tribunal. However, we find that the concession givenby the learned counsel on behalf of DOT concerning non-refundabledeposits is palpably incorrect.

161. We had put learned counsel for the parties at notice duringthe hearing as to the correctness of the finding recorded by the tribunalbased on the concession, which was prima facie incorrect. We haveheard learned counsel for the parties on the issue whether non-refundable deposit forms part of the revenue of the licensee.

162. Appendix II to Annexure-II of the licence agreement: ItemNo.5, in Section D of the format, is an entry concerning non-refundabledeposits from subscribers. It has to be included as per the format inthe statement of the gross revenue. The definition of gross revenue iswide enough to cover non-refundable deposits as non-refundabledeposits are revenue earned from licensed activities. Non-refundabledeposits are to be treated as accrued in the profit and loss account as AB

C

D

E

F

G

H

Aper Annexure III of the licence agreement. It is apparent that non-refundable deposits are in fact revenue received in advance from thesubscribers. Even if they are used for discount etc. in the bills, theyform part of revenue. Licensees themselves treat non-refundabledeposits as income under section 80 IA (2a) of the Income-tax Act.Be that as it may. The finding recorded by the TDSAT concerningBnon-refundable deposits not being part of the revenue based upon wrongconcession made by the learned counsel appearing for the DOT, is asa result of this is liable to be set-aside. It was expected of the TDSATto consider the concession following law, as such cases cannot bedecided and ought not to be decided on the basis of prima facie incorrectCconcession of the counsel, it has to be legally tested. In case anyadmission is made, its correctness has to be examined.

In re: Licence fee demand where spectrum is not granted

163. Concerning demand of licence fee in the circle where theDlicensee was not granted spectrum: When the spectrum itself has notbeen issued, licence activity has not come into play, no revenue isgenerated. TDSAT has held that the demands of licence fee based onother activities, are bad, unreasonable, invalid, and unsustainable. Duringthe period in question, the UAS licence came bundled with the spectrum,and it is evident that without a spectrum, the licensee could not workEout the licence. The finding recorded by the TDSAT is appropriate.Once there is no activity under a licence, merely on the basis that thelicence has been issued, no revenue earned, it cannot be shared. Still,there is no activity under the licence, i.e., based on non-licensedactivities, the revenue sharing could not have been asked. It would beFan unreasonable and unconscionable bargain to pass on such a liability.We agree with finding recorded by TDSAT in the case of Videocon &S. Tel.

In re: Income from interest and dividend

In re: Income from interest and dividend

164. Argument has also been raised concerning interest incomeGand dividend income. Since these items are expressly included in thedefinition of gross revenue in clause 19.1. There is no scope to entertainthe submission concerning the exclusion of interest and dividend fromgross revenue. Whatever, interest and dividend earned from the licensingand non-licensing activities, have to form part of gross revenue forHdetermination of licence fee.

In re: Bad-debts written off

165. The bad debts written off are not allowed as a deductionby the DOT while computing adjusted gross revenue, bad debt is writtenoff when recovered subsequently, it cannot be added to the grossrevenue. The TDSAT in the impugned order, has observed as under:

“Licensees submit that if a bad debt, that is written off is lateron recovered, it is required to be reported to the DoT, this,according to the licensees, that bad debts written off may beallowed as deductions from revenue but as and when those arerecovered subsequently those should be added on to revenue.The submission is not acceptable but it needs to be clarified thatwhen any bad debt written of is recovered finally, it may not becharged to license fee again as that would result in doublecharging of license fee on the same revenue.”

166. TDSAT has not accepted the submission of the licensees.However, at the same time, it has safeguarded the interest of thelicensees. In case it is realised later on, it may not be charged again. Itshould be charged only once. We find the finding to be appropriate.No case for interference in the findings recorded by the TDSAT ismade out.

In re: Liability written off

167. The TDSAT has observed as under:

“Take the example of a company that makes a provision forretirement benefits for the amount. For income tax, it will beconsidered as an expense, but no discount from income will beallowed for the sum for determining the license fee. If such aliability is written off on a future date and shown accordingly inthe profit and loss statement it surely cannot be brought to chargefor a second time for computing licence fee.”

No objection has been raised on behalf of DOT to the saidfindings.

168. DOT submits that the reasoning is correct. However,TDSAT could not have undertaken this exercise head-wise. It ispresented on behalf of the licensees that notional revenue cannot beincluded in the revenue of the company based on provisional liabilitybeing finalised by actual liability. The amount kept as provisional liability A

B

C

D

E

F

G

H

Acannot be treated as income. In our opinion, TDSAT has rightly heldthat if it is to be considered as an expenditure, liability has to be treatedas an expense, and no discount on the income will be allowed for thesum for determining the licence fee. It cannot be charged for the secondtime for computation of licence fee.

B

169. In Rajputana Trading Co. Ltd. v. Commissioner ofIncome Tax, West Bengal-I, (1982) 2 SCC 775, it has been observedthat once liability is written off, it has to be added as income from thebusiness under section 10(2A) and such income should be given somelocal habitation or name.

C

170. Hence, we hold that it is to be treated as an expense, anddiscount cannot be allowed for determining the licence fee.

In re: Inter-corporate loan

171. Certain licensees have raised the loan being holdingDcompanies for the subsidiaries from various banks and financialinstitutions. In turn, this amount is given to the subsidiaries for their day-to-day operations. On this amount, the subsidiaries pay interest at theSBI Prime Lending Rates (PLR) every quarter, which in turn is paidby the holding company to the banks/financial institutions. DOT seeksEto include the interest received from the subsidiaries companies in therevenue of the holding company. The TDSAT has included the incomefrom interest on inter-corporate loan as part of gross revenue. It issubmitted on behalf of licensees that as the holding company onlyperforms the function for the subsidiary company and the interestFamount is only reimbursement of the amount paid to the bank, it cannotbe included in the gross revenue. As such, it does not form part of grossrevenue.

172. The submission has no legs to stand, and it is apparent fromthe definition of gross revenue in clause 19.1 that income from interestGis to be included in the gross revenue. Thus, the submission is baseless.By the fact that the holding company gives loan to the subsidiarycompany and recovers interest from subsidiaries, is good enough tomake it a part of gross revenue.

173. Thus, interest income from inter-corporate loan has to beHincluded in the gross revenue for working out the licence fee.

In re: Revenue under IP-1 Registration

174. Whether it can be claimed/clubbed under revenue underCUG licence? It is apparent from the definition of gross revenue thatincome from licensed activities and even from non-licensing activitiesand any other miscellaneous revenue of the licensee has to be included.Thus, DOT has rightly included the income of the licensee from IPregistration under the CUG licence.

In re: Income from management consultancy services:

175. When we consider the definition of gross revenue, it has tobe included in the adjusted gross revenue to work out the licence fee.The income from management support and consultancy of the licenseecannot be excluded. Submission to the contrary cannot be accepted andis as a result of this rejected.

176. The TDSAT has also rightly held in the case of Bharti Airtelthat the revenue from Cable Landing Station has to be included in thegross revenue.

In re: Res Judicata

177. Coming to the submission raised on behalf of DOT that thefindings in Union of India v. AUSPI (2011) (supra) operate as resjudicata with respect to items dealt with and act as constructive resjudicata with respect to the questions that were not raised in the petitionwhich were filed in Petition No.7/2003 and Petition No.82/2005. Thechallenge was made to most items on the ground; they could not beincluded in the definition of gross revenue; same did not form part ofthe licensed activity. However, this Court has repelled this submissionand has included the such items in the definition of gross revenue. It isclear that once this Court has held that the income which covered underthe definition of gross revenue and were claimed to be excluded earlieron the ground that they could not form part of gross revenue, thedefinition so including them was ultra vires and illegal/invalid. The sameheads are now sought to be excluded by taking the shelter that they donot form part of revenue under AS-9. Though they form part of grossrevenue under Clause 19.1. There is no scope left for this exercise.Though, we have examined every question raised on merit again as itwas submitted that this Court had left the question open as to properinterpretation. This Court has held that TRAI and the TDSAT had nojurisdiction to decide on the validity of the definition of gross revenue A

B

C

D

E

F

G

H

Aand adjusted gross revenue in the licence agreement and to excludeitems of revenue, which were included in the definition of gross revenuein the licence agreement, whether they are from non-licencing activities.

178. Considering whether the licensee can challenge thecomputation of adjusted gross revenue and if so, at what stage and onBwhat ground, this Court has observed that one such dispute can be thatcomputation of adjusted gross revenue made by the licensor and thedemand raised based on such computation is not following the licenceagreement. The dispute can be raised after the licence agreement hasbeen entered into at the appropriate stage, when the demand is raisedby the licensor/licensee. This Court observed if the dispute is raised,CTDSAT will have to go into the facts and material to decide demand isas per licence, in particular, the definition of adjusted gross revenue inthe licence agreement. It can also interpret the terms and conditionsof the licence agreement, as the tribunal has not gone into the factsand material relating to the demand of a particular licensee. It wasDfurther observed that the tribunal may go into the facts and materialbased on which demand is raised to make the computation. Thus, thescope of the latter observations is not so wide to take out certain items,though included explicitly in the definition of gross revenue and to holdthat they do not to form part of it. Income from licensing and non-licensing activities are in the ambit of gross revenue had beenEdetermined conclusively in 2011 judgment. Only facts and material canbe seen for computation.

179. It was submitted that the computation involves the processof that of computing, numbering, reckoning, and distributing. Theaccount of estimation by rule of law is distinguished from the arbitraryFconstruction of the parties. The reliance has been placed on thedecision in Hindustan Machines Ltd. v. Union of India, 1985 (2)SCC 197.

180. Reliance has also been placed on Lohia Machines Ltd. &Anr. v. Union of India & Ors., (1985) 2 SCC 197 in which for incomeGtax, the term computation has been considered. Wharton Law Dictionaryreference has also made as to the definition of computation based uponLohia Machines Ltd. (supra). It is a legal process of computinginclusion and exclusion of items, which may otherwise be regarded asforming part of the capital employed, as interpreted by this Court inLohia Machines Ltd. (supra) in which following observations have beenHmade:

“18. It is because the expression “capital employed” has avariable meaning that it has been enacted by the legislature that,to calculate the relief allowable under Section 80-J sub-section(1), the statutory percentage must be applied to the “capitalemployed” as computed in the prescribed manner. How the“capital employed” shall be computed is left to be prescribed bythe Central Board of Revenue by making Rule or Rules underSection 295 of the Income Tax Act, 1961. The process ofcomputation would involve both inclusion and exclusion of items,which may possibly be regarded as falling within the expression“capital employed”. The Central Board of Revenue may includesome items and exclude some others while prescribing themanner of computation of the “capital employed”. This is thesense in which the word “computed” has been consistently usedby the legislature while enacting legislation of this kind. Turningto the earliest legislation where the word “computed” has beenused in relation to the “capital employed”, we find that in theExcess Profits Tax Act, 1940 for determining the standard profits,the statutory percentage was required to be applied to the averageamount of capital employed as computed in accordance with theSecond Schedule and the Second Schedule provided for inclusionof certain items and exclusion of certain others including borrowedmoneys and debts. The legislature clearly, in this statute, regardedexclusion of borrowed moneys and debts as implicit in the processof computation of the “capital employed” or to put it differently,according to legislative usage, computation of the “capitalemployed” could legitimately involve as part of the process,exclusion of items such as borrowed moneys and debts. So alsoin the Business Profits Tax Act, 1941 and the Super Tax ProfitsTax Act, 1953, the word “computed” was used in the same senseas involving in the process of computation of the “capitalemployed”, exclusion of borrowed moneys and debts. Similarly,in the Companies (Profits) Surtax Act, 1964 also, the word“computed” has been used in the same sense. Of course it maybe pointed out that in this statute the word “computed” has beenused in relation to the “capital of the company” and not in relationto the “capital employed” but that would make no difference,because what we are concerned with here is the sense in whichthe word “computed” has been used and whether it involves the AB

C

D

E

F

G

H

A

B

C

D

E

F

G

H

AB

C

D

E

F

G

H

A

B

C

D

E

F

G

H

process of exclusion as well as inclusion and on that point, theAct analogically throws considerable light. The statutorydeduction which must be made from the chargeable profits forthe purpose of determining the charge of Surtax under this statuteis defined to mean “an amount equivalent to ten percent of thecapital of the company as computed in accordance with theprovisions of the Second Schedule” and the Second Scheduleafter its amendment by Finance Act 66 of 1976 does not providefor inclusion of borrowed moneys and debts in computation ofthe capital of the company though it provides for inclusion of thepaid-up share capital and reserves. It will thus be seen that thereis legislative history behind the use of the word “computed” inrelation to the “capital employed” and it has been legislativelyrecognised as involving, as part of the process of computation,both inclusion as well as exclusion of items which may otherwise be regarded as forming part of the “capital employed.” It is inthe context of this background and not by way of a virgin attemptthat the word “computed” has been used by the legislature inrelation to the “capital employed” in Section 80-J sub-section (1).

19. It may be noted that even in the Income Tax Act, 1961 theword “computed” has been consistently used in relation to“income” in the sense of involving both inclusion and exclusionof items of income. Section 2 clause (45) defines “total income”to mean the total amount of income referred to in Section 5“computed in the manner laid down in this Act”. Now, if we lookat the provisions in the Income Tax Act, 1961, which lay downthe manner of computation of the total income, it would be clearthat the process of computation of total income involves bothinclusion and exclusion of various items of income. Section 10provides that in computing the total income of a previous yearof any person, any income falling within any of the clauses ofthat section shall not be included in the total income, though suchincome which is required to be excluded is undoubtedly incomeand therefore part of total income according to the plain naturalconnotation of that expression. But it is required to be excludedin determining the charge of tax because “total income” is definedas total amount of income, “computed in the manner laid downin the Act”. The same position obtains also in regard to Section11 and it excludes certain categories of income in computation

of the total income. Then, we may refer to Section 29 whichprovides that the income from profits and gains of business andprofession shall be computed in accordance with the provisionscontained in Sections 30 to 43-A. These sections provide forinclusion and exclusion of various items in computing the totalincome. Sections 80-A to 80-VV also provide for deductions tobe made in computing the total income and under sections suchas 80-HH, 80-JJ and 80-O, even an item which indisputably formspart of income of an assessee, is required to be excluded incomputing the total income chargeable to tax. No one has everargued and indeed it is impossible even to conceive of such anargument, that when Section 2 clause (45) defines total incomeas the total amount of income computed in accordance with theprovisions of the Act, what is indubitably part of income cannotbe excluded in the computation. However, the argument of Mr.Palkhivala was that in the case of definition of “total income”the exclusion of items of income in the process of computationis provided for by the legislature itself and is not purported to bedone by any rule-making authority. The legislature, stated Mr.Palkhivala, can cut down the width and amplitude of theexpression “total amount of income” by expressly providing thatparticular item or items shall be excluded in the computation ofthe total amount of income, but the Rule-making authority cannotdo so, because by doing so, it would be derogating from theprovisions of the statute. Now we have already pointed out thatsince the expression “capital employed” has a variable meaningwhich in a given case may or may not include borrowed moneys,the Central Board of Revenue, could, in exercise of its rule-making power, exclude borrowed moneys in computation of the“capital employed” and in doing so, it would not in any way beacting contrary to the mandate of the statute. But the point whichwe wish to emphasise here, while referring to the definition of“total income” in Section 2 clause (45), is that the word“computed” have been used by the legislature as comprehendingwithin its scope not only inclusion but also exclusion of certainitems of income which are admittedly and without doubt, part ofthe income of the assessee. We find that even in some of thesub-sections of Section 80-J the word “computed” has been usedin the same sense as involving both inclusion and exclusion. The AB

C

D

E

F

G

H

A

AB

C

D

E

F

G

H

A

second proviso to sub-section (4) of Section 80-J provides that“where any building or any part thereof previously used for anypurpose is transferred to the business of the industrial undertaking,the value of the building or part so transferred shall not be takeninto account in computing the ‘capital employed’ in the industrialundertaking”. So also Explanation 2 to the same sub-sectionenacts in so many terms that in a case falling within its scopeand ambit, “the total value of the machinery or plant or part sotransferred shall not be taken into account in computing the‘capital employed’ in the industrial undertaking”. Then again, theExplanation to sub-section (6) of Section 80-J makes a similarprovision for exclusion of “total value of the building machineryor plant or part so transferred” in computing the “capitalemployed” in the case of business of a hotel. It will thus be seenthat, even according to these provisions in Section 80-J, theprocess of computation of the “capital employed” can legitimatelyexclude item or items which are plainly and indubitably part ofthe “capital employed”. Of course the exclusion enacted by theseprovisions is made by the legislature and not by the Rule-makingauthority, but again, if we may emphasise, the point is notwhether an exclusion is made by the legislature or by the Rule-making authority but whether such exclusion is implicit in theprocess of computation so as to be comprised in it. And on thispoint not only the provisions of the Excess Profits Tax Act, 1940,the Business Profits Tax Act, 1947, the Super Profits Tax Act,1963 and the Companies (Profits) Surtax Act, 1964 but also thevarious provisions of the Income Tax Act, 1961 referred to byus, clearly indicate that the word “computed” has been used bythe legislature in sub-section (1) of Section 80-J as involving notonly inclusion but also exclusion of items which may otherwisebe regarded as falling within the expression “capital employed”.It is left by the legislature to the Central Board of Revenue asrule-making authority to prescribe the manner in which the “capitalemployed” shall be computed and in so prescribing, the CentralBoard of Revenue may include or exclude items which may be B

C

D

E

F

G

regarded as forming part of the “capital employed”.”

181. This Court has considered the matter given the provisionscontained in section 80J of the Income Tax Act and has observed thatHcapital employed has variable meanings. It has been legislatively

recognised both inclusion as well as exclusion of the items, which mayotherwise be regarded as forming part of the capital employed. Thus,the expression computation has not been used in the 2011 decision toinclude those very items from the purview of the definition of grossrevenue, which have been held to be covered by this Court to be partof gross revenue. According to the 2011 judgment, whether the demandis in terms and conditions of the licence agreement and, in particular,the definition of adjusted gross revenue, could have been seen. TheTDSAT could also view the facts and material based on which demandhas been raised, but it was not permissible to exclude the items whichare included in the definition of gross revenue, as is sought to be done.Be that as it may. We have examined all the submissions which havebeen raised on merits again, uninfluenced by the plea of res judicata/constructive res judicata, and we have found no merit in the submissionswhich have been raised. Thus, we refrain from burdening the judgmentwith the decisions cited at the Bar concerning res judicata andconstructive res judicata.

In re: Levy of interest, penalty, and interest on penalty:

In re: Levy of interest, penalty, and interest on penalty:

182. Levy of licence fee is provided in clause 20.2. In case ofany delay in payment of licence fee beyond the stipulated period wouldattract penalty at the rate, which would be 2% above the Prime LendingRate (PLR) of the State Bank of India. As per clauses 20.5 and 20.8,if the licensee does not pay the demand, consequences would follow.The clauses are extracted hereunder:

“20.5 Any delay in payment of Licence Fee payable or any otherdues payable under the LICENCE beyond the stipulated periodwill attract interest at a rate which will be 2% above the PrimeLending Rate (PLR) of State Bank of India existing as on thebeginning of the Financial Year (namely 1[st] April) in respect ofthe licence fees pertaining to the said Financial Year. The interestshall be compounded monthly and a part of the month shall bereckoned as a full month for the purposes of calculation ofinterest. A month shall be reckoned as an English calendar month.

20.8 In case, the total amount paid as quarterly Licence Feefor the 4 (four) quarters of the financial year, falls short by morethan 10% of the payable Licence Fee, it shall attract a penaltyof 50% of the entire amount of short payment. However, if suchshort payment is made good within 60 days from the last day of A

B

C

D

E

F

G

H

Athe financial year, no penalty shall be imposed. The amount ofpenalty shall be payable within 15 days of the date of signingthe audit report on the annual accounts, failing which interest shallbe further charged per terms of Condition 20.5.”

183. It is apparent that in case licence fee is not paid as perBclause 20.2, the agreement is that the outstanding will attract interestat the rate of 2% above the Prime Lending Rate of the State Bank ofIndia existing as on the date of the beginning of the financial year, thatis first of April. The interest shall be compounded monthly. Under clause20.8, the penalty is to be paid in case the total amount paid as quarterlylicence fee falls short by more than 10% of the payable licence fee, itCshall attract a penalty of 50% of the entire amount of short-payment.A grace period of 60 days is granted, otherwise, it will carry the interest.The amount of penalty shall be payable within 15 days of the date ofsigning the audit report, failing which interest shall be charged as perterms of clause 20.5.D184. Whether interest and penalty have to be levied or not is tobe gone into on the facts and circumstances of the case.

185. The TDSAT has held that it would not be appropriate tolevy interest as well as the penalty. In case interest has to be levied, ithas to be collected at a nominal amount. The TDSAT has not specifiedEthe same.

186. DOT submits that as per the terms and conditions of theagreement, interest has to be paid for delayed payment. The contracthas been entered into, and the rate of interest has been fixed therein.It is not for the court to modify the same and penalty clause is alsoFattracted considering the nature of the objections raised as to the verydefinition of gross revenue whereas parties have fully understood themeaning of gross revenue and the regime of revenue sharing was highlybeneficial, and they have earned revenue and failed to share the sameas compared to the fixed fee regime. Thus, it was incumbent upon theGlicensees to make payment of interest and penalty as agreed.

187. The licensees submit that when once this Court passes anorder in the present appeals, it will have to be given effect to as towhich items can be included or excluded in the gross revenue. It isonly if the demand is not then paid within the stipulated period; theHquestion of payment of interest would arise. It is further submitted that

the penalty is for failure to pay the demand within the specified period.Penalty requires mens rea, contumacious conduct, or deliberatedisregard of the person’s statutory liability. Parties are in litigation since2003. TDSAT decided on the validity of definition in the year 2007.After that, this Court passed judgment in 2011 and remitted the caseto TDSAT. TDSAT has again decided concerning certain items in favourof the licensees, and throughout litigation, demands were stayed by thisCourt/TDSAT. Disputes are bona fide disputes. The licensees have paidabout 80% of the demand raised by DOT, and the instant disputepertains only to 20% of the demand on which stay was in operation.Under section 74 of the Indian Contract Act, compensation must beonly reasonable compensation. DOT has also levied penalty and intereston penalty. In the absence of deliberate refusal to pay, no penalconsequences like penalty can be imposed. It is also submitted that afiscal contract/agreement is to be construed strictly, and if there is adoubt, the same needs to be interpreted in favour of the assessee. Non-payment was neither deliberate nor under defiance of any law. Thelicensees have placed reliance on:

A. Hindustan Steel Ltd. v. State of Orissa, 1969 (2) SCC 627,in which following observations are made:

“8. Under the Act penalty may be imposed for failure to registeras a dealer — Section 9(1) read with Section 25(1)(a) of theAct. But the liability to pay penalty does not arise merely uponproof of default in registering as a dealer. An order imposingpenalty for failure to carry out a statutory obligation is the resultof a quasi-criminal proceeding, and penalty will not ordinarily beimposed unless the party obliged either acted deliberately indefiance of law or was guilty of conduct contumacious ordishonest, or acted in conscious disregard of its obligation. Penaltywill not also be imposed merely because it is lawful to do so.Whether penalty should be imposed for failure to perform astatutory obligation is a matter of discretion of the authority tobe exercised judicially and on a consideration of all the relevantcircumstances. Even if a minimum penalty is prescribed, theauthority competent to impose the penalty will be justified inrefusing to impose penalty, when there is a technical or venialbreach of the provisions of the Act or where the breach flowsfrom a bona fide belief that the offender is not liable to act in A

B

C

D

E

FGH

A

B

C

D

E

F

G

H

the manner prescribed by the statute. Those in charge of theaffairs of the Company in failing to register the Company as adealer acted in the honest and genuine belief that the Companywas not a dealer. Granting that they erred, no case for imposingpenalty was made out.”

B. Akbar Badrudin Giwani v. Collector of Customs, 1990 (2)SCC 203, “60. In the present case, the Tribunal has itself specifically statedthat the appellant has acted on the basis of bona fide belief thatthe goods were importable under OGL and that, therefore, theappellant deserves lenient treatment. It is, therefore, to beconsidered whether in the light of this specific finding of theCustoms, Excise & Gold (Control) Appellate Tribunal, the penaltyand fine in lieu of confiscation require to be set aside and quashed.Moreover, the quantum of penalty and fine in lieu of confiscationare extremely harsh, excessive and unreasonable bearing in mindthe bona fides of the appellant, as specifically found by theAppellate Tribunal.

61. We refer in this connection to the decision in Merck Sparesv. Collector of Central Excise & Customs, New Delhi, (1983)13 ELT 1261 (CEGAT), Shama Engine Valves Ltd. v. Collectorof Customs, (1984) 13 ELT 533 (CEGAT), Bombay andMadhusudan Gordhandas & Co. v. Collector of Customs,Bombay (1987) 29 ELT 904, wherein it has been held that inimposing penalty the requisite mens rea has to be established. Ithas also been observed in Hindustan Steel Ltd. v. State ofOrissa, (1969) 2 SCC 627, by this Court that: (SCR HN p. 753)

“The discretion to impose a penalty must be exercisedjudicially. A penalty will ordinarily be imposed in cases wherethe party acts deliberately in defiance of law, or is guilty ofcontumacious or dishonest conduct, or acts in consciousdisregard of its obligation; but not, in cases where there is atechnical or venial breach of the provisions of the Act orwhere the breach flows from a bona fide belief that theoffender is not liable to act in the manner prescribed by thestatute.”

62. In the instant case, even if it is assumed for argument’s sakethat the stone slabs imported for home consumption are marblestill in view of the finding arrived at by the Appellate Tribunalthat the said product was imported on a bona fide belief that itwas not marble, the imposition of such a heavy fine is not at all”warranted and justifiable.

C. Jaiprakash Industries Ltd. v. Commissioner of CentralExcise, Chandigarh, 2003 (1) SCC 67, para 8.

“8.In this case, there was a divergent view of the various HighCourts whether crushing of bigger stones or boulders into smallerpieces amounts to manufacture. In view of the divergent viewsof the various High Courts, there was a bona fide doubt as towhether or not such an activity amounted to manufacture. Thisbeing the position, it cannot be said that merely because theappellants did not take out a licence and did not pay the duty theprovisions of Section 11-A got attracted. There is no evidenceor proof that the licence was not taken out and/or duty not paidon account of any fraud, collusion, wilful misstatement orsuppression of fact. We, therefore, set aside the demand underthe show-cause notice dated 3-5-1993.”

D. In Tecumseh Products India Ltd. v. Commissioner ofCentral Excise, Hyderabad, 2004 (6) SCC 30, it was held as under:

“7. But, insofar as the application of extended period of limitationprovided under Section 11-A is concerned, we do not think thatthe Tribunal is justified because it was not clear as to whether ifany part is used for the purpose of repairing a machinery wouldamount to manufacture. In fact, the Tribunal on a detailedanalysis and after going into several processes carried out by theappellant, came to the conclusion that the stators which wereused in the repairing of the compressors involved manufacturingactivity. This circumstance itself shows that there was bona fidedispute between the parties in regard to the question whetherstators made ready for the purpose of use of compressorsinvolved any manufacturing activity or not. Therefore, to theextent the authorities invoked Section 11-A of the Act and A

B

C

D

E

F

GH

A

imposed penal interest and other penalties shall stand set asideand the order made by the Tribunal stands modified to thatextent.”

E. In J. K. Synthetics Ltd. v. Commercial Taxes Officer, 1994B(4) SCC 276, following observation has been made:

“17. Let us look at the question from a slightly different angle.Section 7(1) enjoins on every dealer that he shall furnishprescribed returns for the prescribed period within the prescribedtime to the assessing authority. By the proviso the time can beextended by not more than 15 days. The requirement of Section7(1) is undoubtedly a statutory requirement. The prescribed returnmust be accompanied by a receipt evidencing the deposit of fullamount of ‘tax due’ in the State Government on the basis of thereturn. That is the requirement of Section 7(2). Section 7(2-A),no doubt, permits payment of tax at shorter intervals but theultimate requirement is deposit of the full amount of ‘tax due’shown in the return. When Section 11-B(a) uses the expression“tax payable under sub-sections (2) and (2-A) of Section 7”, thatmust be understood in the context of the aforesaid expressionsemployed in the two sub-sections. Therefore, the expression ‘taxpayable’ under the said two sub-sections is the full amount oftax due and ‘tax due’ is that amount which becomes due exhypothesi on the turnover and taxable turnover “shown in orbased on the return”. The word ‘payable’ is a descriptive word,which ordinarily means “that which must be paid or is due, ormaybe paid” but its correct meaning can only be determined ifthe context in which it is used is kept in view. The word hasbeen frequently understood to mean that which may, can orshould be paid and is held equivalent to ‘due’. Therefore, theconjoint reading of Sections 7(1), (2) and (2-A) and 11-B of theAct leaves no room for doubt that the expression ‘tax payable’in Section 11-B can only mean the full amount of tax whichbecomes due under sub-sections (2) and (2-A) of the Act whenassessed on the basis of the information regarding turnover andtaxable turnover furnished or shown in the return. Therefore, solong as the assessee pays the tax which according to him is dueon the basis of information supplied in the return filed by him, C

D

E

F

G

H

there would be no default on his part to meet his statutoryobligation under Section 7 of the Act and, therefore, it would bedifficult to hold that the ‘tax payable’ by him ‘is not paid’ to visithim with the liability to pay interest under clause (a) of Section11-B. It would be a different matter if the return is not approvedby the authority, but that is not the case here. It is difficult onthe plain language of the section to hold that the law envisagesthe assessee to predicate the final assessment and expect himto pay the tax on that basis to avoid the liability to pay interest.That would be asking him to do the near impossible.”

F. Kailash Nath Associates v. Delhi Development Authority& Anr., 2015 (4) SCC 136, paras 40 & 43

“40. From the above, it is clear that this Court held that MaulaBux v. Union of India, (1969) 2 SCC 554, was not, on facts, acase that related to earnest money. Consequently, the observationin Maula Bux that forfeiture of earnest money under a contractif reasonable does not fall within Section 74, and would fall withinSection 74 only if earnest money is considered a penalty is noton a matter that directly arose for decision in that case. The lawlaid down by a Bench of five Judges in Fateh Chand v.Balkishan Dass, (1964) 1 SCR 515, is that all stipulationsnaming amounts to be paid in case of breach would be coveredby Section 74. This is because Section 74 cuts across the rulesof the English common law by enacting a uniform principle thatwould apply to all amounts to be paid in case of breach, whetherthey are in the nature of penalty or otherwise. It must not beforgotten that as has been stated above, forfeiture of earnestmoney on the facts in Fateh Chand case was conceded. In thecircumstances, it would therefore be correct to say that asearnest money is an amount to be paid in case of breach ofcontract and named in the contract as such, it would necessarilybe covered by Section 74.”

G. Central Bank of India v. Ravindra & Ors., (2002) 1 SCC367, paras 38, 55

“38. However “penal interest” has to be distinguished from A

B

C

D

EFG

H

A

B

C

D

E

F

G

H

“interest”. Penal interest is an extraordinary liability incurred bya debtor on account of his being a wrongdoer by havingcommitted the wrong of not making the payment when it shouldhave been made, in favour of the person wronged and it is neitherrelated with nor limited to the damages suffered. Thus, whileliability to pay interest is founded on the doctrine of compensation,penal interest is a penalty founded on the doctrine of penal action.Penal interest can be charged only once for one period of defaultand therefore cannot be permitted to be capitalised.

55. During the course of hearing it was brought to our noticethat in view of several usury laws and debt relief laws in forcein several States private moneylending has almost come to anend and needy borrowers by and large depend on bankinginstitutions for financial facilities. Several unhealthy practiceshaving slowly penetrated into prevalence were pointed out.Banking is an organised institution and most of the banks pressinto service long-running documents wherein the borrowers fillin the blanks, at times without caring to read what has beenprovided therein, and bind themselves by the stipulationsarticulated by the best of legal brains. Borrowers other than thosebelonging to the corporate sector, find themselves havingunwittingly fallen into a trap and rendered themselves liable andobliged to pay interest the quantum whereof may at the end proveto be ruinous. At times the interest charged and capitalised ismanifold than the amount actually advanced. Rule of damdupatdoes not apply. Penal interest, service charges and otheroverheads are debited in the account of the borrower andcapitalised of which debits the borrower may not even be aware.If the practice of charging interest on quarterly rests is upheldand given a judicial recognition, unscrupulous banks may resortto charging interest even on monthly rests and capitalising thesame. Statements of accounts supplied by banks to borrowersmany a times do not contain particulars or details of debit entriesand when written in hand are worse than medical prescriptionsputting to test the eyes and wits of the borrowers. Instances ofunscrupulous, unfair and unhealthy dealings can be multipliedthough they cannot be generalised. Suffice it to observe that suchissues shall have to be left open to be adjudicated upon inappropriate cases as and when actually arising for decision and

we cannot venture into laying down law on such issues as donot arise for determination before us. However, we propose toplace on record a few incidental observations, without which, wefeel, our answer will not be complete and that we do as under:

(1) Though interest can be capitalised on the analogy thatthe interest falling due on the accrued date andremaining unpaid, partakes the character of amountadvanced on that date, yet penal interest, which ischarged by way of penalty for non-payment, cannot becapitalised. Further interest i.e. interest on interest,whether simple, compound or penal, cannot be claimedon the amount of penal interest. Penal interest cannotbe capitalised. It will be opposed to public policy.

(2) Novation, that is, a debtor entering into a freshagreement with a creditor undertaking payment ofpreviously borrowed principal amount coupled withinterest by treating the sum total as principal, anycontract express or implied and an expressacknowledgement of accounts, are the best evidence ofcapitalisation. Acquiescence in the method of accountingadopted by the creditor and brought to the knowledgeof the debtor may also enable interest being convertedinto principal. A mere failure to protest is notacquiescence.

(3) The prevalence of banking practice legitimatisesstipulations as to interest on periodical rests and theircapitalisation being incorporated in contracts. Suchstipulations incorporated in contracts voluntarily enteredinto and binding on the parties shall govern thesubstantive rights and obligations of the parties as torecovery and payment of interest.

(4) Capitalisation method is founded on the principle that theborrower failed to make payment though he could havemade and thereby rendered himself a defaulter. To holdan amount debited to the account of the borrowercapitalised it should appear that the borrower had anopportunity of making the payment on the date of entryor within a reasonable time or period of grace from the A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

date of debit entry or the amount falling due and therebyavoiding capitalisation. Any debit entry in the accountof the borrower and claimed to have been capitalisedso as to form an amalgam of the principal sum may beexcluded on being shown to the satisfaction of the courtthat such debit entry was not brought to the notice ofthe borrower and/or he did not have the opportunity ofmaking payment before capitalisation and therebyexcluding its capitalisation.

(5) The power conferred by Sections 21 and 35-A of theBanking Regulation Act, 1949 is coupled with duty toact. The Reserve Bank of India is the prime bankinginstitution of the country entrusted with a supervisoryrole over banking and conferred with the authority ofissuing binding directions, having statutory force, in theinterest of the public in general and preventing bankingaffairs from deterioration and prejudice as also to securethe proper management of any banking companygenerally. The Reserve Bank of India is one of thewatchdogs of finance and economy of the nation. It is,and it ought to be, aware of all relevant factors, includingcredit conditions as prevailing, which would invite itspolicy decisions. RBI has been issuing directions/circulars from time to time which, inter alia, deal withthe rate of interest which can be charged and the periodsat the end of which rests can be struck down, interestcalculated thereon and charged and capitalised. It shouldcontinue to issue such directives. Its circulars shall bindthose who fall within the net of such directives. For suchtransaction which are not squarely governed by suchcirculars, the RBI directives may be treated as standardsfor the purpose of deciding whether the interest chargedis excessive, usurious or opposed to public policy.

(6) Agricultural borrowings are to be treated on a pedestaldifferent from others. Charging and capitalisation ofinterest on agricultural loans cannot be permitted in Indiaexcept on annual or six-monthly rests depending on therotation of crops in the area to which the agriculturistborrowers belong.

(7) Any interest charged and/or capitalised in violation ofRBI directives, as to rate of interest, or as to periods atwhich rests can be arrived at, shall be disallowed and/or excluded from capital sum and be treated only asinterest and dealt with accordingly.

(8) Award of interest pendente lite and post-decree isdiscretionary with the court as it is essentially governedby Section 34 CPC dehors the contract between theparties.In a given case if the court finds that in theprincipal sum adjudged on the date of the suit thecomponent of interest is disproportionate with thecomponent of the principal sum actually advanced thecourt may exercise its discretion in awarding interestpendente lite and post-decree interest at a lower rateor may even decline awarding such interest. Thediscretion shall be exercised fairly, judiciously and forreasons and not in an arbitrary or fanciful manner.”

188. Before considering the applicability of the decisions above,the factual gamut of the case has to be considered. The demand wasraised for the first time in the year 2003 despite the fact that thedefinition of gross revenue was clear, and as is apparent from thecorrespondence and the agreement reached between the parties, therewas no doubt what constitutes gross revenue. Licensees were awarethat these items concerning which they have raised the dispute wereincluded in the definition of gross revenue, as such, they had initiallyquestioned inclusion on the basis of the validity of the definition of grossrevenue. The challenge was found to be sans any basis by this Court.The objections raised concerning the validity of the gross revenue, werewholly unsustainable and on the face of it, were liable to be rejected,and came to be rejected finally and conclusively by this Court in theyear 2011. After that, again the objections have been repeated toexclude those very revenue items which were held to be included onceover an effort has been made to get rid of the definition of grossrevenue. The objections which have been raised pertained to thedefinition of gross revenue for which the court held they are part ofrevenue. Now, relying upon AS-9 standards, an attempt has been madeby an indirect method for excluding items, which are expressly includedin the definition of gross revenue. Objections are too tenuous, and, as A

BCD

EFG

H

Aa matter of fact, there was no scope to raise such objections in 2003itself. Because of the various correspondence which has been referred,it becomes apparent that all these heads are included in the definitionof gross revenue, and there is no justification for the licensees to raisethe objections and to keep them pending for over two decades.

B

189. Further, the conduct of the licensees has also to beconsidered in the backdrop of the fact that the regime of revenue sharingwas extremely beneficial than the previous regime of the fixed licencefee, and they have tremendously benefited by it as is apparent fromthe statistics of the revenue earned by the licensees under the revenueCsharing regime. When Government has parted with the privilege as torevenue on sharing basis under the license, and an agreement enteredinto, it ought to have been precisely followed. The conduct of thelicensees was highly unfair, and anyhow and somehow, they hadattempted to delay the payment. It passes comprehension how theyhave contended that the demand has to be worked out after this CourtDrenders the decision. Demand had been raised way-back in the year2003, which is ultimately the subject-matter of the lis. As the objectionsare baseless and wholly untenable, it cannot be said that there was abona fide dispute concerning various items. The disputes raised couldnot be termed to be bona fide at all. They were justified in order toEdelay the liability and the payment in accordance with the agreement.In this backdrop and what has been held by us, we have to considerwhether the interest, penalty, and interest on penalty can be levied ornot. Particularly since it is the revenue sharing regime and theGovernment has been deprived of the benefit of revenue which it wouldFhave earned but for granting the privilege which it has parted with infavour of the licensees.

190. In M/s. Everest Industrial Corporation & Ors. v. GujaratState Financial Corporation, (1987) 3 SCC 597, this Court held thatthe rate of interest payable on the principal amount due under the court’sGorder passed under section 32 of the State Financial Corporations Act,1951 would be as stipulated in the contract as the provisions of section34 CPC are not attracted, order under section 32 being not a decree,liability to pay contractual rate of interest cannot be disowned, merelybecause of absence of direction for payment of interest in order underHsection 32. This Court has held:

“6. If as held by this Court the proceeding instituted under Section31(1) of the Act is something akin to an application forattachment of property in execution of a decree at a stageposterior to the passing of the decree no question of passing anyorder under Section 34 of the Code would arise since Section34 of the Code would be applicable only at the stage of thepassing of the decree and not to any stage posterior to thedecree. It may also be mentioned here that even under the Codethe question of interest payable in mortgage suits filed in civilcourts is governed by Order 34 Rule 11 of the Code and not bySection 34 of the Code which may be applicable only to casesof personal decrees passed under Order 34 Rule 6 of the Code.The High Court was right in holding that interest would be payableon the principal amount due in accordance with the terms of theagreement between the parties till the entire amount due waspaid as per the order passed under Section 32 of the Act. Wehold that the decision of the Karnataka High Court, referred toabove, which has applied Section 34 of the Code to a proceedinginstituted under Section 31(1) of the Act is not correctly decided.”

191. In Punjab Financial Corporation v. Surya AutoIndustries, (2010) 1 SCC 297, the Court held that when the terms ofthe agreement have not been questioned, contractual rate of interestcannot be altered. The Court has observed thus:

“25. The High Court also committed serious error in declaringthat the appellant Corporation will be entitled to charge simpleinterest at the rate of 10% w.e.f. 1-4-2003 i.e. after the expiryof six months from the date of taking over of the unit.Undisputedly, the respondent had not challenged the terms of loanagreement. Therefore, the High Court could not have suo motualtered the terms of agreement and directed the appellant tomake fresh calculation of the outstanding dues and allowed therespondent to pay the amount as per fresh demand by sellingthe mortgaged property.This approach of the High Court is exfacie contrary to the law laid down in U.P. Financial Corpn. v.Gem Cap (India) (P) Ltd., (1993) 2 SCC 299 and HaryanaFinancial Corpn. v. Jagdamba Oil Mills (2002) 3 SCC 496.”

A

B

C

D

E

F

G

H

A192. In Hindustan Steel Ltd. v. State of Orissa (supra), reliedon by licensees the matter was of imposition of penalty in a quasi-criminal proceeding that penalty will not ordinarily be imposed unlessthe party obliged either acted deliberately in defiance of law or wasguilty of conduct – contumacious or dishonest, or acted in consciousdisregard of its obligation. Penalty to be imposed is exercised by judicialBdiscretion. The ratio of the case, it is not attracted for the reason thatin the instant matter, it is the contractual rate of interest and penaltyagreed to which cannot be said to be arduous in any manner. The rateof interest has been agreed to and particularly since it is a revenue-sharing regime, and the licensees have acted in conscious disregard ofCtheir obligation. Thus, on the anvil of the decision above also, they areliable to pay the dues with interest and penalty. There is no discretionto vary the penalty. It is 50% of the amount which is in short-fall whichcannot be said to be unreasonable and that too, two grace periods havebeen given in clause 20.8 to make payment of the same. As it is theagreed term and cannot be said to be arbitrary, the ratio of the decisionDis not attracted. Reliance has also been placed on Akbar BadrudinGiwani v. Collector of Customs (supra), wherein the dispute was bonafide. It was a case of exercise of power by the tribunal while imposinga penalty and fine instead of confiscation. There is no such discretionavailable when the parties have agreed in default what amount is to beEpaid. It automatically follows that it is not to be determined by licensoronce over again. Parties (licensor and licensees) are bound by the termsand conditions of the contract. There is no enabling clause to vary eitherthe rate of interest or the penalty provided therein and even if permissibleit is not called for to vary interest or penalty fixed under the agreementin the facts and circumstances of the case. The decision mentionedFabove was concerning discretion to impose the penalty. Here, there isno such discretion, and considering the conduct of conscious disregard,the decision rather negates the submission than espousing the same.

193. Reliance has been placed on J.K. Industries Ltd. & Anr.v. Union of India & Ors., (supra) and Tecumseh Products India Ltd.G(supra). In both the cases, duty was not paid under the provisions ofsection 11-A. There were divergent views of the High Courts. It wasnot found to be a case of fraud, collusion, wilful misstatement, orsuppression of facts. Thus, the action of the imposing penal interestunder section 11A and other penalties were set aside as there was aHbona fide dispute. In the present case, there is no bona fide dispute,

and it is not appropriate to vary the interest or the penalty. That has tobe worked out from 2003 and not after the decision to be passed bythis Court. Facts in J K Synthetics Ltd. (supra) were different. In thatcase, the assessee had paid the tax based on information supplied byhim in the return. Thus, it was held that it would not be proper to levyinterest under clause (a) of section 11B. In the instant case, the demandhad been raised by the licensor, and after that, untenable objections havebeen raised which had no foundational basis, and the licensees havetaken inconsistent stands. Earlier they had questioned on the groundthat these items were wrongly included in the definition, now they arecontending that the same are not part of the definition in agreement.

194. Reference has also been made to the decision in KailashNath Associates (supra). In that case, there was forfeiture of earnestmoney. The factual matrix of the instant case is different. The casewas dealing with the court’s power to grant reasonable compensationwhen the amount fixed in the contract is like a penalty; only reasonablecompensation can be awarded. Whether or not actual damage or lossis proved, has to be considered. It is only in cases where it is possibleto prove actual damage or loss, such proof is not to be dispensed. It isonly in cases where damage or loss is difficult or impossible to provethat the liquidated amount named in the contract can be awarded. Inthe instant case, it is quite reasonable amount of the penalty in case ofdefault in payment of the amount. The term cannot be said to beunconscionable. As the Government has been deprived of the revenueand the licensees have been benefited by revenue sharing regime, inspite of that, they have not shared the revenue. They are bound by thestipulation, which is found to be quite reasonable in the facts andcircumstances of the case.

195. In Central Bank of India v. Ravindra, (supra), this Courtconsidered the question of award of payment of interest and has heldthat there is nothing wrong with the party voluntarily entering into thetransaction as to stipulation, for payment of compound interest ,atreasonable rates and authorising the creditors to capitalise the amounton the amount remaining unpaid so as to enable interest to be chargedon the accrued rate on the interest component of the capitalised sumfor the succeeding period. Interest, once capitalised, sheds its colourof interest and becomes a part of the principal to become a debt ashas been observed thus:

AB

C

D

EF

G

H

A

B

C

D

E

F

G

H

“36.The English decisions and the decisions of this Court andalmost all the High Courts of the country have noticed and-approved longestablished banking practice of charging interestat reasonable rates on periodical rests and capitalising the sameon remaining unpaid. Such a practice is prevalent and alsorecognised in non-banking moneylending transactions. Thelegislature has stepped in from time to time to relieve the debtorsfrom hardship whenever it has found the practice of chargingcompound interest and its capitalisation to be oppressive andhence needing to be curbed. The practice is permissible, legaland judicially upheld excepting when superseded by legislation.There is nothing wrong in the parties voluntarily entering intotransactions, evidenced by deeds incorporating covenant orstipulation for payment of compound interest at reasonable rates,and authorising the creditor to capitalise the interest on remainingunpaid so as to enable interest being charged at the agreed rateon the interest component of the capitalised sum for thesucceeding period. Interest once capitalised, sheds its colour ofbeing interest and becomes a part of the principal to bind thedebtor/borrower.

44. We are of the opinion that the meaning assigned to theexpression “the principal sum adjudged” should continue to beassigned to “principal sum” at such other places in Section 34(1)where the expression has been used qualified by the adjective“such”, that is to say, as “such principal sum”. Recognition ofthe method of capitalisation of interest to make it a part of theprincipal consistently with the contract between the parties orestablished banking practice does not offend the sense of reason,justice and equity. As we have noticed, such a system has a long-established practice and a series of judicial precedents upholdingthe same. Secondly, the underlying principle as noticed in severaldecided cases is that when interest is debited to the account ofthe borrower on periodical rests, it is debited because of it havingfallen due on that day. Nothing prevents the borrower from payingthe amount of interest on the date it falls due. If the amount ofinterest is paid there will be no occasion for capitalising theamount of interest and converting it into principal. If the interestis not paid on the date due, from that date the creditor is deprivedof the use of the money, and which it would have made if the

debtor had paid the amount of interest on the date due, thecreditor needs to be compensated for deprivation. As held inPazhaniappa Mudaliar v. Narayana Ayyar, AIR 143 Mad 157,the fact situation is analogous to one as if the creditor hasadvanced money to the borrower equivalent to the amount ofinterest debited. We are, therefore, of the opinion that theexpression “the principal sum adjudged” may include the amountof interest, charged on periodical rests, and capitalised with theprincipal sum actually advanced, so as to become an amalgamof principal in such cases where it is permissible or obligatoryfor the court to hold so. Where the principal sum (on the date ofsuit) has been so adjudged, the same shall be treated as “principalsum” for the purpose of “such principal sum” — the expressionemployed later in Section 34 CPC. The expression “principal sum”cannot be given different meanings at different places in thelanguage of same section, i.e. Section 34 CPC.

(emphasis supplied)”

196. Concerning penal interest, this Court in Central Bank ofIndia v. Ravindra (supra) has observed that the penalty is founded onthe doctrine of penal action. Penal interest can be charged only oncefor one period of default, and therefore cannot be permitted to becapitalised.

“55. (1) Though interest can be capitalised on the analogy thatthe interest falling due on the accrued date and remaining unpaid,partakes the character of amount advanced on that date, yetpenal interest, which is charged by way of penalty for non-payment, cannot be capitalised. Further interest i.e. interest oninterest, whether simple, compound or penal, cannot be claimedon the amount of penal interest. Penal interest cannot becapitalised. It will be opposed to public policy.”

197. It is not levy of penal interest, which is involved in the instantcase. Thus, based on the decision mentioned above, we find that whenthere is contractual stipulation, the interest can be levied andcompounded.

198. Resultantly, we are of the considered opinion that interestand penalty have rightly been levied. Once an amount of shortfall hasnot been paid, it has to carry 50% of the penalty on defaulted amount, A

B

C

D

E

F

G

H

Aas agreed. Thus, we find no substance in the submission that interest,penalty, and interest on penalty cannot be realised. It is as per theagreement. In the facts and circumstances, we find no ground to reducethe same, considering the nature of untenable objections raised on behalfof the licensees, which were in fact either barred by res judicata orconstructive res judicata but as this Court had remitted the matter toBTDSAT to find that demand was based on proper interpretation oflicence. Matter was remitted after giving finding on inclusion of thevarious heads in the definition of gross revenue. Even as per the caseof licensees they were not validly included in definition, now reprobatingthat, stand has been taken that they did not form part of revenue whichCis not permissible. No litigant can be permitted to reap fruits on suchinconsistent and untenable stands and litigate for decades in severalrounds which is not so uncommon but is disturbing scenario projectedin very many cases. We have examined the matter upon merits andthen aforesaid conclusion indicates frivolous nature of objections.

D199. In the result, the appeals of licensees are dismissed and filedby DOT, are accordingly allowed in view of the findings recorded.

200. No order as to costs.

Divya PandeyE

Appeals disposed of.

F

G

H