UNION OF INDIA versus ASSOCIATION OF UNIFIED TELECOM SERVICE PROVIDERS OF INDIA ETC.ETC.
[2019] 16 S.C.R. 672, Supreme Court of India, 2019
Outcome: Disposed off
Segment: Ratio
acceptance on its part of its liability to pay especially
when it was only upon such payment that it could be permitted
to avail of the migration package. Allowing the appellant at this
stage to question the demand raised under the migration package
would amount to permitting the appellant to accept what was
favourable to it and reject what was not. The appellant cannot
approbate and reprobate.
23. The maxim qui approbat non reprobat (one who approbates
cannot reprobate) is firmly embodied in English common law and
often applied by courts in this country. It is akin to the doctrine
of benefits and burdens which at its most basic level provides
that a person taking advantage under an instrument which both
grants a benefit and imposes a burden cannot take the former
without complying with the latter. A person cannot approbate and
reprobate or accept and reject the same instrument.
UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM
SERVICE PROVIDERS OF INDIA [ARUN MISHRA, J.]
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28. For the reasons set out by us hereinabove, we have no
hesitation in holding that the appellant was not entitled to question
the terms of the migration package after unconditionally accepting
and acting upon the same.”
90. After the introduction of the migration package policy, 1999,
there is an exponential growth of the telecom sector. In Bharti Cellular
Ltd. v. Union of India, 2010 (10) SCC 174, this Court held that
acceptance of benefits under the package precluded them from
questioning the terms of the same. The Court observed:
“8. There is, in our opinion, no legal infirmity in the view taken
by the Tribunal. Once the appellant-petitioner had specifically and
unconditionally agreed to accept the migration package and given
up all disputes relating to licence agreement for the period up to
31-7-1999, it was not open to it to turn around and agitate any
such dispute after availing of the migration package. A party
which has unconditionally accepted the package cannot after such
acceptance reject the conditions subject to which the benefits
were extended to it under the package. It cannot reject what is
inconvenient and onerous while accepting what is beneficial to
its interests. The package having been offered subject to the
conditions that all disputes relating to the licence agreement for
the period ending 31-7-1999 shall stand abandoned by the
operators, there was no room for going back on that
representation.”
(emphasis supplied)
91. The terms and conditions cannot be said to be oppressive as
submitted on behalf of the licensees on the strength of Central Inland
Water Transport Corporation v. Brojo Nath Ganguly, 1986 (3) SCC
156, it cannot be said that DOT was in a dominant position, or
possessed wholly disproportionate and unequal bargaining power. In the
matter of commercial contracts, the doctrine of unconscionable
bargaining is not applicable as held with respect to migration package
in 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 appellant-petitioner had specifically and
unconditionally agreed to accept the migration package and given
up all disputes relating to licence agreement for the period up to
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31-7-1999, it was not open to it to turn around and agitate any
such dispute after availing of the migration package. A party
which has unconditionally accepted the package cannot after such
acceptance reject the conditions subject to which the benefits
were extended to it under the package. It cannot reject what is
inconvenient and onerous while accepting what is beneficial to
its interests. The package having been offered subject to the
conditions that all disputes relating to the licence agreement for
the period ending 31-7-1999 shall stand abandoned by the
operators, there was no room for going back on that
representation.”
(emphasis supplied)
92. Once benefit has been drawn, the licensees cannot deny
validity or binding effect of contract.  In Cauvery Coffee Traders,
Mangalore v. Hornor Resources (International) Co. Ltd., (2011) 10
SCC 420) it was observed:
“A party cannot be permitted to “blow hot and cold”, “fast and
loose” or “approbate and reprobate”. Where one knowingly
accepts the benefits of a contract or conveyance or an order, is
estopped to deny the validity or binding effect on him of such
contract or conveyance or order. This rule is applied to do equity,
however, it must not be applied in a manner as to violate the
principles of right and good conscience.”
93. In R.N. Gosain v. Yashpal Dhir, AIR 1993 SC 352, it was
held:
“10. Law does not permit a person to both approbate and
reprobate. This principle is based on the doctrine of election
which
postulates that no party can accept and reject the same instrument
and that ‘a person cannot say at one time that a transaction is
valid and thereby obtain some advantage, to which he could only
be entitled on the footing that it is valid, and then turn round and
say it is void for the purpose of securing some other advantage’.”
94. Submissions have been raised in respect of various revenue
heads not being revenue cannot be included within the purview of gross
revenue. We propose to deal with each of them under separate heads.
UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM
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In re: Discount and Commissions:
95. The Tribunal has dealt with discounts, and commissions under
3 heads : (i)  discounts allowed on international roaming; (ii) commission
and discount allowed to distributors on sale of pre-paid vouchers; (iii)
goodwill waiver, discount and rebates.
96. The Tribunal held with respect to discounts allowed on
international roaming that if the discounts are in the form of reduced
billing and the amount booked in the profit and loss account is on the
basis of the invoices raised and no deduction was shown on account
of discount, no addition may be made in the same on the ground that
the billing was on a discounted price. The tribunal has further held that
if the amount billed is for a higher amount and the discount is in the
form of volume discount given separately, the billed amount should be
taken as revenue, and the discount may be treated as an expense which
is not open to deduction under clause 19.1. A credit note given after
the billing may also be treated as an expense. If the revenue booked in
the profit and loss account shows netting off on account of any discount,
the amount netted off may also be added up for computation of gross
revenue.
97. The tribunal has adopted two different criteria concerning
discounts on international roaming. With respect to commission and
discount allowed to distributors on sale of pre-paid vouchers, the tribunal
has 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 profit
and loss account is after netting off the discount. On the other hand, if
the sale is on a stated/agreed price, invoiced at that agreed price and
booked under the revenue in the profit and loss account accordingly,
without netting off any discount, then the actual selling price would be
the revenue and the difference  between the MRP and this selling price
cannot be added to gross revenue.
98. Concerning goodwill waiver, discount, and rebates, the tribunal
has held that under clause 19.1, the items shall form part of gross
revenue without netting off any expenses. The case of licensees on
this score has not been accepted. In the case of wrong billing and its
revision, the correct differential amount cannot be taken as part of gross
revenue.
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99. It has been urged on behalf of licensees that the discounts
are not like expenses. The treatment of discount as expenditure is
contrary to the fundamental principle of accounting. Expenses are
always in the form of outflow of cash. In the telecom sector, discounts
are given to the customers to get the advantage of the much lesser
amount. 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 per
binding and mandatory principle of AS-9, the ICAI has declared
discounts, rebates, deductions, lesser realisation of cost price are not
to be treated as an expenditure. It is further submitted that an agreement
between the parties determines the revenue arising on a transaction. It
is measured at the fair value of the consideration received or receivable
considering the amount of consideration. The amount of any discount
or volume-based discount and volume rebates are not considered as
revenue.
101. It is further submitted that the licensees have been given
the discount that is transparently reflected in its invoice. The appellant
only receives the discounted amount, which is the realised revenue or
the cash inflow in their hands. The licence fee is paid on this realised
amount.
102. It is further submitted that the licensees gives “trade
discounts” and “subscriber’s discount,” and both are exempted from
recognition as revenue for
the reason that firstly as per AS-9, trade
discounts are not included within the definition of revenue since they
represent a reduction of cost. Guidance Note 5 on terms used in financial
statements verifies that the trade discount is a reduction granted by a
supplier from the list price of goods or services and the DOT in para
47 of the affidavit dated 11.7.2003 has mentioned that trade discounts
shown in the invoice should not be included in gross revenue. These
discounts are transparently reflected in the invoice raised on the
distributor.
103. Concerning the “subscriber’s discount,” it is submitted on
behalf of the licensees that these discounts offered to the customers
or subscribers are part of the tariff plan. Subscriber has a choice of
different rental plans offered by the appellants, where certain discounts
are offered by way of some free minutes/calls/SMS/VAS/value. Once
a subscriber selects a plan, he is entering into a contract with the
UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM
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operator, is entitled to services and discounts, as indicated in the plan.
Usually, these are in the form of free calls or additional data, and no
revenue is collectible. Hence it cannot be taken into account for
determining licence fee. DOT is asking for licence fee on the notional
revenue for these free calls/SMS/VAS minutes/data when the appellants
collect no amount on this account. These amounts of discounts are
transparently reflected in the invoice raised on the subscriber as
memorandum.
104. It is further submitted on behalf of the licensees that services
are offered by the licensees and not goods. For payment of service
tax, the licensees consider the gross amount charged as derived and
mandated under section 67 of the Service Tax Act, 1994, which includes
only 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 service
tax liability is only concerning the discounted price so received by the
Cellular companies. The licensees frequently offer discounts as they
are used as competitive tools to increase business in the long run. Those
were inevitable as there were 8 to 10 operators operating in the same
geography, and the licensees had to match highly competitive prices
offered, especially by new entrants. Discounts help to survive and grow
business and increase revenue, which is to the advantage of DOT.
105. On behalf of the DOT, it has
been submitted that discounts
over and above the agreed charges are part of the overall commercial
strategy 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 the
revenue as expenses are not permitted to be netted off, such amounts
form part of revenue; otherwise, it would lead to accounting jugglery,
which is very consciously avoided by purposefully drafting the AGR
definition in “inclusive” terms. Otherwise, the discounts may be used
by the company to reduce its costs, and the profitability of the company
may remain unaffected, but the gross revenue for the computation of
AGR may be reduced. As the company may make contracts with
distributors and provide them with huge discounts in the form of reduced
billing. To say this (i), the company may make contracts with the
distributors to sell pre-paid vouchers of Rs.100 for Rs.70. Against the
discount, the company may make with the distributors further agreement
reducing the company’s cost, such as the supply of contractual
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workforce, the printing of paper vouchers, etc. Thus, it would cause
evade of the licence fee without affecting the profitability of the
company. The commissions thus form part of the income. The
commission is nothing but “expenses” for growth in the business of the
licensees, it cannot be netted off while computing the gross revenue.
The finding, to the extent it is contrary, recorded by TDSAT is
derogatory to the contractual definition of gross revenue. DOT also
submits that the question of discount was raised earlier in the order
dated 30.8.2007 by TDSAT. This Court did not accept it; as such, it is
barred by res judicata and the question as to discount on international
roaming, and questions as to other discounts, were not raised before
TDSAT. As such, these objections concerning discounts allowed to
distributors on sale of pre-paid vouchers are barred by the principle of
constructive res judicata.
106. When we consider the rival submissions it has been
mentioned in the communication dated 26.7.2001 that the interest
income, dividend income, value of rebates, discounts, free calls, and
reimbursement from the USO funds have to be included in the adjusted
gross revenue. Consequently, a prayer was made to set aside the
communication dated 26.7.2001 in Petition No.7 of 2003.  Prayer has
not been granted on the ground that the Government has not accepted
the recommendations of TRAI and the decision of the Government is
final, binding and conclusive as has
been held by this Court in AUSPI
(2011).  Finding has been recorded that parties have agreed to aforesaid
position as reflected in communication dated 26.7.2001.
107. When we ponder on the definition of “gross revenue” in
clause 19.1 of the licence agreement, it is apparent that the gross
revenue has to be taken into consideration without any set-off for
related items of expense.  Thus, the gross amount, as per the definition,
is the gross revenue, without set-off, is to be taken into consideration
including the discounts given. Parties understood right from the beginning
that the gross revenue does not exclude discounts, commissions, rebate
etc. and specific challenge made to the same had not been accepted
in 2011. Now once again by the circuitous method, impermissible attempt
has been made to re-write the definition of gross revenue. The definition
of ‘gross revenue’ is independent of AS-9 as the definition of revenue
in AS-9 cannot govern the definition in Clause 19.1 of the licence
agreement. What has been defined in AS-9 is revenue, whereas, for a
UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM
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licence fee, gross revenue is the revenue. It would be greatest fallacy
to say that while gross revenue has been defined in Clause 19.1 of
agreement, revenue has not been defined in the licence agreement.
What has been defined as gross revenue is in fact broader definition
of revenue and has to be taken as definition of revenue for licence
agreement.  An attempt has made to wriggle out of the rigour of the
definition of gross revenue by banking upon the definition of revenue
in AS-9 is to scuttle the effect of the previous decision in Union of
India v. AUSPI (2011). Gross revenue as defined in agreement cannot
be diluted in any manner whatsoever based on the submission mentioned
above, as AS-9 is only for method of accounting and specific definition
of revenue i.e., gross revenue under the licence agreement has to
prevail. In our considered opinion, ‘gross revenue’ is the revenue has
been held in 2011 judgment finding is binding on parties for determination
of license fees under the licence agreement and the definition of revenue
in AS-9 cannot govern. Reliance upon the affidavit filed on behalf of
DOT is wholly misconceived. What is the meaning of the definition of
gross 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 is
misconceived one on in-depth scrutiny.
108. The
submission was raised on behalf of the licensees relying
upon J.K. Industries (supra) that fair value has to be taken into
consideration to reduce discounts etc.  The concept of fair value is not
the basis of Accounting Standard-9. Fair value is the operating concept
of IND AS-18. In AS-9, revenue recognition is at nominal value and
that the fundamental difference between the two accounting standards.
Thus, the nominal value has to be taken as the one which is relevant
for AS-9. Under the AS-9 regime, the revenue recognition shall be
measured as the gross inflow of cash, receivables, or other consideration
received. There is no concept of fair valuation under AS-9.
109. With the advent of modern technology, the mode of business
transactions has changed. The number of online purchases and sales
has been continually growing, and the techniques to retain clients online
are being utilised. Unlike sales promotion schemes in the case of off-
line transactions, the online transactions of sales carry cash back
rewards, discount coupons, and reward points. The incentives may
include cash coupons, discount coupons, cash discounts, cash-back and
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credit points, etc. The various incentives affect the amount of revenue
to be recognised. Under IND AS-18 Revenue or IND AS-115, Revenue
from Contracts with Customers states that revenue shall be measured
at the fair value of the consideration received or receivable after taking
into account the number of various incentives provided to the customers.
110. Reliance has been placed on Union of India v. Bombay
Tyres International Pvt. Ltd., (2005) 3 SCC 787, wherein this Court
has observed that trade discount should be allowed to be deducted from
the sale price. The decision is in the context of the Central Excise &
Salt Act, 1944. The decision has no relevance to consider the concept
of gross revenue under the licence agreement. Reliance has also been
placed on the decision of this Court in Deputy Commissioner of Sales
Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s. Advani
Oorlikon (P) Ltd., (1980) 1 SCC 360, in which this Court considered
the question of taxable turnover and the concept of sale price under
the Sales Tax Act. It was held that the trade discount on catalogue
price allowed by the wholesaler to the retailer is not includible in the
taxable turnover. Trade discount is distinct from cash discount. A cash
discount is a discount granted in consideration of prompt payment. A
trade discount is a deduction from the catalogue price of goods allowed
by wholesalers to retailers engaged in the trade. Reliance has also been
placed on the decision
of Delhi High Court in M/s. United Exports v.
Commissioner of Income Tax, Delhi (2009) SCC Online Del 2566
rendered in the context of the provisions of section 40-A(2)(b) of the
Income-tax Act, 1961. Certain trade discount was given. The High Court
held that the provision pertained to disallowance to an expenditure, an
amount spent by the assessee as an expenditure. For that, actual
payment must be made. There has to be an expenditure incurred before
the provision can be said to be applicable. Trade discount was held not
to be an expenditure as it is incurred for which allowance could have
been claimed under section 40(A)(2). Above mentioned decisions are
wholly inapplicable, given the definition of gross revenue and have been
rendered 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 for
consideration was the discount on qualifying for deduction under Rule
9(a) of 1963 Rules. The trade discount was given for dealers on
achieving a pre-set sales target. It was held that for the discount on
UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM
SERVICE PROVIDERS OF INDIA [ARUN MISHRA, J.]
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qualifying for deduction under Rule 9(a) of the said Rules must be shown
in invoice, itself and that it would not be good enough to show it
employing a credit note issued after the sale. The decision is on the
method of computation when discount can be allowed on sales-tax and
VAT under the Kerala General Sales Tax Rules, 1963, and has no
relevance. In Commissioner of Central Excise, Madras v. Addison
& Co. Ltd., (2016) 10 SCC 56, the question of turnover discount came
up for consideration under section 11-B of the Central Excise Act, 1944.
It was held that trade discounts should not be disallowed because they
are not payable at the time of each invoice or deducted from the invoice
price.  In Southern Motors v. State of Karnataka & Ors., (2017) 3
SCC 467, a question arose of trade discount given post-issuance of tax/
sale invoice, a deduction from the sale price for computing taxable
turnover when the discount was not reflected in the tax invoice or bill
of 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 Tax
Rules, 2005. Yet in Maya Appliances Pvt. Ltd. v. Additional
Commissioner of Commercial Taxes & Ors., (2018) 2 SCC 756 has
also been relied upon where the question of computation of taxable
turnover came up for consideration in the context of Karnataka Value
Added Tax Act, 2003, with respect to all regular trade discounts and
they
are allowable as permissible deductions, if proper proof is shown.
112. The decisions have no relevance having been rendered under
the provisions of different statutes and for construing the definition of
gross revenue under the licence agreement, which has to prevail.
113. Reliance has been placed on service tax Circular dated
13.10.1997, which provides that service tax liability is only in respect
of the discounted price so received by the Cellular companies. The
question of service tax liability has no relevance for determination of
licence fee for which definition has been worked out by the Government
of India, which has been agreed to by the licensees also as that was
beneficial to them as compared to the fixed fee regime which prevailed
earlier. They have switched over to the new regime of sharing the
revenue earned by them on a percentage basis. The definition of gross
revenue has the purpose behind it and was the outcome of prolonged
exercise and has already been upheld, and the question cannot be
reopened once over again by an indirect method.
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114. The trade discounts cannot be deducted from the gross
revenue merely on the ground that they represent a reduction of cost.
The reliance by the licensees on the Guidance Note filed that discounts
are reduction granted by a supplier from the list price of goods or
services is of no avail owing to the definition of the gross revenue. Set
off of trade discounts is not permissible under Clause 19.1 of agreement
against revenue as expenses are not permitted to be netted up.
115. Concerning cash discount, it is apparent that cash discount
may be used in various methods. It is an incentive for customers. The
customer makes payment after deducting amount of cash discount, if
eligible for availing of the same as per the agreement between the entity
and the customer. Under AS-9, revenue is recognised at the gross
amount and cash discount is regarded as an expense when the seller
receives 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 Z
pays within 50 days, a cash discount of 10% shall be provided by A. It
is reasonably sure that Z to pay the amount within 15 days. In the AS
regime, the revenue has to be recorded at Rs.1000, and when Z pays
Rs.900, the amount of cash discount of Rs.100 will be recognised as
an expense. That is the effect of the revenue to be recognised as a
gross amount under AS-9. Concerning the volume-based discount, under
the AS-9 regime, revenue is
recognised at the gross amount received
or receivable from the customers. However, the value of trade discounts
and volume rebates received cannot be deducted from the gross revenue
owing to the definition in clause 19.1. The subscriber’s discount can
also be in the form of free calls, some free minutes SMS value.
116. DOT has rightly asked for the licence fee on the notional
revenue of free calls, SMS, VAS minutes/data. When these amounts
admittedly are reflected in the invoice raised on the subscriber as
memorandum, it is the gross revenue. It forms part of the gross revenue
and cannot be deducted. That is what was intended by carving out the
definition to make it free from litigation and accounting jugglery and to
free determination of licence fee from the clutches of accounting
jugglery.
117. The discounts allowed on international roaming, commission,
and discount allowed to distributors on sale of pre-paid vouchers form
part of the gross revenue and cannot be deducted by placing reliance
on the definition of revenue and certain notes of AS-9 standards;
whereas they are explicitly included in the definition of gross revenue.
UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM
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118. As to pre-paid options, the format of statement of revenue
and licence fee contained in Appendix II to Annexure-II provides in
the case of pre-paid options, sale of pre-paid SIM cards including full
value of components charged therein.  Revenue from mobile community
phone service including full value of all components charged therein
has to be considered, revenue from franchisees/re-sellers including all
commissions and discounts, etc. have to form part of the gross revenue.
How the parties have understood and agreed to pay the gross revenue
is apparent from the correspondence and letter dated 22.7.2001 and
the ultimate definition mentioned in the licence agreement Clause 19.1
and rejection of TRAI’s recommendations by the Government.
119. The TDSAT has erred in holding that if the discounts are in
the 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 and
above the agreed charges are part of overall commercial strategy to
enhance the business, and hence, these discounts are like expenses.
Expenses are not permitted to be net off under clause 19.1 from the
gross revenue under the licence agreement. Similarly, the TDSAT has
erred in holding and giving a finding concerning commission and
discounts if the invoice is at a discounted price, which is at Rs.90
instead
of Rs.100. For the same reason, the finding of TDSAT is not sustainable.
120. The TDSAT has rejected the case of the licensees. Where
the bill is for a higher amount and the discount is in the form of volume
discount given separately, the billed amount should be taken as the
revenue, and the discount may be treated as an expense. That part of
the finding is not disturbed. However, for all discounts and commissions
allowed on international roaming, and to distributors on sale of pre-paid
vouchers, trade discounts, subscribers’ discounts, and volume rebates
form part of gross revenue.
121. It has also been submitted on behalf of the licensees that
offering discounts is frequently used to increase business in the long
run/term. These are inevitable as there were 8 to 10 operators operating
in the same geography at highly competitive prices. Discounts help to
survive and grow business and augment revenue. Thus it is in the nature
of expense for earning the profit and by this method  it is admitted that
business has grown and there is an increase in revenue, hence the same
being part of the commercial strategy to enhance the business, it has
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to be treated in the nature of expense and cannot be deducted from
gross revenue.
122. Thus, we have no hesitation to reject the claim for various
forms of discounts, commissions, pre-paid vouchers, goodwill waiver
etc., raised on behalf of the licensees and set aside the finding of the
TDSAT to the extent it is contrary to the stand taken by DOT, and we
hold that all discounts and commission etc. as discussed form part of
the 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 of
purchasing equipments or settling roaming charges etc. in foreign
currency. The change in exchange rate vis-à-vis a foreign currency
from the date of transaction to the time of settlement may cause gain
or loss based upon the fluctuations in the exchange rate of rupee.
TDSAT in the 2007 judgment held that the fluctuations in the foreign
exchange rate have nothing to do with the licensed activities of the
telecom service providers. The TDSAT in the impugned judgment and
order in 2015 has held that foreign exchange gains are of two types.
The reduction in liability towards payment for purchase of capital goods
from pre-paid and payment of charges or outroamers and secondly in
receipt from inroamer. In the first case, there is a decrease in cost,
which cannot be taken as revenue for the purpose of determining AGR.
In case of reduction, payment of charges for
outroaming the reduction
is allowed only on payment basis. Therefore, the difference between
accrual and paid basis cannot be taken as revenue for AGR calculation,
and in the second case, revenue is recorded on accrual basis. Any
charges till payment is made, are notional income, which cannot be taken
as revenue for AGR basis. On actual payment since no discount is given
and the actual receipt is less, no licence fee should be charged if the
same is more. Thus, any gain or loss due to foreign exchange fluctuations
will have no bearing on the licence fee.
124. The DOT submits that the mandate of the definition of gross
revenue has been ignored. The gain from foreign exchange fluctuation
is to be taken into the calculation of adjusted gross revenue, the income
is understood as an increase in economic benefits in the form of inflows
from the enhancement of assets or decreases in liability that result in
increase in equity. The definition of income covers both revenue and
gains. The gains from foreign exchange fluctuations should be added
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without any net off against the losses, and these should be on accrual
basis.
125. It is submitted on behalf of licensees that DOT is trying to
confuse the revenue with income. The foreign exchange fluctuation gain
is unrealised gain and is purely notional, and no flow of revenue takes
place. AS-11 mandates the reporting of foreign currency in the balance-
sheet at the prevailing foreign exchange rate. The difference in
exchange variation between the transaction date and the year-end rates
is booked as an unrealised exchange of gain or loss. The transactions
denominated in foreign currency are recorded at the exchange rate
prevailing at the time of transaction and realised. As such, gain or loss
results when there is a change in the exchange rate between the
transaction date and date of settlement of items.
126. It is further submitted on behalf of the licensees that notional
gains are not inflows of cash and do not represent revenue. When there
is neither accrual nor receipt of income, no revenue can be said to have
resulted. A higher cost of an asset shown in the books on account of a
higher foreign exchange rate may be reduced to reflect the current
foreign exchange rate and does not result in any revenue received or
receivable by the appellant. If forex gain is on any item of expenditure,
then it should not enter calculation of gross revenue as expenses are
not deductible while calculating gross revenue. It is
further submitted
that Para 3(iii) of AS-9 expressly excludes the realised or unrealised
gains resulting from changes in foreign exchange rates and adjustment
arising on the transaction of foreign currency financial statements.
127. When we consider the rival submissions, it is apparent that
there can be realised as well as unrealised foreign exchange gains/losses
which may differ depending on whether or not the transaction has been
completed by the end of the accounting period. The realised gains or
losses are the gains or losses that have been achieved. It means that
the customer has already settled the invoice before the close of the
accounting period. For example, to say a customer purchased items
worth $1000 from a foreign seller based abroad, and the invoice is valued
at $1100 at the invoice rate. When customer settles the invoice after a
few days, say four weeks, after the date invoice was sent, and the
invoice is valued at $1200 when converted to US dollars at the current
exchange rate. It means that the seller will have a realised gain of $100.
The foreign currency gain is recorded in the income section of the
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income statement. Unrealised gain or loss results when the invoice is
settled, but in case the customer fails to pay the invoice by the close
of the accounting period. The seller calculates the gains or losses that
would be earned if the customer paid the invoice at the end of the
accounting period. While preparing a financial statement, a transaction
will be recorded as an unrealised loss of $100 in case the value of the
invoice was $200. On the last date of the accounting period, the invoice
is valued at $100. Thus, the unrealised loss will be of $100. The
unrealised gain or loss is recorded in the balance-sheet. When preparing
the actual financial statement, companies are required to report the
transaction in the home currency to make it easy to understand all the
financial reports. It means that all transactions carried out in foreign
currency must be converted to the home currency at the current
exchange rate when the business recognises the transaction. The
exchange difference which arises on reporting the mandatory items at
the rate different from the ones at which they are recorded initially,
must be recognised rate as an income or an expense. Thus, gain from
foreign 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 be
added on accrual basis. If later on, the amount has to be spent on the
purchase of equipment or
settling roaming charges in foreign currency,
that is also a gain and results in economic benefit and has to be
accounted for while working out the gross revenue as a decrease in
liability would be gain. Whatever may be the expenditure, whether it
has increased or decreased, must be accounted for as it forms part of
the gross revenue.
129. In the definition of gross revenue, any other miscellaneous
revenue is included, and when once the item has to be shown in the
balance-sheet or profit and loss account, obviously, it has to be
accounted for gross revenue, even as a notional figure. Once the amount
is receivable, it has to be taken as part of gross revenue. The finding
to 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 be
accounted for and must be accounted for as per the value spent on
the date of the banking transaction, which cannot be ignored. Thus, the
gains from foreign exchange fluctuations have to be added in the
computation of gross revenue, otherwise, the benefit which is accruing
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will be ignored.  Where profit or loss arises on account of appreciation
of foreign currency, such gain or loss has to form part of profit from
the business or loss. Whether it is profit or loss on account of trading
or 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 foreign
currency has to be accounted for in the account at the time when the
amount is received or at the end of the accounting year. Thus, there is
no escape from the conclusion that forex gain has to be accounted for
as part of gross revenue. When loss can be claimed as an expenditure,
profit or gain due to fluctuations in the rate of foreign exchange has
also to be accounted for towards gross receipt, which is gross revenue.
In re: Monetary Gains on Sale of Shares:
130. It is submitted on behalf of the Tata Teleservices Ltd. and
other licensees that gains from sale of shares should not be included in
the inclusive definition of gross revenue. The gains on the sale of capital
assets and receipt from the sale of scrap. The issue has arisen when
an asset/scrap is sold for more than its book value, then the difference
between net sale proceeds and book value is the amount of gain on
sale 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 over
and over the gross book value (cost) of the
assets, that is when sale
proceeds are more than the original purchase cost of the assets; and
(ii) gain over and above the net book value, i.e. when the sale proceeds
are less than the initial purchase cost but more than the net worth of
the asset. The tribunal has held that the gain on sale of capital assets
as per the first case, i.e., when the increase is over and above the book
value of the asset, it will form part of calculation of gross revenue.
131. Given the definition of gross revenue in the licence
agreement, every amount which is more than the book value of the
current asset and comes to licensee company, has to be considered for
calculation of gross revenue without netting off. Thus, the reasons given
by the tribunal that any gain over and above the net book value, that is,
when the sale proceeds are less than the original purchase cost but
more than the net worth of the assets, has to be excluded from the
gross revenue, cannot be accepted. The gross revenue for the current
year has to be worked out based on the value of the capital assets.
Gross revenue for any year is considered in light of the opening
statement and also closing statement at the end of the year. What is
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gain over and above the book value in the year in question, has to be
taken into consideration towards gross revenue received. Submission
to the contrary raised on behalf of the licensees cannot be accepted.
We are not able to accept the submission that the money collected on
the 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 above
net book value and scrap and not the entire proceeds are to be taken
as revenue in calculation of the gross revenue without netting off and
should be on accrual basis, is unobjectionably within the ken of definition
of gross revenue. To say in case e.g., gain for AGR will accrue when
the 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 be
the same in case the value of an asset worth Rs.100 has depreciated
to book value worth Rs.60 and is sold at Rs.70, as urged on behalf of
DOT, Rs. 10 will form part of gross revenue. For what purpose and
head the income tax would be leviable, is not the question for our
consideration.
132. The submission raised that the sale of shares is not an
ordinary business activity, as provided in Para 4.1 of AS-9. Even Para
3(i) of AS-9 which excludes from the ambit of ‘revenue’ any realised
or unrealised gains resulting from disposal of non-current
assets, i.e.
appreciation in the value of fixed assets. Again, a futile attempt has
been made to get rid of the definition of gross revenue, and confusion
is sought to be created by ordinary business activity, which is the
expression used in Para 4.1 of AS-9. In contrast, the definition of gross
revenue in clause 19.1 includes gross revenue from non-licensed
activities also. Thus, the submission is wholly sans substance and stands
repelled. Finding to the contrary recorded by TDSAT considering the
initial cost is set aside.  It has to be seen as book value as on date of
sale.  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:
133. Where an asset is destroyed, and the insurance claim is
received for more than its book value. The difference between the
insurance claim received and the book value is treated as revenue by
the DOT for computing AGR. The dispute was not raised initially by
the licensees, while the order in the year 2007 came to be passed. It
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has been raised after this Court has remitted the case to the TDSAT
in the year 2011. The TDSAT has held that if the asset destroyed is
replaced immediately and the claim received is more than the actual
cost of replacing the equipment, the difference would be taken as
income; and in a case where the asset destroyed is not replaced
immediately, the gain to the extent more than the gross book value is
considered as income. The asset has appreciated over time, then
insurance claim received more than the total cost, though being real
gain, 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 erred
in making the classification of the revenue. In case the insurance claim
received 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 for
the current year, over and above the book value, is to be treated gross
revenue. There is no need to make any classification as to when an
asset is destroyed and replaced later on. The insurance claim received
more than depreciated book value has to be recorded in the profit and
loss account under any other income, that too constitutes a gain,
therefore, it will form part of the gross revenue in the calculation without
netting off and on accrual basis. To say if the revenue to form part of
gross revenue will be treated only when the
insurance claim received
is more than the book value. Therefore, the excess amount received
over and above the book value shall be taken as revenue for calculation
of gross revenue. For the use of accounting, the gain from the insurance
claim, the bifurcation made by the contingencies, was uncalled for and
cannot be culled out from the definition of gross revenue, which was
to simplify the procedure of assessment of licence fee. What is the
meaning to be given to the word ‘immediately’ would differ from case
to case and determination of licence fee. The cost of replacement also
depends upon various factors. An old asset may be replaced by a brand
new one of the higher prices. For an accounting of gain from the
insurance claim, the methodology classification adopted by DOT is not
found to be proper and is not in tune with the definition of gross
revenue.
135. It is submitted on behalf of the licensees that the amount
received towards insurance claim is for indemnification towards loss
of capital asset to compensate for the loss. The decision in Vania Silk
Mills v. C.I.T. Ahmedabad, (supra) has been pressed into service
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wherein it has been held that while paying for the loss, the insurance
company compensates for the loss. The insurance claim is not the value
of the damage to property but only takes into consideration the amount
required to restore it to its original condition. Insurance contracts are
for indemnification. Therefore, it is submitted that the claims are not
as revenue.
136. The submission raised on behalf of the licensees cannot be
accepted as the insurance claim over and above the book value is
considered as revenue and not the value of the capital asset as there
is an inflow of cash received. It is accounted for in the profit and loss
account. It has to form part of the gross revenue as defined in clause
19.1. The artificial bifurcation of insurance claim made by the TDSAT
cannot be accepted and is contrary to contractual definition of gross
revenue. The finding of TDSAT to the extent it is contrary to revenue
is set aside.
In re: Amount of negative balance of pre-paid customer:
137. The negative balance occurs when a pre-paid customer
exhausts the available talk-time. TSPs as a matter of policy, sometimes
provides the customer with a small amount of loan talk-time as it may
deem 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 the
customer. In case where the customer fails to re-charge the fresh
top-
up amount, the balance remains negative in the pre-paid account of the
customer. The pre-paid vouchers are sold for a price for which the
customer gets a fixed duration of talk-time/usage of the service. When
it 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 into
account for computation of gross revenue as it is notional revenue, which
is neither billed nor received. It is not due to the fault of the licensee,
and the licensee does not gain anything from such usage beyond the
permitted duration for the amount received by it.
138. The case set up by DOT is that the negative balance is
communicated to the customer and also shown in the account. It is billed
on accrual basis and becomes part of gross revenue. In case it is not
realised, the same has the effect of bad debt, which is not allowed as
a deduction as per the definition of gross revenue. In case it is not
counted towards the gross revenue, it may encourage the licensee to
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give discounts increasing their gross revenue by such incentive and not
paying the licence fee to the public exchequer.
139. It is apparent that the amount of negative balance is a
business strategy, and the amount is adjusted in case re-charge is opted.
Otherwise also, it is billed and reflected on accrual basis in the account
of the customer. Though it has to form part of gross revenue for
determination of licence fee under clause 19.1, the number of calls at
the full value have to be measured without any discounts or incentive
of such business strategy. It is a part of revenue.  It cannot be deducted
from the gross revenue to be worked out as per the definition of gross
revenue under AS-9. Thus, the finding of the TDSAT cannot be said
to align with the meaning of gross revenue in factual aspects of the
case and is set aside.
In re: Reimbursement of the infrastructure operating
expenses
140. The telecom service provider needs infrastructure like towers
to operate. To achieve economies of scale, two or more companies may
share one such passive infrastructure.
141. The licensees have submitted that setting up of passive
infrastructure like towers is not an activity which requires licence. The
tower structure is sometimes erected by independent parties and is
offered to service providers on rent. Similar activity, when carried out
by a service provider, should not be treated as part of licensed activity.
Therefore,
the revenue earned by licensee from rent/leasing out passive
infrastructure should not form part of adjusted gross revenue. It is also
submitted that renting/leasing of dark fibre towers etc. is carried out
by IP-1 operators. These operators do not require any licence. It is a
non-licensed activity and should be out of the purview of adjusted gross
revenue.
142. The TRAI recommended that renting and leasing of the
passive infrastructures by service providers is a regular telecom activity
and should, therefore, be part of AGR.
143. The TDSAT has observed that in case A has one tower at
a particular building, the same tower can be permitted to be used by
B. B would pay rent to A for the use of this tower. In case B pays
Rs.100 as rent to A, A will have to incur operating expenses for keeping
the equipment in the tower, functional, which may inter alia, require
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diesel generator. If monthly expenses for such operating expenses is
Rs.10, then A and B would divide it in equal proportions. Thus, Rs.5
paid by B to A would be a revenue for A (Airtel). The TDSAT has
deducted Rs.5 from the gross revenue on a notional logic that the rent
of Rs.100 should be treated as rent of Rs.95 plus Rs.5 towards
reimbursement of expenditure. Thus, according to TDSAT, usage of
facility like rent has to be included in the gross revenue, and
reimbursement of spending should not be included in the gross revenue
provided it is shown separately in the invoice and not shown in the profit
and loss account as revenue.
144. The stand of DOT is that the interpretation is expressly
contrary to clause 19.1, which categorically includes “revenue from
permissible sharing infrastructure”. The definition of gross revenue does
not permit differentiation between the reimbursement of expenses and
rent for the usage of the facility. By the interpretation of TDSAT,
accounting jugglery would take place, and the licensee will try to derive
maximum reimbursement of infrastructure operating expenses under the
category of “reimbursement of expenditure” rather than under the “rent
category”. The company may form cartel and put up a common
expenditure in the type of reimbursement of the cost it would give a
chance for netting off the expenditure against revenue, which is
prohibited in clause 19.1.
145. In the definition of gross revenue, the item sharing of
infrastructure facility is explicitly mentioned. In the format in Appendix
2 to Annexure-II also, the entire amount is required to be shown. It
has been specifically mentioned that there cannot be any setting off of
the amount of gross revenue, and the entire money received has to be
treated as the gross revenue for the determination of licence fee. It is
not the determination of profit. The gross revenue carries a different
definition, and the intendment is clear to prevent disputes. Thus the entire
amount received by the licensee on account of sharing of passive
infrastructure has to be counted in the gross revenue while working
out AGR. Thus, the finding to the contrary recorded by the TDSAT is
set aside.
In re: Waiver of late fee
146.Late fee is a penalty charged by the licensee in case
customer fails to pay the bill within the due date. Sometime late fee is
waived off by the licensee as a goodwill gesture at the time of payment.
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The submission raised on behalf of the licensee is that the licence fee
should 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 the
amount of waiver of late fee has to be excluded from the gross revenue.
The recommendation to the contrary made to the TRAI was set aside.
The TDSAT in the impugned order passed in 2015 has held that the
late fee is a penalty and the penalty that has been waived off, cannot
be added to the revenue. In the first place, penalty cannot be said to
be 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.
148. DOT submits that if the operator bills the late fee, it would
be 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 towards
gross revenue without setting off, and if the operator waives it off, it
has the same effect of discount being given to the customer which
cannot be allowed as no deduction (net off) is allowed under clause
19.1. When once the late fee amount is billed and the amount is not
paid within the due date, and the late fee is attracted, merely non-
realisation of the same for any reason, cannot be excluded from the
part of gross revenue as per its definition. Gross revenue has to be
taken whether it is received or not, and
netting off is not allowed under
clause 19.1. Once the amount has been billed, it is for the licensee to
realise it. There cannot be any justification for excluding late fee from
the gross revenue. In case money is lost by the service provider, the
same losses cannot be excluded from the AGR for the determination
of licence fee.
150. Late free is included explicitly in the definition of gross
revenue. As such, it has to be computed as part of gross revenue.
Merely by waiver, it cannot be ousted from the purview of gross
revenue once it becomes leviable. Thus, the finding of the TDSAT is
not sustainable and is set aside.
In re: Gains from roaming charges and PSTN pass-through
charges
151. Roaming charges apply when the customer leaves the home
network area and roams into the network or coverage area of another
service area. Pass-through charges are charges paid by the licensee
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to the licensor for allowing their subscribers’ calls to be carried on their
networks. Clause 19.2 of the licence agreement provides for certain
deductions of roaming charges and PSTN pass-through charges from
gross revenue on actually paid basis. The TDSAT considered grievance
on behalf of the licensees that many a time it happens that the licensee
to whom such charges to be paid, happens to be the same company. It
is stated officers of the respondent do not allow deduction of such
charges on the ground that there is no such actual payment as the
company making as well as receiving the payment is the same. But
the revenue is counted under both the licences to compute the gross
revenue, and the tribunal has observed that irrespective of the company
being the same, pass-through charges shall be allowed to be deducted
as soon as the same are accounted as revenue under the different
licence held by the company.
152. DOT submits that merely because one company has a
licence of more than one circle, there will not be common accounts of
that company. The licence fee is realised as per the separate account.
In case both the licences are different, accounts are different, and
payment of licence fee for each circle is different, Idea (Delhi Circle
would pay to Idea (Bombay Circle) on actual basis as against on accrual
basis, becomes revenue in the accounts of Idea (Bombay Circle).
153. In this regard, the definition is apparent as to what deduction
has to be made
from gross revenue. Thus, it is more or less a problem
of particular calculation. How calculation is to be made?
154. Clause 19.2 makes it clear that detailed call charges paid
to other eligible telecommunication service providers within India shall
be excluded from gross revenue. Similarly, roaming revenues passed
on to other eligible/ineligible service providers are also excluded. In that
case, they must be actually passed over to the licensees in different
service areas. Only then it can be excluded from gross revenue and
not otherwise.
155. Revenue from operating FCC 214 licence, USA, the
problem arises in the case of Bharti BILGO which is an isolated case
where it has a branch of Bharti Airtel in U.S. The submission of Bharti
Airtel is that since the income generated by the branch is a separate
income, it cannot be included in the income of Bharti Airtel in India. In
the year 2007, the TDSAT has observed that the VSNL had the
monopoly for ILD service before 1.4.2002. VSNL ceased to be a
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Government-owned company. The old ILD licence permitted VSNL
to carry both the activities, i.e., ILD service as well as TV uplinking.
Under the new regime, a separate licence had to be obtained. Licence
for TV uplinking service was obtained from the Ministry of Information
and Broadcasting Ltd. while DOT issued the ILD licence. TV uplinking
service cannot be rendered in the ILD licence due to the definition of
the word service in that licence. Since for TV uplinking facility, a
separate licence is required, such service could not be rendered under
an ILD licence. The ILD licence issued by DOT carries a revenue-
sharing scheme out of the gross revenue, which is not there in case of
TV uplinking licence issued by the Ministry of Information &
Broadcasting. The said licence is practically free. Therefore, other
service providers of TV uplinking service do not have to pay almost
any licence fee. The TDSAT had rejected the recommendation of TRAI
according to which revenue from TV uplinking and Internet service is
to form part of AGR as it was held to be a form of AGR. It was held
by TDSAT that revenue from these services is to be excluded from
AGR.
156. In the impugned order, the tribunal has held that the revenue
from operating FCC 214 licence arises not from the licence granted
by DOT but by FCC. Hence, this inflow cannot be taken as part of
AGR unless the DOT can establish that there is technical, managerial
and
financial interconnection interlacing and synergy between company’s
operations in the USA and India the gross revenue from the services
of 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 world
and would treat majority of the international income of the licensee as
having been generated in the branch office outside the country and
would not take it into account from calculation of gross revenue for
payment of licence fee. It could not be said that the situation would
not affect the profitability of the company since the revenue is generated
in the branch office of the company but will affect the calculation of
gross revenue as only a repatriated amount would be taken for
calculation. Relying on the observations made by this Court in Union
of India v. AUSPI (2011) at Para 49 in which this Court has held that
in such a scenario, the business can be transferred to a separate legal
entity to avoid the branch office’s revenue to be clubbed with the main
office. The income of the subsidiaries has to be included in the case of
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Bharti Airtel, it has separate subsidiaries, which are separate legal
entities in and outside India, and the income generated from such
subsidiaries are not considered or included while computing the adjusted
gross revenue of Bharti Airtel. Since BILGO is a branch of Bharti Airtel
and not a separate legal entity, because of the previous decision of 2011,
the business for which no licence is required, should be transferred to
a separate legal entity to avoid computation of gross revenue, if not
due it has to be part of gross revenue.
158. In our opinion, para 49 of the judgment of 2011 takes care
of the submission. Once there is a branch, maybe based abroad, its
income and the activity of the branch may not require any licence since
licensee is undertaking the activity, and the definition of adjusted gross
revenue activities includes revenue beyond the licence. The same has
to be included in the gross revenue. The submission stands concluded
by the previous decision, and we find no merit in the submission.
159. The finding recorded by the TDSAT, to the extent it is
contrary 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 its
customers, which at times are non-refundable but are used to provide
discounts on the bills raised. Concerning non-refundable deposits, the
claim was not pressed by the learned counsel appearing on behalf of
DOT before the tribunal.
However, we find that the concession given
by the learned counsel on behalf of DOT concerning non-refundable
deposits is palpably incorrect.
161. We had put learned counsel for the parties at notice during
the hearing as to the correctness of the finding recorded by the tribunal
based on the concession, which was prima facie incorrect. We have
heard 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: Item
No.5, in Section D of the format, is an entry concerning non-refundable
deposits from subscribers. It has to be included as per the format in
the statement of the gross revenue. The definition of gross revenue is
wide enough to cover non-refundable deposits as non-refundable
deposits are revenue earned from licensed activities. Non-refundable
deposits are to be treated as accrued in the profit and loss account as
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per Annexure III of the licence agreement.  It is apparent that non-
refundable deposits are in fact revenue received in advance from the
subscribers. Even if they are used for discount etc. in the bills, they
form part of revenue. Licensees themselves treat non-refundable
deposits as income under section 80 IA (2a) of the Income-tax Act.
Be that as it may.  The finding recorded by the TDSAT concerning
non-refundable deposits not being part of the revenue based upon wrong
concession made by the learned counsel appearing for the DOT, is as
a result of this is liable to be set-aside. It was expected of the TDSAT
to consider the concession following law, as such cases cannot be
decided and ought not to be decided on the basis of prima facie incorrect
concession of the counsel, it has to be legally tested.  In case any
admission is made, its correctness has to be examined.
In re:  Licence fee demand where spectrum is not granted
163. Concerning demand of licence fee in the circle where the
licensee was not granted spectrum: When the spectrum itself has not
been issued, licence activity has not come into play, no revenue is
generated. TDSAT has held that the demands of licence fee based on
other activities, are bad, unreasonable, invalid, and unsustainable. During
the period in question, the UAS licence came bundled with the spectrum,
and it is evident that without a spectrum, the licensee could not work
out the licence.
The finding recorded by the TDSAT is appropriate.
Once there is no activity under a licence, merely on the basis that the
licence has been issued, no revenue earned, it cannot be shared. Still,
there is no activity under the licence, i.e., based on non-licensed
activities, the revenue sharing could not have been asked. It would be
an unreasonable and unconscionable bargain to pass on such a liability.
We agree with finding recorded by TDSAT in the case of Videocon &
S. Tel.
In re: Income from interest and dividend
164. Argument has also been raised concerning interest income
and dividend income. Since these items are expressly included in the
definition of gross revenue in clause 19.1. There is no scope to entertain
the submission concerning the exclusion of interest and dividend from
gross revenue. Whatever, interest and dividend earned from the licensing
and non-licensing activities, have to form part of gross revenue for
determination of licence fee.
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In re: Bad-debts written off
165. The bad debts written off are not allowed as a deduction
by the DOT while computing adjusted gross revenue, bad debt is written
off when recovered subsequently, it cannot be added to the gross
revenue. The TDSAT in the impugned order, has observed as under:
“Licensees submit that if a bad debt, that is written off is later
on recovered, it is required to be reported to the DoT, this,
according to the licensees, that bad debts written off may be
allowed as deductions from revenue but as and when those are
recovered subsequently those should be added on to revenue.
The submission is not acceptable but it needs to be clarified that
when any bad debt written of is recovered finally, it may not be
charged to license fee again as that would result in double
charging 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 the
licensees. In case it is realised later on, it may not be charged again. It
should be charged only once. We find the finding to be appropriate.
No case for interference in the findings recorded by the TDSAT is
made out.
In re: Liability written off
167. The TDSAT has observed as under:
“Take the example of a company that makes a provision for
retirement benefits for the amount. For income tax, it will be
considered as an expense, but no discount from income will be
allowed for the sum for determining the
license fee. If such a
liability is written off on a future date and shown accordingly in
the profit and loss statement it surely cannot be brought to charge
for a second time for computing licence fee.”
No objection has been raised on behalf of DOT to the said
findings.
168. DOT submits that the reasoning is correct. However,
TDSAT could not have undertaken this exercise head-wise. It is
presented on behalf of the licensees that notional revenue cannot be
included in the revenue of the company based on provisional liability
being finalised by actual liability. The amount kept as provisional liability
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cannot be treated as income. In our opinion, TDSAT has rightly held
that if it is to be considered as an expenditure, liability has to be treated
as an expense, and no discount on the income will be allowed for the
sum for determining the licence fee. It cannot be charged for the second
time for computation of licence fee.
169. In Rajputana Trading Co. Ltd. v. Commissioner of
Income Tax, West Bengal-I, (1982) 2 SCC 775, it has been observed
that once liability is written off, it has to be added as income from the
business under section 10(2A) and such income should be given some
local habitation or name.
170. Hence, we hold that it is to be treated as an expense, and
discount cannot be allowed for determining the licence fee.
In re: Inter-corporate loan
171. Certain licensees have raised the loan being holding
companies for the subsidiaries from various banks and financial
institutions. In turn, this amount is given to the subsidiaries for their day-
to-day operations. On this amount, the subsidiaries pay interest at the
SBI Prime Lending Rates (PLR) every quarter, which in turn is paid
by the holding company to the banks/financial institutions. DOT seeks
to include the interest received from the subsidiaries companies in the
revenue of the holding company. The TDSAT has included the income
from interest on inter-corporate loan as part of gross revenue. It is
submitted on behalf of licensees that as the holding
company only
performs the function for the subsidiary company and the interest
amount is only reimbursement of the amount paid to the bank, it cannot
be included in the gross revenue. As such, it does not form part of gross
revenue.
172. The submission has no legs to stand, and it is apparent from
the definition of gross revenue in clause 19.1 that income from interest
is to be included in the gross revenue. Thus, the submission is baseless.
By the fact that the holding company gives loan to the subsidiary
company and recovers interest from subsidiaries, is good enough to
make it a part of gross revenue.
173. Thus, interest income from inter-corporate loan has to be
included in the gross revenue for working out the licence fee.
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In re: Revenue under IP-1 Registration
174. Whether it can be claimed/clubbed under revenue under
CUG licence? It is apparent from the definition of gross revenue that
income from licensed activities and even from non-licensing activities
and any other miscellaneous revenue of the licensee has to be included.
Thus, DOT has rightly included the income of the licensee from IP
registration under the CUG licence.
In re: Income from management consultancy services:
175. When we consider the definition of gross revenue, it has to
be included in the adjusted gross revenue to work out the licence fee.
The income from management support and consultancy of the licensee
cannot be excluded. Submission to the contrary cannot be accepted and
is as a result of this rejected.
176. The TDSAT has also rightly held in the case of Bharti Airtel
that the revenue from Cable Landing Station has to be included in the
gross revenue.
In re: Res Judicata
177. Coming to the submission raised on behalf of DOT that the
findings in Union of India v. AUSPI (2011) (supra) operate as res
judicata with respect to items dealt with and act as constructive res
judicata with respect to the questions that were not raised in the petition
which were filed in Petition No.7/2003 and Petition No.82/2005. The
challenge was made to most items on the ground; they could not be
included in the definition of gross revenue; same did not form part of
the licensed activity. However, this Court has repelled
this submission
and has included the such items in the definition of gross revenue. It is
clear that once this Court has held that the income which covered under
the definition of gross revenue and were claimed to be excluded earlier
on the ground that they could not form part of gross revenue, the
definition so including them was ultra vires and illegal/invalid.  The same
heads are now sought to be excluded by taking the shelter that they do
not form part of revenue under AS-9. Though they form part of gross
revenue under Clause 19.1. There is no scope left for this exercise.
Though, we have examined every question raised on merit again as it
was submitted that this Court had left the question open as to proper
interpretation. This Court has held that TRAI and the TDSAT had no
jurisdiction to decide on the validity of the definition of gross revenue
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and adjusted gross revenue in the licence agreement and to exclude
items of revenue, which were included in the definition of gross revenue
in the licence agreement, whether they are from non-licencing activities.
178. Considering whether the licensee can challenge the
computation of adjusted gross revenue and if so, at what stage and on
what ground, this Court has observed that one such dispute can be that
computation of adjusted gross revenue made by the licensor and the
demand raised based on such computation is not following the licence
agreement. The dispute can be raised after the licence agreement has
been entered into at the appropriate stage, when the demand is raised
by the licensor/licensee. This Court observed if the dispute is raised,
TDSAT will have to go into the facts and material to decide demand is
as per licence, in particular, the definition of adjusted gross revenue in
the licence agreement. It can also interpret the terms and conditions
of the licence agreement, as the tribunal has not gone into the facts
and material relating to the demand of a particular licensee. It was
further observed that the tribunal may go into the facts and material
based on which demand is raised to make the computation. Thus, the
scope of the latter observations is not so wide to take out certain items,
though included explicitly in the definition of gross revenue and to hold
that they do not to form part of it.
Income from licensing and non-
licensing activities are in the ambit of gross revenue had been
determined conclusively in 2011 judgment. Only facts and material can
be seen for computation.
179. It was submitted that the computation involves the process
of that of computing, numbering, reckoning, and distributing. The
account of estimation by rule of law is distinguished from the arbitrary
construction of the parties. The reliance has been placed on the
decision 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 income
tax, the term computation has been considered. Wharton Law Dictionary
reference has also made as to the definition of computation based upon
Lohia Machines Ltd. (supra). It is a legal process of computing
inclusion and exclusion of items, which may otherwise be regarded as
forming part of the capital employed, as interpreted by this Court in
Lohia Machines Ltd. (supra) in which following observations have been
made:
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 “18. It is because the expression “capital employed” has a
variable 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 “capital
employed” as computed in the prescribed manner. How the
“capital employed” shall be computed is left to be prescribed by
the Central Board of Revenue by making Rule or Rules under
Section 295 of the Income Tax Act, 1961. The process of
computation 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 include
some items and exclude some others while prescribing the
manner of computation of the “capital employed”. This is the
sense in which the word “computed” has been consistently used
by the legislature while enacting legislation of this kind. Turning
to the earliest legislation where the word “computed” has been
used in relation to the “capital employed”, we find that in the
Excess Profits Tax Act, 1940 for determining the standard profits,
the statutory percentage was required to be applied to the average
amount of capital employed as computed in accordance with the
Second Schedule and the Second Schedule provided for inclusion
of certain items and exclusion of certain others including borrowed
moneys and debts. The legislature clearly, in this statute, regarded
exclusion of borrowed moneys
and debts as implicit in the process
of computation of the “capital employed” or to put it differently,
according to legislative usage, computation of the “capital
employed” could legitimately involve as part of the process,
exclusion of items such as borrowed moneys and debts. So also
in the Business Profits Tax Act, 1941 and the Super Tax Profits
Tax Act, 1953, the word “computed” was used in the same sense
as involving in the process of computation of the “capital
employed”, 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 may
be pointed out that in this statute the word “computed” has been
used in relation to the “capital of the company” and not in relation
to the “capital employed” but that would make no difference,
because what we are concerned with here is the sense in which
the word “computed” has been used and whether it involves the
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process of exclusion as well as inclusion and on that point, the
Act analogically throws considerable light. The statutory
deduction which must be made from the chargeable profits for
the purpose of determining the charge of Surtax under this statute
is defined to mean “an amount equivalent to ten percent of the
capital of the company as computed in accordance with the
provisions of the Second Schedule” and the Second Schedule
after its amendment by Finance Act 66 of 1976 does not provide
for inclusion of borrowed moneys and debts in computation of
the capital of the company though it provides for inclusion of the
paid-up share capital and reserves. It will thus be seen that there
is legislative history behind the use of the word “computed” in
relation to the “capital employed” and it has been legislatively
recognised 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 in
the context of this background and not by way of a virgin attempt
that the word “computed” has been used by the legislature in
relation to the “capital employed” in Section 80-J sub-section (1).
19. It may be noted that even in the Income Tax Act, 1961 the
word “computed” has been consistently used in relation to
“income” in the sense of involving both inclusion and exclusion
of 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 look
at the provisions in the Income Tax Act, 1961, which lay down
the manner of computation of the total income, it would be clear
that the process of computation of total income involves both
inclusion and exclusion of various items of income. Section 10
provides that in computing the total income of a previous year
of any person, any income falling within any of the clauses of
that section shall not be included in the total income, though such
income which is required to be excluded is undoubtedly income
and therefore part of total income according to the plain natural
connotation of that expression. But it is required to be excluded
in determining the charge of tax because “total income” is defined
as total amount of income, “computed in the manner laid down
in the Act”. The same position obtains also in regard to Section
11 and it excludes certain categories of income in computation
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of the total income. Then, we may refer to Section 29 which
provides that the income from profits and gains of business and
profession shall be computed in accordance with the provisions
contained in Sections 30 to 43-A. These sections provide for
inclusion and exclusion of various items in computing the total
income. Sections 80-A to 80-VV also provide for deductions to
be made in computing the total income and under sections such
as 80-HH, 80-JJ and 80-O, even an item which indisputably forms
part of income of an assessee, is required to be excluded in
computing the total income chargeable to tax. No one has ever
argued and indeed it is impossible even to conceive of such an
argument, that when Section 2 clause (45) defines total income
as the total amount of income computed in accordance with the
provisions of the Act, what is indubitably part of income cannot
be 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 computation
is provided for by the legislature itself and is not purported to be
done by any rule-making authority. The legislature, stated Mr.
Palkhivala, can cut down the width and amplitude of the
expression “total amount of income” by expressly providing that
particular item or items shall be excluded in the computation of
the total amount of income, but the Rule-making authority cannot
do so, because by doing so, it
would be derogating from the
provisions of the statute. Now we have already pointed out that
since the expression “capital employed” has a variable meaning
which 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 be
acting contrary to the mandate of the statute. But the point which
we 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 comprehending
within its scope not only inclusion but also exclusion of certain
items of income which are admittedly and without doubt, part of
the income of the assessee. We find that even in some of the
sub-sections of Section 80-J the word “computed” has been used
in the same sense as involving both inclusion and exclusion. The
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second proviso to sub-section (4) of Section 80-J provides that
“where any building or any part thereof previously used for any
purpose is transferred to the business of the industrial undertaking,
the value of the building or part so transferred shall not be taken
into account in computing the ‘capital employed’ in the industrial
undertaking”. So also Explanation 2 to the same sub-section
enacts in so many terms that in a case falling within its scope
and ambit, “the total value of the machinery or plant or part so
transferred shall not be taken into account in computing the
‘capital employed’ in the industrial undertaking”. Then again, the
Explanation to sub-section (6) of Section 80-J makes a similar
provision for exclusion of “total value of the building machinery
or plant or part so transferred” in computing the “capital
employed” in the case of business of a hotel. It will thus be seen
that, even according to these provisions in Section 80-J, the
process of computation of the “capital employed” can legitimately
exclude item or items which are plainly and indubitably part of
the “capital employed”. Of course the exclusion enacted by these
provisions is made by the legislature and not by the Rule-making
authority, but again, if we may emphasise, the point is not
whether an exclusion is made by the legislature or by the Rule-
making authority but whether such exclusion is implicit in the
process of computation so
as to be comprised in it. And on this
point 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 the
various provisions of the Income Tax Act, 1961 referred to by
us, clearly indicate that the word “computed” has been used by
the legislature in sub-section (1) of Section 80-J as involving not
only inclusion but also exclusion of items which may otherwise
be regarded as falling within the expression “capital employed”.
It is left by the legislature to the Central Board of Revenue as
rule-making authority to prescribe the manner in which the “capital
employed” shall be computed and in so prescribing, the Central
Board of Revenue may include or exclude items which may be
regarded as forming part of the “capital employed”.”
181. This Court has considered the matter given the provisions
contained in section 80J of the Income Tax Act and has observed that
capital employed has variable meanings. It has been legislatively
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recognised both inclusion as well as exclusion of the items, which may
otherwise be regarded as forming part of the capital employed. Thus,
the expression computation has not been used in the 2011 decision to
include those very items from the purview of the definition of gross
revenue, which have been held to be covered by this Court to be part
of gross revenue. According to the 2011 judgment, whether the demand
is in terms and conditions of the licence agreement and, in particular,
the definition of adjusted gross revenue, could have been seen. The
TDSAT could also view the facts and material based on which demand
has been raised, but it was not permissible to exclude the items which
are 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 have
been raised on merits again, uninfluenced by the plea of res judicata/
constructive res judicata, and we have found no merit in the submissions
which have been raised. Thus, we refrain from burdening the judgment
with the decisions cited at the Bar concerning res judicata and
constructive res judicata.
In re: Levy of interest, penalty, and interest on penalty:
182. Levy of licence fee is provided in clause 20.2. In case of
any delay in payment of licence fee beyond the stipulated period would
attract penalty at the rate, which would be 2% above the Prime Lending
Rate (PLR) of the State Bank of India. 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 other
dues payable under the LICENCE beyond the stipulated period
will attract interest at a rate which will be 2% above the Prime
Lending Rate (PLR) of State Bank of India existing as on the
beginning of the Financial Year (namely 1st April) in respect of
the licence fees pertaining to the said Financial Year. The interest
shall be compounded monthly and a part of the month shall be
reckoned as a full month for the purposes of calculation of
interest. A month shall be reckoned as an English calendar month.
20.8  In case, the total amount paid as quarterly Licence  Fee
for the 4 (four) quarters of the financial year, falls short by more
than 10% of the payable Licence Fee, it shall attract a penalty
of 50% of the entire amount of short payment. However, if such
short payment is made good within 60 days from the last day of
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the financial year, no penalty shall be imposed. The amount of
penalty shall be payable within 15 days of the date of signing
the audit report on the annual accounts, failing which interest shall
be further charged per terms of Condition 20.5.”
183. It is apparent that in case licence fee is not paid as per
clause 20.2, the agreement is that the outstanding will attract interest
at the rate of 2% above the Prime Lending Rate of the State Bank of
India existing as on the date of the beginning of the financial year, that
is first of April. The interest shall be compounded monthly. Under clause
20.8, the penalty is to be paid in case the total amount paid as quarterly
licence fee falls short by more than 10% of the payable licence fee, it
shall attract a penalty of 50% of the entire amount of short-payment.
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 of
signing the audit report, failing which interest shall be charged as per
terms of clause 20.5.
184. Whether interest and penalty have to be levied or not is to
be gone into on the facts and circumstances of the case.
185. The TDSAT has held that it would not be appropriate to
levy interest as well as the penalty. In case interest has to be levied, it
has to be collected at a nominal amount. The TDSAT has not specified
the same.
186. DOT submits that as per the terms and
conditions of the
agreement, interest has to be paid for delayed payment. The contract
has 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 also
attracted considering the nature of the objections raised as to the very
definition of gross revenue whereas parties have fully understood the
meaning of gross revenue and the regime of revenue sharing was highly
beneficial, and they have earned revenue and failed to share the same
as compared to the fixed fee regime. Thus, it was incumbent upon the
licensees to make payment of interest and penalty as agreed.
187. The licensees submit that when once this Court passes an
order in the present appeals, it will have to be given effect to as to
which items can be included or excluded in the gross revenue. It is
only if the demand is not then paid within the stipulated period; the
question of payment of interest would arise. It is further submitted that
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the penalty is for failure to pay the demand within the specified period.
Penalty requires mens rea, contumacious conduct, or deliberate
disregard of the person’s statutory liability. Parties are in litigation since
2003. TDSAT decided on the validity of definition in the year 2007.
After that, this Court passed judgment in 2011 and remitted the case
to TDSAT. TDSAT has again decided concerning certain items in favour
of the licensees, and throughout litigation, demands were stayed by this
Court/TDSAT. Disputes are bona fide disputes. The licensees have paid
about 80% of the demand raised by DOT, and the instant dispute
pertains only to 20% of the demand on which stay was in operation.
Under section 74 of the Indian Contract Act, compensation must be
only reasonable compensation. DOT has also levied penalty and interest
on penalty. In the absence of deliberate refusal to pay, no penal
consequences like penalty can be imposed. It is also submitted that a
fiscal contract/agreement is to be construed strictly, and if there is a
doubt, the same needs to be interpreted in favour of the assessee. Non-
payment was neither deliberate nor under defiance of any law. The
licensees 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 register
as a dealer — Section 9(1) read with Section 25(1)(a) of the
Act. But the liability to pay
penalty does not arise merely upon
proof of default in registering as a dealer. An order imposing
penalty for failure to carry out a statutory obligation is the result
of a quasi-criminal proceeding, and penalty will not ordinarily be
imposed unless the party obliged either acted deliberately in
defiance of law or was guilty of conduct contumacious or
dishonest, or acted in conscious disregard of its obligation. Penalty
will not also be imposed merely because it is lawful to do so.
Whether penalty should be imposed for failure to perform a
statutory obligation is a matter of discretion of the authority to
be exercised judicially and on a consideration of all the relevant
circumstances. Even if a minimum penalty is prescribed, the
authority competent to impose the penalty will be justified in
refusing to impose penalty, when there is a technical or venial
breach of the provisions of the Act or where the breach flows
from a bona fide belief that the offender is not liable to act in
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the manner prescribed by the statute. Those in charge of the
affairs of the Company in failing to register the Company as a
dealer acted in the honest and genuine belief that the Company
was not a dealer. Granting that they erred, no case for imposing
penalty 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 stated
that the appellant has acted on the basis of bona fide belief that
the goods were importable under OGL and that, therefore, the
appellant deserves lenient treatment. It is, therefore, to be
considered whether in the light of this specific finding of the
Customs, Excise & Gold (Control) Appellate Tribunal, the penalty
and fine in lieu of confiscation require to be set aside and quashed.
Moreover, the quantum of penalty and fine in lieu of confiscation
are extremely harsh, excessive and unreasonable bearing in mind
the bona fides of the appellant, as specifically found by the
Appellate Tribunal.
61. We refer in this connection to the decision in Merck Spares
v. Collector of Central Excise & Customs, New Delhi, (1983)
13 ELT 1261 (CEGAT), Shama Engine Valves Ltd. v. Collector
of Customs, (1984) 13 ELT 533 (CEGAT), Bombay and
Madhusudan Gordhandas & Co. v. Collector of Customs,
Bombay (1987) 29 ELT 904, wherein it has been held that in
imposing penalty the requisite mens rea has to be established. It
has also been
observed in Hindustan Steel Ltd. v. State of
Orissa, (1969) 2 SCC 627, by this Court that: (SCR HN p. 753)
“The discretion to impose a penalty must be exercised
judicially. A penalty will ordinarily be imposed in cases where
the party acts deliberately in defiance of law, or is guilty of
contumacious or dishonest conduct, or acts in conscious
disregard of its obligation; but not, in cases where there is a
technical or venial breach of the provisions of the Act or
where the breach flows from a bona fide belief that the
offender is not liable to act in the manner prescribed by the
statute.”
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62. In the instant case, even if it is assumed for argument’s sake
that the stone slabs imported for home consumption are marble
still in view of the finding arrived at by the Appellate Tribunal
that the said product was imported on a bona fide belief that it
was not marble, the imposition of such a heavy fine is not at all
warranted and justifiable.”
(emphasis supplied)
C. Jaiprakash Industries Ltd. v. Commissioner of Central
Excise, Chandigarh, 2003 (1) SCC 67, para 8.
“8. In this case, there was a divergent view of the various High
Courts whether crushing of bigger stones or boulders into smaller
pieces amounts to manufacture. In view of the divergent views
of the various High Courts, there was a bona fide doubt as to
whether or not such an activity amounted to manufacture. This
being the position, it cannot be said that merely because the
appellants did not take out a licence and did not pay the duty the
provisions of Section 11-A got attracted. There is no evidence
or proof that the licence was not taken out and/or duty not paid
on account of any fraud, collusion, wilful misstatement or
suppression of fact. We, therefore, set aside the demand under
the show-cause notice dated 3-5-1993.”
(emphasis supplied)
D. In Tecumseh Products India Ltd. v. Commissioner of
Central Excise, Hyderabad, 2004 (6) SCC 30, it was held as under:
“7. But, insofar as the application of extended period of limitation
provided under Section 11-A is concerned, we do not think
that
the Tribunal is justified because it was not clear as to whether if
any part is used for the purpose of repairing a machinery would
amount to manufacture. In fact, the Tribunal on a detailed
analysis and after going into several processes carried out by the
appellant, came to the conclusion that the stators which were
used in the repairing of the compressors involved manufacturing
activity. This circumstance itself shows that there was bona fide
dispute between the parties in regard to the question whether
stators made ready for the purpose of use of compressors
involved any manufacturing activity or not. Therefore, to the
extent the authorities invoked Section 11-A of the Act and
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imposed penal interest and other penalties shall stand set aside
and the order made by the Tribunal stands modified to that
extent.”
(emphasis supplied)
E. In J. K. Synthetics Ltd. v. Commercial Taxes Officer, 1994
(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 furnish
prescribed returns for the prescribed period within the prescribed
time to the assessing authority. By the proviso the time can be
extended by not more than 15 days. The requirement of Section
7(1) is undoubtedly a statutory requirement. The prescribed return
must be accompanied by a receipt evidencing the deposit of full
amount of ‘tax due’ in the State Government on the basis of the
return. That is the requirement of Section 7(2). Section 7(2-A),
no doubt, permits payment of tax at shorter intervals but the
ultimate 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”, that
must be understood in the context of the aforesaid expressions
employed in the two sub-sections. Therefore, the expression ‘tax
payable’ under the said two sub-sections is the full amount of
tax due and ‘tax due’ is that amount which becomes due ex
hypothesi on the turnover and taxable turnover “shown in or
based on the return”. The word
‘payable’ is a descriptive word,
which ordinarily means “that which must be paid or is due, or
maybe paid” but its correct meaning can only be determined if
the context in which it is used is kept in view. The word has
been frequently understood to mean that which may, can or
should be paid and is held equivalent to ‘due’. Therefore, the
conjoint reading of Sections 7(1), (2) and (2-A) and 11-B of the
Act leaves no room for doubt that the expression ‘tax payable’
in Section 11-B can only mean the full amount of tax which
becomes due under sub-sections (2) and (2-A) of the Act when
assessed on the basis of the information regarding turnover and
taxable turnover furnished or shown in the return. Therefore, so
long as the assessee pays the tax which according to him is due
on the basis of information supplied in the return filed by him,
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there would be no default on his part to meet his statutory
obligation under Section 7 of the Act and, therefore, it would be
difficult to hold that the ‘tax payable’ by him ‘is not paid’ to visit
him with the liability to pay interest under clause (a) of Section
11-B. It would be a different matter if the return is not approved
by the authority, but that is not the case here. It is difficult on
the plain language of the section to hold that the law envisages
the assessee to predicate the final assessment and expect him
to pay the tax on that basis to avoid the liability to pay interest.
That would be asking him to do the near impossible.”
(emphasis supplied)
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 Maula
Bux v. Union of India, (1969) 2 SCC 554, was not, on facts, a
case that related to earnest money. Consequently, the observation
in Maula Bux that forfeiture of earnest money under a contract
if reasonable does not fall within Section 74, and would fall within
Section 74 only if earnest money is considered a penalty is not
on a matter that directly arose for decision in that case. The law
laid down by a Bench of five Judges in Fateh Chand v.
Balkishan Dass, (1964) 1 SCR 515, is that all stipulations
naming amounts to be paid in case of breach would be covered
by Section 74. This is because Section 74 cuts across the rules
of the English
common law by enacting a uniform principle that
would apply to all amounts to be paid in case of breach, whether
they are in the nature of penalty or otherwise. It must not be
forgotten that as has been stated above, forfeiture of earnest
money on the facts in Fateh Chand case was conceded. In the
circumstances, it would therefore be correct to say that as
earnest money is an amount to be paid in case of breach of
contract and named in the contract as such, it would necessarily
be covered by Section 74.”
(emphasis supplied)
G. Central Bank of India v. Ravindra & Ors., (2002) 1 SCC
367, paras 38, 55
“38. However “penal interest” has to be distinguished from
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“interest”. Penal interest is an extraordinary liability incurred by
a debtor on account of his being a wrongdoer by having
committed the wrong of not making the payment when it should
have been made, in favour of the person wronged and it is neither
related with nor limited to the damages suffered. Thus, while
liability 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 default
and therefore cannot be permitted to be capitalised.
55. During the course of hearing it was brought to our notice
that in view of several usury laws and debt relief laws in force
in several States private moneylending has almost come to an
end and needy borrowers by and large depend on banking
institutions for financial facilities. Several unhealthy practices
having slowly penetrated into prevalence were pointed out.
Banking is an organised institution and most of the banks press
into service long-running documents wherein the borrowers fill
in the blanks, at times without caring to read what has been
provided therein, and bind themselves by the stipulations
articulated by the best of legal brains. Borrowers other than those
belonging to the corporate sector, find themselves having
unwittingly fallen into a trap and rendered themselves liable and
obliged to pay interest the quantum whereof may at the end
prove
to be ruinous. At times the interest charged and capitalised is
manifold than the amount actually advanced. Rule of damdupat
does not apply. Penal interest, service charges and other
overheads are debited in the account of the borrower and
capitalised of which debits the borrower may not even be aware.
If the practice of charging interest on quarterly rests is upheld
and given a judicial recognition, unscrupulous banks may resort
to charging interest even on monthly rests and capitalising the
same. Statements of accounts supplied by banks to borrowers
many a times do not contain particulars or details of debit entries
and when written in hand are worse than medical prescriptions
putting to test the eyes and wits of the borrowers. Instances of
unscrupulous, unfair and unhealthy dealings can be multiplied
though they cannot be generalised. Suffice it to observe that such
issues shall have to be left open to be adjudicated upon in
appropriate cases as and when actually arising for decision and
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we cannot venture into laying down law on such issues as do
not arise for determination before us. However, we propose to
place on record a few incidental observations, without which, we
feel, our answer will not be complete and that we do as under:
(1) Though interest can be capitalised on the analogy that
the interest falling due on the accrued date and
remaining unpaid, partakes the character of amount
advanced on that date, yet penal interest, which is
charged by way of penalty for non-payment, cannot be
capitalised. Further interest i.e. interest on interest,
whether simple, compound or penal, cannot be claimed
on the amount of penal interest. Penal interest cannot
be capitalised. It will be opposed to public policy.
(2) Novation, that is, a debtor entering into a fresh
agreement with a creditor undertaking payment of
previously borrowed principal amount coupled with
interest by treating the sum total as principal, any
contract express or implied and an express
acknowledgement of accounts, are the best evidence of
capitalisation. Acquiescence in the method of accounting
adopted by the creditor and brought to the knowledge
of the debtor may also enable interest being converted
into principal. A mere failure to protest is not
acquiescence.
(3) The prevalence of banking practice legitimatises
stipulations as to interest on periodical rests and their
capitalisation being incorporated in contracts. Such
stipulations incorporated in contracts voluntarily
entered
into and binding on the parties shall govern the
substantive rights and obligations of the parties as to
recovery and payment of interest.
(4) Capitalisation method is founded on the principle that the
borrower failed to make payment though he could have
made and thereby rendered himself a defaulter. To hold
an amount debited to the account of the borrower
capitalised it should appear that the borrower had an
opportunity of making the payment on the date of entry
or within a reasonable time or period of grace from the
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date of debit entry or the amount falling due and thereby
avoiding capitalisation. Any debit entry in the account
of the borrower and claimed to have been capitalised
so as to form an amalgam of the principal sum may be
excluded on being shown to the satisfaction of the court
that such debit entry was not brought to the notice of
the borrower and/or he did not have the opportunity of
making payment before capitalisation and thereby
excluding its capitalisation.
(5) The power conferred by Sections 21 and 35-A of the
Banking Regulation Act, 1949 is coupled with duty to
act. The Reserve Bank of India is the prime banking
institution of the country entrusted with a supervisory
role over banking and conferred with the authority of
issuing binding directions, having statutory force, in the
interest of the public in general and preventing banking
affairs from deterioration and prejudice as also to secure
the proper management of any banking company
generally. The Reserve Bank of India is one of the
watchdogs of finance and economy of the nation. It is,
and it ought to be, aware of all relevant factors, including
credit conditions as prevailing, which would invite its
policy decisions. RBI has been issuing directions/
circulars from time to time which, inter alia, deal with
the rate of interest which can be charged and the periods
at the end of which rests can be struck down, interest
calculated thereon and charged and
capitalised. It should
continue to issue such directives. Its circulars shall bind
those who fall within the net of such directives. For such
transaction which are not squarely governed by such
circulars, the RBI directives may be treated as standards
for the purpose of deciding whether the interest charged
is excessive, usurious or opposed to public policy.
(6) Agricultural borrowings are to be treated on a pedestal
different from others. Charging and capitalisation of
interest on agricultural loans cannot be permitted in India
except on annual or six-monthly rests depending on the
rotation of crops in the area to which the agriculturist
borrowers belong.
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(7) Any interest charged and/or capitalised in violation of
RBI directives, as to rate of interest, or as to periods at
which rests can be arrived at, shall be disallowed and/
or excluded from capital sum and be treated only as
interest and dealt with accordingly.
(8) Award of interest pendente lite and post-decree is
discretionary with the court as it is essentially governed
by Section 34 CPC dehors the contract between the
parties. In a given case if the court finds that in the
principal sum adjudged on the date of the suit the
component of interest is disproportionate with the
component of the principal sum actually advanced the
court may exercise its discretion in awarding interest
pendente lite and post-decree interest at a lower rate
or may even decline awarding such interest. The
discretion shall be exercised fairly, judiciously and for
reasons 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 was
raised for the first time in the year 2003 despite the fact that the
definition of gross revenue was clear, and as is apparent from the
correspondence and the agreement reached between the parties, there
was no doubt what constitutes gross revenue. Licensees were aware
that these items concerning which they have raised the dispute were
included in the definition of gross revenue, as such, they had initially
questioned inclusion on
the basis of the validity of the definition of gross
revenue. The challenge was found to be sans any basis by this Court.
The objections raised concerning the validity of the gross revenue, were
wholly unsustainable and on the face of it, were liable to be rejected,
and came to be rejected finally and conclusively by this Court in the
year 2011.  After that, again the objections have been repeated to
exclude those very revenue items which were held to be included once
over an effort has been made to get rid of the definition of gross
revenue. The objections which have been raised pertained to the
definition of gross revenue for which the court held they are part of
revenue.  Now, relying upon AS-9 standards, an attempt has been made
by an indirect method for excluding items, which are expressly included
in the definition of gross revenue. Objections are too tenuous, and, as
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a matter of fact, there was no scope to raise such objections in 2003
itself. Because of the various correspondence which has been referred,
it becomes apparent that all these heads are included in the definition
of gross revenue, and there is no justification for the licensees to raise
the objections and to keep them pending for over two decades.
189. Further, the conduct of the licensees has also to be
considered in the backdrop of the fact that the regime of revenue sharing
was extremely beneficial than the previous regime of the fixed licence
fee, and they have tremendously benefited by it as is apparent from
the statistics of the revenue earned by the licensees under the revenue
sharing regime. When Government has parted with the privilege as to
revenue on sharing basis under the license, and an agreement entered
into, it ought to have been precisely followed. The conduct of the
licensees was highly unfair, and anyhow and somehow, they had
attempted to delay the payment. It passes comprehension how they
have contended that the demand has to be worked out after this Court
renders the decision. Demand had been raised way-back in the year
2003, which is ultimately the subject-matter of the lis. As the objections
are baseless and wholly untenable, it cannot be said that there was a
bona fide dispute concerning various items. The disputes raised could
not be termed to be bona fide at all. They were justified in order
to
delay the liability and the payment in accordance with the agreement.
In this backdrop and what has been held by us, we have to consider
whether the interest, penalty, and interest on penalty can be levied or
not. Particularly since it is the revenue sharing regime and the
Government has been deprived of the benefit of revenue which it would
have earned but for granting the privilege which it has parted with in
favour of the licensees.
190. In M/s. Everest Industrial Corporation & Ors. v. Gujarat
State Financial Corporation, (1987) 3 SCC 597, this Court held that
the rate of interest payable on the principal amount due under the court’s
order passed under section 32 of the State Financial Corporations Act,
1951 would be as stipulated in the contract as the provisions of section
34 CPC are not attracted, order under section 32 being not a decree,
liability to pay contractual rate of interest cannot be disowned, merely
because of absence of direction for payment of interest in order under
section 32. This Court has held:
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“6. If as held by this Court the proceeding instituted under Section
31(1) of the Act is something akin to an application for
attachment of property in execution of a decree at a stage
posterior to the passing of the decree no question of passing any
order under Section 34 of the Code would arise since Section
34 of the Code would be applicable only at the stage of the
passing of the decree and not to any stage posterior to the
decree. It may also be mentioned here that even under the Code
the question of interest payable in mortgage suits filed in civil
courts is governed by Order 34 Rule 11 of the Code and not by
Section 34 of the Code which may be applicable only to cases
of personal decrees passed under Order 34 Rule 6 of the Code.
The High Court was right in holding that interest would be payable
on the principal amount due in accordance with the terms of the
agreement between the parties till the entire amount due was
paid as per the order passed under Section 32 of the Act. We
hold that the decision of the Karnataka High Court, referred to
above, which has applied Section 34 of the Code to a proceeding
instituted under Section 31(1) of the Act is not correctly decided.”
(emphasis supplied)
191. In Punjab Financial Corporation v. Surya Auto
Industries, (2010) 1 SCC 297, the Court held that when the terms of
the agreement have not been questioned, contractual rate of interest
cannot be altered. The Court has observed thus:
“25. The High Court also
committed serious error in declaring
that the appellant Corporation will be entitled to charge simple
interest at the rate of 10% w.e.f. 1-4-2003 i.e. after the expiry
of six months from the date of taking over of the unit.
Undisputedly, the respondent had not challenged the terms of loan
agreement. Therefore, the High Court could not have suo motu
altered the terms of agreement and directed the appellant to
make fresh calculation of the outstanding dues and allowed the
respondent to pay the amount as per fresh demand by selling
the mortgaged property. This approach of the High Court is ex
facie contrary to the law laid down in U.P. Financial Corpn. v.
Gem Cap (India) (P) Ltd., (1993) 2 SCC 299 and Haryana
Financial Corpn. v. Jagdamba Oil Mills (2002) 3 SCC 496.”
(emphasis supplied)
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192. In Hindustan Steel Ltd. v. State of Orissa (supra), relied
on by licensees the matter was of imposition of penalty in a quasi-
criminal proceeding that penalty will not ordinarily be imposed unless
the party obliged either acted deliberately in defiance of law or was
guilty of conduct – contumacious or dishonest, or acted in conscious
disregard of its obligation. Penalty to be imposed is exercised by judicial
discretion. The ratio of the case, it is not attracted for the reason that
in the instant matter, it is the contractual rate of interest and penalty
agreed to which cannot be said to be arduous in any manner. The rate
of interest has been agreed to and particularly since it is a revenue-
sharing regime, and the licensees have acted in conscious disregard of
their obligation. Thus, on the anvil of the decision above also, they are
liable to pay the dues with interest and penalty. There is no discretion
to vary the penalty. It is 50% of the amount which is in short-fall which
cannot be said to be unreasonable and that too, two grace periods have
been given in clause 20.8 to make payment of the same. As it is the
agreed term and cannot be said to be arbitrary, the ratio of the decision
is not attracted. Reliance has also been placed on Akbar Badrudin
Giwani v. Collector of Customs (supra), wherein the dispute was bona
fide. It was a case of exercise of power by the tribunal while imposing
a penalty and fine
instead of confiscation. There is no such discretion
available when the parties have agreed in default what amount is to be
paid. It automatically follows that it is not to be determined by licensor
once over again. Parties (licensor and licensees) are bound by the terms
and conditions of the contract. There is no enabling clause to vary either
the rate of interest or the penalty provided therein and even if permissible
it is not called for to vary interest or penalty fixed under the agreement
in the facts and circumstances of the case. The decision mentioned
above was concerning discretion to impose the penalty. Here, there is
no 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.
(supra). In both the cases, duty was not paid under the provisions of
section 11-A. There were divergent views of the High Courts. It was
not found to be a case of fraud, collusion, wilful misstatement, or
suppression of facts. Thus, the action of the imposing penal interest
under section 11A and other penalties were set aside as there was a
bona fide dispute. In the present case, there is no bona fide dispute,
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and it is not appropriate to vary the interest or the penalty. That has to
be worked out from 2003 and not after the decision to be passed by
this Court. Facts in J K Synthetics Ltd. (supra) were different. In that
case, the assessee had paid the tax based on information supplied by
him in the return. Thus, it was held that it would not be proper to levy
interest under clause (a) of section 11B. In the instant case, the demand
had been raised by the licensor, and after that, untenable objections have
been raised which had no foundational basis, and the licensees have
taken inconsistent stands. Earlier they had questioned on the ground
that these items were wrongly included in the definition, now they are
contending that the same are not part of the definition in agreement.
194. Reference has also been made to the decision in Kailash
Nath Associates (supra). In that case, there was forfeiture of earnest
money. The factual matrix of the instant case is different. The case
was dealing with the court’s power to grant reasonable compensation
when the amount fixed in the contract is like a penalty; only reasonable
compensation can be awarded. Whether or not actual damage or loss
is proved, has to be considered. It is only in cases where it is possible
to prove actual damage or loss, such proof is not to be dispensed. It is
only in cases where damage or loss is difficult or impossible to prove
that the liquidated amount named in the contract can be awarded. In
the instant case, it is quite reasonable amount of the penalty in case of
default in payment of the amount. The term cannot be said to be
unconscionable. As the Government has been deprived of the revenue
and the licensees have been benefited by revenue sharing regime, in
spite of that, they have not shared the revenue. They are bound by the
stipulation, which is found to be quite reasonable in the facts and
circumstances of the case.
195. In Central Bank of India v. Ravindra, (supra), this Court
considered the question of award of payment of interest and has held
that there is nothing wrong with the party voluntarily entering into the
transaction as to stipulation, for payment of compound interest ,at
reasonable rates and authorising the creditors to capitalise the amount
on the amount remaining unpaid so as to enable interest to be charged
on the accrued rate on the interest component of the capitalised sum
for the succeeding period. Interest, once capitalised, sheds its colour
of interest and becomes a part of the principal to become a debt as
has been observed thus:
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“36. The English decisions and the decisions of this Court and
almost all the High Courts of the country have noticed and
approved long-established banking practice of charging interest
at reasonable rates on periodical rests and capitalising the same
on remaining unpaid. Such a practice is prevalent and also
recognised in non-banking moneylending transactions. The
legislature has stepped in from time to time to relieve the debtors
from hardship whenever it has found the practice of charging
compound interest and its capitalisation to be oppressive and
hence needing to be curbed. The practice is permissible, legal
and judicially upheld excepting when superseded by legislation.
There is nothing wrong in the parties voluntarily entering into
transactions, evidenced by deeds incorporating covenant or
stipulation for payment of compound interest at reasonable rates,
and authorising the creditor to capitalise the interest on remaining
unpaid so as to enable interest being charged at the agreed rate
on the interest component of the capitalised sum for the
succeeding period. Interest once capitalised, sheds its colour of
being interest and becomes a part of the principal to bind the
debtor/borrower.
44. We are of the opinion that the meaning assigned to the
expression “the principal sum adjudged” should continue to be
assigned 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 of
the method of capitalisation of interest to make it a part of the
principal consistently with the contract between the parties or
established 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 upholding
the same. Secondly, the underlying principle as noticed in several
decided cases is that when interest is debited to the account of
the borrower on periodical rests, it is debited because of it having
fallen due on that day. Nothing prevents the borrower from paying
the amount of interest on the date it falls due. If the amount of
interest is paid there will be no occasion for capitalising the
amount of interest and converting it into principal. If the interest
is not paid on the date due, from that date the creditor is deprived
of the use of the money, and which it would have made if the
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debtor had paid the amount of interest on the date due, the
creditor needs to be compensated for deprivation. As held in
Pazhaniappa Mudaliar v. Narayana Ayyar, AIR 143 Mad 157,
the fact situation is analogous to one as if the creditor has
advanced money to the borrower equivalent to the amount of
interest debited. We are, therefore, of the opinion that the
expression “the principal sum adjudged” may include the amount
of interest, charged on periodical rests, and capitalised with the
principal sum actually advanced, so as to become an amalgam
of principal in such cases where it is permissible or obligatory
for the court to hold so. Where the principal sum (on the date of
suit) has been so adjudged, the same shall be treated as “principal
sum” for the purpose of “such principal sum” — the expression
employed later in Section 34 CPC. The expression “principal sum”
cannot be given different meanings at different places in the
language of same section, i.e. Section 34 CPC.
(emphasis supplied)”
196. Concerning penal interest, this Court in Central Bank of
India v. Ravindra (supra) has observed that the penalty is founded on
the doctrine of penal action. Penal interest can be charged only once
for one period of default, and therefore cannot be permitted to be
capitalised.
“55. (1) Though interest can be capitalised on the analogy that
the interest falling due on the accrued date and remaining unpaid,
partakes the character of amount advanced on that date, yet
penal interest, which is charged by way of penalty for non-
payment, cannot be capitalised. Further interest i.e. interest on
interest, whether simple, compound or penal, cannot be claimed
on the amount of penal interest. Penal interest cannot be
capitalised. It will be opposed to public policy.”
197. It is not levy of penal interest, which is involved in the instant
case. Thus, based on the decision mentioned above, we find that when
there is contractual stipulation, the interest can be levied and
compounded.
198. Resultantly, we are of the considered opinion that interest
and penalty have rightly been levied. Once an amount of shortfall has
not been paid, it has to carry 50% of the penalty on defaulted amount,
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[2019] 16 S.C.R.
as agreed. Thus, we find no substance in the submission that interest,
penalty, and interest on penalty cannot be realised. It is as per the
agreement. In the facts and circumstances, we find no ground to reduce
the same, considering the nature of untenable objections raised on behalf
of the licensees, which were in fact either barred by res judicata or
constructive res judicata but as this Court had remitted the matter to
TDSAT to find that demand was based on proper interpretation of
licence.  Matter was remitted after giving finding on inclusion of the
various heads in the definition of gross revenue. Even as per the case
of licensees they were not validly included in definition, now reprobating
that, stand has been taken that they did not form part of revenue which
is not permissible. No litigant can be permitted to reap fruits on such
inconsistent and untenable stands and litigate for decades in several
rounds which is not so uncommon but is disturbing scenario projected
in very many cases. We have examined the matter upon merits and
then aforesaid conclusion indicates frivolous nature of objections.
199. In the result, the appeals of licensees are dismissed and filed
by DOT, are accordingly allowed in view of the findings recorded.
200. No order as to costs.
Divya Pandey
Appeals disposed of.