SC and HC Judgments Online at MyNation

Judgments of Supreme Court of India and High Courts

Union Of India vs Association Of Unified Telecom … on 24 October, 2019

1

REPORTABLE

SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.6328­6399 OF 2015

UNION OF INDIA ..APPELLANT(S)

VERSUS

ASSOCIATION OF UNIFIED TELECOM
SERVICE PROVIDERS OF INDIA ETC.ETC. ..RESPONDENT(S)

WITH

CIVIL APPEAL NOS. 6183­6255 OF 2015

CIVIL APPEAL NOS.5832­5852 OF 2015

CIVIL APPEAL NO.5909 OF 2015

CIVIL APPEAL NO.6009 OF 2015

CIVIL APPEAL NO.5996 OF 2015

CIVIL APPEAL NO.5957 OF 2015

CIVIL APPEAL NO.5997 OF 2015

CIVIL APPEAL NO.5998 OF 2015

CIVIL APPEAL NO.6011 OF 2015

CIVIL APPEAL NO.6002 OF 2015

CIVIL APPEAL NO.6010 OF 2015

CIVIL APPEAL NO.6012 OF 2015

CIVIL APPEAL NOS.8496­8505 OF 2015

CIVIL APPEAL NOS.8493­8495 OF 2015

CIVIL APPEAL NO.5929 OF 2015

CIVIL APPEAL NO.5911 OF 2015
Signature Not Verified

Digitally signed by
RACHNA
Date: 2019.10.24
17:08:54 IST
Reason:
CIVIL APPEAL NO.5882 OF 2015

CIVIL APPEAL NO.5931 OF 2015
2

CIVIL APPEAL NO.5934 OF 2015

CIVIL APPEAL NO.5930 OF 2015

CIVIL APPEAL NOS.6888­6895 OF 2015

CIVIL APPEAL NO.6003 OF 2015

CIVIL APPEAL NO.6004 OF 2015

CIVIL APPEAL NOS.8506­8530 OF 2015

CIVIL APPEAL NOS.8009­8017 OF 2015

CIVIL APPEAL NO.344 OF 2016

CIVIL APPEAL NO.498 OF 2016

CIVIL APPEAL NO.497 OF 2016

CIVIL APPEAL NO.493 OF 2016

CIVIL APPEAL NO.14624 OF 2015

CIVIL APPEAL NO.13550 OF 2015

CIVIL APPEAL NOS.13705­13711 OF 2015

CIVIL APPEAL NO.13590 OF 2015

CIVIL APPEAL NO.13587 OF 2015

CIVIL APPEAL NO.13586 OF 2015

CIVIL APPEAL NO.13585 OF 2015

CIVIL APPEAL NO.13591 OF 2015

CIVIL APPEAL NO.13538 OF 2015

CIVIL APPEAL NO.13588 OF 2015

CIVIL APPEAL NO.13593 OF 2015

CIVIL APPEAL NOS.13595­13596 OF 2015

CIVIL APPEAL NO.13584 OF 2015

CIVIL APPEAL NO.13574 OF 2015

CIVIL APPEAL NO.13681 OF 2015

CIVIL APPEAL NOS.13581­13582 OF 2015
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CIVIL APPEAL NO.13592 OF 2015

CIVIL APPEAL NO.13699 OF 2015

CIVIL APPEAL NO.13697 OF 2015

CIVIL APPEAL NO.13698 OF 2015

CIVIL APPEAL NO.13680 OF 2015

CIVIL APPEAL NOS.6022­6044 OF 2016

CIVIL APPEAL NO. 8275 OF 2019 @ SPECIAL LEAVE PETITION (C)
NO.20219 OF 2016

CIVIL APPEAL NOS.8646­8648 OF 2018

JUDGMENT

ARUN MISHRA, J.

1. In the appeals, the question involved is with respect to the

definition of gross revenue as defined in clause 19.1 of the licence

agreement granted by the Government of India to the Telecom Service

Providers. The case has a chequered history and the scenario

projected is that even after the licensees agreeing with the revenue

sharing regime under the Telecom Policy of 1999 for the last two

decades, definition of gross revenue has been litigated upon, though

the intendment was to keep it free from the same and various

disputes. Notwithstanding the fact that disputes have been raised, and

despite the fact what is the meaning to be given to gross revenue, was

agreed upon between the parties. The telecom sector was

liberalized under the National Telecom Policy, 1994 and various

licenses were issued to companies under Section 4 of the Indian

Telegraph Act, 1885. The licences granted to the service providers
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stipulated a fixed licence fee, which was payable by the service

providers every year.

2. However, as the said fixed license fee was very high and the

telecom service providers consistently defaulted in making the

payments, the telecom service providers made a representation to the

Government of India for relief against the steep license fee. The said

representation was considered and keeping the interest of the country,

and the telecom sector in mind, a new package, known as “the

National Telecom Policy, 1999 Regime” giving an option to the

licensees to migrate from fixed licence fee to revenue sharing fee was

made applicable in the year 1999. The National Telecom Policy, 1999

was devised after holding detailed deliberations and consultations with

the telecom service providers and the telecom industry. Clause III of

the migration package reads as under:

“(iii) The Licence fee as a percentage of gross revenue under
the license shall be payable w.e.f. 1.8.1999. The Government
will take a final decision to charge the quantum of the revenue
share as licence fee after obtaining recommendations of the
Telecom Regulatory Authority of India (TRAI). Meanwhile, the
Government decided to fix 15% of the gross revenue of the
licensee as a provisional license fee. The gross revenue for this
purpose would be the total revenue of the Licensee company
excluding the PSTN related call charges paid to DOT/MTNL
and service tax collected by the licensee on behalf of the
Government from their subscribers. On receipt of TRAI’s
recommendation and Government’s final decision, the final
adjustment of provisional dues will be effected depending upon
the percentage of revenue share and the definition of revenue
for this purpose as may be finally decided.”

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3. As mentioned, in the new Telecom Policy, 1999, the purpose and

objects for the shift to “Revenue Sharing Regime,” which, as such, was

more beneficial to the telecom service providers were:

 Make available telephone on demand by the year 2002 and
sustain it after that to achieve a teledensity of 7 by the year
2005 and 15 by the year 2010.

 Encourage the development of telecom in rural areas making
it more affordable by suitable tariff structure and making
rural communication mandatory for all fixed service
providers.

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

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

 Provide Internet access to all district headquarters by the year
2000.

 Provide high­speed data and multimedia capability using
technologies including ISDN to all towns with a population
higher than 2 lakh by the year 2002.

4. Considering the objectives and targets of the new Telecom Policy,

1999, it appears that:

i. The Central Government gave a liberalised mode of payment
by “revenue sharing” regime, which was the price for parting
with the exclusive privilege the Central Government had.

ii. The Telecom Policy, 1999, was so designed that the
Government becomes a partner or sharer of “gross revenue.”

iii. From out of money received under the head of “Adjusted
Gross Revenue,” the Central Government took a conscious
decision to spend money to remote and uncovered areas,
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rural areas, tribal areas, and hilly areas to ensure maximum
tele­connectivity.

iv. The said objective was achieved, inter alia, by giving
subsidies for the establishment of telecom infrastructure in
such areas

5. Fifteen percent AGR was fixed as license fee under “revenue

sharing,” which was reduced to 13 percent and lastly to 8 percent in

2013. It appears that the “revenue sharing” package turned out to be

very very beneficial to the telecom service providers, which is evident

from the continuing rise in the gross revenue, which is as follows:

Financial Year (ending in Gross Revenue earned by
March) TSPs (in crores)

2004 4,855
2006 2,666
2007 89,108
2008 1,05,061
2009 1,43,044
2010 1,44,232
2011 1,60,251
2012 1,82,637
2013 2,04,221
2014 2,24,430
2015 2,37,676

6. However, the telecom service providers in spite of the financial

benefits of the package started to ensure that they do not pay the

licence fee to the public exchequer based on even an agreed “AGR”.

7. To arrive at the formula of “AGR,” the Draft Licence Agreement

was circulated to the telecom operators. It is pertinent to note that

the Draft Licence Agreement provided clause 18.2, which pertains to
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an annual license fee payable as a percentage of adjusted gross

revenue “AGR.” Gross Revenue defined under clause 19 of the Draft

Licence Agreement, reads as under:

“19. Definition of ‘Adjusted Gross Revenue’:

19.1 Gross Revenue:

The Gross Revenue shall be inclusive of installation
charges, late fees, sale proceeds of handsets (or any other
terminal equipment etc.), revenue on account of interest,
dividend, value­added services, supplementary services, access
or interconnection charges, roaming charges, revenue from
permissible sharing of infrastructure and any other
miscellaneous revenue, without any set­off for related item of
expense, etc.

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

I. PSTN/PLMN related call charges (Access Charges)
actually paid to other eligible/entitled

telecommunication service providers within India;
I. Roaming revenues actually passed on to other
eligible/entitled telecommunication service providers
and;

II. Service Tax on provision of service and Sales Tax
actually paid to the Government if gross revenue had
included as component of Sales Tax and Service Tax.

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

8. Along with the Draft Licence Agreement, all annexures to the

license, including the format of Statement of Revenue and Licence Fee

(Appendix­II to Annexure­II) were circulated. As per the form of the

Statement of Revenue and Licence Fee, the telecom operators were

required to submit the relevant data/revenue earned by them so that

the ultimate AGR/license fee can be determined.
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9. That vide communication dated 01.03.2001, the Association of

Basic Telecom Operators submitted their comments on Draft License

Agreement for basic service licenses. The comments on the revenue to

levy the license fee were as under:

“For ascertaining the Revenue, income is proposed to be
considered on an accrual basis while deductible expenses are
proposed to be considered on an actual or pass­through basis.
Also, logically, the LICENSEE should be required to pay license
fee only on that income which he has actually obtained. In
view of this, the above mode of revenue is inequitable. Hence,
both the income as well as deductible expenses should be
computed on actual basis to arrive at an equitable and fair
figure of revenue on which the License Fee can be levied.

Income from interest, dividend, etc. are also proposed to be
included while computing the Revenue. Such income is purely
non­operational income as it is earned from sources other
than the provision of SERVICE and is recognised to be so by
all statutory authorities including the ICAI, SEBI and the
Stock Exchanges. Hence, no license fee should be levied on
such income, and accordingly, such income should not be
included for computing the figure of REVENUE.

All such deposits as are credited to the PL Account are
proposed to be covered in REVENUE. This is irrational since
these ……. Further, all bad debts recovered and write­back
of provisions and other debits for earlier years are also
proposed to be included in REVENUE. However, no deduction
on account of bad debts provisions, etc. for the current year is
allowed to while computing REVENUE. This is both
inequitable, irrational, and against the fundamental
accounting concepts. Such additions on account of write­back
should be allowed only in licensees are given the
corresponding benefit of the very same expenses from the
current period’s income for computing REVENUE.

Lastly, the definition should be a comprehensive one
comprising an exhaustive (and not indicative) list of items
which will be included in the expression REVENUE. Any
indicative list is bound to give rise to unnecessary disputes in
the future, which will be detrimental to the LICENSEES in
most cases.”

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10. It appears that after that the licenses were issued in favour of

the respective telecom operators. As observed hereinabove, the

telecom operators availed the benefit of migration package. However,

thereafter when the department raised the demands on the service

providers, in the year 2003 the Association of Basic Telecom Operators

and respective telecom operators filed a petition before the Telecom

Disputes Settlement and Appellate Tribunal, New Delhi (hereinafter

referred to as the ‘TDSAT’) under Section 14(a)(i) read with Section

14(A) (1) of the SectionTelecom Regulatory Authority of India Act, 1997

(hereinafter referred to as the “SectionTRAI Act”) being Petition No. 07 of

2003. It was a case of the telecom operators that the department was

supposed to determine the quantum based on the recommendations of

the TRAI. According to the telecom operators, the department had

illegally included various elements of income in the definition of the

term “AGR” which do not accrue from the operations under the license

viz., dividend income, interest income on short term investment,

discounts on calls, revenues from other activities separately licensed,

reimbursements under the Universal Service Fund (USF) etc. The

telecom operators heavily relied upon the recommendations issued by

the TRAI on 31.08.2000, making detailed recommendations on the

terms and conditions for issuance of licenses to new Basic Operators,

more particularly the recommendations made by the TRAI with the
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revenue sharing of 12%, 10% and 8% for categories A, B and C Circles

respectively ought to be levied on the Basic Operators.

11. On merits and components of the AGR, the telecom operators

submitted the following grounds:

“48) BECAUSE logically the LICENSEE should be required to
pay licence fee only on that income which he has actually
obtained;

50) BECAUSE income from interest, dividend, etc., which are
proposed to be included while computing the Revenue are
purely non­operational income as it is earned from
sources other than the provision of SERVICE and is
recognized to be so by all statutory authorities including
the ICAI, SEBI and the Stock Exchange.

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

52) BECAUSE all such deposits as are credited to the PL
Account are proposed to be covered in REVENUE which
is irrational;

53) BECAUSE further, all bad debts recovered and write­back
of provisions and other debits for earlier years are also
proposed to be included in REVENUE;

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

57) BECAUSE the definition should be a comprehensive one
comprising an exhaustive (and not indicative) list of items
which will be included in the expression REVENUE;”

12. It appears that no other grounds were raised. The telecom

operators in Petition No.7 of 2003 prayed as under:

“a) declare that Adjusted Gross Revenues can only relate to
revenues directly arising out of telecom operations licensed
under Section 4 of the Indian Telegraph Act, 1885 (after
adjustment of expenses and write­offs and revenues not
directly attributable to the licensed telecom activities and
miscellaneous and other items indicated in the DoT letter
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dated 26.7.01, including interest income and dividend
income, value of rebates, discounts, free calls and
reimbursement from the USO fund etc., ought not be
included in the Adjusted Gross Revenues for the purposes
of computation License Fee;

b) set aside the DoT letters dated 7.5.03, attempting to
adjust/set off their claims relating to Adjusted Gross
Revenue from out of the amounts due and refundable to the
Petitioners consequent to the Judgements of this Hon’ble
Tribunal and the Hon’ble Supreme Court;

c) set aside the DoT demand letters inter alia dated 21.8.02,
9.8.02, 14/21.1.03, 23.1.03, 7.3.03 and similar demands
raised against the BSOs claiming Revenue Share on interest
income and other miscellaneous heads which are contrary
to the Recommendations of the TRAI;

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

e) direct the DoT to refund the BSOs all such excess amounts
together with interest @ 12% per annum that may have
been collected by it under its letter dated 26.7.01 or 7.5.03
or otherwise, contrary to the recommendations of the TRAI
dated 31.10.00.”

13. The objections described above can be said to be the first set of

the grounds by the telecom operators raised at the first instance and

the earliest. It appears that after TDSAT remitted the matter to the

TRAI by observing that there was no adequate consultation with the

TRAI before finalising the AGR and the components which form the

AGR. While remitting the matter to the TRAI, the TDSAT made some

observations regarding the inclusion in gross revenue of the licensee

revenue derived from non­licensed activities. The TDSAT directed

listing for further directions/hearing after the recommendations of the

TRAI are received or in the first week of October 2006, whichever is
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earlier (Order dated 07.07.2006, Coram: Justice N. Santosh Hegde,

Chairperson, and D.P. Sehgal, Member).

14. That in the order dated 07.07.2006, the Tribunal rejected the

contentions of the UOI and held that under Section 4 of the Indian

Telegraph Act, 1885, the Central Government can take percentage of

the share of gross revenue of a licensee realised from activities of the

licensee under the licence and therefore revenue received by a licensee

from activities beyond licence activities would be outside the purview

of Section 4 of the Telegraph Act. The Tribunal further held that

Section 11(1)(a) of the TRAI Act mandates the Central Government to

seek recommendations from the TRAI on the licence fee payable by the

licensee and as the TRAI has made no effective consultation, the

matter should be remitted to the TRAI and the TRAI can consider the

issue and send its recommendations to the Tribunal. At this stage, it

is required to be noted that the Union of India challenged the order

dated 07.07.2006 of the Tribunal before this Court in Civil Appeal No.

84 of 2007 under Section 18 of the TRAI Act. During the pendency of

the civil appeal, the TRAI sent its recommendations as to the AGR

which have been sought by the Tribunal vide its order dated

07.07.2006. Therefore, when Civil Appeal No.84/2007 came up for

hearing before this Court on 19.01.2007, this Court dismissed the

said appeal with the liberty to the Union of India to urge all

contentions raised in the civil appeal before the Tribunal.
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15. It appears that after that the TRAI sent its recommendations to

the TDSAT. At this stage, it is required to be noted that though in

view of the order passed by this Court dated 19.01.2007 passed in

Civil Appeal No. 84/2007, a liberty was reserved in favour of the Union

of India to urge all contentions raised in the civil appeal and

accordingly the Union of India submitted that the Union of India is

entitled to reopen the issue whether the validity of the definition of

AGR in the Licence Agreement could be questioned before the Tribunal

including the submission that the AGR shall also include the revenue

from activities outside the license, the TDSAT in its fresh order dated

30.08.2007 did not permit the Union of India to raise the aforesaid

issues, and the Tribunal held that its earlier order dated 07.07.2006

having become final, it cannot be reopened after the disposal of Civil

Appeal No. 84/2007. The Tribunal held that it’s finding in the earlier

order dated 07.07.2006 that the adjusted gross revenue “AGR” will

include only revenue arising from licence activities and not revenue

from activities outside the licence cannot be re­agitated by the Union

of India. Therefore, the TDSAT held that the AGR would include only

the revenue from licence activities. After that the Tribunal in its fresh

order dated 30.08.2007 considered the recommendations of the TRAI

regarding the heads of the revenue to be included and the heads of the

revenue to be excluded from the AGR and decided as follows:
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“(i) The Tribunal accepted the recommendation of TRAI that
income from dividend even though part of the revenue does
not represent revenue from licensed activity and, therefore,
cannot be included in the adjusted gross revenue.

(ii) The Tribunal accepted the recommendation of TRAI that
interest earned on investment of savings made by a licensee
after meeting all liabilities including liability on account of the
share of the Government in the gross revenue cannot be
included in the adjusted gross revenue, but, interest on
investment of funds received by a licensee by way of deposits
from customers on account of security against charges and on
account of concessions given in the charges payable for using
the telecom services have to be included in the adjusted gross
revenue as these are related to telecom service, which is part
of the licensed activity.

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

(iv) The Tribunal accepted the recommendation of TRAI that
gains from foreign exchange rate fluctuations are also not part
of the licensed activity of telecom service providers and,
therefore, cannot constitute part of the adjusted gross
revenue.

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

(vi) The Tribunal also accepted the recommendation of TRAI
that rent from property owned by the licensee should be
excluded from the adjusted gross revenue, provided it is
established that the property is not in any way connected with
establishing, maintaining and working of telecommunication.

(vii) The Tribunal accepted the recommendation of TRAI that
income from renting and leasing of passive infrastructures like
towers, dark fiber, etc. should be part of the adjusted gross
revenue as they are parts of the licensed activity of the
licensee.

(viii) The Tribunal accepted the recommendation of TRAI that
revenue from sale of tenders, directories, forms, forfeiture of
deposits/earnest money in relation to telecom service should
form part of the adjusted gross revenue, but held that
management fees, consultancy fees and training charges from
telecom service should not form part of the adjusted gross
revenue as these activities do not require a licence.
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(ix) The Tribunal held that payments received on behalf of the
third party should not form part of the adjusted gross revenue
and did not accept the recommendation of TRAI in this regard.

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

(xi) The Tribunal accepted the recommendation of TRAI that
sale of handsets or telephone equipment bundled with telecom
service should be part of the adjusted gross revenue because
such sale comes within the licensed activity.

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

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

(xiv) The Tribunal accepted the recommendation of TRAI that
costs on account of port charges, interconnection set­up
charges, leased lines, sharing of infrastructure, roaming
signalling charges and content charges should form part of the
adjusted gross revenue.

(xv) The Tribunal did not accept the recommendation of TRAI
that bad debts, waivers, and discounts should form part of the
adjusted gross revenue and held that such losses incurred by
a licensee should be excluded from the adjusted gross
revenue.

(xvi) The Tribunal accepted the recommendation of TRAI that
service tax payable by the licensee should be included or
excluded from the adjusted gross revenue on an accrual basis
and also accepted the recommendation of TRAI that
interconnection usage should also be included or excluded
from the adjusted gross revenue on an accrual basis.
(xvii) Tribunal did not accept recommendation of TRAI that its
recommendations with regard to items, which are to be
included or excluded from the gross revenue, should be
effective from a prospective date and instead held that the
findings of the Tribunal with regard to items, which are
included or excluded from the adjusted gross revenue, will be
effective from the date the licensee approached the Tribunal.”

16. A fresh final order passed by the TDSAT dated 30.08.2007 was

the subject matter of appeal before this Court in the case of SectionUnion of
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India and another v. Association of Unified Telecom Service Providers of

India, (2011) 10 SCC 543. This Court formulated the following

substantial questions of law:

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

(ii) Whether TRAI and the Tribunal have the jurisdiction to
decide the validity of the terms and conditions of the licence
which had been finalised by the Central Government and
incorporated in the licence agreement including the definition
of adjusted gross revenue.

(iii) Whether as a result of the Union of India not filing an
appeal against the order dated 7­7­2006 of the Tribunal
passed in favour of some of the licensees, the said order dated
7­7­2006 had not become binding on the Union of India with
regard to the issue that revenue realised from activities beyond
the licensed activities cannot be included in the adjusted gross
revenue.

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

17. While answering issue No.1, this Court took note of the

expressed language of the order dated 19.01.2007 passed in Civil

Appeal No.84 of 2007 and held that it was open for the Union of India

to raise all contentions which were raised in Civil Appeal No.84 of

2007 including the following grounds:

“1. Because the judgment and order dated 7­7­2006 passed by
the TDSAT are wrong, erroneous, contrary to law and deserves
to be set aside.

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2. Because the TDSAT failed to appreciate that the migration
package accepted and acted upon by the respondents herein
itself provided for the definition of gross revenue and adjusted
gross revenue.

3. Because the TDSAT failed to appreciate that the licensees
unconditionally accepted the migration package, exploited the
licence on the terms and conditions mentioned therein and
after that challenged the definition of adjusted gross revenue.

4. TDSAT failed to appreciate that it had no jurisdiction or
power to examine the correctness of terms of the licence which
had been unconditionally accepted and acted upon by the
licensees.

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

6. Because the TDSAT failed to appreciate that under Section 4
of the Telegraph Act, 1885 it is the exclusive privilege of the
Central Government to establish, maintain and work
telegraph/telecom and this privilege can be given to the private
parties by granting licences on such terms and conditions as
the Central Government thinks fit and appropriate.”

18. This Court specifically observed and held that the Union of India

could urge before the Tribunal all contentions under the Grounds 1 to

6, extracted above, including the assertion that the definition of

adjusted gross revenue “AGR” as given in the licence could not be

challenged by the licensees before the Tribunal and will include all

items of revenue mentioned in the definition of adjusted gross revenue

in the licence.

19. While answering second substantial question of law, namely,

whether TRAI and the Tribunal have the jurisdiction to decide the

validity of the terms and conditions of the licence including the
18

definition of adjusted gross revenue finalised by the Central

Government and incorporated in the licence, this Court observed and

held as under:

“37. A bare perusal of sub­section (1) of Section 4 of the
Telegraph Act shows that the Central Government has the
exclusive privilege of establishing, maintaining, and working
telegraphs. This would mean that only the Central
Government, and no other person, has the right to carry on
telecommunication activities.

39. The proviso to sub­section (1) of Section 4 of the Telegraph
Act, however, enables the Central Government to part with
this exclusive privilege in favour of any other person by
granting a licence in his favour on such conditions and in
consideration of such payments as it thinks fit. As the Central
Government owns the exclusive privilege of carrying on
telecommunication activities and as the Central Government
alone has the right to part with this privilege in favour of any
person by granting a licence in his favour on such conditions
and in consideration of such terms as it thinks fit, a licence
granted under the proviso to sub­section (1) of Section 4 of the
Telegraph Act is in the nature of a contract between the
Central Government and the licensee.

40. A Constitution Bench of this Court in SectionState of
Punjab v. Devans Modern Breweries Ltd. [(2004) 11 SCC 26]
relying on Har Shankar case [(1975) 1 SCC 737] and SectionPanna
Lal v. State of Rajasthan [(1975) 2 SCC 633] has held in para
121 at p. 106 that issuance of liquor licence constitutes a
contract between the parties. Thus, once a licence is issued
under the proviso to sub­section (1) of Section 4 of the
Telegraph Act, the licence becomes a contract between the
licensor and the licensee. Consequently, the terms and
conditions of the licence, including the definition of adjusted
gross revenue in the licence agreement are part of a contract
between the licensor and the licensee. We have to, however,
consider whether the enactment of the SectionTRAI Act in 1997 has in
any way affected the exclusive privilege of the Central
Government in respect of the telecommunication activities and
altered the contractual nature of the licence granted to the
licensee under the proviso to sub­section (1) of Section 4 of the
Telegraph Act.

41. Section 2(e) of the TRAI Act quoted above defines “licensee”
to mean any person licensed under sub­section (1) of Section 4
of the Telegraph Act for providing specified public
telecommunication services and Section 2(ea) defines
“licensor” to mean the Central Government or the telegraph
authority who grants a licence under Section 4 of the
19

SectionTelegraph Act. Sub­Sectionsection 2(k) defines “telecommunication
service” very widely so as to include all kinds of
telecommunication activities. These provisions under the SectionTRAI
Act do not affect the exclusive privilege of the Central
Government to carry on telecommunication activities nor do
they alter the contractual nature of the licence granted under
the proviso to sub­section (1) of Section 4 of the Telegraph Act.

43. These provisions in the SectionTRAI Act show that
notwithstanding subsection (1) of Section 4 of the Telegraph
Act vesting exclusive privilege in the Central Government in
respect of telecommunication activities and notwithstanding
the proviso to sub­section (1) of Section 4 of the Telegraph Act
vesting in the Central Government the power to decide on the
conditions of licence including the payment to be paid by the
licensee for the licence, TRAI has been conferred with the
statutory authority to make recommendations on the terms
and conditions of the licence to a service provider and the
Central Government was bound to seek the recommendations
of TRAI on such terms and conditions at different stages, but
the recommendations of TRAI are not binding on the Central
Government, and the final decision on the terms and
conditions of a licence to a service provider rested with the
Central Government. The legal consequence is that if there is a
difference between TRAI and the Central Government with
regard to a particular term or condition of a licence, as in the
present case, the recommendations of TRAI will not prevail
and instead the decision of the Central Government will be
final and binding.

44. In contrast to this recommendatory nature of the functions
of TRAI under clause (a) of sub­section (1) of Section 11 of the
TRAI Act, the functions of TRAI under clause (b) of sub­section
(1) of Section 11 of the TRAI Act are not recommendatory. This
will be clear from the very language of clause (b) of sub­section
(1) of Section 11 of the TRAI Act which states that TRAI shall
discharge the functions enumerated under sub­clauses (i), (ii)
and (ix) under clause (b) of sub­section (1) of Section 11 of the
TRAI Act. Under clause (c) of sub­section (1) of Section 11 of
the TRAI Act, TRAI performs the function of levying fees and
other charges in respect of different services and under clause

(d) of sub­section (1) of Section 11, the Central Government
can entrust to TRAI other functions. These functions of TRAI
under clauses (c) and (d) of sub­section (1) of Section 11 of the
TRAI Act are also not recommendatory in nature. That the
functions of TRAI under clause (a) are recommendatory while
the functions of TRAI under clauses (b), (c) and (d) are not
recommendatory will also be clear from provisos first to fifth
which refer to the recommendations of TRAI under clause (a)
of sub­section (1) of Section 11 of the TRAI Act and not to
clauses (b), (c) and (d) of sub­section (1) of Section 11 of the
TRAI Act.

20

45. The scheme of the SectionTRAI Act therefore is that TRAI being an
expert body discharges recommendatory functions under
clause (a) of sub­section (1) of Section 11 of the TRAI Act and
discharges regulatory and other functions under clauses (b),

(c) and (d) of sub­section (1) of Section 11 of the TRAI Act. TRAI
being an expert body, the recommendations of TRAI under
clause (a) of sub­section (1) of Section 11 of the TRAI Act have
to be given due weightage by the Central Government, but the
recommendations of TRAI are not binding on the Central
Government. On the other hand, the regulatory and other
functions under clauses (b), (c) and (d) of sub­section (1) of
Section 11 of the TRAI Act have to be performed independent
of the Central Government and are binding on the licensee
subject to only appeal in accordance with the provisions of the
SectionTRAI Act.

46. A reading of Section 14(a)(i) of the TRAI Act would show
that the Tribunal has the power to adjudicate any dispute
between a licensor and a licensee. A licensor, as we have seen,
has been defined under Section 2(ea) of the TRAI Act to mean
the Central Government or the Telegraph Authority who grants
a licence under Section 4 of the Telegraph Act and a licensee
has been defined in Section 2(e) of the TRAI Act to mean any
person licensed under sub­section (1) of Section 4 of the
Telegraph Act providing specified telecommunication services.
The word “means” in Sections 2(e) and Section2(ea) of the TRAI Act
indicates that the definitions of licensee and licensor in
Sections 2(e) and Section2(ea) of the TRAI Act are exhaustive and
therefore would not have any other meaning. As Justice G.P.
Singh puts it in his book Principles of Statutory Interpretation,
12th Edn., at pp. 179­80:

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

47. A dispute between a licensor and a licensee referred to in
Section 14(a)(i) of the TRAI Act, therefore, is a dispute after a
person has been granted a licence by the Central Government
or the Telegraph Authority under sub­section (1) of Section 4
of the Telegraph Act and has become a licensee and not a
dispute before a person becomes a licensee under the proviso
to sub­section (1) of Section 4 of the Telegraph Act. In other
words, the Tribunal can adjudicate the dispute between a
licensor and a licensee only after a person had entered into a
licence agreement and become a licensee and the word “any”
in Section 14(a) of the TRAI Act cannot widen the jurisdiction
of the Tribunal to decide a dispute between a licensor and a
person who had not become a licensee. The result is that the
Tribunal has no jurisdiction to decide upon the validity of the
terms and conditions incorporated in the licence of a service
provider, but it will have the jurisdiction to decide “any”
dispute between the licensor and the licensee on the
interpretation of the terms and conditions of the licence.
21

48. Coming now to the facts of the cases before us, Clause (iii)
of the Letter dated 22­7­1999 of the Government of India,
Ministry of Communications, Department of
Telecommunications, to the licensees quoted above made it
clear that the licence fee was payable with effect from 1­8­
1999 as a percentage of gross revenue under the licence and
the gross revenue for this purpose would be total revenue of
the licensee company excluding the PSTN related call charges
paid to DoT/MTNL and service tax calculated by the licensee
on behalf of the Government from the subscribers. It was also
made clear in the aforesaid Clause (iii) that the Government
was to take a final decision after receipt of TRAI’s
recommendation on not only the percentage of revenue share
but also the definition of revenue. In accordance with this
Clause (iii), the Government took the final decision on the
definition of adjusted gross revenue and incorporated the same
in the licence agreement. Once the licensee had accepted
Clause (iii) of the Letter dated 22­7­1999 that the licence fee
would be a percentage of the gross revenue which would be the
total revenue of the licensee company and had also accepted
that the Government would take a final decision not only with
regard to the percentage of revenue share but also the
definition of revenue for this purpose, the licensee could not
have approached the Tribunal questioning the validity of the
definition of adjusted gross revenue in the licence agreement
on the ground that adjusted gross revenue cannot include
revenue from activities beyond the licence.

49. If the wide definition of adjusted gross revenue so as to
include revenue beyond the licence was in any way going to
affect the licensee, it was open for the licensees not to
undertake activities for which they do not require licence
under Section 4 of the Telegraph Act and transfer these
activities to any other person or firm or company. The
incorporation of the definition of adjusted gross revenue in the
licence agreement was part of the terms regarding payment
which had been decided upon by the Central Government as a
consideration for parting with its rights of exclusive privilege in
respect of telecommunication activities and having accepted
the licence and availed the exclusive privilege of the Central
Government to carry on telecommunication activities, the
licensees could not have approached the Tribunal for an
alteration of the definition of adjusted gross revenue in the
licence agreement.

50. Regarding the recommendations of TRAI under Section
11(1)(a)(i) of the TRAI Act, we find that the Tribunal in its order
dated 7­7­2006 has held that the opinion of the renowned
expert on Accountancy that any other definition of adjusted
gross revenue would lead to reduction of licence fee liability by
way of accounting jugglery was not placed before TRAI and as
a result there was no proper and effective consultation with
TRAI and the weightage that was due to the recommendations
of TRAI was not given effect to. In our considered opinion, if
22

the Tribunal found that there was no effective consultation
with TRAI on the opinion of the expert on accountancy, the
Tribunal could have at best, if it had the jurisdiction to decide
the dispute, directed TRAI to consider the opinion of the expert
on accountancy and send its recommendations to the Central
Government and directed the Central Government to consider
such fresh recommendations of TRAI as provided in the
provisos to Section 11(1) of the TRAI Act. Instead, the Tribunal
has considered the recommendations of TRAI and passed the
impugned fresh order dated 30­8­2007 contrary to the very
provisions of Section 11(1)(a) of the TRAI Act and the provisos
thereto. At any rate, as the Central Government has already
considered the fresh recommendations of TRAI and has not
accepted the same and is not agreeable to alter the definition
of adjusted gross revenue, the decision of the Central
Government on the point was final under the first proviso and
the fifth proviso to Section 11(1) of the TRAI Act, 1997.

53. SectionIn State of U.P. v. Devi Dayal Singh [(2000) 3 SCC 5] a
truck owner, Devi Dayal Singh, challenged the right of the
State Government to recover by way of toll under Section 2 of
the Tolls Act, 1851, an amount for the actual construction of
the bridge. This Court held that Section 2 of the Tolls Act,
1851 which enables the State Government to levy toll at such
rates “as it thinks fit” and the only restriction is latent in the
word “toll” itself. This was therefore not a case of a dispute
between the Government and the contractor where the
contractor had challenged a stipulation of the contract. In the
present case, on the other hand, the licensees had accepted
the terms of the licence and after having taken the benefits of
the licence are now trying to wriggle out from the terms of the
licence and in particular the definition of the adjusted gross
revenue.

55. On the other hand, we find from the long line of decisions
in SectionHar Shankar v. Excise Taxation Commr. [(1975) 1 SCC
737], SectionGovt. of A.P. v. Anabeshahi Wine Distilleries (P)
Ltd. [(1988) 2 SCC 25 : 1988 SCC (Tax) 147], SectionExcise
Commr. v. Issac Peter [(1994) 4 SCC 104], SectionState of
Orissa v. Narain Prasad [(1996) 5 SCC 740], SectionState of
M.P. v. KCT Drinks Ltd. [(2003) 4 SCC 748], SectionState of
Punjab v. Devans Modern Breweries Ltd. [(2004) 11 SCC
26], SectionShyam Telelink Ltd. v. Union of India [(2010) 10 SCC 165 :
(2010) 4 SCC (Civ) 99] and in SectionBharti Cellular Ltd. v. Union of
India [(2010) 10 SCC 174 : (2010) 4 SCC (Civ) 108], that this
Court has consistently taken a view that once a licensee has
accepted the terms and conditions of a licence, he cannot
question the validity of the terms and conditions of the licence
before the court. We, therefore, hold that TRAI and the
Tribunal had no jurisdiction to decide on the validity of the
definition of adjusted gross revenue in the licence agreement
and to exclude certain items of revenue which were included in
23

the definition of adjusted gross revenue in the licence
agreement between the licensor and the licensee.”

20. While considering the substantial question of law no.3, this

Court observed and held in paragraph 59 as under:

“59. Thus, the Tribunal in its order dated 7­7­2006 has not
just decided a dispute on the interpretation of adjusted gross
revenue in the licence agreement but has decided on the
validity of the definition of adjusted gross revenue in the
licence agreement. As we have already held, the Tribunal had
no jurisdiction to decide on the validity of the terms and
conditions of the licence, including the definition of adjusted
gross revenue incorporated in the licence agreement. Hence,
the order dated 7­7­2006 of the Tribunal insofar as it decides
that revenue realised by the licensee from activities beyond the
licence will be excluded from adjusted gross revenue dehors
the definition of adjusted gross revenue in the licence
agreement is without jurisdiction and is a nullity, and the
principle of res judicata will not apply.”

21. While answering and considering the fourth substantial question

of law, namely, whether the licensee can challenge the computation of

adjusted gross revenue, and if so, at what stage and on what grounds,

this Court observed and held in paragraph 63 as follows:

“63. Section 14(a)(i) of the TRAI Act, as we have seen, provides
that the Tribunal can adjudicate any dispute between the
licensor and the licensee. One such dispute can be that the
computation of adjusted gross revenue made by the licensor
and the demand raised on the basis of such computation is
not in accordance with the licence agreement. This dispute,
however, can be raised by the licensee, after the licence
agreement has been entered into and the appropriate stage
when the dispute can be raised is when a particular demand is
raised on the licensee by the licensor. When such a dispute is
raised against a particular demand, the Tribunal will have to
go into the facts and materials on the basis of which the
demand is raised and decide whether the demand is in
accordance with the licence agreement and in particular the
definition of adjusted gross revenue in the licence agreement
and can also interpret the terms and conditions of the licence
agreement. We, however, find from the order dated 7­7­2006
24

that instead of challenging any demands made on them, the
licensees have questioned the validity of the definition of
adjusted gross revenue in the licences given to them and the
Tribunal has finally decided in its order dated 30­8­2007 as to
what items of revenue would be part of adjusted gross revenue
and what items of revenue would not be part of adjusted gross
revenue without going into the facts and materials relating to
the demand on a particular licensee.”

22. Ultimately, this Court allowed the appeals preferred by the Union

of India and set aside the order dated 30.08.2007 passed by the

TDSAT. Thereafter, in paragraph 67, this Court clarified as under:

“67. We have delivered today the judgment in these cases
(supra paras 1­66) and while answering the last substantial
question of law, we have held that when a particular demand
is raised on a licensee, the licensee can challenge the demand
before the Tribunal and the Tribunal will have to go into the
facts and materials on the basis of which the demand is raised
and decide whether the demand is in accordance with the
licence agreement and in particular the definition of adjusted
gross revenue in the licence agreement and can also interpret
the terms and conditions of the licence agreement.”

23. After that, the respective telecom operators again approached the

TDSAT challenging the demand notices/demand. The TDSAT by the

impugned order has considered the specific head of items to be

included or excluded under the definition of AGR. The TDSAT

examined the following heads:

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

2. Insurance claim in respect of Capital Assets.

3. Discounts and Commissions.

Discounts allowed on international roaming.
Commission and discount allowed to distributors on sale of
pre­paid vouchers.

4. Waiver of Late Fee.

5. Amount of negative balance of the pre­paid customer.

6. Roaming Charges and PSTN pass­through charges
25

(PSTN – Public Switch Telephone Network)

7. Reimbursement of Infrastructure operating expenses.

8. Gain from foreign exchange fluctuation.

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

10. Proceeds from divestment of investment in a
company
(Example, case of Sistema Shyam in Hexacom)

11. The demand for License fee in a circle where the Licensee
is not granted spectrum (in the case of Videocon S. Tel)

12. Interest, Penalty, and Interest on Penalty

13. Non­refundable deposits and notional interest on interest­
free loans.”

24. TDSAT in the impugned order has held that the Gain on sale of

Capital assets and receipt from the sale of scrap cannot be included in

gross revenue for computation of licence fee. However, it is required to

be noted that the said issue was raised earlier and considered by the

TDSAT in its earlier order dated 30.08.2007 and held in favour of the

telecom operators. However, this Court, in the case of AUSPI (supra) –

expressly set aside the order passed by the TDSAT. Therefore,

subsequently it was not open for the TDSAT to again hold contrary by

the impugned order on the head as mentioned earlier and it can be

said to be barred by res judicata because of the specific order of AUSPI

(supra).

25. Various questions arise for consideration as under:

(i) In re: Definition of gross revenue.

(ii) In re: Discount and commissions.

(iii) In re: Gains arising out of foreign exchange fluctuations.
26

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

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

(vi) In re: Amount of negative balance of pre­paid customer.

(vii) In re: Reimbursement of the infrastructure operating

expenses.

(viii) In re: Waiver of late fee.

(ix) In re: Gains from roaming charges PSTN pass­through

charges.

(x) In re: Non­refundable deposits.

(xi) In re: Licence fee demand where spectrum is not granted.

(xii) In re: Income from interest dividend.

(xiii) In re: Bad­debts written off.

(xiv) In re: Liability written off.

(xv) In re: Inter­corporate loan.

(xvi) In re: Revenue under IP­1 Registration.

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

(xviii) In re: Res Judicata.

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

In Re: Definition of Gross Revenue

26. A new package, namely “the National Telecom Policy 1999

Regime,” gave an option to the licensees to migrate from fixed licence

fee to revenue sharing fee, which was to the advantage of Telecom

Service Providers (for short, ‘the TSPs’). The objective of the
27

Government was to achieve social and economic goals to provide the

service to all uncovered area including rural areas, remote, hilly and

tribal areas and to create an efficient infrastructure thereby propelling

India into an IT superpower and to increase teledensity from 0.4 to 4

by the year 2010 and to provide internet access to all district

Headquarters by the year 2000. Human resource development

training, telecom equipment manufacturer, and remote area telephony

were the other objectives.

27. The Central Government has given a liberalised mode of payment

by revenue sharing regime, which was the price parting with the

exclusive privilege which the Central Government had. The

intendment was to make the Government partner or sharer of gross

revenue. Out of the existing gross revenue, the Central Government

decided to spend money on remote and uncovered areas, rural, tribal,

and hilly areas. The Government incurred a colossal amount of

Rs.49.120 crores under the Universal Service Obligation Fund (for

short, ‘the USOF’) and incurred a committed liability of Rs.59,774

crores for ongoing projects including laying of optical fiber cables up to

Gram Panchayat areas under “Digital India Mission.” Initially, 15

percent Adjusted Gross Revenue (for short, ‘the AGR’) was fixed as

license fee under revenue sharing, which was reduced to 13 percent

and lastly to 8 percent in 2013. Out of the 8 per cent, a substantial
28

portion of 5 per cent is spent by the Central Government under the

USOF.

28. The Sector is benefited immensely under the Scheme as

apparent from the gross revenue trend from 2004 to 2015. Clause

19.1 defines gross revenue. It came as relief against the high license

fee. The gross revenue for this purpose would be the total revenue of

the licensee company with certain exceptions provided in Clause 19.2

to arrive at the figure of AGR. The Policy of 1999 contained the

stipulation that the conditions are to be accepted in its entirety, and

no dispute concerning the license agreement shall be raised at any

future date. The acceptance of the package be deemed full and final

settlement, and after that amendment to the license agreement has to

be signed. Following stipulations were mentioned explicitly in the

Migration Package:

“2. Migration to the NTP­99 on the conditions mentioned above
will be permitted on the premise that the aforesaid conditions
are accepted as a package in its entirety and simultaneously
all legal proceedings in Courts, tribunals or in Arbitration
instituted by the license and Associations of Cellular and Basic
Service Operators (COAI) ABTO) against DoT or UOI shall be
withdrawn. Further, any dispute with regard to the license
agreement for the period up to 31.07.1999 shall not be raised
at any future date. The acceptance of the package will be
deemed as full and final settlement of all existing disputes
whatsoever irrespective of whether they are related with the
present package or not.

3. After the terms and conditions of the package are accepted,
amendments to the existing license agreement will be signed
between the licensor and the licensee.”
29

29. To avoid the accounting jugglery, the Department of

Telecommunications (for short, ‘the DoT’) sought the advice of experts

in the field of accountancy to decide upon the broad definition of the

gross revenue. The relevant portion of the experts’ opinion is extracted

hereunder:

“1.1 The question of what should constitute ‘revenue’ in the
context of the ‘revenue sharing’ policy of the government is a
vexed one. Accounting principles seek to measure economic
transactions and events in a dynamic and open environment
and, therefore, do not always provide as definitive guidance as
one would wish. While keeping these inherent limitations of
accounting as a measurement discipline in view, an attempt
has been made in this note to articulate a basic set of
propositions that may assist in dealing with the issue on hand.
Needless to add, these propositions are presented only as a
starting point for discussions and further refinement.
1.2 As far as possible, our definition of ‘revenue’, the principles
for its measurement and the procedure for establishing the
authenticity of actual figures should be simple and
objective. While it is recognised that this is a difficult
proposition given the inherent nature of accounting and the
diversity in the telecom scenario (which it is recognised that
this is a difficult proposition given the inherent nature of
accounting and the diversity in the telecom scenario (which is
likely to grow at a fast pace), our attempt should be to
evolve a system of revenue sharing that does not become
as arduous and litigative as some other revenue­generating
activities of the government, e.g., income tax, excise duty
etc.

1.3 Defining ‘revenue in a broad, comprehensive and
inclusive manner is likely to pose fewer problems of
interpretation (and consequently lesser disputes and
litigation) than would be the case otherwise. Further,
exclusion of certain items from the definition of ‘revenue’
may sometimes encourage companies to design their tariff
and payment schemes in such a manner that their license
fee liability is reduced to the minimum. Of course, the
comprehensiveness of definition of revenue would need to be
duly considered in determining the percentage of revenue to be
charged as license fee, so that the amount of license fee is
30

appropriate in the context of the present stage of evolution of
telecom companies.

1.4 To ensure consistency, we may lay down uniform
accounting policies to be followed by telecom companies for
presenting their annual accounts as well as periodical
statements of revenue to be sent to the government supporting
their payments.”
(emphasis supplied)

30. The definition of revenue has been taken in a broad,

comprehensive, and inclusive manner to pose fewer problems of

interpretation, and exclusion of certain items was avoided.

31. On 21.5.2001, the Government of India finalised the concept of

gross revenue and AGR.

32. The format of the statement of revenue and license fee payable

by the TSPs is appended to the license agreement, which reflected the

various heads and components, including any other

income/miscellaneous receipts from the wireline subscribers, which

was to be included for the computation of AGR. Provision in Clause

20.2 was made for payment of license fee by the licensee on the basis

of actual revenue (on accrual basis). The accrual was necessary

irrespective of its realisation at a subsequent date or even its non­

realisation.

33. Shri Tushar Mehta, learned Solicitor General of India, appearing

on behalf of Union of India submitted that the definition of gross
31

revenue has to prevail over the mode of accounting. Under Clause

20.4 of the agreement, the licensee must state in the prescribed form

as Annexure­II. The format is a part of the license under the title of

“Format of Statement of Revenue and Licensee Fee.” It has no

connection with the accounting standards prescribed under the

SectionCompanies Act. The format is the basis for the calculation of the

license fee in revenue sharing. The licensees provide the details as per

the format Annexure­II along with the certificate of Auditors. The TSP

has to provide all the details of gross revenue as per the definition.

The accounting standards deal with the broad principles to be followed

while maintaining accounts and can never override the definition of

gross revenue. Accounting Standard (AS­9) deals with the definition of

revenue, but that cannot prevail over the definition of Gross Revenue

as defined in the agreement. The provisions of Section 211 (3B) of

Companies Act makes it clear that accounting standards are not

sacrosanct.

34. The profit and loss account and balance­sheet have to comply

with the accounting standards, as provided in Section 211(3A). In

case they do not comply, for any deviation, the reasons, and the

economic effect have to be disclosed. In Petition No.7 of 2003 filed by

AUSPI, the declaration was sought that AGRs can only be related to

revenues directly arising out of the telecom operations licenced under
32

Section 4 of the Indian Telegraph Act, 1885. A prayer was made to set

aside the demand letter issued in 2002 and 2003, claiming revenue

share on interest income and other miscellaneous heads. In Petition

No.82 of 2005, a prayer was made to re­compute and modify the

demands as per demand notes dated 28.3.2003 and 13.7.2004 on

account of the wrongful entry of gross revenue and AGR, the DoT

cannot levy license fee, which result in charge of the license fee twice

on the same revenue in the hands of two or more operators/circles.

DoT be directed to calculate AGR on realisation basis, not on an

accrual basis, and not to include notional revenue income in AGR.

35. Prayer was made to direct DoT to modify the definition of gross

revenue and AGR for license fee as also WPC charges under Section 4

of the Indian Telegraph Act, 1885. Prayers were also made to direct

DoT to modify the Format of Statement of Gross Revenue, Adjusted

Gross Revenue, and License Fee and strike down the definition of

gross revenue and AGR. This Court in Union of India v. AUSPI (2011)

held that Tribunal has no jurisdiction to exclude certain items of

revenue, which were included in the definition of AGR. The licensee

could not have approached the Tribunal for the alteration of the

definition of AGR in the license agreement. TRAI and Tribunal had no

jurisdiction to decide on the validity of the definition AGR in the

licence agreement. The licensees are not only precluded to challenge
33

the definition of gross revenue/AGR, but also by the meaning the

Government may choose to put to the definition. The Tribunal has

travelled beyond its jurisdiction to act contrary to the specific findings

and decision in AUSPI v. Union of India.

36. Shri Arvind Datar, Shri C.A. Sundaram, Shri Shyam Divan, Shri

Gopal Jain, Shri Ramji Srinivasan, Dr. Abhishek Manu Singhvi, Shri

Kavin Gulati, Shri B. Adinaraynan Rao, Shri U. Hazarika, Shri Chetan

Sharma and Shri Siddhartha Dave, learned senior counsel appearing

on behalf of TSPs submitted that the meaning of gross revenue has to

be determined in accordance with the provisions of AS­9 which only

includes gross inflow of cash, receivables that arise out of ordinary

activities of the telecom companies. In the definition of gross revenue,

only revenue cash inflow as revenue can be included; not all the

incomes which is recorded in profit and loss account and non­revenue

items cannot be included in the definition of gross revenue within the

ambit of accounting standards. Clause 18.2 of the license agreement

provides only license fee of 10 per cent of AGR excluding the spectrum

charges. The gross revenue under Clause 19.1 is not gross income or

gross inflow or gross receipts.

34

37. It is further submitted on behalf of the licensees that revenue

has not been defined under the license. Clauses 20.6 and 22 of the

license agreement provided as to how the licensees are obliged to

prepare their accounts. Section 211(3A) read with Section 211(3C) of

the Companies Act, 1956, casts an obligation on companies to

maintain their books of account following accounting standards

recommended by the Institute of Chartered Accountants of India

constituted under the SectionChartered Accountants Act.

38. They have insisted to adopt fair valuation method relying on

decision in J.K. Industries Limited v. Union of India, (2007) 13 SCC

673.

39. It is further submitted that accounting standards have been

made mandatory. The DoT has admitted in their counter affidavit

dated 11.7.2003 in Petition No.7 of 2003 that definition of term

revenue is in line with AS­9. The Government cannot resile from the

stand that revenue definition is in line with AS­9 and cannot take a

contradictory stand at different stages of the case. The party cannot

be permitted to approbate and reprobate on the same aspect.

40. It is submitted on behalf of licensees. that in order to compute

the adjusted gross revenue would constitute (a) it must be revenue; (b)
35

it is gross and not net revenue; and (c) it would be adjusted revenue,

but adjustment can be made only by deductions as provided under

Clause 19.2. Revenue has to be interpreted in keeping with

commercial and financial parlance. The contract itself recognise the

applicability of the accounting standards as apparent from Clauses

20.6 and 22.7. The accounts have to be maintained as per the

accounting standards. The purpose of accounting standards is to

ensure that there is clarity, uniformity in dealing with the financial

terms to give definitiveness and clarity to such financial expressions.

Accounting standards are mandatory. Revenue had not been defined

in the commercial license agreement and this being a commercial

contract and the accounting standards having been incorporated by

reference in the license agreement as such the basis on which the

license fee has to be decided, the same would prevail.

41. It is further submitted that all receipts would not form part of

AGR. The use of the word inclusive under Clause 19.2 does not make

the definition of AGR expansive though the definition is not exhaustive

as the provision of value­added services is different and provided in

other clauses and service is to mean service in a licensed service area.

Thus, license fee has to be confined in respect of business carried on

to provide the services under the license. A single company may hold

five licenses for five different service areas. The license fee at 10
36

percent cannot be levied on the same revenue cannot be charged to

license fee more than once, as apparent from Clause 20.4 of the

license read with Appendix­II to Annexure­II to it, which is the

prescribed format by the licensor indicating the streams of revenue

required by a licensee to be disclosed. The miscellaneous receipts

provided under each head are not meant to include any and every

receipt received by the company.

42. It should be held that such revenue from non­licensed revenue

was not part of AGR at all. Contra proferentum rule requires clauses

19.1 and 19.2 to be interpreted against the maker and to prefer the

interpretation which is favourable to the licensees.

43. The service providers submitted that basic principles to decide

what constitutes revenue have to be followed. The receipt must be

having the nature of revenue, and it cannot be subjected to double

charge. No one can generate revenue from oneself, and someone else’s

revenue cannot be treated as that of others.

44. When we consider the submissions as observed there was a

paradigm shift in Telecom Policy of 1999 from the fixed licence fee to

the revenue sharing basis regime, which was advantageous to the
37

Telecom Service Providers. Under the new regime, the Central

Government shared the privilege under Sectionsection 4 of the Indian

Telegraph Act with the TSPs. It came as a relief against the high

licence fee, which used to be charged under the 1999 policy. The

migration package contained the stipulation as to no dispute to be

raised as to working out sharing of revenue. Experts were consulted in

the field of accountancy, and it was their advice that the actual figures

should be simple and objective to evolve a system of revenue sharing

that does not become as arduous one and litigative, had been evolved.

Revenue has been defined in a broad, comprehensive, and inclusive

manner not to pose problems of interpretation and to protect from the

accounting jugglery. Gross revenue has been defined to be inclusive of

specific items mentioned in clause 19.1 and any other miscellaneous

revenue, without any set­off for related items of expense, etc. All the

licensees accepted the migration package and have signed the

agreements. It has turned out to be a substantial financial booster in

favour of the licensees as is apparent from figures of the gross revenue

earned by them mentioned above. When under a contract signed by

the parties, gross revenue and AGR have been given the meaning

coupled with the format and the annexures which form part of the

contract. Format is contained in appendix to Annexure­II which is

part of the agreement in which requisite information has to be
38

furnished. The meaning in clause 19 of the gross revenue and the

format mentioned above have to prevail.

45. No doubt about it that the accounts have to be maintained as

per the AS­9 regime prevalent at the relevant time. The definition of

the contract has to prevail and not what is generally revenue, as

defined in AS­9.

46. The question as to what constitute Gross Revenue has been

agitated, though concluded in earlier decision in 2011, by the TSPs.

again by raising the submission that we have to follow the definition of

revenue as defined in AS­9, it would be the revenue as generated by

activities under the licence; whereas the definition of gross revenue

includes the income from non­licensing activities also as part of the

gross revenue, which we have to discard.

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

includes explicitly:

(i) installation charges;

(ii) Late fees;

(iii) sale proceeds of handsets;

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

(v) revenue on account of interest;

(vi) revenue on account of dividend;

(vii) value­added services;

(viii) supplementary service as fixed charges;

39

(ix) access or interconnection charges;

(x) roaming charges;

(xi) revenue from permissible sharing of infrastructure; and

(xii) any other miscellaneous revenue.

48. No set­off can be claimed for related items of expense etc. on any

of the items mentioned above of the inclusive definition and on the

miscellaneous revenue.

49. Clause 19.2 of the agreement excludes certain items from gross

revenue to arrive at the figure of AGR, which are (a) PSTN/ PLMN

related charges (access charges) actually paid to other eligible service

providers within India; (b) roaming revenue passed on to the TSPs

through service tax paid to the Government, if gross revenue had

included the component of service tax and sales tax.

50. In Union of India v. AUSPI (2011), this Court has held that the

terms and conditions of the licence, including the definition of gross

revenue in the licence agreement, are part of the contract. The Central

Government alone has the right to define revenue and has parted with

the privilege under Sectionsection 4 of the Telegraph Act. A licence granted

under Sectionsection 4(1) of the Telegraph Act is in the nature of the contract

between the Central Government and the licensee. The provisions of

the SectionTRAI Act do not affect the specific exclusive privilege of the Central
40

Government to carry on telecommunication activities, nor do they alter

the contractual nature for the licence granted under the proviso to

Sectionsection 4(1) of the Telegraph Act. After TRAI makes the

recommendation, the Central Government shall take a final decision

under Sectionsection 11(1)(a)(ii) of the TRAI Act. The TRAI shall have the

function to make a recommendation. In case of difference between

TRAI and Central Government with regard to particular terms or

conditions of the licence, the recommendation of TRAI cannot prevail,

and it is the decision of the Central Government, which is to be final

and binding. The tribunal has no jurisdiction to decide upon the

validity of terms and conditions incorporated in a licence; it has

jurisdiction to decide any dispute between the licensor and the

licensee on the interpretation. It has also been observed to make a

final decision on the definition of the gross revenue in the licence

agreement, the Government has the competence. The licence fee would

be a percentage of gross revenue, which would be the total revenue of

the licensee company.

51. This Court has held in Union of India v. AUSPI (2011) that the

licensing company had accepted in the letter dated 22.7.1999 that the

licence fee would be a percentage of the gross revenue, which should

be the total revenue of the licensee company. The licensee agreed that

the Government has to take a final decision not only concerning the
41

percentage of revenue share but also the definition of revenue for this

purpose. The licensee could not have approached the tribunal to

question the validity of the definition of adjusted gross revenue in the

licence agreement on the ground that the adjusted gross revenue

cannot include revenue from activities beyond the licence.

52. It is submitted on behalf of the licensees that the term revenue

has nowhere been defined under the licence. As such, it would be

necessary to find out what is the meaning of revenue in AS­9. The

submission that revenue has to be related to the activities of the

licensee company, a reference has been made to the definition of

revenue as given in clause 4.1 of AS­9, which reads as under:

“4.1 Revenue is the gross inflow of cash, receivables, or other
consideration arising in the course of the ordinary activities of
an enterprise from the sale of goods, from the rendering of
services, and from the use by others of enterprise resources
yielding interest, royalties, and dividends. Revenue is
measured by the charges made to customers or clients for
goods supplied and services rendered to them and by the
charges and rewards arising from the use of resources by
them. In an agency relationship, the revenue is the amount of
commission and not the gross inflow of cash, receivables, or
other consideration.”

53. The explanation contained in clause 5 of AS­9 relating to revenue

recognition is extracted hereunder:

“Explanation
Revenue recognition is mainly concerned with the timing of
recognition of revenue in the statement of profit and loss of an
enterprise. The amount of revenue arising on a transaction is
usually determined by agreement between the parties involved
42

in the transaction. When uncertainties exist regarding the
determination of the amount or its associated costs, these
uncertainties may influence the timing of revenue,”

54. Clauses 20.6, 20.7, and 22 of the licence agreement have also

been referred. They are extracted hereunder:

“20.6 Final adjustment of the Licence Fee for the year shall be
made based on the gross revenue figures duly certified by the
AUDITORS of the LICENSEE in accordance with the provision
of SectionCompanies Act, 1956.

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

xxx

22. Preparation of Accounts.

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

22.2 The LICENSEE shall be obliged to:

a) Compile and maintain accounting records, sufficient to
show and explain its transactions in respect of each completed
quarter of the Licence period or of such lesser periods as the
LICENSOR may specify, fairly presenting the costs (including
capital costs), revenue and financial position of the
LICENSEE’s business under the LICENCE including a
reasonable assessment of the assets employed in and the
liabilities attributable to the LICENSEE’S business, as well as,
for the quantification of Revenue or any other purpose.

b) Procure in respect of each of those accounting statements
prepared in respect of a completed financial year, a report by
the LICENSEE’s Auditor in the format prescribed by the
LICENSOR stating inter alia whether in his opinion the
statement is adequate for the purpose of this condition and
thereafter deliver to the LICENSOR a copy of each of the
accounting statements not later than three months at the end
of the accounting period to which they relate.

43

c) Send to the LICENSOR a certified statement on an
affidavit by authorised representative of the company,
containing full account of Revenue as defined in condition 19
for each quarter separately along with the payment for the
quarter.

22.3 (a) The LICENSOR or the TRAI, as the case may be, shall
have a right to call for and the LICENSEE shall be obliged to
supply and provide for examination any books of accounts that
the LICENSEE may maintain in respect of the business carried
on to provide the service(s) under the Licence at any time
without recording any reasons thereof.

22.3 (b) LICENSEE shall invariably preserve all billing and all
other accounting records (electronic as well as hard copy for a
period of THREE years from the date of publishing of duly
audited approved Accounts of the company and any
dereliction thereof shall be treated as a material breach
independent of any other breach, sufficient to give a cause for
cancellation of the LICENCE.

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

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

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

22.7 The LICENSEE shall be liable to prepare and furnish the
company’s annual financial accounts, according to the
accounting principles prescribed and the directions given by
the LICENSOR or the TRAI, as the case may be, from time to
time.”
44

55. The clauses mentioned above provided as to how the licensees

are obliged to prepare the accounts. There is a statutory obligation

cast under the SectionCompanies Act. Section 211(3A) read with Sectionsection

211(3C) of the Companies Act provides to maintain their books of

accounts following the accounting standards and for which reliance

has been placed upon SectionJ K Industries v. Union of India (supra) in

which the Court has emphasised upon the fair valuation principles.

They have relied upon the following observations:

“124. On the other hand, fair valuation principles are
important in the context of valuing derivatives and other
investments. If one were to describe one single change in
accounting practice over the last few years, it would be the use
of fair valuation principles. Today, the object behind the
enactment of AS, which are now made mandatory under
Section 211(3­SectionA) of the Companies Act, is to shift from
historical method of accounting to fair valuation. In the case of
mergers and acquisitions, which is common today in the world
of globalisation, fair valuation principles have important role to
play. Mergers and acquisitions are sometimes undertaken to
defer revenue expenditure over future years by invoking the
matching concept, which results in putting fictitious assets on
the balance sheet. This is one reason why fair valuation
principles are accepted.

125. AS are established rules relating to recognition,
measurement, and disclosures, thereby ensuring that all
enterprises that follow them are comparable and that their
financial statements are “true and fair.” Measurements and
disclosures based on fair value are becoming increasingly
important. Fair valuation is generally used in valuation and
disclosure of financial instruments, derivatives, conversions,
auctions in a bond, business combinations, impairment of
assets, retirement obligations, transactions involving exchange
of assets without monetary consideration, transfer pricing,
etc.”

56. The accounting standards are mandatory to be followed by the

companies, and DOT has admitted in the counter affidavit of
45

11.7.2003 in Petition 7 of 2003 that the definition of the term revenue

in the agreement is in line with AS­9 under the accounting standards.

Thus, they cannot approbate and reprobate. Thus, identification of

revenue would come within the purview of gross revenue, is the sole

test that it should conform with the definition of revenue as provided

in AS­9, and the golden thread is the phrase arising in the course of

the ordinary activities of the enterprise.

57. Revenue is a ‘Term of Art’ as per Chapter 4.08 Kim Lewison, the

Interpretation of Contract, Sweet Maxwell, 1997, wherein it has

been observed as under:

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

(emphasis added)

58. The Technical meaning as to the gross expression revenue does

not mean inflows that are not revenue and other miscellaneous

revenue cannot have a broader meaning. It must qualify as revenue.

It is not miscellaneous inflow and miscellaneous receipts. The items of

the revenue must be interpreted as per the doctrine of ejusdem

generis, as observed in SectionMaharashtra University of Health Sciences v.

Satchikitsa Prasarak Mandla, (2010) 3 SCC 786. Following

observations have been made:

46

“27. The Latin expression “ejusdem generis” which means “of
the same kind or nature” is a principle of construction,
meaning thereby when general words in a statutory text are
flanked by restricted words, the meaning of the general words
are taken to be restricted by implication with the meaning of
the restricted words. This is a principle which arises “from the
linguistic implication by which words having literally a wide
meaning (when taken in isolation) are treated as reduced in
scope by the verbal context.” It may be regarded as an instance
of ellipsis, or reliance on implication. This principle is
presumed to apply unless there is some contrary indication
[see Glanville Williams, The Origins and Logical Implications of
the Ejusdem Generis Rule, 7 Conv (NS) 119].”

59. Thus, as per licensees the miscellaneous revenue has to be

revenue as defined in AS­9. The miscellaneous revenue only serves

the purpose of capturing such other revenue that satisfies common

characteristics of the preceding word.

60. As per licensees, the revenue pertained only to the licensed

activities and was specific to activities under the licensing agreement

in the designated area on the services rendered to the customers. The

rule of interpretation of a commercial contract is that when the

provision is not exclusively defined, it is to look at how the parties

would understand the same by their subsequent conduct as observed

in SectionGodhra Electricity Co. Ltd. v. State of Gujarat, (1975) 1 SCC 199

thus:

“11. In the process of interpretation of the terms of a contract,
the court can frequently get great assistance from the
interpreting statements made by the parties themselves or
from their conduct in rendering or in receiving performances
under it. Parties can, by mutual agreement, make their own
contracts; they can also by mutual agreement remake them.

47

The process of practical interpretation and application,
however, is not regarded by the parties as a remaking of the
contract; nor do the courts so regard it. Instead, it is merely a
further expression by the parties of the meaning that they give
and have given to the terms of their contract previously made.
There is no good reason why the courts should not give great
weight to these further expressions by the parties, in view of
the fact that they still have the same freedom of contract that
they had originally. The American Courts receive subsequent
actings as admissible guides in interpretation. It is true that
one party cannot build up his case by making an
interpretation in his own favour. It is the concurrence therein
that such a party can use against the other party. This
concurrence may be evidence by the other party’s express
assent thereto, by his acting in accordance with it, by his
receipt without objection of performances that indicate it, or by
saying nothing when he knows that the first party is acting on
reliance upon the interpretation (see Corbin on Contracts, Vol.
3, pp.249 254­56).

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

“In France construction of a contract is within the sole
province of the judges of fact who are entirely free to use
whatever material seems relevant to them… The rule is the
same in Germany, where since 1888, it is established that
even statements made by one of the contracting parties to a
third person about the content of the contractual intentions
are admissible guides to interpretation… In Italy, SectionArticle
1362(2) provides in impressively succinct language… The
Vienna Convention on the law of Treaties of 1969 (which to
a large extent merely codifies earlier international practice)
enjoins the interpreter of a treaty to take into account ‘any
subsequent practice in the application of the treaty which
establishes the agreement of the parties regarding its
interpretation’: SectionArticle 31(3)(b) [see Notes by P.A. Mann on
L. Schuler A.G. v. Wickman Machine Tool Sales Ltd., (1973) 2
WLR 683, Law Quarterly Review, Vol. 89, pp. 464­65].

The real reason against taking into account the
subsequent conduct of the parties is the rule which excluded
extrinsic evidence in the construction of a written contract.

16. We are not certain that if evidence of subsequent acting
under a document is admissible, it might have the result that
a contract would mean one thing on the day it is signed, but
by reason of subsequent event, it would mean something a
month or year later. Subsequent “interpreting” statements
might not always change the meaning of a word or a phrase. A
word or a phrase is not always crystal clear. When both parties
subsequently say that by the word or phrase which, in the
context, is ambiguous, they meant this, it only supplies a
glossary as to the meaning of the word or phrase. After all, the
48

inquiry is as to what the intention of the parties was from the
language used. And, why is it that parties cannot clear the
latent ambiguity in the language by a subsequent interpreting
statement? If the meaning of the word or phrase or sentence is
clear, extrinsic evidence is not admissible. It is only when
there is latent ambiguity that extrinsic evidence in the shape of
interpreting statement in which both parties have concurred
should be admissible. The parties themselves might not have
been clear as to the meaning of the word or phrase when they
entered into the contract. Unanticipated situation might arise
or come into the contemplation of the parties subsequently
which would sharpen their focus and any statement by them
which would illuminate the darkness arising out of the
ambiguity of the language should not be shut out. In the case
of an ambiguous instrument, there is no reason why
subsequent interpreting statement should be inadmissible.

“The question involved is this: Is the fact that the parties
to a document, and particularly to a contract, have
interpreted its terms in a particular way and have been in
the habit of acting on the document in accordance with that
interpretation, any admissible guide to the construction of
the document? In the case of an unambiguous document,
the answer is ‘No.’ (See Odgers’ Construction of Deeds and
Statutes, 5th Edn. by G. Dworkin, pp. 118­19).”
But, as we said, in the case of an ambiguous one, the answer
must be “yes.” In Lamb v. Goring Brick Co., a selling agency
contract contained the words “the price shall be mutually
agreed.” Documents showing the mode adopted for
ascertaining the price were put in evidence without objection.
In the court of appeal Greer, L.J. said:

“In my opinion, it is not necessary to consider how this
contract was acted on in practice. If there had been an
ambiguity, and the intention of the parties had been in
question at the trial, I think it might have been held that the
parties had placed their own construction on the contract
and, having acted upon a certain view, had thereby agreed
to accept it as the true view of its meaning.””
(emphasis supplied)

61. The submission raised for adopting fair valuation method relying

on S.K. Synthetics (supra) is based upon misconception of method

applicable to A.S­9. The argument is crafted to get rid of AS­9 and the

definition of gross revenue in the agreement. We have to consider

valuation method of accounting standards which are laid time to time
49

to find an answer to the submission. The ICAI issued the AS­9 revenue

recognition standard in the year 1985. In the initial years, it was

recommendatory for only Level­I enterprises but was made mandatory

for all enterprises from 1.4.1983. The meaning of enterprise is as

defined in Sectionsection 3 of the Companies Act, 1956. The IND AS­18

regime has been introduced later on. In AS­9, revenue recognition is at

“nominal” value; whereas IND AS­18, the revenue recognition is at a

“fair” value. The barter transactions are included in Ind AS­18,

whereas this aspect is not covered in AS­9. In AS­9 revenue

recognition, interest income is recognised on a time proportion basis,

whereas in Ind AS­18, interest income is recognised using an effective

interest rate method. AS­9 recognises revenue as per the completed

service method or percentage completion method, whereas Ind AS­18

only recognises revenue as per the percentage of completion method.

Thus, there is a fundamental difference. The fair value concept has no

place in AS­9 as per which the accounts are to be maintained and

submitted for determination of gross revenue. AS­9 revenue

recognition regime states that the amount of revenue shall be

measured by the gross inflow of cash, receivables, or other

consideration received. There is no concept of fair valuation. Thus, the

submission raised based on a fair valuation method based on the

decision in SectionJ.K. Industries v. Union of India (supra) cannot be accepted

as the decision is on consideration of different accounting standard
50

which adopts fair valuation method i.e., Ind AS­18 and not relevant for

the AS­9 accounting standard.

62. The submission is wholly devoid of substance. It is not only

barred by the principle of constructive res judicata but also indicates

that the licensees are raising the similar objections which they have

raised earlier and were not entertained by this Court and were

rejected. Again precisely, the same attempt is made by submitting;

revenue should be taken as defined in AS­9, not in Clause 19.1 of the

agreement, submission runs contrary to the decision of the Court, as

held in para 48 of the 2011 judgment, which operates as res judicata

inter se parties. The meaning of revenue is apparent that it has to be

gross revenue, and the licence fee would be a percentage of the same.

Thus, the licensees have made a futile attempt to submit that the

revenue to be considered would be derived from the activities under

the licence; whereas it has been held in 2011 that the revenue from

activities beyond the licence have to be included in adjusted gross

revenue, is binding.

63. Even otherwise, on merit, the submission raised is baseless. The

contractual definition of gross revenue is binding. This Court has

observed that it was open for the licensee not to undertake activities
51

for which they do not require licence under Sectionsection 4 of the Telegraph

Act and transfer these activities to any other firm or company.

However, they cannot avoid the consequences of the contractual

definition which has been accepted by the parties, and they are bound

to make payment of licence fee on the basis of gross revenue, which

would be the total revenue of the licensing company. As the

Government has not accepted the TRAI’s recommendations, the

decision of the Central Government on the point of definition of

adjusted gross revenue was final and binding. This Court has also

held that TRAI and tribunal had no jurisdiction to decide on the

validity of the definition of adjusted gross revenue under the licence

agreement and to exclude certain items of revenue which were

included in the definition of gross revenue in the licence agreement

between the licensor and licensee. The tribunal had no jurisdiction to

exclude certain items on the ground of the validity of the definition of

adjusted gross revenue. The finding of the tribunal in the order dated

7.7.2006 insofar as it decided that the revenue realised by the licensee

from activities beyond the licence to be excluded from adjusted gross

revenue in the licence agreement is without jurisdiction and is a

nullity. The matter was sent back to TDSAT for computation of

adjusted gross revenue. It was also observed if a dispute is raised that

computation is not following licence agreement, the tribunal has to go

into facts and material on which demand is raised and to decide
52

demand is following the licence agreement and in particular, the

definition of adjusted gross revenue. It can also interpret the terms

and conditions of the licence agreement. The tribunal did not go into

the facts and material relating to the demand as to the particular

licence. The tribunal can go into the question of whether the demand

is under the licence agreement and in particular, the definition of

adjusted gross revenue.

64. Under clause 20.6, certification of accounts by auditors

appointed under the SectionCompanies Act is stipulated under the licence.

The preparation of accounts under clause 22 of the licence agreement

is an independent head. The definition of gross revenue given under

the agreement in Clause 19.1 and that is the total revenue. In our

considered opinion, when there is a contractual definition as to what

would be the gross revenue that would be the revenue and also the

total revenue, the revenue as mentioned in the mode of accounting AS­

9 cannot govern the definition. The general definition of revenue in the

mode of accounting cannot govern the contractual definition of gross

revenue.

65. As per clause 20.4, a licensee must make quarterly payment in

the prescribed format as Annexure­II showing the computation of

revenue and licence fee payable. The Format is part of the licence and
53

is independent of accounting standards and is in tune with the

definition of gross revenue, and is the basis for the calculation of

licence fee. It is only for uniformity that the account has to be

maintained as per accounting standards AS­9 which are prescribed

from time to time. Once the licensee provides the details to the

Government in format Annexure­II along with accounts certified by the

auditor, the reconciliation has to take place. The accounting standard

AS­9 is relevant only for whether the figure given by the licensee as to

gross revenue is maintained in proper manner once gross revenue is

ascertained, then after certain deductions, adjusted gross revenue has

to be worked out. The accounting standard provided in AS­9 cannot

override the definition of gross revenue, which is the total revenue for

licence and the finding in Union of India v. AUSPI (2011) in this regard

is final, binding, and operative. The accounting standard AS­9 makes

it clear that same is in the form of guidelines, it is not comprehensive

and does not supersede the practice of accounting. It only lays down a

system in which accounts have to be maintained. Accounting

standards make it clear that it does not provide for a straight­jacket

formula for accounting but merely provide for guidelines to maintain

the account books in systematic manner.

66. Though the definition of revenue given in clause 4.1 of AS­9

cannot govern the contract, the contractual definition of gross revenue
54

which is the gross revenue under Clause 19.1 and total revenue for

the purpose of the agreement for which an independent definition has

been carved out under the statutory power while parting with the

privilege under Sectionsection 4 by the Central Government, once the contract

has been entered into, the definition of gross revenue is binding, and

the licensees cannot try to wriggle out of the decision by making

impermissible attempts to depart from it. The plea is barred by res

judicata, and on merits the objection is wholly untenable. The

definition of revenue in clause 4.1 of AS­9 provides that the revenue is

the gross inflow of cash, receivables, or other consideration arising in

the course of the ordinary activities. When the revenue in AS­9 is the

gross inflow of cash and the amount which is receivable, not the

amount received, which is realised or other consideration arising, can

also be taken into consideration as per accounting standard AS­9. The

definition of revenue in AS­9 rather than supporting the cause of the

licensees defeats the same. They cannot bank upon the expression in

clause 4.1 in the course of ordinary activities of an enterprise is only to

be included in gross revenue as that is what has been expressly

negated in Union of India v. AUSPI (2011). Given the definition of gross

revenue, the same includes revenue from activities beyond the licence.

Explanation to clause 5 of AS­9 also makes it clear that the agreement

between the parties would determine the amount of revenue arising on

a transaction.

55

67. Section 211 of the Companies Act, 1956 deals with the obligation

of the company to comply with accounting standards. In case they do

not comply, it has to be disclosed in its profit and loss account, the

deviation, reasons for such deviation, and financial effect. Sections

211(3A) and Section211(3B) are quoted hereunder:

“211 (3A) Every profit and loss account and balance­sheet
of the company shall comply with the accounting standards.
(3B) Whether the profit and loss account and the balance­
sheet of the company do not comply with the accounting
standards, such companies shall disclose in its profit and
loss account and balance­sheet, the following, namely:­

(a) the deviation from the accounting standards;

(a) the reasons for such deviation; and

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

68. Thus, it is apparent that accounting standard AS­9 is a method

to maintain accounts and, deviation if made, has to be reflected

separately.

69. Prayer made in Petition No.7/2003 filed by AUSPI v. Union of

India was to declare that ‘gross revenue’ can only relate to revenue

directly arising out of telecom operations licensed under Sectionsection 4 of

the Indian Telegraph Act, and items indicated in the DOT letter dated

26.7.2001 including interest income and the dividend income, value of

rebates, discounts, free calls and reimbursement from the USO fund,

etc. ought not to be excluded in the adjusted gross revenues. It was
56

also prayed that revenue share on interest income and other incomes

be set aside.

70. In Petition No.82/2005, demand was dated 28.3.2003 and

13.7.2004, etc. and refund on account of wrongful application and

implementation of gross revenue and adjusted gross revenue was

sought along with interest. Prayer was made that licence fee or WPC

charges on any non­telecom revenue, i.e., the revenues which are not

derived from the licensed activities under the licence/revenues which

do not relate to or do not have a direct nexus to the establishment,

maintenance and working of Telegraph, cannot be levied. DOT cannot

collect what is not revenue. Prayer was also made to direct DOT to

calculate adjusted gross revenue on a realisation basis and not accrual

basis, and not to include any notional revenue/income in the adjusted

gross revenue. Prayer was made to direct DOT to modify the

definitions of gross revenue and also adjusted gross revenue, bring

them in conformity with the migration package. Prayer was also made

to suitably modify the format of statement of gross revenue, adjusted

gross revenue and licence fee in accordance with the correct

definitions, and to strike down the definitions of gross revenue, and

adjusted gross revenue contained in DOT’s licence amendment dated

11.4.2001 as being unfair, unjust, unreasonable and arbitrary.
57

71. Thus, it is apparent that right from the beginning, the licensees

were aware of the precise terms and conditions and their obligations

as contained in the letter dated 26.7.2001and purport of the

definitions of gross revenue and adjusted gross revenue. Notional

revenue has to be charged. The order of TDSAT excluding certain

items of revenue, which were included in the definition of AGR by

declaring the definition of gross revenue to be invalid, was set aside by

this Court in Union of India v. AUSPI (supra) and this Court held that

items are to be included in definition of gross revenue.

72. The rule of interpretation of contra proferentum has also been

pressed into service. As observed in SectionUnited India Insurance Co. Ltd. v.

Pushpalaya Printers, 2004 (3) SCC 694 thus:

“6. ….If the word “impact” is interpreted narrowly, the
question of impact by any rail would not arise as the question
of a rail forcibly coming to the contact of a building or
machinery would not arise. In the absence of specific exclusion
and the word “impact” having more meanings in the context, it
cannot be confined to forcible contact alone when it includes
the meanings “to drive close”, “effective action of one thing
upon another” and “the effect of such action”, it is reasonable
and fair to hold in the context that the word “impact”
contained in clause 5 of the insurance policy covers the case of
the respondent to say that damage caused to the building and
machinery on account of the bulldozer moving closely on the
road was on account of its “impact”. It is also settled position
in law that if there is any ambiguity or a term is capable of two
possible interpretations, one beneficial to the insured should
be accepted consistent with the purpose for which the policy is
taken, namely, to cover the risk on the happening of certain
event. Although there is no ambiguity in the expression
“impact,” even otherwise applying the rule of contra
preferentem, the use of the word “impact” in clause 5 in the
58

instant policy must be construed against the appellant. Where
the words of a document are ambiguous, they shall be
construed against the party who prepared the document. This
rule applies to contracts of insurance, and clause 5 of the
insurance policy, even after reading the entire policy in the
present case, should be construed against the insurer. A
Constitution Bench of this Court in SectionGeneral Assurance Society
Ltd. v. Chandmull Jain AIR 1966 SC 1644 has expressed that
(AIR p. 1649, para 11)

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

(emphasis supplied)

73. As observed in SectionIndustrial Promotion Investment Corporation of

Orissa Ltd. v. New India Assurance Co. Ltd., (2016) 15 SCC 315 thus:

“10. We proceed to deal with the submission made by the
counsel for the appellant regarding the rule of contra
proferentem. The Common Law rule of construction “ verba
chartarum fortius accipiuntur contra proferentem ” means that
ambiguity in the wording of the policy is to be resolved against
the party who prepared it. MacGillivray on Insurance Law1
deals with the rule of contra proferentem as follows:

“The contra proferentem rule of construction arises only where
there is a wording employed by those drafting the clause which
leaves the court unable to decide by ordinary principles of
interpretation which of two meanings is the right one. ‘One
must not use the rule to create the ambiguity — one must find
the ambiguity first.’ The words should receive their ordinary
and natural meaning unless that is displaced by a real
ambiguity either appearing on the face of the policy or,
possibly, by extrinsic evidence of surrounding circumstances.”
(footnotes omitted)

11. Colinvaux’s Law of Insurance 2 propounds the contra
proferentem rule as under:

“Quite apart from contradictory clauses in policies,
ambiguities are common in them, and it is often very
uncertain what the parties to them mean. In such cases,
the rule is that the policy, being drafted in language chosen
1 Legh­Jones, Longmore et al (Eds.) MacGillivray on Insurance Law (9th Edn., Sweet and
Maxwell, London 1997) at p.280.

2 Robert and Merkin (Eds.), Colinvaux’s Law of Insurance (6th Edn., 1990) at p.42.
59

by the insurers, must be taken most strongly against them.
It is construed contra proferentes, against those who offer
it. In a doubtful case, the turn of the scale ought to be given
against the speaker because he has not clearly and fully
expressed himself. Nothing is easier than for the insurers to
express themselves in plain terms. The assured cannot put
his own meaning upon a policy, but, where it is ambiguous,
it is to be construed in the sense in which he might
reasonably have understood it. If the insurers wish to
escape liability under given circumstances, they must use
words admitting of no possible doubt.

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

(emphasis supplied)

74. In our opinion, the rule mentioned above of contra proferentem

does not apply to the present case as there is no ambiguity or doubt in

the definition of gross revenue in the agreement.

75. It is further submitted that for identifying the revenue, the sole

test is that it should conform with the definition of revenue as

provided in AS­9. For interpreting the scope of the provisions, the

principle of noscitur a sociis has to be applied which provides that

when definition includes various heads and while they may not be

exhaustive as a rule of interpretation, what is being included within

the definition, would be an aid to interpreting the scope of the

provisions. For applying the said principle, reliance has been placed

on,
60

(SectionA) Vania Silk Mills v. C.I.T., Ahmedabad, 1991 (4)
SCC 22, on observation:­
“11. It is true that the definition of “transfer” in Section
2(47) of the Act is inclusive, and therefore, extends to events
and transactions which may not otherwise be “transfer”
according to its ordinary, popular and natural sense. It is
this aspect of the definition which has weighed with the
High Court and, therefore, the High Court has argued that if
the words “extinguishment of any rights therein” are
substituted for the word “transfer” in Section 45, the claim
or compensation received from the insurance company
would be attracted by the said section. The High Court has,
however, missed the fact that the definition also mentions
such transactions as sale, exchange etc. to which the word
“transfer” would properly apply in its popular and natural
import. Since those associated words and expressions imply
the existence of the asset and of the transferee, according to
the rule of noscitur a sociis, the expression “extinguishment
of any rights therein” would take colour from the said
associated words and expressions, and will have to be
restricted to the sense analogous to them. If the legislature
intended to extend the definition to any extinguishment of
right, it would not have included the obvious instances of
transfer, viz., sale, exchange etc. Hence the expression
“extinguishment of any rights therein” will have to be
confined to the extinguishment of rights on account of
transfer and cannot be extended to mean any
extinguishment of right independent of or otherwise than on
account of transfer.”

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

“109. We are of the view that persons who act jointly or in
concert with others are connected with the business activity
of the resolution applicant. Similarly, all the categories of
persons mentioned in Section 5(24­A) show that such
persons must be “connected” with the resolution applicant
within the meaning of Section 29­A(j). This being the case,
the said categories of persons who are collectively
mentioned under the caption “relative” obviously need to
have a connection with the business activity of the
resolution applicant. In the absence of showing that such
person is “connected” with the business of the activity of the
resolution applicant, such person cannot possibly be
disqualified under Section 29­A(j). All the categories in
Section 29­A(j) deal with persons, natural as well as
artificial, who are connected with the business activity of
the resolution applicant. The expression “related party,”
therefore, and “relative” contained in the definition Sectionsections
61

must be read noscitur a sociis with the categories of
persons mentioned in Explanation I, and so read, would
include only persons who are connected with the business
activity of the resolution applicant.”

(SectionC) South Gujarat Roofing Tiles Manufacturers v.
State of Gujarat, 1976 (4) SCC 601,

3. The question turns on a true construction of the
explanation to entry 22 which says that for the purpose of
this entry potteries industry “includes” the manufacture of
the nine “articles of pottery” specified therein. Pottery in a
wide sense will take in all objects that are made from clay
and hardened by fire, from crude earthen pots to delicate
porcelain. Mr Patel appearing for the respondent, State of
Gujarat, contends that the explanation indicates that
potteries industry in Entry 22 is intended to cover all
possible articles of pottery including Mangalore pattern
roofing tiles. Referring to the well­known use of the word
‘include’ in interpretation clauses to extend the meaning of
words and phrases occurring in the body of the statute, Mr.
Patel submits that the explanation, when it says that
potteries industry “includes” the nine named objects, what
is meant is that it includes not only these objects but other
articles of pottery as well. It is true that “includes” is
generally used as a word of extension, but the meaning of a
word or phrase is extended when it is said to include things
that would not properly fall within its ordinary connotation.
We may refer to the often quoted observation of Lord
Watson in Dilworth v. Commissioner of Stamps that when
the word “include” is used in interpretation clauses to
enlarge the meaning of words or phrases in the statute

“these words or phrases must be construed as
comprehending, not only such things as they signify
according to their natural import but also those things
which the interpretation clause declares that they shall
include.”

Thus where “includes” has an extending force, it adds to the
word or phrase a meaning which does not naturally belong
to it. It is difficult to agree that “includes” as used in the
explanation to Entry 22 has that extending force. The
explanation says that for the purpose of Entry 22, potteries
industry includes the manufacture of the nine “articles of
pottery” specified in the explanation. If the objects specified
are also “articles of pottery”, then these objects are already
comprised in the expression “potteries industry”. It hardly
makes any sense to say that potteries industry includes the
62

manufacture of articles of pottery, if the intention was to
enlarge the meaning of potteries industry in any way.

4. We are also unable to agree with Mr Patel that the
articles specified in the explanation may have been
mentioned out of abundant caution to emphasize the
comprehensive character of the entry, to indicate that all
varieties of pottery are included therein. This argument,
though more plausible, does not also seem acceptable. It is
possible that one might have doubts whether things like
refractories or electrical or textile accessories would pass
under the description pottery as that word is used in
common parlance, but the explanation also mentions
crockery and toys regarding which there could be hardly
any doubt. The inclusion in the list of objects which are
well­recognised articles of pottery makes it plain that the
explanation was added to the entry not by way of abundant
caution.

5. The contention of Mr. Tarkunde for the appellants is that
the articles mentioned in the explanation were intended to
be exhaustive of the objects covered by Entry 22. According
to Mr, Tarkunde if the legislature wanted to bring within the
entry all possible articles of pottery then there was hardly
any point in mentioning only a few of them by way of
explanation. To this Mr Patel’s reply is that it is well­known
that where the legislature wants to exhaust the significance
of the term defined, it uses the word “means” or the
expression “means and includes”, and that if the intention
was to make the list exhaustive, the legislature would not
have used the word “includes” only. We do not think there
could be any inflexible rule that the word ‘include’ should be
read always as a word of extension without reference to the
context. Take for instance Entry 19 in the schedule which
also has an explanation containing the word “includes”.
Entry 19 is as follows:

“Employment in any tobacco processing establishment,
not covered under Entry 3.

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

Entry 3 to which Entry 19 refers reads:

“Employment in any tobacco (including bidi making)
manufactory.”
63

It is clear from the explanation to Entry 19 that there could
be no other way or manner of “processing” besides what is
stated as included in that expression. Though “include” is
generally used in interpretation clauses as a word of
enlargement, in some cases the context might suggest a
different intention. Pottery is an expression of very wide
import, embracing all objects made of clay and hardened by
heat. If it had been the legislature’s intention to bring within
the entry all possible articles of pottery, it was quite
unnecessary to add an explanation. We have found that the
explanation could not possibly have been introduced to
extend the meaning of potteries industry or the articles
listed therein added ex abundanti cautela. It seems to us
therefore that the legislature did not intend everything that
the potteries industry turns out to be covered by the entry.
What then could be the purpose of the explanation. The
explanation says that, for the purpose of Entry 22, potteries
industry “includes” manufacture of the nine articles of
pottery named therein. It seems to us that the word
“includes” has been used here in the sense of ‘means’; this
is the only construction that the word can bear in the
context. In that sense it is not a word of extension, but
limitation; it is exhaustive of the meaning which must be
given to potteries industry for the purpose of Entry 22. The
use of the word “includes” in the restrictive sense is not
unknown. The observation of Lord Watson in Dilworth v.
Commissioner of Stamps which is usually referred to on the
use of “include” as a word of extension, is followed by these
lines:

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

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

(emphasis supplied)

76. The definition of gross revenue is crystal clear in the agreement.

How the adjusted gross revenue to be arrived at is also evident. It
64

cannot be submitted that the revenue has not been defined in the

contract. Once the gross revenue is defined, one cannot depart from it

and the very meaning is to be given to the revenue for the agreement.

Overall revenue, has to be taken into account for determination of

licence fees without set off, as provided in the agreement. The same

was defined to simplify it to rule out the litigation, disputes, and

accounting myriads. The submission raised that the term revenue has

to be interpreted as the consideration payable in keeping with

commercial and financial parlance is what is intended to be avoided.

Raising of such submission is a futile attempt that has been made to

wriggle out of the definition of gross revenue, which has been held to

be binding in the previous judgment in Union of India v. AUSPI (2011).

The submission that the contract recognises the applicability of

accounting standards, in our opinion, it is only to maintain books of

accounts. To a certain extent, it cannot be disputed that to have

clarity, uniformity, and definitiveness; the accounting standards lay

down guidelines with respect to financial terms. However, when the

financial terms in the agreement are clear in the form of definition of

gross revenue governed by Clause 19.1 of the agreement, the definition

of Accounting Standard­9 cannot supersede it which is a general one.

77. The submission has been made that the accounting standards

themselves make it clear what should be included as revenue and
65

accounting standards have been incorporated in the agreement and

incorporated by reference in the licence agreement. For this, reliance

has been placed on SectionGeneral Assurance Society Ltd. v. Chandmull Jain,

AIR 1966 SC 1644, wherein it is observed:

“11. A contract of insurance is a species of commercial
transactions, and there is a well­established commercial
practice to send cover notes even prior to the completion of a
proper proposal or while the proposal is being considered or a
policy is in preparation for delivery. A cover note is a
temporary and limited agreement. It may be self­contained, or
it may incorporate by reference the terms and conditions of the
future policy. When the cover note incorporates the policy in
this manner, it does not have to recite the term and
conditions, but merely to refer to a particular standard policy.
If the proposal is for a standard policy and the cover note
refers to it, the assured is taken to have accepted the terms of
that policy. The reference to the policy and its terms and
conditions may be expressed in the proposal or the cover note
or even in the letter of acceptance, including the cover note.
The incorporation of the terms and conditions of the policy
may also arise from a combination of references in two or more
documents passing between the parties. Documents like the
proposal, cover note, and the policy are commercial
documents, and to interpret them, commercial habits and
practice cannot altogether be ignored. During the time the
cover note operates, the relations of the parties are governed
by its terms and conditions, if any, but more usually by the
terms and conditions of the policy bargained for and to be
issued. When this happens, the terms of the policy are
incipient, but after the period of temporary cover, the relations
are governed only by the terms and conditions of the policy
unless insurance is declined in the meantime. Delay in issuing
the policy makes no difference. The relations even then are
governed by the future policy if the cover notes give sufficient
indication that it would be so. In other respects there is no
difference between a contract of insurance and any other
contract except that in a contract of insurance there is a
requirement of uberrima fides i.e. good faith on the part of the
assured and the contract is likely to be construed contra
proferentem that is against the company in case of ambiguity
or doubt. A contract is formed when there is an unqualified
acceptance of the proposal. Acceptance may be expressed in
writing, or it may even be implied if the insurer accepts the
premium and retains it. In the case of the assured, a positive
act on his part by which he recognises or seeks to enforce the
policy amounts to an affirmation of it. This position was clearly
recognised by the assured himself, because he wrote, close
66

upon the expiry of the time of the cover notes, that either a
policy should be issued to him before that period had expired
or the cover note extended in time. In interpreting documents
relating to a contract of insurance, the duty of the court is to
interpret the words in which the contract is expressed by the
parties because it is not for the court to make a new contract,
however reasonable if the parties have not made it themselves.
Looking at the proposal, the letter of acceptance and the cover
notes, it is clear that a contract of insurance under the
standard policy for fire and extended to cover flood, cyclone
etc. had come into being.”

78. SectionIn M.R. Engineers Contractors Pvt. Ltd. v. Som Datt Builders

Ltd., (2009) 7 SCC 696, the Court held:

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

(i) An arbitration clause in another document, would get
incorporated into a contract by reference, if the following
conditions are fulfilled:

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

(2) the reference to the other document should clearly
indicate an intention to incorporate the arbitration
clause into the contract,

(3) the arbitration clause should be appropriate, that is
capable of application in respect of disputes under the
contract and should not be repugnant to any term of
the contract.

(ii) When the parties enter into a contract, making a
general reference to another contract, such general
reference would not have the effect of incorporating the
arbitration clause from the referred document into the
contract between the parties. The arbitration clause from
another contract can be incorporated into the contract
(where such reference is made), only by a specific
reference to arbitration clause.

(iii) Where a contract between the parties provides that
the execution or performance of that contract shall be in
terms of another contract (which contains the terms and
conditions relating to performance and a provision for
settlement of disputes by arbitration), then, the terms of
the referred contract in regard to execution/performance
67

alone will apply, and not the arbitration agreement in the
referred contract, unless there is special reference to the
arbitration clause also.

(iv) Where the contract provides that the standard form of
terms and conditions of an independent trade or
professional institution (as for example the standard
terms and conditions of a trade association or architects
association) will bind them or apply to the contract, such
standard form of terms and conditions including any
provision for arbitration in such standard terms and
conditions, shall be deemed to be incorporated by
reference. Sometimes the contract may also say that the
parties are familiar with those terms and conditions or
that the parties have read and understood the said terms
and conditions.

(v) Where the contract between the parties stipulates that
the conditions of contract of one of the parties to the
contract shall form a part of their contract (as for
example the general conditions of contract of the
Government where the Government is a party), the
arbitration clause forming part of such general conditions
of contract will apply to the contract between the parties.”

79. Submission though attractive, but is again an attempt by taking

a rigmarole to get rid of the definition of ‘gross revenue’. Earlier the

validity of definition was questioned to confine the meaning of gross

revenue how the revenue is sought to be confined to activities under

the licence by way of AS­9. The reliance has been placed on statement

made by DOT in the reply filed in 2003 that the definition of gross

revenue is in line with AS­9, it is by way of explaining and cannot have

the effect of changing the definition of gross revenue given in the

agreement. The definition in agreement is unambiguous, clear, and

beyond the pale of doubt, and there is no confusion in the definition of

gross revenue, which is the basis for realisation of the licence fee.

68

Licensees have made a futile attempt to wriggle out of the definition in

an indirect method, which was rejected directly in the decision of 2011

between the parties and it was held that these very heads form part of

gross revenue.

80. The submission has been raised on the ground of approbation

and reprobation relying on SectionSuzuki Parasrampuria Suitings Private

Limited v. Official Liquidator of Mahendra Petrochemicals Limited,

(2018) 10 SCC 707. The observations made are extracted hereunder:

“12. A litigant can take different stands at different times but
cannot take contradictory stands in the same case. A party
cannot be permitted to approbate and reprobate on the same
facts and take inconsistent shifting stands. The untenability of
an inconsistent stand in the same case was considered in
SectionAmar Singh v. Union of India, (2011) 7 SCC 69, observing as
follows: (SCC p. 86, para 50)
“50. This Court wants to make it clear that an action at law
is not a game of chess. A litigant who comes to court and
invokes its writ jurisdiction must come with clean hands.
He cannot prevaricate and take inconsistent positions.”

13. A similar view was taken in Joint Action Committee of Air
Line Pilots’ Assn. of India v. DGCA, (2011) 5 SCC 435,
observing: (SCC p. 443, para 12)
“12. The doctrine of election is based on the rule of estoppel
—the principle that one cannot approbate and reprobate
inheres in it. The doctrine of estoppel by­election is one of
the species of estoppels in pais (or equitable estoppel),
which is a rule in equity. … Taking inconsistent pleas by a
party makes its conduct far from satisfactory. Further, the
parties should not blow hot and cold by taking inconsistent
stands and prolong proceedings unnecessarily.”

81. SectionIn Jal Mahal Resorts Private Limited v. K.P. Sharma, (2014) 8 SCC

866, the Court observed:

69

“4. However, in spite of withdrawal of the special leave
petitions, if the petitioner State is taking a diametrically
opposite stand which it had taken before the High Court as
also before this Court when the arguments were concluded, we
surely have reservations in permitting the learned Senior
Counsel to take an opposite stand now and advance
arguments exactly the opposite of what was submitted in the
High Court as also before this Court through the earlier
counsel being the Attorney General.

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

6. There is no doubt that the impleaded respondent may
advance his arguments before the Court as he has been
impleaded as a party­respondent but under the garb of
advancing arguments a stand which was taken before the High
Court earlier is changed at the stage of special leave petition,
cannot be permitted especially when the counsel, as already
stated, has withdrawn the special leave petitions preferred by
the State. He may, however, advance submissions as a
respondent in other matters, which he is at liberty to make
within a period of two weeks, which, however, shall be subject
to its acceptance.”

82. SectionIn A.P. Dairy Development Corporation Federation v. B.

Narasimha Reddy, (2011) 9 SCC 286, the following observations were

made:

“40. In the matter of the Government of a State, the
succeeding Government is duty­bound to continue and carry
on the unfinished job of the previous Government, for the
reason that the action is that of the “State”, within the
meaning of SectionArticle 12 of the Constitution, which continues to
subsist and therefore, it is not required that the new
Government can plead contrary to the State action taken by
the previous Government in respect of a particular subject.
The State, being a continuing body can be stopped from
changing its stand in a given case, but where after holding
enquiry it came to the conclusion that action was not in
conformity with law, the doctrine of estoppel would not apply.
Thus, unless the act done by the previous Government is
found to be contrary to the statutory provisions, unreasonable
or against policy, the State should not change its stand merely
70

because the other political party has come into power.
“Political agenda of an individual or a political party should not
be subversive of rule of law.” The Government has to rise
above the nexus of vested interest and nepotism, etc. as the
principles of governance have to be tested on the touchstone of
justice, equity and fair play. The decision must be taken in
good faith and must be legitimate. (SectionVide Onkar Lal Bajaj v.
Union of India, (2003) 2 SCC 673, SectionState of Karnataka v. All
India Manufacturers Organisation, (2006) 4 SCC 683 and State
of T.N. v. K. Shyam Sunder, (2011) 8 SCC 737.)”

83. In our considered opinion, it cannot be said that DOT has taken

inconsistent stands at different stages of the same litigation. Their

stand is apparent that the gross revenue has been clearly defined in

the agreement. Parties have agreed to various inclusions in the

agreement and have willingly switched over to revenue­ sharing regime

under the 1999 policy and same is apparent from the stand and the

reliefs prayed in the petitions filed in 2003 and 2005 extracted above.

The licensees were aware of items specifically included in the

agreement. TSPs agreed to interpretation and accepted it as held by

this Court in 2011 judgment. Licensees are taking inconsistent

stands, earlier they have taken the stand that all these items

concerning which disputes have been raised, had been included

illegally in the definition of gross revenue, the definition may be

declared ultra vires, invalid, and be struck down. They have also

contended that revenue from activities under the licence cannot be

included in gross revenue, which submission has been negated by this

Court in 2011, it was held that the gross revenue would include the
71

revenue generated from non­licensing activities. Licensees cannot be

permitted to approbate and reprobate and to take inconsistent stands

that they are not included in gross revenue as per AS­9. The stand

taken rather than buttressing the submissions raised by them,

counters and militates against their own interest and paves the way in

favour of DOT.

84. A submission has been raised that the definition of gross

revenue is not exhaustive. It only includes those streams which are

specifically included in the definition of AGR. If it is an inclusive

definition of AGR, and all receipts were ipso facto part of AGR, then

there was no occasion to further provide in clause 2.2 (b)(ii) that the

revenue from value­added services was to be treated as part of AGR.

Further, the licensee was obliged to maintain separate account for

service defined in Annexure 1 to the licence in clause 55 to mean

service in a licensed service area. By the fact that separate provision

is made for value­added services, a separate account has to be

maintained as per clauses 22.1, 22.2 and 22.3 that is for arriving at

the figure of revenue and step in aid, to clarify how the licensee has to

operate, that would not change the definition of gross revenue which is

the meaning of revenue itself is apparent, same is gross inflow of the

cash, and the amount which is receivable as provided in AS­9 also.

Thus, the submission raised that the definition is not wide, cannot be
72

accepted, and stands repelled. Clauses 22.1, 22.2 and 22.3 cast

obligation upon the licensee to draw, keep and furnish independent

accounts for the service. Under clauses 22.1 and 22.2, the licensee

has to maintain records quarterly. Accounts have to be audited and

can be called for by the licensor or the TRAI, as provided in Clause

22.3. The format of gross revenue is supportive of definition of gross

revenue as defined in the agreement. Clause 22 is a rider upon the

licensee to maintain the records of activities and other matters such as

financial position as enumerated therein.

85. Clause 18.1 of the agreement has also been pressed into service.

The submission raised that a single company may hold 5 licences for 5

different service areas; the AGR as suggested by the DOT, cannot be

followed as it may end up in paying the licence fee at the rate of 5

times. As the licence fee cannot be charged more than once, there is

no room to entertain the submission. It is not what is contemplated in

the definition. While computing the licence fee, the gross revenue has

to be taken into consideration under a particular licence for which it is

being determined. The argument had been raised on a hypothetical

basis without foundational facts to raise the same is thus, liable to be

and is rejected at the threshold.

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86. DOT has urged that the Central Government has exclusive

privilege under Sectionsection 4 of the Telegraph Act; thus, it is bound to get

the best price for natural resources. To part with the exclusive

privilege under the revenue sharing regime is extremely beneficial to

the licensees. Thus, the State must get the price for its valuable right

as mandated under SectionArticle 14. In our opinion, there is no doubt that

the State is a trustee of the natural resources and is obliged to hold it

for the benefit of the citizens but also to ensure equal distribution to

sub­serve the common good as observed under SectionArticle 39 of the

Constitution of India in Re : Natural Resources Allocation, 2012 (10)

SCC 1. The Government being the sole repository of all the resources

in the country, also has the exclusive power to determine the licence

conditions at which it parts with the exclusive right to the resources.

Government has to make an effort to get the best price for its valuable

rights and cannot throw them away, and there would be no

arbitrariness in the same as observed in SectionState of Orissa Ors. v.

Harinarayan Jaiswal Ors., (1972) 2 SCC 36, thus:

“13. Even apart from the power conferred on the Government
under Sections 22 and Section29, we fail to see how the power
retained by the Government under clause (6) of its order, dated
January 6, 1971, can be considered as unconstitutional. As
held by this Court in Cooverjee B. Bharucha case, one of the
important purpose of selling the exclusive right to sell liquor in
wholesale or retail is to raise revenue. Excise revenue forms an
important part of every State’s revenue. The Government is the
guardian of the finances of the State. It is expected to protect
the financial interest of the State. Hence quite naturally, the
Legislature has empowered the Government to see that there
74

is no leakage in its revenue. It is for the Government to decide
whether the price offered in an auction sale is adequate. While
accepting or rejecting a bid, it is merely performing an
executive function. The correctness of its conclusion is not
open to judicial review. We fail to see how the plea of
contravention of SectionArticle 19(1)(g) or SectionArticle 14 can arise in these
cases. The Government’s power to sell the exclusive privileges
set out in Section 22 was not denied. It was also not disputed
that those privileges could be sold by public auction. Public
auctions are held to get the best possible price. Once these
aspects are recognised, there appears to be no basis for
contending that the owner of the privileges in question who
had offered to sell them cannot decline to accept the highest
bid if he thinks that the price offered is inadequate. There is
no concluded contract till the bid is accepted. Before there was
a concluded contract, it was open to the bidders to withdraw
their bids — see SectionUnion of India v. Bhimsen Walaiti Ram, (1970)
2 SCR 594. By merely giving bids, the bidders had not
acquired any vested rights. The fact that the Government was
the seller does not change the legal position once its exclusive
right to deal with those privileges is conceded. If the
Government is the exclusive owner of those privileges, reliance
on SectionArticle 19(1)(g) or SectionArticle 14 becomes irrelevant. Citizens
cannot have any fundamental right to trade or carry on
business in the properties or rights belonging to the
Government—nor can there be any infringement of SectionArticle 14,
if the Government tries to get the best available price for its
valuable rights. ….”

(emphasis supplied)

87. Similar is the case law laid down in SectionHar Shankar v. Excise

Taxation Commissioner, 1975 (1) SCC 737; SectionGovernment of A.P. v.

Anabeshahi Wine Distilleries (P) Ltd., (1988) 2 SCC 25; SectionExcise

Commissioner v. Issac Peter, (1994) 4 SCC 104; SectionState of Orissa v.

Narain Prasad (1996) 5 SCC 740, SectionState of M.P. v. KCT Drinks Ltd.,

(2003) 4 SCC 748 and SectionState of Punjab v. Devans Modern Breweries

Ltd., (2004) 11 SCC 26.

75

88. A licence granted under Sectionsection 4(1) is in the nature of a

contract. DOT has relied upon SectionKhardah Company Ltd. v. Raymond

Co. (India) Pvt. Ltd., 1963 (3) SCR 183 in which it has been observed

that once a contract has been reduced to writing, terms have to be

ascertained from the agreement. It may be relevant to look into the

circumstances in case need arises, which resulted in the inclusion of

the definition of AGR in the licence agreement. The deliberations were

held with the licensees, experts, and then finally migration package,

revenue sharing regime is being consented to, was worked out in

which the definition of adjusted gross revenue as a part of the

financial condition of the licence is mentioned. As to the provisions of

gross revenue there had been consensus ad idem between the parties.

The licensees are bound by it as they have executed the licence

agreement. A party is free to enter into a contract with a State, there is

no compulsion, it is voluntary on both sides and binding and cannot

be termed to be unfair as observed in SectionAssistant Excise Commissioner

Ors. v. Issac Peters Ors. (1994) 4 SCC 104, thus:

“26. …..We are, therefore, of the opinion that in case of
contracts freely entered into with the State, like the present
ones, there is no room for invoking the doctrine of fairness and
reasonableness against one party to the contract (State), for
the purpose of altering or adding to the terms and conditions
of the contract, merely because it happens to be the State. In
such cases, the mutual rights and liabilities of the parties are
governed by the terms of the contracts (which may be
statutory in some cases) and the laws relating to contracts. It
must be remembered that these contracts are entered into
pursuant to public auction, floating of tenders or by
76

negotiation. There is no compulsion on anyone to enter into
these contracts. It is voluntary on both sides. There can be no
question of the State power being involved in such contracts. It
bears repetition to say that the State does not guarantee profit
to the licensees in such contracts. There is no warranty
against incurring losses. It is a business for the licensees.
Whether they make a profit or incur a loss is no concern of the
State. In law, it is entitled to its money under the contract. It is
not as if the licensees are going to pay more to the State in
case they make substantial profits. We reiterate that what we
have said hereinabove is in the context of contracts entered
into between the State and its citizens pursuant to public
auction, floating of tenders or by negotiation. It is not
necessary to say more than this for the purpose of these cases.
What would be the position in the case of contracts entered
into otherwise than by public auction, floating of tenders or
negotiation, we need not express any opinion herein.”

89. The licensees who have taken the advantage under the licence,

carry certain obligations. The licensee is bound to discharge the

obligation while taking benefit under the licence of migration package,

for this purpose as held in SectionShyam Telelink Ltd. v. Union of India, 2010

(10) SCC 165, thus:

“21. The unconditional acceptance of the terms of the package
and the benefit which the appellant derived under the same
will estop the appellant from challenging the recovery of the
dues under the package or the process of its determination. No
dispute has been raised by the appellant and rightly so in
regard to the payment of outstanding licence fee or the interest
due thereon. The controversy is limited to the computation of
liquidated damages of Rs. 8 crores out of which Rs. 7.3 crores
was paid by the appellant in the beginning without any
objection followed by a payment of Rs. 70 lakhs made on 29­5­
2001.

22. Although the appellant had sought waiver of the liquidated
damages yet upon rejection of that request it had made the
payment of the amount demanded which signified a clear
acceptance on its part of the obligation to pay. If the appellant
proposed to continue with its challenge to demand, nothing
prevented it from taking recourse to appropriate proceedings
and taking the adjudication process to its logical conclusion
77

before exercising its option. Far from doing so, the appellant
gave up the plea of waiver and deposited the amount which
clearly indicates 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.

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. SectionIn 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 appellant­petitioner had
specifically and unconditionally agreed to accept the
migration package and given up all disputes relating to
licence agreement for the period up to 31­7­1999, 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
78

licence agreement for the period ending 31­7­1999 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 SectionCentral 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 SectionS.K. Jain v.

State of Haryana, 2009 (4) SCC 35, thus:

“8. There is, in our opinion, no legal infirmity in the view taken
by the Tribunal. Once the appellant­petitioner had specifically
and unconditionally agreed to accept the migration package
and given up all disputes relating to licence agreement for the
period up to 31­7­1999, 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 31­7­
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. SectionIn Cauvery Coffee Traders, Mangalore v.

Hornor Resources (International) Co. Ltd., (2011) 10 SCC 420) it was

observed:

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“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. SectionIn 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.

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 pre­paid 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
80

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 pre­paid 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
81

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.

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 AS­9, 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
82

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 volume­based 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 AS­9, 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.

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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 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
84

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 volume­based

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 pre­paid
85

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 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 pre­paid 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
86

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 set­off for related items

of expense. Thus, the gross amount, as per the definition, is the gross

revenue, without set­off, 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 re­write the definition of gross revenue. The

definition of ‘gross revenue’ is independent of AS­9 as the definition of

revenue in AS­9 cannot govern the definition in Clause 19.1 of the

licence agreement. What has been defined in AS­9 is revenue,

whereas, for a licence fee, gross revenue is the revenue. It would be

greatest fallacy to say that while gross revenue has been defined in
87

Clause 19.1 of agreement, revenue has not been defined in the licence

agreement. What has been defined as gross revenue is in fact broader

definition of revenue and has to be taken as definition of revenue for

licence agreement. An attempt has made to wriggle out of the rigour of

the definition of gross revenue by banking upon the definition of

revenue in AS­9 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 AS­9 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 AS­9 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 in­depth 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
88

the basis of Accounting Standard­9. Fair value is the operating

concept of IND AS­18. In AS­9, 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 AS­9. Under the AS­9 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 off­line 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 credit points, etc. The various incentives affect the amount of

revenue to be recognised. Under IND AS­18 Revenue or IND AS­115,

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.

89

110. Reliance has been placed on SectionUnion 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

SectionSalt 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 SectionDeputy 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

SectionSales 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 SectionM/s. United Exports

v. Commissioner of Income Tax, Delhi (2009) SCC Online Del 2566

rendered in the context of the provisions of Sectionsection 40­A(2)(b) of the

Income­tax 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
90

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 Sectionsection 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 SectionIFB 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 pre­set

sales target. It was held that for the discount on 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 sales­tax and VAT

under the Kerala General Sales Tax Rules, 1963, and has no

relevance. SectionIn Commissioner of Central Excise, Madras v. Addison Co.

Ltd., (2016) 10 SCC 56, the question of turnover discount came up for

consideration under Sectionsection 11­B 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
91

invoice price. SectionIn Southern Motors v. State of Karnataka Ors., (2017)

3 SCC 467, a question arose of trade discount given post­issuance 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 SectionMaya 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
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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.

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 AS­9, revenue is recognised at the

gross amount and cash discount is regarded as an expense when the
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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 AS­9. Concerning the volume­based discount,

under the AS­9 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.
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117. The discounts allowed on international roaming, commission,

and discount allowed to distributors on sale of pre­paid vouchers form

part of the gross revenue and cannot be deducted by placing reliance

on the definition of revenue and certain notes of AS­9 standards;

whereas they are explicitly included in the definition of gross revenue.

118. As to pre­paid options, the format of statement of revenue and

licence fee contained in Appendix II to Annexure­II provides in the case

of pre­paid options, sale of pre­paid 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/re­sellers 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 set­off is
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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 pre­paid 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
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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 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, pre­paid 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 vis­à­vis 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
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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 pre­paid

and payment of charges or outroamers and secondly in receipt from

inroamer. In the first case, there is a decrease in cost, which cannot be

taken as revenue for the purpose of determining AGR. In case of

reduction, payment of charges for outroaming the reduction is allowed

only on payment basis. Therefore, the difference between accrual and

paid basis cannot be taken as revenue for AGR calculation, and in the

second case, revenue is recorded on accrual basis. Any charges till

payment is made, are notional income, which cannot be taken as

revenue for AGR basis. On actual payment since no discount is given

and the actual receipt is less, no licence fee should be charged if the

same is more. Thus, any gain or loss due to foreign exchange

fluctuations will have no bearing on the licence fee.

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
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should be added 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. AS­11 mandates the reporting of foreign currency in the

balance­sheet at the prevailing foreign exchange rate. The difference in

exchange variation between the transaction date and the year­end

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
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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 AS­9 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 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
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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 balance­sheet. 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
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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

balance­sheet 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 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
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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.

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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

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
104

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 AS­9. Even Para 3(i) of AS­

9 which excludes from the ambit of ‘revenue’ any realised or

unrealised gains resulting from disposal of non­current 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 AS­9. In contrast, the definition of gross

revenue in clause 19.1 includes gross revenue from non­licensed

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:
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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 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
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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 SectionVania Silk

Mills v. C.I.T. Ahmedabad, (supra) has been pressed into service

wherein it has been held that while paying for the loss, the insurance
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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 pre­paid customer:

137. The negative balance occurs when a pre­paid customer exhausts

the available talk­time. TSPs as a matter of policy, sometimes provides

the customer with a small amount of loan talk­time as it may deem fit,

say of the value of Rs.10 or Rs.20. The utilisation of this talk­time

results in negative balance in the account of the pre­paid customer.

The balance is recovered from the subsequent re­charge made by the
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customer. In case where the customer fails to re­charge the fresh top­

up amount, the balance remains negative in the pre­paid account of

the customer. The pre­paid vouchers are sold for a price for which the

customer gets a fixed duration of talk­time/usage of the service. When

it is exhausted, and long talk­time 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

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 re­charge is opted.

Otherwise also, it is billed and reflected on accrual basis in the
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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 AS­9. 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 IP­1 operators. These operators do not require any
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licence. It is a non­licensed 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

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.

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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 Annexure­II 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
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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. 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.
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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 pass­through charges
114

151. Roaming charges apply when the customer leaves the home

network area and roams into the network or coverage area of another

service area. Pass­through charges are charges paid by the licensee to

the licensor for allowing their subscribers’ calls to be carried on their

networks. Clause 19.2 of the licence agreement provides for certain

deductions of roaming charges and PSTN pass­through charges from

gross revenue on actually paid basis. The TDSAT considered grievance

on behalf of the licensees that many a time it happens that the

licensee to whom such charges to be paid, happens to be the same

company. It 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, pass­through charges shall be allowed to be

deducted as soon as the same are accounted as revenue under the

different licence held by the company.

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
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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 Government­owned
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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
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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 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
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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: Non­refundable Deposits

160. It is permissible for the licensee to accept deposits from its

customers, which at times are non­refundable but are used to provide

discounts on the bills raised. Concerning non­refundable deposits, the

claim was not pressed by the learned counsel appearing on behalf of

DOT before the tribunal. However, we find that the concession given
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by the learned counsel on behalf of DOT concerning non­refundable

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 Annexure­II of the licence agreement: Item No.5,

in Section D of the format, is an entry concerning non­refundable

deposits from subscribers. It has to be included as per the format in

the statement of the gross revenue. The definition of gross revenue is

wide enough to cover non­refundable deposits as non­refundable

deposits are revenue earned from licensed activities. Non­refundable

deposits are to be treated as accrued in the profit and loss account as

per Annexure III of the licence agreement. 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 non­refundable

deposits as income under section 80 IA (2a) of the Income­tax 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
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concession made by the learned counsel appearing for the DOT, is as a

result of this is liable to be set­aside. 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.

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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 non­licensing activities, have to form part of

gross revenue for determination of licence fee.

In re: Bad­debts 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
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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 head­wise. 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 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.

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169. SectionIn Rajputana Trading Co. Ltd. v. Commissioner of Income Tax,

West Bengal­I, (1982) 2 SCC 775, it has been observed that once

liability is written off, it has to be added as income from the business

under Sectionsection 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: Inter­corporate 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 day­to­day

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 inter­corporate 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
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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 inter­corporate loan has to be

included in the gross revenue for working out the licence fee.

In re: Revenue under IP­1 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 non­licensing 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
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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 AS­9.
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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 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 non­licencing 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
127

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 non­licensing

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 SectionLohia 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
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forming part of the capital employed, as interpreted by this Court in

Lohia Machines Ltd. (supra) in which following observations have been

made:

“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 80­J 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 SectionBusiness
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
SectionCompanies (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 process of exclusion as well as
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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 SectionFinance 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
paid­up 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 80­J sub­section (1).

19. It may be noted that even in the SectionIncome 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 SectionIncome 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 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 Section43­A. These sections
provide for inclusion and exclusion of various items in
computing the total income. Sections 80­A to 80­VV also
provide for deductions to be made in computing the total
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income and under sections such as 80­HH, 80­JJ and 80­O,
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 rule­making 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 rule­making 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 80­J the word “computed” has been used in
the same sense as involving both inclusion and exclusion. The
second proviso to sub­section (4) of Section 80­J 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 sub­section 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 80­J 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
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according to these provisions in Section 80­J, 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
Rule­making 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 SectionBusiness Profits Tax Act, 1947, the Super
Profits Tax Act, 1963 and the SectionCompanies (Profits) Surtax Act,
1964 but also the various provisions of the SectionIncome Tax Act,
1961 referred to by us, clearly indicate that the word
“computed” has been used by the legislature in sub­section (1)
of Section 80­J 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 rule­making
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 Sectionsection 80J of the Income Tax Act and has observed that

capital employed has variable meanings. It has been legislatively

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
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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 1 st 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
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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 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

short­payment. 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
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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 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
135

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 Sectionsection 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. Non­payment was neither deliberate nor under

defiance of any law. The licensees have placed reliance on:

SectionA. Hindustan Steel Ltd. v. State of Orissa, 1969 (2) SCC 627, in

which following observations are made:

“8. SectionUnder 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 quasi­criminal 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
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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 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.”

SectionB. 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 SectionMerck Spares
v. Collector of Central Excise Customs, New Delhi, (1983) 13
ELT 1261 (SectionCEGAT), Shama Engine Valves Ltd. v. Collector of
Customs, (1984) 13 ELT 533 (SectionCEGAT), 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 SectionHindustan 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.”
137

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)

SectionC. 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 11­A 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 show­cause notice
dated 3­5­1993.”

(emphasis supplied)

SectionD. 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 11­A 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 11­SectionA of the Act and imposed penal interest and other
138

penalties shall stand set aside and the order made by the
Tribunal stands modified to that extent.”

(emphasis supplied)

SectionE. 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(2­A), 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 11­B(a) uses the expression “tax
payable under sub­sections (2) and (2­A) of Section 7”, that
must be understood in the context of the aforesaid expressions
employed in the two sub­sections. Therefore, the expression
‘tax payable’ under the said two sub­sections 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 (2­A)
and 11­B of the Act leaves no room for doubt that the
expression ‘tax payable’ in Section 11­B can only mean the full
amount of tax which becomes due under sub­sections (2) and
(2­SectionA) 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, 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 11­B. It would be a
different matter if the return is not approved by the authority,
139

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)

SectionF. 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
SectionMaula 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 SectionFateh 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)

SectionG. Central Bank of India v. Ravindra Ors., (2002) 1 SCC 367,

paras 38, 55

“38. However “penal interest” has to be distinguished from
“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
140

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 long­running 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 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 non­payment, 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.

141

(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 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 Section35­SectionA 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
142

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 six­monthly rests depending on
the rotation of crops in the area to which the agriculturist
borrowers belong.

(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 post­decree 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 post­decree 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
143

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 AS­9 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 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
144

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 way­back in the year

2003, which is ultimately the subject­matter 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.

145

190. SectionIn 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 Sectionsection 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 Sectionsection 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 Sectionsection 32. This Court has held:

“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. SectionIn Punjab Financial Corporation v. Surya Auto Industries, (2010) 1

SCC 297, the Court held that when the terms of the agreement have
146

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. 1­4­2003 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 SectionU.P.
Financial Corpn. v. Gem Cap (India) (P) Ltd., (1993) 2 SCC 299
and SectionHaryana Financial Corpn. v. Jagdamba Oil Mills (2002) 3
SCC 496.”
(emphasis supplied)

192. SectionIn Hindustan Steel Ltd. v. State of Orissa (supra), relied on by

licensees the matter was of imposition of penalty in a quasi­criminal

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
147

to vary the penalty. It is 50% of the amount which is in short­fall

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 SectionAkbar

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 SectionJ.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 Sectionsection 11­
148

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 Sectionsection

11A and other penalties were set aside as there was a bona fide

dispute. In the present case, there is no bona fide dispute, and it is not

appropriate to vary the interest or the penalty. That has 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 Sectionsection 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
149

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. SectionIn 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:

150

“36. The English decisions and the decisions of this Court and
almost all the High Courts of the country have noticed and
approved long­established 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 non­banking 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 long­established 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
debtor had paid the amount of interest on the date due, the
creditor needs to be compensated for deprivation. As held in
SectionPazhaniappa 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
151

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 SectionCentral 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
non­payment, 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
152

been paid, it has to carry 50% of the penalty on defaulted amount, 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.
153

200. No order as to costs.

…………………………. J.

(ARUN MISHRA)

…………………………. J.

(S. ABDUL NAZEER)

…………………………. J.

(M.R. SHAH)
NEW DELHI;

OCTOBER 24, 2019.

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