Indian Telecom's AGR Tangle - Who is at fault?

On 1st Sept 2020, the historic AGR case, which had rattled the telecom sector for the past two decades, concluded with the SC judgment. The overall impact on the sector is a staggering Rupees One Lakh Sixty-Nine Thousand Crores (22.8 billion USD). It looks hilarious, that it took such a long time to settle something so fundamental - the basis of the settlement of 1999 between the government and the telecom operators. Lot has been written about it, but in this note, I plan to point to key mistakes that were committed (by all concerns) - leading to this mess.

Mistake No.1 - DoT had deliberately left the key term (definition of revenue) open in their proposed package for migration (from fixed license fees to revenue share) dated 22nd July 1999 [clause iii]. By doing so they had set the expectation that they will decide the same later based on a fair consultation process run by TRAI.

Mistake No.2 - DoT did consult the TRAI but rejected all its recommendations without assigning any reasons. Nor did it place the consultant report (which it consulted privately) for discussion and deliberation before all. The TRAI act [page 10, sec 11] empowers DoT will full rights to refer back to TRAI its recommendations for reconsideration but does it empowers DoT to decide such matters of importance without assigning any reason? If so what is the purpose of holding a consultation? What value the TRAI can add (the 2nd time) when references are sent back for reconsideration without DoT even explaining the basis of the disagreement? See extracts of DoT's back reference to TRAI [page 7, 2.3(j)] under.

"The government proposed to follow a definition of Adjusted Gross Revenue (AGR) for the purpose of the computing license fee which is different from the definition recommended by TRAI."

Mistake No.3 - TRAI should have formally asked DoT the rationale of proposing a different definition. But looks like they never did. The TRAI act [page 9, last para] is reproduced below for easy reference.

"Provided also that the Authority may request the Central Government to furnish such information or documents as may be necessary for the purpose of making the recommendation under sub-clauses (i) and (ii) of clause (a) of this section and the government shall supply such information within a period of seven days from receipt of such request."

Looks like that neither TRAI asked nor DoT provided the rationale of rejecting TRAI's recommendation on the "definition of revenue".

This lead to total confusion in the minds of the operators, as they could not appreciate why they were asked to share revenue on verticals which had nothing to do with the Telegraph Act of 1885.

Mistake No 4 - TDSAT in its judgment dated 30th Aug 2007 had rejected Union of India's plea that SC had empowered it on 19th Jan 2007 to urge all its contentions (including those which were settled earlier on 7th July 2006) before TDSAT. The extracts of the SC order dated 19th Jan 2007 is reproduced below for reference.

"Heard the parties. Pursuant to the direction of the TDSAT in the impugned order, a fresh recommendation has been made by the TRAI. in view thereof, we see no reason to interfere. The appeal is dismissed. The appellant (DoT), is, however, given liberty to urge all the contentions raised in this petition before TDSAT"

The extracts of TDSAT's judgment of 30th Aug 2007 [page 12] is reproduced below.

"We have considered the contentions of both parties and we are of the view that the appeal against the order of this Tribunal having been dismissed by the Supreme Court, the order has become final and cannot be reopened. When an order becomes final, it cannot be challenged before the authority passing the order. It is a basic principle of our jurisprudence that an authority passing an order cannot itself sit in appeal against the order. Therefore, we reject the contention of the learned ASG that he should be allowed to re-agitate the issues which were raised by way of appeal against our order dated 7th July 2006 before the SC."

This proved very costly, as this was one of the bases used by SC to in its order dated 11th Nov 2011 to undo all the outcomes that happened before TDSAT to date. The first Para of page 34 of the SC judgment dated 11th Nov 2011 is reproduced below.

"It will be clear from the language of the order dated 19th Jan 2007 that while dismissing the appeal, the court has given liberty to the appellant, namely, Union of India, to urge the contentions raised in the Civil Appeal No.84 of 2007"

Mistake No.5 - SC while passing the order on 19th Jan 2007 did not look into the issue of Jurisdiction of TDSAT, which it questioned in its judgment dated 11th Nov 2011 - the whole basis of rejecting TDSAT's earlier judgment of 30th Aug 2007. Extracts of the SC judgment [page 49] is reproduced under.

"The result is that the Tribunal has no jurisdiction to decide upon the validity of the terms and conditions incorporated in the license of a service provider, but it will have jurisdiction to decide "any" dispute between the licensor and the licensee on the interpretation of the terms and condition of the license".

Now the question is if TDSAT didn't have jurisdiction then why the matter did not get investigated in 2007 itself when the matter first came to SC? Why wait for 4 years to pass this order in 2011? So much time and effort could have been saved. No?

Mistake No.6 - SC in its judgment dated 11th Nov 2011 decided and deliberated on four substantial questions of law. 1) Whether DoT has the right to re-agitate the same issues decided by TDSAT on 7th July 2006 in lieu of SC dismissing DoT's appeal No.84 of 2007; 2) Whether TDSAT has jurisdiction to decide the terms and condition of the license; 3) Whether DoT not filing an appeal against the order dated 7th July 2006 of TDSAT passed in favor of the licensee, the said order has become final; 4) Whether the licenses can challenge the computation of AGR, and if so at what stage and on what grounds.

But it did not include other questions of law, i.e a) whether DoT can reject TRAI's recommendations without assigning any reasons (arbitrarily), b) whether it is fair on behalf of DoT to structure a contract with such ambiguity, the terms of which the DoT can decide unilaterally at a later stage, and that too without assigning any reasons?

Why aren't these questions not included in the SC deliberation? The reason it is important to know as the "unilateralism" of DoT after having set the expectation of fair consultation with TRAI, trigged the biggest and longest litigation - lasting for 20 years and impacted the industry 23 billion dollars of unnecessary outflows, which ironically DoT was trying to avoid through its definition of AGR. Strange, isn't it?

Mistake No 7 - SC in its judgment dated 24th Oct 2019 disregarded all past facts of delays and mistakes caused by judicial processes that the operators had no control. It attributed all delays on the head of the operators. In this background, even if the SC held the definition of AGR of DoT right, it had virtually no rationale to impose such huge penalties (that too with interests) on the operators. This is in light of the facts explained above.

Mistake No 8 - SC in its order dated 11th June 2020 has bailed the PSUs out of the obligation to pay license fees based on the same definition as is applicable for the telecom operators. Its rationale key rationale is that licenses of NLD and IP-II are different from UAL and ISP, as they (NLD and IP-11) include a sentence "by way of providing service under the license". Ok so far so good, all the PSUs also hold an ISP license. So the logic of them being excluded from the responsibility of paying license fees on their total revenue does not hold good, just because NLD and IP-II licenses being different. This is when the PSUs were fully aware of the SC judgment of 2011, wherein the SC used the rationale of moving "non-license" activities under a separate company to justify clubbing of all revenues for the purpose of calculating license fees. Then why didn't the PSUs act to separate out their telecom activities under a separate company? Also, if the PSUs are eligible for such relaxation, then why not extend the same to MTNL and BSNL as well? The SC judgment looks arbitrary and is deprived of sound logic.

Mistakes No 9 - SC in its judgment dated 1st Sept 2020, included a table titled "Amounts Recoverable From Major TSPs As Per Preliminary Assessment". Also, in the same judgment, it has prevented the operators from reassessing these dues. Clause 38(i) on page 45/46 is reproduced from the judgment for reference.

"That for the demand raised by the Department of Telecom in respect of the AGR dues based on the judgment of this Court, there shall not be any dispute raised by any of the Telecom Operators and that there shall not be any re-assessment."

Now it is not understood how can an Assessment which is marked "Preliminary" can be treated as final? That too when the operators did not have the opportunity to check and verify and also there are issues that the operators are facing from DoT for claiming relief on existing pass-through allowed as per the deduction allowed on the license agreement.

Mistake No 10 - Telecom operators continued to push this case without any visualization of the risk it entails if they lose. They should have pushed for an early settlement. Also, they should have advocated for the dismantling of the revenue share regime in 2007 itself when they were preparing for 3G auctions. Not a single operator raised this point. As it was subscriber-based revenue share policy was helping them to fight CDMA which was given half the quantum of spectrum (compared to GSM) - it being efficient technology. So much so, when Ratan Tata offered to pay Rs 1500 Cr for 3G spectrum, most industry stalwarts accused him by saying if Tatas have excess money they should give it to PM's relief fund. This approach impacted credibility by creating a perception that all that the operator wants is a "free and subsidized spectrum". In my view, the revenue share based licensing (where spectrum came bundled with the license) should have been dismantled as soon as the DoT started offering spectrum through auctions.

Conclusion

It is clear from the above that the AGR case is barred with mistakes and delays and all cannot be attributed to the operators. In that case, what is the point of imposing huge interest and penalties - when these are more than 70 % of the total demand? Isn't it unfair? Also why the PSUs have been bailed out when they hold a similar license? And that too when they were fully aware of the SC judgment of 2011 which called for moving telecom activities out of the main business to prevent outflows out of nonlicensed activities. SC judgment of 2019 accused the operators having escaping license fees after having taken the benefit of the migration package, but didn't the DoT also benefited in terms of expanding fees and services. Else why didn't it choose to continue with BSNL and MTNL, and what was the need for it (DoT) opening up of the telecom sector?

If you are interested in knowing further details of this case you can refer to my earlier notes titled - SC Judgment on AGR: Rationale and Implications & Was SC's Interpretation of AGR the Real Intent of DoT?

Also, you can get all documents related to this case and chronology in the links embedded.

(Views expressed are of my own and do not reflect that of my employer)

PS: Find the list of other relevant articles in the embedded link.