Telcos dispute over AGR resurfaces at SC with a judgment and curative petition

The return of the AGR litigation

On October 10, telcos sought an urgent hearing of their curative petitions challenging certain specific portions of the 2019 judgment on Adjusted Gross Revenue (AGR).

The National Telecom Policy (NTP) of 1999 permitted telecommunication companies to pay their license fee and spectrum fee to the government as a percentage of their yearly income. However, telecom companies disputed the definition of the term Gross Revenue at the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) and at the Supreme Court.

The Telcos’ contention was that AGR computation should include only those revenues the company earns from the telecommunication business. DoT contested this and said that the telcos must pay eight percent of the entire revenue to the government as license and spectrum fee.

In 2015, TDSAT held that to compute AGR, DoT has to consider only the revenue from the telecommunication business of the company. In 2019, the Supreme Court overturned TDSAT's verdict and held that AGR is to be computed on the total revenue of the company, irrespective of whether it is telecommunication-related or not. The Supreme Court's judgment imposed a penalty as "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 a disturbing scenario projected in very many cases."

As a result of this, DoT's total demand amounted to Rs 1.19 lakh crore — Vodafone Idea owed Rs 58,254 crore, Bharti Airtel Rs 43,989 crore, and Tata Teleservices owed Rs 16,798 crore to the government.

In 2020, the Supreme Court set a 10-year time frame to the companies to pay the dues. In 2021, the SC rejected Vodafone Idea and Bharti Airtel's plea to recompute the dues.

In 2023, the telcos filed a curative petition contending that the penalty and the interest on the penalty levied by the Supreme Court's 2019 judgment are so substantial that they threaten the existence of the company.

According to Vodafone Idea’s (VI) plea, which was filed in September 2023, "The company is already on the verge of a financial crisis, which threatens its very existence, and the judgment passed by this Hon’ble Court, prohibiting even the correction of clerical and arithmetical errors in the demands, foreclosing any reduction of the amount payable by thousands of crores of rupees and further imposing a penalty and interest on penalty, is highly unjust."

VI has also asked the SC to set aside portions of the 2019 judgment which held that the demands made by DoT would be final, even if there are clerical or arithmetical errors in the computation of dues. This means that the demanded amount could not be rectified, and the company would be compelled to make payments even if there are such errors.

A curative petition is filed by a party after the apex court dismisses their plea to review a judgment. The petition should seek to reverse those portions of a judgment that, according to the party, would lead to a miscarriage of justice if not corrected.

License fee to be treated as capital expenditure:

On October 16, the SC ruled that the license fee that telcos pay every year as a percentage of their profit should be treated as capital expenditure and not as revenue expenditure. The taxable income of telcos is likely to increase owing to this judgment.

Revenue expenditures are those that businesses incur operationally during the normal course. India’s income tax law permits the deduction of revenue expenditure from the total profits. Capital expenditures are those that businesses incur to acquire an asset or upgrading themselves, these are not deductible from income. Since the SC has now ruled that license fee is a capital expenditure, the telcos may not be able to deduct the license fee from their annual income.

This issue can also be traced back to the NTP 1999, which permitted telecommunication companies to pay their license fee and spectrum fee to the government as a percentage of their yearly income. Telcos started classifying their annual license fee as revenue expenditure, since it pertains to the operation of the company. However, the I-T department contended that it would be a capital expenditure under the Income Tax Act.

The High Courts of Bombay, Karnataka and Delhi ruled in favour of the telcos. However, the Supreme Court held that the manner of payment is irrelevant and that the variable licence fee payments made after July 1999 are a continuation of the licence fee payment, which is a mandatory payment intrinsic to the trade itself.