UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM SERVICE PROVIDERS OF INDIA ETC.ETC.

A In re: Discount and Commissions:

95Copy pinpoint95. The Tribunal has dealt with discounts, and commissions under 3 heads : (i) discounts allowed on international roaming; (ii) commission and discount allowed to distributors on sale of pre-paid vouchers; (iii) goodwill waiver, discount and rebates. B

96Copy pinpoint96. The Tribunal held with respect to discounts allowed on international roaming that if the discounts are in the form of reduced billing and the amount booked in the profit and loss account is on the basis of the invoices raised and no deduction was shown on account of discount, no addition may be made in the same on the ground that the billing was on a discounted price. The tribunal has further held that if the amount billed is for a higher amount and the discount is in the form of volume discount given separately, the billed amount should be taken as revenue, and the discount may be treated as an expense which is not open to deduction under clause 19.1. A credit note given after the billing may also be treated as an expense. If the revenue booked in the profit and loss account shows netting off on account of any discount, the amount netted off may also be added up for computation of gross revenue.

97Copy pinpoint97. The tribunal has adopted two different criteria concerning discounts on international roaming. With respect to commission and discount allowed to distributors on sale of pre-paid vouchers, the tribunal has held that if the sale and invoicing is on Maximum Retail Price (MRP) and if any discount is given separately then in terms of clause 19.1, such discount is not deductible even if the revenue booked in the profit and loss account is after netting off the discount. On the other hand, if the sale is on a stated/agreed price, invoiced at that agreed price and booked under the revenue in the profit and loss account accordingly, without netting off any discount, then the actual selling price would be the revenue and the difference between the MRP and this selling price cannot be added to gross revenue. G

98Copy pinpoint98. 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 H revenue.

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99Copy pinpoint99. It has been urged on behalf of licensees that the discounts A 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. B Therefore, discounts can never be treated as an expenditure.

100Copy pinpoint100. It is further submitted on behalf of the licensees that as per binding and mandatory principle of AS-9, the ICAI has declared discounts, rebates, deductions, lesser realisation of cost price are not to be treated as an expenditure. It is further submitted that an agreement between the parties determines the revenue arising on a transaction. It C is measured at the fair value of the consideration received or receivable considering the amount of consideration. The amount of any discount or volume-based discount and volume rebates are not considered as revenue.

101Copy pinpoint101. 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.

102Copy pinpoint102. It is further submitted that the licensees gives “trade discounts” and “subscriber’s discount,” and both are exempted from recognition as revenue for the reason that firstly as per AS-9, trade discounts are not included within the definition of revenue since they represent a reduction of cost. Guidance Note 5 on terms used in financial statements verifies that the trade discount is a reduction granted by a F 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. G

103Copy pinpoint103. 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 H

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A 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.

104Copy pinpoint104. It is further submitted on behalf of the licensees that services are offered by the licensees and not goods. For payment of service tax, the licensees consider the gross amount charged as derived and mandated under section 67 of the Service Tax Act, 1994, which includes only the amount realised by the licensees and not the notional amount. Circular No.23/3/97/-S.T. dated 13.10.1997, mandates that the service tax liability is only concerning the discounted price so received by the Cellular companies. The licensees frequently offer discounts as they are used as competitive tools to increase business in the long run. Those were inevitable as there were 8 to 10 operators operating in the same geography, and the licensees had to match highly competitive prices offered, especially by new entrants. Discounts help to survive and grow business and increase revenue, which is to the advantage of DOT.

105Copy pinpoint105. On behalf of the DOT, it has been submitted that discounts over and above the agreed charges are part of the overall commercial strategy to enhance business. Hence, these discounts are like expenses. As per definition of “gross revenue” in clause 19.1 of the agreement, it is not permissible to set off these volume-based discounts against the F 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 G AGR may be reduced. As the company may make contracts with distributors and provide them with huge discounts in the form of reduced billing. To say this (i), the company may make contracts with the distributors to sell pre-paid vouchers of Rs.100 for Rs.70. Against the discount, the company may make with the distributors further agreement H reducing the company’s cost, such as the supply of contractual

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workforce, the printing of paper vouchers, etc. Thus, it would cause evade of the licence fee without affecting the profitability of the company. The commissions thus form part of the income. The commission is nothing but “expenses” for growth in the business of the licensees, it cannot be netted off while computing the gross revenue. The finding, to the extent it is contrary, recorded by TDSAT is derogatory to the contractual definition of gross revenue. DOT also submits that the question of discount was raised earlier in the order dated 30.8.2007 by TDSAT. This Court did not accept it; as such, it is barred by res judicata and the question as to discount on international roaming, and questions as to other discounts, were not raised before TDSAT. As such, these objections concerning discounts allowed to distributors on sale of pre-paid vouchers are barred by the principle of constructive res judicata.

106Copy pinpoint106. When we consider the rival submissions it has been mentioned in the communication dated 26.7.2001 that the interest income, dividend income, value of rebates, discounts, free calls, and reimbursement from the USO funds have to be included in the adjusted gross revenue. Consequently, a prayer was made to set aside the communication dated 26.7.2001 in Petition No.7 of 2003. Prayer has not been granted on the ground that the Government has not accepted the recommendations of TRAI and the decision of the Government is final, binding and conclusive as has been held by this Court in AUSPI (2011). Finding has been recorded that parties have agreed to aforesaid position as reflected in communication dated 26.7.2001.

107Copy pinpoint107. When we ponder on the definition of “gross revenue” in clause 19.1 of the licence agreement, it is apparent that the gross revenue has to be taken into consideration without any set-off for related items of expense. Thus, the gross amount, as per the definition, is the gross revenue, without set-off, is to be taken into consideration including the discounts given. Parties understood right from the beginning that the gross revenue does not exclude discounts, commissions, rebate etc. and specific challenge made to the same had not been accepted in 2011. Now once again by the circuitous method, impermissible attempt has been made to re-write the definition of gross revenue. The definition of ‘gross revenue’ is independent of AS-9 as the definition of revenue in AS-9 cannot govern the definition in Clause 19.1 of the licence agreement. What has been defined in AS-9 is revenue, whereas, for a H

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

108Copy pinpoint108. The submission was raised on behalf of the licensees relying upon J.K. Industries (supra) that fair value has to be taken into consideration to reduce discounts etc. The concept of fair value is not the basis of Accounting Standard-9. Fair value is the operating concept of IND AS-18. In AS-9, revenue recognition is at nominal value and that the fundamental difference between the two accounting standards. F Thus, the nominal value has to be taken as the one which is relevant for AS-9. Under the AS-9 regime, the revenue recognition shall be measured as the gross inflow of cash, receivables, or other consideration received. There is no concept of fair valuation under AS-9.

109Copy pinpoint109. With the advent of modern technology, the mode of business transactions has changed. The number of online purchases and sales has been continually growing, and the techniques to retain clients online are being utilised. Unlike sales promotion schemes in the case of off- line transactions, the online transactions of sales carry cash back rewards, discount coupons, and reward points. The incentives may include cash coupons, discount coupons, cash discounts, cash-back and

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credit points, etc. The various incentives affect the amount of revenue A to be recognised. Under IND AS-18 Revenue or IND AS-115, Revenue from Contracts with Customers states that revenue shall be measured at the fair value of the consideration received or receivable after taking into account the number of various incentives provided to the customers.

110Copy pinpoint110. Reliance has been placed on Union of India v. Bombay B Tyres International Pvt. Ltd., (2005) 3 SCC 787, wherein this Court has observed that trade discount should be allowed to be deducted from the sale price. The decision is in the context of the Central Excise & Salt Act, 1944. The decision has no relevance to consider the concept of gross revenue under the licence agreement. Reliance has also been placed on the decision of this Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s. Advani Oorlikon (P) Ltd., (1980) 1 SCC 360, in which this Court considered the question of taxable turnover and the concept of sale price under the Sales Tax Act. It was held that the trade discount on catalogue price allowed by the wholesaler to the retailer is not includible in the taxable turnover. Trade discount is distinct from cash discount. A cash discount is a discount granted in consideration of prompt payment. A trade discount is a deduction from the catalogue price of goods allowed by wholesalers to retailers engaged in the trade. Reliance has also been placed on the decision of Delhi High Court in M/s. United Exports v. E Commissioner of Income Tax, Delhi (2009) SCC Online Del 2566 rendered in the context of the provisions of section 40-A(2)(b) of the Income-tax Act, 1961. Certain trade discount was given. The High Court held that the provision pertained to disallowance to an expenditure, an amount spent by the assessee as an expenditure. For that, actual payment must be made. There has to be an expenditure incurred before F the provision can be said to be applicable. Trade discount was held not to be an expenditure as it is incurred for which allowance could have been claimed under section 40(A)(2). Above mentioned decisions are wholly inapplicable, given the definition of gross revenue and have been rendered in context of concerning provisions of different statutes. G

111Copy pinpoint111. Reliance has also been placed on IFB Industries Ltd. v. State of Kerala, (2012) 4 SCC 618. The question coming up for consideration was the discount on qualifying for deduction under Rule 9(a) of 1963 Rules. The trade discount was given for dealers on achieving a pre-set sales target. It was held that for the discount on H

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A qualifying for deduction under Rule 9(a) of the said Rules must be shown in invoice, itself and that it would not be good enough to show it employing a credit note issued after the sale. The decision is on the method of computation when discount can be allowed on sales-tax and VAT under the Kerala General Sales Tax Rules, 1963, and has no B relevance. In Commissioner of Central Excise, Madras v. Addison & Co. Ltd., (2016) 10 SCC 56, the question of turnover discount came up for consideration under section 11-B of the Central Excise Act, 1944. It was held that trade discounts should not be disallowed because they are not payable at the time of each invoice or deducted from the invoice price. In Southern Motors v. State of Karnataka & Ors., (2017) 3 C SCC 467, a question arose of trade discount given post-issuance of tax/ sale invoice, a deduction from the sale price for computing taxable turnover when the discount was not reflected in the tax invoice or bill of sale. It was held that it has to be proved that such discounts were given. The decision was in the context of Karnataka Value Added Tax D Rules, 2005. Yet in Maya Appliances Pvt. Ltd. v. Additional Commissioner of Commercial Taxes & Ors., (2018) 2 SCC 756 has also been relied upon where the question of computation of taxable turnover came up for consideration in the context of Karnataka Value Added Tax Act, 2003, with respect to all regular trade discounts and they are allowable as permissible deductions, if proper proof is shown. E

112Copy pinpoint112. 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.

113Copy pinpoint113. Reliance has been placed on service tax Circular dated F 13.10.1997, which provides that service tax liability is only in respect of the discounted price so received by the Cellular companies. The question of service tax liability has no relevance for determination of licence fee for which definition has been worked out by the Government of India, which has been agreed to by the licensees also as that was beneficial to them as compared to the fixed fee regime which prevailed earlier. They have switched over to the new regime of sharing the revenue earned by them on a percentage basis. The definition of gross revenue has the purpose behind it and was the outcome of prolonged exercise and has already been upheld, and the question cannot be reopened once over again by an indirect method.

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114Copy pinpoint114. The trade discounts cannot be deducted from the gross A 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. B

115Copy pinpoint115. Concerning cash discount, it is apparent that cash discount may be used in various methods. It is an incentive for customers. The customer makes payment after deducting amount of cash discount, if eligible for availing of the same as per the agreement between the entity and the customer. Under AS-9, revenue is recognised at the gross C amount and cash discount is regarded as an expense when the seller receives the payment net off discount is not permissible. For example, if A has sold goods to Z for Rs.1000 on 90 days’ credit period, but if Z pays within 50 days, a cash discount of 10% shall be provided by A. It is reasonably sure that Z to pay the amount within 15 days. In the AS D regime, the revenue has to be recorded at Rs.1000, and when Z pays Rs.900, the amount of cash discount of Rs.100 will be recognised as an expense. That is the effect of the revenue to be recognised as a gross amount under AS-9. Concerning the volume-based discount, under the AS-9 regime, revenue is recognised at the gross amount received or receivable from the customers. However, the value of trade discounts and volume rebates received cannot be deducted from the gross revenue owing to the definition in clause 19.1. The subscriber’s discount can also be in the form of free calls, some free minutes SMS value.

116Copy pinpoint116. 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. G

117Copy pinpoint117. The discounts allowed on international roaming, commission, and discount allowed to distributors on sale of pre-paid vouchers form part of the gross revenue and cannot be deducted by placing reliance on the definition of revenue and certain notes of AS-9 standards; whereas they are explicitly included in the definition of gross revenue. H

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118Copy pinpoint118. As to pre-paid options, the format of statement of revenue and licence fee contained in Appendix II to Annexure-II provides in the case of pre-paid options, sale of pre-paid SIM cards including full value of components charged therein. Revenue from mobile community phone service including full value of all components charged therein has to be considered, revenue from franchisees/re-sellers including all B 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. C

119Copy pinpoint119. The TDSAT has erred in holding that if the discounts are in the form of reduced billing, no addition to be made in the gross revenue. It would mean violating the definition of gross revenue where no set- off is permitted. It is rightly submitted by DOT that discounts over and above the agreed charges are part of overall commercial strategy to D 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. E

120Copy pinpoint120. The TDSAT has rejected the case of the licensees. Where the bill is for a higher amount and the discount is in the form of volume discount given separately, the billed amount should be taken as the revenue, and the discount may be treated as an expense. That part of the finding is not disturbed. However, for all discounts and commissions allowed on international roaming, and to distributors on sale of pre-paid vouchers, trade discounts, subscribers’ discounts, and volume rebates form part of gross revenue.

121Copy pinpoint121. It has also been submitted on behalf of the licensees that offering discounts is frequently used to increase business in the long run/term. These are inevitable as there were 8 to 10 operators operating in the same geography at highly competitive prices. Discounts help to survive and grow business and augment revenue. Thus it is in the nature of expense for earning the profit and by this method it is admitted that business has grown and there is an increase in revenue, hence the same being part of the commercial strategy to enhance the business, it has

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to be treated in the nature of expense and cannot be deducted from gross revenue.

122Copy pinpoint122. Thus, we have no hesitation to reject the claim for various forms of discounts, commissions, pre-paid vouchers, goodwill waiver etc., raised on behalf of the licensees and set aside the finding of the TDSAT to the extent it is contrary to the stand taken by DOT, and we hold that all discounts and commission etc. as discussed form part of the gross revenue for the purpose of payment of licence fee. In re: Gains arising out of Foreign Exchange Fluctuations:

123Copy pinpoint123. The telecom service providers have transactions of purchasing equipments or settling roaming charges etc. in foreign currency. The change in exchange rate vis-à-vis a foreign currency from the date of transaction to the time of settlement may cause gain or loss based upon the fluctuations in the exchange rate of rupee. TDSAT in the 2007 judgment held that the fluctuations in the foreign exchange rate have nothing to do with the licensed activities of the telecom service providers. The TDSAT in the impugned judgment and order in 2015 has held that foreign exchange gains are of two types. The reduction in liability towards payment for purchase of capital goods from pre-paid and payment of charges or outroamers and secondly in receipt from inroamer. In the first case, there is a decrease in cost, which cannot be taken as revenue for the purpose of determining AGR. E 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.

124Copy pinpoint124. The DOT submits that the mandate of the definition of gross revenue has been ignored. The gain from foreign exchange fluctuation is to be taken into the calculation of adjusted gross revenue, the income is understood as an increase in economic benefits in the form of inflows from the enhancement of assets or decreases in liability that result in increase in equity. The definition of income covers both revenue and gains. The gains from foreign exchange fluctuations should be added H

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A without any net off against the losses, and these should be on accrual basis.

125Copy pinpoint125. It is submitted on behalf of licensees that DOT is trying to confuse the revenue with income. The foreign exchange fluctuation gain is unrealised gain and is purely notional, and no flow of revenue takes place. AS-11 mandates the reporting of foreign currency in the balance- sheet at the prevailing foreign exchange rate. The difference in exchange variation between the transaction date and the year-end rates is booked as an unrealised exchange of gain or loss. The transactions denominated in foreign currency are recorded at the exchange rate prevailing at the time of transaction and realised. As such, gain or loss results when there is a change in the exchange rate between the transaction date and date of settlement of items.

126Copy pinpoint126. It is further submitted on behalf of the licensees that notional gains are not inflows of cash and do not represent revenue. When there is neither accrual nor receipt of income, no revenue can be said to have resulted. A higher cost of an asset shown in the books on account of a higher foreign exchange rate may be reduced to reflect the current foreign exchange rate and does not result in any revenue received or receivable by the appellant. If forex gain is on any item of expenditure, then it should not enter calculation of gross revenue as expenses are not deductible while calculating gross revenue. It is further submitted that Para 3(iii) of AS-9 expressly excludes the realised or unrealised gains resulting from changes in foreign exchange rates and adjustment arising on the transaction of foreign currency financial statements.

127Copy pinpoint127. 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. H The foreign currency gain is recorded in the income section of the

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

128Copy pinpoint128. Similarly, gain from foreign exchange fluctuation should be added on accrual basis. If later on, the amount has to be spent on the purchase of equipment or settling roaming charges in foreign currency, that is also a gain and results in economic benefit and has to be accounted for while working out the gross revenue as a decrease in liability would be gain. Whatever may be the expenditure, whether it has increased or decreased, must be accounted for as it forms part of the gross revenue. F

129Copy pinpoint129. In the definition of gross revenue, any other miscellaneous revenue is included, and when once the item has to be shown in the balance-sheet or profit and loss account, obviously, it has to be accounted for gross revenue, even as a notional figure. Once the amount is receivable, it has to be taken as part of gross revenue. The finding to the contrary recorded by the TDSAT is thus liable to be set aside. G 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 H

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A 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 B currency has to be accounted for in the account at the time when the amount is received or at the end of the accounting year. Thus, there is no escape from the conclusion that forex gain has to be accounted for as part of gross revenue. When loss can be claimed as an expenditure, profit or gain due to fluctuations in the rate of foreign exchange has also to be accounted for towards gross receipt, which is gross revenue. C In re: Monetary Gains on Sale of Shares:

130Copy pinpoint130. 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. F

131Copy pinpoint131. Given the definition of gross revenue in the licence agreement, every amount which is more than the book value of the current asset and comes to licensee company, has to be considered for calculation of gross revenue without netting off. Thus, the reasons given by the tribunal that any gain over and above the net book value, that is, when the sale proceeds are less than the original purchase cost but more than the net worth of the assets, has to be excluded from the gross revenue, cannot be accepted. The gross revenue for the current year has to be worked out based on the value of the capital assets. Gross revenue for any year is considered in light of the opening statement and also closing statement at the end of the year. What is

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gain over and above the book value in the year in question, has to be taken into consideration towards gross revenue received. Submission to the contrary raised on behalf of the licensees cannot be accepted. We are not able to accept the submission that the money collected on the sale of shares etc. is not like revenue receipt but is a capital receipt. The gain from the sale of capital asset including increase over and above net book value and scrap and not the entire proceeds are to be taken as revenue in calculation of the gross revenue without netting off and should be on accrual basis, is unobjectionably within the ken of definition of gross revenue. To say in case e.g., gain for AGR will accrue when the sale proceeds or the current disposition value of the goods is Rs.60, and if it is sold at Rs.70, in that case, there will be a gain of Rs.10. C 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 D consideration.

132Copy pinpoint132. The submission raised that the sale of shares is not an ordinary business activity, as provided in Para 4.1 of AS-9. Even Para 3(i) of AS-9 which excludes from the ambit of ‘revenue’ any realised or unrealised gains resulting from disposal of non-current assets, i.e. E appreciation in the value of fixed assets. Again, a futile attempt has been made to get rid of the definition of gross revenue, and confusion is sought to be created by ordinary business activity, which is the expression used in Para 4.1 of AS-9. In contrast, the definition of gross revenue in clause 19.1 includes gross revenue from non-licensed activities also. Thus, the submission is wholly sans substance and stands F 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: G

133Copy pinpoint133. 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 H

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A 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.

134Copy pinpoint134. On behalf of DOT, it is submitted that the tribunal has erred in making the classification of the revenue. In case the insurance claim received is more than the book value, it is to be treated as revenue. According to the definition in clause 19.1, the gross inflow of cash for the current year, over and above the book value, is to be treated gross revenue. There is no need to make any classification as to when an asset is destroyed and replaced later on. The insurance claim received more than depreciated book value has to be recorded in the profit and loss account under any other income, that too constitutes a gain, therefore, it will form part of the gross revenue in the calculation without netting off and on accrual basis. To say if the revenue to form part of gross revenue will be treated only when the insurance claim received is more than the book value. Therefore, the excess amount received over and above the book value shall be taken as revenue for calculation of gross revenue. For the use of accounting, the gain from the insurance claim, the bifurcation made by the contingencies, was uncalled for and cannot be culled out from the definition of gross revenue, which was to simplify the procedure of assessment of licence fee. What is the meaning to be given to the word ‘immediately’ would differ from case to case and determination of licence fee. The cost of replacement also depends upon various factors. An old asset may be replaced by a brand new one of the higher prices. For an accounting of gain from the insurance claim, the methodology classification adopted by DOT is not found to be proper and is not in tune with the definition of gross revenue.

135Copy pinpoint135. It is submitted on behalf of the licensees that the amount received towards insurance claim is for indemnification towards loss of capital asset to compensate for the loss. The decision in Vania Silk H Mills v. C.I.T. Ahmedabad, (supra) has been pressed into service

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wherein it has been held that while paying for the loss, the insurance A 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. B

136Copy pinpoint136. 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 C cannot be accepted and is contrary to contractual definition of gross revenue. The finding of TDSAT to the extent it is contrary to revenue is set aside. In re: Amount of negative balance of pre-paid customer: D

137Copy pinpoint137. The negative balance occurs when a pre-paid customer exhausts the available talk-time. TSPs as a matter of policy, sometimes provides the customer with a small amount of loan talk-time as it may deem fit, say of the value of Rs.10 or Rs.20. The utilisation of this talk- time results in negative balance in the account of the pre-paid customer. The balance is recovered from the subsequent re-charge made by the E customer. In case where the customer fails to re-charge the fresh top- up amount, the balance remains negative in the pre-paid account of the customer. The pre-paid vouchers are sold for a price for which the customer gets a fixed duration of talk-time/usage of the service. When it is exhausted, and long talk-time is used, it results in a negative balance. F 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. G

138Copy pinpoint138. 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 H

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A give discounts increasing their gross revenue by such incentive and not paying the licence fee to the public exchequer.

139Copy pinpoint139. It is apparent that the amount of negative balance is a business strategy, and the amount is adjusted in case re-charge is opted. Otherwise also, it is billed and reflected on accrual basis in the account of the customer. Though it has to form part of gross revenue for determination of licence fee under clause 19.1, the number of calls at the full value have to be measured without any discounts or incentive of such business strategy. It is a part of revenue. It cannot be deducted from the gross revenue to be worked out as per the definition of gross revenue under AS-9. Thus, the finding of the TDSAT cannot be said to align with the meaning of gross revenue in factual aspects of the case and is set aside. In re: Reimbursement of the infrastructure operating expenses

140Copy pinpoint140. 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.

141Copy pinpoint141. The licensees have submitted that setting up of passive infrastructure like towers is not an activity which requires licence. The E tower structure is sometimes erected by independent parties and is offered to service providers on rent. Similar activity, when carried out by a service provider, should not be treated as part of licensed activity. Therefore, the revenue earned by licensee from rent/leasing out passive infrastructure should not form part of adjusted gross revenue. It is also submitted that renting/leasing of dark fibre towers etc. is carried out by IP-1 operators. These operators do not require any licence. It is a non-licensed activity and should be out of the purview of adjusted gross revenue.

142Copy pinpoint142. 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.

143Copy pinpoint143. 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 for the use of this tower. In case pays Rs.100 as rent to A, A will have to incur operating expenses for keeping H the equipment in the tower, functional, which may inter alia, require

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diesel generator. If monthly expenses for such operating expenses is A Rs.10, then and would divide it in equal proportions. Thus, Rs.5 paid by B to 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.

144Copy pinpoint144. 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. E

145Copy pinpoint145. In the definition of gross revenue, the item sharing of infrastructure facility is explicitly mentioned. In the format in Appendix 2 to Annexure-II also, the entire amount is required to be shown. It has been specifically mentioned that there cannot be any setting off of the amount of gross revenue, and the entire money received has to be treated as the gross revenue for the determination of licence fee. It is not the determination of profit. The gross revenue carries a different definition, and the intendment is clear to prevent disputes. Thus the entire amount received by the licensee on account of sharing of passive infrastructure has to be counted in the gross revenue while working out AGR. Thus, the finding to the contrary recorded by the TDSAT is set aside. In re: Waiver of late fee 146.Late fee is a penalty charged by the licensee in case customer fails to pay the bill within the due date. Sometime late fee is waived off by the licensee as a goodwill gesture at the time of payment. H

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A 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.

147Copy pinpoint147. 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. B 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. C

148Copy pinpoint148. 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.

149Copy pinpoint149. 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.

150Copy pinpoint150. Late free is included explicitly in the definition of gross revenue. As such, it has to be computed as part of gross revenue. Merely by waiver, it cannot be ousted from the purview of gross revenue once it becomes leviable. Thus, the finding of the TDSAT is not sustainable and is set aside. In re: Gains from roaming charges and PSTN pass-through charges

151Copy pinpoint151. Roaming charges apply when the customer leaves the home network area and roams into the network or coverage area of another service area. Pass-through charges are charges paid by the licensee

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to the licensor for allowing their subscribers’ calls to be carried on their A networks. Clause 19.2 of the licence agreement provides for certain deductions of roaming charges and PSTN pass-through charges from gross revenue on actually paid basis. The TDSAT considered grievance on behalf of the licensees that many a time it happens that the licensee to whom such charges to be paid, happens to be the same company. It B is stated officers of the respondent do not allow deduction of such charges on the ground that there is no such actual payment as the company making as well as receiving the payment is the same. But the revenue is counted under both the licences to compute the gross revenue, and the tribunal has observed that irrespective of the company being the same, pass-through charges shall be allowed to be deducted C as soon as the same are accounted as revenue under the different licence held by the company.

152Copy pinpoint152. 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. D In case both the licences are different, accounts are different, and payment of licence fee for each circle is different, Idea (Delhi Circle would pay to Idea (Bombay Circle) on actual basis as against on accrual basis, becomes revenue in the accounts of Idea (Bombay Circle).

153Copy pinpoint153. 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?

154Copy pinpoint154. 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.

155Copy pinpoint155. 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 H

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A Government-owned company. The old ILD licence permitted VSNL to carry both the activities, i.e., ILD service as well as TV uplinking. Under the new regime, a separate licence had to be obtained. Licence for TV uplinking service was obtained from the Ministry of Information and Broadcasting Ltd. while DOT issued the ILD licence. TV uplinking service cannot be rendered in the ILD licence due to the definition of B 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 & C 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 D AGR.

156Copy pinpoint156. In the impugned order, the tribunal has held that the revenue from operating FCC 214 licence arises not from the licence granted by DOT but by FCC. Hence, this inflow cannot be taken as part of AGR unless the DOT can establish that there is technical, managerial and financial interconnection interlacing and synergy between company’s operations in the USA and India the gross revenue from the services of 214 FCC licence is reflected in the company’s accounts.

157Copy pinpoint157. The stand of the DOT is that if this is permitted, every TSP/ licensee in India would have branch offices in other parts of the world and would treat majority of the international income of the licensee as having been generated in the branch office outside the country and would not take it into account from calculation of gross revenue for payment of licence fee. It could not be said that the situation would not affect the profitability of the company since the revenue is generated in the branch office of the company but will affect the calculation of gross revenue as only a repatriated amount would be taken for calculation. Relying on the observations made by this Court in Union of India v. AUSPI (2011) at Para 49 in which this Court has held that in such a scenario, the business can be transferred to a separate legal entity to avoid the branch office’s revenue to be clubbed with the main office. The income of the subsidiaries has to be included in the case of

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Bharti Airtel, it has separate subsidiaries, which are separate legal A entities in and outside India, and the income generated from such subsidiaries are not considered or included while computing the adjusted gross revenue of Bharti Airtel. Since BILGO is a branch of Bharti Airtel and not a separate legal entity, because of the previous decision of 2011, the business for which no licence is required, should be transferred to B a separate legal entity to avoid computation of gross revenue, if not due it has to be part of gross revenue.

158Copy pinpoint158. 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 C 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.

159Copy pinpoint159. The finding recorded by the TDSAT, to the extent it is contrary to the DOT, based upon certain conditions, is set aside. D

In re: Non-refundable Deposits

160Copy pinpoint160. It is permissible for the licensee to accept deposits from its customers, which at times are non-refundable but are used to provide discounts on the bills raised. Concerning non-refundable deposits, the claim was not pressed by the learned counsel appearing on behalf of DOT before the tribunal. However, we find that the concession given by the learned counsel on behalf of DOT concerning non-refundable deposits is palpably incorrect.

161Copy pinpoint161. 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.

162Copy pinpoint162. Appendix II to Annexure-II of the licence agreement: Item G No.5, in Section D of the format, is an entry concerning non-refundable deposits from subscribers. It has to be included as per the format in the statement of the gross revenue. The definition of gross revenue is wide enough to cover non-refundable deposits as non-refundable deposits are revenue earned from licensed activities. Non-refundable deposits are to be treated as accrued in the profit and loss account as H

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A per Annexure III of the licence agreement. It is apparent that non- refundable deposits are in fact revenue received in advance from the subscribers. Even if they are used for discount etc. in the bills, they form part of revenue. Licensees themselves treat non-refundable deposits as income under section 80 IA (2a) of the Income-tax Act. Be that as it may. The finding recorded by the TDSAT concerning non-refundable deposits not being part of the revenue based upon wrong concession made by the learned counsel appearing for the DOT, is as a result of this is liable to be set-aside. It was expected of the TDSAT to consider the concession following law, as such cases cannot be decided and ought not to be decided on the basis of prima facie incorrect concession of the counsel, it has to be legally tested. In case any admission is made, its correctness has to be examined. In re: Licence fee demand where spectrum is not granted

163Copy pinpoint163. Concerning demand of licence fee in the circle where the licensee was not granted spectrum: When the spectrum itself has not been issued, licence activity has not come into play, no revenue is generated. TDSAT has held that the demands of licence fee based on other activities, are bad, unreasonable, invalid, and unsustainable. During the period in question, the UAS licence came bundled with the spectrum, and it is evident that without a spectrum, the licensee could not work out the licence. The finding recorded by the TDSAT is appropriate. Once there is no activity under a licence, merely on the basis that the licence has been issued, no revenue earned, it cannot be shared. Still, there is no activity under the licence, i.e., based on non-licensed activities, the revenue sharing could not have been asked. It would be an unreasonable and unconscionable bargain to pass on such a liability. We agree with finding recorded by TDSAT in the case of Videocon & S. Tel. In re: Income from interest and dividend

164Copy pinpoint164. Argument has also been raised concerning interest income and dividend income. Since these items are expressly included in the definition of gross revenue in clause 19.1. There is no scope to entertain the submission concerning the exclusion of interest and dividend from gross revenue. Whatever, interest and dividend earned from the licensing and non-licensing activities, have to form part of gross revenue for determination of licence fee.

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In re: Bad-debts written off A

165Copy pinpoint165. 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.”

166Copy pinpoint166. TDSAT has not accepted the submission of the licensees. However, at the same time, it has safeguarded the interest of the licensees. In case it is realised later on, it may not be charged again. It should be charged only once. We find the finding to be appropriate. No case for interference in the findings recorded by the TDSAT is made out. In re: Liability written off E

167Copy pinpoint167. 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 F 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. G

168Copy pinpoint168. DOT submits that the reasoning is correct. However, TDSAT could not have undertaken this exercise head-wise. It is presented on behalf of the licensees that notional revenue cannot be included in the revenue of the company based on provisional liability being finalised by actual liability. The amount kept as provisional liability H

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A 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.

169Copy pinpoint169. In Rajputana Trading Co. Ltd. v. Commissioner of Income Tax, West Bengal-I, (1982) 2 SCC 775, it has been observed that once liability is written off, it has to be added as income from the business under section 10(2A) and such income should be given some local habitation or name. C

170Copy pinpoint170. Hence, we hold that it is to be treated as an expense, and discount cannot be allowed for determining the licence fee.

In re: Inter-corporate loan

171Copy pinpoint171. Certain licensees have raised the loan being holding companies for the subsidiaries from various banks and financial institutions. In turn, this amount is given to the subsidiaries for their day- to-day operations. On this amount, the subsidiaries pay interest at the SBI Prime Lending Rates (PLR) every quarter, which in turn is paid by the holding company to the banks/financial institutions. DOT seeks to include the interest received from the subsidiaries companies in the revenue of the holding company. The TDSAT has included the income from interest on inter-corporate loan as part of gross revenue. It is submitted on behalf of licensees that as the holding company only performs the function for the subsidiary company and the interest amount is only reimbursement of the amount paid to the bank, it cannot be included in the gross revenue. As such, it does not form part of gross revenue.

172Copy pinpoint172. 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.

173Copy pinpoint173. Thus, interest income from inter-corporate loan has to be included in the gross revenue for working out the licence fee.

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In re: Revenue under IP-1 Registration A

174Copy pinpoint174. Whether it can be claimed/clubbed under revenue under CUG licence? It is apparent from the definition of gross revenue that income from licensed activities and even from non-licensing activities and any other miscellaneous revenue of the licensee has to be included. Thus, DOT has rightly included the income of the licensee from IP B registration under the CUG licence. In re: Income from management consultancy services:

175Copy pinpoint175. When we consider the definition of gross revenue, it has to be included in the adjusted gross revenue to work out the licence fee. The income from management support and consultancy of the licensee C cannot be excluded. Submission to the contrary cannot be accepted and is as a result of this rejected.

176Copy pinpoint176. 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. D In re: Res Judicata

177Copy pinpoint177. Coming to the submission raised on behalf of DOT that the findings in Union of India v. AUSPI (2011) (supra) operate as res judicata with respect to items dealt with and act as constructive res judicata with respect to the questions that were not raised in the petition which were filed in Petition No.7/2003 and Petition No.82/2005. The challenge was made to most items on the ground; they could not be included in the definition of gross revenue; same did not form part of the licensed activity. However, this Court has repelled this submission and has included the such items in the definition of gross revenue. It is clear that once this Court has held that the income which covered under the definition of gross revenue and were claimed to be excluded earlier on the ground that they could not form part of gross revenue, the definition so including them was ultra vires and illegal/invalid. The same heads are now sought to be excluded by taking the shelter that they do not form part of revenue under AS-9. Though they form part of gross revenue under Clause 19.1. There is no scope left for this exercise. Though, we have examined every question raised on merit again as it was submitted that this Court had left the question open as to proper interpretation. This Court has held that TRAI and the TDSAT had no jurisdiction to decide on the validity of the definition of gross revenue H

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

178Copy pinpoint178. Considering whether the licensee can challenge the computation of adjusted gross revenue and if so, at what stage and on B 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, C TDSAT will have to go into the facts and material to decide demand is as per licence, in particular, the definition of adjusted gross revenue in the licence agreement. It can also interpret the terms and conditions of the licence agreement, as the tribunal has not gone into the facts and material relating to the demand of a particular licensee. It was further observed that the tribunal may go into the facts and material based on which demand is raised to make the computation. Thus, the scope of the latter observations is not so wide to take out certain items, though included explicitly in the definition of gross revenue and to hold that they do not to form part of it. Income from licensing and non- licensing activities are in the ambit of gross revenue had been determined conclusively in 2011 judgment. Only facts and material can be seen for computation.

179Copy pinpoint179. 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.

180Copy pinpoint180. Reliance has also been placed on Lohia Machines Ltd. & Anr. v. Union of India & Ors., (1985) 2 SCC 197 in which for income tax, the term computation has been considered. Wharton Law Dictionary reference has also made as to the definition of computation based upon Lohia Machines Ltd. (supra). It is a legal process of computing inclusion and exclusion of items, which may otherwise be regarded as forming part of the capital employed, as interpreted by this Court in Lohia Machines Ltd. (supra) in which following observations have been made:

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“18. It is because the expression “capital employed” has a A variable meaning that it has been enacted by the legislature that, to calculate the relief allowable under Section 80-J sub-section (1), the statutory percentage must be applied to the “capital employed” as computed in the prescribed manner. How the “capital employed” shall be computed is left to be prescribed by the Central Board of Revenue by making Rule or Rules under Section 295 of the Income Tax Act, 1961. The process of computation would involve both inclusion and exclusion of items, which may possibly be regarded as falling within the expression “capital employed”. The Central Board of Revenue may include some items and exclude some others while prescribing the manner of computation of the “capital employed”. This is the sense in which the word “computed” has been consistently used by the legislature while enacting legislation of this kind. Turning to the earliest legislation where the word “computed” has been used in relation to the “capital employed”, we find that in the D Excess Profits Tax Act, 1940 for determining the standard profits, the statutory percentage was required to be applied to the average amount of capital employed as computed in accordance with the Second Schedule and the Second Schedule provided for inclusion of certain items and exclusion of certain others including borrowed moneys and debts. The legislature clearly, in this statute, regarded exclusion of borrowed moneys and debts as implicit in the process of computation of the “capital employed” or to put it differently, according to legislative usage, computation of the “capital employed” could legitimately involve as part of the process, exclusion of items such as borrowed moneys and debts. So also in the Business Profits Tax Act, 1941 and the Super Tax Profits Tax Act, 1953, the word “computed” was used in the same sense as involving in the process of computation of the “capital employed”, exclusion of borrowed moneys and debts. Similarly, in the Companies (Profits) Surtax Act, 1964 also, the word G “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 H

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A process of exclusion as well as inclusion and on that point, the Act analogically throws considerable light. The statutory deduction which must be made from the chargeable profits for the purpose of determining the charge of Surtax under this statute is defined to mean “an amount equivalent to ten percent of the capital of the company as computed in accordance with the provisions of the Second Schedule” and the Second Schedule after its amendment by Finance Act 66 of 1976 does not provide for inclusion of borrowed moneys and debts in computation of the capital of the company though it provides for inclusion of the paid-up share capital and reserves. It will thus be seen that there is legislative history behind the use of the word “computed” in relation to the “capital employed” and it has been legislatively recognised as involving, as part of the process of computation, both inclusion as well as exclusion of items which may otherwise be regarded as forming part of the “capital employed.” It is in the context of this background and not by way of a virgin attempt that the word “computed” has been used by the legislature in relation to the “capital employed” in Section 80-J sub-section (1).

19. It may be noted that even in the Income Tax Act, 1961 the word “computed” has been consistently used in relation to E “income” in the sense of involving both inclusion and exclusion of items of income. Section 2 clause (45) defines “total income” to mean the total amount of income referred to in Section 5 “computed in the manner laid down in this Act”. Now, if we look at the provisions in the Income Tax Act, 1961, which lay down the manner of computation of the total income, it would be clear that the process of computation of total income involves both inclusion and exclusion of various items of income. Section 10 provides that in computing the total income of a previous year of any person, any income falling within any of the clauses of that section shall not be included in the total income, though such income which is required to be excluded is undoubtedly income and therefore part of total income according to the plain natural connotation of that expression. But it is required to be excluded in determining the charge of tax because “total income” is defined as total amount of income, “computed in the manner laid down in the Act”. The same position obtains also in regard to Section H 11 and it excludes certain categories of income in computation

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of the total income. Then, we may refer to Section 29 which provides that the income from profits and gains of business and profession shall be computed in accordance with the provisions contained in Sections 30 to 43-A. These sections provide for inclusion and exclusion of various items in computing the total income. Sections 80-A to 80-VV also provide for deductions to be made in computing the total income and under sections such as 80-HH, 80-JJ and 80-O, even an item which indisputably forms part of income of an assessee, is required to be excluded in computing the total income chargeable to tax. No one has ever argued and indeed it is impossible even to conceive of such an argument, that when Section 2 clause (45) defines total income as the total amount of income computed in accordance with the provisions of the Act, what is indubitably part of income cannot be excluded in the computation. However, the argument of Mr. Palkhivala was that in the case of definition of “total income” the exclusion of items of income in the process of computation is provided for by the legislature itself and is not purported to be done by any rule-making authority. The legislature, stated Mr. Palkhivala, can cut down the width and amplitude of the expression “total amount of income” by expressly providing that particular item or items shall be excluded in the computation of the total amount of income, but the Rule-making authority cannot do so, because by doing so, it would be derogating from the provisions of the statute. Now we have already pointed out that since the expression “capital employed” has a variable meaning which in a given case may or may not include borrowed moneys, the Central Board of Revenue, could, in exercise of its rule- F making power, exclude borrowed moneys in computation of the “capital employed” and in doing so, it would not in any way be acting contrary to the mandate of the statute. But the point which we wish to emphasise here, while referring to the definition of “total income” in Section 2 clause (45), is that the word “computed” have been used by the legislature as comprehending G within its scope not only inclusion but also exclusion of certain items of income which are admittedly and without doubt, part of the income of the assessee. We find that even in some of the sub-sections of Section 80-J the word “computed” has been used in the same sense as involving both inclusion and exclusion. The H

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A second proviso to sub-section (4) of Section 80-J provides that “where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the ‘capital employed’ in the industrial undertaking”. So also Explanation 2 to the same sub-section enacts in so many terms that in a case falling within its scope and ambit, “the total value of the machinery or plant or part so transferred shall not be taken into account in computing the ‘capital employed’ in the industrial undertaking”. Then again, the Explanation to sub-section (6) of Section 80-J makes a similar provision for exclusion of “total value of the building machinery or plant or part so transferred” in computing the “capital employed” in the case of business of a hotel. It will thus be seen that, even according to these provisions in Section 80-J, the process of computation of the “capital employed” can legitimately exclude item or items which are plainly and indubitably part of the “capital employed”. Of course the exclusion enacted by these provisions is made by the legislature and not by the Rule-making authority, but again, if we may emphasise, the point is not whether an exclusion is made by the legislature or by the Rule- making authority but whether such exclusion is implicit in the process of computation so as to be comprised in it. And on this point not only the provisions of the Excess Profits Tax Act, 1940, the Business Profits Tax Act, 1947, the Super Profits Tax Act, 1963 and the Companies (Profits) Surtax Act, 1964 but also the various provisions of the Income Tax Act, 1961 referred to by us, clearly indicate that the word “computed” has been used by the legislature in sub-section (1) of Section 80-J as involving not only inclusion but also exclusion of items which may otherwise be regarded as falling within the expression “capital employed”. It is left by the legislature to the Central Board of Revenue as rule-making authority to prescribe the manner in which the “capital employed” shall be computed and in so prescribing, the Central Board of Revenue may include or exclude items which may be regarded as forming part of the “capital employed”.”

181Copy pinpoint181. This Court has considered the matter given the provisions contained in section 80J of the Income Tax Act and has observed that capital employed has variable meanings. It has been legislatively

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recognised both inclusion as well as exclusion of the items, which may otherwise be regarded as forming part of the capital employed. Thus, the expression computation has not been used in the 2011 decision to include those very items from the purview of the definition of gross revenue, which have been held to be covered by this Court to be part of gross revenue. According to the 2011 judgment, whether the demand is in terms and conditions of the licence agreement and, in particular, the definition of adjusted gross revenue, could have been seen. The TDSAT could also view the facts and material based on which demand has been raised, but it was not permissible to exclude the items which are included in the definition of gross revenue, as is sought to be done. Be that as it may. We have examined all the submissions which have been raised on merits again, uninfluenced by the plea of res judicata/ constructive res judicata, and we have found no merit in the submissions which have been raised. Thus, we refrain from burdening the judgment with the decisions cited at the Bar concerning res judicata and constructive res judicata. D In re: Levy of interest, penalty, and interest on penalty:

182Copy pinpoint182. 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, E 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 F Lending Rate (PLR) of State Bank of India existing as on the beginning of the Financial Year (namely 1st April) in respect of the licence fees pertaining to the said Financial Year. The interest shall be compounded monthly and a part of the month shall be reckoned as a full month for the purposes of calculation of interest. A month shall be reckoned as an English calendar month. G 20.8 In case, the total amount paid as quarterly Licence Fee for the 4 (four) quarters of the financial year, falls short by more than 10% of the payable Licence Fee, it shall attract a penalty of 50% of the entire amount of short payment. However, if such short payment is made good within 60 days from the last day of H

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A 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.”

183Copy pinpoint183. It is apparent that in case licence fee is not paid as per clause 20.2, the agreement is that the outstanding will attract interest at the rate of 2% above the Prime Lending Rate of the State Bank of India existing as on the date of the beginning of the financial year, that is first of April. The interest shall be compounded monthly. Under clause 20.8, the penalty is to be paid in case the total amount paid as quarterly licence fee falls short by more than 10% of the payable licence fee, it shall attract a penalty of 50% of the entire amount of short-payment. A grace period of 60 days is granted, otherwise, it will carry the interest. The amount of penalty shall be payable within 15 days of the date of signing the audit report, failing which interest shall be charged as per terms of clause 20.5. D

184Copy pinpoint184. Whether interest and penalty have to be levied or not is to be gone into on the facts and circumstances of the case.

185Copy pinpoint185. The TDSAT has held that it would not be appropriate to levy interest as well as the penalty. In case interest has to be levied, it has to be collected at a nominal amount. The TDSAT has not specified the same.

186Copy pinpoint186. 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.

187Copy pinpoint187. The licensees submit that when once this Court passes an order in the present appeals, it will have to be given effect to as to which items can be included or excluded in the gross revenue. It is only if the demand is not then paid within the stipulated period; the question of payment of interest would arise. It is further submitted that

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the penalty is for failure to pay the demand within the specified period. A Penalty requires mens rea, contumacious conduct, or deliberate disregard of the person’s statutory liability. Parties are in litigation since

2003. TDSAT decided on the validity of definition in the year 2007. After that, this Court passed judgment in 2011 and remitted the case to TDSAT. TDSAT has again decided concerning certain items in favour of the licensees, and throughout litigation, demands were stayed by this Court/TDSAT. Disputes are bona fide disputes. The licensees have paid about 80% of the demand raised by DOT, and the instant dispute pertains only to 20% of the demand on which stay was in operation. Under section 74 of the Indian Contract Act, compensation must be only reasonable compensation. DOT has also levied penalty and interest on penalty. In the absence of deliberate refusal to pay, no penal consequences like penalty can be imposed. It is also submitted that a fiscal contract/agreement is to be construed strictly, and if there is a doubt, the same needs to be interpreted in favour of the assessee. Non- payment was neither deliberate nor under defiance of any law. The D licensees have placed reliance on: A. Hindustan Steel Ltd. v. State of Orissa, 1969 (2) SCC 627, in which following observations are made: “8. Under the Act penalty may be imposed for failure to register as a dealer — Section 9(1) read with Section 25(1)(a) of the E Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in H

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A the manner prescribed by the statute. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out.” B B. Akbar Badrudin Giwani v. Collector of Customs, 1990 (2) SCC 203, “60. In the present case, the Tribunal has itself specifically stated that the appellant has acted on the basis of bona fide belief that the goods were importable under OGL and that, therefore, the appellant deserves lenient treatment. It is, therefore, to be considered whether in the light of this specific finding of the Customs, Excise & Gold (Control) Appellate Tribunal, the penalty and fine in lieu of confiscation require to be set aside and quashed. Moreover, the quantum of penalty and fine in lieu of confiscation are extremely harsh, excessive and unreasonable bearing in mind the bona fides of the appellant, as specifically found by the Appellate Tribunal.

61. We refer in this connection to the decision in Merck Spares v. Collector of Central Excise & Customs, New Delhi, (1983) E 13 ELT 1261 (CEGAT), Shama Engine Valves Ltd. v. Collector of Customs, (1984) 13 ELT 533 (CEGAT), Bombay and Madhusudan Gordhandas & Co. v. Collector of Customs, Bombay (1987) 29 ELT 904, wherein it has been held that in imposing penalty the requisite mens rea has to be established. It F has also been observed in Hindustan Steel Ltd. v. State of Orissa, (1969) 2 SCC 627, by this Court that: (SCR HN p. 753) “The discretion to impose a penalty must be exercised judicially. A penalty will ordinarily be imposed in cases where the party acts deliberately in defiance of law, or is guilty of contumacious or dishonest conduct, or acts in conscious disregard of its obligation; but not, in cases where there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

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62. In the instant case, even if it is assumed for argument’s sake A 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.” B (emphasis supplied) C. Jaiprakash Industries Ltd. v. Commissioner of Central Excise, Chandigarh, 2003 (1) SCC 67, para 8. “8. In this case, there was a divergent view of the various High Courts whether crushing of bigger stones or boulders into smaller pieces amounts to manufacture. In view of the divergent views of the various High Courts, there was a bona fide doubt as to whether or not such an activity amounted to manufacture. This being the position, it cannot be said that merely because the appellants did not take out a licence and did not pay the duty the provisions of Section 11-A got attracted. There is no evidence or proof that the licence was not taken out and/or duty not paid on account of any fraud, collusion, wilful misstatement or suppression of fact. We, therefore, set aside the demand under the show-cause notice dated 3-5-1993.” E (emphasis supplied) D. In Tecumseh Products India Ltd. v. Commissioner of Central Excise, Hyderabad, 2004 (6) SCC 30, it was held as under: “7. But, insofar as the application of extended period of limitation provided under Section 11-A is concerned, we do not think that the Tribunal is justified because it was not clear as to whether if any part is used for the purpose of repairing a machinery would amount to manufacture. In fact, the Tribunal on a detailed analysis and after going into several processes carried out by the appellant, came to the conclusion that the stators which were used in the repairing of the compressors involved manufacturing activity. This circumstance itself shows that there was bona fide dispute between the parties in regard to the question whether stators made ready for the purpose of use of compressors involved any manufacturing activity or not. Therefore, to the extent the authorities invoked Section 11-A of the Act and H

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A imposed penal interest and other penalties shall stand set aside and the order made by the Tribunal stands modified to that extent.” (emphasis supplied) E. In J. K. Synthetics Ltd. v. Commercial Taxes Officer, 1994 B (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 C extended by not more than 15 days. The requirement of Section 7(1) is undoubtedly a statutory requirement. The prescribed return must be accompanied by a receipt evidencing the deposit of full amount of ‘tax due’ in the State Government on the basis of the return. That is the requirement of Section 7(2). Section 7(2-A), D no doubt, permits payment of tax at shorter intervals but the ultimate requirement is deposit of the full amount of ‘tax due’ shown in the return. When Section 11-B(a) uses the expression “tax payable under sub-sections (2) and (2-A) of Section 7”, that must be understood in the context of the aforesaid expressions employed in the two sub-sections. Therefore, the expression ‘tax payable’ under the said two sub-sections is the full amount of tax due and ‘tax due’ is that amount which becomes due ex hypothesi on the turnover and taxable turnover “shown in or based on the return”. The word ‘payable’ is a descriptive word, which ordinarily means “that which must be paid or is due, or maybe paid” but its correct meaning can only be determined if the context in which it is used is kept in view. The word has been frequently understood to mean that which may, can or should be paid and is held equivalent to ‘due’. Therefore, the conjoint reading of Sections 7(1), (2) and (2-A) and 11-B of the Act leaves no room for doubt that the expression ‘tax payable’ G in Section 11-B can only mean the full amount of tax which becomes due under sub-sections (2) and (2-A) of the Act when assessed on the basis of the information regarding turnover and taxable turnover furnished or shown in the return. Therefore, so long as the assessee pays the tax which according to him is due H on the basis of information supplied in the return filed by him,

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there would be no default on his part to meet his statutory obligation under Section 7 of the Act and, therefore, it would be difficult to hold that the ‘tax payable’ by him ‘is not paid’ to visit him with the liability to pay interest under clause (a) of Section 11-B. It would be a different matter if the return is not approved by the authority, but that is not the case here. It is difficult on the plain language of the section to hold that the law envisages the assessee to predicate the final assessment and expect him to pay the tax on that basis to avoid the liability to pay interest. That would be asking him to do the near impossible.” (emphasis supplied) C F. Kailash Nath Associates v. Delhi Development Authority & Anr., 2015 (4) SCC 136, paras 40 & 43 “40. From the above, it is clear that this Court held that Maula Bux v. Union of India, (1969) 2 SCC 554, was not, on facts, a case that related to earnest money. Consequently, the observation in Maula Bux that forfeiture of earnest money under a contract if reasonable does not fall within Section 74, and would fall within Section 74 only if earnest money is considered a penalty is not on a matter that directly arose for decision in that case. The law laid down by a Bench of five Judges in Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515, is that all stipulations naming amounts to be paid in case of breach would be covered by Section 74. This is because Section 74 cuts across the rules of the English common law by enacting a uniform principle that would apply to all amounts to be paid in case of breach, whether they are in the nature of penalty or otherwise. It must not be forgotten that as has been stated above, forfeiture of earnest money on the facts in Fateh Chand case was conceded. In the circumstances, it would therefore be correct to say that as earnest money is an amount to be paid in case of breach of contract and named in the contract as such, it would necessarily be covered by Section 74.” G (emphasis supplied) G. Central Bank of India v. Ravindra & Ors., (2002) 1 SCC 367, paras 38, 55 “38. However “penal interest” has to be distinguished from H

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A “interest”. Penal interest is an extraordinary liability incurred by a debtor on account of his being a wrongdoer by having committed the wrong of not making the payment when it should have been made, in favour of the person wronged and it is neither related with nor limited to the damages suffered. Thus, while liability to pay interest is founded on the doctrine of compensation, penal interest is a penalty founded on the doctrine of penal action. Penal interest can be charged only once for one period of default and therefore cannot be permitted to be capitalised.

55. During the course of hearing it was brought to our notice that in view of several usury laws and debt relief laws in force in several States private moneylending has almost come to an end and needy borrowers by and large depend on banking institutions for financial facilities. Several unhealthy practices having slowly penetrated into prevalence were pointed out. Banking is an organised institution and most of the banks press into service long-running documents wherein the borrowers fill in the blanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by the best of legal brains. Borrowers other than those belonging to the corporate sector, find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous. At times the interest charged and capitalised is manifold than the amount actually advanced. Rule of damdupat does not apply. Penal interest, service charges and other overheads are debited in the account of the borrower and capitalised of which debits the borrower may not even be aware. If the practice of charging interest on quarterly rests is upheld and given a judicial recognition, unscrupulous banks may resort to charging interest even on monthly rests and capitalising the same. Statements of accounts supplied by banks to borrowers many a times do not contain particulars or details of debit entries and when written in hand are worse than medical prescriptions putting to test the eyes and wits of the borrowers. Instances of unscrupulous, unfair and unhealthy dealings can be multiplied though they cannot be generalised. Suffice it to observe that such issues shall have to be left open to be adjudicated upon in appropriate cases as and when actually arising for decision and

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we cannot venture into laying down law on such issues as do not arise for determination before us. However, we propose to place on record a few incidental observations, without which, we feel, our answer will not be complete and that we do as under: (1) Though interest can be capitalised on the analogy that the interest falling due on the accrued date and remaining unpaid, partakes the character of amount advanced on that date, yet penal interest, which is charged by way of penalty for non-payment, cannot be capitalised. Further interest i.e. interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy. (2) Novation, that is, a debtor entering into a fresh agreement with a creditor undertaking payment of previously borrowed principal amount coupled with interest by treating the sum total as principal, any contract express or implied and an express acknowledgement of accounts, are the best evidence of capitalisation. Acquiescence in the method of accounting adopted by the creditor and brought to the knowledge of the debtor may also enable interest being converted into principal. A mere failure to protest is not acquiescence. (3) The prevalence of banking practice legitimatises stipulations as to interest on periodical rests and their capitalisation being incorporated in contracts. Such F 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 G 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 H