Economics

ECONOMICS – END TERM PAPER

SEMESTER I

A Study of the Adjusted Gross Revenue Dispute in the

Telecom Industry

SUBMITTED TO:
Prof. PARINAAZ MEHTA
KIRIT.P MEHTA SCHOOL OF LAW

SUBMITTED BY:
ANUJ JAIN
FY BBA.LLB (HONS)

ROLL NO:
D001

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TABLE OF CONTENTS

Cover Page.................................................................................................................1

Table of Contents.......................................................................................................2

Abstract......................................................................................................................3

Introduction...............................................................................................................4

Aim............................................................................................................................5

Research Objectives..................................................................................................5

Research Questions....................................................................................................5

Hypothesis.................................................................................................................6

Limitations.................................................................................................................6

Review of Literature..................................................................................................6

Findings.....................................................................................................................8

Conclusion...............................................................................................................14

Bibliography............................................................................................................15

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ABSTRACT

Purpose: The purpose of this research paper is to study the Adjusted Gross Revenue Dispute of
the Telecom industry in detail.

Research Implication: This paper provides a better understanding of the Adjusted Gross
Revenue (AGR) Dispute; lists out and studies various statistics, research papers, articles and
journals related to the dispute; explores the entire history of the AGR dispute; and also highlights
the judgment of the recent 2020 Supreme Court hearing related to the AGR dispute.

Findings: Under this model, mobile telephone companies were to pay the government a
proportion of their AGR as an annual licensing fee and spectrum use charges . Most of the
companies switch to this model as it heavily saved them spectrum fees. According to the License
Agreements between the Department of Telecommunications and the telecom companies, the
AGR was determined after some deductions specified in the license agreements are taken into
account. This dispute between the government and the telecom companies over the definition of
the ‘Adjusted Gross Revenue’ is known as the AGR dispute. In 2007-2008, the Telecom
Disputes Settlement and Appellate Tribunal ordered in favor of the telecom companies and
narrowed down the definition of AGR. Further, the Supreme Court only gave the telecom
companies three months to clear their outstanding dues of more than one lakh crore. Lastly, in
2020, the government presented to the Supreme Court a 20 year plan for the telecom companies
to repay their dues, in response to which the Supreme Court declared that 20 years to be too long,
instead the court gave the telecom companies 10 years to repay their dues. Due to the AGR
judgment, the only remaining competitors in the telecom market, that is, Vodafone and Airtel
have been severely affected.

Originality/Value: The paper sheds light on the Adjusted Gross Revenue dispute while
discussing the after effects of the dispute. The paper also showcases the problems created by
haste decisions and unclear definations.

Keywords: Adjusted Gross Revenue, AGR, Dispute, Telecommunications, Spectrum Charges.

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INTRODUCTION

The abrupt entry of Reliance Jio has been compared to a ‘Tsunami.’ Reliance Jio, with its low
prices and free initial services, has triggered a crisis within the Indian telecommunication
industry. Most of the smaller service providers have either faced bankruptcy or aggressive take
over. The only major players that have been able to survive this tsunami are Vodafone, Airtel
and Government-backed BSNL. Further exerting stress over the already loss-ridden industry is
the recent judgment of the Supreme Court upholding the definition of AGR as stipulated by the
Department of Telecommunications which dictates that all the revenue, irrespective of its source,
will be included in the calculation of total licensing fees and spectrum usage charges under the
revenue-sharing model. With respect to which, the Department has started recovery of the said
fees and charges, which the already loss incurring telecom companies are not able to pay. 

But this problem is not the result of any recent adaptation or amendment of rules, instead the
seeds of the problem were sown long ago, when India had just liberated its economy and many
powerful private players had just entered the market. The entry of these established international
telecom operators resulted in high competition in the local telecom markets. Many of the small
telecom operators were unable to compete against the Multinational mammoths. As many as 13
major competitors were knocked out of the race. As a result, the government decided to take
action and bail out the loss making telecom operators. A major obstacle suppressing the
companies was the steep licensing fees, which many operators faced problem paying. Therefore,
in 1999, the then NDA government stepped in to overhaul the license regime and bail out the
stressed sector. Government introduced the ‘Revenue-Sharing Model’ to allow operators to
switch from the steep fixed licensing fees regime. Under this regime, the mobile telephone
operators were required to share a percentage of their AGR with the government as annual
license fee (LF) and spectrum usage charges (SUC).

The definition of AGR in this model has been under debate for many years on the basis of
whether gross revenue includes revenue of sources other than the core services or not. The 2019
Supreme court verdict upheld the definition provided by the Department of Telecommunications
and sent shivers throughout the industry, triggering a crisis.

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The AGR case is a very important case, effects of which will be felt throughout the country.
There has not been any extensive research about the topic. The scarcity of research papers,
journals and articles has motivated the researcher to write this research paper. The aim of this
paper is to understand the AGR case in detail and speculate its potential effects in the future. 

AIM OF THE STUDY

The aim of this paper is to understand the AGR case in detail and speculate its potential effects in
the future. 

RESEARCH OBJECTIVES:

1. To conduct an extensive study with respect to the history and roots of AGR.
2. To understand the AGR dispute and its causes.
3. To understand the Steep Fixed License Fees Regime and the Revenue-Sharing Model in
detail.
4. To discuss the various cases in relation to the dispute about the definition of AGR in the
agreements made between the Telecom companies and the department of
telecommunications.

RESEARCH QUESTIOINS:

1. What is the definition of ‘AGR’ and its sudden increase in relevance in the telecom
industry?
2. What is the AGR dispute and what are its causes?
3. What is the difference between the Steep Fixed License Fees Regime and Revenue-
Sharing Model?
4. Which are the various law cases related to the dispute?

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HYPOTHESIS

Null Hypothesis (H0): The AGR dispute has had a significant impact on the Telecom Industry.

Alternate Hypothesis (H1): The AGR dispute has had a significant impact on the Telecom
Industry.

LIMITATIONS OF THE STUDY

This study is solely based on secondary data of research papers, journals and articles. It is not
based on any practical research because of time and money constraints.

REVIEW OF LITERATURE

Akansha Gupta, 2020 Supreme Court Ruling on AGR in Telecom Sector - A Case
Analysis

In this research paper, the researcher has focused on providing a deep analysis of the 2020
Supreme Court judgment in the AGR dispute of the Telecom sector. Before analyzing the
judgment, the researcher briefly discusses the entire history of the AGR dispute and explains the
demands of the Telecom companies and that of the Department of Telecommunications. She
states that the dispute is around the definition of the Adjusted Gross Revenue based on which the
companies have to pay their fees for their spectrum usage. The telecom companies want the
definition to be narrowed to include revenue from only core services while the government wants
the definition to be widen to include both telecom and non-telecom services. The researcher
states that the Supreme court in its hearing on January 17, 2020, rejected the pleas of Vodafone
Idea, Bharti Airtel and Tata Teleservices to review the October 24, 2019 verdict that widened the
definition of Adjusted Gross Revenue (AGR), leaving the three telecom operators collectively
facing more than Rs 1.02 lakh crore in additional licence fees, spectrum usage charges (SUC),
penalties and interest.

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Prasanna Kulkarni, Review of TRAI Recommendations on Components of

Adjusted Gross Revenue (AGR)
This research explores the definition and meaning of the Adjusted Gross Revenue in detail. This
paper explores the various charges that the Telecom operators have to pay in India. The
researcher explains that before setting up and starting their operation, it is mandatory for the
Telecom Service Provider in India to obtain a license from the Government of India. The license
fee consists of two parts: a fixed one time entry fee and an annual fee charged as a percentage of
the annual ‘Adjusted Gross Revenue (AGR)’. Thought old Telecom operators have been in a
dispute over the definition of the AGR, all new operators have to compulsorily pay the annual
fees as a percentage of their entire revenue, from both telecom and non-telecom services. The
researcher states that several groups and some actual telecom service providers objected to the
concept (computation) of “adjusted gross revenue,” which contains some receipts / profits that
are unrelated to the telecom industry. As a result, the annual licencing fee will rise. However,
certain costs and liabilities that can be excluded from telecom income are not required to be
deducted. This boosts the licensing fee once again. This research paper examines the Telecom
Regulatory Authority of India's (TRAI) latest guidelines, which have omitted many of the above
irregularities.

Rekha Jain & G. Raghuram, Lessons of reforms of the telecom sector

In this research paper, the researchers have given an in-depth analysis of the after effects of the
reforms carried out in the telecom sector. They states that the telecommunications industry has
emerged as one of the main industries that have propelled the Indian economy back to life.
Proactive policies such as opening up the market to private players and competition, unbundling
the government's policy, legislative, and organizational functions, and removing constraints on
foreign investments, combined with a perception of reforms as a continuous phase, provided a
conducive atmosphere for development. These reforms paved the way for the introduction of
emerging innovations. The researchers discuss the lessons of the Indian telecom sector reforms
in this research report. They begin by examining where the sector stands in terms of its effect on
service delivery and the economy in comparison to the past. Then they sketch out the sector
structure, delving into the roles and relationships of the various players. Following that, they

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include a roadmap of changes implemented over a two-decade period. They extract the enabling
principles that guided the reform process and draw lessons for other infrastructure industries
from this.

FINDINGS

The Long History of AGR Dispute

The AGR conflict has a long history.

Its origins can be traced all the way back to 1999, but no one could have predicted that the
consequences of an ambiguous term would result in a massive industry-wide dispute. In 1999,
the newly elected NDA government pledged to continue the Indian economy's liberalisation. The
entry of foreign players with deep pockets into the Indian telecom industry, on the other hand,
was crushing local players. There was a pressing need to assist these businesses, as they were on
the verge of failing due to debt and loans. The government identified that the biggest hurdle in
front of the telecom companies was the high licensing fees.

Since the then-NDA government was opposed to the License Raj, it wanted to include an
alternate model for telecom firms to pay for their spectrum use. It was known as the 'Revenue
Sharing Model.' Under this regime, mobile telephone companies were forced to pay the
government a proportion of their AGR as an annual licensing fee (LF) and spectrum use charges
(SUC). About all organizations moved to this platform because it was much less expensive than
the previous license regime. However, the government made a big error by failing to define the
share of revenue, known as ‘Adjusted Gross Revenue’ from which the firms would pay a
mutually agreed-upon percentage. This led to a dispute between the government and the
companies after a couple of years.

License arrangements between the Department of Telecommunications (DoT) and telephone

providers aid in determining the latter's gross profits. The AGR is then determined after some
deductions specified in the license agreements are taken into account. Based on the deal, the LF
and SUC were set at 8% and 3-5% of the AGR, respectively. The key point of contention
between the DoT and the telecom operators has been the concept of AGR. The companies

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claimed that AGR should comprise just the revenue accrued from the core services and not
dividend, interest income or profit on sale of any investment or fixed assets, while the
government believed that the AGR should include revenue from both telecom and non-telecom
services, i.e., overall revenue. This dispute between the government and the telecom companies
over the definition of the ‘Adjusted Gross Revenue’ is known as the AGR dispute.

Many court lawsuits relating to the conflict were soon filed. First, in 2005, the Cellular Operators
Association of India (COAI), a non-governmental trade association comprised of both telecom
firms and stakeholders, questioned the government's concept for AGR measurement. However,
the controversy between the Department of Telecommunications and telecom operators over the
concept of modified gross revenue (AGR) took an interesting turn in 2007-08. The Telecom
Disputes Settlement and Appellate Tribunal (TDSAT) limited the reach of AGR in 2007-8. As a
result, the then-UPA government filed an appeal. The Department of Telecommunications (DoT)
questioned the TDSAT's authority over the provisions of telecom licences that had previously
been approved unconditionally by telecom firms in the Supreme Court. In an order dated January
19, the Supreme Court rejected the Department of Transportation's appeal and ordered it to
present its arguments before the TDSAT.

The Union Minister for the Telecom Section at the time was A. Raj, who was later embroiled in
many scandals. The TDSAT echoed its previous conclusions. Then, On August 30, the TDSAT
approved the majority of TRAI's advice and issued an order that would apply to AUSPI members
who had transferred to the TDSAT as of the date they filed their petitions. AUSPI and the
Cellular Operators Association of India (COAI) filed a summary petition, requesting that the
TDSAT order be made available to all members of the two organisations as of the date of their
petition. Following this, under the recommendation of the Law Ministry, which was headed at by
Kapil Sibal at the time, the Department of Telecommunications (DoT) filed another appeal. The
Department of Telecommunication appealed the August 30 TDSAT decision to the Supreme
Court once more. When the DoT appeal was pending before the Supreme Court, several telcos
petitioned TDSAT to be included in the tribunal's August 30 order.

On October 11, 2011, the Supreme Court ruled that TDSAT's August 30, 2007, order should be
overturned. It required licensees to appeal any petition before TDSAT, which will have to

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investigate the merits of the application and determine if it was in compliance with the licence
agreement and the AGR concept. Both telecom licensees petitioned the TDSAT, questioning the
basis of the DoT's license fee demand.

In 2015, the TDSAT issued a stay of proceedings in favour of telecom firms, ruling that AGR
covers all receipts except capital receipts and income from non-core sources such as leasing,
benefit on disposal of fixed assets, dividend, interest, and miscellaneous. As a point of
comparison, consider the example of an aluminium mine. The excise may have argued that the
expense of a fan and lake should be included in the assessable value. The cost of property,
labour, and so on are all factored into the final cost of each kg of aluminium. Leaving aside the
TDSAT's decision, the Supreme Court upheld the DoT's concept of AGR on October 24, 2019. 
In its judgment, the Supreme Court has given telecom firms a 10-year grace period to pay their
AGR dues to the government.

The judgment:

1. The National Company Law Tribunal (NCLT) should decide whether or not spectrum
can be sold under the Insolvency and Bankruptcy Code.
2. Due to the current Covid-19 situation, telecom companies should pay 10 per cent of the
total dues by March 31, 2021.
3. Telecom companies would also have to make payments on or before February 7 every
year. The non-payment of dues in any year would lead to accrual of interest and invite
contempt of court proceedings against such companies.

The Supreme Court's decision in the AGR case in October 2019 initially only gave telecom
providers three months to make repayments. The court concluded that the private
telecommunications industry has long reaped the benefits of the Centre's liberalised mode of
payment by revenue share scheme. However, the government later suggested in court a 20-year
"formula" for telcos to pay the dues in phased instalments. However, the court found that the
payout term of 20 years was unfair. Even after partial payment, the total amount owed will be
Rs.1.43 lakh crore.

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The Definition of AGR and its Calculation

The Adjusted Gross Revenue (AGR) is the use and licence tax imposed on mobile operators by
the Department of Telecommunications (DoT). It is divided into bandwidth usage charges and
licencing fees, with prices ranging from 3-5% to 8%. The charges are calculated by the
Department of Transportation based on all revenue earned by a telco, including non-telecom
related sources such as deposit rights and asset sales.

Recent Developments

On October 24, 2019, the Supreme Court issued a major decision about the licensing
arrangement between telecom firms and the Department of Telecommunications (DoT). In its
decision, the Court acknowledged the DoT's view of Adjusted Gross Revenue and ruled against
the telecom firms.

In a hearing on January 17, 2020, the Supreme Court denied petitions by Vodafone Idea, Bharti
Airtel, and Tata Teleservices to review the October 24, 2019 verdict that widened the definition
of Adjusted Gross Revenue (AGR), leaving the three telecom operators facing more than Rs 1.02
lakh crore in additional license fees, spectrum usage charges (SUC), penalties, and interest.

On February 14, 2020, As the Department of Telecommunications (DoT) had failed to take any
action or recover a single rupee from telecom operators such as Bharti Airtel and Vodafone Idea
India (VIL) on their AGR dues, a scathing attack was launched by the Supreme Court on the
Department of Telecommunications.

A three-judge bench led by Justice Arun Mishra expressed surprise that the telecom operators –
Vodafone Idea and Bharti Airtel – had failed to pay any of their dues by the 23 January deadline
set by the court in its AGR decision last October. Justice Mishra was furious, saying he was
"literally stunned" that not a "single penny has been charged till date," and demanded that
contempt proceedings be initiated against the telecom operators. The only telecom operator that
has paid up is Reliance Jio. The court was equally furious with the Department of Telecom for
allowing the telecom operators to delay payments until the court verdict.

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The bench's steadfast stance on payment of dues is likely to drive Vodafone Idea, which would
have to cough up Rs 53,000 crore quickly, into bankruptcy. Bharti Airtel, which owes over Rs
35,000 crore, is capable of raising the necessary funds. It is amassing a war chest to pay down
the debts, having recently raised $250 million in permanent bonds after raising $3 billion in
January.

The Crisis Facing the Telecommunications Sector

With the entry of Jio, the competition in the telecom industry has skyrocketed. Due to the
aggressive marketing strategies used by Jio like free voice calls and unlimited data, many
telecom operators who were unable to compete, due to their low capital spending power, were
kicked out of the market. Only three major players were left, they are Vodafone Idea, Airtel and
BSNL MTNL. These companies are already facing huge debts and losses due to the huge
spending triggered by the entry of Jio.

The AGR dispute does not have any impact on Reliance Jio as the company did not exist in 1999
and does not have any remaining dues to the government. The widening of the definition of AGR
has only affected the existing players, that too very harshly. The remaining players are being
forced to pay thousands of crores in remaining AGR dues, which is very difficult for the already
struggling telecom operators. There is aa strong chance that the AGR judgment of 2019
widening the definition of AGR will push Vodafone out of the telecom race while severely
injuring Airtel.

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CONCLUSION

The origins of the AGR dispute can be traced all the way back to 1999 when the Indian telecom
companies were verge of failing due to debt and loans after the entry of foreign players due to
liberalization of the economy. Therefore, to help the local telecom operators, government
launched the 'Revenue Sharing Model’ as an alternative to the existing steep licensing fees
regime. Under this model, mobile telephone companies were to pay the government a proportion
of their AGR as an annual licensing fee (LF) and spectrum use charges (SUC). Most of the
companies switch to this model as it heavily saved them spectrum fees.

According to the License Agreements between the Department of Telecommunications and the
telecom companies, the AGR was determined after some deductions specified in the license
agreements are taken into account. Based on the deal, the LF and SUC were set at 8% and 3-5%
of the AGR, respectively. But contentions arose between the DoT and the telecom operators on
the subject of the concept of AGR. The companies claimed that AGR should comprise just the
revenue accrued from the core services and not dividend, interest income or profit on sale of any
investment or fixed assets, while the government believed that the AGR should include revenue
from both telecom and non-telecom services, i.e., overall revenue. This dispute between the
government and the telecom companies over the definition of the ‘Adjusted Gross Revenue’ is
known as the AGR dispute.

There were many lawsuits and petitions related to the dispute. In 2005, the Cellular Operators
Association of India (COAI questioned the government's concept for AGR measurement. In
2007-2008, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) ordered in favor
of the telecom companies and narrowed down the definition of AGR. The definition remained
unchanged even after many petitions by the government. However, in 2019, the Supreme Court
reversed the judgment and ordered in favor of the government and widened the definition of
AGR. Further, the Supreme Court only gave the telecom companies three months to clear their
outstanding dues of more than one lakh crore. Lastly, in 2020, the government presented to the
Supreme Court a 20 year plan for the telecom companies to repay their dues, in response to
which the Supreme Court declared that 20 years to be too long, instead the court gave the
telecom companies 10 years to repay their dues.

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Due to the AGR judgment, the only remaining competitors in the telecom market, that is,
Vodafone and Airtel have been severely affected. The verdict has been a huge unrelated win for
Reliance Jio as it does not have any remaining dues towards the government. Further, as
Vodafone and Airtel will be forced to pay back their dues, they will have less capital to compete
against Jio.

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BIBLIOGRAPHY

Prasanna Kulkarni, Review of TRAI Recommendations on Components of Adjusted Gross

Revenue (AGR), Telecom Business Review, Volume 1, Issue 1, pp. 3-12. (2008) (ISSN No.
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Akansha Gupta, 2020 Supreme Court Ruling on AGR in Telecom Sector - A Case Analysis, The
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Rekha Jain & G. Raghuram, Lessons of Reforms of the Telecom Sector, Indian Institute Of
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Satya Sontanam, All you wanted to know about AGR, BusinessLine. (2019, November 19)
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