Thursday, 10 April 2014

DTH operators owe 20 Billion to Government

Although the case is still pending in the Supreme Court, the Ministry of Information and Broadcasting on 24th March has sent a letter to all the six private direct-to-home (DTH) operators asking them to pay outstanding license fee dues within the next 15 days. 
As per our sources, the Government has not been paid a whopping Rs 2,066  crore as license fee dues by the six private DTH operators, in which Dish TV with Rs 625 crore and Tata Sky with Rs 620 crore as dues are the biggest defaulters. 
Under Article 3 of license condition DTH operators are required to pay annually 10 per cent of their adjusted gross revenue (AGR) as annual licence fee to the government. However, some DTH operators like Tata Sky have questioned the definition of AGR. Their contention is that licence fee should be paid only on subscription revenue and not on allied earnings such as dividend and interest income. 
The DTH operators have also argued that licence fee should be applicable to subscription revenue net of content cost (as content cost is a pass-through to the broadcasters). The matter moved to the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) and the dispute is now lying in the Supreme Court. The matter is sub judice and comes up for hearing in the first week of April. 

The direct-to-home (DTH) operators are licensees under Section 4 of the Indian Telegraph Act.  Indisputably, in terms of the licenses granted to them, they were required to pay the license fee only on the basis of Adjusted Gross Revenue (AGR) which has been defined in the license as under:
“ADJUSTED GROSS REVENUE” for the purpose of levying LICENCE fee as a percentage of revenue shall mean the Gross Revenue as reduced by: Call Charges (access charges) actually paid to other telecom service providers for carriage  of calls; Service tax for provision of service and sales tax actually paid to the Government if gross revenue had included the component of service tax and sales tax.”
We may also notice that what would be a ‘Gross Revenue’ has also been stated in the said license. 
“Gross revenue for this purpose would be the gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of the Direct to Home (DTH) enterprise from rendering or services and from the use by other of the enterprise resources yielding rent, interest, dividend, royalties, commissions etc. Gross Revenue shall, therefore, be calculated without deduction of taxes and agency commission, on the basis of billing rates, not of discounts to advertisers. Barter advertising contracts shall also included in the gross revenues on the basis of relevant billing rates.  In the case of licensee providing or receiving goods and services from other companies that are owned or controlled by the owners of the licensee, all such transactions shall be valued at normal commercial rates and included in the profit and loss accounts of the licensee to calculate its gross revenue.”

TDSAT judgment on AGR 
Direct-to-home operators raised objection against the definition of AGR as given in the guidelines, claiming that the definition given by the govt. is violating the fundamental rights of DTH operators and they demanded that Ministry of Information and Broadcasting need to redefine the AGR. Tata Sky one of the leading direct-to-home operators in India had challenged direction of the ministry of information and broadcasting to pay 10 per cent of its whole earning as license fee. TDSAT Passing an order in the case filed by Tata Sky in petition no 129 (C) of 2007 on 26/08/08, directed that licence fee should be based on revenues arising out of licensed activities only, and not on the basis of entire revenue earned by DTH operators.
The Tribunal in its judgment held that in our view the contention raised on behalf of Union of India cannot be accepted thereafter, if the licensee is able to save some amount and invest it in some securities or mutual funds that cannot be said to be income from licensed activity..Not being in the nature of pass through charges, they need not be deducted from the gross revenue. This Tribunal noticed :- 
“Thus for DTH the license fees should be applied on the adjusted gross revenue i.e. total revenues excluding items that are of a pass through nature. This would also be consistent with the government’s policy for the Telecom Sector to apply license fee on the adjusted gross revenue and not on the total revenue”. 
The Tribunal further stated that AGR has to be calculated and the petitioners liability to pay licence fee will be based on it. As already discussed, in the present case the revenue earned by the petitioner from sales of set-top boxes and accessories is to form part of AGR besides the revenue earned under the head subscription, installation and service revenue. Dividend income has to be excluded while income from interest will depend on facts which the licensee will have to disclose to the Government.

TRAI’s 8% proposal on DTH license
Telecom Regulatory Authority of India (TRAI) on 14th November 2013 has brought consultation paper on the issue of direct-to-home (DTH) licence renewal, in the consultation paper Authority has proposed that the licence fee for DTH services be charged at 8 per cent of the adjusted gross revenue (AGR) and would exclude service and sales tax as done in the case of telecom companies.
In 2006 TRAI had added a new clause to the licensing condition explaining the concept of AGR as done in telecom industry. New clause 3.1. read as fellow:
The gross revenue for purposes of calculating license fee would be gross inflow of cash, receivable or other consideration arising in the course of ordinary activity of the DTH enterprise for rendering of service and from the use by others of enterprise resources, interest, dividend, royalty, commission etc.
This proposal had brought a positive implication on the DTH companies who are hard hit by the current licence fee structure for their services. They are required to pay an annual fee equivalent to 10 per cent of their fiscal gross revenues.
However, Roop Sharma president of Cable operators Federation of India (COFI) thinks the other way. In her comments on the TRAI consultation on DTH licensing she has stated that since the sector is matured, growing and flourishing it is time that government treated it as a large Scale industry and ensured that adequate revenue is collected from the industry commensurate with its earnings. Also the DTH players are all global companies with deep pockets having vertically integrated supporting companies but are in the habit of cribbing all the times using various forums like FICCI, ASSOCHAM, CII, CASBAA that they are paying heavy multiple taxes and are incurring losses. This is only to influence the mind of the policy makers. Small cable operators also pay entertainment tax and service tax and other levies as DTH operators do. Government has to understand the scope of their nationwide business. On one hand in the public forums they declare India as the largest DTH market in the world and on the other hand they crib that their business has become unviable due to multiple taxes which they have been actually avoiding taking matters to the courts. If their condition was so bad, they should have quit the business. Hence COFI has suggested to the Regulator and the government not to listen to the double‐side talks of DTH players and regulate them as an old established industry on the line of the telecom industry..   

For renewal of DTH licences, COFI has suggested the following conditions before a DTH licence is renewed:‐ 
All dues as required by existing regulations, irrespective of whether a court case is going on should be cleared unless a stay has been given by the concerned court. 
There should not be any serious violations of licensing conditions at more than three occasions. 
If  a matter is in the court for any purpose, an NOC from the Court should be obtained and submitted to the government . 
Details of investors including foreign investors, both individuals as well as institutional should be submitted to the Ministry. 
A fresh security clearance from Home Ministry and clearance from Finance Ministry should be obtained since ten years is a long period and many changes would have taken place.
Any DTH operator having a criminal case against him during the licence period should become uneligible for renewal of licence. 
Even during the licence period if the DTH operator gets convinced on criminal charges, his licence should be cancelled. 
There should be an additional fee for advanced services like interactive television, games, 3D & HDTV services as they fetch higher subscriptions.   
Although all DTH operators have planned to appeal against this Ministry order, it has to be seen how serious the Ministry is in pursuing this as after getting relief from TDSAT in various cases filed by Tata Sky, Sun TV and Bharti Airtel, Ministry succeeded in getting the TDSAT order quashed on 11 October 2011. However, it is a mystery why in the last three years, Ministry could not get the dues from the DTH operators? In the absence of an operational government, will there be any result now?


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