TELECOM
DISPUTES SETTLEMENT & APPELLATE TRIBUNAL
NEW DELHI
(With M.A.No.34 of 2003, M.A. No. 190 of 2005)
BPL Mobile Cellular Limited & Another
…Petitioners
Vs.
Department of Telecommunications …Respondent
(b)Petition No.22 of 2005
IDEA Cellular Limited …Petitioner
Vs
Union of India & Anr. …Respondents
BPL Mobile Communications Ltd. … Pétitionner
Vs.
Department of Telecommunications …Respondent
Bharti Broadband Limited …Petitioner
Vs
Department of Telecommunications …Respondent
Essel Shyam Communication Ltd.
(ESCL) … Petitioner
Vs.
Department of Telecommunications
(DoT) & Ors. …Respondents
(f) Petition
No.227 of 2007
(M.A. No.136 of 2007)
Videsh Sanchar Nigam Limited
…Petitioner
Versus
Union of India & Ors. …Respondents
(g) Petition No.228 of 2007
(M.A. No.137 of 2007)
Videsh Sanchar Nigam Limited …Petitioner
Versus
Union of India & Ors. …Respondents
BEFORE:
HON’BLE MR. JUSTICE S.B.SINHA, CHAIRPERSON
HON'BLE MR. G. D. GAIHA, MEMBER
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For Petitioners (a) & (c) |
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Mr. C.S. Vaidyanathan, Senior Advocate Mr. Rishi Agrawala, Advocate Mr. Akshay Ringe, Advocate Mr. Nakul Mohta, Advocate Mr. Nikhil Rohatgi, Advocate |
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For Respondent in (a) to (c) |
: |
Mr.Kuldip Singh, Advocate |
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For
Petitioner in (b) |
: |
Mr. P.V. Kapur, Senior Advocate Mr. Manjul Bajpai, Advocate Mr. Ashish Yadav, Advocate Ms.Devika Bajpai, Advocate Mr. Akshay Misra, Advocate |
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For Respondents in (b) |
: |
Mr.Kuldip Singh,Advocate |
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For Petitioner in (d) |
: |
Mr. Kaushik Mishra, Advocate |
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For Respondent in (d) |
: |
Mr. Vineet Malhotra, Advocate |
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For Petitioner in (e) |
: |
Mr. Maninder Singh, Senior Advocate Mr.Saurabh Mishra,Advocate Mr.Arjun Natarajan,Advocate Ms.Nitya Thakur,Advocate |
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For Respondent (e) |
: |
Mr. S.K.Dubey, Advocate |
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For Petitioners in (f), (g) |
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Mr. U. Hazarika, Advocate |
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For Respondents in (f), (g) |
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Mr.Sanjay R. Hegde, Advocate |
S.B. Sinha
Introduction
The petitioners, in this batch of
petitions, inter-alia, question the validity and/or legality of the provisions
contained in the respective license agreements entered into by them with the
Department of Telecommunications of the Union of India, in terms whereof the
latter claims itself to be entitled to levy penalty at the rate of 150% of the
shortfall in payment of the license fee for different years.
The petitioners furthermore question the justifiability or otherwise of
such a levy in each of these petitions.
We, therefore, are required to take into consideration for factual
aspects involved in each case separately.
BPL
Mobile Cellular Ltd Case (Petition No. 8/03
and Petiton No. 27/05)
The parties entered into license agreements
with the respondent for establishing cellular mobile services in the State of Tamil
Nadu, Kerala and Maharashtra Circles.
The said agreement contained stipulations with regard to levy of interest at Primary Lending Rate (PLR)
as specified by the State Bank of India plus 5% thereover and compounded
monthly. Indisputably, the said
agreement did not contain any stipulation for payment of any penalty.
BPL
Mobile Cellular Ltd entered into a similar agreement for the Mumbai Metro on
30.11.1994.
A Migration
Package was offered by the Department of Telecommunication (DOT) of Union of
India to the petitioner and the same was accepted.
The
Telecom Regulatory Authority of India (TRAI) recommended imposition of penalty
in cases of National Long Distance Operators in the event of occurrence of any
intentional under-statement of any payment required to be made in each quarter
towards license fees. It is contended
that the cellular operators were not consulted prior to making of the said
recommendations by TRAI in terms of Section 11(1)(a) of the Telecom Regulatory
Authority of India Act, 1997 (hereinafter referred to as ‘the said Act’).
Recommendations
were also made by TRAI with regard to insertion of penalty clauses in the NLD
license on or about 15.5.2000, stating that while considering insertion thereof;
the same should be made operational only in cases of deliberate
under-declaration.
Fresh agreements were entered into by
and between the parties hereto on or about 3.4.2002 on the basis of revenue
sharing. It also did not contemplate
imposition of penalty. Respondent,
however, sought to introduce the penalty
clause by way of Clause 1.8 in the license agreement, in terms whereof, 150% penalty was to be levied for short
deposit of license fee.
It reads as under :
“1.8 In
case, the total amount paid on the self assessment of the LICENSEE 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 150% of
the entire amount of short payment. This
amount of short payment along with the 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 as per terms of Condition 3.5. However, if such short payment is made good
within 60 days from the last day of the financial year, no penalty shall be
imposed.”
The
petitioners contend that in view of the Orders passed by this Tribunal in Petition
No. 10 of 2001 on 9.4.2002 with regard to wrong interpretation of ADC Charge
payable to the respondent, huge amounts of refund became payable by the
respondent to it with interest. The petitioner
asked for refund of a sum of Rs. 87.03 crores as on the date of the judgment in
terms of a letter dated 17.5.2002. A
request for adjusting all the claims of the respondents towards payment of license fees for all the licenses was also made
by the petitioner by its letter dated 20.5.2002 which was not responded to.
Only on or about 3.12.2002, penalty for a sum
of Rs. 1.49 crores was imposed in respect of Kerala Circle, the details whereof
are as under:-
(Amount
in Rupees)
|
PERIOD |
AGR |
Revenue Share Due |
Revenue Share Paid |
Difference |
Interest on delayed payment upto 31.10.02 |
Penalty |
|
|
(A) |
(B) |
(C) |
(D) |
(E) |
(F) |
(G) |
|
|
1999-00 (Aug 99 to March 00) |
314060351 |
47109053 |
37260000 |
9849053 |
423549 |
|
|
|
2000-01 |
591165489 |
82910763 |
91200000 |
-8289237 |
1309704 |
|
|
|
2001-02 |
689799388 |
68979939 |
59040000 |
9939939 |
4013889 |
14909909 |
|
|
Total |
1595025228 |
198999755 |
187500000 |
11499755 |
5747142 |
14909909 |
|
The petitioner objected to imposition of
the said penalty amount as also levy of interest thereupon by its letter dated
6.1.2003.
An
appeal in the meanwhile had been filed by the respondent against the said
judgment of this Tribunal dated 17.5.2002 before the Supreme Court of India which
was dismissed by a judgment dated 4.3.2003.
By reason
of a letter dated 18.3.2003, the respondent unilaterally contended that penalty
clause would operate retrospectively.
Validity of the said letter was also questioned by the petitioner in
terms of its letter dated 18.3.2003. Insertion
of clause 3.8 of the license agreement was also objected to by the petitioner
by a letter dated 21.3.2003.
The
respondent adjusted the amount which was lying at its hands pursuant to the
judgment of this Tribunal as also that of the Supreme Court of India dated
4.3.2003 after a delay of more than 63 days.
The purported penalty imposed for
a sum of Rs. 1.49 crores was also adjusted from the amount lying in its hands. No
Show Cause Notice, however, was issued prior thereto.
The matter relating to wireless spectrum
charges were indisputably governed by a separate license. The petitioner by a letter dated 12.5.2003
requested that the amount remaining with DoT be adjusted towards the license
fees in respect of the Mumbai Circle. The
said instruction of the petitioner was ignored and the refundable amount against
the WPC Charges was also adjusted.
The
matter relating to refund was the subject matter of a petition before this
Tribunal marked as Petition No. 17 of 2002 in this Tribunal. By a judgment and Order dated 13.5.2003, this
Tribunal directed that refunds which were to be made to the petitioner no. 2
should be adjusted from the outstanding dues.
Whereas according to the respondent, the refundable amount was Rs. 1.34
crores, according to the petitioner no. 2, the amount was much higher. The said refundable amount was however
adjusted against dues as outstanding on 13.5.2003. The petitioner in terms of a letter to the
respondent raised a grievance that adjustments had wrongly been made and the
respondent was not entitled thereto, as amounts refundable to the petitioner as
on 3.4.2002 should have been adjusted.
It is
at that stage, the Petition No. 8 was filed.
Respondent
invoked the bank guarantee furnished by the petitioner to the extent of Rs.
25.9 crores and on 19.6.2003, recovered the entire outstanding license fees of
Rs. 19.45 crores alongwith the interest payable thereupon viz a sum of Rs. 3.08 crores.
On an
application filed by the petitioner, the Tribunal stayed the levy of the amount
of penalty by an Order dated 20.6.2003.
On the same date, the respondent imposed
penalty for a sum of Rs. 29,18,42,155/- for purported delay in payment of Rs.
19,45,61,437/- towards license fee by
encashment of the bank guarantee.
Idea Cellular (Petition No. 22/05 and
Petition No. 27/05)
The petitioner was granted a
license by the DoT in December, 1995 for the States of Andhra Pradesh, Gujarat
and Maharashtra.
Clause 19.2 of the said licenses provided for payment of license fees
in advance every quarter.
The Union of India evolved a new Telecom Policy in the year 1999,
pursuant whereto and in furtherance whereof, all the licensees were offered to
switch-over to Migration Package, in terms whereof, in stead and place of a fixed
sum the license fee became payable on a revenue sharing basis. Such an offer was made to the petitioner on
22.7.1999, by reason whereof, the license fee on revenue sharing basis was to
be paid within 10 days in advance for the relevant year with effect from 1.4.2000. Payment of license fee, thereafter, was to be
made on quarterly basis. In terms of
the said license agreement, no audited statement was required to be filed.
It may be placed on record that in the 1995
agreement, there was no provision for levy of penalty for non-payment of the
license fees within the stipulated time.
Respondent, however, amended the terms
of the license on or about 6.3.2002, pursuant whereto and in furtherance
whereof, license fee became payable in four quarterly advances within 15 days
of commencement of the relevant quarter on self-assessment basis.
As per the new arrangement, the
petitioner was to pay license fees for the quarter April-June 2002 on or before
15.4.2002.
This Tribunal in the AGR matter by a
judgement dated 9.4.2002 passed in Petition No. 10 of 2001 directed the respondent
to refund the excess amount recovered from the petitioner, as a result whereof
the respondent is said to have become liable to pay unto it a sum of Rs. 116
crores.
For the financial year 2001-2002, only a net amount of Rs. 4.81 Crores
was payable by the petitioner to the respondent, which was less than 10% of the
payable License Fee.
The petitioner wrote to DoT to adjust the outstanding amount against
the refundable amount on 18.4.2002 and again on 24.5.2002, but it neither
adjusted any sum nor communicated its disinclination to do so. The petitioner again made a request for
adjustment of the amount due from it towards license fees from the refundable
amount by reason of its letters dated 11.6.2002
and 2.7.2002.
Instead of acceding to the said request,
the respondent preferred an Appeal before the Supreme Court of India against
the said judgement dated 09.04.2002 of this Tribunal. The petitioner was asked to pay the balance amount
of Rs. 57.03 Crores, which was complied with.
License fee for the quarter April-September, 2002 was also paid on 5.8.2002.
By an order dated 22.8.2002, the
respondent imposed the impugned penalty on the petitioner.
The Supreme Court of India by its Order
dated 4.3.2003 confirmed the direction of this Tribunal in Petition No.10 of
2001 vide its order dated 09.04.2002 directing the respondent to make refunds.
The petitioner is
a Public Limited Company. It has been
granted a license to provide value added service for closed user group by
INSAT. The services are also known as
VSAT (hereinafter called and referred to for the sake of brevity as “the
services”).
On or
about 28.3.1995, the Department of Telecommunications (DoT) issued a license in
favour of the predecessor in interest of the petitioner, which was subsequently
assigned to it.
The amount
of license fees payable to the respondent is contained in Schedule ‘B’ of the
license. Clause 9 of the said agreement
clearly provides that the license fee payable to the respondent would not
include the amount of royalty payable for use of radio frequency, i.e., the
spectrum charges. Moreover, clause 21.1
of the license mandates that there shall be a separate license for utilisation
of the radio frequency.
Clause
21.3 of the said agreement reads as under:-
“21.3 License fee and Royalty shall have to be paid
for grant of license which will be subject to revision from time to time.
21.3.1. Royalty : Rs. 20,000/- for the Hub station
and Rs. 5,000/- per V SAT station,
per annum.
21.3.2. License fee : Rs. 10/- per station (Hub or
VSAT) per annum is chargeable.”
On or about 16.4.2003, the respondent
issued an Order for payment of spectrum charges. Clause 1.2 of the said Order provides that a
percentage of the adjusted gross revenue for levy of spectrum charges would be
received as specified under the license.
Clauses
1.3 and 1.4 furthermore provided that in case of any delay in the payment of
spectrum charges, penal interests shall be levied. Clauses 1.2, 1.3 and 1.4 read as under:-
“1.2 Adjusted Gross Revenue (AGR) for the purpose
of levying WPC spectrum charges shall be same as specified under the main DoT
License Agreement.
1.3 Payment of spectrum charges shall be on
advance quarter basis and payable within 15 days of the commencement of the
respective quarter, failing otherwise the same shall invoke penal interest as
per the procedure in vogue in the main DoT License.
1.4 Penal interest shall be levied as per
existing norms, procedure terms and conditions in vogue for delayed /
non-payments for main DoT License Agreement.”
The license issued by the respondent as
amended came into force on or about 23.1.2004.
Clause 1.2 of the amended license provided that the license fee would be
payable by the licensee. Clause 1.5
thereof mandates that in case of delay in payment of license fee beyond the
stipulated period, the licensee would be liable for payment of interest.
Clause
1.8 of the amended license provided that if the payment of license fee for four
quarters of the financial year fell short by more than 10%, the same would
attract a penalty of 150% of the entire amount payable in the following terms:-
“1.8 In case, the total amount paid on the self
assessment if the Licensee as quarterly license fee for the 4 (four) quarters
of the financial year, falls short by more than 10% of the payable license fee,
it shall attract a penalty of 150% of the entire amount of short payment….”
Clause 1.9 stipulates that payment of
spectrum charges would be payable at such times and in such manner as is
prescribed from time to time.
It
reads as under:-
“1.9 The license fee / royalty towards WPC charges
shall be payable at such time(s) and in such manner as the WPC Wing of the
Department of Telecommunications, Ministry of Communications may prescribe from
time to time.”
By reason
of a letter dated 7.2.2006, the respondent communicated to the petitioner that
a sum of Rs. 98,19,525/- is due from it.
In response thereto, the petitioner, by it’s letter dated 21.2.2006
contended that in calculating the said amount, the respondent has erroneously
imposed penalty for delay in payment of the spectrum charges. By a letter dated 22.3.2006, the respondent,
however, reiterated its stand relying on or on the basis of clause 6.8 of the
amended license.
The
respondent, by a letter dated 3.4.2006, however, raised a contention that
reference to clause 6.8 was made by way of mistake in stead and in place of
clause 1.8. By a notice dated
25.10.2006, the petitioner was asked by the respondent to pay the amount of
penalty for delay in payment of spectrum charges. The respondent, moreover, contended that
clause 1.5 of the Order dated 16.4.2003 has nothing to do with the delay in
payment of spectrum charges. It was
stated—
“5. Para 8 & 9 of the petition are wrong and
denied. It is denied that the license
fee for VSAT and spectrum charges for WPC have been separately provided in the
license. It is submitted that the license
fee for VSAT license and spectrum charges are covered in the same agreement. No separate license agreement was signed for
WPC spectrum charges as per clause 21 of the original License Agreement. Therefore, the contention of the petitioner
that the provisions for payment of spectrum charges and provisions of payment
of license fee are “entirely distinct and independent” is wrong and denied.”
On the aforementioned premise, we may
notice clauses 1.3 and 1.4 of the Order dated 16.4.2003 passed by the
respondent which read as under:-
“1.3 Payment of WPC spectrum charges shall be on advance
quarter basis and payable within 15 days of the commencement of the respective
quarter, failing otherwise the same shall invoke penal interest as per the
procedure in vogue in the main DoT license.
1.4 Penal interest shall be levied as per
existing norms, procedure terms and conditions in vogue for delayed /
non-payments for main DoT license agreement.”
It is not in dispute that the petitioner
has paid spectrum charges amounting to Rs. 8,78,937/-. The petitioner furthermore accepts that a sum
of Rs. 8,73,937 would be leviable by way of penal interest on the
aforementioned amount. It, however,
disputes its liability to pay penalty @ 150% of the amount of charges purported
to be due.
The petitioner is
a public sector undertaking. It was
granted a National Long Distance (NLD) license on or about 8.12.2002. An agreement was also executed by and between
the petitioner and the Central Government, in terms whereof, the procedure and
schedule for payment of annual license fee and other dues payable by the
petitioner had been specified.
It is
beyond any controversy that annual license fee was payable by way of percentage
of revenue earned under the license.
In
this matter, we are concerned with clauses 6.2 and 6.8 of the license which
read as under:-
“6.2 License fee shall be payable in four
quarterly instalments during each financial year. Each quarterly instalment shall be paid in
advance, within 15 days of the commencement of that quarter. This fee for each quarter shall be paid by
the Licensee on the basis of own assessment of revenue (on accrual basis) for
the current quarter subject to a minimum payment of the actual revenue share of
the previous quarter, duly certified with an affidavit by a representative of
the licensee authorised by the Board Resolution. However, the Licensee shall pay the license
fee for the first quarter of the first year of payment on the basis of the
expected revenue for the service in the first quarter.
6.8. In case, the total amount paid on the
self-assessment of the Licensee as quarterly license fees for the 4 (four)
quarters of the financial year, falls short by more than 10% of the payable
license fee, it shall attract a penalty of 150% of the entire amount short
payment. However, if such short payment
is made good within 60 days from the last day of the financial year, no penalty
shall be imposed. This 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 as per terms
of condition 6.5.”
It may, however, be noticed that in
terms of clause 6.5, interest is payable on delayed payment at a rate which
will be 5% above the Prime Lending Rate (PLR) of the State Bank of India. Clause 6.6 provides that final adjustment of
the license fee for the year shall be made on or before 30th June of
the following years based on the gross revenue figure duly certified by the
auditors of the license in accordance with the provisions of the Companies Act,
1956.
In these
petitions, the validity of the said clause 6.8 only is in question.
Bharti Broadband Case (Petition No. 98/05)
The petitioner is
a licensee. A license agreement was
entered into by and between M/s Comsat Max Ltd and the respondent on or about
2.8.1994. It was subsequently amended on
30.1.2002 in terms whereof, the mode of payment of the licensee fee was changed
whereby, the revenue for commercial VSAT
services were to be paid on Adjusted Gross Revenue (AGR) basis. On or about 14.3.2005, the respondent called
upon the petitioner to pay the provisional license fee for the year 2001-02 for
a sum of Rs. 10,11,52,296/-. The demand
was based on calculation sheets containing computation of quarterly AGR and license
fee, interest and penalty. A notice was
issued by the respondent on 30.3.2005 asking the petitioner to pay license fee
for the year 2001-02 whereby the petitioner was called upon to make payment
with interest by 30.3.2005 failing which, it was threatened that action would be
taken under the terms and conditions of the license agreement.
In
response to the said notice, the petitioner, by a letter dated 7.4.2005,
indicated to the respondent that it had three different revenue streams. It was contended that the petitioner
maintained separate books of account for the revenue earned by providing
services under the aforementioned licenses and revenue earned from the trading
activity which are disclosed separately in the audited financial statement of the
company. The petitioner requested the
respondent not to include ISP revenue, trading revenue etc in the license fee
and not to impose any penalty on the premise that the license fee actually
deposited by it had not fallen short of the stipulated amount of license fee
due and payable by 10% and in that view of the matter, the penalty clause
contained in clause 1.8 of the amended license agreement was not
attracted. According to the petitioner,
it was entitled to a refund of Rs. 113,81,958/-. The petitioner submitted an audited AGR
statement for the year 2003-04 and the license fee for the financial year
2003-04 by a letter dated 24/25.5.2005.
According to the petitioner, there had been no change in the figures of revenue
earned which were earlier disclosed in the AGR certificates, save and except
that the new certificates specifically mentioned of revenues arising under the
VSAT license, ISP license and trading income by giving break-ups thereof.
On
the premise that the certificate was issued not by the auditor who had audited
the accounts of the petitioner, it was asked to pay the amount of Rs. 10.37
crores before 30.6.2005 to avoid further accruals of interest by a letter dated
16/12.6.2005. By a letter dated 29.6.2005,
the petitioner brought it to the notice of the respondent that AGR certificate
for the year 2003-04 was issued by the statutory auditors of the company for
the period ending 31.3.2003. It was moreover
pointed out that during the financial year 2003-04, the statutory auditors of
the company were replaced by Price Water House.
Several other correspondences were exchanged between the parties. By a letter dated 5.8.2005, the respondent
directed the petitioner to deposit a sum of Rs. 5.04 crores within 7 days of
issuance of the said communication towards provisional re-assessment of license
fee for the years 2001-02, 2002-03 and 2003-04.
SUBMISSIONS
The principal submissions in support of
these petitions were made by Mr.C.S. Vaidyanathan, Mr.Kapoor, Mr.Srinivasan and
Mr. Hazarika the learned senior counsel.
Other counsels while adopting their submissions raised contentions
independently in their respective cases.
Mr.Sanjay
R. Hegde, appearing for the Solicitor General of India, Mr.Dubey, Mr.Malhotra
and Mr.Kuldeep Singh represented the Union of India in these matters.
The
principal contentions raised on behalf of the petitioners herein are as under:
(i) The penal provisions inserted by
way of the second amendment in the agreement seeking to impose penalty at the
rate of 150% of the amount of short fall is ultra vires Article 14 of the
Constitution of India.
(ii) The said provision in any event
being wholly unconscienable is hit by Section 23 of the Indian Contract Act.
(iii)
The Government of India through the DoT had no authority to direct insertion
of a penalty clause in the licences for telecom services.
(iv)
In any view of the matter, mere delay in payment beyond the fixed period of 60 days from the close of
financial year can not be considered to be reasonable for the purpose of
imposing 150% penalty as not only, penal interest at the rate of Prime Lending
Rate (PLR) + 5% have been charged and fully recovered before imposition of
penalty, but the respondent had also the authority to enforce the bank
guarantees which have been furnished by the petitioners.
(v)
The penalty clause inserted in the amended licence agreement being
compensatory in nature must be held to be contravening the provisions of
Section 73 and Section 74 of the Indian Contract Act.
(vi)
The intent and purpose of introducing the penalty clause being to
safeguard willful misdeclarations or under-declaration of revenue or fraudulent
concealment of more than 10% of AGR on self assessment basis, no penalty could
have been imposed in absence of any finding of the aforementioned ingredients
by the Government of India or by any court of law.
(vii)
The Central Government could not have inserted a clause for imposition
of penalty unilaterally nor act pursuant thereto or in furtherance thereof
without affording an opportunity of
hearing to the petitioners.
(viii) Having regard to the provision
contained in Sections 20(A), 29(A) and 7 of the Indian Telegraph Act, the
Central Government had no jurisdiction to impose penalty beyond the rate
provided for therein.
(ix)
Having regard to the judgment of the Supreme Court of India in CA
No.5050 of 2005, the direction to adjust the amount of penalty should be held
to have been substituted in place and stead of the direction issued by this
Tribunal.
(x)
As the quantum of penalty must be commensurate with the actual loss, if
any, suffered by the Government of India and/or any amount which should be
reasonable ; no penalty could have been levied, keeping in view the fact that
the respondents had been charging interest for the entire amount, which itself
was penal in nature.
(xi)
Keeping in view the recommendations made by TRAI, which according to
the 1st respondent were accepted by the Central Government, the
element of mens rea was required to be found to be existing before passing of an
order imposing penalty.
(xii)
The terms and conditions of a contract contained in the
license agreement could not have been modified unilaterally by the respondent
herein by issuing office orders or otherwise.
(xiii) After the
judgment of this Tribunal in the AGR matter, the respondents could not have levied
penalty relying on or on the basis of clause 6.8 of the license agreement,
having regard to the provisions of the Indian Telegraph Act.
(xiv) The Parliament, although
inserted Section 9(A) at a later date,
did not amend the provisions of Section 20(A) or any other provisions
and thus must be held to have kept the said provisions intact.
(xv) The action on the part of the
respondent in any event is otherwise vitiated in law.
Mr.Sanjay
R. Hegde, on the other hand, urged:
(i)
Having regard to the decision of this Tribunal in MA No.22 of 2004
arising out of Petition No.10 of 2001 dated 18.03.2005, the petitioners could
not have prayed for adjustment of the principal amount from the amount payable
by way of refund as directed by this Tribunal while disposing of Petition No.10 of 2001.
(ii)
The Penalty Clause in the licence agreement having been inserted by way
of an agreement as a reasonable amount of compensation as provided for under
Section 74 of the Indian Contract Act, the question of the same being ultra
vires Article 14 of the Constitution of India or being unreasonable or
unconscionable, arbitrary or violative of Section 23 of the Indian Contract Act
does not and cannot arise.
(iii)
The licence agreement having been modelled on a revenue sharing
arrangement in terms whereof the licensee cannot seek to obtain advantage
thereof that is payment of licence fee divisible in four quarters as against
payment of licence fee in advance without being compelled to pay the amount
admissible and due to the Government at the end of financial year.
(iv)
The provisions of Section 20(A) as also Section 29(A) of the Act being
punitive in character do not have a bearing on levy of penalty for failure to
pay under a contract in as much as such clauses are in addition to the statutory
provisions and insertion of such clauses by mutual agreement is not
barred.
(v)
The amount payable under the penalty clause is directly relatable to an
incorrect assessment followed by failure to pay on the expiry of 60 days from
the end of the financial year, thus, and being limited to 150% on the shortfall
of the licence fee, cannot be held to be violative of Section 74 of the Indian
Contract Act.
(vi)
It is not a case where Section 16 of the Indian Contract Act would be
applicable as the said provision merely enables the court to raise a
presumption against a contractual provision.
(vii)
In any event the principal conditions to attract the said provision
being domination of will and unconscienability i.e. absence of meaningful
choice, are absent in the instant case.
(viii) The licence agreement governs
the contractual relationship of the parties and mere existence of a penalty
clause cannot give rise to the presumption of substantive or procedural
unfairness and in any event the Indian Contract Act does not contemplate
invalidation of the contract on such grounds.
(ix)
Section 20(A) and Section 29(A) of the Act being penal in nature,
penalty can be imposed only if a criminal proceeding is initiated therefor and
not otherwise. Both the provisions,
namely Sections 20A and 29A stand on different footings and comprehend
different categories of offences.
(x)
Proviso appended to Section 4 of the Act enables the Government of
India to grant a license on such conditions and in consideration of such
payment as it thinks fit to any person to establish, maintain or work a
telegraph within any part of India.
(xi)
Section 7(A) of the Act recognized the power of the Central Government
to enter into an agreement.
In Bharti
Broadband, it has been contended :
(a)
Indisputably, the petitioner had paid a sum of Rs. 5,05,63,357/- on
22.8.2005.
(b)
It is furthermore not in dispute that in terms of judgments dated
7.7.2006 and 30.8.2007, it has clearly been held that only the revenue earned
from the license activities would form part of the AGR.
(c)
The payment having been made ‘without prejudice’, the implications whereof
would be:-
(i)
that the the matter has not been tested on merits; and
(ii)
that fresh proceedings, according to law, were not barred.
The respondent, however, contends that
the demand raised was as per terms and conditions of license, the details
whereof read as under:-
Rs. in Cr.
|
Year |
Penalty |
Interest |
Total |
|
2001-02 |
0 |
.30 |
.30 |
|
2002-03 |
4.21 |
.43 |
4.64 |
|
2003-04 |
0 |
.12 |
.12 |
According to the respondent, therefore,
penalty has been imposed only for financial year 2002-03 as the shortfall had
exceeded 10%. The petitioner, it was
urged, being bound to follow the terms of the agreement of license and demand
having been raised in accordance therewith, question of any refund does not
arise.
Statutory
Provisions
Before adverting
to the rival contentions of the parties as noticed heretobefore, we may notice
some provisions of the statutes which are relevant for determination of the issues
involved in these matters.
The
Indian Telegraph Act, 1885.
The said Act was
enacted to amend the law relating to telegraphs in India.
Part II of the
said Act confers privileges and powers on the Government. Section 4(1) provides that the Central
Government would have the exclusive privilege for establishing, maintaining and
working telegraphs.
The proviso
appended thereto, however, enables the Central Government to grant a licence,
on such terms and conditions and in consideration of such payments as it thinks
fit, to any person to establish, maintain or work a telegraph within any part
of India.
The second
proviso appended thereto enables the Central Government to permit
establishment, maintenance and working of wireless telegraphs on ships and
telegraphs other than wireless telegraphs to any person on such terms and
conditions as made by rules prescribed.
Section 7 of the
Act provides for the rule making power.
Sub-section (1) thereof enables the Central Government to make rules
consistent with the Act for the conduct of all or any telegraphs established,
maintained or worked by the Government or by persons licenced under the said
Act. Sub-section (2) of Section 7,
however, provides for all or any of the matters for which rules could be
framed, clauses (h) and (i) whereof read as under:
“(h) the time at which, the manner in which, the
conditions under which the persons by whom the rates, charges and fees
mentioned in this sub-section shall be paid and the furnishing of security for
the payment of such rates, charges and fees;
(i) the payment of compensation to the Central
Government for any loss incurred in connection with the provision of any
telegraph line, appliance or apparatus for the benefit of any person -
(a) where the line, appliance or apparatus is,
after it has been connected for use, given up by that person before the
expiration of the period fixed by these rules, or
(b) where the work done for the purpose of
providing the line, appliance, or apparatus is, before it is connected for use,
rendered abortive by some act or omission on the part of that person.”
Sub-section 3 of Section 7 reads as follows:
(3)
When making rules for the conduct of any telegraph established, maintained or
worked by any person licensed under this Act, the Central Government may by the
rules prescribe fines for any breach of the same:
Provided that the fines so prescribed shall not
exceed the following limits, namely:-
i.
When the
person licensed under this Act is punishable for the breach, one thousand
rupees, and in the case of a continuing breach a further fine of two hundred
rupees for every day after the first during the whole or any part of which the
breach continues.
ii.
When a servant
of the person so licensed, or any other person, is punishable for the breach,
one-fourth of the amounts specified in clause (i).
Any rule framed
under the Act has to be laid before the Parliament as provided for under
sub-section (5) of Section 7 thereof.
Section 7A
provides for the saving of the provisions of the existing agreements; whereas
Section 7B provides for resolution of disputes.
Section 20A of
the Act is a penal provision in terms whereof in the event of contravention of
any of the conditions contained in the licence by the holder thereof,
punishment with fine which may extend to one thousand rupees, and with a
further fine which may extend to five hundred rupees for every week during
which the breach of the condition continues, may be imposed.
Section 29A also
contains a penal provision in the following terms:
[29A.
Penalty – If any
person, without due authority, -
(a)
makes or issues any document of a nature
reasonably calculated to cause it to be believed that the document has been
issued by, or under the authority of, the Director-General of [Posts and
Telegraphs], or
(b)
makes on any document any mark in
imitation of, or similar to, or purporting to be, any stamp or mark of any
Telegraph Office under the Director General of [Posts and Telegraph], or a mark
of a nature reasonably calculated to cause it to be believed that the documents
so marked has been issued by, or under authority of, the Director-General of
[Posts and Telegraphs],
he shall be punished with fine
which may extend to fifty rupees.]
The
Indian Contract Act, 1872
Sections 73 and Section 74 of the Indian
Contract Act read as under:
Section 73. Compensation for loss or damage caused by breach
of contract – When a contract has been broken, the party who suffers by such
breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of
it.
Such compensation
is not to be given for any remote and indirect loss or damage sustained by
reason of the breach.
Compensation for
failure to discharge obligation resembling those created by contract – When an
obligation resembling those created by contract has been incurred and has not
been discharged, any person injured by the failure to discharge it is entitled
to receive the same compensation from the party in default, as if such person
had contracted to discharge it and had broken his contract.
Illustration:
(n) A contracts to pay a sum of money to B on a
day specified. A does not pay the money
on that day. B, in consequence of not
receiving the money on that day, is unable to pay his debts, and is totally
ruined. A is not liable to make good to
B anything except the principal sum he contracted to pay, together with
interest upon the day of payment.
Section 74. Compensation for breach of contract where
penalty stipulated for – When a contract
has been broken, if a sum is named in the contract as the amount to be paid in
case of such breach, or if the contract contains any other stipulation by way
of penalty, the party complaining of the breach is entitled, whether or not
actual damage or loss is proved to have been caused thereby, to receive from
the party who has broken the contract reasonable compensation not exceeding the
amount so named or, as the case may be, the penalty stipulated for.”
Illustration:
(d) A gives B a bond for the repayment of
Rs.1,000 with interest at 12 percent, at the end of six months, with a
stipulation that, in case of default, interest shall be payable at the rate of
75 percent from the date of default.
This is stipulation by way of penalty, and B is only entitled to recover
from A such compensation as the Court considers reasonable.
The
Telecom Regulatory Authority of India Act, 1997
The Parliament of
India in the year 1997 enacted the Telecom Regulatory Authority of India
Act.
License has been
defined in Section 2(e) to mean any person licensed under sub-section (1) of
section 4 of the Indian Telegraph Act, 1885 for providing specified public
telecommunication services.
Section 2(ea) defines
licensor to mean the Central Government or the telegraph authority who grants a
licence under section 4 of the Indian Telegraph Act.
Chapter III of
the Act provides for constitution of the Telecom Regulatory Authority of India
(TRAI) as also its powers and functions.
Chapter IV of the
Act inter alia provides for establishment of the Tribunal as also its
jurisdiction.
Actions taken by the respondent prior to
amendment of the license.
Before we take
notice of different clauses of the agreement, we may notice that indisputably
the petitioners have been granted licences in the year 1995. Upon coming into force of the migration
package, they were to pay the licence fee in advance for the first year. However, from the second year they were to
pay licence fee on each quarter. Payment
of such quarterly licence fee was also to be made in advance.
Pursuant to or in
furtherance of the National Telecom Policy adopted by the Central Government in
the year 1999, the licensees were required to pay the licence fee on a revenue
sharing basis in stead and place of fixed amount. The petitioners did not object to amendment
in the licence, in terms whereof license fee was to be paid on a revenue
sharing basis. The amended licence came
into force on different dates but in some cases on or about 06.03.2002. Before such migration package has been
resorted to, the Central Government by a letter dated 22.07.1999 marked without
prejudice, stated the details of the amendments proposed to be made.
TRAI also made
recommendations on introduction of payment of compensation in National Long Distance
communications, paragraph 35 whereof reads as under:
“35. While progressive quarterly payments are
likely to be at variance with reference to the final liability based on audited
accounts, these payments should be as accurate as possible. Any under statement of interim quarterly
payments beyond twenty percent of the final calculation may attract a penalty
(not exceeding the amount of short payment) in case the licensee fails to show
that the under statement was not deliberate and that the projections were
reasonable as per the then obtaining circumstances.”
Agreement
From a letter
dated 03.04.2002 issued by the Government of India, Ministry of Communications,
it appears that the quantum of revenue sharing was also to be arrived at upon
taking into consideration the recommendations of TRAI.
The agreement was
amended, as noticed hereinbefore in some cases, on or about 03.04.2002 which
reads as under:
“In consideration
of the acceptance by the Licensee, of the terms and conditions contained in the
offered Migration Package vide No.842-153/99-VAS (Vol.V) (Pt.) dated 22.7.1999
for migration to the revenue sharing regime under New Telecom Policy-1999, the
license agreement shall stand substituted and modified as follows with effect
from 1.8.1999, notwithstanding anything contained in the License Agreement.”
Annual licence
fee in terms thereof was 15% of the Gross Revenue (GR) w.e.f. August,
1999.
GR has been
defined in clause 2.1 which reads as under:
“2.1 Gross Revenue:
The Gross Revenue
shall be inclusive of installation charges, late fees, sale proceeds of
handsets (or any other terminal equipment etc.), revenue on account of
interest, dividend, value added services, supplementary services, access or
interconnection charges, roaming charges, revenue from permissible sharing of
infrastructure and any other miscellaneous revenue, without any set-off for
related item of expense etc.”
Clause 3 provides
for schedule of payment of annual licence fee.
Clauses 3.1, 3.2, 3.4, 3.5, 3.7 and 3.8 which are material for our
purpose read as under:
“3.1 For the purposes of Licence Fee, the 1st
year shall end on 31st March following the date of commencement of
the Licence Agreement and the licence fee for the First year shall be
determined on a pro-rata basis for the actual duration of the “year”. From the second year onwards, the year shall
be of Twelve English calendar months from 1st of April to the 31st
March for payment of Licence Fee.
EXPLANATION: The Licence fee for the last quarter of the
first year and last quarter of the last year of the Licence will be computed
with reference to the actual number of days after excluding the other quarters,
each being of three months.
3.2 Licence Fee shall be payable in four
quarterly installments during each financial year. Each quarterly installment shall be paid in
advance within 15 days of the commencement of that quarter. This Fee for each quarter shall be paid by
the LICENSEE on the basis of own assessment of revenue (on accrual basis) for
the current quarter subject to a minimum payment equal to the actual revenue
share of the previous quarter, duly certified with an affidavit (as per
Proforma annexed) by a representative of the LICENSEE, authorized by the Board
Resolution coupled with General Power of Attorney. However, for the first quarter of the first
year, the licensee shall pay the Licence fee on the basis of the expected
revenue from the SERVICE in the first quarter.
3.4. The LICENSEE shall adjust and pay the
difference between the advance payment made and actual amount duly payable (on
accrual basis) of the previous quarter, along with the advance payment for the
current quarter.
3.5. Any delay in payment of Licence Fee, or any
other dues payable under the LICENCE beyond the stipulated period will attract
interest at a rate which will be 5% above the Prime Lending Rate (PLR) of State
Bank of India prevalent on the day the payment became due. 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.
3.7 A reconciliation between the figures
appearing in the quarterly statements with those appearing in annual accounts
shall be submitted along with a copy of the published annual accounts and audit
report, within 7 (seven) Calendar days of the date of signing of the audit
report. The annual financial account and
the statement as prescribed above shall be prepared following the norms as
prescribed in Annexure-C.
3.8 In case, the total amount paid on the self
assessment of the LICENSEE 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 150% of the entire amount of short payment. This amount of short payment along with the
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 as per
terms of Condition 3.5. However, if such
short payment is made good within 60 days from the last day of the financial
year no penalty shall be imposed.”
Clauses 4
provided for furnishing of financial bank guarantee. Clauses 4.1 and 4.4 read as under:
“4.1 The licensee shall maintain on year to year
basis a Financial Bank Guarantee (FBG), valid for one year from any Scheduled
Bank or Public Financial Institution duly authorized to issue such Bank
Guarantee, in the prescribed proforma (Annexure-D). The amount of FBG shall be equivalent to the
estimated sum payable for two quarters towards the license fee and other dues,
not otherwise securitized. The amount of
FBG shall be subject to periodic review by the licensor. The Licensee shall also maintain on year to
year basis a Performance Bank Guarantee (PBG) in the prescribed proforma
(Annexure-E) of an amount as prescribed in existing License Agreement. The licensee shall be permitted to reduce the
value of the PBG by 50% after the coverage criteria prescribed in the license
is fulfilled.
4.4 Without prejudice to any other remedy,
Licensor may encash BG in case of any breach in terms & conditions of the
LICENCE by the LICENSEE.”
We, in these
applications, are not concerned with any other provision of the said agreement.
Bank
Guarantee
Indisputably, the
petitioners herein furnished bank guarantees in respect of amount specified in
their respective contracts. Clause 3 of
the bank guarantee furnished reads as under:
“3. We, the bank, hereby further undertake to
pay as primary obligor and not merely as surety to pay such sum not exceeding
Rs.________________ (Rupees _________________ Only) to the Authority
immediately on demand and without demur stating that the amount claimed is due
by way of failure of the LICENSEE to pay any fees or charges or any part
thereon in terms of the said Licence.”
Some general observations
As the power to
impose penalty is contained in different agreements and numbered differently,
we call the respective clauses as the penal clause. Before proceeding further, we would also like
to place on record that the effect and purport of the penal clauses is identical.
The difference
between a clause empowering a party to the contract to impose penalty as an ‘In
Terrorem’ clause for enforcing reasonable deterrent on the one hand and a
provision for levy of ‘liquidated damages’ is well known.
If the penal
clause is to act ‘in terrorem’, it, save in exceptional cases, would be
rendered invalid. It is also a well
settled principle of law that some claim in the contract by way of
pre-estimated damages, may not be enforced by a court of law and only a
reasonable amount out of the pre-estimated damage would be payable, unless the
amount named is held to be a reasonable pre-estimate.
The penal clause, indisputably, however,
was inserted at a later stage, being not a part of the original agreement. It is beyond any controversy that for
non-payment or short-payment of license fee, attracts interest @ 5% over and
above the premium interest rate of State Bank of India compounded monthly or a
fraction of month.
If interest beyond the normal rate
becomes payable, the same would amount to penalty. It is doubtful whether a clause for levy of
double penalty and furthermore interest on penalty would satisfy the
requirements of law. In our opinion, the Indian Contract Act does not envisage
the same.
The respondent being the licensor has,
in terms of Section 4 of the Indian Telegraph Act, 1885, a special privilege in
the matter of grant of license. The
statute contemplates imposition of any term and condition therefor which, it
may be assumed, would include a deterrent provision. It is, however, well settled that the State
in all its actions, including contractual ones, must act fairly and
reasonably. It is also bound to comply
with the principles of natural justice.
The action on the part of the State, in
imposing penalty of a huge amount, thus, would deserve strict
constriction. The respondent as a State,
cannot indulge in unjust enrichment in terms of a contract qua contract. Its conduct cannot be arbitrary or
capricious. Its conduct even in the
matters involving contract qua contract should be just and proper. It should not take undue advantage of its
superior position as a licensor.
All the
petitioners were to receive a huge amount from the respondent. For all intent and purport, therefore, they
were not defaulters. While imposing
penalty on the petitioners, the respondent was required to keep this aspect of
the matter in mind.
Interpretation of the Penal Clause
The penal clause is attracted when :-
(i)
The license fee payable in four quarters of the Financial Year falls
short of more than 10%.
(ii)
The amount would be payable together with the amount within 15 days of
the date of signing the audit report on the annual accounts, failing which,
interest shall be further charged as per condition 3.5. If such short payment, however, is made good
within 60 days of the last date of the Financial Year, no penalty shall be
imposed.
(iii)
The license remains effective from 1st of April of a year to
31st of March of the next year.
There cannot be
any doubt or dispute that the question as to whether a stipulation in a
contract is by way of penalty or not must be answered in the background of
various factors namely, the rights and obligations, acquaintance from a
transaction, the intention of the parties, the real purpose of the stipulation,
the character of the transaction and its special nature, if any. The courts are required to take into
consideration the fact as to whether it may operate ‘in terrorem’ so far as a
promisor is concerned forcing him to perform the contract, in which event the
provision would be held to be penal in nature.
We may notice
that the Supreme Court of India in K.B.Subbarama Sastri V. K.S. Raghavan, AIR
1987 SC 1257; (1987) 2 SCC 424 opined that if on such comprehensive
construction, it is found that the real purpose for which the stipulation was
incorporated in the contract was by reason of its burdensome character, it may
operate ‘in terrorem’ over the promisor so as to drive him to fulfill the
contract, in which event, the provision would be held to be penal in nature.
We would deal
with the aspect of ‘in terrorem’ at some details a little later.
The question as to whether in a case
where a very large sum becomes immediately payable in consequence of
non-payment of a very small sum, should be considered to be a penalty or not,
came up for consideration in Kemble v.
Farren, [1824-34], All England Reporter Rep. Page 641 (at 642), wherein it
was held:-
“But that a very large sum should
become immediately payable in consequence of the non-payment of a very small
sum, and that the former should not be considered as a penalty, appears to be a
contradiction in terms; the case being precisely that in which courts of equity
have always relieved and against which courts of law have, in modern times,
endeavoured to relieve by directing juries to assess the real damages sustained
by the breach of the agreement.”
Yet
again, in Astley v. Weldon,
[1775-1802] All E.R. Rep., Page 606, it was held as under:-
“There is one case in which the
sum agreed for must always be considered as a penalty; and that is, where the
payment of a smaller sum is secured by a larger. In this case,
it is impossible to grable the covenants, and to hold that in one case
the plaintiff shall recover only for the
damages sustained, and in another that he shall recover the penalty :
the concluding clause applies equally to all the covenants. If anything is to be collected from the form
of this declaration, it should seem that the plaintiff meant to sue only for
the damages actually sustained. If he
had declared in debt and assigned breaches he would have been considered as
having made his election to proceed under the statute and by varying the form
of the action he shall not elude the statute.”
The
said principle was reiterated by the House of Lords in Bridge v. Campbell Discount Co., Ltd., reported in [1962] 1 All
E.R. Page 385 in the following terms:
“My Lords, if I am right so far,
the appellant has clearly committed a breach of the hire-purchase agreement by
failing to pay the subsequent instalments, and it becomes necessary to consider
whether the payment stipulated in cl. 9(b) of the agreement was a penalty or
liquidated damages.
The
essence of a penalty is a payment of money stipulated in terrorem of the
offending party; the essence of liquidated damages is a genuine covenanted
pre-estimate of damage.
See per
LORT DUNEDIN in Dunlop Pneumatic Tyre Co., Ltd. V. New Garage & Motor Co.,
Ltd. (4). I find it impossible to regard
the sum stipulated in cl. 9 as a genuine pre-estimate of the loss which would
be suffered by the respondents in the events specified in the same clause. One reason will suffice, though others might
be given. This was a second-hand car
when the appellant took it over on hire-purchase. The depreciation in its value would naturally
become greater the longer it remained in the appellant’s hands. Yet the sum to be paid under cl. 9 (b) is
largest when, as in the present case, the car is returned after it has been in
the hirer’s possession for a very short time, and gets progressively smaller as
time goes on. This could not possibly be
the result of a genuine pre-estimate of the loss. Further, in my view, the provisions of cl. 9
were “stipulated as in terrorem” of a the appellant. As counsel for the appellant put it” “They
are intended to secure that the hirer will not determine the agreement until at
least two-thirds of the price has been paid.”
The result is that the appellant is entitled to relief in accordance
with principles laid down by LORD THURLOW, L.C., in Sloman v. Walter(5).”
Bridge(supra),
has been followed in a large number of cases.
We may mention a few.
(1)
Lambark Ltd v. Excel [1964]1
Queen’s Bench, 415.
(2)
United Dominions Trust (Commercial) V Ennis (1967) 2 All E.R.345
(3)
Anglo Auto Finance Co V James (1963) 3 All E.R.566
Bridge (supra)
has also been followed interalia by Australian High Court in AMIV-UDC Finance
Vs. Austin (1987) 68 ALR 185 and IAC (Leasing) Vs. Hamphry (1971) 46 A.L.J.R.
106.
It is of some significance to notice that in Stockloser v. Johnson [1954]1 Queen’s Bench, Page 476,
a clause providing for special penalty over interest came up for consideration
before the Court of Appeal. It was
stated that the conduct of the defendant will have bearing when the effect of a
penal clause is in question.
Somervell, J., referring to Tindal, C.J’s., Summary of Law in Campbell (supra) stated the
law, thus—
“But that a very large
sum should become immediately payable, in consequence of the nonpayment of a
very small sum, and that the former should not be considered as a penalty,
appears to be a contradiction in terms. Therein a question arose as to whether
a vendor to whom payments of some instalments had been made by the vendee as a
part payment of the consideration should be entitled to retain the same because
of shortfall of a very small percentage of the consideration amount”.
It
was furthermore opined:-
“As it
seems to me, James, L.J. is assimilating the retention of instalments, if the
result would be penal in its nature, to a provision for the payment of a
penalty sum on a breach or breaches. It
is a question of the effect of the clause and not of the defendant’s conduct.”
It
was observed :-
“I am
not, of course, suggesting that the plaintiff’s readiness in case was not
relevant to the question whether relief should be given. I am only not satisfied that it is the sole
condition of relief. If the Judicial
Committee had intended to lay down this limitation it would have done so.
I think
rightly, that Farwell J. inclined to the narrower view and certainly treated
case as based on the readiness and willingness of the purchaser. On the other hand, I think that he took pains
to make it clear that on any view of the facts of that case he did not think
that unconscienability was established.
In the following passage he was clearly dealing with cases where the
penalty principle was invoked by the plaintiff seeking to recover back
money. He said : “In order to entitle a
plaintiff to relief from a penalty, it is necessary in my judgment for him to
show that there is some ground upon which it would be unconscionable in the
defendants to retain the money or the whole of the money. I find it difficult to see why, in a case of
this kind, it should be unconscionable on the part of the vendor, who has
contracted to part with his land on agreed terms, to enforce the contract if he
so desires. There may be special
circumstances in some cases, in which the court would take the view that it was
unconscionable, and that the plaintiff was accordingly entitled to relief, but
unless I can be satisfied that in this case there is something unconscionable
in what the defendants seek to do, in my judgment I have no jurisdiction to
grant any relief whatsoever. It should
be observed that this is not strictly a case of a penalty at all since the
payment in question was an integral part of the principal contract.”
It is of some
interest to note that Soh Kee Bun in an Article
titled ‘Deposits and Reasonable
Penalties’ published in 1997 Singapore Journal of Legal Studies, page 50, made a critical analysis of cases of
a large number of decisions involving forfeiture of a deposit which is
analogus to an action for penalty and opined that the principles stated in Stockloser v. Johnson should be
accepted not only on the basis of General Common Law Penalty Rule and General
Equitable Consideration but also on the basis of the principle of Restitution
of Unjust Enrichment and Transaction and Jurisdictional Differences, stating –
“It is
hoped that there will be greater acceptance of the broader approach in
Stockloser, so that it can be developed.
Because of the current position in England, some of the statements of
principle in Stockloser have, for want of better authority, been interpreted
almost as statutory provisions.
Ultimately, a general jurisdiction to deal with the forfeiture of money,
under whatever label, is logically unavoidable.
*85. However, there is a possibility that a 10%
deposit may, because of the lack of clear local judicial pronouncements, be
used as the starting point in many smaller common law jurisdictions like
Singapore. It is wrong in principle to
do so. Various factors have to be
considered in assessing reasonableness, and an obvious one would be the state
of the relevant market, which will vary from jurisdiction to jurisdiction. The property market can be used to illustrate
this. In a jurisdiction with stable
property prices, a 10% deposit would have a very different complexion from a
similar deposit in a jurisdiction with fast rising or fluctuating property
prices.”
Reference may also be made to Hugh Beale
on ‘Unreasonable Deposits’ published in 1993 Law Quarterly Review page 524-530
and A.J. Oakley on ‘Deposits : Still a Guarantee of Performance?’ in 1994
Conveyancer and Property Lawyer, page 100-109, and Lusina Ho on ‘Deposit:The
Importance of Being (An) Earnest’ published in 2003 Law Quarterly Review page
34.
The question of
unenforceability of a penal clause in the context of hire-purchase agreement arose
also in Anglo Auto Finance Company V. James [1963] Vol.III All E.R., page 566,
wherein a right to recover contained in Clause 5 of the agreement provided that
on determination, the hirer should pay “a sum equal to the amount…by which the
hire-purchase price (less the deposit, plus monthly instalments already paid)
exceeds the net amount realized by the sale of the….vehicle by the owner after
such determination. It was held to be a
penal clause.
The
agreement to pay interest is to pay on default at a higher rate of interest,
i.e., @ 5% over the Prime Lending Rate fixed by State Bank of India from time
to time; compounded monthly even for a fraction of a month.
Interpretation of Section 74
of Indian Contract Act came up for consideration before the Supreme Court of
India in Maula Bux Vs. Union of India (UOI) AIR1970SC1955, wherein it was categorically
held:
“7. Counsel for the Union, however,
urged that in the present case Rs. 10,000/- in respect of the potato contract
and Rs. 8,500 in respect of the poultry contract were genuine pre-estimates of
damages which the Union was likely to suffer as a result of breach of contract,
and the plaintiff was not entitled to any relief against forfeiture. Reliance
in support of this contention was placed upon the expression (used in Section 74
of the Contract Act), "the party complaining of the breach is entitled,
whether or not actual damage or loss is proved to have been caused thereby, to
receive from the party who has broken the contract reasonable
compensation". It is true that in every case of breach of contract the
person aggrieved by the breach is not required to prove actual loss or damage
suffered by him before he can claim a decree, and the Court is competent to
award reasonable compensation in case of breach even if no actual damage is
proved to have been suffered in consequence of the breach of contract. But the
expression "whether or not actual damage or loss is proved to have been
caused thereby" is intended to cover different classes of contracts which
come before the Courts. In case of breach of some contracts it may be
impossible for the Court to assess compensation arising from breach, while in
other cases compensation can be calculated in accordance with established
rules. Where the Court is unable to assess the compensation, the sum named by
the parties if it be regarded as a genuine pre-estimate may be taken into
consideration as the measure of reasonable compensation, but not if the sum
named is in the nature of a penalty.”
The Court
referred to in extenso from its earlier decision in Fateh Chand Vs.Balkishan
Das AIR1963 SC1405, to notice as under :
“this
Court in dealing with a case in which a claim for damages for breach of
contract to sell a lien of immovable property arose, pronounced that the
expression "the contract contains any other stipulation by way of
penalty" comprehensively applies to every covenant involving a penalty
whether it is for payment on breach of contract of money, or delivery of
property in future, or for forfeiture of right to money or other property
already delivered. Duty not to enforce the penalty clause but only to award
reasonable compensation is statutorily imposed upon courts by 74 of the Indian
Contract Act. In all cases, therefore, where there is a stipulation in the
nature of penalty for forfeiture of an amount deposited pursuant to the terms
of a contract which expressly provides for forfeiture the Court has
jurisdiction to award such sum only as it considers reasonable, but not
exceeding the amount specified in the contract as liable to forfeiture. The
same principles, in our judgment, would apply in the case in which there is a
stipulation in the contract by way of a penalty, and the damages awarded to the
party complaining of the breach will not in any case exceed the loss suffered
by the complainant party.”
It was observed
:
“The section
(Section 74) is clearly an attempt to eliminate the somewhat elaborate
refinements made under the English common law in distinguishing between
stipulations providing for payment of liquidated damages and stipulations in
the nature of penalty. Under the common law a genuine pre-estimate of damages
by mutual agreement is regarded as a stipulation naming liquidated damages and
binding between the parties : a stipulation in a contract in terrorem is a
penalty and the Court refuses to enforce it, awarding to the aggrieved party
only reasonable compensation. The Indian Legislature has sought to cut across
the web of rules and presumptions under the English common law, by enacting a
uniform principle applicable to all stipulations naming amounts to be paid in
case of breach, and stipulations by way of penalty.”
The Court also observed :
Section 74
declares the law as to liability upon breach of contract where compensation is
by agreement of the parties pre-determined, or where there is a stipulation by
way of penalty. But the application of the enactment is not restricted to cases
where the aggrieved party claims relief as a plaintiff. The section does not
confer a special benefit upon any party; it merely declares the law that
notwithstanding any term in the contract predetermining damages or providing
for forfeiture of any property by way of penalty, the Court will award to the
party aggrieved only reasonable compensation not exceeding the amount named or
penalty stipulated.
In P.
D'Souza Vs. Shondrilo Naidu (2004)6SCC649, it was held as
under :
“31. In M.L.
Devender Singh and Ors. v. Syed Khaja MANU/SC/0019/1973 : [1974]1SCR312 , the following statement of law
appears:
"The
question always is: What is the contract? Is it that one certain act shall be
done, with a sum annexed, whether by way of penalty or
damages, to secure the performance of this very act? Or, is it that one of the
two things shall be done at the election of the party who has to perform the
contract, namely, the performance of the act or the payment of the sum of
money? If the former, the fact of the penal or other like sum being annexed
will not prevent the Court's enforcing performance of the very act, and thus
carrying into execution the intention of the parties; if the latter, the
contract is satisfied by the payment of a sum of money, and there is no ground
for proceeding against the party having the election to compel the performance
of the other alternative.
From
what has been said it will be gathered that contracts of the kind now under
discussion are divisible into three classes:
(i) Where the sum
mentioned is strictly a penalty -a sum named by way of
securing the performance of the contract, as the penalty is
a bond:
(ii) Where the
sum named is to be paid as liquidated damages for a breach of the contract:
(iii) Where the
sum named is an amount the payment of which may be substituted for the
performance of the act at the election of the person by whom the money is to be
paid or the act done.
Where
the stipulated payment comes under either of the two first - mentioned heads,
the Court will enforce the contract, if in other respects it can and ought to
be enforced, just in the same way as a contract not to do a particular act,
with a penalty added to secure its performance or a sum named as liquidated
damages, may be specifically enforced by means of an injunction against
breaking it. On the other hand, where the contract comes under the third head,
it is satisfied by the payment of the money, and there is no ground for the
Court to compel the specific performance of the other alternative of the
contract."
In Dr. A.R. Biswas’s Encyclopedic
Law Dictionary the term ‘in terrorem’
has been defined as under:
“A condition in a will or gift
which is intended to frighten or intimidate the donee is said to be In terrorem. When a contract has been broken and the sum
named in the contract becomes payable for the breach or some penalty, the
plaintiff is entitled to reasonable
compensation or the penalty stipulated for. The reason is that the sum or the penalty has
been inserted in terrorem.
Section 74 of the Indian Contract Act 1872.”
What would be the
effect of a clause said to be in terrorem has been considered by the Apex Court
in a number of decisions. We would refer
to a few of them.
In
Steel Authority of India Ltd.Vs. Gupta Brother Steel Tubes Ltd., it has
been held :-
“The
Section is clearly an attempt to eliminate the sometime elaborate refinements
made under the English common law in distinguishing between stipulations
providing for payment of liquidated damages and stipulations in the nature of
penalty. Under the common law a genuine pre-estimate of damages by mutual
agreement is regarded as a stipulation naming liquidated damages and binding
between the parties: a stipulation in a contract in terrorem is a penalty and
the Court refuses to enforce it, awarding to the aggrieved party only
reasonable compensation. The Indian Legislature has sought to cut across the
web of rules and presumptions under the English common law, by enacting a
uniform principle applicable to all stipulations naming amounts to be paid in
case of breach, and stipulations by way of penalty.”
In P.K. Palanisamy Vs. N. Arumugham and Anr.
-2009 (10) SCALE 79, the law was laid down in the following terms:-
“Section 148 of the Code, in terms, allows extension of
time, even if the original period fixed has expired, and Section 149 is equally liberal. A fortiori, those
sections could be invoked by the applicant, when the time had not actually
expired. That the application was filed in the vacation when a Division Bench
was not sitting should have been considered in dealing with it even on
13-7-1954, when it was actually heard. The order, though passed after the
expiry of the time fixed by the original judgment, would have operated from
8-7-1954. How undesirable it is to fix time peremptorily for a future happening
which leaves the Court powerless to deal with events that might arise in
between, it is not necessary to decide in this appeal. These orders turn out,
often enough to be inexpedient. Such procedural orders, though peremptory
(conditional decrees apart) are, in essence, in terrorem, so that dilatory
litigants might put themselves in order and avoid delay. They do not, however,
completely estop a court from taking note of events and circumstances which
happen within the time fixed. For example, it cannot be said that, if the
appellant had started with the full money ordered to be paid and came well in
time but was set upon and robbed by thieves the day previous, he could not ask
for extension of time, or that the Court was powerless to extend it. Such
orders are not like the law of the Medes and the Persians. Cases are known in
which Courts have moulded their practice to meet a situation such as this and
to have restored a suit or proceeding, even though a final order had been
passed.”
Yet again in Niyaz Ahmad Khan Vs. Mahmood Rahmat Ullah Khan and Anr. 2008(8)SCALE635,
the Apex Court held:-
“Where the High Court chooses to impose any
conditions in regard to stay, such conditions should not be unreasonable or
oppressive or in terrorem. Adopting some arbitrary figure as prevailing market
rent without any basis and directing the tenant to pay absurdly high rent would
be considered oppressive and unreasonable even when such direction is issued as
a condition for stay of eviction. High Court should desist from doing so.”
In Prithvichand Ramchand Sablok Vs. S.Y.
Shinde AIR1993SC1929, the Apex Court observed:-
“The
defendant shall pay to the plaintiff a sum of Rs. 15,000/- and costs on or
before 31st December, 1993. If however, he fails to pay the said amount of Rs.
15,000/- with costs within the time stipulated, the plaintiff will be at
liberty to recover the entire sum of Rs. 20,000/- with interest and costs from
the defendant by executing the decree.The latter clause of such a decree will
clearly be in terrorem and, therefore, penal in character. No court will
execute the same.”
PAYABLE
Was there any shortfall is a question,
which must now be posed and answered. A
huge amount was owing and due from the respondent. A decree was passed by this
Tribunal in favour of the petitioner.
They were in possession of huge amount. The said amount was held in
trust. In some matters they preferred appeals before the Supreme Court of
India. In some matters they did so only
after a demand for refund of the said amount was made.
In some of the cases, as noticed
hereinbefore, adjustments of the amount lying in their hands was sought
for. The Supreme Court of India had not
stayed the operation on the judgment of this Tribunal. The interim order passed by it was confined
to adjustment of the amount. If the
respondent was not ready and willing to adjust, the amount, lying in its hands,
in view of the interim order passed by Supreme Court of India, should have been
refunded in terms of the judgment of this Tribunal. It failed and / or
neglected to do so.
Adjustment was made at a much later date
i.e. after the penalty was levied. The
respondent was therefore did not take a fair action, which should have been taken
by it, being a ‘State’ within the meaning of Article 12 of the Constitution of
India. It cannot deny level playing field with the private operators.
It is of some
significance to notice that interest on penalty has also been charged which
clearly demonstrate that the first part of clause 4.8 has been given effect to
by the respondent. It is well settled
that no damage is payable on damages by way of interest or otherwise in as much
as quantum of damages was required to be determined.
In Commissioner, Central Excise &
Customs V. ITC Ltd. reported in (2007) 1
SCC 62 the Apex Court has held as under :
“19. Section 11-A of the Act provides for a penal
provision. Before a penalty can be
levied, the procedures laid down therein must be complied with. For construction of a penal provision, it is
trite, the golden rule of literal interpretation should be applied. The difficulty which may be faced by the
Revenue is of no consequence. The power
under Section 11-A of the Act can be invoked only when a duty has not been
levied or paid or has been short-levied or short-paid. Such a proceeding can be initiated within six
months from the relevant date which in terms of Sub-section (3)(ii)(b) of
Section 11-A of the Act (which is applicable in the instant case) in a case
where duty of excise is provisionally assessed under the Act or the Rules made
thereunder, the date of adjustment of duty after the final assessment
thereof. A proceeding under Section 11-A
of the Act cannot, therefore, be initiated without completing the assessment
proceedings.
20. Ranganathan, J. in Ujjagar Prints (II) v.
Union of India [(1989) 3 SCC 488] defined the word "levied" in the
following terms:
"The word
"levied" is a wide and generic expression. One can say with as much appropriateness
that the Income Tax Act levies a tax on income as that the Income Tax Officer
levies the tax in accordance with the provisions of the Act. It is an
expression of wide import and takes in all the stages of charge, quantification
and recovery of duty, though in certain contexts it may have a restricted
meaning"
21. The
question as to non-levy or short-levy of an excise duty would arise only when
the levy had been laid in accordance with law.
When a duty is levied, it becomes payable which in turn would mean
legally recoverable.
22. In New Delhi Municipal Committee v. Kalu Ram
[(1976) 3 SCC 407], the word "payable" has been defined in the
following terms:
"The word
"payable" is somewhat indefinite in import and its meaning must be
gathered from the context in which it occurs. "payable" generally
means that which should be paid."”
See also State of Kerala & Ors Vs. V.R.
Kalliyanikutty & Anr : AIR 1999 SC
1305 and New Delhi Municipal Committee V. Kalu Ram & Anr : AIR 1976 SC 1637.
No amount in the
strict sense of the term was payable by the petitioner, and, thus, in our
considered opinion, the said decision will apply in all fours in the instant
case. Furthermore, the respondent could
not take advantage of its own wrong.
See B.M.Madani V. ITO : 2008 (13)
SCALE 329; :Chairman,
Indore Vikas Pradhikaran v. Pure Industrial
Cock and Chem. Ltd. and Ors. - AIR 2007SC 2458, M.R. Satwaji Rao (D) by L.Rs. Vs. B. Shama Rao (Dead) by L.Rs. and Ors. - AIR 2008 SC 2328, Chinthamani Ammal Vs. Nandagopal Gounder and Anr.- 2007(4)
SCC 163 and Raja
Ram Pal Vs. The
Hon'ble Speaker, Lok Sabha and Ors. - (2007) 3 SCC 184.
Natural Justice
In a case where the penal clause is
sought to be invoked, ordinarily the principles of natural justice should be followed.
There is nothing in the agreement to
indicate that application of the said salutory principle has been excluded either
expressly or by necessary implication.
The respondent did not give any
opportunity of hearing to the petitioners.
No show cause notice was issued.
Even the representations of the
petitioner, contending that no penalty could be levied on the amount lying in
the hands of the respondent should be adjusted, were not responded to.
There cannot be any doubt or dispute
that the petitioners were to suffer grave civil consequences. They were, thus, entitled to an opportunity
of hearing. Had such an opportunity been
given, the petitioners could demonstrate that they have not committed any
default in payment of the license fee as the shortfall was below the
permissible 10% limit.
In Rajesh Kumar & Ors v. Dy. CIT &
ors. [JT 2006(10) SC 76 : 2007 (2) SCC 181], it was held:
“15. Effect
of civil consequences arising out of determination of lis under a statute is
stated in State of Orissa v. Dr. (Miss)
Binapani Dei and Ors. [1967 (2) SCR
625]. It is an authority for the
proposition when by reason of an action on the part of a statutory authority,
civil or evil consequences ensure, principles of natural justice are required
to be followed. In such an event,
although no express provision is laid down in this behalf compliance of
principles of natural justice would be implicit. In case of denial of principles of natural
justice in a statute, the same may also be held ultra vires Article 14 of the
Constitution.”
(See
also V.K. Ashokan v. Asstt. Excise
Commnr. & Ors. [JT 2009(5) SC 104].
RETROSPECTIVITY
In some of these petitions, the levy of
penalty is in relation to a period much prior to the amendment made in the
agreement. By reason of such penal clause inserted in the terms of the said
agreement, a huge financial obligation has been laid on them. It, thus, could not have been given any retrospective
effect.
Any levy of penalty prior to the period
in question must, therefore, be held to be illegal and without jurisdiction.
An agreement should be construed to have
only a prospective effect and not a retrospective one. Even ordinarily a statute cannot be so
construed.
Instead of burdening this judgment with
a large number of case laws on the subject, it will be profitable to refer from
Principles of Statutory Interpretation by Justice G.P.Singh 11th
Edition page 497, which is to the following effect:
“Thus
to apply an amending Act, which creates a new obligation to pay additional
compensation, or which reduces the rate of compensation, to pending proceedings
for determination of compensation for acquisitions already made, will be to
construe it retrospective which cannot be done unless such construction follows
from express words or necessary implication.
Similarly, a new law enhancing compensation payable in respect of an
accident arising out of use of motor vehicle will not be applicable to
accidents taking place before its enforcement and pending proceedings for assessment
of compensation will not be affected by such a law unless by express words or
necessary implication the new law is retrospective. It makes no difference in application of
these principles that the amendment is by substitution or otherwise.”
In Shakti Tubes Ltd. Vs. State
of Bihar and Ors.,[2009(7)SCC673 it was held as under :
“24. Generally, an Act
should always be regarded as prospective in nature unless the legislature has
clearly intended the provisions of the said Act to be made applicable with
retrospective effect.
In support of the said proposition, the Apex Court
referred to the following passage from its earlier decision in Assam Small
Svale Industries Development Corpn. Ltd. v. J.D. Pharmaceuticals, (2005)13SCC
19:
“13.
It is a cardinal principle of construction that every statute is prima facie
prospective unless it is expressly or by necessary implication made to have a
retrospective operation. The aforesaid rule in general is applicable where the
object of the statute is to affect vested rights or to impose new burdens or to
impair existing obligations. Unless there are words in the statute sufficient
to show the intention of the legislature to affect existing rights, it is
deemed to be prospective only -- "nova constitutio futuris formam
imponere debet non praeteritis" -- a new law ought to regulate what is
to follow, not the past. (See Principles of Statutory Interpretation by
Justice G.P. Singh, 9th Edn., 2004 at p. 438.). It is not necessary
that an express provision be made to make a statute retrospective and the
presumption against retrospectivity may be rebutted by necessary implication
especially in a case where the new law is made to cure an acknowledged evil for
the benefit of the community as a whole (ibid., p. 440).
25.
In the case of Zile Singh v. State of Haryana : AIR2004SC5100 , the Court observed as
follows:
“15. Though
retrospectivity is not to be presumed and rather there is presumption against
retrospectivity, according to Craies (Statute Law, 7th Edn.), it is
open for the legislature to enact laws having retrospective operation. This can
be achieved by express enactment or by necessary implication from the language
employed. If it is a necessary implication from the language employed that the
legislature intended a particular section to have a retrospective operation,
the courts will give it such an operation. In the absence of a retrospective
operation having been expressly given, the courts may be called upon to
construe the provisions and answer the question whether the legislature had
sufficiently expressed that intention giving the statute retrospectivity. Four
factors are suggested as relevant: (i) general scope and purview of the
statute; (ii) the remedy sought to be applied; (iii) the former state of the
law; and (iv) what it was the legislature contemplated. (p. 388) The rule
against retrospectivity does not extend to protect from the effect of a repeal,
a privilege which did not amount to accrued right. (p. 392)
16. Where a statute is
passed for the purpose of supplying an obvious omission in a former statute or
to "explain" a former statute, the subsequent statute has relation
back to the time when the prior Act was passed. The rule against
retrospectivity is inapplicable to such legislations as are explanatory and
declaratory in nature. A classic illustration is the case of Attorney
General v. Pougett (Price at p. 392). By a Customs Act of 1873 (53
Geo. 3, c. 33) a duty was imposed upon hides of 9s 4d, but the Act omitted to
state that it was to be 9s 4d per cwt., and to remedy this omission another
Customs Act (53 Geo. 3, c. 105) was passed later in the same year. Between the
passing of these two Acts some hides were exported, and it was contended that
they were not liable to pay the duty of 9s 4d per cwt., but Thomson, C.B., in
giving judgment for the Attorney General, said: (ER p. 134)
‘The duty in this
instance was, in fact, imposed by the first Act; but the gross mistake of the
omission of the weight, for which the sum expressed was to have been payable,
occasioned the amendment made by the subsequent Act: but that had reference to
the former statute as soon as it passed, and they must be taken together as if
they were one and the same Act;’ (Price at p. 392)”
VSAT Contracts
The learned counsel in this matter
rightly contended that the provisions of the contract would clearly demonstrate
that no penalty can be levied for delayed payment of the spectrum charges as
the manner in which such payment was to be made is as prescribed by the DoT
from time to time.
There
cannot be any doubt that in view of the Order dated 16.4.2003 passed by the
respondent, in case of any delay in payment of spectrum charges only penal
interest was to be charged and not any penalty.
Clauses 1.8 and 1.9 of the amended license are, therefore, required to
be read conjointly. The Order dated
16.4.2003 passed by DoT, together with clauses 1.8 and 1.9 would reveal that
only in the event of delay in payment of license fee, the penal clause would be
attracted and not otherwise. Spectrum
charges, thus, being not license fee within the meaning of the agreement, no
penalty @ 150% of the shortfall could be levied.
For the reasons aforementioned, the
impugned demand cannot be sustained, which are set aside accordingly. The petitions are allowed with costs.
Counsel’s fees is to be assessed at Rs. 1,00,000/-
in each case.
.................J
(S.B. Sinha)
Chairperson
…………………
(G. D. Gaiha)
Member