Dual Till, Light Touch Regulation and exclusion from liability to pay UDF by transit passenger; Telecom Tribunal’s decision deals a blow to BIAL

Telecom Disputes Settlement & Appellate Tribunal (TDSAT): S.K. Singh, Chairperson rejected the claims raised by Bangalore International Airport Pvt. Ltd. (BIAL) whereby it had challenged Tariff Orders passed by the Airport Economic Regulatory Authority (AERA) in respect of Kempegowda International Airport near Bangalore.

BIAL claimed more autonomy in determining various charges except the three which had been described as regulated charges under the Concession Agreement and more finances for its operations. Reliance in this regard was placed on Delhi International Airport Ltd. v. AERA, (AERA Appeal No.10 2012) by BIAL, wherein it had been held that a contractual right has to be recognized under law unless it is to be ignored as per express provisions in a statute or has to be disregarded on account of necessary implication flowing from the statute. In the case of DIAL, the Concession Agreement as well as the State support agreement to the extent they offered concession and created rights in the airport operator, were held to have legal force which could not be disregarded in exercise of powers under Section 13 of the Act.

Issues of Dual Till and Cargo, Ground Handling and Fueling (CGF)

BIAL, in addition to demand for SRT/Dual Till, pleaded for treating CGF (Cargo, Ground Handling and Fueling) activities as non-aeronautical services. It was the case of BIAL that even if CGF services were to be regulated as aeronautical services, revenue therefrom should be treated as non-aeronautical revenue because of the right granted by Article 10.3 of the Concession Agreement that the Airport Operator could determine all other charges.

Considering the submission of BIAL that by virtue of explicit list of regulated charges given in Schedule 6 of the Concession Agreement, Clause 10.3 of the Concession Agreement vested BIAL and/or Service Provider Right Holders the freedom to determine the charges in respect of other facilities and services provided at the Airport or on the site, without any restrictions, the Bench stated that but the right noted above was only to determine the charges and not to treat it as non-aeronautical charges. Section 13(1)(a) of Airports Economic Regulatory Authority of India Act, 2008 entitled the Authority to perform the function of determining the tariff for the aeronautical services taking into consideration various factors including the Concession Agreement. Hence,

“When the provisions in the Concession Agreement such as Clause 10.1 permit the operation of applicable law on the subject, AERA definitely got the right to determine the aeronautical services covered by CGF, more so in view of policy directive of MoCA for a dual Till regime.”

Since the policy change leading to dual Till had been held valid and binding on BIAL, the Bench held that as a natural corollary the CGF charges declared as aeronautical charges under such policy must come within the domain of AERA for determination of tariff in respect of such aeronautical services including the regulated charges covered by Schedule 6 of the Concession Agreement.

“Allowing a diarchy and leaving determination of tariff for CGF in the hands of BIAL after the creation of dual Till would also run counter to the International Civil Aviation Organisation policy.”

Issues relating to treatment of Land

BIAL was aggrieved by the AERA’s decision to consider revenues from land development activities akin to non-aeronautical revenues and to use its 30% towards cross-subsidization of Airport charges. BIAL contended that land development activities should be kept totally out of the ambit of tariff determination because AERA had no jurisdiction over such activities and Revenue from land development activities could not be included in non-aeronautical basket for usurping 30% for the purpose of cross-subsidization. The Bench opined,

“From the definition of “Airport” and “Aerodrome”, BIAL could not take any advantage because the Concession Agreement, the State Support Agreement and the land lease agreement did not show that land comprising the site was divided into two or more parts so as to confine the area of Airport to a limited extent.”

Since no such arrangement was made under any of the agreements, the claim of BIAL that there was additional land beyond the airport precincts over which AERA would have no legal Authority of regulation for tariff determination was rejected.

Issues relating to Pre-Control Period Losses

BIAL wanted the Authority (AERA) to take into consideration and provide to it the pre-control period losses with interest, approximately Rs.269 crores. The Authority noted that its powers were notified under the Act w.e.f. 01-09-2009 and since BIAL had not posted any losses in its Profit & Loss Statement for the period 2009-10 or 2010-11, hence there was no question of considering any pre-control period shortfall or loss for the purpose of determination of aeronautical tariffs.

The Bench opined that relevant facts, figures and accounts for the earlier period should had been gone into by AERA to find out whether there was any merit in the claim of BIAL. Since that had not been done, the claim for per-control period losses as determined in various parts of Para 5 of the tariff order for the First Control Period and virtually reiterated in the next tariff order were set aside for the purpose of remitting the claim back to AERA for fresh consideration on its own merits and in accordance with law and this order.

Issues relating to Capital Expenditure

The main issue raised by BIAL was whether the Authority had the jurisdiction and legal competence to impose a penalty of 1% of the cost of Terminal II-Phase1 if BIAL fails to commission the said work by March 2021 and to not consider any additional interest during construction (IOC)/Financing Allowance if the project is delayed beyond 31-03-2021.

AERA disclosed that on the basis of claim that the Terminal II Building would be completed by March 2021 as estimated by BIAL, the Authority agreed to treat the capitalization year for Terminal II-Phase 1 as 2020-21. This advantage to BIAL would be totally undeserved if the claim of BIAL that it would complete Terminal II-Phase 1 by end of March 2021 was not found correct. Hence, as a balancing exercise for allowing capitalization on the assurance of BIAL such a penalty which was nothing but reduction of ARR had been provided to ensure that such promise did not cause loss to the users and undue advantage to BIAL if the claim as to the time of completion was ultimately found incorrect.

Issues of exclusion from RAB

Regarding the grievance of BIAL that the Authority erred in disallowing Rs.69.45 crores from the value of assets involving capital expenditure only on the basis of report of EIL, the Bench opined that EIL was appointed by the AAI which is a 13% shareholder in BIAL and hence the Authority did not commit any error in accepting the report of EIL after sending the same to AAI which offered no objection to that report. Referring to the decision in DIAL’s case, wherein in similar circumstances the Bench had permitted reduction of cost of assets on the basis of expert report of EIL, the Bench stated that there was no good ground to doubt the correctness and reasonableness of the report.

Exclusion from liability to pay UDF by transit passenger

Earlier to the tariff order for the Second Control Period also transit/transfer passengers were granted exemption from levy of User Development Fee (UDF) at the Airport in question but earlier the qualifying time-limit for exemption was 6 hours. The impugned decision had enlarged the time limit to 24 hours. Aggrieved by fear of loss of UDF, BIAL had sought for setting aside of the decision granting exemption to all transit/transfer passengers who were transiting within 24 hours.

Rejecting BIAL’s apprehension that it would affect the availability of cash flow, the Bench was of the view that this aspect alone was not sufficient to warrant interference when it was bound to receive due attention of the Authority in a holistic manner.

Appreciating the intention of the Authority was to uniformly apply the period of 24 hours to all airports in India, the Bench opined that this would promote a healthy practice of standardizing the meaning of transit/transfer passengers exempted from payment of UDF/DF/Passengers Service Fee (PSF). Since there was no loss of revenue because the same would have to be verified and ultimately trued-up, the prayer of BIAL was rejected.

Quality of Service

BIAL objected that AERA could not monitor performance standards while passing a tariff order under Section 13(1)(a) of the Act and that in any case AERA had no jurisdiction to prescribe service quality parameters and it could not even monitor the quality of service when acceptable. Rejecting the contention of the BIAL, the Bench remarked,

“An impression is created by isolated reading of Section 13(1)(d) that the Authority can only monitor such performance standards relating to quality as have been set specifically by the Central Government or its authorized authority. But full reading of the provisions in the Act and the binding effect of the Concession Agreement easily lead to the conclusion that power under Section 13(1)(d) is an additional power and it does not take away powers and duties of the Authority to monitor quality of the services on the basis of current prevailing national and international practices and the standards.”

The Bench held that as a Regulator under the Act the Authority has heavy responsibility to keep an eye on the overall functioning and performance of the Airport for which adequate funds have to be provided through tariff formulation.

Expenditure on Corporate Social Responsibility (CSR)

BIAL had challenged the decision of the Authority which in effect disallowed the claim of BIAL and certain stakeholders that CSR expenditure should be allowed because it was a mandatory cost to be borne by the operator in view of statutory requirements. BIAL argued that the said decision should be set aside and expenditure on CSR as a cost pass-through should be allowed.

The Bench was of the view that there is no difference between expenditure towards CSR once it is mandated by law vis-à-vis expenditure in the nature of income tax which is allowed as a cost pass- through. Not allowing such cost would amount to indirectly lowering the percentage fixed as a fair return on equity, because if the impugned decision of the Authority was to be accepted, the expenditure towards CSR had to come out from such return allowed for the equity holders.

In view of the above, the grievance of BIAL in respect of expenditure on CSR was found to have merits and the impugned decision on the issue was set aside. The Authority was directed to pass consequential orders so that no loss due to reduction in determined fair return is caused to the equity holders on account of expenditure on CSR.

Light touch Regulation

During the first control period BIAL pleaded for grant of freedom to determine tariff for different aeronautical services subject to an overall price cap determined by the Authority which was rejected by AERA stating that for adopting light touch Regulation the relevant criteria were – (a) Materiality test; (b) Competitiveness test; and (c) Reasonableness test. Only on successful clearance of all the three tests, a Regulator, if permitted by the relevant statutes might adopt the light touch approach. So far as Airport business as a whole was concerned, according to AERA, the light touch approach would fail at least the competitiveness test because of obvious monopoly of the Airport operator BIAL for long number of years. Upholding the stand taken by AERA, the Bench remarked,

“It must be a holistic exercise by the Authority to protect the interest of all the stakeholders including general public as well as the Airport operator. Asking the Authority to leave such task in the hands of the Airport operator would amount to directing AERA to abdicate its statutory duties and functions.”

[Bangalore International Airport Ltd.(BIAL) v. Airport Economic Regulatory Authority of India, 2020 SCC OnLine TDSAT 339, decided on 16-12-2020]

Kamini Sharma, Editorial Assistant has reported this brief.

Appearance by:

For Appellant (BIAL): Mr. Gopal Subramanium, Sr. Advocate, Mr. Sajan Poovayya, Sr. Advocate, Mr. Manu Kulkarni, Advocate, Mr. Sriparna Dutta, Advocate, Ms. Shristi Widge, Advocate, Ms. Hima Lawerence, Advocate, Mr.Vishwas N., Advocate, Mr.Saransh Jain, Advocate, Mr.Pawan Bhushan, Advocate and Ms.Shloka Narayanan, Advocate

For Appellant(FIA): Mr. Buddy Ranganathan, Advocate, Ms. Divya Chaturvedi, Advocate and Ms. Srishti Rai, Advocate

For Respondent(AERA): Ms. Shweta Bharti, Advocate, Mr. Jyoti Kr. Chaudhary, Advocate Mr. Avinash Singh, Advocate and Mr. Ankit Jain, Advocate

For Respondent 2 (MOCA): Ms. Anjana Gosain, Advocate and Ms. Shalini Nair, Advocate

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