C & AG AUDIT ON PRIVATE TELECOM COMPANIES

[Mr. M. GOVINDARAJAN]

Section 4 of the Indian Telegraph Act, 1885 provides that the Central Government has the exclusive privilege of establishing, maintaining and working telegraphs. It further provides that the Central Government is empowered to grant a licence, on such 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.

Till the formulation of the National Telecom Policy, 1994 the Telecom is the monopoly in the hands of the Central Government.   The era of privatization and liberalization in India saw the dawn of the Telecom Policy, which amongst other things stressed on achieving the universal service, bringing the quality in telecom services to world standard, provisions of wide range of services to meet the customer’s demand at reasonable price and participation of corporate entries in the basic as well as value added telecom services; private operators to be competing with government operators.   For this purpose the Telecom Regulatory Authority of India was established by virtue of Telecom Regulatory Authority of India Act, 1997. The Authority is to ensure the compliance of the operators with the licence conditions.

It is the liability of the licencee to maintain the books of accounts as per Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002. The licencee is also to furnish a Statement of Revenue and licence fee for each quarter of the year as per Appendix II to Annexure II. The revenue generated is required to be shared with the Central Government on percentage basis as mentioned in the licence granted to the licencee. The purpose of ascertaining the quantum of revenue share the Central Government would be entitled to carry out such exercise in respect whereof provisions have been made in the respective licences granted.   Clause 22.3 of the licence confers a right upon the Central Government to ask the licencee to supply and provide for examination any books of account and for the said purpose the licencee is required to preserve all billing and other accounting records for a period of three years. The Central Government, under clause 22.4, is empowered to scrutinize the said books of accounts so as to facilitate independent verification therefore for the purpose of ascertaining the amount due to it as its share of the revenue.

Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002 provides that every service provider shall produce all such books of accounts and documents, referred to Rule 3(1) that has a bearing on the verification of the Revenue to the Authority-

• For the purpose of calculating license fee; and
• To furnish to the Comptroller and Auditor General of India the Statement or information, relating thereto, which the Comptroller and Auditor General of India may require to be produced before him and the Comptroller and Auditor General of India may audit the same in accordance with the provisions of Section 16 of the Comptroller and Auditor General’s (Duties, Powers and conditions of Service) Act, 1971’

Vide letter dated 28.01.2010 the TRAI addressed Reliance group companies intimating that the Comptroller and Auditor General of India has decided to audit the books of accounts of their company for the period of three years commencing from 2006 – 07 onwards to assessee the Government share out of the revenues carried by their company in terms of the licence agreements with DoT. It was requested that all necessary records/books of accounts circle/area-wise, on the maintenance of books of accounts and other relevant matters during the last week of January 2010 in the office of DO Audit, P&T, New Delhi, which would facilitate the audit work. It was further requested to extend their co-operation to the Branch Audit Offices and Delhi Office of DG Audit P&T for completion of the above audit work besides providing all necessary records/information/documents required in connection with the audit work. The company expressed its difficulty in providing the books of accounts in physical form as they are being maintained in electronic form in SAP R3. The same could be viewed in the concerned IT systems which would be made available at their head quarters, Mumbai. The Director General, Audit vide his letter dated 10.05.2010 requested to give a presentation covering the business activities, accounting policies, Accounting, billing and financial systems and all other issues relating to revenue share followed by brief interface meeting with their audit team on 20.05.2010.

The Audit team also addressed Tata Group of companies vide letter dated 21.5.2010 to produce their books of account for audit on the same line.

Against the order for audit by Comptroller and Auditor General of India the Association of Unified Telecom Service Providers of India and Cellular Operators of India with the private operators filed writ petitions before the Delhi High Court.  [2014 (1) TMI 661 - DELHI HIGH COURT]  The following are the contentions raised by them before the Court:

• Under Article 149 of the Constitution of India, the Comptroller and Auditor General in India is empowered only to audit the accounts of the Union and of the States as also of such authorities or bodies as may be prescribed by or under any law made by Parliament;
• The phrase ‘any other authority or body’ must be read in conjunction with the earlier part i.e., ‘the Union and the States’, meaning thereby, statutory authorities, government companies or entities financed by the Union or by the State;
• The private companies are outside the purview of Article 149 of the Constitution of India;
• Each clause, each phrase and each word in a statute has to be construed, not in isolation, but in the context and the scheme of the statute;
• Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002, is ultra vires;
• If a constitutional provision (Article 149) imposes restrictions on the power of a constitutional authority, no law made by Parliament can widen the said power;

The High Court analyzed Article 149 of the Constitution. A plain reading of Article 149 of the Constitution of India would reveal that it is the constitutional duty of the C&AG to perform such duties and exercise such powers in relation to the accounts of the Union and the States and of any other authority or body as may be prescribed by or under any law made by Parliament. In other words Parliament would be competent to frame a law on two subjects:

• The manner and scope of the audit pertaining to the accounts of the Union and the State; and
• Such other bodies or authorities accounts whereof would be subject to audit by the C&AG of India including the manner and scope of the audit.

The High Court observed that indeed, law has to be interpreted meaningfully, in pace with the development in society.   In a modern progressive society it would be unreasonable to confine the intention of the legislature to the meaning attributed to the words used at the time when the law was made unless a contrary intention appears.   Law has to be interpreted in the given new facts and situations and the existing words of the law have to be read as capable of comprehending new facts and situations.

The High Court did not see no scope for any argument of there being any conflict between Section 16 of the C&AG (Duties, Powers and conditions of Service) Act, 1971 and Article 149 of the Constitution of India.   They also did not see no scope for an argument to urge any conflict between Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002 and Section 16 of the C&AG (Duties, Powers and Conditions of Service) Act, 1971 for the reason, interpreting the contract the licencees are the accountant of the Central Government with respect to complete, accurate and honest maintenance of the books as to any transaction(s) involving revenue. Under the terms of the licence agreement the licencee has undertaken the accounting responsibility for the Central Government as well as itself.   Thus the accounts of the licencees, in relation to the revenue receipts can be said to the accounts of the Central Government and thus subject to revenue audit as per Section 16 of the C&AG (Duties, Powers and Conditions of Service) Act, 1971.

The High Court held that the power of the C&AG to conduct a revenue audit of the accounts drawn up by the licencees does not flow from Rule 5 of TRAI, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002 but flow from Article 149 of the Constitution of India and with the concept of revenue explained by the Court with reference to Article 266 of the Constitution of India, finding flesh and blood from Section 16 of the C&AG (Duties, Powers and Conditions of Service) Act, 1971.

The High Court concluded that neither Rule 5 of the TRAI, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002 is ultra vires Section16 of the C&AG (Duties, Powers and Conditions of Service) Act, 1971 nor is Section16 ultra vires Article 149 of the Constitution of India.   The Rule and the Section fits perfectly into the Constitutional Scheme of every rupee flowing into the Consolidated Fund of India, by way of revenue, to be audited by the C&AG of India.   The Rule, the Section and the constitutional provisions as interpreted by the High Court perfectly fit the critical features of the new emerging regulatory State which has to reconstruct institutions on the ruins of the club government requiring displacing the key feature of the club with standardization and formality; the provision of systematic information accessible both to insiders and outsiders and strengthening the control mechanism and public reporting.

The High Court further directed C&AG that the audit has to be only an audit pertaining to the receipts and no more. They would not confuse with their wide all embracing power under Section 14(2) of C&AG (Duties, Powers and Conditions of Service) Act, 1971 which includes inquiries into aspects like faithfulness, wisdom and economy in expenditures. A synergy between the two would be not only for the benefit of the industry, the economy of the country, the society at large but would go a long way in establishing public confidence in good Corporate Governance.