AGR: Curious case of how Airtel, Vodafone Idea paid lower than DoT’s estimated dues

After the Supreme Court ordered telecom operators to pay the dues related to Adjusted Gross Revenue (AGR), Bharti Airtel, Vodafone Idea and Tata Teleservices have deposited money based on their respective calculations.

However, the amount paid by the three operators is much lower than the initial estimate made by the Department of Telecom (DoT).

While Airtel has paid only 34.5 per cent of the DoT’s provisional dues, Vodafone Idea and Tata Teleservices have given 40.6 per cent and 16 per cent respectively.

DoT’s assessment of dues from Bharti (including Telenor) stands at ₹37,700 crore. The company has however paid a total of ₹18,000 crore, including an ad-hoc ₹5,000 crore as an additional amount to cover differences, if any, arising from the reconciliation exercise with the DoT. The period of self-assessment done by Airtel spans from FY2007 till the end of December 2019, and includes accrued interest till February 29, 2020.

In the case of Vodafone Idea, the DoT had pegged the dues at ₹53,000 crore. But the company’s self-assessment pegs the total AGR liability at ₹21,533 crore. The period of self-assessment is the same as Bharti Airtel. The company has paid Rs 3,500 crore towards this liability so far.

Tata Teleservices’ self-assessment pegs the AGR liabilities at ₹2,197 crore versus the DoT’s assessment of ₹13,800 crore. The company has paid a total of ₹4,197 crore to the exchequer, including ₹2,000 crore ad-hoc additional amount in line with what Airtel has paid.

So why is there a divergence in the estimates made by the DoT and the self-assessment done by the operators?

Absence of documents

Analysts at Kotak Institutional Equities reckon that this could be due to a lack of adequate documentation.

“We understand that allowable set-offs against revenues were disallowed by the DoT often due to the absence of documentation or even absence of documentation in a particular format. We find this rather surprising, and understand that clarity has only emerged on this over the past few years. The biggest of such disallowed items includes interconnect charges — these have been allowed as a deduction in the AGR by all authorities, including the Supreme Court. Proper documentation of interconnect payouts has allowed operators to now calculate the correct AGR,” said a research report from Kotak.

Analysts at ICICI Securities said that certain deductions were disallowed by the DoT owing to the absence of documents. The proper documentation would allow AGR to decline post the adjustment for these deduction versus the calculated made by the DoT.

“We understand the biggest difference is on account of interconnection charges not allowed to be deducted in the absence of documentation. In fact, for the longest time, there also seems no clarity on how such charges would be demonstrated and clarity seems to have been emerging on this only in the last few years,” ICICI Securities said.

Accounting differences

There could be accounting differences too. The DoT requires license fee to be paid on cash basis versus the accounting on an accrual basis that operators follow. This has also caused differences in amounts and timing of payout of such amounts.

“We also understand that some of the prior period demands may have had items, which were duplicated, double-counted, permitted expenses not considered fully even if a small portion is disputed,” the Kotak report said.

A recent media report said that the DoT is facing a challenge in carrying out the assessments due to various issues related to deduction verification reports (DVRs). Telecom operators have been submitting two separate audited details of deduction towards interconnection usage charges and roaming fee to the DoT.

In one set, deductions have been claimed by telecom operators on a paid basis, while they on the other hand have claimed on an accrual basis.

The expenses or pass-through allowed to be deducted from the gross revenue is based on cash accounting. Any deduction on accrual has been entirely disallowed by DoT for working AGR thereby, increasing AGR amount.

“Tata Communications, in its earnings release, has mentioned it has received AGR dues notice of ₹66 billion of which ₹54 billion was disallowed by the DoT towards cost adjustment to gross revenue claimed on accrual basis instead of actual (cash). Notably, we understand even on a small outstanding in the bill, the entire bill has been disallowed for deduction by the DoT,” said ICICI Securities.

Another round of legal battle

Industry watchers said that the divergence in the amounts could buy more time for the beleaguered operators. “It took nearly 15 years to get finality on whether the operators have to pay or not. Now the question is how much they have to pay. The difference in DoT’s estimates and the operators’ calculation could mean that this would lead to another round of legal battle. That should give the operators at least a year before the court settles it,” said an industry executive.

Analysts at Kotak believe that the path forward could involve an independent audit by the CAG and/or one of the big-4 auditing firms.

Even here if the final amount is much higher than the self-assessment made by the operators, it could end up in courts. The Supreme Court has asked the DoT to give a status report on the dues collected on March 17.

It is not clear how it will look at the telecom operators paying amounts lower than the DoT’s assessment.

“The SC may not rule on the quantum of the dues. Technically, the TDSAT is equipped to handle such a dispute. TDSAT has earlier ruled in favour of the operators in this AGR matter, so the operators could be hoping for relief if the case lands up there,” said another industry expert.

Analysts at Kotak believe that there is a case for better disclosures on the math from both the DoT as well as the operators.

“While we appreciate the matter is still sub judice, once the legal chapter is over, Bharti and VIL could (and should) disclose their self-assessment workings highlighting the areas of difference versus the DoT math. Even as this isn’t a statutorily mandated disclosure, we believe the minority shareholders deserve to know. A detailed explanation of the math post the closure of the legal proceedings is a must, in our view. It would go a long way in inspiring confidence among the minority investors,” Kotak report said.