The Supreme Court of India has declared that the Comptroller & Auditor General of India (“CAG”) has the power to call for and audit the accounts of private companies who are parties to revenue sharing arrangements with the Government in order to ensure that the Government was receiving the revenue lawfully due to it. The ruling was delivered on April 17, 2014 by a bench comprising of Justice K.S. Radhakrishnana and Justice Vikramajit Sen in the case of Association of Unified Tele Services Providers & Others v. Union of India.
The Supreme Court verdict directly affects private companies who are presently parties to revenue sharing arrangements with the Government, particularly companies engaged in the business of telecommunications, mining natural resources, public private partnerships involving infrastructure projects and private entities engaging in any transaction which would require them to credit a revenue receipt to the Government of India/State Government or Government of a Union Territory.
The appellants in the case were the Association of Unified Tele Services Providers. It is an association comprised of licensees of unified access service licenses. On 28.1.2010 the Telecom Regulatory Authority of India (“TRAI“) addressed a letter to one of the service providers stating that the CAG has decided to audit the books of accounts of the service provider for a period of three years commencing form 2006-2007. The service provider responded to this letter on 15.4.2010 stating that the service provider was already undergoing a special audit by an independent auditor appointed by the Department of Telecommunications. The service provider further stated that the auditing powers of the CAG under the Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 (“CAG Act”) pertain only to the accounts of government companies and therefore the CAG could not order an audit on the service provider. The TRAI in its letter dated 21.5.2010 to one of the service providers stated that the audit by the CAG was being done in terms of Section 16 of the CAG Act and the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts) Rules 2002 (“TRAI Rules”) and therefore was independent of any audit being conducted by TRAI.
Section 16 of the CAG Act and Rule 5 of the TRAI Rules state the following:
“16. It shall be the duty of the Comptroller and Auditor-General to audit all receipts which are payable into the Consolidated Fund of India and of each State and of each Union Territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks fit and report thereon.”
Every service provider shall produce all such books of accounts and documents, referred to in sub-rule (1) of rule 3, that has a bearing on the verification of the Revenue, to the Authority –
(i) for the purpose of calculating license fee; and
(ii) 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 (56 of 1971).”
The appellants moved the Delhi High Court in WP 3673 of 2010 for a declaration that Rule 5 of the TRAI Rules was ultra vires of Section 16 of the CAG Act and Article 149 of the Constitution of India as the said provisions did not cover private entities under their scope.
Article 149 of the Constitution of India states:
“Article 149- Duties and powers of the Comptroller and Auditor General
The Comptroller and Auditor General shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States and of any other authority or body as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States as were conferred on or exercisable by the Auditor General of India immediately before the commencement of this Constitution in relation to the accounts of the Dominion of India and of the Provinces respectively.”
The Delhi High Court while dismissing WP 3673 of 2010 stated that the accounts of the service providers, in relation to the revenue receipts can be said to be the accounts of the Central Government and, thus, subject to a revenue audit under Section 16 of the CAG Act.
The Appellants thereafter moved the Supreme Court challenging the order of the Delhi High Court.
The Supreme Court upheld the order of the Delhi High Court and dismissed the appeal.
The Supreme Court observed that Section 16 of the CAG Act, Rule 5 of the Rules and Article 149 of the Constitution need to be understood in light of the fact that ‘spectrum’ is a natural resource, which belongs to the nation as a whole, and as such, the people through Parliament should know how the country’s natural resources have been dealt with by the Union, State or its instrumentalities or even by private licence holders.
The Court went on to state that parliamentary debates that refer to Article 149 of the Constitution in a restrictive sense may not be the sole criteria to be adopted by a court while examining the meaning and content of the said Article, since its content and significance has to vary from age to age, and generation to generation. Therefore the Court interpreted the provisions of the Constitution as well as the CAG Act in their widest amplitude.
The Court made reference to Article 266 of the Constitution of India which states that “all revenue receipts by the Government of India” shall be credited into the Consolidated Fund of India. The Court reasoned that license fees and spectrum charges are revenue receipts that will be credited to the Consolidated Fund of India in terms of Article 266. These license fees being based on the gross revenue of the companies, the CAG is empowered by Section 16 of the CAG Act to audit the same.
Harmoniously reading Article 149 and Article 266 of the Constitution with Sections 16 and 18 of the CAG Act and Rule 5 of the TRAI Rules, the Supreme Court concluded that the CAG is empowered to call for the accounts of private service providers to verify if the Government has received its lawful share of revenue. Accordingly the audit powers of the CAG in this case would be limited to a revenue audit rather than a full audit.
While the Court’s decision was rendered in the specific context of a regulation which permitted the CAG’s examination of the accounts of service providers, based on the observations of the Court related to the nature of natural resources and the importance of CAG’s oversight on whether revenue sharing is accurate, it would be possible to conclude that even absent such a specific provision, the CAG will have the right to examine the accounts of a company which has been allotted the right to exploit a natural resource and which has a revenue sharing arrangement with the Government.
Ajay Kumar (firstname.lastname@example.org)
Neha Vijayvargiya (email@example.com)