HUGHES COMMUNICATIONS INDIA LIMITED Vs UNION OF INDIA

Tender - Licence - Set off Clause - Letter of Intent not part of the bid and therefore, non-compliance thereof would not tantamount to not abiding by terms of the bid - Petitioner entitled not to accept the Letter of Intent if terms are altered by DoT- Clause 19 of Maharashtra Circle Licence, which provides for set off, cannot be invoked qua Karnataka Circle in the absence of Karnataka Circle Licence having been signed.

Petitioner Tata Teleservices (Maharashtra) Ltd. (for short Tata Teleservices) is the successor of Hughes Tele.com (India) Ltd. and is holder of a licence under Section 4 of the Indian Telegraph Act, 1885 (Act, for short) to establish, maintain and operate basic telephone service in Telecom Circle of Maharashtra and Goa (Maharashtra Telecom Circle). Hughes Tele.com (India)

Ltd. was also an applicant for grant of similar licence for Karnataka Telecom Circle. Even though issued with a letter of intent initially, it was not granted the licence for Karnataka Telecom Circle as some of its requests were under consideration. However, under the conditions for Notice Inviting Tender (clause 11) it had given Earnest Money Bank Guarantee (EMBG) for Rs.50.00 crores. Validity of the bank guarantee had been extended from time to time and lastly it expired on 21.3.99 without being invoked by the Union of India. It was thereafter that claim of Rs.50.00 crores in EMBG was raised by the Union of India by invoking the set off clause in the licence agreement for Maharashtra Telecom Circle. The Union of India also appropriated the amount of Rs.50.00 crores on the ground of alleged breach of terms of letter of intent issued for Karnataka Telecom Circle to Hughes Tele.com (India) Ltd. Thus in effect petitioner wants refund of Rs.50.00 crores with interest though prayer in the petition is unnecessarily elaborated.

The basic question that arises for consideration is if the claim of Rs.50.00 crores as alleged by Union of India could be set off, either legal or equitable and if at all the provisions of condition 19 of the licence of Maharashtra Telecom Circle were applicable in the present case to claim set off.

Before we proceed further, to consider the rival contentions of the parties we may set out clause 11 and condition 19 as aforementioned:

Clause 11 of the General Conditions set out in Section II of the Notice Inviting Tender required that the bidder should provide an Earnest Money Bank Guarantee (EMBG) in the sum of Rs.50 Crores together with the bid, without which the bid would be treated as incomplete and not liable for consideration. This clause 11 is as under:

“Earnest Money: The bidder shall enclose the original Bank Guarantee valid for six months (and extendible for a further period of six months) for each Service Area separately in a prescribed format issued by any scheduled bank towards Earnest Money as per the following: Category of Earnest Money per Service Are Service Area bid A Rs. 50 Crores B Rs. 25 Crores C Rs. 5 Crores

The Bank Guarantee submitted towards Earnest Money for a service area shall be forfeited and encashed by TELECOM AUTHORITY in case the bidder does not abide by his bid for the service area. No relaxation of any kind on Bank Guarantee towards Earnest Money will be given to any bidder. Bank Guarantee towards Earnest Money so deposited will be returned and released to bidders whose bids stand rejected. After issue of License, the bank guarantee for the earnest money will be returned to the selected bidders.”

Condition 19 provides for set off under which Union of India invokes its right to adjust Rs.50.00 crores paid by the petitioner under this licence for alleged dues of the Union of India under the alleged breach of term of letter of intent for Karnataka Circle. This condition 19 is as under:

“Any sum of money due and payable to the LICENSEE (including Earnest Money refundable to him) under this licence may be appropriated by the Government or any other person or persons including contracting through the Government of India and the same may be set off against any claim of the Government or such other persons for payment of a sum of money arising out of this licence or under any other licence made by the LICENSEE with the Government or such other person or persons including TELECOM AUTHORITY contracting through Government of India.” We may also note that Hughes Tel.com (India) Ltd. had also given Financial Bank Guarantee in the sum of Rs.50.00 crores and a Performance Bank Guarantee in the sum of Rs.25.00 crores for the Karnataka Telecom Circle which expired before these could be invoked. There is, however, no claim for that advanced by the Union of India. A great deal of stress has been laid by Mr. Maninder Singh, the counsel for Union of India on the right of Union of India for set off and also on the counter claim. After the notice was issued on the petition filed by Tata Teleservices, Union of India in the Department of Telecommunication filed its written statement.

Though in paras 40 to 43 of its preliminary submissions and counter claim, it claimed a sum of Rs.654.25 crores which included interest calculated upto 31.10.2002 as payable by the petitioner, there was no specific plea for that and it was merely stated in para 43 that the petitioner was obliged and duty bound to pay this amount. Rather in the prayer in the written statement it was stated that: “In view of the facts stated and submissions made hereinabove, it is most respectfully submitted that the present petition is wholly devoid of merits and deserves to be dismissed with exemplary costs. The respondent-DoT prays accordingly”. It will be appropriate to refer to paras 43, 44 and 45 of the preliminary submissions and counter claim of Union of India before its reply on merit and these paras are as under: “43: It is most humbly and respectfully submitted that the Petitioner is obliged and duty bound to pay to the respondent-DOT at least a sum of Rs.654.25 crores as its committed and binding licence fee obligation (including interest of an amount of Rs.433.35 crores calculated upto 31.10.2002), which amount the Government has lost on account of misleading attitude of the petitioner and the failure of the petitioner to honour its obligation to provide basic telecom services in Karnataka circle.

44. It is most respectfully submitted that the Government is fully entitled under the provisions of set off as per the understanding and documents between the parties and even otherwise under the provisions of general law, to recover all its dues from any telecom operator. Not only is this liability of the petitioner completely indisputable and the action of the respondent in setting off the said amount unimpeachable, but the petitioner owes a further liability to the Government as set out hereinabove, which it is obliged and duty bound to discharge. It is respectfully submitted that the present petition deserves to be dismissed and the petitioner deserves to be directed to deposit with the government the entire amount of committed license fee plus applicable interest. The respondent prays accordingly. 45. That without prejudice to the preliminary submissions/objections raised hereinabove the answering respondent is also filing a detailed parawise reply to the contents of the petition. Save & except that which is specifically admitted hereinafter, the contents of the petition under reply may be treated as wrong and denied. In Superintending Engineer & Ors. vs. B. Subba Reddy – (1999) 4 SCC 423, a question arose under the provisions of the Arbitration Act, 1940, as to the nature of cross-objections. It was held that cross-objection is a substantive right and not procedural in nature and that cross-objections are like an appeal and that the court fee is payable on cross-objection like that on the memorandum of appeal. Following that principle, it has to be held that a claim for counter claim is a substantive right and not procedural in nature. Section 16 of the Act prescribes the procedure and powers of the Appellate Tribunal. No right has been given to the Union of India to stake claim for counter claim in a petition filed by the petitioner seeking certain amounts as due from the Union of India, being a licensor. Thus, counter claim of the Union of India is otherwise not maintainable under these proceedings.

In its letter dated 10.8.99 DoT wrote to Tata Teleservices with reference to their letter dated 27.7.1999 wherein Tata Teleservices had conveyed their unconditional acceptance of the package for migration to NTP- 99 regime in respect of the licence for basic services in Maharashtra service area. In this letter of DoT demands were raised regarding Maharashtra Telecom Circle. In para 5, however, a demand was made for payment of Rs.50.00 crores with respect of basic service for Karnataka Circle which is as under: “5. You are also required to make payment of Rs.50 crores (Rs.Fifty Crores) in full on or before 16.8.99 being due from your company on account of your failure to sign Licence Agreement in respect of Basic Service for Karnataka Circle, for which LOI dt. 27.1.97 was issued to you”.

Tata Teleservices says that payment was made on the threat of cancellation of the licence of the Maharashtra service area though the demand of Rs.50.00 crores aforesaid was not due and payable and in fact it was a disputed demand. Tata Teleservices in their letter dated 6.9.199 to DoT said that the demand in respect of Karnataka Circle was not covered under the migration package inasmuch as no migration package had been offered with respect to Karnataka service area and there could not be any migration package as there was no licence granted for this area. To this DoT replied that it exercised its options under Condition No.19 claiming set off of the licence agreement relating to Maharashtra circle licence. At no stage in the correspondence DoT ever raised its demand of counter claim as now set out in the preliminary objections and counter claim in its written statement. No notice demanding this amount was ever issued to the Tata Teleservices and it does surprise us how all of sudden such a claim was made in the written statement. Be that as it may, we are unable to entertain any such counter claim and if Union of India has any right to recover this amount it has to take appropriate proceedings. Thus the claim for counter-claim is rejected keeping in view the law and facts of the case. Mr. Maninder Singh submitted that payment of licence fee for any basic service licence commenced immediately upon acceptance of Letter of Intent (LOI) by the licensee and that the liability to pay annual licence fee was never dependent upon the formal signing of the licence agreement. He referred to Special Condition ‘E.1’ of the LOI dated 27.1.97 which he said was accepted by the petitioner by its letter dated 24.2.1997. This Special Condition E.1 reads as under:

“E. Special Conditions:- 1) Licence fee for the first year for each service area calculated as per Clause 3 of Section V of tender document and as indicated in ‘A’ above shall be payable to the LICENSOR through Demand Draft drawn on any Scheduled Bank in New Delhi in favour of the Pay & Accounts Officer (HQRS), Department of Telecom, New Delhi before signing of Licence Agreement for the respective service area…..”

If we now refer to letter dated 24.2.97 of the petitioner it could not be correct to say that LOI was accepted unconditionally by the petitioner. In the last paragraph of the letter dated 24.2.97 the petitioner said as under: “Additionally, we are prepared to pay the License Fee and to execute the License and the Interconnect Agreement upon receipt of clarification of certain limited issues indicated to you previously in connection with the acceptance thereof dated October 18, 1996. Nothing has been said as to what was the response of the DOT to this request of the petitioner. It cannot, therefore, be said that there was unconditional acceptance of the terms of LOI. Moreover, the words in Special Condition ‘E.1’ quoted above, do not say that licence fee is payable immediately upon the acceptance of terms of conditions of LOI. The Special Condition ‘E.1’ merely states that licence fee for first year shall be payable before signing of the licence agreement and these words cannot be stretched to mean that licence fee would be payable merely on the acceptance of terms of LOI.

Separate tenders were invited for the telecom territorial circles. Each telecom territorial circle and the licence thereof was to be treated separately. Bids were to be given separately for each telecom circle and so also the earnest money/bank guarantee. As a matter of fact, clause 11 regarding earnest money which we have quoted elsewhere in the judgment provides for submission of bank guarantee for each service area separately.

Reference may be made to a few decisions cited by Mr. Maninder Singh in support of the claim of set off. In Union of India vs. KK.H. Rao – (1977) 1 SCC 583, it was held with reference to the facts of the case, that though the defendants were entitled under the terms of the contract to set off the damages against amounts due to the plaintiff on earlier contracts, it did not authorise forfeiture of security deposit made on earlier contracts and further that the plaintiff was liable for the actual loss suffered by the defendants owing to the breach of the contract. It is difficult to appreciate as to how this judgment is applicable to the facts of the present case. In Jasraj Inder Singh vs. Hemraj Multanchand – (1977) 2 SCC 155, the plaintiff was doing business with the defendant who was having two shops at different places. The defendant had dealings with the plaintiff at both the places and the dealings were inter-related to the extent that advances made at one shop were realised at the other. Yet the plaintiff filed suit for recovery of sums due in respect of one shop located at a particular place.

It was the defence of the defendant that the demand was untenable since he had supplied certain material to the plaintiff at that particular shop for the plaintiff to sell the same through other branch. The defendant said if those proceeds were taken into account, a larger sum will be found due to him in respect of that very shop regarding which suit was filed. Plaintiff had resisted the defence on the ground that sale of the material though supplied by the defendant was for a matter of his other shop and should not be mixed up with the shop regarding which suit had been filed. Trial court accepted the defence put up by the defendant but the High Court, on appeal filed by the plaintiff reversed that. On appeal filed by the defendant to the Supreme Court, it was allowed and the judgment of the trial court was restored. The Supreme Court observed (from head note): “Shops are not persons although suits may be filed in trade names. The trial Court took a commonsense view in commingling the business account of the same parties. This was good law. A plurality of shops owned by the same person does not proliferate into many shop-persons.

The artificial dissection of these transactions could not square up with the reality of the situation. The true nature of the action here is a suit on accounts for the sum due on striking a balance. That itself is the cause of action. (Paras 4 and 14) So if the present action is one on accounts and the various entries in the two shops at Khamgaon and Bombay involve transfusion of funds and goods, there is no reason why the Court should not accept as sound the approach made by the trial Court that the entirety of accounts in the two shops should be viewed as a composite one. It reduced litigation; it promoted the final financial settlement as between the parties; it has the stamp of reality. Procedure is the handmaid and not the mistress of justice and, in this spirit, the trial Court’s adjudication cannot be faulted. (Para 14)”

In Lakshmichand and Balchand vs. State of Andhra Pradesh – (1987) 1 SCC 19 Supreme Court referred to a full Bench decision of the Andhra Pradesh High Court in Bhoganadham Seshaiah vs. Budhi Veerabhadrayya – AIR 1972 Andhra Pradesh 134 which had examined at some length the circumstances in which such set off may be granted. The Court then said that there was no doubt that in certain cases a court has a power to allow set off even in cases which did not strictly fall within the terms of the Order 21 Rule 18 of the Code of Civil Procedure. In the case before the Supreme Court it said that the facts however, called for somewhat different consideration. The court then said: “8. In regard to the claim to adjustment on the second count the position is more controversial. The claim is founded in the doctrine of equitable set off, but we do not find evidence before us to bring the case within the operation of the doctrine. It is not a case where cross demands arise out of the same transaction or the demands are so connected in their nature and circumstances that they can be looked upon as part of the transaction. Nor can assistance be derived from Clause 71. The benefit of that provision can be claimed only if the amount sought to be retained is an ascertained sum, an amount which can be readily adjusted against the amount payable under the other contract. Here, the amount sought to be adjusted has yet to be determined as a liability against the contractor. It has been disputed by the appellant. Accordingly, Clause 71 cannot be invoked”.

As to what is the difference between the legal set off and equitable set off we may profitably refer to paras 24 and 25 of the full Bench decision of the Andhra Pradesh High Court in Bhoganadham Seshaiah case which was referred to by the Supreme Court as well:

“24. The distinction between the two has, however, to be borne in mind. The difference between the legal set off and an equitable set off is that while in the former case the Court is bound to entertain and adjudicate upon the plea when raised, the defence of equitable set off cannot be claimed as a matter of right, but the Court has a discretion to adjudicate upon it in the same suit of execution proceedings or to order it to be dealt with in a separate suit or execution proceedings. 25. From what is discussed above, it would be plain that equitable set off can be claimed in a case where cross-demands arise out of the same transaction as well as in cases where the cross-demands may not arise out of the same transaction but they are so connected in the nature or circumstances that it would be inequitable to allow one party to execute his decree driving the other party to separate proceedings of execution. No hard and fast rules can be laid down, nor it is desirable to do so as to in what circumstances in such cases equitable set off can be permitted. The granting of equitable set off rests in the discretion of the Court.

This discretion is a judicial discretion and we conceive that the dominant feature of judicial discretion is that it has to be exercised accordingly to settled rules rather than individual fluctuating and unsettled opinion. Thus where a Court thinks that investigation into the claim of equitable set off will cause great delay it may refuse to allow it or may order the enquiry to proceed on such terms as it thinks fit. Mr. C.S. Vaidyanathan, learned Senior Advocate appearing for the Petitioner laid too much stress on the “migration package” to fortify the claim made in the petition as according to him all the disputes between the parties i.e. Tata Teleservices got settled and any further demand after acceptance of “migration package” could not be raised. By letter dated 22.7.1999 addressed to all the Cellular Operators and Basic Service Operators Central Government offered a package for migration under New Telecom Policy-1999 regime. It is not necessary to refer to various terms and conditions mentioned in this letter except to note that the cut-off date for change over to NTP-99 regime was 1.8.1999.

The change over was from licence fee to revenue sharing regime. Now a licensee was required to pay one time entry fee and licence fee as a percentage share of gross revenue under the licence. It is not disputed that all the licensees accepted the terms and conditions of the package. Para 2 of the letter is relevant on which reliance was placed by Mr. Vaidyanathan and which we reproduce: “Migration to the NTP-99 on the conditions mentioned above will be permitted on the premise that the aforesaid conditions are accepted as a package in its entirety and simultaneously all legal proceedings in Courts, Tribunals, Authority or in Arbitration instituted by the licensee and Associations of Cellular and Basic Service Operators (COAI and ABTO) against DoT or UOI shall be withdrawn. Further any dispute with regard to the license agreement for the period upto 31.7.1999 shall not be raised at any future date. The acceptance of this package will be deemed as a full and final settlement of all existing disputes whatsoever irrespective of whether they are related with the present package or not”.

We, however, think that the claim of set off is under the terms of condition 19 of the licence of Tata Teleservices regarding Maharashtra circle and it has nothing to do with the “migration package”. Moreover “migration package” is separate for each licence with respect to the service area to which licence pertained.

Since it is the claim of set off it is for the Union of India to show as to how such a claim is sustainable. Let us see the sequence of events. In terms of the invitation to tender, Tata Teleservices submitted EMBG which was valid for six months and was extendible for a further period of six months. It is stated that by mutual agreement EMGB was extended till 21.3.99. Under the terms of clause 11 of the tender documents bank guarantee could be enforced “in case the bidder does not abide by his bid for the service area”. Assuming that there was such a breach where Tata Teleservices did not abide by its bid, the bank guarantee could have been enforced and the earnest money forfeited. This Union of India did not do during the validity of the bank guarantee period and it lost its right to enforce the same after the period of bank guarantee had expired. Union of India became remediless. Only if it could be said that the bank guarantee which was to be kept valid for agreed period was made invalid by certain act attributed to Tata Teleservices, then Union of India could claim the amount of bank guarantee in any separate proceedings even if the bank guarantee could not be enforced.

The claim in the present case for the right to enforcement of bank guarantee is stated to have arisen because after Tata Teleservices gave unconditional acceptance of letter of intent, it was bound to sign the licence agreement of Karnataka circle and in default the case fell within clause 11 of the tender documents resulting in right to enforce of EMBG. We have not been shown any clause in the tender document which provides that letter of intent would form part of the bid by the licensee and non compliance with LOI would tantamount to not abiding by the terms of the bid. Moreover, there has not been any unconditional acceptance of the letter of intent. It is also pleaded by Mr. Vaidyanathan that after the bid was made, substantial changes were made in the terms of tender to which Tata Teleservices was not bound and was within its right not to accept the altered terms. There has not been any satisfactory reply to this by the Union of India. Since the demand of Rs.50.00 crores though ascertained is disputed one, Union of India could not appropriate the same exercising its right of set off.

Even plea of equitable set off is not available inasmuch as, as noted above, licence for each telecom circle is separate and separate EMBG had been given. The decision of the Supreme Court in the Case of Jasraj Inder Singh vs. Hemraj Multanchand – (1977) 2 SCC 155 rather supports the case of Tata Teleservices. Now when we examine the terms of clause 19 in the licence regarding Maharashtra circle any sum of money due and payable to Tata Teleservices under the licence may be appropriated by the Central Government by way of set off against any claim of the Central Government and that could be done whether under this licence or any other licence made by Tata Teleservices to the Central Government. But then for the purpose to invoke this Condition 19 there has to be licence of Karnataka circle. Admittedly, there was none. Condition 19 is inapplicable.

This petition is, therefore, allowed. Central Government will refund the amount of Rs.50.00 crores with interest @ 17% per annum from the date the amount of Rs.50.00 crores was appropriated by the Central Government till payment. Petitioner will also be entitled to cost, counsel fee Rs.10,000/-.

………..…Sd/-……….J (D.P.Wadhwa) Chairperson

….………Sd/-………… (R.U.S. Prasad) Member

…..……Sd/-………….. (P.R.Dasgupta) Member