CAG gets more power to audit even private firms

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The court added a caveat to the order, though: The CAG audit ought to be only on the telcos' receipts and no further. Reuters The court added a caveat to the order, though: The CAG audit ought to be only on the telcos' receipts and no further. Reuters
SummaryHC ruling in telecom case allows scrutiny of revenue, not expenditure.

In a ruling that legal experts say could fortify the Comptroller and Auditor General’s (CAG) constitutional prerogatives and open the accounts of private corporates to its supervisory audit, the Delhi High Court on Monday held that the CAG can audit such accounts as far as the question of the government’s “revenue” — that by definition flows into the Consolidated Fund of India — is involved. To quote from the verdict, “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 Comptroller and Auditor General of India.”

Dismissing a clutch of writ petitions filed by telecom industry bodies Cellular Operators Association of India (COAI) and Association of Unified Telecom Providers of India (AUSPI) challenging the Telecom Regulatory Authority of India and the sectoral auditor general’s directives to all telecom operators to disclose their account books to the CAG, the court said these fiats were perfectly constitutional.

The ruling, with received mixed reactions from top lawyers and perturbed the industry, could give ammunition to Delhi chief minister Arvind Kejriwal, who has announced a CAG audit of the capital’s electricity distribution companies’ expenditure in the wake of charges that they are overstating expenses.

The court added a caveat to the order, though: The CAG audit ought to be only on the telcos’ receipts and no further.

The apex auditor, the court cautioned, “would not confuse himself with his wide all-embracing power under Section 14(2) of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971, which includes inquiries into aspects like faithfulness, wisdom and economy in expenditures”.

The court held that auditing the annual gross revenue (AGR) of telecom companies was within the CAG’s rights as estimating the quantum of AGR was integral to verifying whether the government’s income as licence fee and spectrum usage charges are protected.

Upholding the view that the “general (state) revenue” would include not only taxes and duties but all the public money which the state collects and receives “from whatever source and in whatever manner”, the court said neither relevant Trai rules nor the pertinent sections of the CAG Act are ultra vires Article 149 of the Constitution.

“The Rule, the Section and the constitutional provisions as interpreted by us perfectly fit the critical features of the new emerging regulatory State,” a two-member bench of justices Pradeep Nandrajog and V Kameswar Rao said.

Holding that in contracts like the ones between the government and telcos, the latter as licensees are accountants for the government (as far as its revenue-share is concerned), the court said “...any interpretation of a regulatory law must keep in mind that primacy needs to be given to the fiduciary principles of good faith in dealing by the regulated especially when the regulated is the beneficiary of a natural resource and has to pay to the custodian of the natural resource money determined as a percentage of the revenue generated from the licensed activities by the regulated”.

Monday’s court order could potentially expand the CAG’s ambit to cover the accounts of private companies in various sectors using natural resources under contractual agreements with the government. The immediate impact of the order would, however, be on private telecom operators’ revenue-sharing details, beginning 2006-07. As per a 2009 audit, assigned by the telecom ministry and conducted by private audit firms, five leading operators — Bharti Airtel, Vodafone, Reliance Communications, Tata Teleservices and Idea Cellular — had understated revenues to the tune of Rs 10,268 crore in 2006-07 and 2007-08. Following these audits, the department of telecommunications had sent a penalty demand notice of Rs 1,600 crore to the five operators.

Telecom companies pay 6-10% of their AGR as licence fee and 3-8% as spectrum usage charges. Reporting lower revenue could bring down the amounts they have to share with the government. AGR is defined as the revenue earned by the telecom operators, excluding interconnection charges and roaming charges that are paid to other operators; and service tax paid to the government.

According to solicitor general of India Mohan Parasaran, the HC has enlarged the CAG’s jurisdiction to audit all public utilities discharging essential public functions. “After the RTI Act, except for national security, transparency has to be maintained in every sphere,” he said.

Senior lawyer Harish Salve said CAG audit for the purposes of ascertaining the government’s share of annual gross revenue is fair enough. “The CAG can definitely check whether the percentage of gross revenue given to the government has been properly calculated. However, the judgment will not have any bearing on other revenue departments (like those dealing with taxes) as they are being periodically audited,” he added.

Former additional solicitor general Vivek Tankha said: “Licence agreement will telecom companies and production-sharing contract with private oil companies are commercial contracts to develop a natural resource, which according to the apex court is a state’s wealth. It can’t be a completely private contract.”

Telecom companies, sources said, are likely to challenge the HC order in the Supreme Court, which will have to examine the issue in a larger commercial perspective including impact on foreign direct investment in India.

Ficci president Sidharth Birla said, “As far as audit by the CAG is concerned, we believe the CAG was constituted to be answerable to Parliament in respect of businesses which are owned by the government. So therefore, to my mind, there is no place for CAG interfering into a private company’s books.”

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