INTERNET WITH TELEPHONY

Transcription

1 INTERNET WITH TELEPHONY Introduction (1) Section 4 the Indian Telegraph Act 1885, gives the Central Government of India, exclusive privilege of establishing, maintaining and working of Telegraph (Now Telecommunications) operations in India. (2) Under the proviso to the said Section, the Government also had right to transfer to any person, this privilege, by way of granting License on such terms and conditions as deemed fit. (3) Accordingly, until the year 1994, providing of Telecom Services in India was solely held by the Department of Telecommunications, under the Ministry of Communications, Government of India. Thus, on 31 st March 1992, the country had 5.81 million basic telephone connections. About 80% of the network was operated by Department of Telecommunications (DoT) and 20% of the network was controlled by MTNL (in Delhi and Mumbai). (4) Nevertheless, due to considerable demand for telephones, and the resources of DoT were engaged only in providing basic telephony on priority basis, the demand could not be met. (5) Further, world over there was an increasing trend for privatization and greater liberalization. Hence, such trend was proposed to be introduced in India too. (6) In order to meet the growing demand for telecommunications, which could not be met by the DoT in an acceptable manner, in the year 1994, the Government announced the National Telecom Policy (NTP 94). NTP 1994 also recognized that the required resources for achieving these targets would not be available only out of Government sources and concluded that private investment and involvement of the private sector was required to bridge the resource gap. The

2 Government invited private sector participation in provisioning of services in a phased manner from the early nineties, and thus the Indian Telecom Sector was compulsorily opened to private participation by granting Licenses to the Telecom Companies registered under the Indian Companies Act (7) Cellular Mobile Telephone Service (CMTS) had already spread in many other countries through private sector efforts. Hence, in India too, initially, it was considered appropriate to open up CMS to private sector participation. (8) CMTS was introduced in India on a commercial basis in the four metro cities in the year 1994 and later to other Telecom Circles. (9) Later, for value added services such as Paging Services and Fixed Telephone Service (FTS) were also introduced. (10) After a competitive bidding process, licenses were awarded to 8 CMTS operators in the four metros, 14 CMTS operators in 18 State circles, 6 FTS operators in 6 State Circles and to paging operators in 27 cities and 18 State circles. VSAT services were also liberalized for providing data services to closed user groups. (11) The Internet Service Provider (ISP) Policy was announced in November 98. ISP Licenses, which prohibited telephony on Internet, were issued starting from on non-exclusive basis. Besides the above, other licenses including E- mail & Voice mail were also issued.. (12) The New telecom Policy (NTP) was announced in the year 1999 (NTP 99) took into account the far reaching technological developments taking place in the telecom sector globally and the Government s resolve to make India a global IT superpower. NTP, 1999 also sought to address the problems that were being faced by the existing Licensed Service Providers.

3 (13) The National Long Distance (NLD) Service was opened up for competition from and International Long Distance (ILD) Service was opened up for competition with effect from 1 st April, (14) The new telecom Policy envisaged opening of Internet Telephony whereupon the Government decided to permit ISPs to process and carry voice signals with effect from 1 st April It was allowed only to those who alone have applied. (15) In respect of ISP Licenses, License fee was waived up to and Re. 1/- per annum thereafter for those ISPs who obtain licenses prior to (16) With effect from License Fee is being 6% of AGR for ISP (IT) Operators (17) With effect from 24/08/2007, there was no distinction between ISP without Telephony and ISP with Telephony. All the ISP license holders were allowed to provide Telephony. (18) Definitions: (A) Internet Telephony International Telecommunication Union, Telecommunication Standardization Sector (ITU-T), Study Group 2 (SG 2) has given the following explanation for the term IP Telephony : IP is an abbreviation for Internet Protocol. It is a communications protocol developed to support a pocket switched network. The protocol has been developed by Internet Engineering Task Force (IETF). IP Telephony is the exchange of information primarily in the form of speech that utilizes a mechanism known as Internet Protocol.

4 There are two major categories for voice transmission over IP Networks based on the IP Network used and they are (i) Voice transmitted over Public Internet and it is termed as Internet Telephony. (ii) Voice transmitted over managed IP Networks and it is termed as Voice over IP (VoIP). The primary difference between voice service on managed and unmanaged IP networks is the quality of speech. However, the difference is being diminished with technological advancement, new coding techniques and availability of higher bandwidth as provided by Broadband connections. (B) Licenses: Telecom operators are required to obtain a license from DoT under Section 4 of the Indian Telegraph Act, The licenses issued by the Department can be broadly classified into three categories: i) Commercial licenses- are licenses under which telecom services are provided by the licensees to third parties. The commercial licenses include-basic, CMTS, UASL, NLD, ILD, IP-II, ISP & VSAT. The License fees are recovered as revenue share at a prescribed percentage of the Adjusted Gross Revenues (AGR). ii) Captive licenses- are licenses under which services are provided within the Closed User Group and the network is not connected to the Public Switched Telephone Network. These include-vsat, OFC links and, Microwave Links. The license fee is normally fixed per installation. iii) Other service Providers (OSPs) & IP-I-As per New Telecom Policy (NTP) 1999, OSPs such as tele-banking, tele-medicine, tele-trading, e-commerce etc will be allowed to operate by using infrastructure provided by various access

5 providers for non-telecom services. The Telecom Commission in May 1999, accorded in principle approval for registration of Call Centers, both International and Domestic, in the country under the above category. Later, services like Network Operation Centers and Vehicle Tracking Systems were also added to this category. These require only a Registration. No License fee is payable by the OSPs/IP-I. (C) Service Areas Based on Service Area of Operation, the Licenses are categorized as Category 'A', 'B' & 'C' as follows:- Category Category "A" Category "B" Category "C" Service Area Whole of India 20 territorial Telecom Circles, four Metro Districts- Delhi, Mumbai, Calcutta or Chennai and four major Telephone Districts- Ahmedabad, Bangalore, Hyderabad or Pune. Any Secondary Switching Areas (SSA) of DOT with geographical boundaries as on An applicant company may be granted any number of licenses and there will be no limit of number of licenses granted in a particular area. C category Licenses are presently abolished. The old Licenses will however be allowed to continue until the validity period. After expiry of validity period, these licenses will not be renewed again for Category C License. (D) BANK GUARANTEES Bank Guarantees are obtained to securitize the performance of the license conditions, inter-alia of payments of License Fees. Two kinds of Bank

6 Guarantees are envisaged under the various licenses (i) Performance Bank Guarantee (PBG) and (ii) Financial Bank Guarantee (FBG). (a) Performance Bank Guarantee (PBG) While the PBGs are in general for compliance to various terms of the license, including the roll out obligations under the license, the FBGs are obtained specifically to secure the future payments of license fee. In respect of PBGs the role of Finance branch is more of a custodian as the administration of these guarantees i.e. the value for which they have to be obtained, their reduction or invocation is done at the instance of concerned Licensing branch of the Department. Invocation of PBG may be done by LF branch if it is not renewed in time. Performance Bank Guarantee - Rs. 2 Crore for Category 'A' Service Area, Rs. 20 lakh for each Category 'B' Service Area and Rs. 3 Lakh for each Category 'C' Service Area. (b) Financial Bank Guarantee (FBG) Initially, the Licensee submits a FBG valid for one year, for a fixed amount as specified in each license. Thereafter, the FBG is to be furnished equivalent to the estimated sum payable for two quarters towards the license fee and other dues not otherwise securitized. The FBG on an ongoing basis shall be equivalent to two quarters license fee and calculated as twice of the arithmetic mean of last four quarters license fees enhanced by 10%. Any reduction from the initially prescribed levels shall be after receipt and review of two full quarter s estimate and report of AGR

7 Financial Bank Guarantee- Rs.20 Lakh for Category A Service Area, Rs.2 Lakh for Category B Service Area and Rs.50 Thousand for Category C Service Area (E) Gross Revenue: The Gross Revenue shall be inclusive of Internet access service, internet content service, Internet Telephony service installation charges, late fees, sale proceeds of terminal equipments, revenue on account of interest, dividend, value added services, supplementary services, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, without any set-off for related item of expense, etc. (F) Adjusted Gross Revenue (AGR) The following shall be excluded from the Gross Revenue to arrive at the AGR: (i) Charges from Internet access, Internet content and Internet access related installation charges. (ii) Service Tax on provision of service and Sales Tax actually paid to the Government if gross revenue had included as component of Sales Tax and Service Tax. As regards the component of Service Tax billed, collected and paid to the Government, it is stated that if the company had depicted the component in the Revenue and License Fee Statement then it has to be taken into account for the purpose of Assessment, else, if the same had not been shown by the Company in the Revenue & License Fee Statement, it need not be insisted upon and the Assessment be done directly without taking the component into account. In this context, Issue Number 6 and Clarification issued under DOT (HQ) letter from file No.1-28/2006/LF dated may be referred to.

8 (G) Other Income Other Income may be defined as any Other Income not included in the Gross Revenue of Revenue and License Fee Statement, however found to be directly or indirectly involved in earning Internet Revenue for the Company and finds place as Revenue earned in the P&L A/c of the Company. If however for certain Other Incomes shown as Revenue in the P&L A/c but not taken in the Gross Revenue of Revenue and License Fee Statement on account of certification given by the Company Auditors as not forming part of Internet Revenues, such Revenues may be omitted from the purview of Other Income. (H) License Fee On grant of a license, a License Fee is charged over the period of the License, as a percentage share of Adjusted Gross Revenue (AGR). The License Fee includes Universal Service Levy (USL) at 6% of the AGR. (LF 1 % + USL 5 %) For ISP Licenses there would be Six Cases for Assessment of License Fee and they are as follows. Cases (i) If the Company holds the License prior to 24/08/2007, but has not started Commercial Service of ISP or ISP (IT) Service the Licensee must submit Audited NIL AGR Statement, along with a certificate of noncommencement of Commercial ISP/ISP (IT) Service issued by the Company Auditors. (ii) If the company had started Commercial Service of ISP (IT) prior to 24/08/2007, the License Fee is to be assessed in the normal 6% of Adjusted Gross Revenue. (iii) If however, the Company had started Commercial Service of ISP prior to 24/08/2007, but yet to start ISP (IT) Service, the Licensee is required to submit the Audited AGR Statement along with the Certificate of non-

9 (iv) commencement of Commercial ISP (IT) Service issued by the Company Auditors. In such cases, the company is liable to pay License 6% of AGR calculated on the component of eligible Other Income earned during the said Financial Year. If the Company has signed the License Agreement after 24/08/2007, but has not started Commercial Service of ISP/ ISP (IT), the Licensee must submit Audited NIL AGR Statement, along with a certificate of noncommencement of Commercial ISP Service issued by the Company Auditors. However, in such cases, the Licensee has to pay annual minimum License Fee of Rs.50, 000/- for A Category License and Rs.10, 000/- in respect of B category License. (v) In respect of License Agreement signed after 24/08/2007 if the Company has started Commercial Service of ISP (IT), the License Fee is to be assessed in the normal 6% of Adjusted Gross Revenue, subject to Annual License annual minimum of Rs.50,000/- for A Category License and Rs.10,000/- in respect of B category License. (vi) If however, in respect of License Agreement signed after 24/08/2007, but started ISP Service, but yet to start commercial ISP (IT) Service, the Licensee is required to submit the Audited AGR Statement along with the Certificate of non-commencement of Commercial ISP (IT) Service issued by the Company Auditors. In such cases, the company is liable to pay License 6% of AGR calculated on the component of eligible Other Income earned during the said Financial Year subject to Annual License a minimum of Rs.50,000/- for A Category License and Rs.10,000/- in respect of B category License.

10 (vii) Assessment Procedure The following documents are required to be submitted by a company for the purpose assessment of License Fee for any particular year. Audited Revenue and Licence Fee Statements for each quarter separately for the said year. Audited Reconciliation Statement reconciling the difference of Revenue between the Figure of Gross Revenue depicted in the P&L Account and Audited statement of Revenue and Licence Fee for the said year. Audited Profit and Loss Account and Audited Balance Sheets along with schedules for the said year. The Annual Reports of the Company for the said year. The details of LF Paid periodically for each quarter during the said year. Details of Service Tax, Sales Tax billed, collected and paid to the government. Note: Audited here means that The Quarterly Revenue & License Fee Statement should be signed by the Auditors and not merely a Certificate of Audit attached to the Revenue and License Fee Statement. (19) Factors Governing Other Income The Definition of AGR and the Factors governing Other Income are at the evolution stage only and the definitions coined by the DOT have not been accepted by the Telecom Operators. They challenged the issue in the TDSAT. As the verdict of TDSAT dated 30/08/2007 on the issue was not acceptable to the DOT, the DOT made an appeal in the Supreme Court against the TDSAT Judgement dated 30/08/2007 and obtained interim stay order in the case. The hearing is still carried on and until the final Judgement is delivered, the components taken now for AGR and Other Income

11 by the DOT will hold good.views taken by the TDSAT, DOT and TRAI on different components to be taken under AGR and Other Income are given below:

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13 (20) Reconciliation Statement A reconciliation between the figures appearing in the quarterly statements submitted in terms of the clause 13.4(A)(d) of the agreement with those appearing in annual accounts shall be submitted along with a copy of the published annual accounts audit report and duly audited quarterly statements, within 7 (seven) Calendar days of the date of signing of the audit report. (21) Interest Clause Any delay in payment of Licence Fee payable, or any other dues payable under the LICENCE beyond the stipulated period will attract interest at a rate, which will be 5% above the Prime Lending Rate (PLR) of State Bank of India prevalent on the day the payment became due. The interest shall be compounded monthly and a part of the month shall be reckoned as a full month for the purposes of calculation of interest. A month shall be reckoned as an English calendar month. Provided that in respect of the licence fees accruing on or after First April, 2005, the rate of interest shall be the prime lending rate (PLR) of the State Bank of India (SBI) existing on the first day (namely 1 st April) of the concerned financial year plus two percent (2%). (22) Penalty clause In case, the total amount paid as quarterly Licence Fee for the 4 (four) quarters of the financial year, falls short by more than 10% of the payable Licence Fee, it shall attract a penalty of 150% of the entire amount of short payment. However, if such short payment is made good within 60 days from the last day of the financial year, no penalty shall be imposed. This amount of penalty shall be payable within 15 days of the date of signing the audit report on the annual accounts, failing which interest shall be further charged per terms of Condition 13.4 (A)(e). Provided that in respect of the licence fees accruing on or after First April, 2005, the rate of penalty shall be fifty percent (50%).

14 (24) Assessment of License Fee Case (i) If the Company holds the License prior to 24/08/2007, but has not started Commercial Service of ISP or ISP (IT) Service, the Licensee must simply submit Audited NIL AGR Statement, along with a certificate of non-commencement of Commercial ISP/ISP (IT) Service issued by the Company Auditors. Case (ii) If the company had started Commercial Service of ISP (IT) prior to 24/08/2007, the License Fee is to be assessed in the normal 6% of Adjusted Gross Revenue. Company X Determination of AGR ( in Rupees) for the year Description Qtr-I Qtr-II Qtr-III Qtr-IV Total Gross revenue from AGR statement 1,745,741 3,899,707 4,618,680 5,100,575 15,364,703 Deductions:- Revenue from Internet Access Service 41, , , , ,472 Revenue from internet content service Service Tax paid to the Govt 189, , , ,320 1,656,816 Total deductions. 231, , ,750 1,025,677 2,558,288 AGR Stated By the Company 1,513,969 3,418,618 3,798,930 4,074,898 12,806,415 Add: Excess Deductions Claimed for Internet Access Service 4,561 11,893 32,632 49,221 98,307 Unreconciled Difference 385, , ,254 1,036,446 3,257,298 Total Additions 389, , ,886 1,085,667 3,355,605 AGR as per DoT for levy of Licence fee 1,903,606 4,300,033 4,797,816 5,160,565 16,162,020 License 6% 114, , , , ,721

15 Case (iii) If however, the Company had started Commercial Service of ISP prior to 24/08/2007, but yet to start ISP (IT) Service, the Licensee is required to submit the Audited AGR Statement along with the Certificate of non-commencement of Commercial ISP (IT) Service issued by the Company Auditors. In such cases, the company is liable to pay License 6% of AGR calculated on the component of eligible Other Income earned during the said Financial Year. Company Y LTD Determination of AGR ( in Rupees) for the year Description Qtr-I Qtr-II Qtr-III Qtr- IV Total Gross revenue from AGR statement excluding Service tax 2,103,450 1,276,051 1,607,777 62,219 5,049,497 Deductions:- Revenue from Internet Access Service 2,103,450 1,276,051 1,607,777 62,219 5,049,497 Revenue from internet content service Total deductions. 2,103,450 1,276,051 1,607,777 62,219 5,049,497 AGR as stated by the Company Add: Other Income 14,958 9,074 11, ,907 AGR as per DoT for levy of Licence fee 14,958 9,074 11, ,907 License 6% ,154 Case (iv) If the Company has signed the License Agreement after 24/08/2007, but has not started Commercial Service of ISP/ ISP (IT), the Licensee must submit Audited NIL AGR Statement, along with a certificate of non-commencement of Commercial ISP Service issued by the Company Auditors. However, in such cases, the Licensee has to pay annual minimum License Fee of Rs.50, 000/- for A Category License and Rs.10, 000/- in respect of B category License.

16 Case (v) In respect of License Agreement signed after 24/08/2007 if the Company has started Commercial Service of ISP (IT), the License Fee is to be assessed in the normal 6% of Adjusted Gross Revenue, subject to Annual License minimum of Rs.50,000/- for A Category License and Rs.10,000/- in respect of B category License. Example as in the case of Case (ii) above but the Annual License Fee should minimum of Rs.50,000/- for A Category License and Rs.10,000/- in respect of B category License. Case (vi) If however, in respect of License Agreement signed after 24/08/2007, but started ISP Service, but yet to start commercial ISP (IT) Service, the Licensee is required to submit the Audited AGR Statement along with the Certificate of noncommencement of Commercial ISP (IT) Service issued by the Company Auditors. In such cases, the company is liable to pay License 6% of AGR calculated on the component of eligible Other Income earned during the said Financial Year subject to Annual License a minimum of Rs.50,000/- for A Category License and Rs.10,000/- in respect of B category License. Company Z Ltd (Determination of AGR in Rupees) Description Qtr-I Qtr-II Qtr-III Qtr-IV Total Gross revenue from AGR statement (Only Other Income) , , ,189 Deductions:- Revenue from Internet Access Service Revenue from internet content service Service Tax paid to the Govt Total deductions AGR as stated by the Company , , ,189 AGR as per DoT for levy of Licence fee , , ,189 License 6% ,805 7,846 29,651

17 (25) Other Income Other Income A Ltd Gross Income as per P&L A/C Sales/Services Revenue (Incl. Taxes) 18,622,663 Other Income Total Gross Revenue 18,646,190 Less Revenues Relating to Pondicherry License as per Reconciliation Statement ,189 Gross Revenue of Chennai License ,622,001 Gross Revenue as per Revenue and License Fee Statement ,364,703 Un Reconciled Difference 3,257,298 X Operational Revenue for the year ,806,415 Y Operational Revenue for First Quarter ,513,969 A Operational Revenue for Second Quarter ,418,618 B Operational Revenue for ThirdQuarter ,798,930 C Operational Revenue for Fourth Quarter ,074,898 D Total Operational Revenue 12,806,415 Distribution of Other Income to Each Quarter Amount First Quarter (= A*X/Y) Second Quarter (= B*X/Y) Third Quarter = (C*X/Y) Fourth Quarter =(D*X/Y) Total

18 (26) Interest Clause (In Rupees) Details of payments , , , , Quarter to LF Amount due Amount received From Period To Rate Time (in months) Monthly Intt 114,216 90, ,501 23,378 13, , , , , to , , , ,263 27, , ,060 76, , , to , , , ,196 30, , , , , , to , , , ,336 26, , ,876 Total 969, , ,336

19 (27) Penalty Clause Calculation of Penalty:- Revenue Share due for ,721 Interest due as on ,713 Amount paid upto ,838 Principal due as on ,336 Shortfall 878,883 Total due as on ,050 10% of Revenue Share 96,972 Penalty and interest on penalty 583,993 Penalty 50% of Shortfall 439,442 Total Dues as on ,043 Date of signing of Audit Report Interest rate applicable Interest due period to Number of months 28 Interest due in rupees 144,551 Total Penalty/Interest due 583,993 Conclusion I hope that the explanation and example given above are sufficient to calculate License Fee dues in respect of any ISP/ ISP (IT) License. In case of doubts, you can rightfully seek clarifications from the DOT (HQ). It may be however kept in view that the assessments made above is provisional only subject to final verdict of definition of AGR pronounced by the H ble Supreme Court of India on the issue. Thank you