DELHI INTERNATIONAL AIRPORT LTD. v. AIRPORT ECONOMIC REGULATORY AUTHORITY OF INDIA & ORS.

A instead shift onto the stakeholders, which is contrary to the object of the aforementioned provision. DIAL and MIAL had voluntarily submitted to pay 45.99 per cent and 38.7 per cent of their total revenue as Annual Fee respectively. Thus, even assuming that a deduction of the Annual Fee would lead to ‘T’ remaining zero, the same would only be a result of choices made by the Airport Operators with respect to their commitment towards Annual Fee percentage.

109Copy pinpoint109. FIA and AERA urged that the treatment of corporate tax under ‘T’ could be contrasted with the formula for Weighted Average Cost of Capital (for short ‘WACC’), which is another separate component of the TR formula. The definition for WACC notes that the “marginal rate of corporate tax” must be taken. Thus, in the context of ‘T’, had the intention of the drafters been to compute only the notional tax and not the actual tax liability, they would have clearly specified as they did in the case of WACC. Our Rationale: D

110Copy pinpoint110. Our thought process on the aforesaid plea has given rise to a conundrum – whether we should adopt the course taken in respect of the other issues where we lay emphasis on the view adopted by AERA and the Tribunal, or whether we should follow the principle enunciated in Nabha Power to read the contract strictly in its terms.17 E

111Copy pinpoint111. No doubt, it is a principle of taxation that it is the actual tax which is paid and which has to be taken into account. This is what the AERA and the TDSAT have done ostensibly on the premise that there should not be any undue enrichment of the Airport Operators. However, to our mind, the more important factor is to look at what the contract F says and whether some other construction would be required to be given to the contract.

112Copy pinpoint112. If we turn to the express language of ‘T’ in Schedule 1 of the SSA the wordings are clear and unequivocal. The determination has to be made of “corporate taxes on earnings pertaining to Aeronautical G Services” (emphasis supplied). ‘T’ is part of a formula. No doubt it refers to taxation, but how it would apply to the formula has to be determined from the definition of ‘T’ and not from how generally ‘tax’ is understood. These are complex formulas settled by experts and various factors weigh in arriving at them. 17 (supra). H

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113Copy pinpoint113. In the overall scenario, it is the TR which is crucial where A ‘T’ is only a component. No one is saying that a different methodology and not the common practice has to be followed for payment of tax. It is for the component ‘T’ to be calculated in the formula for TR that ‘T’ has been defined. ‘T’ has to be computed based solely on regulatory accounts prepared by AERA for the TR formula. If the Annual Fee is the component which is taken out of aeronautical services, the definition of ‘T’ would have to be read completely differently.

114Copy pinpoint114. The focus of all stakeholders has resulted in a particular formula in with various components whereby aeronautical services are controlled. Non-aeronautical services are more revenue generating aspects. In order to balance the interest of the other stakeholders with the Airport Operators, 30 per cent of the non-aeronautical revenue is subtracted from the aeronautical revenue. In this larger philosophy, it would be imprudent and contrary to the express terms of the contract to seek to re-define any component other than the manner in which it is specifically mentioned. To that limited extent, Mr. Datar was right in invoking the principle of business efficacy as that was the result intended by the parties.

115Copy pinpoint115. Article 3.1.1 of the SSA mandates that Annual Fee shall not be considered as a cost in relation to provision of Aeronautical Services. The question thus arises is that if it is so, then how can tax be computed any differently. In our view, the clause has to be read as a whole. It forms part of a proviso, which reads as under: “3.1.1 GOI’s intention is to establish an independent airport economic regulatory authority (the “Economic Regulatory Authority”), which will be responsible for certain aspects of regulation (including regulation of Aeronautical Charges) of certain airports in India. GOI agrees to use reasonable efforts to have the Economic Regulatory Authority established and operating within two (2) years from the Effective Date. GOI further confirms that, subject to Applicable Law, it shall make reasonable endeavours to procure that the Economic Regulatory Authority G shall regulate and set/ re-set Aeronautical Charges, in accordance with the broad principles set out in Schedule 1 appended hereto. Provided however, the Upfront Fee and the Annual Fee paid / payable by the JVC to AAI under the OMDA shall not be included as part of costs for provision of Aeronautical Services and no H

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A pass-through would be available in relation to the same.” (emphasis supplied).

116Copy pinpoint116. The first part of the proviso is clear in its terms that upfront fee and the Annual Fee paid/payable by the Airport Operators to AAI under the OMDA shall not be included as part of costs for provision of B Aeronautical Services. There is no doubt a second part to it which states that “no pass-through would be available in relation to the same”. It is the latter part which is sought to be emphasised in the decision-making process of the AERA. This is because if the first part is implemented there will be an element of pass-through. However, if we were to accept the view of the AERA, it would be in a sense amount to nullifying the first part of the proviso. No construction should be given to a contract where the first part itself is nullified by a reading of the latter part. This clause is more general in its terms. Pass-through would not be permitted in normal circumstances as per the clause. However, insofar as the tax element is concerned, there appears to be an exception because of the manner in which the ‘T’ in the formula itself has been derived. Qua the Annual Fee, the SSA does not contemplate a subtraction from the expenses. There is also no direct extraction from other stakeholders qua the annual fee and thus there is no pass-through. This would also be harmonious construction of the clauses of the contract so that one part of it does not do violence to the other. E

117Copy pinpoint117. Thus, the aforesaid is the only aspect on which we are inclined to interfere with the impugned orders and find merit in the contention of the Airport Operators that the Annual Fee paid by them should not be deducted from expenses pertaining to aeronautical services before calculating the ‘T’ element in the formula. F

118Copy pinpoint118. We now come to remaining issues raised in the appeals filed by FIA and Lufthansa. Development Fee:

119Copy pinpoint119. The Development Fee (for short ‘DF’) concept does not G form part of OMDA or SSA, neither did it form part of the Act initially. The cost of development of the airport overshot the estimated budgets. Vide its order dated 09.02.2009, the Central Government had permitted DIAL to collect DF at Rs. 200 per departing domestic passenger and Rs. 1300 per departing international passenger, inclusive of applicable taxes, in terms of Section 22A of the AAI Act. This was on an ad-hoc H

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REGULATORY AUTHORITY OF INDIA [SANJAY KISHAN KAUL, J.]

basis for a period of 36 months with effect from 01.03.2009. The aforesaid A order mentioned two milestones upon which this approval was to be reviewed at a subsequent stage by AERA. A similar order of the Central Government was made with respect to MIAL on 27.02.2009 although with different amounts of DF.

120Copy pinpoint120. These orders were the subject of challenge in Civil Appeal B Nos. 3611/2011, 3612/2011, 3613/2011, and 3614/2011 before this Court. It was held in Consumer Online Foundation & Ors. v. Union of India & Ors. that the order dated 09.02.2009 was ultra vires the AAI Act.18 Further, it was noted that no DF could be levied or collected from embarking passengers at major airports under Section 22A of the AAI Act unless the AERA had determined the rate of such DF. AERA vide C Order No. 28/2011-12 dated 08.11.2011 issued on 14.11.2011 determined the DF as Rs. 200 per embarking domestic passenger and Rs. 1300 per embarking international passenger commencing from 01.12.2011 for a period of 18 months.

121Copy pinpoint121. In the case of MIAL, AERA determined the DF at Rs. 100 D per embarking domestic passenger and Rs. 600 per embarking international passenger with effect from 01.01.2013 until April 2021. The TDSAT vide the impugned orders dated 20.03.2020 and 16.07.2020 chose not to interfere with either of the AERA orders.

122Copy pinpoint122. The DF has been subsequently discontinued by DIAL with effect from 30.04.2016. Thus, the dispute pertains to only that particular window.

123Copy pinpoint123. The said Act initially did not contain any reference to this aspect. However, in terms of Act 27 of 2019 vide S.O. No.3445(E) dated 19.09.2019, sub-section (1A) was incorporated in Section 13 of the said Act with effect from 26.09.2019. Section 13 of the said Act deals with the functions of authority and falls in Chapter III, i.e. “Powers and Functions of the Authority”. The inserted sub-section (1A) reads as under: “[(1A) Notwithstanding anything contained in sub-sections (1) and G (2), the Authority shall not determine the tariff or tariff structures or the amount of development fees in respect of an airport or part thereof, if such tariff or tariff structures or the amount of

18 (2011) 5 SCC 360. H

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A development fees has been incorporated in the bidding document, which is the basis for award of operatorship of that airport: Provided that the Authority shall be consulted in advance regarding the tariff, tariff structures or the amount of development fees which is proposed to be incorporated in the said bidding document B and such tariff, tariff structures or the amount of development fees shall be notified in the Official Gazette.]”

124Copy pinpoint124. Mr. Buddy Ranganathan learned counsel for FIA, however, did not press this issue insofar as imposition of DF is concerned per se. Cargo and Ground Handling Services:

125Copy pinpoint125. FIA was aggrieved by the TDSAT’s treatment of Cargo and Ground Handling Services as non-aeronautical in nature. It was contended that the AERA in the DIAL Tariff Order had treated such revenue as aeronautical for the period from 01.04.2009 to 24.11.2009 as DIAL was performing these services by itself. For the remainder of the First Control Period, this was held to be non-aeronautical. The TDSAT D vide impugned order dated 23.04.2018 had held that these revenues would be non-aeronautical in nature irrespective of whether such services were performed by DIAL itself or through its delegates. In the case of MIAL, the TDSAT vide order dated 15.11.2018 noted that the treatment of Cargo and Ground Handling Services had already been conclusively E decided in its previous order dated 23.04.2018 and was not an issue that survived for determination.

126Copy pinpoint126. FIA submitted that Cargo and Ground Handling Services were contemplated to be aeronautical in nature, and referred to the definition under Section 2(a) of the said Act and Schedules 5 & 6 of OMDA. FIA also sought to rely on the Parliamentary Standing Committee F Report on the AERA Bill 2007 to fortify its stand.

127Copy pinpoint127. However, on the pointed query of the Court as to whether these contentions had been urged by the FIA before the TDSAT in the same manner, learned counsel for FIA candidly confessed that they were not. This particular line of argument had never been advanced before G the AERA and the appellate authority and that closes this issue. Levy of User Development Fee (UDF):

128Copy pinpoint128. AERA in the MIAL and DIAL Tariff Orders had allowed UDF to be charged on embarking as well as disembarking passengers. This finding was affirmed by the TDSAT in its order dated 23.04.2018. H

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Lufthansa in the present appeal contended that such levy was not contemplated in the said Act. The AERA and the TDSAT had erroneously traced the source of this levy to Section 13(1)(b) of the said Act, which referred only to AERA’s power to determine the DF. This was to be differentiated from the levy of the UDF, which was a separate fee. The plea was that the DF having been determined under the aforesaid provision, there could not be subsequent determination of another UDF.

129Copy pinpoint129. We may say that not a very serious argument was made in this behalf other than the aspect of two different nomenclatures. We agree with AERA’s reasoning that the expression ‘UDF’ is mentioned in the Aircraft Rules, 1937, and is different from Section 13(1)(b) of the said Act which contemplates ‘DF’ only. Thus, the AERA had been mandated to determine the UDF. Nothing more is really required to be discussed on these aspects. Conduct of AERA:

130Copy pinpoint130. One of the last-minute arguments sought to be advanced by D Lufthansa was on the aspect of AERA failing to discharge its duty as per the mandate of the said Act by not determining the tariff in a reasonable and efficient manner. The grievance can be summarized as under: a. AERA had simply adopted DIAL’s submissions and proposals E in its tariff order without considering objections by stakeholders. b. AERA granted meetings to DIAL on 13.12.2011, 29.12.2011, 30.12.2011 and 02.01.2012. However, other stakeholders were granted only one meeting. This was not consonant with the due consultation process envisaged in Section 13(4) of the said Act. F c. Figures presented by DIAL were not independently verified by AERA due to paucity of time. There were also no independent studies carried out by AERA and instead, things were left to be trued-up as a matter of course.

131Copy pinpoint131. We are unable to appreciate this contention for the reason G that all stakeholders were heard. The orders of the AERA and the TDSAT are more than exhaustive on all aspects and the authorities had endeavored to perform their roles. We may say that the very aspect which we have not appreciated in favour of the Airport Operators, i.e., their attempt to somehow reduce their liability equally applies to Lufthansa which H

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A somehow wants to reduce their outflow on different aspects. AERA had recognized that their determination was in the nature of an initial pioneering flight based on the material available, and fine-tuning could always be done in the future. We do appreciate that the aviation industry is competitive in nature but that holds both for the airline and the Airport Operators. It is a delicate balancing role which has to be performed by B the authorities. That role having been performed, the general grievances really do not survive. Project Cost:

132Copy pinpoint132. An aspect seriously debated before us was with respect to C Project Cost, which kept on escalating from the original estimate. The Project Cost is taken as the base figure for determination of the Regulatory Asset Base. Thus, an increase in the Project Cost leads to a higher tariff determination by AERA. FIA has raised the issue of Project Cost, which is a ground for challenge in CA Nos.10902/2018 and 6658-6659/2019 i.e., appeals qua the challenge to the DIAL and MIAL Tariff Orders, as D well as in CA Nos.3675/2020 and 145/2021, i.e., appeals qua the challenge on DF and fixation of Project Cost. The findings sought to be assailed by FIA are primarily as contained in the TDSAT order dated 20.03.2020 at paragraph 88 in respect of the first set of appeals and the TDSAT order dated 23.04.2018 passed in DIAL’s appeal.

133Copy pinpoint133. On analysis of the AERA order dated 08.11.2011, what emerges is that the issue of DF was dealt with on account of the increase in costs, the proposal of DIAL to levy DF was accepted to bridge the gap. The upward revision of Project Cost was accepted by AERA to be Rs.12,502.66 crores. AERA relied upon the reports of KPMG and F Engineers India Limited (EIL) and expressed its inability to explore the matter further on grounds of the auditors themselves having not been able to further identify losses in monetary terms. Thus, it is this figure of Rs.12,502.66 crore, which has been used for determination of aeronautical tariff at IGIA.

134Copy pinpoint134. FIA contended that even if the Project Cost of Rs.8,975 crore (projected by DIAL to MOCA as reflected in the Central Government’s letter dated 09.02.2009) is accepted as proper and final, its further increase to Rs.12,503 crore should have been discarded by AERA. A 43 per cent increase had been claimed by DIAL in the 4th year of operation of the IGIA. Reliance was placed on the Development H Fee order dated 08.11.2011 to comment that while the Project Cost in

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REGULATORY AUTHORITY OF INDIA [SANJAY KISHAN KAUL, J.]

that order had been accepted as Rs.12,502.86 crores only as a tentative estimate, the same figure has been accepted almost as final in the impugned tariff order.

135Copy pinpoint135. AERA sought to rebut these contentions before the TDSAT. It was contended that the avowed task of determining the Project Cost could only be looked at from a narrow hole – i.e. in order to examine the incurred cost as per available records and verify whether it relates to the approved and essential parts of the Airport. This in turn had to be taken on the basis of accounts bearing certificates granted or approved by the Chartered Accountant. It was vehemently argued that such cost cannot be re-examined on the yardstick of efficient cost but has to be taken as the incurred cost only, as appearing in the duly certified books of accounts. The aforesaid plea of the AERA found favour with the TDSAT and was accepted.

136Copy pinpoint136. If we turn to the TDSAT’s order dated 20.03.2020, this aspect has been dealt with in paras 22, 23 & 24. It was held that the AERA could not have had much latitude in dealing with rising Project Costs as it had little or no scope to do so within its limited statutory role under the said Act. The TDSAT found that AERA had referred to the reports of the two experts and had consulted with all stakeholders, who had been given sufficient opportunity to make their submissions. This would meet the requirement of Section 13(4) of the said Act which requires AERA E to ensure transparency in exercising its powers and discharging its functions. The only caveat put by the TDSAT was that the exclusions mandated by AERA from DIAL’s project cost to the tune of Rs. 354.14 crores should be allowed. The TDSAT’s order dated 16.07.2020 with respect to MIAL’s Project Cost held that no new grounds had been raised and the issue stood settled in DIAL’s case. F

137Copy pinpoint137. Both FIA and Lufthansa argued on the same lines before us by contending that while determining the figures of Project Cost, AERA selectively chose comments from the auditors reports (KPMG and EIL) relating to specific cost adjustments, but failed to take cognizance of DIAL’s overall failure of cost control and monitoring. AERA had failed G to recognize that a higher project cost would lead to a higher regulated asset base and which would consequently lead to higher tariff. Thus, AERA had performed the role of merely approving the books of accounts on the basis of cost incurred. H

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138Copy pinpoint138. Qua the CSIA, Project Cost increased from Rs. 6130 crores in July 2006 to Rs. 12,380 in 2011. It was contended by FIA that this gap was sought to be met by levying DF. Thus, DF amounted to 3.9 times of promoter’s equity contribution and the end users are ultimately bearing the burden. MIAL had acted contrary to Article 13.1 of OMDA, which explicitly provided that the airport operator was solely responsible for B financing of the airport. Reliance was also placed on audit reports indicating that escalation in the project cost was attributable to the casual approach of MIAL towards management and monitoring of the project.

139Copy pinpoint139. In the aforesaid context, arguments were also advanced on the aspect of role of AERA as a regulator in determining Project Cost. C Section 14(1)(a) and (b) of the said Act provide for engaging professionals or AERA’s own staff to enquire and assess the performance of service providers, which included the Airport Operators. No independent study was conducted by AERA even though the same is a statutory obligation under the said Act. Escalated Project Costs had been allowed without D conducting thorough prudence checks as mandated under the aforesaid provisions. Similarly, it was urged that the TDSAT failed to appreciate that AERA had derelicted from its duty as a regulator, and private concessionaires were being rewarded at the cost of the common man.

140Copy pinpoint140. On the other hand, the Airport Operators contended that E Section 13(1)(a)(i) of the said Act deals with capital expenditure while Section 13(1)(a)(iii) deals with the cost of improving efficiency. The said provisions read as under: “13 Functions of Authority. — (1) The Authority shall perform the following functions in respect of major airports, namely:— (a) to determine the tariff for the aeronautical services taking into consideration— (i) the capital expenditure incurred and timely investment in improvement of airport facilities; xxxx xxxx xxxx xxxx xxxx (iii) the cost for improving efficiency;” The cost for improving efficiency as used in sub-clause (iii) was submitted to be very different from efficient cost in respect of capital expenditure and, thus, elements of (iii) could be read into (i). There is no

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REGULATORY AUTHORITY OF INDIA [SANJAY KISHAN KAUL, J.]

test of efficiency laid out in the said Act in terms of capital expenditure and thus AERA only had a limited role qua determining the Project Costs.

141Copy pinpoint141. It was sought to be emphasized that this was a pioneering effort and the Commonwealth Games 2010 were round the corner. The initial timeline of 48 months to develop the IGIA was reduced to 37 months due to pending litigation. This in return played a critical role in cost escalation and into what has been flagged by auditors as process issues. Our Rationale:

142Copy pinpoint142. On examination of rival submissions, we believe that what has to be kept in mind is that we are the third tier of scrutiny. The C concerned authority and the appellate authority were also dealing with a scenario which was the introduction of public-private partnership mechanism for operation of airports for the first time. Any pioneering effort thus require multiple creases to be ironed out. There was no past experience in that sense. Everyone puts their best foot forward. It would thus not be fair to examine these aspects under the microscope.

143Copy pinpoint143. Different aspects towards determination of Project Cost have been examined by AERA, and AERA has carried out its responsibility while granting a little leeway for the pioneering effort in an untested field in the country. The auditors too had not been able to quantify or identify the losses due to increased Project Cost in monetary terms. How can one expect AERA to take on such a task in light of the functions ascribed to it under the said Act.

144Copy pinpoint144. There is also substance in the contention that the whole project was running against strict timelines on account of litigations relating to projects, a common phenomenon in our country. This was more so in the context of the Commonwealth Games being around the corner. Additionally, there is also some substance in what is contended by the Airport Operators that the terminology in Sections 13(1)(a)(i) and 13(1)(a)(iii) of the said Act cannot be read into each other. The manner of reading of the provision by FIA is to combine sub-para (iii) with sub- G para (i) while determining tariff.

145Copy pinpoint145. In our view, the provisions have been separately made because the concept of Section 13(1)(a)(i) requires AERA to determine the tariff by including capital expenditure incurred and timely investment in improvement of airport facilities. One of the other distinct factors to H

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A be considered is the cost of improving efficiency as under Section 13(1)(a)(iii). These aspects have no doubt been examined by the authority concerned, although not necessarily in the manner FIA seeks them to. Does it really lie with us to superimpose a view which has not been found feasible in the given conspectus of the large number of reports and documents before the AERA as well as the TDSAT. We thus reject the contention.

146Copy pinpoint146. In the end, we do believe that the matter having traversed from the AERA to the appellate authority to this Court, the parties and the counsel may have become fully aware of the nitty-gritties of the various matters and thus sought to embark on canvassing the case almost as we are some kind of first authority on these aspects. We are unwilling to do so. We have analysed all the contentions in a broad perspective, keeping in mind that the authority has performed its task and so has the appellate authority. Despite the course of action followed by counsel, we have still analysed the matter in such depth as was required to be done by this Court in rejecting all aspects in these appeals and cross- appeals except one aspect which arose from terminology and its definition. Conclusion:

147Copy pinpoint147. In view of the aforesaid, all appeals are dismissed, except on the issue relating to corporate tax pertaining to aeronautical services, where for the reasons recorded aforesaid we have accepted the contention on behalf of the Airport Operators that the Annual Fee paid by them should not be deducted from expenses pertaining to aeronautical services before calculating the ‘T’ element in the formula. It is only to that extent that the impugned order stands modified.

148Copy pinpoint148. We are not imposing costs in this matter as both sides have taken time to argue the matter before us and there is no point in burdening them with costs.

149Copy pinpoint149. The appeals stand allowed limited to the aforesaid extent while on all other aspects the appeals and cross-appeals are dismissed.

Bibhuti Bhushan Bose Appeals disposed of. (Assisted by : Mahendra Yadav, LCRA)