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

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

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले


 REPORTABLE
 IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.8378 OF 2018
DELHI INTERNATIONAL AIRPORT LTD. …Appellant
Versus
AIRPORT ECONOMIC REGULATORY
AUTHORITY OF INDIA & ORS. …Respondents
With
CIVIL APPEAL No.10902/2018
CIVIL APPEAL No.6658-6659/2019
CIVIL APPEAL No.7331/2021
CIVIL APPEAL No.7334/2021
CIVIL APPEAL No.5401/2019
CIVIL APPEAL No.5738/2019
CIVIL APPEAL No.3675/2020
CIVIL APPEAL No.145/2021
J U D G M E N T
SANJAY KISHAN KAUL, J.
1. The economic liberalisation of the 1990s brought in many regime
changes. One of the sectors which required a re-look was civil aviation
infrastructure. Modernisation of airports all over the world required India
1
to also step up in its efforts towards the development of international
level airports. One can say with some pride that this modernisation effort
has raised the status of the airports in India not only to an international
level but has also resulted in them being rated as amongst the best in the
world.
2. In furtherance of the modernisation effort, the Government of
India introduced the Airport Infrastructure Policy in 1997 with the
objective of augmenting India’s airport infrastructure and with a view
towards its modernisation, development and upgradation. The policy
promoted private sector participation by way of Public Private
Partnership Model and in furtherance of the same, the Airports Authority
of India Act, 1994 (hereinafter referred to as the ‘AAI Act’) was
amended with effect from 01.07.2004 to enable the setting up of private
airports and leasing of existing airports to private operators.
3. A new policy on airport infrastructure was introduced in 2002.
The Airports Authority of India (for short ‘AAI’) initiated a competitive
bidding process, which culminated into the award for the operation,
management and development of the Indira Gandhi International Airport
2
(for short ‘IGIA’) and Chhatrapati Shivaji Maharaj International Airport
(for short ‘CSIA’) to consortiums led by GMR and GVK respectively.
4. A Joint Venture (for short ‘JV’) agreement was executed between
the GMR Consortium and the AAI for Delhi International Airport
Limited (for short ‘DIAL’), and on similar pattern between the GVK
Consortium and the AAI for Mumbai International Airport Limited (for
short ‘MIAL’). These agreements were executed simultaneously on the
same date with the AAI holding 26 per cent shareholding in each of the
JVs. DIAL and MIAL thereafter entered into the Operation,
Management and Development Agreement (for short ‘OMDA’) dated
04.04.2006 with AAI and executed other project agreements including
the State Support Agreement (for short ‘SSA’) dated 26.04.2006. The fee
sharing was, however, different in view of economic logistics and, thus,
DIAL was required to pay AAI an annual fee of 45.99 per cent of the
revenue received by DIAL while MIAL was required to pay AAI an
annual fee of 38.7 per cent of the revenue received by MIAL. An Airport
Operator Agreement was signed on 01.05.2006 and in pursuance of the
same, DIAL and MIAL were handed over management of the respective
airports in Delhi and Mumbai and operations commenced on 03.05.2006.
3
For the purpose of this judgment, DIAL and MIAL shall
collectively be referred to as “Airport Operators”.
5. It was only after a hiatus period of about three years that the
Airports Economic Regulatory Authority of India Act (hereinafter
referred to ‘said Act’) came into force on 01.01.2009 with the exception
of Chapters III and VI, which were made effective from 01.09.2009.
Contractual and Regulatory Framework:
6. In order to appreciate the controversy being dealt with by us, it is
necessary to appreciate the contractual and regulatory framework. DIAL
and MIAL both broadly earn their revenue from two sources, viz.,
Aeronautical and Non-aeronautical. While they are free to fix charges
towards the latter, the former component is controlled by the Airports
Economic Regulatory Authority of India (for short ‘AERA/the
Authority’), which regulates tariff and other charges for aeronautical
services rendered at airports. Aeronautical services are defined in
Section 2(a) of the said Act and are enumerated in Schedule 5 of the
OMDA. The calculation of tariff was to be carried out in accordance
with Section 13 of the said Act, which inter alia provided that the
4
determination of tariff had to be made in accordance with the concession
offered by the Central Government in any agreement or Memorandum of
Understanding. This was obviously with the objective of having
continuity of process in protecting the terms on which the project began.
7. It is not in dispute that the SSA and the OMDA are in the nature of
‘concessions’ offered by the Central Government. As per Schedule I of
the SSA, the AERA was required to observe certain principles in
determining tariff, which include having regard to following an
incentives based approach, adopting a consistent method of
determination, and recognising the need for DIAL and MIAL to generate
sufficient revenue and earn a reasonable return on their investment.
Schedule I of the SSA also contained the tariff determination formula
which was based on an Inflation - X Price Cap Model. The formula
contained multiple components which pertained to various aspects of
aeronautical assets and aeronautical services of DIAL and MIAL. From
these components, an element ‘S’ has to be subtracted, which reflects 30
per cent of the gross revenue generated by the JVC from Revenue Share
Assets (viz., non-aeronautical assets and assets required for provision of
aeronautical related services). This is known as the ‘shared till’ or the
5
‘hybrid till’ model, as a portion of non-aeronautical revenue surplus is
used to cross-subsidize aeronautical costs. The objective apparently was
to ensure that at least a fixed percentage of the revenue would flow to the
authorities before different calculations are made. This was in
consideration for both land and other assets which were handed over to
DIAL and MIAL. The algebraic formulation for calculating the Target
Revenue (for short ‘TR’) as provided in Schedule 1 of the SSA is
reproduced below:
TRi = RBix WACCi + OMi + Di + Ti - Si
where TR = target revenue
RB = regulatory base pertaining to Aeronautical Assets and any
investments made for the performance of Reserved Activities etc.
which are owned by the JYC, after incorporating efficient capitai
expenditure but does not include capital work in progress to the
extent not capitalised in fixed assets. It is further clarified that
working capital shall not be included as part of regulatory base. It
is further clarified that penalties and Liquidated Damages, if any,
levied as per the provisions of the OMDA would not be allowed
for capitalisation in the regulatory base. It is further clarified that
the Upfront Fee and any pre-operative expenses incurred by the
Successful Bidder towards bid preparation will not be allowed to
be capitalised in the regulatory base.
WACC = nominal post-tax weighted average cost of capital,
calculated using the marginal rate of corporate tax
OM = efficient operation and maintenance cost pertaining to
Aeronautical Services. It is clarified that penalties and Liquidated
6
Damages, if any, levied; as per provisions of "Provisions of the
OMDA would not be allowed as part of operation and maintenance
cost.
D = depreciation calculated in the manner as prescribed in
Schedule XIV of the Indian Companies Act, 1956. In the event, the
depreciation rates for certain assets are not available in the
aforesaid Act, then the depreciation rates as provided in the
Income Tax Act for such asset as converted to straight line method
from the written down value method will be considered. In the
event, such rates are not available in either of the Acts then
depreciation rates as per generally accepted Indian accounting
standards may be considered.
T = corporate taxes on earnings pertaining to Aeronautical
Services.
S = 30% of the gross revenue generated by the NC from the
“Revenue Share Assets”. lbe costs in relation to such revenue shall
not be included while calculating Aeronautical Charges.
Revenue Share Assets" shall mean ( a) Non-Aeronautical Assets;
and (b) assets required for provision of aeronautical related
services arising at the Airport and not considered in revenues from
Non-Aeronautical Assets (e.g. Public admission fee etc.)
i = time period (year) i
RBi= RBi-l - Di+ Ii
Where: RB0 for the first regulatory period would be the sum total
of (i) the Book Value of the Aeronautical Assets in the books of the
JVC and
(ii) the hypothetical regulatory base computed using the then
prevailing tariff and the revenues, operation and maintenance cost,
corporate tax pertaining to Aeronautical Services at the Airport,
during the financial year preceding the date of such computation.
7
I= investment undertaken in the period.
8. In a nutshell, AERA is required to compute the tariff using the
formula and keeping in mind the principles listed in Schedule I. What
appears to be only an algebraic formulation was and is obviously capable
of generating controversy and interpretations which is what we face
today.
History of the litigation:
9. The belief in the requirement of specialised authority and appellate
tribunal gave rise to establishment of regulatory and judicial fora for
determination of any dispute forming subject matter of the field in
consonance with the said Act.
10. Although airport operations had commenced earlier, the First
Control Period commenced from 01.04.2009 for a period of five years,
i.e., up to 31.03.2014. AERA determined aeronautical tariffs for the First
Control Period with respect to DIAL on 20.04.2012 and for MIAL on
15.01.2013 (referred to as the DIAL and MIAL Tariff Order
respectively). DIAL was aggrieved and it filed AERA Appeal No.10 of
2012 under Section 18(2) of the said Act challenging various decisions
8
taken by AERA in the DIAL Tariff Order. MIAL preferred a similar
appeal vide AERA Appeal No.4 of 2013. The history to these appeals is
what ought not to have been. This is more so as the operations of the
Airports were an important part of the economic agenda of governments
past and present. Over a period of three years from 2012 to 2015 various
benches of the erstwhile Airports Economic Regulatory Authority
Appellate Tribunal (for short ‘AERAAT’), constituted under the said Act
considered various aspects but on account of the composition of the
Tribunal changing from time to time it never worked out. Finally, a
Notification was issued on 07.09.2015 whereby the Chairman and two
members of the National Consumer Disputes Redressal Commission (for
short ‘NCDRC’) were given additional charge to function as the
AERAAT. Once again, when the process of hearing was on, a
Notification was issued on 26.05.2017 by the Ministry of Finance
notifying that Part XIV of Chapter VI of the Finance Act, 2017 had come
into force and the Telecom Disputes Settlement and Appellate Tribunal
(for short ‘TDSAT’) was designated as the appellate tribunal under the
said Act. Thus, the grievances of the parties were aggravated as half a
decade passed in this process. There was obviously an uncertainty
9
created by there being no quietus to the dispute. The scenario was such
that tariff determination took place even for the Second Control Period
without there being any finality to the First Control Period. This Court
had to step in and pass order dated 03.07.2017 in Civil Appeal
No.8394/2017 filed by Air India Limited pertaining to tariff
determination for the Second Control Period, and the TDSAT was
directed to conclude hearing for the appeals filed by DIAL relating to the
First Control Period within two months from the date of the said order.
11. MIAL’s endeavour for listing its appeal was not successful as the
TDSAT refused its request and commenced hearing DIAL’s appeal from
August, 2017. This was predicated on the deadline of two months fixed
by this Court. However, TDSAT gave liberty to MIAL to make
submissions on important questions of law before concluding the hearing
for DIAL’s appeal.
12. The TDSAT made its order dated 23.04.2018 with respect to
DIAL. There were four issues which survived and these were decided
vide order dated 15.11.2018 in an appeal preferred by MIAL. The
endeavour of MIAL to seek review for limited issue relating to
10
determination of Hypothetical Regulatory Asset Base was rejected on
17.01.2019. Apart from these, AERA Appeal No. 03 of 2013 and AERA
Appeal No. 05 of 2013 were also filed before the TDSAT wherein
imposition of Development Fee (for short ‘DF’) by DIAL and MIAL
respectively were challenged. AERA had allowed the said imposition of
DF and thus appeals were filed before the TDSAT. These came to be
decided by the TDSAT vide order dated 20.03.2020 and 16.07.2020 (for
short ‘DF orders’) respectively for DIAL and MIAL wherein the TDSAT
agreed with the view taken by AERA. All these five orders passed by the
TDSAT are impugned before us in these Civil Appeals.
13. In the aforesaid appeals, Federation of Indian Airlines (for short
‘FIA’), Lufthansa German Airlines (for short ‘Lufthansa’) and AERA are
also before this Court as respondents in appeals filed by DIAL and MIAL
and there are appeals filed by FIA, Lufthansa and others on similar issues
in respect of the said impugned orders.
11
Appeals from Regulatory Authority:
14. One may observe at this stage that in effect this Court has been
made a court of second appeal in similar matters arising out of many
such tribunals. This has resulted in a number of contentious matters
requiring consideration by this Court. The scenario is different from the
‘SLP jurisdiction’ where no re-appreciation of evidence is really required
unless extraordinary circumstances exist, while an appeal of this nature
stands on a different footing and is a continuation of the original
proceedings.1
15. This Court in Modern Dental College and Research Centre v.
State of M.P.2
 has eloquently summarised the onset of the modern
regulatory era:
“87. Regulatory mechanism, or what is called regulatory
economics, is the order of the day. In the last 60-70 years,
economic policy of this country has travelled from laissez faire
to mixed economy to the present era of liberal economy with
regulatory regime. With the advent of mixed economy, there
was mushrooming of public sector and some of the key
industries like aviation, insurance, railways, electricity/power,
telecommunication, etc. were monopolized by the State.
License/permit raj prevailed during this period with strict
control of the Government even in respect of those industries
1 Rajendra Diwan v. Pradeep Kumar Ranibala & Anr., (2019) 20 SCC 143 (Constitution Bench).
2
(2016) 7 SCC 353.
12
where private sectors were allowed to operate. However, Indian
economy experienced major policy changes in early 90s on
LPG Model, i.e. liberalization, privatization and globalization.
With the onset of reforms to liberalize the Indian economy, in
July 1991, a new chapter has dawned for India. This period of
economic transition has had a tremendous impact on the overall
economic development of almost all major sectors of the
economy.”
.... .... .... .... .... ....
89. With the advent of globalization and liberalization, though
the market economy is restored, at the same time, it is also felt
that market economies should not exist in pure form. Some
regulation of the various industries is required rather than
allowing self-regulation by market forces. This intervention
through regulatory bodies, particularly in pricing, is considered
necessary for the welfare of the society and the economists
point out that such regulatory economy does not rob the
character of a market economy which still remains a market
economy. Justification for regulatory bodies even in such
industries managed by private sector lies in the welfare of
people. Regulatory measures are felt necessary to promote
basic wellbeing for individuals in need. It is because of this
reason that we find regulatory bodies in all vital industries like,
insurance, electricity and power, telecommunications, etc.”
16. The contours of judicial review by this Court qua the decision of a
regulatory body have evolved. In Akshay N. Patel v. Reserve Bank of
India & Anr.3
 a notification of the Reserve Bank of India prohibiting the
export of PPE kits during the Covid-19 pandemic was assailed. It was
observed therein that adelicate role is played by this Court in reviewing
3
(2022) 3 SCC 694.
13
the actions of independent regulatory bodies:
“64. .... In liberalized economies, regulatory mechanisms
represent democratic interests of setting the terms of operation
for private economic actors. This Court does not espouse
shunning of judicial review when actions of regulatory bodies
are questioned. Rather, it implores intelligent care in probing
the bona fides of such action and nuanced deference to their
expertise in formulating regulations. A casual invalidation of
regulatory action in the garb of upholding fundamental rights
and freedoms, without a careful evaluation of its objective of
social and economic control, would harm the general interests
of the public.”
17. The liberalised era from 1990s has seen enunciation of limits of
judicial intervention in such appeals from decision of regulators. A
Constitution Bench of this Court in Shri Sitaram Sugar Company &
Anr. v. Union of India & Ors.4
 made some relevant observations to
emphasise that what is required to be seen by this Court is that the
readings are reasonably supported by evidence as judicial review is really
not concerned with matters of economic policy and the endeavour
certainly cannot be to substitute its view for that of the legislature or to
supplant the view of the expert body. The relevant observations are
reproduced hereunder:
“56. The court has neither the means nor the knowledge to reevaluate the factual basis of the impugned orders. The court, in
4
(1990) 3 SCC 223.
14
exercise of judicial review, is not concerned with the
correctness of the findings of fact on the basis of which the
orders are made so long as those findings are reasonably
supported by evidence. In the words of Justice Frankfurter of
the U.S. Supreme Court in Railroad Commission of Texas v.
Rowan & Nichols Oil Company [311 US 570, 575 : 85 L ed
358, 362] :
“Nothing in the Constitution warrants a rejection of these
expert conclusions. Nor, on the basis of intrinsic skills
and equipment, are the federal courts qualified to set
their independent judgment on such matters against that
of the chosen State authorities.... When we consider the
limiting conditions of litigation — the adaptability of the
judicial process only to issues definitely circumscribed
and susceptible of being judged by the techniques and
criteria within the special competence of lawyers — it is
clear that the Due Process Clause does not require the
feel of the expert to the supplanted by an independent
view of judges on the conflicting testimony and
prophecies and impressions of expert witnesses”.
This observation is of even greater significance in the absence
of a Due Process Clause.
57. Judicial review is not concerned with matters of economic
policy. The court does not substitute its judgment for that of the
legislature or its agents as to matters within the province of
either. The court does not supplant the “feel of the expert” by
its own views. When the legislature acts within the sphere of its
authority and delegates power to an agent, it may empower the
agent to make findings of fact which are conclusive provided
such findings satisfy the test of reasonableness. In all such
cases, judicial inquiry is confined to the question whether the
findings of fact are reasonably based on evidence and whether
such findings are consistent with the laws of the land. As stated
by Jagannatha Shetty, J. in Gupta Sugar Works [1987 Supp
SCC 476, 481] :
15
“... the court does not act like a chartered accountant nor
acts like an income tax officer. The court is not
concerned with any individual case or any particular
problem. The court only examines whether the price
determined was with due regard to considerations
provided by the statute. And whether extraneous matters
have been excluded from determination.”
58. Price fixation is not within the province of the courts.
Judicial function in respect of such matters is exhausted when
there is found to be a rational basis for the conclusions reached
by the concerned authority. As stated by Justice Cardozo in
Mississippi Valley Barge Line Company v. United States of
America [292 US 282, 286-87 : 78 L ed 1260, 1265] :
“The structure of a rate schedule calls in peculiar
measure for the use of that enlightened judgment which
the Commission by training and experience is qualified
to form.... It is not the province of a court to absorb this
function to itself.... The judicial function is exhausted
when there is found to be a rational basis for the
conclusions approved by the administrative body.”
18. We may, however, add that in the given factual scenario in the
dispute before us there is something more which is required to be
addressed. Before the complete legislative structure was set in place,
operations were proceeded on the understanding of the agreement
between the parties and the legislative intent is also apparent. This
provides for due honour and consideration being given to the aforesaid
intent as per the provisions of Section 13 of the said Act. The objective
16
is that all parties who have operated in what may be called a pioneering
effort in the field of civil aviation in India should not be taken by surprise
affecting their commercial viability as it would discourage private
participation in such economic activities which have been perceived to be
essential by the Government. To that extent, we are inclined to consider
that some aspects of the agreements have pre-legislative features and,
thus, there is a requirement to look into them. Section 13 of the said Act
forming part of Chapter III deals with “Powers and Functions of the
Authority” and reads as under:
“CHAPTER III
POWERS AND FUNCTIONS OF THE 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;
(ii) the service provided, its quality and other relevant factors;
(iii) the cost for improving efficiency;
(iv) economic and viable operation of major airports;
(v) revenue received from services other than the aeronautical
17
services;
(vi) the concession offered by the Central Government in any
agreement or memorandum of understanding or otherwise;
(vii) any other factor which may be relevant for the purposes of
this Act:
Provided that different tariff structures may be determined for
different airports having regard to all or any of the above
considerations specified at sub-clauses (i) to (vii);
(b) to determine the amount of the development fees in respect
of major airports;
(c) to determine the amount of the passengers service fee levied
under rule 88 of the Aircraft Rules, 1937 made under the
Aircraft Act, 1934 (22 of 1934);
(d) to monitor the set performance standards relating to quality,
continuity and reliability of service as may be specified by the
Central Government or any authority authorised by it in this
behalf;
(e) to call for such information as may be necessary to
determine the tariff under clause (a);
(f) to perform such other functions relating to tariff, as may be
entrusted to it by the Central Government or as may be
necessary to carry out the provisions of this Act.
(2) The Authority shall determine the tariff once in five years
and may if so considered appropriate and in public interest,
amend, from time to time during the said period of five years,
the tariff so determined.
(3) While discharging its functions under sub-section (1) the
Authority shall not act against the interest of the sovereignty
18
and integrity of India, the security of the State, friendly
relations with foreign States, public order, decency or morality.
(4) The Authority shall ensure transparency while exercising its
powers and discharging its functions, inter alia,—
(a) by holding due consultations with all stake-holders with the
airport;
(b) by allowing all stake-holders to make their submissions to
the authority; and
(c) by making all decisions of the authority fully documented
and explained.”
19. Clause (vi) of sub-section (1) of the said Act clearly stipulates that
in the determination of tariff for the aeronautical services, one of the
considerations, is the concession offered by the Central Government in
any agreement or memorandum of understanding or otherwise. Thus, the
principle that legislative intent must prevail over any prior agreement
would not really apply in the present scenario as the legislative intent
itself incorporates and requires the prior agreements to be taken into
consideration albeit along with certain other parameters/requirements.
20. We would now like to turn to the different aspects of tariff fixation
which have formed a debate before us and we consider it appropriate to
deal with them as per the aspects raised, which are really common to the
19
appeals in a larger perspective.
Treatment of Fuel Throughput Charges:
21. The fuel supply chain at the airport begins from entry of Aviation
Turbine Fuel (for short ‘ATF’) into the airport premises and extends up to
fuelling the aircraft. Fuel Throughput Charge (for short ‘FTC’) is a fee
collected by the airport operators from Oil Marketing Companies (for
short ‘OMCs’) for providing fuel to the aircraft. If FTC is treated as an
aeronautical revenue, it would be covered within the TR and in case it is
treated as non-aeronautical revenue, only 30 per cent of the fee recovered
from FTC will be covered in the TR. Thus, the controversy as it appears
before this Court is whether FTC is a service or an access fee and if FTC
is a service, whether FTC falls within the category of aeronautical
services.
22. The opinion of the AERA, in the DIAL tariff order dated
20.04.2012 is that the FTC should be treated as aeronautical revenue as
Section 2(a)(vi) of the said Act defines ‘aeronautical service’ to mean any
service provided “for supplying fuel to the aircraft at an airport.”
20
Further, Entry 17 of Schedule 5 of the OMDA mentions “common
hydrant infrastructure for aircraft fuelling services by authorised
providers” as an aeronautical service, whereas fuel supply finds no
mention in Schedule 6 of the OMDA which lists non-aeronautical
services. FTC was, thus, held to be a charge in respect of provision of an
aeronautical service, namely, supply of fuel to the aircraft and washence
considered an aeronautical charge, which is to be determined by the
Authority under Section 13(1)(a) of the said Act.
23. Another aspect considered by AERA in the MIAL tariff order
dated 15.01.2013 was that the mere establishment of common hydrant
infrastructure alone does not comprise any service unless the concerned
fuel hydrant infrastructure gets appropriate fuel into it. Since the entry of
fuel into the CSI Airport, Mumbai is entirely in the control of MIAL, it
was held that MIAL became a service provider in the chain of supply of
fuel to the aircraft. There is nothing in Schedule 6 of OMDA to indicate
that FTC is a non-aeronautical charge or revenue but on the other hand
Schedule 5 of OMDA clearly provides for aircraft fuelling services.
Entry 11 of Schedule 5 of OMDA states that “any other services deemed
to be necessary for the safe and efficient operation of the airport” means
21
provision of an aeronautical service, and Entry 17 of the said schedule
provides that the common hydrant infrastructure is an aeronautical
service. Thus, merely labelling it as “fuel concession fee” or any other
nomenclature does not change the nature of the aeronautical service and
as this part is provided by the Airport Operator, the revenues arising from
such aeronautical service in the hands of the Airport Operator are
reckoned as aeronautical revenues. SSA and OMDA clearly indicate the
intention of the Government to establish an independent regulator, so it
could not be said that the bidders were unaware that tariff determination
would be impacted in the future.
24. The relevant provisions to appreciate this reasoning read as under:
Section 2(a)(vi) of the AERA Act:
“2. Definitions.—In this Act, unless the context otherwise
requires,—
(a) "aeronautical service" means any service provided—
xxxx xxxx xxxx xxxx xxxx
(vi) for supplying fuel to the aircraft at an airport; and”
.... .... .... .... ....
OMDA:
“CHAPTER I
22
DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Agreement, unless the context otherwise requires:
“Aeronautical Services” shall have the meaning assigned hereto
in Schedule 5 hereof.”
.... .... .... .... ....
“SCHEDULE 5
AERONAUTICAL SERVICES
“Aeronautical Services” means the provision of the following
facilities and services:
xxxx xxxx xxxx xxxx xxxx
11. any other services deemed to be necessary for the safe and
efficient operation of the Airport.
xxxx xxxx xxxx xxxx xxxx
A more detailed list of the above facilities and services would
include the following:
xxxx xxxx xxxx xxxx xxxx
17. Common hydrant infrastructure for aircraft fuelling services
by authorised providers”
“SCHEDULE 6
NON-AERONAUTICAL SERVICES
“Non-Aeronautical Services” shall mean the following facilities
and services (including Part I and Part II):
Part I
1. Aircraft cleaning services
2. Airline Lounges
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3. Cargo handling
4. Cargo terminals
5. General aviation services (other than those used for
commercial air transport services ferrying passengers or cargo
or a combination of both)
6. Ground handling services
7. Hangars
8. Heavy maintenance services for aircrafts
9. Observation terrace
Part II
10. Banks / ATM*
11. Bureaux de Change*
12. Business Centre*
13. Conference Centre*
14. Duty free sales
15. Flight catering services
16. Freight consolidators/forwarders or agents
17. General retail shops*
18. Hotels and Motels
19. Hotel reservation services
20. Line maintenance services
21. Locker rental
22. Logistic Centers*
23. Messenger services
24. Porter service
25. Restaurants, bars and other refreshment facilities
26. Special Assistance Services
27. Tourist information services
28. Travel agency
29. Vehicle fuelling services
30. Vehicle rental
31. Vehicle parking
32. Vending machines
33. Warehouses*
34. Welcoming services
35. Other activities related to passenger services at the Airport,
if the same is a Non-Aeronautical Asset.
24
* These activities/ services can only be undertaken/ provided, if
the same are located within the terminal complex/cargo
complex and are primarily meant for catering the needs of
passengers, air traffic services and air transport services.”
25. The aforesaid determination, not being favourable at all to DIAL
or MIAL, was assailed before the TDSAT. Insofar as the DIAL tariff
order dated 22.04.2018 is concerned, submissions of both DIAL and
MIAL were appreciated. MIAL submitted that revenue from
aeronautical services like cargo, ground handling and FTC must always
be treated as non-aeronautical revenue. It was further submitted that if
the service provider is DIAL, the revenue will be a fee for services but
once it outsources an aeronautical service, the fee for such outsourcing
should be treated as non-aeronautical revenue because in such a case,
DIAL is not rendering any service. This plea did not find favour with the
TDSAT, which held that even when the airport operator engages in
providing an aeronautical service through its servants or agents, the
service must be deemed to be one provided by the airport operator. The
colour of revenue from aeronautical service cannot get changed to that of
revenue from non-aeronautical service by an act of delegation or leasing
out by the concessionaire. The TDSAT also dealt with the MIAL tariff
25
order dated 15.11.2018. One may say that there appears to be some
conflict limited to the extent that while dealing with the MIAL order it
was observed by the TDSAT that while they are alive to the contention
made on behalf of MIAL, they had not taken a view or rendered a finding
on the aspect of FTC in the DIAL order. We say this as the MIAL tariff
order while observing so had recorded in para 4 that only four aspects
were required to be examined. FTC was mentioned as one of the four
aspects and, thus, did survive before the TDSAT despite its earlier
opinion dated 12.04.2018, which had dealt with the aspect of FTC.
26. Be that as it may, turning to the opinion of the TDSAT in the
MIAL tariff order, it was observed that in case of FTC, one monopoly
(airport JVCs having monopoly over airport access) was granting a
concession to another monopoly (of oil companies having monopoly
over marketing of fuel). Since both monopolies had enough market
power, the fact of one monopoly agreeing to pay a concession fee to
another (without passing it on to the end consumer) would mean that it is
providing some extra tangible or intangible ‘facilities’ or ‘services’. This
was notwithstanding MIAL’s submission that it was willing to submit an
undertaking that it will not increase FTC beyond a certain limit.
26
27. The TDSAT turned to Section 2(a) of the said Act, which defined
“aeronautical service” to mean “any service” thereby providing for a
wide range of functions, which also included supply of fuel to aircraft at
the airport. Thus, there was no reason to give a restrictive view to what
constitutes a “service”, but rather the same should be given the widest
import. To support this conclusion, it was opined that this has to be read
along with the object of the said Act, which as per the Preamble of the
Act is “to provide for the establishment of an Airports Economic
Regulatory Authority to regulate tariff and other charges for the
aeronautical services rendered to airports and to monitor performance
standards of airports and for matters connected therewith or incidental
thereto”.
In view of the aforesaid Preamble, it was observed that the
meaning of “service” should be read as an economic activity pertaining
to specified functions of significant import, irrespective of label, source,
nature or history.
28. The appellate authority took note of the submissions of AERA that
the International Civil Aviation Organisation (for short ‘ICAO’)
27
guidelines specifically give examples of aviation fuel supply services as
having an “aeronautical character”, whereas MIAL had relied upon
“Glossary of Terms” of ICAO Documents to treat “concessions granted
to Oil companies to supply aviation fuel and lubricants…” as nonaeronautical revenue. It was held that first reliance must be placed on the
said Act and agreements as reflected in SSA and OMDA rather than on
the ICAO guidelines and no reason was found to interfere with the
AERA’s decision on treatment of FTC for purposes of Target Revenue
formula wherein AERA had relied upon Schedules 5 & 6 of the OMDA.
Submissions on the aforesaid aspects before the Supreme Court:
29. The Airport Operators sought to urge that the FTC was an
access/concession fee and that they were not providing any serviceof any
nature for supplying fuel to an aircraft nor were the OMCs selling or
marketing or providing any service to the airlines. There was also no
delegation or leasing out of any service as OMCs sell fuel which the
Airport Operators are not authorised to sell. The definition of
“aeronautical services” in Section 2(a)(vi) of the said Act would not
include FTC. The word “means” limits the scope of the definition and
provides an exhaustive list of services that are to be treated as
28
aeronautical services.
30. It was urged that the FTC was not relatable to any Aeronautical
Services or Non-Aeronautical Services under Schedule 5 or 6 of the
OMDA. The reliance placed by AERA on Entry 17 of Schedule 5 of the
OMDA was untenable as FTC was independent of the facilities or
services provided by third parties by use of the common hydrant
infrastructure, charges for which are already regulated by the AERA.
Entry 11 of Schedule 5 was urged to be read with in conjunction with
Entries 1 to 10, which also do not refer to any fuelling activities. An
additional plea was that the FTC had been discontinued by the Ministry
of Civil Aviation (for short ‘MOCA’) pursuant to a direction dated
08.01.2020. Thus, it was urged that this was not a service necessary for
safe and efficient operation of the airport as required by Entry 11, and the
subsequent interpretation should be read for the purposes of the past as to
how FTC should be construed. The two services related to supply of
fuel, i.e., the charge of the company that owns the common hydrant
infrastructure at IGIA under Entry 17 of Schedule 5 of OMDA, and the
charges of “into-plane” fuel service providers who transfer fuel from the
common hydrant infrastructure to the aircraft, were regulated by AERA.
29
31. The character of FTC was pleaded to be relatable to Revenue
Share Assets which are assets required for provision of aeronautical
related services and are not considered in revenues from NonAeronautical Services. As an illustration, “public admission fee” is a fee
for the right given to a person to enter into the airport. This is considered
as revenue from aeronautical related services as per the definition of
Revenue Share Assets as it has a correlation with the usage of
Aeronautical Assets by virtue of gaining access to the airport building.
An analogy was sought to be drawn to the fee in the form of FTC, which
is charged by the Airport Operators to the oil companies for the privilege
of access to the IGIA.
32. An important aspect sought to be emphasised was that the bidders
had made their bids based on FTC not being an Aeronautical Charge as
per the clarification given by the AAI in response to pre-bid queries. The
AAI had only stated that the OMCs had in principle agreed to pay FTC
but the exact quantum was not decided and, thus, the Airport Operators
would have the freedom to negotiate with the fuel companies. The FTC
was in the nature of pre-existing charges and not part of aeronautical
30
charges. Airport Operators’ obligation in Clause 5.2(b) of OMDA to
novate all existing contracts entered into by the AAI with third parties
and to get the same transferred to the name of the Airport Operators has
resulted in them continuing to levy FTC and the same was not done as an
obligation to perform aeronautical or non-aeronautical services. The
FTC was, thus, perceived to be a pre-existing charge and not a part of
aeronautical charge as defined in Schedule 1 of the SSA. The Airport
Operators also turned to the ICAO documents to submit that FTC is a
non-aeronautical activity and revenue therefrom is non-aeronautical
revenue.
33. It was submitted by the Airport Operators that for instance, FTC
features under the heading above para 4.18 of ICAO Doc 9562, which
expressly states ‘Revenue from non-aeronautical activities’. Similarly,
para 5.34 falls under the chapter titled “Development and Management
of Non-Aeronautical Activities’ and provides under subheading ‘D’, i.e.
‘Setting Fees and charges for Non-Aeronautical Activities’, that where
FTC is imposed, it should be recognized by airport entities as being
concession charges of an aeronautical nature. Paras 5.4 and 5.5, under
subheading B of Chapter 5 titled “Non-Aeronautical Activities- Types
31
and Operational Responsibilities”, which is further categorized under
types of concessions and rentals, clearly provide that concession fee by
aviation fuel suppliers is revenue from non-aeronautical activities.
34. On the other hand, AERA urged that if fuel throughput service is a
complete service in itself and the Airport Operators are merely delegating
the service to OMCs and taking a concession fee. The commercial
arrangement between the Airport Operators and the OMCs does not
change the colour of the revenue. It was urged that the fuel throughput
service is an aeronautical service as it is a service for providing fuel to
the aircraft on tarmac through common hydrant infrastructure and intoplane agents. It would thus fall under Schedule 5 of OMDA. A reading
of Schedule 5 of OMDA dealing with “aeronautical services” would
mean the provision of “facilities” and “services”. It was urged that the
word “facilities” is ejusdem generis with the word “services.” The
Schedule provided a more detailed list of facilities and services such as
‘Airfield’, ‘airfield lightning’, ‘Air Taxi Services’, ‘Air Taxi Services’,
‘Airside and land access roads and forecourts including writing, traffic
signals, signage and monitoring” and “common hydrant infrastructure for
aircraft fuelling services by authorised providers”. Thus, there were
32
ample elements of facilities used by fuel suppliers that could be
attributed to the FTC. There is no mention of any service pertaining to
fuel supply in Schedule 6 of the OMDA and FTC was completely
disconnected to the services mentioned therein.
35. On the aspect of giving meaningful construction to the said Act in
the context of prior OMDA and SSA, it was urged that there was nothing
in the agreements to indicate that FTC was a non-aeronautical service but
the same was clearly mentioned in Entry 17 of Schedule 5 of the OMDA.
Thus, it was urged that FTC was clearly covered under Section 2(a)5
(ii)6
,
(iv)7&(vi)8
 of the AERA Act.
36. The consequence arising from a contrary view, it was urged, would
be a tendency to charge a higher fee as concession, which the OMCs
would simply pass on to the Airlines and only 30 per cent of FTC would
be covered in the TR. This would result in huge benefits for the Airport
Operators at the cost of several stakeholders. The subsidy offered in the
calculation of Target Revenue to the tune of 30% of non-aeronautical
5 Section 2(a) of the AERA Act defines “aeronautical service”.
6 Service provided for the landing, housing or parking of an aircraft or any other ground facility offered in 
connection with aircraft operations at an airport.
7 Service provided for ground handling services relating to aircraft, passengers and cargo at an airport.
8 Service provided for supplying fuel to the aircraft at an airport.
33
revenue is already a concession offered to the Airport Operators.
37. A reference was also made to the Parliamentary Standing
Committee on Airport Economic Regulatory Authority Bill, 2007, which
had recommended that the non-aeronautical services be also brought
under the ambit of the then proposed regulator, along with the fuel supply
infrastructure..
38. The international scenario was also referred to in the context of the
Australian Competition and Consumer Commission having held that
imposition of a fuel throughput levy is an ‘abuse of market power’ and
that there was a strong case that such airports have market power in the
market for refuelling service. It was further held that contractual
agreements are not a valid reason to justify introduction of such levies.
39. Lastly it was urged that in principle even the ICAO had held that
fuel throughput service is an aeronautical service. The ICAO guidelines
were referred to in this behalf to contend that the Airport Operators were
cherry-picking certain lines and paragraphs from them out of context to
suit their own interests. The ICAO had indicated that FTC was a nonaeronautical revenue only for accounting purposes.
34
40. FIA supported the submissions of AERA and urged that the
question of FTC being aeronautical in nature was settled by AERA by its
Order No.7/2010 dated 04.11.2010, which was never challenged by
DIAL and was also upheld by the TDSAT in its order dated 15.11.2018.
Our Rationale:
41. We have examined this controversy carefully and find no reason to
interfere with the concurrent views taken by the AERA and the appellate
tribunal. The principles we have enunciated at the threshold qua the
contours of judicial review towards the decision of regulatory bodies
squarely come into play [Modern Dental College and Research Centre9
;
Akshay N. Patel10; Shri Sitaram Sugar Company & Anr11].
42. The mere fact that the FTC has been discontinued subsequently
from 2020 would not give rise to an interpretation that it was a nonessential service and was thus also a non-aeronautical service. The
AERA is right in its submissions that all that has been done is that the
Airport Operators are delegating the service to provide fuel to the OMCs
9
(supra)
10 (supra)
11 (supra)
35
and are taking a concession fee and pocketing the same. The
significance of supply of fuel to be provided to the aircraft on
tarmac cannot be lost sight of. Obviously, the aircraft does not
work without fuel. It is being provided through a common
hydrant. There is no mention of FTC in Schedule 6 of OMDA and
thus, there is a complete lack of connection between FTC and
services mentioned therein as non-aeronautical services. Once we
accept this proposition then it is easy to find connect between
some of the aspects mentioned as aeronautical services with the
aspect of FTC.
43. We are not confronted with a situation where there is conflict
between the OMDA/SSA and the said Act, requiring recourse to Section
13(1)(a)(vi). A reading of the OMDA/SSA does not give rise to any view
that the FTC is a non-aeronautical service. It is clearly mentioned in
Entry 17 of Schedule 5 of OMDA.
44. There is also substance in the contention of AERA that the
methodology of Airport Operators would amount to a manner of
subterfuge to somehow pass on the FTC to the airlines with only 30 per
36
cent of it being covered in the TR. Forget the aspect of advantage to the
Airport Operators, the issue is one also of a number of other stakeholders
being adversely affected. The airlines are bound to pass this charge on to
the passengers. It would thus have a cascading effect.. If one may say,
the Australian Competition and Consumer Commission also looks into
this aspect as has been noted by the AERA in the MIAL Tariff Order and,
in fact, categorises it with stronger words as “abuse of market power.”
One cannot use the ICAO documents selectively in different contexts to
derive the conclusion as was sought to be done on behalf of the Airport
Operators.
45. We thus have no hesitation in upholding the view taken by the
AERA and the TDSAT opining that the FTC was a part of the
“Aeronautical Service.”
Calculation of Hypothetical Regulatory Asset Base (HRAB):
46. The two airports were not set up de novo. Existing airports were
taken over. The IGIA was a brownfield airport before it had been taken
over by DIAL and, thus, assets as reflected in the books of accounts
would record depreciation. This created its own difficulties in arriving at
37
a value of the regulatory base for the first year of the first control period.
Another problem faced by the AAI was that it had a common book of
assets for several airports across India. Thus, SSA provided a
hypothetical regulatory asset base to be derived by working backwards.
The calculations to be made would have a cascading effect for successive
years and, thus, base calculation for RB0 would have an impact on the
calculation of RB1 and for further years.
47. The object of calculation of HRAB was to determine RB0, which
was the sum total of:
i. the Book Value of the Aeronautical Assets in the books of the
JVC; and
ii. the hypothetical regulatory base computed using the then
prevailing tariff and the revenues, operation and maintenance cost,
corporate tax pertaining to aeronautical services at the airport, during
the financial year preceding the date of such computation.
48. The effect of the aforesaid is that HRAB was to be computed as a
value for the financial year 2008-2009 (i.e., the first year of the First
Control Period). The controversy in relation to computation of HRAB
before this Court was limited to two aspects:
38
A. Whether the expression “pertaining to aeronautical services” will
be applicable to all the components of RBo, i.e. prevailing tariff and
the revenues, operation and maintenance cost, corporate tax ?
B. Whether permitting AERA to include cost of DIAL manpower in
addition to the contractually mandated AAI manpower artificially
inflates the operation & maintenance cost, thereby distorting the value
of HRAB?
Issue A
49. The AERA opined that the components relating to aeronautical
services had to be reckoned. It was the view of AERA in the MIAL tariff
order that MIAL had erroneously calculated HRAB by relying upon the
Target Revenue as the base and then calculated upwards to reach the
value of HRAB instead of relying upon the components given in the
formula for calculating RB0. On the other hand, MIAL contended before
the TDSAT that the absence of a comma after the term “corporate tax” in
the definition means that it is only the corporate tax that pertains to
aeronautical services and not the other elements. This contention was
39
rejected by the TDSAT vide its order dated 15.11.2018 in MIAL’s appeal
wherein it was observed that it would be useful to test both the contesting
interpretations on the ground of consistency and logical meaning. There
are three commas and three elements in the sentence, namely “prevailing
tariff and revenues”, “operation and maintenance costs” and “corporate
tax”. In terms of consistency TDSAT noticed no problem with treating
all terms as pertaining to “aeronautical services at the airport”. It was
noticed that if the argument of MIAL was to be accepted then only
corporate tax is qualified as pertaining to aeronautical services. This
means that the other two elements can be pertaining to either aeronautical
or non-aeronautical services or both. Admittedly, “operation and
maintenance costs” are meant to be those pertaining only to aeronautical
services. MIAL’s contention was that the remaining first element
“prevailing tariff and revenues” should be treated as aeronautical plus
partial non-aeronautical or as aeronautical plus non-aeronautical. The
TDSAT in this regard observed that it is obvious that this would be
inconsistent and illogical to read from the construction of the sentence.
Thus, the only consistent and logical way to read this sentence is to treat
all the three elements as pertaining to aeronautical services. A reference
40
was also made to the fact that operation and maintenance cost in the
formula to calculateRB0 is an independent and express provision. It was
observed that in the pre-control period of FY 2008-2009, the provisions
of fixing tariff were different than the approaches during the later years
of the control period when ‘S’ is treated as a cross-subsidy for
aeronautical revenue.
50. Airport Operators urged before us that the expression “pertaining
to aeronautical services” applies only to “operation & maintenance cost”
and “corporate tax”. In this regard it was submitted that in the formula
for TR, operation and maintenance cost pertaining to aeronautical
services is reckoned. Similarly, as defined, corporate tax is also only in
terms of earnings pertaining to aeronautical services for the said purpose.
51. It was contended by the Airport Operators that all through the SSA
and other documents, “pertaining to aeronautical services” has only been
used in the context of operation & maintenance costs and taxation. It
was further contended that “prevailing tariffs” is also a defined term
relating to aeronautical services and therefore, it would be absurd for
“revenues” to also relate to aeronautical services. It will only make sense
41
if “revenues” relates to non-aeronautical services.
52. On the accounting principle it was contended that the prevailing
tariff and the revenues represent the receipts of income whereas
operation and maintenance cost and corporate tax refer to outflow. With
respect to corporate tax, this has to be linked only to aeronautical
services. All revenues arising out of aeronautical and non-aeronautical
services were shared in full to compute the aeronautical charges prior to
01.01.2009. Thus, as per the provisions of Schedule I of SSA, the
hypothetical regulatory base will be computed based on the entire
revenue from the period between 01.04.2008 and 31.03.2009, i.e.,
aeronautical and non-aeronautical income so as to calculate the value of
the regulatory base. The expression ‘regulatory base’ means the assets
which are required to earn revenues by the regulatory entity.
53. Mr. Datar sought to rely on the judicial pronouncement in Nabha
Power Ltd. (NPL) v. Punjab State Power Corporation Ltd. (PSPCL) &
Anr.12 for the purposes of rules of interpretation of contracts and how
courts should read implied terms into the contract. More specifically he
relied on the Reddendo Singula Singulis principle, which states that
12 (2018) 11 SCC 508.
42
“Where a complex sentence has more than one subject, and more than
one object, it may be the right construction to render each to each, by
reading the provision distributively and applying each object to its
appropriate subject. A similar principle applies to verbs and their
subjects, and to other parts of speech.”
It was, thus, urged that this principle should be applied to interpret
the disputed clause at hand.
54. AERA contended that “prevailing tariff” and “revenue” are not
two different phrases. Prevailing tariff results in the computation of
revenue and by itself the prevailing tariff cannot be used as a component
to determine RB0. The expression “pertaining to aeronautical services”
should be applied to either all the components of HRAB or none at all.
On accounting formulation, it was urged that Prevailing Tariff x No. of
Users = Revenue and, thus, there could be no bifurcation.
55. Mr. Buddy Ranganathan learned counsel for FIA sought to contend
that the definition of TR formula as well as the Regulatory Base and the
Hypothetical Regulatory Base made it clear that they all pertain to
aeronautical services and assets. He urged that adding the component of
43
non-aeronautical revenue by trying to bifurcate “prevailing tariff and
revenue” is unwarranted and is contrary to the SSA. It was also
contended that MIAL also understood this in the same manner and while
arguing on 23.11.2011 before AERA for calculation of HRAB, it had
taken 30 per cent of non-aeronautical revenue whereas before this Court
it has suggested that 100 per cent of non-aeronautical revenues be taken
in the definition of HRAB. AAI’s letter dated 18.06.2018 talks about
traffic revenue and non-traffic revenue which was completely different
from tariff revenue and bears no relation to HRAB.
Our Rationale:
56. If we analyse the aforesaid aspect, it is an issue of plain
construction of the contract as it reads. There is no reason why explicit
grammatical connotation should not be applied to a contract unless it
results in some absurdity. The contract was negotiated by experts and
they are expected to know all the ramifications of the language they use.
The sentence reads as under:
“ii. the hypothetical regulatory base computed using the then
prevailing tariff and the revenues, operation and maintenance
cost, corporate tax pertaining to aeronautical services at the
44
airport, during the financial year preceding the date of such
computation.” (emphasis supplied)
57. The question, which arises is whether prevailing tariff and revenue
is one expression itself followed by a comma, which refers to operation
and maintenance cost and another comma followed by corporate tax.
Thus, the three expressions have been used whereafter it is added that it
pertains to aeronautical services at the airport. To our mind, it is quite
clear that all the three phrases are qualified by them pertaining to
aeronautical services at the airport. An alternative plea was raised (a
lesser one at that) to distinguish prevailing tariff and revenue as two
different terms. This was to make aeronautical services not applicable, at
least, to prevailing tariffs and revenue by seeking to bifurcate these two
expressions. The result sought to be achieved was that as an alternative,
the aeronautical services would apply to operations and maintenance on
one hand and corporate tax on the other while seeking to exclude tariff
and revenue. If one may say, in order to achieve a particular result, a
reverse engineering process was sought to be applied to contend that the
term revenue would include both aeronautical and non-aeronautical
services.
45
58. We are unable to appreciate how the principle of interpretation of
Reddendo Singula Singulis principle as discussed in Nabha Power Ltd.
(NPL)13 case would be applicable in the present case. The principle is
clear in its terms. It is when a complex sentence has more than one
subject and more than one object that a construction may be required to
render each to each by reading the provision distributively. Firstly, we do
not find it a complex sentence. Secondly, there is no requirement to read
one part with one particular aspect by excluding the other part of the
sentence. The sentence reads clearly where the three concepts are
qualified by aeronautical services.
59. The endeavour should not be to somehow achieve an objective of
increasing the financial inflow of the Airport Operators by one method or
the other. It is not a contract drawn by laymen but by specialists. To
somehow strain the aspect of construction to achieve a particular
objective cannot be a method of constructing this clause. We do find that
the argument is specious, innovative as it may be.
60. We have, thus, no hesitation in agreeing with the view adopted by
13 (supra).
46
AERA and the TDSAT.
Issue B
61. The DIAL tariff order passed by AERA records that training is an
integral part of efficient operation and hence costs incurred in this
activity cannot be ignored only on account of alleged overlap. The cost
admittedly pertained to aeronautical services. AERA disallowed
separation of operation and maintenance costs into “efficient costs” and
“non-efficient costs” and took into account only efficient costs while
calculating HRAB especially when SSA makes no such distinction.
62. The aforesaid conclusion was upheld by TDSAT in the appeal,
wherein repelling the plea of DIAL to exclude the cost of an extra set of
employees for the initial year for calculating HRAB had been rightly
negatived in the light of the provisions in OMDA and other relevant
facts. It was observed that no good ground was made out to overlook the
costs actually incurred.
63. Dr. A.M. Singhvi and Mr. Krishnan Venugopal, learned senior
counsels appearing for DIAL sought to contend before us that the AAI
47
manpower was contractually imposed upon DIAL pursuant to Article
6.1.1 of OMDA. Thus, only the cost of such manpower should have
been included as part of operation and management cost which would
allow efficient costs to be recovered through pricing being the relevant
cost for operating the airport as mandated by the Economic Efficiency
principle in the SSA. Thus, the cost of DIAL’s employees should not be
considered for calculation of HRAB as the same was required in the
transition phase and not in normal course of business. Thus, as per the
SSA, HRAB should be calculated considering profit in normal course of
business for the year immediately before the first control period (i.e., FY
2008-2009). The inclusion of the cost of DIAL manpower in addition to
the contractually mandated AAI manpower in the operation and
management cost artificially inflated the operation and management cost,
thereby distorting the value of HRAB which was in violation of Section
13(1)(a)(vi) of the said Act. It was the plea that AERA had not gone into
the issue of duplication of work and, therefore, the issue cannot be raised
by the respondents at this stage.
64. On the other hand, this plea was stoutly resisted by both AERA
and FIA predicating that training was an integral part of efficient
48
operation and, therefore, costs incurred in this activity, which is an
aeronautical activity, could not be ignored. It was not the case of DIAL
that the cost of AAI staff was not incurred for any aeronautical service or
that the AAI staff functioning at the airport was unnecessary for the
smooth operations of IGIA during FY 2008-2009. It was only a nonrecurring cost and not a non-efficient cost contrary to DIAL’s plea this
cost was a non-efficient cost and therefore could not have been taken into
account. The AAI employees and the employees appointed by DIAL
worked as an integrated unit to run the airport and as and when AAI team
was weaned away, DIAL had added new employees to take their place.
65. We find little merit in this contention. The principle of economic
efficiency incorporated in SSA only means that there should be no extra
cost included which does not affect the efficiency of the system. It can
hardly be said that the system could have worked in the relevant year
without the AAI manpower. No doubt it was a transition phase which
required both sets of manpower to work in tandem towards the efficiency
levels. The relevant aspect is that as and when AAI started pulling out
their manpower, DIAL supplemented the manpower. That manpower
supplemented may be less or more is not relevant. In the year in
49
question, the presence of both sets of manpower was necessary for the
efficient functioning and the manpower of DIAL was in the learning
process. This learning curve cannot be excluded on the ground of not
being relatable to economic efficiency. It can hardly be called
duplication of work even though it may in some sense add to the value of
HRAB but that is a natural corollary. The parties to the contract were
quite conscious of this ramification as they knew the methodology which
would be adopted for the takeover of the airport. Now to contend that
this should be excluded to somehow increase the profit margins of DIAL
is, in our view, completely unsustainable and, thus, we reject this
contention.
Application of CPI-X methodology for calculation of tariff:
66. A mathematical controversy has arisen with respect to the
algebraic formulation arising from the methodology adopted by AERA.
AERA calculated tariff by applying Consumer Price Index (for short
‘CPI’) and then determining the ‘X factor’, which would be subtracted
out of CPI. This X factor has to be calculated as per the SSA. We will
have to appreciate the background scenario to determine the issue. The
operation of the airports is monopolistic in character. The endeavour is
50
that this monopolistic character should not be misused and, thus, in a way
revenue returns are sought to be controlled. The CPI is determined by
the Government from a basket of pricing factors. From this CPI, the X
factor is to be subtracted. This is how AERA seeks to apply the formula.
The view of DIAL is that step one is calculation of TR and thereafter at
the second stage the CPI should be subtracted. Finally, X factor in
applied. On the other hand, as far as AERA is concerned they have made
it a two-stage process by which target revenue is calculated first and CPI
and X factor are calculated together at the second stage.
67. We now come to the issue of X factor as per Schedule 1 of the
SSA. The X factor is calculated by determining what equates the present
value over the regulatory period of the target revenue with the present
value that results from applying the forecast traffic volume with a price
path based on the initial average aeronautical charge, increased by CPI
minus X for each year. Accordingly, the following equation has been
provided:
51
where ACij = average aeronautical charge for the jth category of
aeronautical revenue in the ith year
Tij = volume of the jth category of aeronautical traffic in the ith year
X = escalation factor
n= number of years considered in the regulatory period
m = number of categories of aeronautical revenue e.g. landing
charges, parking charges, housing charges, Facilitation Component
etc.
The maximum average aeronautical charge (price cap)' in a particular
year 'i' for a particular category of aeronautical revenue 'j', is then
calculated according to the following formula:
ACi= ACi-1 x (1+CPI-X)
where CPI = average annual inflation rate as measured by change in
the All India Consumer Price Index (Industrial Workers) over the
regulatory period.
68. It is apparent from the reading of the aforesaid equation that X
factor does not directly figure in the equation but the SSA provides the
following formula to calculate the maximum average aeronautical charge
(price cap) in a particular year ‘i’ for a particular category of aeronautical
revenue ‘j’:
ACi= ACi-1 x (1+CPI-X)
69. It is the plea of DIAL that in the CPI-X methodology of tariff
determination as envisaged in the SSA, the CPI is tariff add-on to cover
52
inflation. It was thus suggested that in this methodology, the efficient
way is to determine the X factor without considering inflationary
increases and only considering real increases in costs, which would
provide an unadulterated ‘X factor’, bereft of inflation. Thereafter, the
CPI inflation coverage on actual year on year basis in rate card is
provided to ensure transparency and ease of computation. Hence, DIAL
requested AERA that it should first arrive at ACi without inflations and
thereafter apply the CPI inflation separately.
70. AERA in DIAL Tariff Order that if this submission was to be
implemented, it would result in the following equation:
71. Regrouping the terms, the aforesaid formula would effectively
result in the following:
72. AERA thus held that this formula contains an additional term
“-ACi-1 x CPI x X” in the determination of aeronautical charge, when
compared to the formulation in the SSA. It was observed that for a
negative X factor, this additional term would result in a net increase in
53
the aeronautical charge. AERA decided that the treatment suggested by
DIAL is not envisaged in the SSA.
73. The subsequent MIAL Tariff Order opined that in the illustration
provided in Schedule 1 of the SSA, X factor is determined together with
inflation. AERA had proposed to follow the formulation specified in the
SSA and to calculate the X factor by solving the system of equations
mentioned therein. In light of no comments by stakeholders or MIAL in
respect of AERA’s position, AERA decided to continue with this position.
74. The TDSAT in terms of its order dated 23.04.2018 opined that the
formula for aeronautical charges is based on the shared till inflation-X
price cap model. The equation suggested by DIAL is different from what
is provided in the SSA and hence is unacceptable. Such anomaly arises
when an interpretation is sought where none is warranted in the SSA.
The TDSAT vide its subsequent order dated 15.11.2018 while dealing
with the MIAL appeal did not delve into the CPI-X methodology, and the
issue has not been appealed by MIAL before the Supreme Court.
75. In the submissions before us, DIAL sought to contend that each
step in CPI-X methodology needs to be applied sequentially as
54
combining all steps would lead to an incorrect result. The three steps
 referred to in the beginning would be:
Step 1 is to apply the tariff formula to determine the target
revenue.
Step 2 requires the calculation of the X factor expressed as a
percentage that would need to be applied to the existing tariff rate
card to equate the existing tariffs to the target revenue. The X factor is
required to be determined without considering inflation which would
provide an unadulterated X factor bereft of inflation. Thereafter, the
existing tariffs may need to be increased or decreased and hence the
X-factor may either be an escalation/reduction factor.
Step 3 is to apply the formula set out in Schedule 1 of the SSA
to factor inflation into the tariffs along with the X factor. This would
require that the existing tariffs be increased or decreased by the sum
of the X factor and the CPI expressed as a percentage.
The use of the word ‘then’ in the formula for maximum average
aeronautical charge in step 2 and before step 3 shows that X is to be
calculated and applied first, and thereafter increased by CPI. The
55
approach adopted by AERA calculates X along with CPI, where CPI
gets subsumed in X. However, target revenue escalated by X
including CPI can never be equal to aeronautical charges because that
would amount to giving the benefit of CPI on one hand and taking it
away on the other hand.
76. DIAL also sought to contend that CPI must be applied to all five
building blocks. AERA had applied the CPI to only two blocks and not
to the remaining three building blocks, i.e. return on RAB, depreciation,
and taxes. AERA had not provided any logical basis or explanation for
this partial application of CPI, due to which the value of tariff increase
had reduced. However, there was no mandate in the SSA to apply the CPI
only to operation and maintenance costs, and non-aeronautical revenues,
and not to the other building blocks in SSA. DIAL sought to produce an
expert opinion of Prof. Martin Cave14 to canvas that AERA’s consultation
paper had misunderstood the purpose of CPI. The approach had focussed
on cost and revenue of the regulated business, whereas the focus should
have been on overall potential for profits. Thus, neither AERA, nor any
of the stakeholders have been able to produce any expert evidence to the
14 Former Deputy Chairman of erstwhile UK Competition Commission and currently a visiting Professor at
Imperial College Business School in regulatory economics.
56
contrary, or even rebut Prof. Cave’s critique of the manner in which
AERA had applied the CPI-X methodology in Schedule 1 of the SSA.
77. The AERA, on the other hand, sought to rebut the approach
canvassed by DIAL. The plea based on selective treatment of two
building blocks was sought to be repelled as incorrect as even though
AERA had applied the CPI factor to each “jth category of aeronautical
revenue”, all five blocks were taken into consideration for calculating the
Target Revenue for aeronautical service by using the formula of Target
Revenue set out in Schedule 1 of the SSA.
78. The concept and purpose of the CPI-X factor is to equalize the Net
Present Value of the Target Revenue determined as per formula for
determining the Target Revenue in Schedule 1 of the SSA which is based
on building blocks and is a cost-based formula, to the Net Present Value
of the actual/projected revenue determined using the forecast traffic
volume, which is a revenue-based formula. This was so as the Net
Present Value of the TR determined as per the formula in the SSA would
be different from the actual/projected revenue determined by the Net
Present Value of the actual/projected revenue based on traffic volume.
57
79. Thus, it is the say of the AERA that if “X factor” is equalised
before CPI is factored, the Net Present Value of Target Revenue will get
equated with the Net Present Value of the actual/projected revenue, and
will thereafter be enhanced using 1+CPI, making the Net Present Value
of the actual/projected revenue always higher than the Net Present Value
of Target Revenue.
80. FIA sought to support the stand of AERA by emphasising that
DIAL had willingly entered into the SSA and it was not open to DIAL to
seek revision of its terms and rescind from the agreement entered into or
cause violence to the algebraic formula. DIAL was thus seeking to alter
the agreement and such alteration of the terms would be impermissible
and detrimental to the stakeholders. It was further submitted that DIAL
had not provided the detailed business plans and the computation based
on which X-Factor had been determined. The expert opinion without
citing any authority alluded to the “orthodox method” for calculation of
the formula, and no reliance ought to be placed of the same due to of lack
of substantiation. AERA had duly factored for inflation where applicable
and required with regard to other components, such as return on RAB,
58
depreciation and tax. A reading of the AERA guidelines and the SSA left
no doubt that the return on RAB is to be calculated on a nominal
basis, i.e. after considering inflation. Depreciation is not cash incurred
and as such the question of considering inflationary index for the same
does not arise. Lastly corporate tax is a derivative of aeronautical
revenues and aeronautical expenses, which are components that have
been duly adjusted for inflation as per the formula for Target Revenue
provided for in the SSA, and, hence, did not require any further
adjustment for inflation.
Our Rationale:
81. On the consideration of the plea it is obvious to us that the
endeavour of DIAL was to lower the ‘X-factor’, which in turn will result
in a higher tariff. The objective is, thus, how the tariff can be made
higher rather than staying true to how the agreement reads. A reverse
engineering process again!
82. We must keep in mind that a specialised authority has gone into
this aspect and also the Tribunal. The controversy revolves around a
formula. This formula in turn would have been determined after due
59
deliberations. It is an algebraic formula and has to be solved by the
principles of algebra. We can only remind ourselves that the BODMAS
principle would have to apply to the formula in the SSA, which is what
the AERA has done. What DIAL wants to do is to re-write the formula
and then apply BODMAS. This, in fact, causes complete violence to the
formula itself. If the manner of calculation of DIAL was to be the basis,
then the SSA would have provided that formula. Now DIAL seeks to rewrite/remodel the formula based on the so-called expert opinion, which
is self-serving in character.
83. DIAL sought to lay a lot of emphasis on the wordings prior to the
setting out of the formula. In that process the use of the word “then” was
sought to be used as a rationale for re-working the formula. In our view,
all that the sentence states is that the maximum average aeronautical
charge (price cap) in a particular year ‘i’ for a particular category of
aeronautical revenue ‘j’ is “then” calculated according to the formula.
The fact that these have to be worked within the formula is emphasised
and the earlier three aspects are factors which have to be included in the
formula in the manner so provided.
60
84. We cannot accept such a self-serving argument by DIAL to
somehow enhance their revenue and that possibly is the reason that
MIAL did not even consider worth its while to emphasise it before the
Tribunal or come up in appeal on that aspect before us. We have, thus,
no hesitation in rejecting this plea of DIAL and affirming the manner of
calculation as per formula by the AERA.
Revenue from Disallowed Area:
85. In the determination of development fee, while approving the
project cost, AERA disallowed an area of 8652 sq. mtrs. of Food and
Beverages area. The said area consisted of non-aeronautical assets built
within IGIA’s terminal area. AERA determined the same to be excessive
construction and not required.
86. AERA in the DIAL Tariff Order opined that the mere fact of
disallowance does not impact the real asset allocation on the ground. In
paras 7.8 to 7.11 of the DIAL Tariff Order, AERA observed that in its
Development Fee Order, assets for which the costs were disallowed were
not required to be built and were over and above the requirement in
respect of the airport project. However, even though AERA had
61
disallowed costs incurred in creation/construction of such assets from the
allowable project cost, these assets had been created, were being used by
the airport operator, and were also accounted for in the final asset
allocation mix. AERA had neither prohibited the airport operator from
utilizing such assets nor was the airport operator asked to decommission
them.
87. The question of whether the cost of construction of a particular
area providing non-aeronautical services was to be considered as part of
the total project cost in determining the development fee was not relevant
to the present consideration. In para 21.4.5 of the DIAL Tariff Order,
AERA observed that it had taken the decision while determining the
development fee under Section 13(1)(b) of the said Act, read with
Section 22A of the AAI Act. However, the present exercise pertained
only to fixation of aeronautical tariff in terms of Section 13(1)(a) of the
said Act, which only required determination of aeronautical RAB. It was
decided that though an area of 8652 sq.mtrs. was disallowed in the
Development Fee Order, the total non-aeronautical revenue would be
reckoned towards the determination of aeronautical tariff without the
exclusion proposed by DIAL.
62
88. Interestingly MIAL did not think it worth its while to raise such a
plea either before the AERA or the TDSAT. The TDSAT’s order dated
23.11.2018 relating to the appeal by DIAL had also not modified the
DIAL Tariff Order in any manner. DIAL still sought to contend that the
view adopted by AERA was fallacious and sought to rely on the
definition of “non-aeronautical assets” in the OMDA. As per article 1.1
of the OMDA, non-aeronautical assets are defined as under:
“all assets required or necessary for the performance of nonaeronautical services at the airport.”
89. It was thus urged that the disallowed area would fall outside the
ambit of non-aeronautical assets. Therefore, they were also outside the
ambit of Revenue Share Assets as defined under the SSA. Hence, the
revenue generated from the disallowed area could not be considered as
part of revenue from Revenue Share Assets.
90. DIAL urged that AERA’s approach was not only discriminatory
but also inconsistent and contrary to its own tariff philosophy and
guidelines. As per para (g) of 5.2.1 of AERA’s Guidelines on Tariff
Determination for Airport Operators 2011 - where an asset is excluded
63
from RAB, the corresponding revenues and expenditures are also to be
excluded from the TR. Similarly, the revenue from the disallowed area
should not form part of the revenue from Revenue Share Assets and
accordingly 30 per cent of such revenue should not be considered for
purposes of the cross-subsidy. Considering the revenue from disallowed
area for cross-subsidizing the tariff would amount to penalizing DIAL
twice; by disallowing the cost of the subject area, and then by including
the revenue generated therefrom in reducing the TR of DIAL.
91. DIAL contended that AERA had violated Section 13(4)(c) of the
said Act, which required that its decisions be fully documented and
explained. The AERA’s approach was stated to be inconsistent with the
expert opinion of Prof. Martin Cave. Prof. Cave had opined that AERA
should exempt the excluded area from which DIAL had already been
prevented from recovering its proper economic costs from the pool of
Revenue Share Assets. AERA simply re-emphasised the reasoning
contained in the DIAL Tariff Order. FIA supported the same and
emphasised that the determination of the allowable project cost and
determination of aeronautical tariff are wholly separate issues under the
provisions of the said Act. The project cost was determined under
64
Section 13(1)(b) of the said Act read with Section 22(a) of the AAI Act.
However, the question that fell for determination of AERA in the DIAL
Tariff Order related to Section 13(1)(a) of the said Act for tariff fixation,
which only required determination of aeronautical RAB. Whether a
particular area was considered for project costs or not was of no
relevance as the same was not a pass-through.
Our Rationale:
92. It would suffice for us to say that the present controversy is limited
to whether the revenue from disallowed area must be considered while
fixing aeronautical tariff under the said Act. The airport operators were
not asked to decommission the assets in the disallowed area. The said
assets had already been created and were being used by the airport
operator. Hence, the revenue from the disallowed area had to be included
in the tariff.
93. The aspect relating to disallowance of the project cost for the
disallowed area was not urged by FIA and hence, we are not commenting
on the same.
Calculation of tax for determining the Target Revenue:
65
94. The TR is to be calculated as per formula provided in Schedule 1
of the SSA. The ‘T’ (tax) element in the formula contemplates the
inclusion of “corporate taxes on earnings pertaining to Aeronautical
Services”. AERA has opined qua both Airport Operators that the
calculation of corporate taxes should be done after deducting all costs,
which would include the revenue share or the Annual Fee paid by them
to the AAI.
The ‘T’ element in the DIAL and MIAL Tariff Orders
95. DIAL had computed the ‘T’ element by separately calculating
aeronautical earnings and determining the corresponding taxes paid on
the same. This manner of calculation excluded earnings from nonaeronautical sources and the tax on such earnings. In essence, DIAL
proposed to treat aeronautical earnings as a separate ‘block’ or a
standalone entity. It was contended before AERA that this was in line
with the SSA, and was a worldwide practice followed across all
regulatory regimes in all industries.
96. AERA vide the DIAL Tariff Order disagreed with DIAL’s
calculation and noted that in financial years 2009-10 and 2010-11, the
66
actual tax paid by DIAL was nil. For 2011-12, the forecast for tax
required to be paid was also nil. For 2012-13 and 2013-14, AERA was
able to make certain forecasts. AERA also noted that the tax was a
statutory payment due to the Government and was being expensed as a
cost in the target revenue computation. Thus, if actual tax paid in any of
the years was lower than the forecast amount, it would lead to a situation
wherein DIAL would be unjustly enriched. Thus, only the actual tax paid
could be taken into account in the ‘T’ element for the years 2009-10,
2010-11, and 2011-12.
97. Insofar as MIAL is concerned, a similar manner of calculation was
adopted. However, AERA vide the MIAL Tariff Order noted that there
was a significant difference between the actual tax paid by MIAL in
respective years as a company and the tax towards aeronautical revenue
calculated by MIAL. This difference was due to the latter calculation not
accounting for the Annual Fee paid by MIAL to AAI.
98. AERA adopted the view that the total tax paid by MIAL consisted
of its operations as a whole and the total cost associated with the same.
In its company account, MIAL had taken the revenue share paid to AAI
67
as a cost and there was no separation into aeronautical or nonaeronautical. Thus, it was held that the tax paid by MIAL should be taken
on actuals for the years 2009-10, 2010-11, 2011-12, and a similar method
was to be followed for 2012-13 and 2013-14. AERA observed that MIAL
ought not to benefit from the difference between tax calculated in its
regulatory account and the tax actually paid by it. This was
notwithstanding the fact that considering the actuals of tax paid would
lower the TR.
99. The TDSAT has actually just affirmed the view taken by AERA for
DIAL. The TDSAT in the appeal by MIAL had also reached a similar
result although with greater explication. MIAL had relied on
hypothetical examples which showed that the ‘T’ element in the tariff
formula would always be zero if the Annual Fee were to be expensed as a
cost. The TDSAT disagreed and found that the outcome would not be
zero simply if the assumptions taken in the hypothetical examples were
to change. The ‘T’ element could only be said to be rendered otiose if
the result of ‘T’ was zero in all circumstances, which could not be said to
be the case here.
68
100. MIAL did seek to contend that they were given a commitment that
the revenue share payable to AAI would not be treated as an element of
cost. The AERA negated this contention on the ground that there was
nothing to evince the same. The illustrative example contained in
Schedule I to the SSA, in which the ‘T’ element was a positive numerical
figure, would not be indicative of such a commitment. The example was
certainly useful but could not be said to be exhaustive in terms of facts or
assumptions. The TDSAT found that the AERA was following a
consistent and reasonable methodology, which was:
First, AERA had proposed to consider the actual tax paid by MIAL as the
component ‘T’.
Second, AERA would review the actual corporate tax on aeronautical
services paid by MIAL.
Third, AERA would true-up the difference between corporate tax paid
after separating aeronautical activities and the actual tax paid as
considered by AERA.
101. The TDSAT found that AERA’s methodology was also consistent
with Article 3.1.1 of the SSA. The said provision provided that the
Annual Fee “…shall not be included as part of costs for provision of aero
services and no pass-through will be available…” It was observed that
69
this provision mandated that the Annual Fee would not be made part of
Operation & Maintenance or any other cost so that it does not have a
‘pass-through’ effect. However, this could not be a ground for MIAL to
argue that the Annual Fee was not a ‘cost’ for taxation purposes. In fact, a
‘pass-through’ effect would occur if the Annual Fee was not deducted as
a cost. If not deducted, it would have an upward effect on the value of T,
thereby increasing the value of TR.
102. It was held that ‘T’ was “corporate tax on earnings pertaining to
aeronautical services” (emphasis supplied). Earnings were nothing other
than the balance of revenue after deducting costs and expenses. Annual
Fee was nothing more than a cost and had to be deducted as well.
103. Mr. Arvind Datar, learned senior counsel led the battle both on
behalf of DIAL and MIAL on this aspect.
104. His emphasis was on the express language of the definition of ‘T’
in Schedule 1 of the SSA which indicates that a determination has to be
made of “corporate taxes on earnings pertaining to Aeronautical
Services”. Thus, ‘T’ had to be computed based solely on the regulatory
accounts prepared by AERA for the TR formula by excluding the Annual
70
Fee. A contrary view would amount to alteration of the definition, which
would then read as corporate taxes ‘paid’ on Aeronautical Services or
corporate taxes ‘on’ Aeronautical Services. He strenuously invoked the
principle of business efficacy to read a term in the agreement to achieve
the results intended by the parties acting as prudent businesspeople.15
105. It was his submission that if AERA’s method were to be followed,
there would never be a profit on aeronautical services. The total of
Operation & Maintenance, depreciation, and interest, taken together with
the Annual Fee would always exceed total aeronautical revenues. ‘T’
would thus always be zero and the component would be rendered otiose.
Various hypothetical examples were adduced in this regard. To fortify
the argument, it was submitted that the given value of ‘T’ was positive in
the numerical illustration appended to the Tariff Determination formula
in Schedule I to the SSA.
106. Mr. Datar then turned to Article 3.1.1 of the SSA which mandates
that the Annual Fee shall not be considered as a cost in relation to
provision of Aeronautical Services. The decision in Nabha Power Ltd.16
15 Nabha Power Ltd. (NPL) (supra).
16 (supra).
71
was cited to the effect that a multi-clause contract must always be
interpreted in a manner that any view on a particular clause of the
contract should not do violence to another part of the contract. The
Airport Operators would effectively be victims of ‘double jeopardy’ if
AERA’s methods were followed. The Annual Fee paid by them was not a
constituent of the TR Formula and could not be recovered by them.
However, they would also be unable to fully recover the corporate tax
component, i.e., ‘T’, due to the Annual Fee getting deducted as a cost
from aeronautical revenue.
107. AERA and FIA had common ground while endorsing the
impugned order. The actual tax paid was the substratum of their
argument. The Airport Operators, it was pleaded, could not be permitted
to unjustly enrich themselves and create an additional burden for other
stakeholders if their actual taxes paid were lesser than forecast taxes.
The established regulatory practice was stated to consider corporate tax
paid on actuals and not on a notional basis.
108. It was submitted that the Airport Operators’ reliance on Article
3.1.1 of the SSA was misplaced. The clause provided that there shall be
72
no pass-through available in relation to Annual Fee. However, a passthrough would certainly occur if the Annual Fee was not deducted as a
cost from Aeronautical Revenue. The burden for bearing the same would
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.
109. 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.
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Our Rationale:
110. 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

111. 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 says and
whether some other construction would be required to be given to the
contract.
112. 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
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
17 (supra).
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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.
113. In the overall scenario, it is the TR which is crucial where ‘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.
114. 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 re75
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.
115. 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 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
pass-through would be available in relation to the same.” (emphasis
supplied).
116. The first part of the proviso is clear in its terms that upfront fee
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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
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.
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117. 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.
118. We now come to remaining issues raised in the appeals filed by
FIA and Lufthansa.
Development Fee:
119. The Development Fee (for short ‘DF’) concept does not 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 basis for a period
of 36 months with effect from 01.03.2009. The aforesaid order
mentioned two milestones upon which this approval was to be reviewed
at a subsequent stage by AERA. A similar order of the Central
78
Government was made with respect to MIAL on 27.02.2009 although
with different amounts of DF.
120. These orders were the subject of challenge in Civil Appeal 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
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.
121. In the case of MIAL, AERA determined the DF at Rs. 100 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.
18 (2011) 5 SCC 360.
79
122. The DF has been subsequently discontinued by DIAL with effect
from 30.04.2016. Thus, the dispute pertains to only that particular
window.
123. 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
(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 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 and such
tariff, tariff structures or the amount of development fees shall be
notified in the Official Gazette.]”
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124. 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:
125. 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
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
decided in its previous order dated 23.04.2018 and was not an issue that
survived for determination.
126. FIA submitted that Cargo and Ground Handling Services were
contemplated to be aeronautical in nature, and referred to the definition
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under Section 2(a) of the said Act and Schedules 5 & 6 of OMDA. FIA
also sought to rely on the Parliamentary Standing Committee Report on
the AERA Bill 2007 to fortify its stand.
127. 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 the
AERA and the appellate authority and that closes this issue.
Levy of User Development Fee (UDF):
128. 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.
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
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aforesaid provision, there could not be subsequent determination of
another UDF.
129. 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:
130. One of the last-minute arguments sought to be advanced by
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 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
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granted only one meeting. This was not consonant with the due
consultation process envisaged in Section 13(4) of the said Act.
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 truedup as a matter of course.
131. We are unable to appreciate this contention for the reason 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
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
84
the authorities. That role having been performed, the general grievances
really do not survive.
Project Cost:
132. An aspect seriously debated before us was with respect to 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
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.
133. 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
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upward revision of Project Cost was accepted by AERA to be
Rs.12,502.66 crores. AERA relied upon the reports of KPMG and
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.
134. 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 Fee order dated
08.11.2011 to comment that while the Project Cost in 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.
135. AERA sought to rebut these contentions before the TDSAT. It was
contended that the avowed task of determining the Project Cost could
86
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.
136. 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 to
ensure transparency in exercising its powers and discharging its
functions. The only caveat put by the TDSAT was that the exclusions
87
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.
137. 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
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.
138. 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
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explicitly provided that the airport operator was solely responsible for
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.
139. In the aforesaid context, arguments were also advanced on the
aspect of role of AERA as a regulator in determining Project Cost.
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 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.
140. On the other hand, the Airport Operators contended that Section
13(1)(a)(i) of the said Act deals with capital expenditure while Section
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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 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.
141. It was sought to be emphasized that this was a pioneering effort
and the Commonwealth Games 2010 were round the corner. The initial
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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:
142. 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 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.
143. 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
91
under the said Act.
144. 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-para
(i) while determining tariff.
145. 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 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
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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.
146. 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:
147. 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
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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.
148. 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.
149. The appeals stand allowed limited to the aforesaid extent while on
all other aspects the appeals and cross-appeals are dismissed.
………………………J.
[Sanjay Kishan Kaul]
....……………………J.
[M.M. Sundresh]
New Delhi.
July 11, 2022.
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