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

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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

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(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.

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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

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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

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‘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.

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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

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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 re-

evaluate 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.

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* 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 non-

aeronautical 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 Non-

Aeronautical 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 into-

plane 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 non-

aeronautical 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 Centre

9

;

Akshay N. Patel

10

; Shri Sitaram Sugar Company & Anr

11

].

42.The mere fact that the FTC has been discontinued subsequently

from 2020 would not give rise to an interpretation that it was a non-

essential 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 non-

recurring 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 j

th

category of

aeronautical revenue in the i

th

year

Tij = volume of the j

th

category of aeronautical traffic in the i

th

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 Cave

14

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 re-

write/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 non-

aeronautical 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 non-

aeronautical 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 non-

aeronautical. 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 pass-

through 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.

73

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).

74

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 re-

75

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

76

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.

77

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

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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.

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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 trued-

up 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

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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 4

th

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

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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

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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

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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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