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Secondary market access to spectrum: A primer

OCTOBER 09, 2015

By Narendra Kumar Singhvi

WELL, who hasn't heard about the 2G scam. It involved huge revenue loss to the government exchequer with politicians and government officials being charged with allegations from across the sectors. The Apex Court declared the issuance of 122 licenses as arbitrary and unconstitutional. In the latest auction in March this year, the Government fetched unmatchable revenue; however, around 11% of available spectrum was unsold.

Historically spectrum has been treated as a scarce resource and subject to strict government regulation. Advances in technology have enabled more efficient use of spectrum, but, at the same time, the number of users for that spectrum has also grown apace. To prevent interference between different users, the artificial generation and use of radio waves is strictly regulated by law, coordinated by an international body, i.e. ITU. The radio spectrum is divided into a number of bands on the basis of frequency and allocated to different users. The license granted by the Indian government for telecom operations as also the use of spectrum has been considered as a contract by the Hon'ble Supreme Court in Bharti Airtel Limited v. Union of India, AIR 2015 SC 2583.

When and where the licensed operators are not transmitting, the spectrum remains idle. Being licensed, the use of spectrum by any other person was not allowed. In India, spectrum is allocated service area wise and, therefore, spectrum requirement needs also should be assessed service area wise. While spectrum allotted to some players remains unused, other players face a crunch for it being a scarce resource. The varying spectrum needs for the telecom companies are due to varying customer profiles in particular service areas, in relation to which the spectrum is allocated.

Lately, with a view to improve spectral efficiency and quality of service as well as to revive the financial conditions of telecom companies with their allocated spectrum being unused, views favouring sharing of spectrum have gained momentum, not only from the industry, but also from the government. The sharing of spectrum allows secondary access to licensed spectrum and mitigates the shortage of licensed spectrum as such.

Earlier spectrum trading was not allowed primarily on the ground that Telecom Service Providers (TSPs) had obtained spectrum through an administrative process without paying its market price. Therefore, allowing such TSPs to trade in spectrum would have resulted in unearned windfall gains to such TSPs. That concern has been taken care of because the Government has decided that all TSPs will have to a pay one-time charge at a market-determined price for their existing spectrum holding beyond 4.4 MHz/2.5MHz for GSM/CDMA for the remaining validity period of the licenses.

On August 12, 2015, the Union Cabinet gave its approval to the guidelines on spectrum sharing, arising from the recommendations of TRAI. A close perusal of the guidelines and TRAI recommendations shows that only spectrum sharing will be allowed for the access service providers having licenses and spectrum in the same band. Clearly, leasing of spectrum will not be permitted. Reference, in this regard, can be made to recommendations of TRAI dated July 21, 2014 and further response dated May 21, 2015. The response of TRAI clarifies that in spectrum sharing, both the licensees pool the respective spectrum resources and use it simultaneously and that it is not akin to spectrum leasing.

On September 9, 2015, the Union Cabinet further approved a proposal of the Department of Telecommunications on guidelines for spectrum trading. The methodology adopted for spectrum trading is quite distinct from that for spectrum sharing. The norms for spectrum trading allow only outright transfer of right to use spectrum from seller to the buyer. Further, the spectrum trading will not alter original validity period of spectrum assignment as applicable to traded block of spectrum. When a block of spectrum is traded, the associated rights and obligations of the spectrum block shall stand transferred from the seller to the buyer. With trading of spectrum, the ownership of the usage right is transferred to the buyer. To understand the working of spectrum trading as proposed, reference can be made to recommendations of TRAI dated January 28, 2014 and further response dated May 21, 2015.

The steps taken by the government towards permitting secondary market access to spectrum have been hailed by the industry and are widely considered to result in better utilization of radiowaves and help small telecom companies to increase their operations. Simultaneously, the apprehensions regarding tax liability on the transactions of spectrum sharing have also gained momentum. While the uncertainty concerning treatment of spectrum as goods or services is glaring, the industry players have raised concerns about the imposition of tax itself, be it Service Tax or VAT.

The moot question is whether spectrum is goods or services. Spectrum is nothing but radio frequency used for wireless communication. The modern communications devices use radio or electro-magnetic waves to transmit sound, data and images. These are invisible wave-like movements that vary in size and intensity. A typical radio wave starts out at a zero point of voltage. It rises to a certain level, falls to another level, and then returns to the zero starting point. Each successive wave forms a wave cycle. A cycle can achieve varying speeds of the rise and fall motion. These speeds are measured in frequencies. Frequencies are measured in hertz or Hz. This term indicates the number of radio waves produced per second to complete the rise and fall cyclical movement. It is the universe of radio frequencies used in transmission of sound, data and images, which is called as spectrum. The spectrum, theoretically speaking, can range from zero to infinity. The International Telecommunication Union (ITU), however, formally recognizes 12 banks of spectrum ranging from 30 Hz to 3000 GHz. Thus, spectrum is nothing but cycle of radio frequencies used for wireless communication.

It is in this background that the question of spectrum being goods or services has to be answered. In BSNL v. Union of India, 2006-TIOL-15-SC-CT-LB, the larger bench of the Hon'ble Supreme Court held in no uncertain terms that the radio frequencies or electro-magnetic waves are a mere medium of communication and they are neither abstracted nor consumed/ delivered/ stored or possessed. That nor are they marketable. It held that what is transmitted is the signal through such means and no part of the waves itself is transferable or deliverable.

However, what is important to note is that the whole reasoning of the Supreme Court was based on the question whether the electro-magnetic waves are goods in respect of an end-use of telecom services. While ascertaining the nature of electro-magnetic waves, the bench was mindful of the fact regarding the scope of discussion being limited in the context of end-user. A perusal of the observations of the Court strengthens this reasoning that the ratio was laid down in the context of transfer of such waves to end-user, if any. In Para No. 60 of the order, it also recognized that the achievement of scientific or technological advances in future cannot be anticipated.

The observations in Para No. 60 have now seen the light of the day. A telecom company having license to use a particular spectrum will be permitted to allow the other company to use the same for providing telecom services. The marketability of these waves will not be under dispute. In this background, there is a possibility of considering the spectrum as goods and to invite the levy of VAT thereon. However, the clouds of uncertainty have grown manifold, particularly in the absence of the authorities having finalized the regulations.

Nonetheless, what is also important to note is the change in the policy approved by the cabinet. What was approved in August was spectrum sharing, wherein the companies are allowed to combine the respective spectrum capacities. However, the approval of spectrum trading in September goes a step ahead and mandates the outright transfer of rights along with obligations pertaining to licensed spectrum. In other words, it may also be considered as a transfer of license. Licenses such as REP license, DEPB etc. have already been subject matter of litigations, wherein Courts have held them to be goods.

The approval by the cabinet of the TRAI recommendations and consequent proposals of the DoT have already raised speculations. Generally, there are no substantial changes between the final regulations and the TRAI recommendations. A possible conclusion on the issue, in any case, can be arrived at on the basis of the provisions of the regulations only. One has to wait and watch the issuance of regulations, which is likely to take place soon.

(The author is Senior Associate, Lakshmikumaran and Sridharan, New Delhi.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the sites)

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