Supreme Court Clarifies Calculation of Aeronautical Tariffs, Upholds Regulatory Authority’s Decision: Delhi International Airport Ltd. vs. Airport Economic Regulatory Authority of India & Ors. (2022) INSC 618 (11 July 2022)

Date of the Judgment: 11 July 2022
Citation: (2022) INSC 618
Judges: Sanjay Kishan Kaul, J., M.M. Sundresh, J.
The Supreme Court of India addressed a complex dispute regarding the calculation of aeronautical tariffs at major airports. The core issue revolved around how certain revenues and costs should be treated when determining these tariffs, particularly concerning the Fuel Throughput Charge (FTC) and the Hypothetical Regulatory Asset Base (HRAB). The Court’s decision clarifies the powers of the Airports Economic Regulatory Authority of India (AERA) and sets important precedents for future tariff calculations. The bench was composed of Justices Sanjay Kishan Kaul and M.M. Sundresh.

Case Background

The case involves appeals from decisions made by the Airports Economic Regulatory Authority of India (AERA) and the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) regarding the determination of aeronautical tariffs for Delhi International Airport Limited (DIAL) and Mumbai International Airport Limited (MIAL). These airports were developed through Public-Private Partnership models, with DIAL and MIAL operating under agreements with the Airports Authority of India (AAI). The dispute arose from different interpretations of how revenue and costs should be calculated under the Airports Economic Regulatory Authority of India Act, 2008, and related agreements.

The main parties involved are:

• Delhi International Airport Ltd. (DIAL): The operator of Indira Gandhi International Airport in Delhi.
• Mumbai International Airport Limited (MIAL): The operator of Chhatrapati Shivaji Maharaj International Airport in Mumbai.
• Airports Economic Regulatory Authority of India (AERA): The regulatory body responsible for setting tariffs for aeronautical services.
• Telecom Disputes Settlement and Appellate Tribunal (TDSAT): The appellate body for disputes related to AERA decisions.
• Federation of Indian Airlines (FIA) and Lufthansa German Airlines: Airlines challenging certain aspects of the tariff orders.

The relief sought by DIAL and MIAL was primarily to challenge the AERA’s method of calculating tariffs, arguing that certain revenues were incorrectly classified and that costs were improperly included, leading to higher tariffs.

Timeline

Course of Proceedings

Initially, AERA determined aeronautical tariffs for the First Control Period (2009-2014) for both DIAL and MIAL. DIAL and MIAL filed appeals before the Airports Economic Regulatory Authority Appellate Tribunal (AERAAT). Due to changes in the composition of the Tribunal, the appeals were not resolved. Subsequently, the National Consumer Disputes Redressal Commission (NCDRC) was given additional charge as AERAAT, but this was again changed when the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) was designated as the appellate tribunal. The Supreme Court intervened to expedite the process, directing TDSAT to conclude the hearing for DIAL’s appeals. TDSAT eventually issued orders on DIAL and MIAL’s appeals, which were then challenged before the Supreme Court.

Legal Framework

The key legal provisions and agreements involved in this case are:

• Airports Economic Regulatory Authority of India Act, 2008: This Act established AERA and outlines its powers and functions, including the determination of tariffs for aeronautical services. Section 2(a) defines “aeronautical service,” and Section 13 specifies the authority’s powers and functions. Section 13(1)(a) states that the Authority shall determine the tariff for the aeronautical services taking into consideration the concession offered by the Central Government in any agreement or memorandum of understanding or otherwise.
• Airports Authority of India Act, 1994: This Act was amended to allow for private sector participation in airport development. Section 22A of the AAI Act deals with the imposition of Development Fees.
• Operation, Management and Development Agreement (OMDA): This agreement between AAI and DIAL/MIAL outlines the terms for the operation and development of the airports. Schedule 5 of the OMDA defines “Aeronautical Services,” and Schedule 6 defines “Non-Aeronautical Services.”
• State Support Agreement (SSA): This agreement outlines the principles for tariff determination, including the use of an Inflation – X Price Cap Model. Schedule 1 of the SSA contains the tariff determination formula.

The legal framework is designed to balance the interests of airport operators, airlines, and passengers while ensuring that tariffs are fair and reasonable. The framework also recognizes the need for private sector participation in airport development while ensuring that public interest is protected.

The algebraic formulation for calculating the Target Revenue (TR) as provided in Schedule 1 of the SSA is as follows:

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 JVC, after incorporating efficient capital 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 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.

I= investment undertaken in the period.

Arguments

The Airport Operators (DIAL and MIAL) argued that:

• Fuel Throughput Charge (FTC): FTC is an access/concession fee, not a service, and therefore should be treated as non-aeronautical revenue. They contended that they are not providing any service for supplying fuel to an aircraft, and the definition of “aeronautical services” in Section 2(a)(vi) of the AERA Act does not include FTC. They also argued that AAI had clarified that FTC was not an aeronautical charge and that they made their bids based on this understanding. They relied on ICAO documents to support their claim.
• Hypothetical Regulatory Asset Base (HRAB): The phrase “pertaining to aeronautical services” should only apply to “operation & maintenance cost” and “corporate tax,” not to “prevailing tariff and revenues.” They also argued that AERA should not have included the cost of DIAL’s manpower in addition to the contractually mandated AAI manpower when calculating HRAB.
• CPI-X Methodology: The Consumer Price Index (CPI) should be applied sequentially, with the X factor determined first, without considering inflationary increases, and then the CPI applied separately. They also argued that CPI should be applied to all five building blocks of the tariff calculation, not just two.
• Revenue from Disallowed Area: Revenue from areas disallowed by AERA should not be included in the calculation of aeronautical tariffs.
• Calculation of Tax for Determining Target Revenue: The corporate taxes on earnings pertaining to aeronautical services should be calculated by excluding the Annual Fee paid to AAI.

AERA, on the other hand, argued that:

• Fuel Throughput Charge (FTC): FTC is an aeronautical service as it is a fee collected for providing fuel to the aircraft. Section 2(a)(vi) of the AERA Act defines “aeronautical service” to include supplying fuel to the aircraft. They also relied on Entry 17 of Schedule 5 of the OMDA, which mentions “common hydrant infrastructure for aircraft fuelling services.” They contended that the Airport Operators were delegating the service to OMCs and taking a concession fee.
• Hypothetical Regulatory Asset Base (HRAB): The phrase “pertaining to aeronautical services” applies to all components of RBo, including “prevailing tariff and revenues,” “operation and maintenance costs,” and “corporate tax.” They argued that all three elements must pertain to aeronautical services and that the argument of the Airport Operators was inconsistent and illogical. They also contended that the cost of DIAL manpower was necessary for the efficient functioning of the airport.
• CPI-X Methodology: The CPI and X factor should be calculated together as per the SSA. They argued that the approach suggested by DIAL was not envisaged in the SSA. They also contended that CPI was applied to all five building blocks indirectly, as the Target Revenue calculation takes all five blocks into account.
• Revenue from Disallowed Area: The revenue from the disallowed area should be included in the calculation of aeronautical tariffs because the assets were being used by the airport operator.
• Calculation of Tax for Determining Target Revenue: The corporate taxes should be calculated after deducting all costs, including the revenue share or Annual Fee paid to AAI.

The Federation of Indian Airlines (FIA) supported AERA’s arguments, emphasizing that the Fuel Throughput Charge (FTC) is an aeronautical service and that the project cost should not be increased without proper scrutiny. Lufthansa argued that AERA had failed to discharge its duty as a regulator by not determining the tariff in a reasonable and efficient manner and that the levy of User Development Fee (UDF) was not contemplated in the said Act.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the Fuel Throughput Charge (FTC) should be treated as an aeronautical or non-aeronautical revenue?
2. How should the Hypothetical Regulatory Asset Base (HRAB) be calculated, specifically regarding the phrase “pertaining to aeronautical services” and the inclusion of manpower costs?
3. What is the correct methodology for applying the CPI-X formula in tariff determination?
4. Should revenue from disallowed areas be included in the calculation of aeronautical tariffs?
5. How should corporate taxes be calculated for determining the Target Revenue, particularly regarding the deduction of the Annual Fee paid to AAI?
6. Whether the Development Fee (DF) was correctly determined and imposed?
7. Whether Cargo and Ground Handling Services should be treated as aeronautical or non-aeronautical services?
8. Whether the levy of User Development Fee (UDF) was valid?
9. Whether AERA had failed to discharge its duty as a regulator?
10. Whether the Project Cost was correctly determined?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

The Court also considered the following legal provisions:

Judgment

The Supreme Court upheld most of the decisions made by AERA and TDSAT, except on the issue of calculating corporate taxes. The Court’s findings are summarized below:

Ratio of the Judgment

The key ratios of the judgment are:

Sentiment Analysis

The sentiment of the judgment can be analyzed as follows:

Conclusion

The Supreme Court’s judgment in Delhi International Airport Ltd. vs. Airport Economic Regulatory Authority of India & Ors. (2022) INSC 618 provides crucial clarity on the calculation of aeronautical tariffs and upholds the regulatory authority of AERA. The Court’s decision on the Fuel Throughput Charge (FTC) and the Hypothetical Regulatory Asset Base (HRAB) sets important precedents for future tariff calculations. The judgment emphasizes the importance of adhering to the terms of agreements and the role of regulatory bodies in ensuring fair and reasonable tariffs. While the airport operators did not succeed on most of the issues, the Court’s decision on the calculation of corporate taxes provides some relief. The judgment is a significant step towards creating a transparent and predictable regulatory environment for the aviation sector in India.