Wednesday, April 27, 2011

UDF at Mumbai and Delhi airports

A Division Bench of the Supreme Court today declared that the User Development Fee [“UDF”] charged by the private operators of the Mumbai and Delhi airports is ultra vires. The judgment, reported as Consumer Online Foundation v Union of India, contains several observations that are crucial in ascertaining the proper scope of the public-private model [“PP”] in the aviation sector. This post set out two entirely distinct issues the Court considered, one of which is likely to prove important in subsequent disputes.

The structure of aviation regulation in India is found in the Airports Authority of India Act, 1994 [“AAI Act”]¸ which created the AAI, and provides in s. 12 that it is to exercise a variety of functions, such as planning runways, air safety services, facilities at airports etc. When the Government decided to adopt the PP Model in developing the Bombay and Delhi airports, two amendments were made to the AII Act. In 2003, s. 12A was added to provide that the AAI may “in the public interest or interest of better management of airports” make a lease of the premises of an airport and assign to the lessee some of its functions under s. 12. S. 22A was also added, and provided in gist that the AAI could, with the approval of the Central Government, levy development fees. This provision was amended in 2008 when the Airports Economic Regulatory Authority Act, 2008 [“AERA Act”] was enacted, to provide that AREA would determine the rates of the UDF. In 2006, the AAI, acting under s. 12, leased out the Delhi and Bombay airports to DIAL and MIAL respectively. On 9 February, 2009, the Government of India conveyed its approval of UDF rates to DIAL and MIAL, and UDF has been levied ever since. The Delhi High Court rejected a challenge to the legality of the levy.

The dispute before the Supreme Court turned on a close analysis of statutory language, which it is necessary to set out before the issues can be described. The relevant provisions are s. 12A(4) and s. 22A. Both versions of s. 22A are set out, for the minor differences in language potentially produce a different construction altogether.

12A. Lease by the authority.--(1) Notwithstanding anything contained in this Act, the Authority may, in the public interest or in the interest of better management of airports, make a lease of the premises of an airport (including buildings and structures thereon and appertaining thereto) to carry out some of its functions under section 12 as the Authority may deem fit:

Provided that such lease shall not affect the functions of the Authority under section 12 which relates to air traffic service or watch and ward at airports and civil enclaves

(4) The lessee, who has been assigned any function of the Authority under sub-section (1), shall have all the powers of the Authority necessary for the performance of such function in terms of the lease.

S. 22A before 2008 amendment

S. 22A as amended in 2008

22A. Power of Authority to levy development fees at airports. -- The Authority may, after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport, the development fees at the rate as may be prescribed and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of-

(a) funding or financing the costs of upgradation, expansion or development of the airport at which the fees is collected; or

(b) establishment or development of a new airport in lieu of the airport referred to in clause (a); or

(c) investment in the equity in respect of shares to be subscribed by the Authority in companies engaged in establishing, owning, developing, operating or maintaining a private airport in lieu of the…

22A. Power of Authority to levy development fees at airports.-- The Authority may,--

(i) after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport other than the major airports referred to in clause (h) of section 2 of the Airports Economic Regulatory Authority of India Act, 3 2008 the development fees at the rate as may be prescribed;

(ii) levy on, and collect from, the embarking passengers at major airports referred to in clause (h) of section 2 of the Airports Economic Regulatory Authority of India Act, 2008 the development fees at the rate as may be determined under clause (b) of sub-section (1) of Section 13 of the Airports Economic Regulatory Authority of India Act, 2008, and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of--

Two issues arose – first, is a private operator, as a matter of law competent under s. 12A(4) to levy UDF and secondly, in any event, can UDF be levied before rates are prescribed by the competent authority. It is convenient to begin with the second issue. The Court held that the levy of UDF is not consideration for services provided, but a “compulsory exaction of money by the Government” with the result that the requirements of Art. 265 had to be complied with. A powerful reason the Court gave for this conclusion is s. 22 of the AAI Act, which provides that the AAI may collect “charges and rent” from inter alia passengers for facilities offered to them. The Court said that the power in s. 22A to levy UDF is over and above the charges and rent, indicating that it was not intended to be levied for consideration, but was “really in the nature of a cess or tax for generating revenue for the specific purposes mentioned in … s. 22A”. It is for this reason, the Court held, that Parliament had to enact legislation specifically authorising the AAI to levy UDF, and therefore UDF could not be levied except strictly in accordance with the condition laid down in s. 22A. S. 22A, as the extract above indicates, requires that UDF must be levied “at such rates as may be determined” by AERA. The Court found that a letter by the Ministry of Civil Aviation giving approval to DIAL and MIAL is therefore insufficient, and that the levy was ultra vires because it preceded the determination of the rate by AREA. It distinguished judgments cited by MIAL and DIAL holding that while the existence of a power is not affected by the failure to make rules, that conclusion is displaced when the statute makes it a precondition for the exercise of the power, and that taxing statutes must be construed strictly. Since AERA had subsequently determined rates for the Delhi airport, DIAL has been permitted to continue to levy UDF but has been directed to place its collections prior to the determination with AAI.

The first issue – whether private operators are competent to levy the fee - is considerably more difficult. The Supreme Court’s reasoning on this aspect of the case rests crucially on its finding that UDF must not only be utilised for the purposes indicated in s. 22A above, but may not be levied or collected for any other purpose. It is convenient to refer to the three purposes in s. 22A as Purpose A, B and C. The Union of India’s case was that s. 12A(4) provides that the lessee is entitled to exercise “all” the powers of the AAI necessary to discharge the functions assigned to it, of which management, upgradation and modernisation were part. Since AAI had the power to levy UDF under s. 22A, it was said to follow that the private operators have it too. The Supreme Court rejected this contention on the basis that while the AAI may use the UDF collected for any of the purposes in s. 22A, it can assign only the power to collect UDF for Purpose A above to the private operators. The Court held that Purpose B (establishing a new airport in lieu of the existing airport) and Purpose C (investment…) cannot be assigned to the operators because:

… the function of establishment and development of a new airport in lieu of an existing airport and the function of establishing a private airport are exclusive functions of the Airports Authority under the 2004 Act, and these statutory functions cannot be assigned by the Airports Authority under lease to a lessee under Section 12A of the Act, the lease agreements, namely, the OMDA and the State Support agreement could not make a provision conferring the right on the lessee to levy and collect development fees for the purpose of discharging these statutory functions of the Airports Authority

While the Court’s construction of s. 22A is certainly a plausible one, it is submitted, with respect, that it is not clear that the “purposes” enumerated in s. 22A qualify levy and collection as well as utilisation. Although a comma precedes the words “for the purpose of” which may therefore be taken to qualify both utilisation and collection, it is significant that those words follow the expression “such fees shall be credited to…and utilised in the prescribed manner…” It is possible that the legislature only intended to provide that UDF, collected with the approval of the Centre and at the rates determined, shall be regulated and utilised for the enumerated purposes. Not adopting this construction leads to the curious result that the lessee who operates the airport is not empowered to collect UDF even on behalf of the AAI to be held for those purposes. Moreover, a comparison of s. 22A prior to 2008 with the present version reinforces the impression that the purposes only govern utilisation.

More significantly, it is difficult, with respect, to completely reconcile the Court’s conclusion on the two issues. If, as it held on the first issue, private operators have no power whatsoever to levy UDF since Purposes B and Purpose C cannot be assigned to them, the fact that AERA determined rates cannot change the result. The Court appears to reconcile the two conclusions by suggesting that the UDF now levied by DIAL is traceable not to s. 12(4) but has been “assigned” to it by the AAI under s. 22A - and that it is generally confined to Purpose A. Yet, the language of ss. 12 and 22 indicate, with respect, that the AAI can only assign a “function” it is required to discharge under s. 12, and that any power the private operator needs to discharge it will have to be traced to s. 12(4).

Some of these uncertainties may be addressed when AERA makes a rate determination for MIAL. Reports on the case are available here and here.

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