# 15 (ADDL.) S.C.R. 705 B.S.N.L v. RELIANCE COMMUNICATION LTD. 'E

- **Citation:** [2010] 15 S.C.R. 705
- **Court:** Supreme Court of India
- **Decided:** 2010-11-29
- **Case number:** Civil Appeal No. 6706 of 2010
- **Bench:** S.H. Kapadia, K.S. Panicker Radhakrishnan, Swatanter Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/15-addl-s-c-r-705-b-s-n-l-v-reliance-communication-ltd-e-26755
- **Pages:** 57

## Headnote

Telecommunication:
Inter-connect agreement - Clause 6. 4. 6 - Interpretation
A
B
c
of - Interconnect agreement between BSNL and Reliance
Company - Wrongly routed calls - Levy of penalty under
Clause 6. 4. 6 - Clause 6. 4. 6, penal or pre-estimate of
damages - Held: Clause 6.4. 6 is not penal but a pre-estimate 0
of reasonable compensation for the loss foreseen at the time
· of entering into the agreement Under the Interconnect
Agreement, the Unified Access Service Licence (UASL)-
Reliance Company is obliged to maintain the integrity of its
exchange/Point Of Interconnection (POI) - Nature of the call,
E
be it local or national or international, as indicated by
corresponding Calling Line Identification (CU), is the basis
for the levy of Interconnection Usage Charges {including
Access Deficit Charge (ADC)] - When Gateway Bypass Scam
takes place and international cal/(s) lands on the local POI
which is not forwarded to the specified trunk group/POI, there
F
is not only bypassing of International Gateway/ POI and
National POI but also evasion of duty to maintain billing
records in detail at each POis - All this results in payment of
Interconnect Usage Charges (/UC) at a lower rate and also
leads to reduced cost for the defaulting UASL - Thus, the
G
defaulting UASL resorts to masking - Also, clause 6. 4. 6
restricts the higher /UC rate made applicable for calls only
for last two preceding months and not for last three years or
705
H
706 SUPREME COURT REPORTS (2010] 15 (ADDL.) S.C R
A longer period - Thus, order of the Tribunal that demand of
BSNL under clause 6.4.6, is penal in nature and thus, set
aside the impugned demand, set aside - Matter remitted back
to the Tribunal to decide the matter de novo in accordance
with law.
B
Inter-connect agreement - Obligations of Unified Access
Service Licence (UASL)-holders under - Explained.
The respondents.Reliance Company entered into
BSO lnter-r..>nnect Agreement with the Department of
C Telecommunications (now BSNL) for inter-connection of
their networks within their respective circles. The
Agreement dealt with local calls, national long distance
calls and international long distance calls. The calls of
each trunk group are connected through dedicated ports
D and are chargeable at rates different from other trunk
groups. The charges are levied by BSNL on Reliance at
the rate of the existing call charges payable for that
particular period depending on the number of calls
handled by a particular port. The BSO regime was
E replaced and the respondent was granted the Unified
Access Service Licence (UASL). BSNL received several
complaints from its subscribers in Gujarat that they were
receiving International Long Distance Calls (ILD) calls
with local Calling Line Identification (CU) Numbers. BSNL
F raised its bill on Reliance (RIL) levying "penalty" with
interest amounting to Rs. 9,89,68,892/- on the basis that
international calls were delivered on its network as local/
national calls from a particular number (02813041000),
belonging to a particular subscriber of the network of
Reliance and thus, wrongly routed/tampered calls. The
G Tribunal set aside the impugned demand holding that the
impugned demand of BSNL under clause 6.4.6 of the
Interconnect Agreement is penal in nature; that under the
said clause unauthorized calls had to be detected by
BSNL and that in case of such detection charges were
H
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
707
to be levied on such calls at the highest applicable IUC;
A
that BSNL failed to draw distinction between
unauthorized calls and calls without/modified CLI in the
Impugned demand; that no opportunity of hearing was
given to Reliance; and that the amount of penalty was not
commensurate with actual damage suffered by BSNL.
B
Therefore, the appellants filed the instant appeal.
Allowing the appeal, the Court
HELD: 1.1 Inter-connection agreement prescribes
terms and conditions under which two licensees or C
service providers inter-connect their networks to allo

## Text

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[2010) 15 (ADDL.) S.C.R. 705
B.S.N.L.
v.
RELIANCE COMMUNICATION LTD.
'E
(Civil Appeal No. 6706 of 2010)
NOVEMBER 29, 2010
[S.H. KAPADIA, CJI., K.S. PANICKER
RADHAKRISHNAN AND SWATANTER KUMAR, JJ.]
Telecommunication:
Inter-connect agreement - Clause 6. 4. 6 - Interpretation
A
B
c
of - Interconnect agreement between BSNL and Reliance
Company - Wrongly routed calls - Levy of penalty under
Clause 6. 4. 6 - Clause 6. 4. 6, penal or pre-estimate of
damages - Held: Clause 6.4. 6 is not penal but a pre-estimate 0
of reasonable compensation for the loss foreseen at the time
· of entering into the agreement Under the Interconnect
Agreement, the Unified Access Service Licence (UASL)-
Reliance Company is obliged to maintain the integrity of its
exchange/Point Of Interconnection (POI) - Nature of the call,
E
be it local or national or international, as indicated by
corresponding Calling Line Identification (CU), is the basis
for the levy of Interconnection Usage Charges {including
Access Deficit Charge (ADC)] - When Gateway Bypass Scam
takes place and international cal/(s) lands on the local POI
which is not forwarded to the specified trunk group/POI, there
F
is not only bypassing of International Gateway/ POI and
National POI but also evasion of duty to maintain billing
records in detail at each POis - All this results in payment of
Interconnect Usage Charges (/UC) at a lower rate and also
leads to reduced cost for the defaulting UASL - Thus, the
G
defaulting UASL resorts to masking - Also, clause 6. 4. 6
restricts the higher /UC rate made applicable for calls only
for last two preceding months and not for last three years or
705
H
706 SUPREME COURT REPORTS (2010] 15 (ADDL.) S.C R
A longer period - Thus, order of the Tribunal that demand of
BSNL under clause 6.4.6, is penal in nature and thus, set
aside the impugned demand, set aside - Matter remitted back
to the Tribunal to decide the matter de novo in accordance
with law.
B
Inter-connect agreement - Obligations of Unified Access
Service Licence (UASL)-holders under - Explained.
The respondents.Reliance Company entered into
BSO lnter-r..>nnect Agreement with the Department of
C Telecommunications (now BSNL) for inter-connection of
their networks within their respective circles. The
Agreement dealt with local calls, national long distance
calls and international long distance calls. The calls of
each trunk group are connected through dedicated ports
D and are chargeable at rates different from other trunk
groups. The charges are levied by BSNL on Reliance at
the rate of the existing call charges payable for that
particular period depending on the number of calls
handled by a particular port. The BSO regime was
E replaced and the respondent was granted the Unified
Access Service Licence (UASL). BSNL received several
complaints from its subscribers in Gujarat that they were
receiving International Long Distance Calls (ILD) calls
with local Calling Line Identification (CU) Numbers. BSNL
F raised its bill on Reliance (RIL) levying "penalty" with
interest amounting to Rs. 9,89,68,892/- on the basis that
international calls were delivered on its network as local/
national calls from a particular number (02813041000),
belonging to a particular subscriber of the network of
Reliance and thus, wrongly routed/tampered calls. The
G Tribunal set aside the impugned demand holding that the
impugned demand of BSNL under clause 6.4.6 of the
Interconnect Agreement is penal in nature; that under the
said clause unauthorized calls had to be detected by
BSNL and that in case of such detection charges were
H
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
707
to be levied on such calls at the highest applicable IUC;
A
that BSNL failed to draw distinction between
unauthorized calls and calls without/modified CLI in the
Impugned demand; that no opportunity of hearing was
given to Reliance; and that the amount of penalty was not
commensurate with actual damage suffered by BSNL.
B
Therefore, the appellants filed the instant appeal.
Allowing the appeal, the Court
HELD: 1.1 Inter-connection agreement prescribes
terms and conditions under which two licensees or C
service providers inter-connect their networks to allow
their respective subscribers to have seamless access to
each other's networks. It is a binding contract that binds
each contracting party with respect to inter-connection
arrangements including commercial, technical and
D
operational. however, the scope and content of each
such contract may vary. Under the said Agreement, Interconnect Usage Charges (IUC) payments are divided into
four heads: (i) originating charges; (ii) carriage charges;
(iii) termination charges; and (iv) Access Deficit Charge
E
payments. ADC payment, as a concept, is a fee paid by
cellular, Unified Access Services, national long distance
and international long distance subscribers. This
payment is in the nature of tax as no service is rendered
in return. ADC payments are to cross subsidize BSNL for
F
developing its fixed network in non-lucrative areas. The
licensee(s) makes ADC payments based on their
adjusted gross revenues. These payments are later on
- transferred to BSNL. An IUC charge is, thus, a payment
by one service provider to another for the use of network G
elements to originate, transit or terminate calls. BSNL
receives ADC payments for international calls made to
fixed numbers. These payments are made by -either
national long distance licensee(s) or international long
distance licensee(s) that collects them. BSNL receives
H
708
SUPREME COURT REPORTS [2010] 15 (ADDL.) S.C.R.
A ADC payments for all international calls from cellular and
limited mobility numbers: These payments are collected
by ILDOs and given to BSNL. Similarly, ADC payments
on calls from international roaming subscribers are
collected by host service providers and paid to BSNL.
B ADC payments for international calls are higher than
similar payments for national long distance or local calls.
This has tempted some licensees to engage in ingenious
~chemes · o a"oid making ADC payments. One such
.;chem£ ::> rn::isking. Call masking takes place when a
c licensee deliberately alters the identity of an incoming
international call before handing it over to another service
provider at an inter-connection point, i.e., POI. The
international calling party's identity is obliterated (i.e.
international Calling Line Identification is wiped out) and
0 the said international call is made to appear as it were
from a domestic/ national number. This technique
enables evasion of ADC payments at enhanced rates for
international calls. Today, all private automated branch
exchanges (PBX) are computerized. A Caller ID (CID) is
E a signal. Most subscribers have a caller ID display unit
at their residence to receive caller ID signals which also
indicates the nature of the call - whether it is local/
national or international. Whenever a call for a mobile
subscriber comes from outside the mobile network or
vice-versa, the call is routed through a special kind of
F gateway switch which is called as Gateway Mobile
Switching Centre. It serves as an interconnection
between mobile switching centre and Public Switched
Telephone Nework which is a network. However, it is at
the POI (point of interconnection) that the GMSC of the
G mobile network of Unified Access Service Licence
(UASL) gets interconnected to the GMSC of BSNL by a
facility of the interconnection seeker (which is.Reliance).
There are two types of POI, namely, international and
local POI. Under the Agreement, UASL agrees to ensure
H that its interconnect facilities delivered at each POI
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
709
conforms to the specified standards for interconnection
A
and that UASL shall be responsible to provide, install,
test, etc. all such interconnection facilities on its side of
POI. Therefore, every POI has two sides. The instant case,
one side of POI is that of .BSNL and the other side is that
of Reliance. [Para 16] [753-F-H; 754-A-H; 755-A-C]
B
1.2 The Calling Line Identification (CLI) means
information generated by the network capability which
identifies and forwards the calling number through the
.. interconnected BSNL's network. Under clause 2.1.13,
C
Trunk Group is a part of POI. The said aspects are not
only technologi~al, they are maintained for billing and
accounting purposes. They generate data(s) in the' form
of CDRs and billing records in detail at the International
Gateway Exchange of ILDO (International POI), at the
NLDO Trunk Automatic Exchange of NLDO (National POI)
D
and Local Telephone Exchange of BSO (Local POI for the
understanding). At each stage, the billing record is
generated so that if an UASL is riding on the network of
BSNL, the former has to pay for the incoming
international call in terms of duration, etc. and even in the
E
case of local calls or national calls which includes the
distance parameter. Under clause 2.1.13, the fully mobile,
limited mobile and fixed services network of UASL shall
be having separate POis with BSNL, which shall be
treated separately for set up costs, port charges, etc.
F
Under clause 2.1.15.3.3, ~or the purpose of international
call, the UASL shall han
1dover the call to BSNL at the
originating Long Distande Charging Centre (i.e. LDCC
TAX). Under clause 6.4.7, all the required information shall
be submitted in the form of monthly certificate as
G
prescribed in Schedule I shall be submitted to BSNL by
UASL. It will indicate details of the traffic routed other than
through BSNL as NLDO/ILDO in respect of international
long distance calls (both incoming and outgoing). It also
indicates procedure for billing and recovery of ADC inter
H
710 SUPREME COURT REPORTS (2010] 15 (ADDL.) S C.R.
A alia in respect of ISO calls (both incoming and outgoing).
This is relevant also because under clause 2.1.5.2 calls
from fully mobile subscribers of other Telecom Service
Providers of the different service area (national roaming)
or Other Country (international roaming) have got to be
B handed over by UASL to BSNL on separate trunk groups
at the Gateway TAX of BSNL of that service area. Under
clause 2.1.9.2, no by pass of traffic shall be resorted to
by any party by delivering the traffic at any POI other than
the specified POl and in case unauthorized diversion in
c routing comes to notice, BSNL shall be free to disconnect
that POI in that area. Thus, under the Agreement if UASL
like Reliance receives an international call at its
exchange, its primary duty would be under the contract
to identify it and to forward it to the appropriate trunk
[l group of BSNL. If the international call(s) falls on the local
POI of Reliance, the latter is obliged under the contract
to identify the call, whether it is local or national or
international, and accordingly forward it to the appropriate
trunk group of BSNL. It is also stipulated in clause 2.9.1
E . (which dealr with network integrity and screening) that
it shall be the duty of the UASL to prevent wrong
transmission. In fact, under clauses 2.9.2 and 2.9.3 the
establishment of proper screening function at its Gateway
shall be the obligation of the UASL so as to detect signals
outside the inter-working specification of TEC. As a ,
F corollary, clause 6.4.G(a) inter alia provides that calls on
non-specified trunk groups (like international calls
landing on the local POis), if detected, for which the IUC
rate applicable is higher then the higher IUC rate would
be applicable for such unauthorized calls. In such a case,
G BSNL would be free to charge the UASL the higher IUC
for all calls recorded on the~e POis from the date of
provisioning of that POI [at Vadodara in the instant case]
or for preceding two months, whi~chever is less. Similarly,
under clause 6.4.6(b), if the UASL ,,..a!"l(s or disguises the
H international call as tr-cal call that t..1 .... SL will have .... pay
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
711
the higher IUC rate meant for international calls to BSNL
A
from the date of provisioning of that POI or for preceding
two months, whichever is less. Thus, if there is masking
of CLI for the calls generated and forwarded from the
telephone of UASL, then it would be the primary duty of
that UASL to prevent such misuse and failing which
B
BSNL would be free to invoke clause 6.4.6. [Para 16) (755D-H; 756-A-H; 757-A-B]
1.3 Clause 6.4.6 restricts the charge co Ir ~t two
preceding months. The charge uncler clause 6.4.v Is not
dependent upon number of calls and even the period of C
misuse of servicei:. is restricted to last two preceding
months. Thus, when an international call, lands on the
local POI of the UASL it knows the nature of the call.
There is a difference between an international CLI and the
local/national CLI. The billing record of that POI indicates
D
the nature of the call. It is the contractual obligation of the
UASL to maintain the billing records in detail (including
the CDR and the monthly certificate in the prescribed
form). Further, when the international call(s) lands at the
local POI of the UASL, the incoming traffic bypasses the
E
authorized route - international gateway exchange of
BSNL, the NLDO trunk exchange of NLDO and the local
telephone exchange of 850. Thus, the defaulting UASL
fails to maintain the billing records (including CDRs at
.. each stage). This results in concealment of details which
F
results in reduced payment of IUC charges by the
defaulting UASL, thus, giving him the unauthorized
benefit of paying less ADC which was the major
component of IUC at the relevant time and which reduces
the cost of providing services which in turn results in
G
destroying the "principle of level playing" which is so
important in the regulatory regime because pricing of the
services in the international market plays an important
role. The above modus operandi enables the defaulting
UASL to sell his product (services) abroad at a rate
H
712
SUPREME COURT REPORTS [201 OJ 15 (ADDL.) S.C.R.
A which may be less as compared to the rates charged by
BSNL (who is also a Competitor Service Provider). The
unauthorized call(s) gets for the defaulting UASL not only
more profits by cost reduction, he also gets more
business at the· rates below the competitive rates. Same
s is the position in case of masking of international calls
as local calls. When an international call(s) lands on the
local POI of the UASL, the latter knows from the display
mechanism at his end (like the subscriber at his end) that
call bears the international CLI and that is the reason for
\
c masking. Otherwise one needs no masking of the CLI. In
both the cases i.e. under clauses 6.4.6(a) and 6.4.6(b) the
same economic and financial consequences flows and
that is the reason why clause 6.4.~ provides for
reasonable pre-estimate of damage. It is not possible to
I) trace each such unauthorized call, particularly its nature,
as to from which place it originated and if it was possible
the cost of tracing such call(s) may be much more than
actual damage, if ascertainable, and therefore, a 'rough
and ready measure' is provided in clause 6.4.6 which
E measure is a reasonable pre-estimate of damage. [Para
.. 16) [757-C-H; 758-A-D]
2.1 The fact that damage is difficult to assess with
precision strengthens the presumption that a sum agreed
between the parties represents a genuine attempt to
. F estimate it and to overcome the difficulties of proof at the
trial. A clause is penal if it provides for "a payment
stipulated as in terrorem of the offending party to force
him to perform the contract. If, on the other hand, the
clause is an attempt to estimate in advance the loss
G which would result from the breach, it is a liquidated
damages clause. The question whether a clause is penal
or pre-estimate of damages depends on its construction
and on the surrounding circumstances at the time of
entering into the contract. The fact that a sum of money
H is payable on breach of contract is described by the
I
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
713
contract as 'penalty' or 'liquidated damages' is relevant
A
but not decisive as to categorization. [Para 17) [758-G-H;
759-A-B]
Chitty on Contracts 30th Edn., para 26-126; Law of
_Contract by G.H. Treitel 10th edition - referred to.
8
2.2 The Interconnect Agreement should be viewed in
the context of the regulatory regime. Telecom as a service,
is the most important circumstance to be considered as
one of the main surrounding circumstances to the
Interconnect Agreement. Under the Interconnect C
Agreement, the UASL is obliged to maintain the integrity
of its exchange/POI. Each service provider, inclu
0ding
BSNL, is a market player/stakeholder. Each UASL is
entitled to a level playing field. The nature of the call, be
it local or national or international, as indicated by D
corresponding CLI, is the basis for the levy of IUC
(including ADC). If by wrong routing of calls or by
masking the cost of providing services is reduced, the
concerned operator gets an undue advantage not only
in the Indian market over other competing operators but
E
also in the international market. Billing is one of the most
vital aspects of the instant case. With technology, an.
international call could fall on the local POI but then the
concerned operator is responsible for the identity of the
call. In the case of calls which are correctly routed, the
F
display screen with the subscriber clearly indicates
whether the call bears international or local/national CLI.
Similarly, when the Gateway Bypass Scam takes place
and the international call(s) lands on the local POI which
is not forwarded to the specified trunk group/POI, there
G
is not only bypassing of International Gateway/ POI and
_National POI but also evasion of duty to maintain billing
. records in detail at each POis. [Para 18) [759-A-H]
2.3 All this results in payment of IUC at a lower rate
as also leads to reduced cost for the defaulting UASL
H
I
.
t
714 SUPREME COURT REPORTS [2010] 15 (ADDL.) S.C.R.
A which provides not only increase in its profit but also
gives it an advantage in international market vis-a-vis
other competitors (including BSNL) because the
defaulting UASL can easily price its product in the
international market at a lower rate and in that sense loss
13
is caused to BSNL. Similarly, masking takes place as
international CLI can easily be identified even when an
international call lands on the local POI of the UASL, thus,
the defaulting UASL resorts to masking. Thus, an
international call coming from the masked number alone
C cannot be taken into account. Thus, clauses 6.4.6(a) and
6.4.6(b) provide for pre-estimate of damages. [Para 19]
[760-A-C]
3.4 The clause 6.4.6 (a) and 6.4.6 (b) restricts the
higher IUC rate made applicable for calls only for last two
D preceding months and not for last three years or the
longer period. These time lines is an indicia showing that
clause 6.4.6 is not penal but a pre-estimate of reasonable
compensation for the loss foreseen at the time of
entering into the agreement. The liquidated damages
E serve the useful purpose of avoiding litigation and
promoting commercial certainty and, therefore, the court
should not be astute to categorize as penalties the
clauses described as liquidated damages. This principle
is relevant to regulatory regimes. While categorizing
F damages as 'penal' or 'liquidated damages' one must
keep in mind the concept of pricing of these contracts
and the level playing field provided to the operators
because it is on costing and pricing that the loss to BSNL
is measured and, therefore, all calls during the relevant
G period have to be seen. Since clause 6.4.6 represents preestimate of reasonable compensation, Section 74 of the
Contract Act is not violated. [Para 19] [760-0-H]
H
Communications Law in India by Vikram Raghavan p
639 - referred to.
8.$.N.L. v. RELIANCE COMMUNICATION LTD.
715
3.4 It is clarified that the judgment is restricted only
A
to the interpretation of clause 6.4.6 of the Interconnect
Agreement read with the Addenda. The clause 6.4.6
represents pre-estimate of reasonable compensation for
the loss suffered by BSNL. Thus, the impugned judgment
is set aside and the matter is remitted to TDSAT to decide
B
the rriatter de novo in accordance with the law laid down.
However, it is highlighted that in the letter dated 13th
October, 2004 addressed by BSNL to Reliance1 it has
been alleged that the calls have landed at the POis of M/
s. Reliance lnfocomm. Ltd. at Karellbaug, Panigate, c
Alkapuri, Makarpura, Padra, Dabhoi and Miyagam
exchanges in Vadodara SSA. Also, it is alleged that the
number 2813041000 was an unallocated number with
Reliance during the relevant period. This· aspect needs
to be examined by TDSAT on facts. [Para 20] [761-A-D]
Fateh Chand v. Balkishan Das (1964) 1 SCR 515;
Bharat Sanchar Nigam Limited v. Motorola India Private
Limited (2009) 2 SCC 337; Mau/a Bux v. Union of India
(1969) 2 SCC 554; Union of India v. Raman Iron Foundry
(1974) 2 sec 231 - referred to.
Case Law Reference:
(1964) 1 SCR 515
(2009) 2 sec 337
(1969) 2 sec 554
(1974) 2 sec 231
Referred to
Referred to:
Referred to.
Referred to.
Para 10
Para 10
Para 10
Para 10
D
E
F
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
G
6706 of 201 o.
From the Judgment & Order dated 24.05.2010 of the
learned Telecom Disputes Settlement and Appellate Tribunal
at New Delhi.
716
SUPREME COURT REPORTS [2010] 15 (ADDL.) S.C.R.
A
Gopal Subramaniam, SG, C.S. Vaidyanathan, Ramji
Srinivasan, Pratibha M. Singh, Tejveer Singh Bhati, Gaurav
Sharma, Abhinav Mukerji, Surbhi Mehta, Tanmay Mehta, Akhil
Sibal, Manali Singhal, Santosh Sachin, Aakarsh Kamra, Abhijat
P. Medh, Mansoor Ali Shokat, Apoorva Mishra, Ramesh Kumar
s Pukharbham, S. Ganesh, Navin Chawla, Ruby Ahuja, Manu
Agarwal, Jatin Mongia, Raunak Dhillon, Manik Karanjawala (for
M. Karajawala and Co.) appearing parties.
The Judgment of the Court was delivered by
C
S.H. KAPADIA, CJI 1. Whether clause 6.4.6 of the
D
Interconnect Agreement between Bharat Sanchar Nigam
Limited (BSNL) and M/s. Reliance lnfocomm Limited is penal
or a pre-estimate of damages is the question which arises for
determination in this civil appeal?
Facts
2. bn 18th March, 1&97, Reliance had entered into BSO -
Interconnect
Agreement
with
Department
of
Telecommunications (DoT) for interconnection of their networks
E within their respective circles. In October, 2000, with its
establishment, the BSNL took over from DoT the
aforementioned BSO Agreement. In November, 2003, the BSO
regime was replaced by Unified Access Services regime which
granted the licence to service providers for both basic and
F mobile telephony services as part of a single unified licence.
Reliance was allowed to operate as a Unified Access Service
provider from November 14, 2003 though it was formally
granted the Unified Access Service Li.cence on 21st
September, 2004 with effect from 14th November, 2003. By an
G addenda dated 28th February, 2006, the agreement was
formally amended with retrospective effect from 14th
November, 2003. The Agreement deals with local calls, national
long distance calls (NLDC) and international long distance calls
(ILD). Calls of each trunk group are connected through
H dedicated ports and are chargeable at rates different from other .
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
717
[S.H. KAPADIA, CJI.]
trunk groups. Hence, depending on the number of calls handled
A
by a particular port, charges are levied by BSNL on Reliance,
at the rate o(the existing call charges payable for that particular
trunk group.
3. On ,24th June, 2003, the DoT issued a circular
8
specifying that Calling Line Identification (CLI) cannot be
tampered with under any circumstances and also gave
directions to service providers on how to prevent such
tampering. By its circular dated 28th January, 2004, the above
circular of DoT coupled with IUC Regulations dated 29th
C
October, 2003 issued by Telecom Regulatory Authority of India
(TRAI) was made effective.
4. In September, 2004, BSNL received several complaints
from its subscribers in Gujarat that they were receiving ILD calls
with local CLI Numbers. On the basis of these reports, BSNL
D
made its own enquiries by calling the local CLI number, i.e.,
0281-3041000. This was on 5th October, 2004, 6th October,
2004 and 7th October, 2004. Each time the number was called
the response from the other end was that the number did not
exist. Therefore, on 8th October, 2004, BSNL reported the
E
matter to Reliance at which time Reliance had sent its report
to DoT regarding the same. In the said report to DoT, Reliance
stated that the wrong routing of ILD calls was being done by
one of its: subscribers, viz., Mis. Raj Enterprises (who was given
60 calls
1
1 circuits). The series of numbers allotted to Raj
F
Enterpri~es was from 2813041000 - 2813041199, i.e., 200
numbersr
5. dn 13th October, 2004, BSNL gave notice to Reliance
saying tfrlat Reliance is having POis at various Exchanges in
Vadodra; that on monitoring incoming traffic to BSNL as
G
indicated in CDRs at the above POis, it was found that there
were numerous calls with CU as 281 3041000; that, such calls
have been received from 4th September, 2004 and, therefore,
BSNL will charge at Rs. 5.65 per minute for all incoming calls
at POI of Reliance from July, 2004. It may be noted that Rs.
H
(
718 SUPREME COURT REPORTS [2010] 15 (ADDL.) S.C.R.
A 5.65 per minute is the rate of incoming ISO calls at TAX POI of
Reliance (the word 'TAX' stands for Trunk Automatic Exchange).
6. On 25th October, 2004, BSNL issues its circular to all
its officers by which continuation of unauthorized diversion in
8
routing of ILD calls is brought to their notice with specific
reference to the case of Reliance. In the circular, it is highlighted
that although Reliance claims that tampering of CLI has been
stopped w.e.f. 16th September, 2004, it is found that.
international calls have been delivered on the local POI of
C Reliance, at trunk group meant for intra circle terminating traffic,
at various SDCC tandem exchanges, with CLI of Reliance
network of other SDCAs which is different from STD Code and
3039xxxx.
7. On 21st March, 2005, BSNL raised its bill on Reliance
D (RIL) levying "penalty" of Rs. 9,17,27,746 with interest from 15th
October, 2004 to 15th April, 2005 at 21 % p.a. for months of
July, 2004 to October, 2004 in all amounting to Rs. 9,89,68,892/
- for illegal routing of calls. This bill dated 21st March, 2005
superseded the provisional bill dated 15th October, 2004
E raised by the Vadodra Unit of BSNL for Rs. 6.89 er. for the said
period July, 2004 to September, 2004. In the said bill, the rate
applied was Rs. 5.65 per minute. This demand was made on
the basis that numerous calls have been detected in the POI
with CLI as 281 3041000 which pertained to ISDNB PRI
F connection given to M/s. Raj Enterprises of Rajkot. According
to Reliance, the calls received in its POis were "grey market"
calls. That, they were neither wrongly routed nor their Clls were
tampered. Ultimately, after detailed correspondence between
BSNL and Reliance, petition No. 275 of 2009 was filed by
G Reliance against the above impugned demand.
8. By the impugned judgment, TDSAT has held that the
impugned demand of BSNL under clause 6.4.6 of the
Interconnect Agreement is penal in nature; that under the said
clause unauthorized calls had to be detected by BSNL and that
H in case of such detection charges were to be levied on such
I
£:45.N.L. v. RELIANCE COMMUNICATION LTD.
719
[S.H. KAPADIA, CJI.]
calls at the ~ighest applicable IUC; that BSNL was under an
A
obligation to draw distinction between unauthorized calls and
calls without/ modified CLI in the impugned demand which in
the present case has not been done; that no opportunity of
hearing was given to Reliance and, lastly, the amount of penalty
was not commensurate with actual damage suffered by BSNL.
B
Accordingly, the impugned demand was set aside. Aggrieved
by the impugned judgment of TDSAT dated 24th May, 2010,
BSNL has come to this Court by this civil appeal.
Submissions
9. On interpretation of clause 6.4.6, Shri Gopal
Subramanium, learned senior counsel appearing for BSNL
submitted that the said clause merely prescribes the payment
c
of a sum by Reliance on the happening of an event other than
breach and, consequently, the distinction between penalties and
D
liquidated damages would not apply because such distinction
applies only to sums payable on breach of the contract and not
whe11 a clause prescribes payment of a sum on the happening
of an event other than breach. In this regard, learned senior
counsel submitted that the Agreement pertains to
E
telecommunication seNices which is capital intensive venture
and which requires seamless and uninterrupted seNice. A
disruption in such seNices would result not only in financial loss
to BSNL and Reliance but also to a large number of
subscribers of both the companies. Moreover, learned senior
F
counsel submitted that it is technically impossible for BSNL to
trace or block a call with a tampered (masked) CLI. That, on a
given day a single POI handles millions of minutes of calls which
are handed over to BSNL and in such a situation it is not
commercially feasible to decipher which call is genuine and
G
which call is without CLl/tampered CLI. Thus, clause 6.4.6
should be interpreted against the background knowledge·
referred to above and, tf so read, it becomes clear that the said
clause is inserted in the Agreement for commercial prudence
as a thumb rule and should as such be interpreted in that
H
'720
SUPREME COURT REPORTS [2010] 15 (ADDL.) S.C.R.
A manner. According to the learned counsel, the onus of proving
the nature of a clause as penal is on the party who has sued
upon it. According to the learned counsel, clause 6.4.6 gives
BSNL an option of terminating the contract or to prolong the
contract on the payment of an additional sum and thus the same
B cannot be characterized as penalty but must be classified as
representing the price for the option of continuing the contract.
Thus, according to the learned counsel clause 6.4.6 represents
-
a condonable default under the contract as payment under the
said clause results in continuance of the contract.
c Consequently, the amount paid under the said clause cannot
be brought under Section 74 of the Contract Act. According to
the learned counsel the situation in clause 6.4.6 amounts to an
alternative mode of performance of the contract. Lastly,
according to the learned counsel where a contract prescribes
D payment of a sum on default, even if the sum payable may be
larger than the actual loss, when the contract is between parties
with equal bargaining power, and as long as the sum payable
is not extravagant, it should not be characterized as penalty.
Similarly, where an agreed sum is payable upon a default if the
loss accruing to the claimant from the default in question cannot
E be accurately or even reasonably be ascertained, then such
sum cannot be classified as penalty and once a stipulation is
held not to be a penalty, there is no need for actual proof of
loss.
F
10. On interpretation of clause 6.4.6 of the Interconnect
Agreement, Shri C.S. Vaidyanathan, learned senior counsel for
Reliance and Shri Ramji Srinivasan, learned senior counsel for
Tata Teleservices Limited, submitted that there is n~ dispute :
between the parties regarding the existence of the grey market
G and its operations by miscreants who use the telecom facilities
provided by various telecom service providers, including
government operators, like BSNL and MTNL. In this connection
learned counsel placed reliance on the compilation submitted
by BSNL. Learned counsel also placed reliance on the
, H statistical data in support of his above contention. The learned -
•
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
721
[S.H. KAPADIA, CJI.]
counsel has also relied upon directions dated 25.10.2004
A
issued in the form of a circular by BSNL to its field offices
suggesting'. steps to be taken by them to detect what is called
as "gateway bypass scam". On the interpretation of clause
6.4.6, learned counsel submitted that the said clause carries a
heavy penalty; that ther .said clause is attracted in cases of
B
tampering/wrong routing of calls attributable to some fault on
the part of the operator and not otherwise, and since in the
present case the actions complained are attributable to an
· ·pnscrupulous subscriber and not to Reliance, clause 6.4.6
'cannot be invoked. In other words, according to the learned c
counsel, grey market operations of telecom are a reality
affecting all telecom service operators and cannot become a
ground for invoking clause 6.4.6 which is a unilateral clause
regardless of the fault of the private 9perator. Learned senior
counsel further submitted that the contention of BSNL regarding
0
"strict civil liability" is entirely misplaced as BSNL does not
possess any statutory power to impose such liability. On
applicability of Section 74 of the Contract Act, learned counsel
submitted that interconnection between different telecom
service providers is essentially in the interest of the
subscribers. That, such interconnection is mandated by the
E
licen~e; that the interconnection charges are regulated by TRAI
under Section 11 of the 1997 Act; that no service provider can
charge interconnection charges more than what is specified by
the regulator; and that clause 6.4.6 of the Interconnection
Agreement between BSNL and Reliance is a one sided penal
provision insisted upon by BSNL. That, what BSNL can recover
is either consideration for services rendered by their
interconnection pr compensatory damages in case -of breach
of any of the clauses of the said Agreement. This is because
F
the Contract Ad does not contemplate any other amount being
G
received by one contracting party (BSNL) from the other
contracting party (Reliance). That, the consideration for services
rendered by interconnection is regulated by TRAI it is not open
to BSNL to charge what they like. On the other hand, the TRAI
regulations do not provide for quantum of damages or a penalty
H
I
722
SUPREME COURT REPORTS [2010) 15 (ADDL.) S.C.R.
A in case of breach of the interconnection agreement. Therefore,
if clause 6.4.6 is attracted before breach, as submitted by
learned counsel for BSNL, and if clause 6.4.6 is not
compensatory, then the amount demanded is without
consideration and would be unconscionable. According to the
B learned counsel clausL 6.4.6 in the Interconnect Agreement
confers only a contractual right. BSNL, according to the learned
counsel, is '1either the sovereign exercising legislative or
execuhe 0· police powi:rs nor is BSNL a regulator. It is not
vested with any powers to impose any penalty for breach of
c contractual terms nor can BSNL be vested with such powers
as BSNL is one of the several operators in the National
Telecom Policy of 1994 and 1999. That, DoT or the TRAI may
exercise regulatory or police powers imposing a penalty or strict
civil liability for violation of any of the terms and conditions of
0 the license when public interest so requires. However, BSNL
does not have any statutory, regulatory or police powers to
impose strict civil liability. That, strict civil liability has been
recognized and upheld where it is imposed by the State
exercising legislative power in respect of violation of tax
liabilities. It has also been recognized and enforced by courts
E in tortuous action in regard to ultra hazardous activity or product
liability but even in such cases the liability is strict in the sense
that no negligence need be proved but quantum of damages
will have to be proved and it will be only compensatory and not
penal because penal liability can be imposed only by legislation.
F According to the learned counsel the concept of strict civil
liability or absolute liability is alien to the scheme, purport and
intent of the law of contracts. On clause 6.4.6 learned counsel
submitted that the said clause occurs in Chapter 8 relating to
interconnection charges and it is in respect of "wrongly routed
G calls". According to the learned counsel the said clause 6.4.6
is premised entirely on the breach of contractual term requiring
calls being handed over in the specific trunk route or calls being
handed over with an appropriate CLI. That, clause 6.4.6 (d) is
a pointer to sub-clause (a) and sub-clause (b) being the
· H remedy for breach, in addition to the rights that BSNL has for
B.S.N.L. v. RELIANCE COMMUNICATION LTD.
723
[S.H. KAPADIA, CJI.]
disconnection of POI or temporary suspension of Interconnect
A
Agreement for misuse. Thus, sub-clauses (a) and (b) and (d)
can be invoked only in case of a breach of the term requiring
handing over of calls in the specified trunk route or handing over
of calls with appropriate CLI and, therefore, it is incorrect to say
that clause 6.4.6 is attracted before the breach of contract and
B
that the provision for remedy of breach is only in clause 8.2 or
8.3. That, it is equally incorrect to contend that the provision for
breach or damages is only what is contained in clause 11 of ·
the general terms. According to the learned counsel clause 6.4.6
can be in the nature of reasonable compensation or c
compensatory damage only if the charges are recovered in
respect of the offending calls and not in respect of the legitimate
calls. Any other interpretation will militate against the
compensatory nature of damages and will amount to imposition
of a penalty without legislative sanction and by one party to the
0
contract usurping sovereign, police and regulatory powers.
Learned counsel submitted that the two months time limit
cannot make clause 6.4.6 reasonable or compensatory, if all
calls, irrespective of whether they are rightly or wrongly routed,
or with CLI or without CLI or disguised CLI are charged at the
· highest IUC rates. Such a provision, according to the learned
E
counsel, will be ex facie penal in nature. Learned counsel
submitted that there is no merit in the contention of BSNL that
technology does not enable tracing of every disguised call.
According to the learned counsel this argument of lack of
technology would be available to BSNL only to the extent that
F
all calls of the offending subscriber, such as Raj Enterprises,
may be treated as unauthorized calls. However, beyond that,
calls of other subscribers, in respect of whom there is not even
a whisper of illegality, cannot be clubbed with the offending
calls because that would amount to imposition of penalty.
G
Learned counsel submitted that under the Contract Act no party
is entitled to recover punitive damages for any breach of
contract. That. in terms of Section 73 of the Act, the party which
suffers by any breach of contract is entitled to receive, from the
party who has broken the contract, compensation for any loss H
724
SUPREME COURT REPORTS [2010] 15 (ADDL.) S.C.R..
A or damage caused to him thereby, which naturally arose in the
usual course of things from such breach. Such compensation
is not to be given for any remote or indirect loss or damage.
According to the learned counsel in terms of section 73 of the
Contract Act in order to receive compensation for loss or
B c;lamage, the party claiming such compensation must prove the
alleged loss or damage. However, section 74 carves out an
exception to the ordinary legal requirement of proving loss or
damage In te"ms of sectioH 74 when a contract is breached,
if a sum is named in the contract as the amount to be paid in
c case of such breach or if the contract contains no other
stipulation by way of penalty, the party complaining of the
breach is entitled, whether or not actual loss or damage is
proved to have been caused thereby, to receive from the party
who has broken the contract, reasonable compensation not
0 exceeding the amount so named or, as the case may be, the
penalty stipulated for.